Section 9AC of the Sale of Land Act – Lessons for developers from a new case
The current property market for apartments is challenging. Restrictions resulting from COVID-19 combined with absent foreign buyers, has caused banks to impose limits on off-the-plan lending and stamp duty increases to create downward pressure on values.
It is inevitable in such a market that purchasers will seek to use any means at their disposal to terminate off-the-plan contracts. Therefore, it is no surprise that the current conditions have resulted in a new Supreme Court of Victoria (Court) decision in relation to Section 9AC of the Sale of Land Act 1962 (Vic) (SLA) in Burger & Ors v Longboat Holdings Group 2 Pty Ltd  VSC (Burger Case).
Section 9AC of the SLA
Firstly, a reminder of the test contained in Section 9AC of the SLA, which provides that:
- if changes are made to a proposed plan of subdivision after a contract is entered into and before it is registered, the developer must notify the purchaser within 14 days of making the amendment (commonly called a ‘section 9AC notice’); and
- a purchaser may rescind its contract within 14 days after receiving the section 9AC notice if the amendment “will materially affect the lot to which the contract relates”.
It is not possible to contract out of section 9AC of the SLA. Also worth noting that section 9AC of the SLA applies to any type of product sold off-the-plan, be it industrial, residential, office or retail.
Previous Court decisions
It is also helpful to consider previous section 9AC decisions, where the courts have established the following principles:
- ‘materially’ is given its ordinary meaning, i.e. to an important degree, considerably
- changes are looked at as a bundle of rights
- a change need not be detrimental or adverse for it materially affect the lot
- the degree of ‘affect’ on the lot is a question of fact in the context of the particular plan; and
- a change that is adverse to the interests of the purchaser is more likely to materially affect the lot.
Facts in Burger Case
Between the date the contracts were signed and the date when the plan of subdivision (Plan) was lodged for registration, the developer made several changes to the Plan including:
- decreasing the area of the apartment, predominantly the master bedroom by 4.39%
- reducing the size of the light court resulting in a decrease of natural light into the master bedroom
- reducing the size of the common property by vesting part of it in the local council as a council reserve
- decreasing the area of common property one by creating common property two. Common property two was converted into a roof terrace, which the purchaser as a member of common property one, could not access. Prior to the change, all owners were able to access the roof terrace; and
- changing the size and location of the car spaces, including reducing the size of one car space by 11% and relocating the other from the top of a car stacker to the bottom.
The developer issued the section 9AC notice advising purchasers of these changes, in response the purchasers of the two lots attempted to terminate their contracts in accordance with section 9AC of the SLA. The developer did not accept the termination and refused to return the deposits on the basis that the changes to the Plan did not materially affect the purchasers’ lots.
In this instance, the Court decided in favour of the purchasers and upheld the termination of the contracts.
In making its decision, the Court considered whether each of the changes made to the Plan materially affected the purchasers’ lots, and found as follows:
- Decrease in area - a change in an area of less than 5% can be material based on the location and nature of the change and its effect. In this case the decrease was held to be material because it occurred in the master bedroom, reduced the light to the bedroom and made movement of furniture into the bedroom more difficult. The presence of a special condition where the purchasers agreed that a decrease of less than 5% was not material, standard in many off-the-plan contracts, did not protect the developer in this instance
- Light court change - this change was not significant by itself, but when combined with the changes to the master bedroom size has materially affected the lots
- Creation of council reserve - once the council reserve was created, the purchasers no longer had exclusive rights over the area, this materially affected the lots
- Change in common property - although the size of common property two was relatively small in the context of the development, the loss of use of the terrace was not insignificant and as a result materially affected the purchasers’ lots; and
- Car space changes - the changes did not affect the type of car that could use the car spaces and therefore, the changes did not materially affect the purchasers’ lots.
Lessons for developers
The decision in the Burger Case is an important addition to previous decisions of the courts in relation to section 9AC. It is a reminder that no matter what provisions are included in a contract of sale, such as an acknowledgement that a change in area of less than 5% is not material, it is not possible to contract out of section 9AC of the SLA.
Whilst well drafted contractual provisions may help narrow the scope for any debate over section 9AC, the practical impact of any change should always be assessed against the materiality test to determine if a change is material.
Where possible in a project, developers should:
- endeavour to keep changes to a minimum
- benchmark any changes against section 9AC and previous court decisions on its application
- engage with purchasers affected by material changes to manage their impact; and
- Obtain legal advice on the specific changes before they are made to the Plan to manage settlement risk.
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