Cannot complete your purchase of land contract? Think your liability is limited to the 10% deposit? Think again!

How are damages to be assessed if you cannot complete a contract for the sale of land as a purchaser?

Entering into a Contract for the Sale of Land is a serious commitment. Please contact Maclarens Lawyers before you enter the agreement.

There is a common misunderstanding that if a purchaser cannot complete a land contract, and the vendor accordingly terminates, the purchaser will only forfeit their deposit. This is erroneous.

As a general principle, where there is a breach of contract by one party, the other party will be entitled to be put in a position had the contract been fulfilled.

Whilst this article is not focused on an action for specific performance, in an action for damages (i.e. money) for a sale of land contract terminated by the vendor, the vendor's claim (which can include costs and loss of profit) may exceed the deposit.

If the damages exceed the deposit, the vendor will be entitled to sue for the excess.

How is the loss of profit calculated?

Clause 9.3 of the Standard form of Contract for Sale provides that, following the termination of a contract on the basis of repudiation by the purchaser, the vendor is able to recover:

• 9.3.1 costs and the deficiency in resale value (with credit given to the deposit) if the property is resold within 12 months;

• 9.3.2 damages for breach of contract.

What happens if the property is resold at a loss after the 12 months has elapsed – how does the court work out damages?

The NSWCA has recently considered this issue in NG v Filmlock Pty Ltd (2014) NSW ConvR 56-342.

In NG V Filmlock Pty Ltd, His Honour Gleeson JA, in corroboration with Tobias AJA and Emmett JA, held that:

“Because there was no resale by the vendors within 12 months after termination, the vendors in the present case had no entitlement under cl 9.3.1 of the contract to sue to recover the deficiency on resale (and associated costs and expenses). Rather, the vendors’ entitlement, under cl 9.3.2 of the contract was to sue to recover damages for breach of contract. As Emmet JA has stated, this must be taken to refer to a claim for damages under the general law”.

This "general law" approach of cl 9.3.2, so the NSWCA held, should be taken to be the difference between the original contract price and the market value at time of termination of contract – not the resale value of the property outside the 12 month period.

Facts of the NG v Filmlock

In this case, the purchaser entered into a contract to purchase for $7,210,000. The purchaser could not settle, and the vendor terminated on 5 May 2008. 13 months later, the vendor sold the property for $4,400,000.

At first instance, His Honour Pembroke J awarded damages representing the difference in resale value with interest.

The NSWCA held that this approach was in error as the resale was outside the relevant 12 month period.

When the Resale Contract is considered

Under the standard form of contract, property must be resold by the vendor within 12 months of the termination in order for the damages to be calculated by reference to that resale.

In NG v Filmlock Pty Ltd, as the resale occurred outside the 12 month period, the comparison should be to the market value at the date of termination, unless evidence is lead to show that the market value cannot be adduced.

Accordingly, the appeal was allowed, and the matter was remitted to the primary judge to ascertain the value of the property as at the date of termination.

Whilst this case is one which clarifies the principles of assessment of damages, it is a timely reminder of the problems one will face as a purchaser who cannot complete the contract for sale of land.

The article was prepared with the able assistance of law student Shazia Nadan.

Maclarens Lawyers has been in operation since 1945. Please contact Maclarens Lawyers for professional legal advice.