Vendors Rescinding Options: How Compliant Paperwork is Indispensable

Published 14 Mar 2017
Dominic Maley

Sieve-Storm Pty Ltd ACN 160 562 354 as trustee for Affordable Property Trust v Murphy [2016] NSWSC 1800 [hereafter "Sieve-Storm P/L v Murphy"] provides a poignant reminder of how important it is to adequately draft an Option agreement. In a rising market, vendors (more usually known as Grantors) in an Option can have a propensity to explore any opening to get out of the agreement and obtain a higher price. Div 9 of Pt 4 of the Conveyancing Act 1919 (NSW) contains a few such openings where there is an issue of non-compliance with the paperwork, allowing the vendor to rescind the contract for non-compliance, notwithstanding they themselves drafted the non-compliant paperwork.

• Facts of Sieve-Storm P/L v Murphy

Ms Yan Murphy granted two Options to Sieve-Storm Pty Limited. The first Option was in respect of 45 Robertson Road, Killarney Vale and the second was in respect of 12 Gillies Street, Kurri Kurri.

Ms Murphy subsequently changed her mind and sought to rescind the Options.

The first basis on which Ms Murphy relied was that the Options were both void, as both Options were drafted in such a way as to allow exercise within 42 days of the date of exchange, which falls afoul of Section 66ZG.

Mr Murphy further went on to argue that even if she failed on the Section 66ZG ground, the Options could be rescinded under Section 66ZI, which "relevantly provides that, if an option to purchase a residential property is granted and the “required documents” [s 149 Certificate, sewer diagram etc] are not attached to the option document at the time it is granted, either party may serve a written notice to the effect that the party rescinds the option".

The third argument was that the Options were not validly exercised in time (which was held) but that is not relevant to the purposes of this article.

It was clearly the case that the Robertson Road Property breached section 66ZI, with neither the contract nor the prescribed documents being attached to Option. His Honour Emmett AJA held "it follows that, under s 66ZI(1), either party was entitled to serve a written notice to the effect that that party rescinds the Robertson Road Option". His Honour then went on to declare: "Ms Murphy also contends that the requirements of s 66ZI were not satisfied in relation to the Gillies Street Option. That question is not as straightforward. While a form of contract for sale was annexed to the instrument dated 5 September 2013, the contract for sale did not identify that part of the Gillies Street Property that was to be the subject of the sale if the Gillies Street Option were to be exercised. Further, the form of contract for sale did not specify the purchase price. Thus, the Gillies Street Option was also affected by s 66ZI of the Conveyancing Act, such that either party was entitled to serve a written notice to the effect that the party rescinds the Gillies Street Option."

• Should the Vendor/Grantor be estopped from relying on the breach of statute when they themselves prepared the paperwork?

While His Honour Justice Emmett AJA held that "even if either the Robertson Road Option or the Gillies Street Option was not void [by virtue of the 42 day rule in Section 66ZG], each was effectively rescinded pursuant to s 66ZI … [and] … in any event, neither was effectively exercised", His Honour went on to discuss Sieve-Storm's claim that Ms Murphy should be "estopped" from relying on the statutory breaches.

According to Sieve-Storm, Ms Murphy induced Sieve-Storm to believe there were valid legal relations in existence, and it would be unconscionable for Ms Murphy to resile from that position, to the detriment of Sieve-Storm. In in those circumstances, the court should estopp and preclude Ms Murphy from denying that a legal relationship exists between Sieve-Storm and Ms Murphy.

His Honour nonetheless "did not consider that any basis for an estoppel would have been established if the Options had been validly exercised".

His Honour went on to say that even if the conduct had enlivened the issue of estoppel "it may well be that an estoppel such as is relied on by Sieve-Storm would not prevail against the provisions of the Conveyancing Act."

Sieve-Storm maintained the argument that the public policy of Div 9 of Pt 4 of the Conveyancing Act was to 'protect the grantees of options, not the grantors', but His Honour did not appear to be greatly persuaded by this argument, and would not subvert the express words of the legislation, particularly in circumstances where only a small option fee was paid, but these questions were left undecided.

• Conclusion

Flawless paperwork is vital for Option contracts. The standard required is even higher than, say, an ordinary Contract for the Sale of Land whereby only the purchaser can rescind (limited to 14 days from date of contract) by reason of a failure to attach the prescribed documents [see the Conveyancing (Sale of Land) Regulation at 16 & 17]. The availability of rescission rights for vendors/grantors in Options, as well as additional provisions such as the 42 day rule of s 66ZG of the Conveyancing Act, means diligence is required more than ever with respect to the paperwork for Options.

For professional legal advice, please contact Maclarens Lawyers on 9682 3777.