Reviewing Off the Plan Contracts to Avoid Substantial Alterations – Lessons from Gough & Ors v South Sky Investments

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You purchase an off the plan property. Prior to settlement, however, the Developer notifies you of changes to specifics of the property, as represented in the Disclosure Document provided by the Developer. Such changes may include the size of rooms, the fittings in the bathroom, the brand of air-conditioning, or may even transform what you thought would be a residential building into a hotel. Can you avoid the contract?

This was the predicament in the recent Supreme Court of Queensland case of Gough & Ors v South Sky Investments Pty Ltd [2012] QCA 161. In this case, six appellants purchased off the plan apartments from South Sky Investments on the Gold Coast in ‘The Oracle’ building. Further into construction, however, the building changed its letting rights, was rebranded ‘Peppers Resort’, and transformed a residence with hotel and resort-like features. Regardless, the court held that such alterations were permitted because, regardless of what information pages had disclosed, the terms of the contract allowed for all of the alterations.

This case illustrates the necessity for buyers purchasing off the plan lots to meticulously review their purchase contracts. If there is particular subject matter which are non-negotiable for the buyer, it is essential that the contract, and in particular the relevant clauses, are reviewed to ensure that sellers cannot make any adverse amendments closer to settlement.

The Oracle  

In 2006, Mr Gough and five other purchasers entered into contracts with the developer (“South Sky Investments”) for the purchase of off the plan apartments in one of two towers in Broadbeach on the Gold Coast. The two-tower development was described as The Oracle, and was one of a number of high rise developments erected on the Gold Coast in addition to Soul and the Q1 in Surfers Paradise.

Prior to signing the contracts, Mr Gough had been provided with an assortment of promotional materials which consistently referred to the development as The Oracle, and described it as a ‘residential building’. The Appellants had also been provided with Disclosure Statements and Information Pages pursuant to s 213 of the Body Corporate and Community Management Act 1997 (“the BCCM Act”) also describing the building as The Oracle.

Before the due date for the completion of the contracts, however, Mr Gough was notified that the first Oracle building was being rebranded as “Peppers Broadbeach” and would be “the flagship Peppers hotel”.

In response, Mr Gough attempted to terminate the contract on the basis that the subject matter – the lot – was substantially different from what was in the contract.  Mr Gough argued that he would be “materially prejudiced” if he was forced to complete the contract of sale.

South Sky Investments sued for breach of contract.

Previous decisions and Relevant Law

Before the Trial Judge, Mr Gough argued that he would be “materially prejudiced” if he was required to complete the contract after the changes made by the developer.

Section 214(4) of the BCCM Act provides that a buyer may cancel a contract if:

  1. It has not already been settled; and
  2. The buyer would be materially prejudiced if compelled to complete the contract, given the extent to which the disclosure statement was, or has become, inaccurate; and
  3. The cancellation is effected by written notice given to the seller within 14 days.

The matter was first heard in the Supreme Court. Mr Gough and 5 other purchasers were successful and the Trial Judge accepted that the Mr Gough had been materially prejudiced as the “contract (including the BCCM Disclosure Statement that formed part of it) did not give protection…” to his expectations. However in the Court of Appeal, Muir J rejected the Trial Judge’s decision and found that on the construction of the contract, retention of The Oracle name and residential nature was not a term of the contract.

The Court of Appeal Decision

The Court held that Mr Gough had failed to prove sufficient grounds for termination of the contract and as such was in breach of his contract. This was for a number of reasons.

1. On the construction of the contract, there was no promise nor term of the contract specifying that South Sky Investments would retain the name ‘The Oracle’

Mr Gough argued that pursuant to the decision in Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007) 233 CLR, it was the common intention of the parties, expressed in the language of their contract and understood in the context of the relationship, that the promise for the building to be named The Oracle was an essential term of the contract. As such, the breach of the essential term warranted a termination of the contract.  Even if the term was not an essential term of the contract, it could be deemed an “intermediate term”.  Therefore altering the building name and nature of the building would still result in a breach that is serious enough to terminate the contract.

The Court of Appeal, however, rejected this argument and Justice Muir stated that:

“The mere fact that a development is given a name and that name is used in promotional and contractual documentation says little, if anything, about whether there is to be found in the contract an implied promise that the name will be used in respect of the completed building.”

His Honour held that the reference to The Oracle in disclosure documents and promotional material did not result in promissory intent. If there had been commercial value in retaining the name of the development, clauses in the contract would have been included “relating to rights in respect of the retention and the use of the name”. As there were no clauses protecting the retention of The Oracle name and brand, it was not a term, or even a warranty, of the contract.

As such, his Honour accepted South Sky Investments’ submission that the use of the name in the promotional material was merely for identification purposes.

2. The Contract allowed for the Letting Rights to other companies

Justice Muir further identified a number of clauses in the contract which permitted letting agents to be engaged by South Sky Investments, as well as clauses which allowed for the leasing of properties. The contract also did not stipulate that such leasing had to occur under “The Oracle” name, and therefore the use of Peppers was not a breach of the contract.

3. There was no Statutory Warranty pursuant to s 215 of the BCCM Act

Under section 215 of the BCCM Act, any material accompanying the Disclosure Statement can form part of the provisions of the purchase contract. Under section 216, this accompanying material can be relied on by the buyer.

The Court of Appeal accepted that an Information Page, which accompanied the Disclosure Document and described the development as the Oracle, could come under s 215 as forming part of the provisions of the contract. However his Honour went on to say that the Information Page could not be read in isolation from the contract or divorced from the Disclosure Statement.

For this reason, Muir J was doubtful that the “critical words” on the Information Page, “The residential component, to be known as The Oracle” could “mean anything more than that the seller’s present intention, subject to rights which may be exercised under the contract, the Caretaking and Letting Agreement, or the lease, is that the residential component will be known as “The Oracle”.

South Sky Investments, therefore, were not under any obligation to retain the name of the development as The Oracle, and had a contractual right to lease out the properties under the Peppers Broadbeach name.

4. The Impact of the Brand Name Change

Muir J accepted the Trial Judge’s finding that there was no evidence to suggest that the value of the apartments could fluctuate due to the new management by Peppers Broadbeach. Again, the Court of Appeal found that there was no contractual provisions which prohibited this action and therefore it did not constitute a sufficiently serious breach.

Lessons

This case highlights the necessity for buyers to review their contracts for off the plan lots to ensure that the Developer cannot make any changes to any subject matter which is non-negotiable or very important to the buyer.

In Gough, the buyers were stuck with their contracts because the contract did not contain specific clauses which granted any importance to the name of the building (“The Oracle”) or excluded its use as a hotel.  The result was that subsequent changes to these aspects were not considered a breach of a term, or even a warranty, in the contract. The buyers were therefore not materially prejudiced in this regard and could not terminate their contracts.

For more information regarding Off the Plan Contracts

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