Formation of Contract in Real Estate Transactions

Formation of Contract in Real Estate Transactions

Tony Cahill

Legal Commentator and Author

TABLE OF CONTENTS

About the author ..................................................................................... iii

Introduction

Essential elements of a valid contract – general principles

Intention to create legal relations – general principles

Agreement – general principles

Masters v Cameron

Statutory provisions for contracts passing interests in land

Formation of contracts for sale of land – private treaty

Formation of contracts for sale of land – auction

Formation of contracts for sale of business (and other contracts)

Formation of leases

Formation of Contract and problems with a copy deposit bond

20

21

22

25

Agents (not only estate agents) and the formation of real estate contracts 30

11

13

3

5

1

1

1

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– – ii –

ABOUT THE AUTHOR

Tony Cahill started practice in 1981. After 13 years with a medium-sized city law firm, Tony commenced practice on his own account at Chatswood until June 2002. Tony is currently undertaking a ‘sabbatical’ from private practice to concentrate on projects in continuing professional education.

Tony is a member of the Law Society’s Property Law and Environmental,

Planning and Development Committees. He has been a member of the Re-

Draft Committees for the 2000 and 2004 editions of the Contract for the

Sale of Business, and the Contract for the Sale of Land since the 1992 edition.

Tony was a co-author with Russell Cocks and Paul Gibney of the first New

South Wales edition of 1001 Conveyancing Answers , and is currently a coauthor of Conveyancing Service New South Wales and Annotated

Conveyancing and Real Property Legislation New South Wales , both published by LexisNexis.

Tony has been a part-time lecturer at the University of Technology,

Sydney, in subjects including construction law, legal studies, and real estate law, and is a part-time lecturer at the Sydney and Northern Sydney

Institutes of TAFE in various law subjects.

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– – iv –

Formation of Contract in Real Estate Transactions

Tony Cahill

____________________________________________________________

Introduction

This paper is designed to provide an overview of some of the issues to be considered in determining whether a valid contract has been formed in a real estate transaction. After a discussion of the requirements for the formation of a valid contract generally, the paper will consider cases highlighting some of the features regulating formation of contracts in a number of categories of real estate transactions.

Essential elements of a valid contract

– general principles

(3)

(4)

(5)

(6)

Most commentators on contract law identify six essential elements for a valid contract at common law:

(1) intention to create legal relations;

(2) agreement – typically established by identifying an offer, and a

“matching” acceptance; consideration (or form); capacity to contract; genuine consent; and legality of purpose.

Some commentators further group the first three categories into the elements which establish the existence of an “apparent” contract, with the remaining three elements being factors which would vitiate the existence of an apparently valid contract.

The focus of this paper will be on the first two elements.

Intention to create legal relations – general principles

It is not uncommon for parties to make arrangements which are promissory in nature, but which are not intended to create legally enforceable rights and obligations. For example, a commitment to follow the observances of a

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Formation of Contract in Real Estate Transactions Tony Cahill particular religion, or promises made to one’s life partner, will generally not be amenable to the jurisdiction of the courts. On the other hand, an employment relationship or retailing arrangement are well-recognised as creating legal rights and obligations.

Whether the parties intended an arrangement to be legally binding will be determined by an objective test rather than by the subjective intention of the parties: Taylor v Johnson (1983) 151 CLR 422 at 428-429; [1983]

HCA 5 at [7]–[9]; Air Great Lakes Pty Ltd v K S Easter (Holdings) Pty Ltd

(1985) 2 NSWLR 309.

A concise statement of the objective theory is set out in Taylor v Johnson at [7], quoting Holmes J in The Common Law (1881), Lecture IX: the law is concerned, not with the real intentions of the parties, but with the outward manifestations of those intentions.

To assist in determining the objective intentions of the parties, the courts have developed three main rules regarding intention:

 where an arrangement is made for social, domestic or family purposes, the court presumes the arrangement is not intended to create legal relations;

 where an arrangement is made for business or commercial purposes, the court presumes the arrangement is intended to be legally binding;

 the above two presumptions are rebuttable. So a party can succeed in establishing that a social, domestic or family arrangement was intended to be legally enforceable, or that a business or commercial arrangement was not intended to create legal relations, but, in either case, the party will require strong evidence to do so.

To take some specific examples illustrating the first rule:

 an agreement between a (non-separated) married couple whereby the husband promised to send money to his wife when she was too ill to return to Ceylon after their holiday together in England was held to be unenforceable ( Balfour v Balfour [1919] 2 KB 571);

 a promise by a man to his fiancée that he would pay her a clothing allowance lacked legal intention ( Cohen v Cohen (1929) 42 CLR

91; [1929] HCA 15);

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Formation of Contract in Real Estate Transactions Tony Cahill

 a volunteer worker at a youth centre receiving accommodation, food and the use of camp facilities (but no wages) failed in a compensation claim ( Teen Ranch Pty Ltd v Brown (1995) 38

AILR ¶5-036 (NSWCA)).

For a case illustrating the operation of the second presumption in the context of an application for credit, see Toll (FGCT) Pty Ltd v Alphapharm

Pty Ltd (204) 219 CLR 165; 79 ALJR 129; 211 ALR 342; [2004] HCA 52 especially at [38]–[41].

For cases in which the relevant presumption was rebutted, see:



Wakeling v Ripley (1951) 51 SR (NSW) 183 – an elderly man in the Southern Highlands promised his sister and her husband that if they moved from England to keep him company he would permit them to live with him rent-free and leave them the property on his death. Held the consequences for the plaintiffs (quitting their employment, selling their home, relocating) were so serious that a reasonable observer would view the parties as having intended to create an enforceable contract.



Rose & Frank Co v Crompton Bros Ltd [1925] AC 445 – written agreement between a British and an American company for the supply of “carbonised tissue paper” held not to create legal relations as the agreement included an “honour clause” stating that the agreement was not to be subject to legal jurisdiction.

Agreement – general principles

In conventional English (and Australian) contractual theory, whether or not an agreement has been reached involves:

 identification of an offer;





 identification of an acceptance; determining whether the offer and acceptance “connect”; and identifying whether the agreement contains all of the matters required to make the agreement sufficiently certain.

The courts have developed numerous rules about offer and acceptance.

Many of the rules take concepts which would in ordinary language be either an “offer” or “acceptance” and limit or remove the notion from what is an offer or an acceptance in the legal sense. Among the more important rules regarding offers are:

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





 an offer can be distinguished from an invitation to treat (for example, a self-service shop display ( Pharmaceutical Society of

Great Britain v Boots Cash Chemists (Southern) Ltd [1953] 1 QB

401) or the advertising of an auction ( Harris v Nickerson (1873)

LR 8 QB 286); an offer can be distinguished from an option (the latter being best characterised as a contract to enter into a further, different contract upon the grantee of the option taking certain steps identified in the option contract, although it should be said that an alternative approach views an option as an irrevocable offer); an offer can be made to a nominated or identified offeree, or to a class of identified persons, or to the “whole world” (famously,

Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256); neither a request for information, nor a response to such a request, constitutes an offer ( Harvey v Facey [1893] AC 552. H telegrammed F “Will you sell me BHP? Telegraph lowest cash price.” F replied “Lowest cash price for BHP £900”. H then purported to accept the “offer”. Held neither of the first two telegrams was an offer).

Some rules about acceptance:

1. A conditional acceptance is not legally an acceptance, but is a counter-offer.

2.

3.

Silence is not sufficient acceptance ( Felthouse v Bindley (1862)

11 CB (NS) 869 – “I offer to buy your horse. If I hear no more about him I shall consider the horse mine at £30 15 shillings” – not effective).

Acceptance must be in accordance with the manner specified in the offer. A particularly memorable illustration of this principle is contained in the decision Comdox v Robins [2009] NSWSC 367.

That case raised the issue of whether an option had effectively been exercised. Bryson AJ observed (at [23]):

“[I]f particular means for exercising an option are intended to be essential for effective exercise, compliance with the prescribed means is necessary if the stated contractual relationship is to result. It does not matter whether observing the prescribed means is objectively important: what matters is whether the words used show that they were intended to be essential. If the language used really means that it is a condition of effective exercise of option that the notice must be on blue paper and delivered by a man in a

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Formation of Contract in Real Estate Transactions

4.

5.

Tony Cahill clown suit, pink paper or a woman in a pixy suit will not be effective. There must be compliance; there is no allowance for taking some other non-complying course, even if it appears to achieve the same result.”

If a time for acceptance is specified, acceptance must offer within that time. If no time is specified, acceptance must occur within a reasonable time.

Acceptance must be in response to, and in reliance on, an offer ( R v Clarke (1927) 40 CLR 227; [1927] HCA 47 – prisoner providing information leading to the arrest of the true murderers held to have no contractual right to the reward as the only thing in his mind when providing the information was the fear of conviction and execution and the desire to be released – a useful illustration of where the offer and the acceptance do not

“connect”).

Masters v Cameron

An area of continuing difficulty in determining whether the parties have reached agreement is whether the parties have in fact concluded the agreement or whether they are, effectively, still in negotiation. The key

Australian decision remains Masters v Cameron (1954) 91 CLR 353;

[1954] HCA 72.

The memorandum considered in that case was in these terms (at p 360,

[7]):

I, Violet Christina Cameron, widow of Bowelling, agree to sell my farming property at Bowelling, being Wellington Location 4095 comprising approximately 5,000 acres, for the sum of Seventeen

Thousand Five Hundred Pounds (17,500 pounds) cash and to complete the fence on the North West portion of the Bowelling/Noggerup Road running through Bokhara, to this extent only. 1. Complete 30 chains of fencing including wire. 2. Erect further 100 chains of bored posts ready for wiring. I agree to sell the land and all fixed improvements on a freehold basis free from all encumbrances, and to pay all costs, including legal fees necessary to procure for the purchaser a freehold unencumbered title thereto. This agreement is made subject to the preparation of a formal contract of sale which shall be acceptable to my solicitors on the above terms and conditions, and to the giving of possession on or about the Fifteenth Day of March 1952. Signed at

Bowelling this Sixth Day of December 1951. VIOLET C. CAMERON

Witnessed by R. O. WAY 6/12/51. And I, Norman James Masters on behalf of N. J. & M. E. I. Masters, of 5 Waratah Street, Cronulla,

N.S.W., hereby agree to purchase the above property on the above terms

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Formation of Contract in Real Estate Transactions Tony Cahill and conditions. Signed at Bowelling this Sixth day of December 1951.

N. J. MASTERS Witnessed by R. O. WAY 6/12/51.

How is that memorandum to be characterised? The Court identified three possible “classes” (at pp360-363; [9]–[13]):

9. Where parties who have been in negotiation reach agreement upon terms of a contractual nature and also agree that the matter of their negotiation shall be dealt with by a formal contract, the case may belong to any of three cases. It may be one in which the parties have reached finality in arranging all the terms of their bargain and intend to be immediately bound to the performance of those terms, but at the same time propose to have the terms restated in a form which will be fuller or more precise but not different in effect. Or, secondly, it may be a case in which the parties have completely agreed upon all the terms of their bargain and intend no departure from or addition to that which their agreed terms express or imply, but nevertheless have made performance of one or more of the terms conditional upon the execution of a formal document. Or, thirdly, the case may be one in which the intention of the parties is not to make a concluded bargain at all, unless and until they execute a formal contract.

10. In each of the first two cases there is a binding contract: in the first case a contract binding the parties at once to perform the agreed terms whether the contemplated formal document comes into existence or not, and to join (if they have so agreed) in settling and executing the formal document; and in the second case a contract binding the parties to join in bringing the formal contract into existence and then to carry it into execution. Of these two cases the first is the more common. Throughout the decisions on this branch of the law the proposition is insisted upon which Lord Blackburn expressed in Rossiter v. Miller

(1878) 3 App Cas 1124 when he said that the mere fact that the parties have expressly stipulated that there shall afterwards be a formal agreement prepared, embodying the terms, which shall be signed by the parties does not, by itself, show that they continue merely in negotiation. His Lordship proceeded: “. . . as soon as the fact is established of the final mutual assent of the parties so that those who draw up the formal agreement have not the power to vary the terms already settled, I think the contract is completed” (1878) 3 App Cas, at p 1151: see also Sinclair, Scott

& Co. Ltd. v. Naughton [1929] HCA 34; (1929) 43 CLR 310, at p

317. A case of the second class came before this Court in

Niesmann v. Collingridge [1921] HCA 19; (1921) 29 CLR 177 where all the essential terms of a contract had been agreed upon, and the only reference to the execution of a further document was in the term as to price, which stipulated that payment should be made “on the signing of the contract”. Rich and Starke JJ. observed (1921) 29 CLR, at pp 184, 185 that this did not make the signing of a contract a condition of agreement, but made it a condition of the obligation to pay, and carried a necessary implication that each party would sign a contract in accordance with the terms of agreement. Their Honours, agreeing with Knox

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C.J., held that there was no difficulty in decreeing specific performance of the agreement, “and so compelling the performance of a stipulation of the agreement necessary to its carrying out and due completion” (1921) 29 CLR, at p 185: see also

O’Brien v. Dawson

[1942] HCA 8; (1942) 66 CLR 18, at p

31.

11. Cases of the third class are fundamentally different. They are cases in which the terms of agreement are not intended to have, and therefore do not have, any binding effect of their own:

Governor & c. of the Poor of Kingston-upon-Hull v. Petch (1854)

10 Exch 610 (156 ER 583). The parties may have so provided either because they have dealt only with major matters and contemplate that others will or may be regulated by provisions to be introduced into the formal document, as in Summergreene v.

Parker [1950] HCA 13; (1950) 80 CLR 304 or simply because they wish to reserve to themselves a right to withdraw at any time until the formal document is signed. These possibilities were both referred to in Rossiter v. Miller (1878) 3 App Cas 1124. Lord

O’Hagan said: “Undoubtedly, if any prospective contract, involving the possibility of new terms, or the modification of those already discussed, remains to be adopted, matters must be taken to be still in a train of negotiation, and a dissatisfied party may refuse to proceed. But when an agreement embracing all the particulars essential for finality and completeness, even though it may be desired to reduce it to shape by a solicitor, is such that those particulars must remain unchanged, it is not, in my mind, less coercive because of the technical formality which remains to be made” (1878) 3 App Cas, at p 1149. And Lord Blackburn said:

“parties often do enter into a negotiation meaning that, when they have (or think they have) come to one mind, the result shall be put into formal shape, and then (if on seeing the result in that shape they find they are agreed) signed and made binding; but that each party is to reserve to himself the right to retire from the contract, if, on looking at the formal contract, he finds that though it may represent what he said, it does not represent what he meant to say. Whenever, on the true construction of the evidence, this appears to be the intention, I think that the parties ought not to be held bound till they have executed the formal agreement” (1878)

3 App Cas, at p 1152. So, as Parker J. said in Von Hatzfeldt-

Wildenburg v. Alexander (1912) 1 Ch 284, at p 289 in such a case there is no enforceable contract, either because the condition is unfulfilled or because the law does not recognize a contract to enter into a contract.

12. The question depends upon the intention disclosed by the language the parties have employed, and no special form of words is essential to be used in order that there shall be no contract binding upon the parties before the execution of their agreement in its ultimate shape: Farmer v. Honan [1919] HCA 13; (1919) 26

CLR 183. Nor is any formula, such as “subject to contract”, so intractable as always and necessarily to produce that result: cf.

Filby v. Hounsell (1896) 2 Ch 737. But the natural sense of such words was shown by the language of Lord Westbury when he

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Formation of Contract in Real Estate Transactions Tony Cahill said in Chinnock v. Marchioness of Ely (1865) 4 De GJ & S 638

(46 ER 1066): “if to a proposal or offer an assent be given subject to a provision as to a contract, then the stipulation as to the contract is a term of the assent, and there is no agreement independent of that stipulation” (1865) 4 De GJ & S 638, at p 646

(46 ER, at p 1069). Again, Sir George Jessel M.R. said in

Crossley v. Maycock (1874) LR 18 Eq 180: “if the agreement is made subject to certain conditions then specified or to be specified by the party making it, or by his solicitor, then, until those conditions are accepted, there is no final agreement such as the Court will enforce” (1874) LR 18 Eq, at pp 181, 182.

13. This being the natural meaning of “subject to contract”, “subject to the preparation of a formal contract”, and expressions of similar import, it has been recognized throughout the cases on the topic that such words prima facie create an overriding condition, so that what has been agreed upon must be regarded as the intended basis for a future contract and not as constituting a contract. Indeed, Lord Greene M.R. remarked during the argument in Eccles v. Bryant and Pollock (1948) Ch 93, at p 94 that when the expression “subject to contract” was used he had never known a case in which it had been suggested, much less held, that this did not import that there was nothing binding till the exchange of parts of the formal contract was made. The effect of the early cases on the subject was stated by Sir George Jessel

M.R. in Winn v. Bull (1877) 7 Ch D 29 when he said in a passage which has become well-known: “It comes, therefore, to this, that where you have a proposal or agreement made in writing expressed to be subject to a formal contract being prepared, it means what it says; it is subject to and is dependent upon a formal contract being prepared. When it is not expressly stated to be subject to a formal contract it becomes a question of construction, whether the parties intended that the terms agreed on should merely be put into form, or whether they should be subject to a new agreement the terms of which are not expressed in detail”

(1877) 7 Ch D, at p 32.

The memorandum in Masters itself was held to fall into the third category, and so there was no binding contract (at p 364, [15]).

In GR Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd (1986)

4 BPR 9315, McLelland J said “There is in reality a fourth class of case additional to the three mentioned in Masters v Cameron , as recognised ... in Sinclair Scott & Co Ltd v Naughton (1929) 43 CLR 310 at 317 , namely,

‘one in which the parties were content to be bound immediately and exclusively by the terms which they had agreed upon whilst expecting to make a further contract in substitution for the first contract, containing, by consent, additional terms’”. See also Love & Stewart Ltd v S Instone & Co

Ltd (1917) 33 TLR 475 at 476. However, the existence of this fourth category has been questioned.

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Capitol Theatre Management Pty Ltd v Council of the City of Sydney

[2005] NSWSC 5 involved a dispute about a lease entered into pursuant to an agreement for lease in March 1992. The lease was not entered into until

16 April 2002 (although the commencement date was to be 16 January

1995). Presumably not coincidentally, CTM commenced proceedings against the Council on 16 April 2002. Those proceedings were settled on terms set out in a letter dated 19 April 2002 (at [9] – emphasis added):

I refer to my letter dated 19 April 2002 and to our ongoing discussions today.

As discussed, the proposed agreement is as follows:

1. The City, Capitol Theatre Management Pty Ltd (Capitol) and

Arena Management Pty Limited (Arena) have agreed that:

(a) the Lord Mayor is entitled to nominate one director who will be appointed to the board of Capitol (the lessee) in respect of which there must be prior consultation with the

Board, which may be the Lord Mayor;

(b) the Lord Mayor (for the City) is entitled to nominate an observer, to be approved by the board of Capitol as lessee

(such approval not to be unreasonably withheld), to attend at least 3 board meetings per annum of the lessee;

(c) the Theatre Management Policy board under the lease is to be abolished;

(d) the City will have a last right of refusal if an assignment of the lease is proposed (including as provided by clause

4.4 of the lease). The terms of this right are to be finalised by further negotiation between the parties;

(e) the formula for rent payable under the lease is to be amended so as to provide an enhanced rental which is calculated on the basis of a percentage of all income of the lessee in respect of the theatre, rather than theatre rental revenue. The details of your proposal are set out in your 19

April 2002 letter. However, the rent payable is to be no less than the greater of:

(i) $100,000 per annum (excluding GST), adjusted annually for CPI; and

(ii) the amount calculated in accordance with the current lease provisions.

(f) Capitol is to provide to the City details of all income of the lessee in respect of the theatre. I acknowledge this has been received for the last 4 years, to enable the City to assess

Arena’s proposal to amend the rent formula.

2. The proceedings will be discontinued with each party to pay its own costs.

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3. The matters outlined above are to be documented as changes to the lease.

4. The parties agree to be bound by the terms of this letter.

I thank you for your cooperation in this matter.

Should you have any queries please do not hesitate to contact me.

The attempts by the parties and their legal advisers to “document” this agreement were lengthy. There was early in the correspondence a comment by Capitol’s company secretary which was described by McDougall J as

“remarkably prophetic” (see [12]–[13]):

So I am now satisfied that this process is now proceeding although I know how these things can sometimes drag on when the lawyers get down to arguing about the details.

By late July 2003, Capitol’s interests indicated that there had been a failure to agree on the right of last refusal. His Honour set out the applicable principles in these terms (at [25]–[28]):

25 The parties approached this issue by reference to the well known three categories formulated by Dixon CJ and McTiernan and

Kitto JJ in Masters v Cameron (1954) 91 CLR 353, 360, perhaps supplemented by the “fourth category” described by Knox CJ and

Rich and Dixon JJ in Sinclair, Scott & Co v Naughton (1929) 43

CLR 310, 317. (The existence of the fourth category as a separate category was identified by McLelland J in Baulkham Hills

Private Hospital Pty Ltd v G R Securities Pty Ltd (1986) 40

NSWLR 622. His Honour’s identification was confirmed on appeal: (1986) 40 NSWLR 631. Whether or not there is a fourth category has been doubted: see, for example, Peden, Carter and

Tolhurst, When Three Just Isn’t Enough: The Fourth Category of

“Subject to Contract” Cases (2004) 20 (2) JCL 156. For present purposes, it is immaterial for me to consider (if it is open to me to consider) whether the fourth category is in truth no more than the first, differently expressed.)

26 Those four categories relate to the situation where parties who have been negotiating reach agreement on terms of a contractual nature and agree that what they have negotiated should be dealt with by a formal contract. The four categories may be summarised as follows:

(1) The parties have reached finality on the terms of their agreement. They intend to be bound to perform those terms. But they wish to restate the terms, to no different effect, in a fuller or more precise way.

(2) The parties have reached complete agreement on the terms of their bargain. They do not intend to depart from or add to that which they have agreed. But they have agreed to make performance of one or more of the terms conditional on the execution of a formal document.

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(3) The parties do not intend to make a concluded bargain at all, unless and until they execute a formal contract.

(4) The parties are content to be bound immediately and exclusively by the terms that they have agreed. But they expect to make a further contract, in substitution for the immediate contract, that will contain additional terms.

27 In the first, second and fourth categories, there is a binding contract. In the first and fourth categories, the parties are bound at once to perform that which they have agreed. In the second category, they are bound to join in bringing the formal contract into existence, and then to perform it. But in the third category, the parties are not bound to perform unless and until they bring into existence the formal contract.

28 The decisive issue is the intention of the parties. But that is not their subjective intention. It is their objective intention, ascertained from the terms of their communications understood in the light of surrounding circumstances. See McHugh JA in G R

Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd

(1986) 40 NSWLR 631, 634; see also Gleeson CJ in Australian

Broadcasting Corporation v XIVth Commonwealth Games Ltd

(1988) 18 NSWLR 540, 548-549.

The Court held that the parties had intended to be legally bound as to the right of last refusal (and the other terms) by their letter of 19 April (at

[39]). Nevertheless, the Council failed because there had been a failure to agree on an essential term, and no available agreed or contemplated mechanism, such that the Court could not give effect to the apparent intention of the parties (at [45], [68]).

Statutory provisions for contracts passing interests in land

Contracts dealing with interests in land have, for reasons of public policy

(not least of which being the “power” attaching to land ownership and the attendant risks of land fraud) have long been subject to “special” rules.

The successor in New South Wales to the Statute of Frauds is Div 3 of Pt 2 of the Conveyancing Act 1919 .

Division 3 Assurances of land

23B Assurances of land to be by deed

(1) No assurance of land shall be valid to pass an interest at law unless made by deed.

(2) This section does not apply to:

(a) an acknowledgment under section 83 of the Wills, Probate and Administration Act 1898 ,

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(b) a disclaimer made in accordance with any law relating to bankruptcy in force before or after the commencement of the Conveyancing (Amendment) Act 1972 , or not required to be evidenced in writing,

(c) a surrender by operation of law, and a surrender which may, by law, be effected without writing,

(d) a lease or tenancy or other assurance not required by law to be made in writing,

(e) a vesting order,

(f) any other assurance taking effect under any Act or

Commonwealth Act.

(3) This section does not apply to land under the provisions of the

Real Property Act 1900 .

23C Instruments required to be in writing

(1) Subject to the provisions of this Act with respect to the creation of interests in land by parol:

(a) no interest in land can be created or disposed of except by writing signed by the person creating or conveying the same, or by the person’s agent thereunto lawfully authorised in writing, or by will, or by operation of law,

(b) a declaration of trust respecting any land or any interest therein must be manifested and proved by some writing signed by some person who is able to declare such trust or by the person’s will,

(c) a disposition of an equitable interest or trust subsisting at the time of the disposition, must be in writing signed by the person disposing of the same or by the person’s will, or by the person’s agent thereunto lawfully authorised in writing.

(2) This section does not affect the creation or operation of resulting, implied, or constructive trusts.

23D Creation of interests in land by parol

(1) All interests in land created by parol and not put in writing and signed by the person so creating the same, or by the person’s agent thereunto lawfully authorised in writing, shall have, notwithstanding any consideration having been given for the same, the force and effect of interests at will only.

(2) Nothing in this section or in sections 23B or 23C shall affect the creation by parol of a lease at the best rent which can reasonably be obtained without taking a fine taking effect in possession for a term not exceeding three years, with or without a right for the lessee to extend the term at the best rent which can reasonably be obtained without taking a fine for any period which with the term would not exceed three years.

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23E Savings in regard to secs 23B, 23C, 23D

Nothing in section 23B, 23C, or 23D shall:

(a) invalidate any disposition by will, or

(b) affect any interest validly created before the commencement of the Conveyancing (Amendment) Act 1930 , or

(c) affect the right to acquire an interest in land by virtue of taking possession, or

(d) affect the operation of the law relating to part performance.

Section 54A of the Act is also relevant:

54A Contracts for sale etc of land to be in writing

(1) No action or proceedings may be brought upon any contract for the sale or other disposition of land or any interest in land, unless the agreement upon which such action or proceedings is brought, or some memorandum or note thereof, is in writing, and signed by the party to be charged or by some other person thereunto lawfully authorised by the party to be charged.

(2) This section applies to contracts whether made before or after the commencement of the Conveyancing (Amendment) Act 1930 and does not affect the law relating to part performance, or sales by the court.

(3) This section applies and shall be deemed to have applied from the commencement of the Conveyancing (Amendment) Act 1930 to land under the provisions of the Real Property Act 1900 .

Formation of contracts for sale of land – private treaty

The usual practice in New South Wales, where parties intend to enter into an agreement to sell and purchase land, is for two copies of the contract to be prepared which are in identical form ( Allen v Carbone (1975) 132 CLR

528 at 533). One copy is signed by the vendor and the other copy by the purchaser. The parts are subsequently exchanged, so that the vendor will hold the copy of the contract bearing the purchaser’s signature and the purchaser will hold the copy bearing the vendor’s signature. A commonly quoted analysis of the significance of exchange is contained in the judgment of Lord Greene MR in Eccles v Bryant [1948] Ch 93 at 99:

... there is a well-known common and customary method of dealing, namely by exchange, and anyone who contemplates that method cannot contemplate the coming into existence of a binding contract before that exchange takes place.

It was argued that exchange is a mere matter of machinery, having in itself no particular importance or significance. So far as significance is concerned, it appeared to me that not only is it not right to say of

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Formation of Contract in Real Estate Transactions Tony Cahill exchange that it has no significance, but it is the crucial and vital fact which brings the contract into existence. As for importance, it is of the greatest importance, and that is why in past ages this procedure came to be adopted by everybody as the proper procedure. In dealing with contracts for the sale of land, it is of the greatest importance to the vendor that he should have a document signed by the purchaser and to the purchaser that he should have a document signed by the vendor.

That statement has been approved by the High Court in Brien v Dwyer

(1978) 141 CLR 378 at 391; 22 ALR 485 at 495; 53 ALJR 123.

When parties propose to enter into a contract for the sale of land by the customary procedure of exchange there is a strong (though not irrebuttable) presumption that the parties do not contemplate the coming into existence of a binding contract before exchange takes place ( GR Securities Pty Ltd v

Baulkham Hills Private Hospital Pty Ltd (1986) 4 BPR 9315). So a purchaser represented by a solicitor will have considerable difficulties in arguing that a series of emails between that solicitor and the vendors will evidence an intention to enter into a binding contract – see Phillip Segal & anor v Max Christopher Donnelly & ors [2012] NSWSC 833, where such an attempt was unsuccessful.

The essential characteristic of exchange of contracts is that each party will have a document signed by the other party in their possession and control

(or the possession and control of their representative such as their legal adviser). One rationale is that it is important that a party to a contract knows what the party’s obligations are.

There are four methods by which an exchange of contracts (by private treaty – sale by auction raises its own issues, some of which are set out below) may occur:

 face-to-face (sometimes described as a “formal” exchange);





 exchange by post; exchange by document exchange; and telephonic exchange.

A face-to-face exchange has the benefits of certainty as to the “instant” of exchange, a “self-checking” facility (each party or their representative monitoring the activity of the other), and ease of dealing with matters such as the payment of the deposit. One of the other methods might be more convenient, particularly where the parties or their legal representatives are separated by distance, but attract risks – delay in “finishing” the exchange, uncertainty about precisely when (or for that matter whether) exchange has

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Formation of Contract in Real Estate Transactions Tony Cahill occurred, a counterpart going astray and so forth. Telephonic exchange is recognised as a method of exchange in both England ( Domb v Isoz [1980]

Ch 548) and New South Wales ( Sindel v Georgiou (1984) 154 CLR 661;

Henderson v Hopkins (1988) 4 BPR 9257).

While it is clearly desirable that the counterparts of the contract be identical, this is not an essential requirement, and a valid contract may be made by exchange of copies which are not identical ( Sindel v Georgiou).

In

Sindel the property was passed in at auction, and negotiations in the auctioneer’s office led to a consensus between the parties. The counterpart signed by the purchaser had details of the purchaser’s name, the price and the deposit inserted, but for some reason those details were not included in the counterpart signed by the vendor. The High Court found the exchange of contracts had been effective on the following basis (at [14] to [15]):

14. An unqualified acceptance of the proposition that delivery of two parts in identical terms is crucial to an effective exchange would exclude the parties’ intention as the governing or, even as a relevant, factor. The question whether the delivery of parts in identical terms is essential must ultimately depend on the parties’ intention. The answer to this question determines the manner in which the contract becomes binding. And as Lord Greene M.R. emphasised in Eccles v. Bryant (at p 99), the manner in which the contract is to be created so as to become binding is to be gathered from their intention, express or implied. In ascertaining their intention, we must take account of those factors which favour an insistence on documents in such a form as will evidence with certainty a contract and the terms of that contract, factors expressed and underlined by Lord Greene M.R. in Eccles v.

Bryant (at p 99) and by Lord Denning M.R. in Harrison v. Battye

(p.60). We must also take account of the real intention of the parties, giving due weight to their objective - the making of a binding contract by means of the exchange of parts. And if the parties, through negotiations between their solicitors, have agreed on the terms of their bargain and settle on an exchange of parts in order to seal that bargain, it would usually accord with their intention to treat the exchange as creating a binding contract, notwithstanding the lack of correspondence in the parts, so long as that lack of correspondence is capable of being remedied by rectification. It will be otherwise when it appears that the parties intend to be bound only by an exchange of parts in identical terms or when the prior negotiations do not completely settle the terms of the bargain and the parties look to the parts as exchanged to fix these terms.

15. This approach places less emphasis on the advantage of bringing into existence a document which establishes with certainty the terms of the contract and more emphasis on the intention of the parties in creating a contract by the ceremony of exchange, the

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Formation of Contract in Real Estate Transactions Tony Cahill terms of the bargain having already been determined. In such a case the importance of exchange lies not so much in the circumstance that it fixes the terms of the contract as in its function in fixing the existence of a binding contract, thereby terminating the period in which each party is free to withdraw from the negotiations. This concept of exchange enables the courts to do greater justice between the parties by precluding one party from acting on the footing that there is no binding contract when, as a result of an undetected error one part of the contract does not correspond with the other. On this view of exchange the availability of rectification is not a problem.

The principle expressed above has its practical limits. In Longpocket

Investments Pty Ltd v Hoadley (1985) NSW ConvR ¶55-244, there was a significant difference in the “subject to finance” clause in the respective counterparts. The purchaser’s solicitor sought the change, and the amendment was agreed to by the vendor’s solicitor after the vendor had signed the contract. The amendment was made on the counterpart signed by the purchaser, but not on the other copy. The Court of Appeal held that since the amendment was agreed to without the knowledge or authority of the vendor, it could not be said that the parties had agreed on the terms of the bargain.

A more extreme example occurred in Parkin v Pagliuca [2008] NSWSC

168. In that case the counterpart signed by the purchaser contained two section 149 certificates, but the copy signed by the vendors contained only one (the transaction was a sale off the plan of a lot in a consolidated site).

More critically, the counterpart signed by the vendors contained printed pages 3 to 11 of the 2000 edition of the contract; those pages were not included in the copy signed by the purchaser. Bryson AJ held that no contract had been formed, or alternatively that if a contract had been formed the purchaser was entitled to rescind any such contract due to the absence of the statutory cooling off notice. The vendors and the purchaser successfully cross-claimed against the solicitor who had been acting for both parties at the time of the attempted formation of the contract. The measure of the purchaser’s damages was, effectively, her costs of the proceedings (which were awarded against the solicitor on an indemnity basis); the damages sustained by the vendor were quantified in Parkin v

Pagliuca [2008] NSWSC 827. The quantum of damages was reduced on appeal by the solicitor, in part because the Court of Appeal considered that a false misrepresentation made by the vendor’s agent was an intervening factor which contributed to the loss sustained by the vendor (and reduced

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Formation of Contract in Real Estate Transactions Tony Cahill the chance that the purchaser would have entered into a contract to buy a different property from the vendor): Williams v Pagliuca [2009] NSWCA

250.

The decision of Hall J in Hearse v Staunton [2010] NSWSC 954 also raised issues relating to contractual formation (and in particular, variation of a contract once formed). The draft contract was prepared naming Mrs

Pallister as purchaser. Her name was subsequently deleted, and the name of her husband substituted in handwriting. Shortly prior to exchange, correspondence between the solicitors for the parties (from Staunton and

Thompson for the purchaser; Lander and Lander for the vendors) indicated that changes were sought to the draft contract. That letter also indicated

“Vanessa Joan Pallister will probably be added as a joint purchaser pursuant to Section 18(3) of the Duties Act prior to completion” .

After exchange there was a second relevant letter:

We enclose an unstamped Transfer for execution by the Vendors. Please return the Transfer to us for stamping purposes.

Please note that we have added Mrs Pallister as a joint purchaser pursuant to

S.18(3) of the Duties Act , 1997. Please amend the counterpart Contract accordingly.

The vendor validly terminated the contract in due course because of purchaser default, and pursued a claim for damages. Mr Pallister was insolvent; Mrs Pallister successfully argued that she was not a purchaser under the contract. The vendors then sued the firm named as solicitors for the purchaser claiming breach of warranty of authority. The reasoning is summarised by Hall J at [21]:

21 The plaintiffs allege that, by the letter of 19 January 2005, Staunton &

Thompson represented that they had authority to contract on Mrs Pallister’s behalf by adding her to the contract as a co-purchaser of the property. On the basis that Staunton & Thompson did not in fact have any such authority from

Mrs Pallister, they claim damages on the basis of alleged breach of warranty of authority. The claim against the third, fourth and fifth defendants is, accordingly, one for the damages that would have otherwise been recoverable from Mrs Pallister had such authority been granted to Mr Staunton.

The vendor failed. The key reasoning is at [109] to [111]:

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109 In those circumstances, the question is whether Mr Staunton impliedly so warranted. In my opinion, the answer to that question is that he did not impliedly warranted that he had Mrs Pallister’s authority to contract on her behalf in relation to the sale of the Clontarf property. In relation to that conclusion, the following matters are noted:-

(1) It is, of course, for the plaintiffs to establish on the probabilities that the implication relied upon ought to be drawn.

(2) The terms of the letter of 19 January 2005 are not, in themselves, capable of supporting the implication of an unqualified assertion or warranty that Mr Staunton had Mrs Pallister’s authority to act as her agent in making her a party to the contract. The letter does not convey either that Mr Staunton was acting for Mrs Pallister nor indicate that he had received her instructions in relation to any aspect of the contract. The letter was entirely consistent with the fact that he continued to act only on Mr Pallister’s instructions.

(3) In the circumstances of the present case, where the alleged agent is a solicitor and the subject matter of the relevant transaction is the sale of land, as a matter of principle, the solicitor does not have implied or ostensible authority from his or her client to amend or make a contract on behalf of the client in relation to a contract for the sale of land: Pianta v National Finance &

Trustees Limited (1964) 180 CLR 146 per Barwick CJ at 151; Ciavarella

(supra) at [104] to [106], per Young CJ in Eq (as his Honour then was); Notter

(supra) at [50] per White J. The solicitor for the plaintiffs, being experienced in conveyancing matters, may be taken as being aware of that long-established principle.

(4) In circumstances in which there was no express warranty or representation, and where the principle in (3) applies, I consider that the dicta of Higginbotham CJ in Maffey v Hobart (1888) 14 VLR 888 at 886 is apposite, wherein it was stated:-

“Where a person deals with another who is an agent of the apparent contracting party, the obligation generally rests upon him to ascertain the authority of a person with whom he deals.”

In the present case, as noted above, there was neither a representation that Mr

Staunton acted for Mrs Pallister nor was any clarification sought or inquiry made on behalf of the plaintiffs of Mr Staunton as to his authority to act for

Mrs Pallister. Nor did Mr Staunton’s correspondence or communications suggest that he had any particular or general authority from Mrs Pallister to

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Formation of Contract in Real Estate Transactions Tony Cahill obtain a variation of the existing contract for sale so as to make her a copurchaser.

110 I am of the opinion that, taking the letter of 16 January 2005 as a whole, and in context, including in particular, the letter of 16 December 2004, the letter of 19 January 2005 was neither an express or implied unqualified assertion by Mr Staunton that he was authorised by Mrs Pallister to act as her agent for the purposes of making her a party to the contract for sale. I consider the proper construction of the letter is that Mr Staunton was saying in it that

Mrs Pallister was to be added to the transfer as a transferee on a specified basis, as had been foreshadowed was likely in the letter of 16 December 2004. The evident, indeed, express purpose was a desire to gain the permitted exemption under s.18(3) available for a related person transferee but who is not a party to the contract.

111 Accordingly on its proper construction, I do not consider that the letter written by Mr Staunton on 19 January 2005 constituted or contained either an express or implied representation that he had authority from Mrs Pallister to act on her behalf so as to bind her as a party to the contract for the sale of the

Clontarf property.

The vendor appealed to the Court of Appeal: Hearse v Staunton [2011]

NSWCA 139. The appeal was dismissed. Young JA made these observations (at [3] to [6]):

3.

I am concerned that conveyancing solicitors would so easily agree with another solicitor's suggestion that a contract should be amended by simply writing in the name of a second purchaser.

4.

I am not sure what is meant by the simple request to "amend" the contract. Normally once a contract is made, it can only be "amended" formally by variation, rescission and replacement with a new contract or novation. Assuming that the solicitors intended a variation, complications arise when the variation is adding a party. What probably happens is that a new contract is made to replace the former contract.

5.

However, the argument proceeded on the basis that this was not the appropriate analysis. If that is correct, then the appellants' case runs foul of what Pape J said in Lee v Irons [1958] VicRp 71; [1958] VR 436,

447 that a party seeking to rely on the cause of action of wrongful warranty of authority must show that he or she entered into the contract relying on the warranty of authority.

6.

On the other hand, if my analysis is correct, both solicitors must be taken to have known the law that solicitors, save in exceptional cases, have no authority to make a contract on behalf of a client (let alone a nonclient). Pianta v National Finance & Trustees Ltd [1964] HCA 61; 180

CLR 146 reinforces this view taken both by the primary judge and

Whealy JA.

– 19 –


Formation of contracts for sale of land

– auction

The conduct of a real estate auction is subject to a number of well-settled common law principles of contract law. Arguably, the most thorough analysis of the position in New South Wales is the judgment of Holland J in AGC (Advances) Ltd v McWhirter (1977) 1 BPR 9454. Some basic statements of principle are:



The work done in anticipation of an auction – advertising, opening the property for inspection, advertising the impending auction for example – is characterised as (a series of) invitations to treat: things done to persuade or induce offers, not in themselves an offer (and so, incapable of being accepted, thereby giving rise to an agreement).

 The opening “patter” of the auctioneer and the calling for bids would likewise be an invitation to treat.



A bid is an offer – in that the bid is capable of immediate and unconditional acceptance by the auctioneer on behalf of the vendor, thereby giving rise to a concluded agreement (although, of course, it would be very rare for an auctioneer to immediately accept the first bid at an auction).



Each bid after the first is both an offer and a counter-offer.



A counter-offer will cancel any prior offer.



A bid, being an offer, can be withdrawn at any time prior to its acceptance. Withdrawal must be communicated to be effective. If a bid is withdrawn, there is no current offer (see the preceding bullet point) and an auctioneer should ask the underbidder to reinstate his or her bid.

 The announcement made by (many) auctioneers “Ladies and gentlemen, the property is on the market” is an invitation to treat; designed to induce offers (incidentally, the phrase also highlights the care which must be taken when an expression, well-known in an industry, is used when communicating with someone who is not active in the industry (see Boulas v Angelopoulos (1991) NSW

ConvR 55-606; (1991) Australian Contracts Reports 90-004).



The fall of the hammer constitutes acceptance, giving rise to a contract (albeit unenforceable until the formalities contemplated by s54A of the Conveyancing Act 1919 are complied with).

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To what extent have the conditions of auction, set out in the Property,

Stock and Business Agents Regulation, changed the basic principles of real estate auction procedure, developed over many decades. This issue was considered in Seivewright v Brennan (2005) 12 BPR 22,979; [2005]

NSWSC 216. In that case an auctioneer had initially accepted (in the sense of recognised) a bid but subsequently rejected the bid as being not in the best interests of the vendor. The bid was made, it seems, by an associate of the registered proprietor, where the vendor was a mortgagee exercising power of sale. The property was then knocked down at the underbidder’s previous bid. The disgruntled bidder argued that cl 18(1)(c) required that the property had to be sold to him as he was “the highest bidder”. Young

CJ in Eq held that the Regulation did not alter the general law of auctions, as set out in cases such as AGC (Advances) Ltd v McWhirter .

On the issue of an auctioneer’s authority, you should note that an auctioneer has implied authority to execute a contract on behalf of the successful bidder, on the basis that bringing an enforceable contract into existence is an integral part of the conduct of an auction ( Chaney v Maclow

[1929] 1 Ch 461; Wright v Madden [1992] 1 Qd R 343). The authority is limited in time; clearly extending to signing moments after the auction, probably to signing on the same day, but not, for instance, to a week after the auction ( Bell v Balls [1897] 1 Ch 663).

The prescribed conditions of auction are no longer reproduced in the printed form of contract for sale of land, so there is no need to amend the printed form merely because of the change to the Regulation. However, if there is to be an auction of a water access licence (“WAL”) using the joint copyright contract for sale of WAL, that printed form will need amendment since the real estate conditions of auction are printed in the form.

Formation of contracts for sale of business (and other contracts)

The strong presumption that parties do not intend to be bound unless and until an exchange of contracts occur does not necessarily apply outside

New South Wales, nor to other types of property transactions within New

South Wales. So, a prudent vendor’s representative when issuing a draft contract for sale of business (or, it seems, a contract for sale of a water access licence) should make it clear (in the covering letter, for example)

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Formation of Contract in Real Estate Transactions Tony Cahill that no binding legal relationship will arise unless and until there is an exchange of identical counterparts.

Formation of leases

Typically, a lease of real estate will be formed not by an exchange of identical counterparts but by the execution by or on behalf of all parties of multiple copies. The usual position must, however, be read subject to any statutory provision to the contrary. In particular, formation of a lease of premises to which the Retail Leases Act 1994 applies will be governed by section 8 of the Act:

8 When the lease is entered into

(1) For the purposes of this Act, a retail shop lease is considered to have been entered into when a person enters into possession of the retail shop as lessee under the lease or begins to pay rent as lessee under the lease (whichever happens first).

(2) However, if both parties execute the lease before the lessee enters into possession under the lease or begins to pay rent under the lease, the lease is considered to have been entered into as soon as both parties have executed the lease.

Note. Therefore, if the lessee starts to pay rent as lessee or enters into possession as lessee, the lease is considered to have been entered into even if neither party has executed the lease at that time. Money paid in advance (purportedly as rent) as a deposit to secure premises for a proposed lease does not constitute rent paid as lessee under the lease.

The scope of this section has been held to be sufficiently wide to permit the formation of a binding agreement for lease where there is a purely “word of mouth” agreement for lease; Perhauz v SAF Properties Pty Ltd [2007]

NSWADT 122; Thai Star Video Pty Limited v Walpole [2007] NSWADT

193.

In Perhauz the Administrative Decisions Tribunal considered the authority of an owner’s agent to create an oral, binding agreement for lease of premises within the scope of the Retail Leases Act 1994 . The facts were unusual in some respects. The applicants (the purported tenants under the alleged agreement for lease) were tenants under a lease of other premises owned by the landlord (and therefore had an existing relationship with the letting agent). The landlord had provided the applicants with a copy of the existing lease of the disputed premises about a year prior to the alleged creation of the agreement for lease as part of an inquiry as to whether the

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Formation of Contract in Real Estate Transactions Tony Cahill applicants would be interested in buying the premises – those negotiations did not come to fruition.

The key issues are succinctly stated at paragraph [54] of the judgment:

54 The specific issues to be resolved in determining whether a binding agreement was created are as follows: (a) whether, as a matter of law, a binding agreement for the lease of retail shop premises can arise in the absence of a document, other written evidence or acts amounting to part performance; (b) whether Mr

Felsch [the estate agent] had authority – actual and/or ostensible – to act as SAF’s agent in concluding an agreement to lease the

Premises; and (c) whether the necessary conditions for concluding an agreement for lease as claimed by the Applicants were in fact satisfied in the course of the relevant conversations.

As to the first issue, the Tribunal held that the definition of retail shop lease in section 3 of the Act permitted an oral agreement for lease (at [59]), and nothing in sections 7 and 8 of the Act prevented such a conclusion (at

[66] to [72]).

As to the second issue, the Tribunal’s reasoning appears at [75] to [78]:

75 In the Tribunal’s opinion, it need not determine whether Mr

Felsch had actual authority (express or implied) to bind SAF. The only evidence given on this issue was Mr Felsch’s statement that he did not have such authority. It is an open question, which need not be resolved, whether SAF’s decision not to call any witness from within its own staff would justify the Tribunal’s inferring that it had conferred the necessary authority on Mr Felsch.

76 The Tribunal’s conclusion is that Mr Felsch did have the requisite ostensible authority, at least until the commencement of his conversation with Mr Perhauz on 26 June 2006. It bases this conclusion on the following considerations advanced by Mr

Carney, coupled with two further matters.

77 These are as follows. First, Mr Felsch was the sole agent representing SAF in finding a tenant for the Premises. Secondly, it is quite plausible that estate agents seeking tenants at comparatively low rents for premises in a country town will possess the authority to conclude binding agreements with parties already known to them and to their principals without needing specific authorisation from an absentee landlord.

78 As to the Respondents’ claim that Mr Perhauz did not seek to rebut Mr Felsch’s assertion relating to the conversation of 26 June

2006, the Tribunal would observe that Mr Perhauz did in fact contain a version of this conversation that omitted much of what

Mr Felsch claimed to have occurred. In any event, as just indicated, the Tribunal’s finding on this issue of authority does not cover the period during which this conversation occurred.

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As to the third issue, the Tribunal held that there was evidence that the parties intended to be legally bound by the various verbal discussions, and that there was sufficient certainty of the key terms of the agreement. On the issue of intention to be legally bound, the Tribunal observed (at [87] to

[92]):

87 Appropriately, Mr Colquhoun and Mr Barraclough relied on a presumption or ‘expectation’ regarding commercial leases that is conveniently summarised in the following statement of Young J in Arjay Investments Pty Ltd v Morrison’s Outdoor Catering Pty

Ltd , unreported, Supreme Court of NSW, 1 May 1995:

Where one has a lease of commercial premises one normally expects that the lease will only come into existence after there has been an exchange of formal documents … if one can see in the negotiations that the parties had in mind the preparation of a more formal document by a solicitor, one tends to think that they did not intend to be bound until the more formal document was produced and exchanged.

88 In this case, according to Mr Perhauz, both he and Mr Felsch contemplated from as early as 22 June 2006 that a formal lease would be prepared by solicitors and executed by the parties.

89 But this is an expectation only, as Bryson J pointed out in

Dellwest Pty Ltd v Cafabe Pty Ltd , Unreported, Supreme Court of

NSW, 26 November 1997, and repeated in Napatarra v Perpetual

Trustee [1999] NSWSC 750 at [8]:

Judges of the Equity Division have … approached allegations that there has been an agreement to grant a commercial lease with the knowledge that commercial practice is that a binding relationship is made at the point of execution and delivery of the lease. However that is no more than an approach, as it is quite open to persons in negotiation for a commercial lease to proceed as they choose and to make an agreement for lease in an informal way, by correspondence or orally; if they do come to an agreement in that way the Court must recognise this is so and act on their agreement.

90 In Long v Piper [2001] NSWCA 342, a Court of Appeal decision dealing with this issue, it is noteworthy that the conclusion that no binding agreement arose until the execution of a formal lease was significantly influenced by the considerations that what was contemplated was ‘a relatively major lease of a hotel with an option to purchase’ and that on the formal commencement of the lease the lessee was to pay a substantial sum by way of premium

(see the judgment of Giles JA at [55] and [74 – 75]). For further discussion of the matters that may be relevant when resolving this question, see e.g. Landsmiths Pty Ltd v Hall [1999] NSWSC 735;

Gamvrogiannis v Blackshaw [2000] NSWSC 314; Lend Lease

Financial Planning Ltd v Southcap Pty Ltd [1998] QCA 117.

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91 In the Tribunal’s opinion, a number of factors in the present case suggest the conclusion that, in the absence of an express stipulation to the contrary, the informal agreement concluded in the conversations on 21, 22 and 23 June was intended to be binding on the parties before the execution of a formal lease.

These factors are as follows: (a) the existence of a current lease of other retail shop premises between the Applicants and SAF; (b) the fact that less than a year ago the Applicants had been given a copy of the lease from SAF to the existing tenants of the

Premises; and (c) the two factors cited above at [77] in support of the Tribunal’s conclusion that Mr Felsch had ostensible authority to enter into a binding agreement on behalf of SAF.

92 Having regard to these aspects of the context in which the conversations of 21, 22 and 23 June between Mr Perhauz and Mr

Felsch occurred, the Tribunal concludes that the requisite intention to enter into a binding agreement was discernible from the words used by the two participants during those conversations.

The Tribunal held that a valid agreement for lease had been created by the conduct of the lessor’s agent.

Formation of Contract and problems with a copy deposit bond

In Signorelli v M G South Pty Ltd [2012] NSWSC 1606; BC201210472,

Rein J considered the consequences of an exchange of contracts for a price of $1,885,000 in which the estate agent accepted a faxed copy of a deposit bond pending provision of the original the following day. The original bond was not forthcoming on time (or at all) despite numerous requests from the vendor’s solicitor. In due course the vendor’s solicitor terminated the contract. The property was resold to an under-bidder for $1,700,000.

The vendor sued the agent and his solicitor for negligence.

The plaintiff was hampered to an extent because the case as conducted bore no resemblance to the case as pleaded and particularised – an approach which understandably drew comment from counsel for each defendant, and from the Judge.

The claim against each defendant was dismissed. Presumably the claim against the solicitor is of greater interest to this audience. Rein J observed

(at [49] to [53]):

49 I shall now deal with the particulars of negligence alleged against Willis (see par [17] above), the first being the failure to verify with Vero General Insurance that the deposit bond was valid, current and enforceable. Mr Picone did seek to

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Formation of Contract in Real Estate Transactions Tony Cahill obtain the original of the deposit bond and he wrote to Vero and received a reply from Deposit Power, made contact with the Commonwealth Bank and checked online. As I have mentioned, it appears from the evidence that a deposit bond was issued by Vero. The difficulty was that the original was not produced by the purchaser to the vendor, either because it had been lost, which was one suggestion which had been made, or that it could not be obtained from "Emma", described as a mobile agent, the person to whom it was sent, or because the purchaser did not want it produced or replaced.

50 Again there is in relation to this a similar point to that made by Mr McLure, and that is that there is no question that what was provided by Mr Elali was not a valid, current enforceable deposit bond. What was required under the contract was a valid, current and enforceable bond. The document provided by Mr Elali on its face made it clear that it was unacceptable for the purposes of making any claim and Mr

Picone was aware of that from the first morning that he saw the document.

51 The second particular (see [17](2) above) is failing to promptly request the original deposit bond from the purchaser. Mr Picone sought the original from the purchaser on

28 July 2009 (see p 125). The response from the purchaser's solicitor was "I will get on to it ASAP" (see p 126). Mr Picone requested the original again by letter to the purchaser's solicitors on 4 August 2009 (p 143), 20 August 2009 (p 144) and 26 August 2009 (p 145) as well as by call on 21 September

2009 (p 160). The delay between 4 August and 20 August and from 26 August to 21 September has not been satisfactorily explained but the first request for the bond was prompt. The plaintiff has failed to make out this head of claim. Even if it were accepted that there was an unreasonable delay, it does not appear that the delay of itself has caused or contributed to the failure of the purchaser to provide the original deposit bond.

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52 Turning now to the third particular at [17](3) above, failing to require payment of the deposit by the purchaser by alternate means as required under the contract.

53 It is true that Willis did not recommend a demand for the 10 per cent but it is not at all clear to what this particular is directed. When viewed against paragraphs 18 - 23 in the pleading, which precede it, it appears that what is intended is an allegation that a demand for the deposit could not be made other than as a demand for the whole 10 per cent deposit and that to seek only the 5 per cent made the demand ineffective. Another possibility is that what is asserted is that

Mr Picone should have recommended that the demand be for the full 10 per cent so as to procure the whole 10 per cent from the purchasers…

Following an excursus about the utility of an expert’s report tendered on behalf of the plaintiff (at [53] to [61]) Rein J continued (at [62] to [65]):

62 The fourth particular at [17](4) above is in advising the plaintiff of his entitlement to terminate the contract with the purchaser when the defendant ought to have known in the circumstances that the plaintiff had no right. The fifth particular at [17](5) above is terminating the contract with the purchaser in circumstances where the plaintiff was not entitled to do so. These particulars are predicated on the assumption that the plaintiff had no right to terminate the contract. The assumption is flawed, essentially for the reasons advanced by

Mr Emmett, namely that the purchaser was obliged by cl 13 to provide a deposit bond and failed to do so notwithstanding a number of requests that he do so. As Brien v Dwyer makes plain, a deposit is "an earnest of performance by the purchaser if the vendor is willing to be bound". (See Brien v Dwyer at

385 per Barwick CJ, at 393 per Gibbs J and at 395 per Jacobs

J.) The deposit is an essential condition or fundamental term of the contract. (See Brien v Dwyer at 401 per Jacobs J.) This

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Formation of Contract in Real Estate Transactions Tony Cahill contract did not require payment of the deposit bond in cash into an agent's account but rather required provision of a deposit bond. The obligation to provide a deposit bond required a deposit bond that could be called on and be converted into cash, not a document that made it clear that it was not itself the bond and could not be relied on to make a call for the $85,000 which the issuer undertook to pay. To be effective as a deposit, the deposit bond must be capable of being turned into cash: see

Stone v Matich (1981) 2 BPR 9301, Josland v Mullaley

Properties Pty Ltd (1993) 6 BPR 13,285-3,289 and Wood Hall

Ltd v Pipeline Authority [1979] HCA 21; (1979) 141 CLR 443 at 457 dealing with bank guarantees. Provision of the copy of the deposit bond did not meet the contractual obligation imposed on the purchaser.

63 Insofar as cl 2.7 of the contract for sale is concerned,

I accept that it precluded the vendor from relying on cl 2.2 to cl

2.5 in circumstances where the vendor had agreed to accept a deposit bond and an effective deposit bond had been produced.

Normally, as explained in Brien v Dwyer , the vendor could terminate the contract immediately and without notice if the deposit was not paid or if, for example, the deposit was paid by cheque and the cheque was not honoured on presentation. The complication here was that the vendor himself or by his agent had agreed to extend the time for provision of the deposit bond to Monday 27 July 2009. The failure to supply the deposit bond by the close of business on the Monday would have entitled the vendor to terminate immediately. It is clear on the evidence that Mr Picone did not advise the plaintiff of that right but the plaintiff's case was not pleaded on the basis that termination should have been recommended and effected on that day. Mr

Picone continued to press for the deposit bond and to seek details of the whereabouts of the original bond. It may well be that from his client's point of view he allowed the process to go on too long but that delay was not the basis of the claim either.

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64 In my view there was no reason why the vendor could not terminate the contract for breach of an essential term.

As I have indicated, whilst that right might have been open, without more, to require provision of the bond by letter was, even if not necessary, not an imprudent thing to do. The letter of demand requires the client to provide "the agreed deposit of

$85,000". The "agreed deposit" could mean the deposit bond in the amount of $85,000 since that was what was agreed but it could also mean the vendor required the payment of the

$85,000 in cash. Since no account was specified in which money was to be paid, I think the former is what was intended by the letter but given the response of the purchaser's solicitor, namely that "the deposit bond is valid and not in breach of condition 2" and there being no suggestion by the purchaser's solicitor that the notice was bad in form, either in the letter at p

172 sent on 1 October 2009 or in the subsequent letter of 4

November 2009 at p 188, nothing turns on this.

65 Mr Emmett, for good reason, opposed any attempt to introduce such claims into the case at the late stage claims of waiver, affirmation and unconscionability vis-à-vis the purchaser were introduced. Even if it were open to be argued, I do not accept that the plaintiff, through his solicitor, waived the requirement for the original deposit bond, and in my view Mr

Picone did nothing to indicate waiver or affirm the contract in a way that precluded an assertion being made that the deposit bond should be provided. Nor can I accept the proposition, if it were able to be advanced, that the vendor's solicitor lulled the purchaser's solicitor into believing that the deposit bond was not required to be an original deposit bond and nor was it in the least "unconscionable" for the plaintiff to have, through Mr

Picone, demanded production of the deposit bond (or deposit, for that matter).

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Agents (not only estate agents) and the formation of real estate contracts

Many estate agents do not understand the significance of:

 the fact of exchange;

 being able to identify whether or not, at any given instant, a contract has been “made” or not;

 the importance of a “ceremony” rather than a “pantomime”, to borrow the language of Allen J in Harris v Fuseoak Pty Ltd

(1995) 7 BPR 14,511;

 the distinction between having the power or a function and having the authority to do so. permission to perform

I have agents put it to me that “the vital thing is to get the purchaser to sign something” (preferably, I presume, a complete contract), or indicating that the main importance of exchange of contracts is to make certain the agent’s entitlement to commission.

Speaking to those in the industry about concepts such as “equitable interests”, “caveatable interests”, “risk passing in relation to proposals from government departments”, “crystallising the instant at which vendor warranty is to be tested”, or “calculating completion dates” is akin to water off a duck’s back.

There is occasionally slightly more interest when you point to “calculating cooling off periods”, or asking the question “if a prospect phoned you and offered $20,000 more for the property, could you say with certainty that a contract has or has not been made with another buyer?”.

If you believe the industry might have rectified the problem after the strong comments of Allen J in Harris v Fuseoak Pty Ltd , I would commend for consideration (by all players in the property industry) the more recent decision of Barrett J in Golding v Vella [2001] NSWSC 567. In that case, the plaintiff vendor acquired vacant land for a “spec building” project. The defendants were shown the house (when it was virtually complete) by a Ms

Cox, a salesperson with a Castle Hill agent. In the early evening of 19

April 1999, Ms Cox orchestrated certain events involving signed parts of a contract document which caused a contract for the sale of the house by the plaintiff to the defendants to be concluded either on that evening or on the following day, 20 April 1999. The defendants soon developed cold feet and took steps to exercise the withdrawal rights made available by the

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“cooling off” provisions in Div 8 of Pt 4 of the

Conveyancing Act . There was doubt as to whether those steps were effective but, in the result, the plaintiff would concede nothing, and the defendants, believing that they had no alternative, affirmed the contract and chose to proceed with the purchase, albeit without enthusiasm. Issues arose between the parties about the installation of certain PC items in the premises, and the state of fencing. The vendor’s solicitor served a notice to complete, the validity of which was disputed. Ultimately, the purchaser purported to rescind on the basis that the vendor’s behaviour constituted a repudiation. The vendor treated that step as a wrongful repudiation by the purchaser, and litigation ensued.

His Honour made some preliminary comments about the manner in which the statement of inclusions on p 1 of the contract had been filled out (it is unclear who did the filling out, but this is within the “black box” area that an agent can fill out). At paras 6 and 7 of the judgment:

6 … In the space on the front sheet labelled “Inclusions” under the heading “Meaning of Term”, there was reference to the various

PC items in contention (cook top, range hood, oven, dishwasher and hot water system), as well as handwritten words after the word “other:”, including “lapped and capped fencing”. It is common ground that none of those items had been installed or constructed when the contract was entered into.

7 This makes a nonsense of the opening words of the “Inclusions” section on the front sheet of the contract:

These marked items inspected by the purchaser (some may be fixtures).

It also makes a nonsense of that part of the defined term

“Property” in the “Meaning of Term” section which refers to “all fixtures and the inclusions”. But it was accepted, clearly enough, that the reference in the “Inclusions” (and therefore “Property”) definition to certain non-existent items “inspected by the purchaser” imported a promise on the vendor’s part to ensure that those items were properly installed or constructed by completion.

On that footing, it should also be accepted that there was no scope for the operation, in relation to those items, of either clause 10.2

(which precludes rescission or termination by the purchaser “only because of a defect in title to or quality of the inclusions”) or special condition 32 (which, somewhat curiously, declares,

“Normally, the Purchaser acknowledges that he is purchasing the

Property in its present condition and state of repair”, when exactly the opposite was the case).

On the facts, His Honour found the purchasers had wrongfully repudiated the contract.

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Of present relevance (and significant to the issue of whether this was an appropriate case for relief being granted to the purchaser under s 55(2A) of the Conveyancing Act 1919 ) were the circumstances of the “making” of the contract.

Commencing at para 38 of the judgment:

38 There are, to my mind, two factors in the present case which may point to elements of injustice in allowing the plaintiff to retain the benefit of the deposit. The first is that the plaintiff re-sold the property for the same price. The second is that attempts by the defendants to extricate themselves from the contract under the

“cooling off” provisions of the Conveyancing Act , although believed at the time to have been unsuccessful, may in reality have been effective. If that is so, the defendants were under a serious misapprehension when they later elected to affirm the contract.

39 The first of these matters, although relevant and persuasive, cannot be determinative. In some cases, the fact that the vendor has re-sold at a profit has been the main element in a decision to grant relief under s.55(2A): see, for example, Nelson v Bellamy

(above). Viewed alone, however, it is generally not sufficient:

Clurstock v Timanu Pty Ltd (1988) NSW ConvR 55-419.

40 This makes it necessary to examine the second matter. That, in turn, raises the question of when the contract was “made”, that being, by virtue of s.66S(2), the starting point of the statutory

“cooling off period”. It is common ground that, if that period began on 19 April 1999, the attempted resort by the defendants to the termination rights provided by the cooling off provisions was ineffective, but if the period began on 20 April 1999 they did in reality become free of the contract.

41 The uncertainty about the time the contract was made arises from events which occurred on 19 April 1999. In the course of those events, Ms Cox of Blameys Town & Country Real Estate Pty Ltd

(trading as Asset Realty, Castle Hill) came to have in her possession two parts of the contract, one signed by Mr Rewell in the place reserved for the vendor’s signature and the other signed by the defendants as purchasers. It appears that Mr Rewell signed in exercise of express authority conferred on him by the plaintiff by means of a document which will be mentioned in due course.

On 20 April 1999, the part signed for the plaintiff as vendor was delivered by Blameys to the solicitors named in the document as solicitors for the purchasers (i.e. the defendants). Also on 20 April

1999, those solicitors received from Blameys a letter referring to the property and beginning:

We wish to advise the proposed purchase of the abovementioned property on behalf of your clients,

Frederick Anthony Vella & Therese Marianne Vella.

42 Details of the transaction followed. These are, in some respects, at odds with the content of the contract. In particular, the vendor is

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Formation of Contract in Real Estate Transactions Tony Cahill described in the letter as New Accent Home Builders of PO Box

6885, Baulkham Hills Business Centre.

43 The fact that there were two parts of the contract, one signed on behalf of the vendor and the other signed by the purchasers, leaves no doubt that the formation of a contract by the familiar conveyancing process of exchange of such parts was envisaged.

In the normal course, that process involves the physical passing of the part signed by the vendor to a representative of the purchaser and the physical passing of the part signed by the purchaser to a representative of the vendor. This is “the crucial and vital fact which brings the contract into existence”: Eccles v Bryant and

Pollock [1948] 1 Ch 93. As the High Court put it in Sindel v

Georgiou (1984) 154 CLR 661, “[t]he ceremony of exchange constitutes a mutual acknowledgment that the bargain has been struck”. That “ceremony” may, as the High Court recognised, be performed by physical delivery, by post or constructively by telephone. In the case of constructive exchange by telephone, it is suggested by Associate Professor Butt (at p.214) that the essential element is an acknowledgment by one party to the conversation that he or she holds one part physically in his or her possession to the order of the other party to the conversation so that there is a constructive passing of possession. In a case where a party to the conversation is not the contracting principal, it is implicit in this that that party must act with the principal’s authority, whether actual or otherwise. The relevance and sufficiency of constructive possession emerge clearly from the judgment of Buckley LJ in

Domb v Isoz [1980] 1 All ER 942.

44 It follows that there was an exchange of contracts in the present case on 19 April 1999 if Ms Cox’s possession of both signed parts can at some point be seen as having caused her to hold the part signed by the vendor to the order of the purchasers and the part signed by the purchasers to the order of the vendor. This makes it necessary to look at the evidence concerning the authority of Ms Cox and her employer, Blameys.

45 It became clear in the course of the trial that Blameys held no written appointment as selling agent from the vendor, although the plaintiff thought that commission would have been paid to

Blameys had the sale been completed. Ms Cox said in evidence that she believed Mr Rewell’s firm, New Accent Home Builders, to be the vendor or, perhaps, a joint vendor. Blameys held no written appointment as selling agent from that firm either. The form of contract identified New Accent Home Buildings itself as the vendor’s agent. The plaintiff had faxed to his solicitor a letter dated 16 April 1999 as follows:

[The judgment then sets out a short letter of authority.]

46 All of these elements point towards Mr Rewell possessing actual authority to act on the plaintiff’s behalf in relation to a sale of the property. It seems likely that it was Mr Rewell who brought Ms

Cox and Blameys into the picture. But while it might thus be possible to infer that Ms Cox participated in the events of the evening of 19 April 1999 with some form of reasonably

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Formation of Contract in Real Estate Transactions Tony Cahill comprehensive delegated authority of the plaintiff, it is not possible to draw any inference that she had authority from the defendants who were actually with her when relevant acts occurred.

47 In her affidavit of 24 August 1999, Ms Cox deposed to the following sequence of events on 19 April 1999:

1. She had Mr Rewell sign one part of the contract on the plaintiff’s behalf in Mr Rewell’s office at about 2.30 pm.

2. The defendants signed the other part of the contract in Ms

Cox’s presence at about 5.30 pm. She had with her at that time the part previously signed by Mr Rewell.

3. The defendants and Ms Cox were the only persons present.

They checked that the two signed parts matched (in fact there were minor differences between them but nothing turns on that).

4. Ms Cox wrote the date 19 April 1999 into the space for the date on the front sheet of each part.

5. Ms Cox retained the part signed by Mr Rewell for the plaintiff and said to the defendants, “I will take this contract to your solicitor’s office tomorrow morning”.

6. Ms Cox and the defendants then joined (or were joined by)

Mr Rewell. Ms Cox gave to Mr Rewell the part signed by the defendants and left the defendants talking with Mr

Rewell, taking with her the part signed by him for the plaintiff.

48 There is nothing in other evidence to cast doubt on this description of events. Throughout the course of those events, Ms

Cox retained the document signed by Mr Rewell on behalf of the plaintiff. She had that document when she met the defendants in the early evening. She did not give the document to them. She did not at any stage say, “I am now holding this to your order” or

“This is now yours”. She only said, “I will take this contract to your solicitor’s office tomorrow morning”, the reference to “this contract” being a reference to the part signed by the plaintiff’s agent. The defendants did not ask her to take the document to their solicitor’s office the following day. Nor did they quarrel with the statement she made. There is nothing at all to suggest that the part signed for the plaintiff came into the actual or constructive possession of the defendants at all on 19 April 1999.

It remained throughout with the person who brought it into their presence with what was, clearly enough, the indirectly conferred authority of the plaintiff.

49 There are similarities between this factual situation and that considered by Allen J in Harris v Fuseoak Pty Ltd (1995) 7 BPR

14,511. One issue in that case was whether a binding contract was formed when an estate agent engaged in what his Honour described as a “somewhat remarkable performance” and a

“somewhat bizarre adaption, if not parody, of ordinary conveyancing practice”. The purchaser (plaintiff) signed a form

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Formation of Contract in Real Estate Transactions Tony Cahill of contract shortly after an unsuccessful auction. The vendors (the

Fitzgeralds) were not present. Their selling agent, Rosenfeldt, held the original contract signed by (or for) them. With one signed part in each hand, Rosenfeldt then proceeded to cross his arms, telling the plaintiff that contracts were thereby exchanged. I shall set out at some length the observations of Allen J in relation to those events, as I consider them most pertinent to the present case:

As a result of the pantomime performed by Mr Rosenfeldt on the day of the failed auction the plaintiff did not even receive a copy of the signed contract. He did not end up on that day with a copy of the contract signed by (or for) the

Fitzgeralds. Mr Rosenfeldt kept the copies. Indeed the plaintiff physically did not as much as touch a copy of the contract during the ceremony in which his act was to constitute the solemn acknowledgment by him of the contract having come into operation. What authority did Mr

Rosenfeldt have to make the ‘exchange’ as if not only was he acting for the vendors but also, in this formal ceremony inter partes, for the plaintiff? His evidence smacked of him informing the plaintiff of what he was doing and that in consequence the plaintiff was bound, rather than of him seeking the plaintiff’s authority to act on his behalf to effect an exchange. Be that as it may this parody of an exchange had no contractual effect unless the plaintiff is to be held to have authorised Mr Rosenfeldt to act in that manner and thereby bind him to the contract. It scarcely seems credible that the plaintiff would have done so when, as Mr Rosenfeldt knew, a solicitor was going to be acting for him on the purchase. ... There was no admission by the plaintiff in his evidence that he intended to give Mr

Rosenfeldt this unusual authority which Mr Rosenfeldt needed in order to bind the plaintiff. His evidence was quite to the contrary.

It is not normal conveyancing practice for an agent to exchange contracts for the sale of land. The law indeed scrutinises such conduct with suspicion. The risk is obvious

– namely that the agent will act without authority in order to give the appearance of a binding contract and hence diminish the risk that the sale will not come to contract and that he, accordingly, will lose the prospective commission.

Section 84AB(4) of the Property, Stock and Business

Agents Act 1941 provides:

If a prospective party to a proposed contract for the sale of residential property for whom a real estate agent acts in relation to the exchange or making of the contract notifies the real estate agent, or it is apparent from the proposed contract, that a solicitor is or will be acting for the party, the real estate agent may only participate in the exchange or making the

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Formation of Contract in Real Estate Transactions Tony Cahill contract if expressly authorised to do so by the party or the solicitor.

The evidence is clear that Mr Rosenfeldt knew that Mr

Aubrey Brown [a solicitor] would be acting for the plaintiff. There is nothing to suggest that he was authorised by Mr Brown to make the exchange. There was no evidence before his Worship that he was ‘expressly authorised to do so’ by the plaintiff. It is true that if he was impliedly authorised by conduct, the absence of express authorisation would not invalidate the contract

(s.84AB(6)). The provisions, however, of that section indicate the awareness of the law of the risk of an agent arrogating to himself authority which an intending purchaser does not really intend him to have.

50 As I have said, I consider those observations to be most pertinent to this case. There, as here, there was no evidence that the orchestrating real estate salesperson had any authority of the purchaser who was actually present. But here, in contradistinction to there, the evidence does not suggest that the salesperson even attempted, by words or gestures, to bring about a change in constructive possession of the signed parts. In both cases, the contract made it clear that the purchaser had a solicitor and the real estate salesperson knew this. Ms Cox actually wrote the name of the defendants’ solicitors into the form of contract.

51 It is plain from the defendants’ evidence that they had little, if any, idea about what “exchange” meant in the particular context.

The first defendant said in cross-examination:

McNALLY:

Q. I think your evidence was, after you signed on the 19th you wanted to exchange on the 19th. Do you agree with that?

A. According to what Frances Cox suggested, once we signed, obviously we do exchange, I presume.

Q. So you presumed, on the evening of the 19th, that once you had signed the contract and once the vendor had signed the contract, that you had entered into a contract?

A. Yes, obviously.

Q. And you believed that both you and the vendor were bound by that contract on the 19th after you signed?

A. Yes, I guess so.

52 The cross-examination of the second defendant included the following:

Q. So, there was a stage on the evening of the 19th where you had signed the contract and Mr Rewell had signed the contract?

A. Yes.

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Q. And at that stage you thought there was a contract in existence, didn’t you?

A. Well, the one that we had just signed, yes.

Q. You thought the vendor was bound to sell you the property at that stage, didn’t you?

A.

Q.

A.

I thought that was how it worked, yes.

You wanted that to be the case, didn’t you, at that stage?

I guess so, yes.

Q. Ms Cox, to your understanding, took your copy of the contract to your solicitors the next day?

A.

Q.

I can’t be sure of that.

You didn’t receive a copy of the contract on the evening?

A. No.

Q. You are aware, are you not, that Ms Cox said that she would send it to your solicitors the following day?

A.

She said she would send it to our solicitor, but she didn’t say the following day.

Q. As far as you were concerned, she was doing that for you?

A. Well, I assume so, yes.

53 These statements as to what the defendants assumed or presumed or guessed or thought to be the way things worked say nothing about the conferring by them of any authority on Ms Cox. They had very little idea of the legal significance of the events of the evening of 19 April 1999. Ms Cox, I suggest, was in essentially the same position. It was very much a case of the blind leading the blind so far as the legal consequences and legal requirements were concerned. The recognition in s.84AB of the Property, Stock and Business Agents Act 1941 that there is a legitimate role for real estate agents in the exchange or making of contracts for the sale of residential property is founded on an assumption that such agents and their employees will familiarise themselves with at least the basic legal concepts. Such an assumption was not borne out in this particular case.

54 My conclusion is that a contract for sale between the plaintiff as vendor and the defendants as purchasers was not made on 19

April 1999 because the events which took place on the evening of that day under the orchestration of Ms Cox were ineffective to produce that legal result. The contract was made on the following day when Ms Cox, who I am prepared to accept was acting under delegated authority from the plaintiff, either personally or through an agent delivered the part signed for the plaintiff by Mr Rewell to the solicitors acting for the defendants.

55 This conclusion means that the steps the defendants afterwards took to withdraw under the cooling off provisions were, in reality, legally effective. And that, in turn, is a very powerful consideration when it comes to the Court’s assessment of

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Formation of Contract in Real Estate Transactions Tony Cahill whether, in terms of the formulation of Street CJ in Eq in the

Lucas & Tait case (above), it is unjust and inequitable that the vendor should have the deposit. As the foregoing analysis shows, the plaintiff’s insistence on holding the defendants to the contract after they had tried to withdraw was legally unwarranted. Had the legal position been correctly assessed at that point, the defendants would not have suffered the consequence of becoming liable for the balance of the deposit and would have recovered the part they actually paid. They acted under a serious misapprehension as to their legal rights and, in that respect, their position is distinguishable from that of the purchasers in Mallett v Jones

[1959] VR 122. That being so, I consider that relief under s.55(2A) of the Conveyancing Act is appropriate in relation to not only the sum of $1,337.50 paid but also the liability for the balance of $52,162.50 which I have found to exist.

For a still more recent decision considering the role of agents in making or exchanging contracts, see the decision of Young CJ in Eq of Paterson v

Clarke [2002] NSWSC 1206; [2003] ACL Rep (Iss 2) 355 NSW 9. In particular, his Honour considered whether the agent had authority to exchange in the face of a letter from the solicitors for the vendor advising that the agent was not to effect exchange. His Honour found that the authority of the agent had been made out, and declared that the contract was on foot. It appears that a relevant consideration was that the party seeking to argue that there was a problem with exchange did not raise any issue with the circumstances until a significant time after the events at the time of the exchange.

It is worth looking at the analysis of the nature of the agent’s authority in

Paterson v Clarke . The authority of an agent to perform a particular task will typically be:

 express (or actual) – clearly stated and identifiable from the grant of authority; or

 implied – not spelt out in the grant of express authority, but a necessary consequence of that grant; or

 ostensible (or apparent – sometimes described as agency by estoppel) – the principal does something which makes it seem that the agent has authority, despite the principal not giving the agent express authority.

So an estate agent who has been granted express authority to seek a buyer for a property would have implied authority to take photographs of the property. An estate agent who lacks express authority to enter into a residential tenancy agreement will have ostensible authority because of the

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Formation of Contract in Real Estate Transactions Tony Cahill notorious and almost invariable practice of real estate agents signing such agreements on behalf of the landlord/principal rather than attending the landlord to obtain the principal’s signature. An estate agent would not, however, have ostensible authority to sign a lease of commercial premises.

On the question of the agent’s authority to effect an exchange of contracts,

Young CJ in Eq observed (at [17]–[36]):

17 Mr Evans put that the agents had no authority to exchange contracts and thus there was no contract. He further puts that as an exchange was needed under conveyancing practice in New

South Wales, one needed to see that there had been a ceremony conducted at a particular point in time which amounted to an exchange; thus, the fact that part of the contract signed by the purchasers found its way to the vendor’s solicitors files in due course was immaterial.

18 Mr Evans submitted that the agents had no actual implied ostensible or apparent authority to exchange contracts.

19 As to actual authority, he pointed to the exclusive agency agreement signed by the defendant on 15 January 2002. This agreement provided that the agent was the sole agent in consideration of the agent promising to use their best endeavours to sell the property; that the agent was entitled to a commission if the principal entered into a contract for the sale of the property and that:

6. The agent is not authorised to enter into or sign a contract for sale on behalf of the principal.

20 Mr Evans puts great store on clause 6. However, to my mind it cannot be conclusive in solving the question of authority. This is because there is a clear distinction between making a contract and exchanging parts of a contract signed by the vendor or purchaser as the case may be. This distinction has always been taken. Thus in section 84AB(3) of the Property, Stock and Business Agents

Act 1941 (now repealed and replaced in almost identical words by s 64(1)(c) of the Property, Stock and Business Agents Act 2002 ), the legislature has said that a real estate agent may participate in the exchange or making of contracts for the sale of residential property. Again, as was conceded in this case, solicitors have general authority to exchange contracts, but it is quite clear that apart from express authorisation a solicitor has no general authority to make a contract on behalf of the client: Pianta v

National Finance and Trustees Ltd (1964) 180 CLR 146.

21 However, the sole evidence on actual authority is that of the defendant. As I have noted, he says he never instructed the agents to exchange. Of course, he never forbad it either, but it is sufficient for determining the question of express actual authority that he did not instruct the agents to exchange. There was no cross-examination on this.

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22 The agents were not called, and it is a little difficult to work out in whose camp the agents are. They were the defendant’s agents, yet the material would suggest that the defendant intends to sue them, so it is probably explicable why neither party called them.

23 That leaves me with the situation that the defendant’s evidence probably should be accepted on this matter. I say “probably” because the actions of Mr Nedwich and his office do throw great doubt on the credibility of some of the defendant’s statements, but notwithstanding this, it seems to me that I should accept the defendant on this issue.

24 As to implied actual authority, it must be remembered that when one appoints an agent to do something “there is an implied authority combined with it to do all acts which may be necessary for the purpose of effecting the object for which the express authority is given”; per Romilly MR in Pole v Leask (1860) 28

Beav 562, 574; 54 ER 481, 487.

25 The object of the agency was to sell the land or at least to find a purchaser ready, willing and able to sign a contract. The agent then had implied authority to do that which is “generally considered to be in the ordinary course of business of real estate agents in selling land” ( Presser v Caldwell Estates Pty Ltd [1971]

2 NSWLR 471, 485). Does this include exchange of contracts?

As I have said, I was not favoured with any evidence as to what was the normal practice of estate agents so that I have to make up my mind on this question of fact on the surrounding circumstances and general practice.

26 Mr Evans relied on Petersen v Moloney (1951) 84 CLR 91, 95 and Richards v Hill [1920] NZLR 724. However, to my mind neither of those cases, nor the illustrations given in the 16th edition of Bowstead & Reynolds on Agency (Sweet & Maxwell,

London, 1996) p 128, assist in solving the present problem.

27 Section 84AB(4) and (6) of the 1941 Act and now s 64(2) of the current Act provide that a real estate agent, whilst he or she may participate in the exchange of contracts, he or she may only do so if expressly authorised to do so by the party or the party’s solicitor in the circumstances that exist in the present case, but that a contract is not invalid merely because of the failure of the agent to comply with that provision.

28 That seems to me to say that as a general rule exchange of contracts by real estate agents is thought by the legislature to be within the general authority of estate agents (vide subsection (3)) but that the real estate agent, probably on pains of a criminal penalty, is not to be involved in that activity in the circumstances of this case, though such disobedience is not to affect the validity of the contract.

29 I realise that the onus of proving the contract, including the validity of the exchange, is on the plaintiff, and I am also very much aware that in Harris v Fuseoak Pty Ltd (1995) 7 BPR

14,511 at 14,521 in a passage approved by Barrett J in Golding v

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Vella (2001) 10 BPR 18,919 at 18,932 Allen J was scathing of the practice of estate agents exchanging contracts. His Honour said:

It is not normal conveyancing practice for an agent to exchange contracts for the sale of land. The law indeed scrutinises such conduct with suspicion. The risk is obvious

– namely, that the agent will act without authority in order to give the appearance of a binding contract and hence diminish the risk that the sale will not come to contract and that he, accordingly, will lose the prospective commission.

30 But remarks of Allen J and Barrett J really go no further than to say it is not usual for the agent to exchange contracts and that it is a dangerous practice. They do not say that it is beyond the usual authority of agents or that solicitors should be wary of the practice because the exchange might not bind the vendor.

31 Accordingly, in my view, there was implied actual authority on the agent to exchange.

32 The same answer must be given to the question whether there was ostensible or apparent authority. For a while I worried that section

84AB(4) might mean that a solicitor should in the case of a contract naming another solicitor be so suspicious as to not consider that the agent had apparent authority and that in the present case the letter of 23 January reinforced this. However, it seems to me that a solicitor is entitled when dealing with an estate agent to assume that the agent is complying with his or her statutory duty and had express authority to exchange.

33 I should point out that the case is not on all fours with cases like

Harris where there was a parity of exchange. In Harris the agent collected the contracts from both parties and crossed his arms and retained both copies. In the present case, Ms Field was given and retained the copy of the contract signed by the vendor and Mr or

Mrs Franzen was given the copy signed by the purchasers, which he or she in due course passed on to the vendor’s solicitors. In this respect, the case is similar to Golding v Vella where Barrett J held that where the agent had conducted the “exchange” but had later transmitted the contract to the opposing party’s solicitor, that at least at that moment there was a binding contract.

34 There is no doubt at all that the vendor’s solicitors received the purchasers’ copy, the purchasers had the vendor’s copy, and thereafter both parties’ solicitors acted on the basis there had been a proper exchange. Any precondition that had been laid down, assuming it had been validly laid down by the vendor’s solicitors’ letter of 23 January, had either been waived or treated as being fulfilled. After all, it would not matter at all to the vendor’s solicitors if the purchasers’ copy came to them via post, the DX or been handed to them by a representative of the estate agent.

35 Accordingly, in my view there was a contract and there was exchange.

36 However, I have not yet dealt with the submission of Mr Evans that exchange is something needing ceremony. This is correct to

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Formation of Contract in Real Estate Transactions Tony Cahill an extent and probably the usual ceremony did take place between

Ms Field and Mr or Mrs Franzen. However, one must not press the ceremony point too far, as it is quite clear on the authorities one can have exchange by mail or DX in which the vendor’s solicitors receive the purchasers’ part, dates the contract, and then sends on the vendor’s copy, so one could even have an exchange by telephone in which there is no ceremony at all. Although this is called in the cases a constructive exchange, it is still a valid exchange: see Sindel v Georgiou (1984) 154 CLR 661, 666 and

Kirton v Nethery (1996) 7 BPR 14,954, 14,955.

The Court of Appeal dismissed the appeal: Clarke v Paterson [2003]

NSWCA 160.

It is worth reiterating that, in the absence of express authority, a solicitor

(or, by analogy, a conveyancer) does not have authority to make a contract on behalf of a client, nor to make a material or significant alteration to a counterpart of the proposed contract after signature by their client. The

“classic” authority is the High Court decision of

Pianta v National Finance and Trustees Ltd (1964) 180 CLR 146. Later cases confirming this proposition include Longpocket Investments Pty Ltd v Hoadley (1985) 3

BPR 9606 at 9611 and Iannello v Sharpe [2006] NSWSC 713.

The authority of a solicitor/agent to amend and enter into contracts for the sale of land was one of the issues raised in the decision of Iannello v

Sharpe [2006] NSWSC 713; [2007] NSWCA 61. That case involved a contract drafted with a deposit of 5 per cent of the purchase price on p 1, the identification of the purchaser as “Malcolm Sharpe or nominee”, and a special condition in these terms:

Notwithstanding anything else herein contained, the vendor shall accept on exchange of this agreement payment of $225,000, being part of the deposit. The parties expressly agree that if the purchaser defaults in the observance or performance of any obligation hereunder which is or has become essential, the balance of the deposit, namely $225,000, shall become immediately due and payable and the purchaser shall forfeit the whole of the sum of $450,000 pursuant to clause 9 hereof to the vendor.

Prior to exchange, the vendor’s solicitor, on instructions, deleted the phrase

“or nominee” and amended the deposit figure on p 1 by changing the amount to 10 per cent of the price.

The changes to the purchaser’s signed copy were made after the purchaser signed the contract. Contracts were exchanged, the purchaser defaulted and the vendors terminated the contract, claiming the amount paid at exchange, the top-up sum, and damages.

– 42 –


The vendor was unsuccessful at first instance on the basis that there was no evidence before the Court that the changes to the purchaser’s signed copy were made with the authority of the purchaser.

Windeyer J considered that the deletion of the phrase “or nominee” may or may not have been significant or material. His reasoning appears at [9]:

It is not really necessary for me to decide whether or not the deletion of the words “or nominee” was a significant or material alteration. In ordinary terms, Mr Sharpe could have required the vendor to transfer to his nominee. That might have had some stamp duty consequences, but probably no more than those which would have arisen had the words remained.

This finding was not challenged on appeal (CA at [15]).

The change to the amount of deposit was found at first instance to be significant and substantial because (at [9]):

… it is generally regarded at law in conveyancing matters that no penalty arises if there is provision for forfeiture of a deposit of up to 10 per cent. It is also significant because the change would give some work to special condition 14 of the contract because it would have allowed the deposit to be paid by two instalments, yet the amount of $225,000 not paid on exchange would still remain part of the deposit and become liable to forfeiture upon termination if that termination occurred as a result of default by the purchaser. Had the deposit figure remained at

$225,000 then that would have been the amount of the deposit liable to forfeiture under clause 9 and the vendor would have been left to any right in damages to claim any additional amount.

The legal issue raised by the lack of evidence of authority is succinctly stated at [10]:

There can be no doubt that a solicitor is not authorised unless authorised in writing to make a contract on behalf of a client purchaser. There is equally no doubt in my view that if authorised he can agree to and make alterations to the document, even after it has been signed by the purchaser. In this case, however, there is no evidence of such authorisation and the only evidence is that of the defendant after the contract was signed by him. Mr McGrath [the purchaser’s representative] did not tell him that the words “or nominee” had been deleted, nor that the deposit was changed from five per cent to ten per cent on the front page of the contract. There is no evidence, and he was not asked whether he authorised the change.

That statement of principle caused the Court of Appeal no difficulty.

The final result at first instance was that a purchaser “with no merit whatsoever” received a refund of his $225,000, and an order for costs.

– 43 –


The key issue on appeal was the status of the amendment to the deposit on p 1 of the contract.

The Court of Appeal came to a different conclusion as to whether the alteration to p 1 was a material change. The rationale appears in the leading judgment of Hodgson JA (at [18]–[21]):

18 In my opinion it is clear that the alteration did not make any difference to the amounts required to be paid under the contract or to the time and circumstances in which they were required to be paid. Both before and after the alteration, Special Condition 14 had the effect that $225,000.00 was payable on exchange of contracts, and a further $225,000.00 was payable “if the purchaser defaults in the observance or performance of any obligation hereunder which is or has become essential”.

19 The circumstance that, on the front page, $450,000.00 was said to be the deposit rather than $225,000.00 does not make any difference to this. The circumstance that, on the front page, the balance is said to be $4,050,000.00 rather than $4,275,000.00 also makes no difference to the effect of the contract, because cl.16.7 requires the purchaser on completion to pay “the price (less any deposit paid)”; so the purchaser would still be paying

$4,275,000.00 on completion, if only $225,000.00 had been paid as a deposit, even though the balance stated on the front page is

$4,050,000.00.

20 Mr. Inatey SC for the purchaser did not contest the above propositions in any significant way; but he submitted that the alteration did make a material change because it had the effect of making the whole $450,000.00 properly characterised as a deposit and therefore not subject to the rules concerning penalties.

Alternatively, he submitted that, if the alterations did not make that change, the position both before and after the alteration was that the provision in Special Condition 14 about the second

$225,000.00 was a stipulation for damages on default, not for a deposit, and was invalid as a penalty. He relied particularly on

Luu v. Sovereign Developments Pty. Limited [2006] NSWCA 40.

21 Mr. Orlov for the vendors submitted that, both before and after the alteration, Special Condition 14 was a provision for payment of a deposit by instalments; and he relied particularly on Ashdown v. Kirk [1999] 2 Qd.R. 1 and Romanos v. Pentagold Investments

Pty. Limited (2003) 217 CLR 367 at [19]-[20]. He submitted that in Ashdown , default by the purchaser accelerated the vendors’ entitlement to a second instalment of the deposit to the date of default, so that the provision that the instalment be paid on default did not alter its character as a deposit. In a case such as the present, what operated as an earnest for performance of the contract was the purchaser’s unconditional promise to pay the balance of the deposit.

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On the status of the “deposit top-up clause”, Hodgson JA (at [27]–[32]) considered there were two distinguishing issues between the present case and the decision of the Court of Appeal in Luu v Sovereign Developments

Pty Limited [2006] NSWCA 40:

27 … First, Bryson JA was able to say that the front page made it clear that the deposit was $65,000.00, and that the Special

Condition in that case related to something which the contract was not treating as a deposit. Second, the amount in Special

Condition 5 was payable on any default, no matter how trivial, so that its character as a penalty was clear.

28 On the first matter, in the present case the reference to deposit on the front page is expressly qualified by reference to Special

Condition 14; so it is not possible to say that the front page makes it clear that the second $225,000.00 is not part of the deposit. It can also be said that this is clearer in the altered form of the contract, where the front page refers to the deposit as being

$450,000.00 or 10% of the price.

29 The second matter is not directly relevant to the question of whether the second $225,000.00 is a deposit; but rather is relevant to the question whether, accepting it is not a deposit, it is or is not a pre-estimate of damages. That is a question on which Mr. Orlov did not address submissions; and in my opinion, accepting that the obligation to pay the second $225,000.00 would only arise in circumstances where the vendors have lost their bargain, nevertheless it cannot be considered a pre-estimate of damages.

The first $225,000.00, which was undoubtedly a deposit, would be greatly in excess of expenses that could be lost in connection with the terminated contract; and there is no evidence to suggest that the loss of the bargain would involve other loss, for example because of some problem in effecting a re-sale for a similar price.

In fact, it appears that the re-sale was for a higher price; and although this is not directly relevant, it tends to confirm that there was no reason to anticipate that a later re-sale would be for a substantially lesser price.

30 In those circumstances, the Court should conclude that, if the second $225,000.00 is not part of a deposit, provision for its payment would be a penalty and not enforceable. On that basis, the significance of the second difference from the case of Luu disappears.

31 Returning to the first possible point of distinction between Luu and the present case, in my opinion the statement of principle in the last sentence of par.[24] of the judgment in Luu is correct; so that the name which the parties have chosen to give to a payment is not determinative of whether or not it is a deposit. It is necessary also to look at the character of the payment and/or the obligation to make it. The first point of distinction between Luu and the present case relates only to the name the parties have chosen to give to the payment; and in my opinion the nature of the obligation to make the payment is more important in

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Formation of Contract in Real Estate Transactions Tony Cahill determining its character than the name chosen by the parties; although I do accept that in some cases the name could be relevant, particularly where a deposit is payable by instalments.

32 On that approach, in my opinion the obligation to make the second payment of $225,000.00 is not an obligation to pay a deposit or part of a deposit. There never would be a time when this second $225,000.00 (as such) would be paid so as to show that the purchaser is in earnest in committing himself to pay the rest. On the contrary, the only time when Special Condition 14 obliges the purchaser to pay this sum is when the purchaser has demonstrated that he is not in earnest, and indeed the termination of the contract means that he would not be able to complete the contract. The obligation to pay the second $225,000.00 is inconsistent with the characteristics of a deposit. In my opinion, this would equally be so whichever version of the front page was operative.

The net effect of the Court of Appeal decision was that, since the alteration to the quantum of deposit on p 1 was held to make no difference to the amount of deposit, a contract was formed; the amount paid on exchange was the deposit; that amount was validly forfeited to the vendor; the second payment dealt with in the special condition was penal and unenforceable.

The decision of the Supreme Court in Zhang v VP302 SPV Pty Ltd [2009]

NSWSC 73; BC200900869 (23/2/09, White J) received some publicity in the popular press (“Judge tears up $1m property contract” – Sydney

Morning Herald, 24 February 2009, page 3). The focus of the Herald article was a successful claim by the purchasers that the estate agent’s advertising of the property “had misled them into entering into the deal”.

The case raises a number of issues of importance.

The plaintiffs exchanged contracts in September 2003 to purchase from the first defendant a four-storey terrace house off the plan in Victoria Park,

Zetland. The judgment provides some additional relevant information about the purchasers (at [53] to [54]):

53 Both plaintiffs emigrated to Australia from China. The first plaintiff, Mr Zhang, emigrated in 1998 when he was 28. He is a chef by occupation. In about 2000 or 2001 he purchased a twobedroom flat in Campsie. He does not read English and his spoken English is poor.

54 The second plaintiff, Ms Liu, emigrated to Australia in September

2001 aged 23. She is a waitress by occupation. She and Mr Zhang became de facto partners at the end of 2003. She has a better knowledge of English than Mr Zhang, but she is not fluent. Both plaintiffs gave their evidence through an interpreter.

– 46 –


Ms Liu had never purchased property before.

The second defendant, Sydney Advance Realty, was the estate agency engaged as the vendor’s listing and marketing agent, and was stakeholder under the contract. The third defendant, Ms Huo, was the employed salesperson who dealt with the purchasers. The strata plan was registered by 7 July 2005 (by which time the market had fallen substantially from its

2003 level). The purchasers failed to complete by the due date and failed to comply with a notice to complete. The vendor terminated the contract on

24 August 2005. Two days later, the agent released the deposit and accrued interest to the vendor. Shortly prior to the hearing the first defendant went into voluntary administration; that defendant took no part in the hearing.

The contract nominated MSJ as the vendor’s solicitor; M was the principal of the firm named in the contract as acting for the purchasers (and also the solicitor with carriage of the matter).

The plaintiffs sought an order for the return of the deposit from the agency on four grounds:



No contract was entered into. The plaintiffs claimed that the contracts as exchanged between the respective solicitors included terms to which the plaintiffs had not agreed, and their solicitor lacked the requisite authority (at [5]);



If a contract had been entered into, the plaintiffs were induced to do so by misrepresentations, giving rise to contractual remedies and constituting conduct in breach of s52 Trade Practices Act and s42

Fair Trading Act . Ten misrepresentations were alleged (at [6]):

(a) that the development site was the leader of the three suburbs that would be doubled [sic] in value within 5 years and that there was a reasonable basis for this statement;

(b) the property would be a good investment and its value would be higher than the purchase price at the date of settlement and that there was a reasonable basis for these statements;

(c) management fees would be extremely low and that there was a reasonable basis for this statement;

(d) that management fees would be low, that there was a reasonable basis for concluding that they would be approximately $450 to $480 per quarter, and that they would not exceed $500 per quarter and that there was a reasonable basis for this statement, because there would be no swimming pool and no shared lift appurtenant to the property;

– 47 –


(e) there would be a park or garden behind the property and that there was a reasonable basis for this statement;

(f) the property would be full of sunshine or would have a lot of sunshine with no problem and that there was a reasonable basis for this statement;

(g) the building behind the terraces in which the property was to be situated would be an (at most) three-storey building and that there was a reasonable basis for this statement;

(h) there would be a home office and study in the property, the study having natural light and that there was a reasonable basis for this statement;

(i) the property would have a park view and that there was a reasonable basis for this statement;

(j) the property would be set in a garden-like living environment and that there was a reasonable basis for this statement.”



Relief under various statutory provisions – the Contracts Review

Act, the undue harassment provisions of the trade practices and fair trading statutes, and unconscionability under s51AA Trade

Practices Act, as well as general law unconscionability and undue influence (at [8]);



Conduct disentitling the issue of a Notice to Complete by the vendor (at [9]). Four matters under this heading were relied on at the hearing: failure to supply proper answer to requisitions; sending replies to the purchaser’s former firm rather than the firm then acting; the time for compliance with the notice being less than 14 days; and service of the notice only 8 days after service of an occupation certificate (in breach of the Conveyancing (Sale of Land)

Regulation 2005 cl 6A and Schedule 2 item 2).

The purchasers succeeded under the misrepresentation ground, and also under the Contracts Review Act. The purchasers failed to establish the first and fourth grounds, and did not succeed in their claims under the remaining statutory provisions mentioned at the third bullet point (at [121] to [130]).

The second and third defendants claimed the vendor’s termination was effective because the purchasers were incapable of completing, and

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Formation of Contract in Real Estate Transactions Tony Cahill evinced their intention not to do so (at [10]). This contention was upheld by the Court, although in the light of the other findings there was no need for detailed analysis. While the first defendant was not entitled to issue a

Notice to Complete, it was nevertheless entitled to terminate because the purchasers had repudiated the contract (at [130]).

A preliminary point (at [11] to [17]) was a determination of the amount of deposit paid. The plaintiffs alleged they had overpaid the deposit and the second defendant had misappropriated funds. The issue was confused by the purchaser having paid eight cash instalments (only two of which predated the contract, five of the other six were outside the time allowed by a special condition), the purchasers requesting the cash payments be put through the accounts of the agency in batches of less than $10,000, and the salesperson issuing both hand-written and computer-generated receipts covering the same amounts (although prepared in a manner which did not make this immediately clear). This issue was ultimately resolved adversely to the purchasers.

The chronology (slightly simplified) leading up to exchange of counterparts was as follows:



29 August : draft contract from MSJ to M.



Sometime between 3 September and (probably) 8 September: conference between the purchasers, M, and the salesperson. The draft contract was amended to provide that the purchaser would receive all interest on the deposit. A new special condition was added regarding a $20,000 rebate.



8 September : letter from M to MSJ indicating M was instructed to request 6 amendments, including the two noted above.



9 September : letter from MSJ to M attaching a replacement clause dealing with interest and an expanded version of the rebate clause.

Each of these clauses differed from what had been discussed by M with his clients. Interest would be payable to the purchaser unless a party defaulted (in which case the interest would follow the deposit) . The rebate clause would cease to apply “ if for some reason the purchaser substitutes the cash deposit for a bond at any time prior to settlement”.



10 September: M initiates exchange via DX, with the amendments in the MSJ letter included.

– 49 –




11 September: MSJ dates both contracts, and submits the counterpart, signed by the vendor to M. The counterparts were identical.

Following Pianta v National Finance and Trustees Ltd [1964] HCA 61;

(1964) 180 CLR 146 at 152, White J found that M did not have actual authority, express or implied, to bind his clients to a contract which included those terms (at [32]). The more difficult question, and one which

His Honour considered was the subject of “surprisingly little authority”, was whether M had ostensible authority to exchange contracts which included those terms on behalf of the plaintiffs. His Honour opined (at

[35]):

The trend of recent authority is that a solicitor does not have implied or ostensible authority to commit his or her client to a contract by negotiation or correspondence with the opposite party. That is different from the question whether a solicitor has ostensible authority to bind his or her client by an exchange of identical counterparts.

The judgment distinguishes a number of authorities (for example, CTM

Nominees Pty Ltd v Galba Pty Ltd (1982) 2 BPR 9588 and Longpocket

Investments Pty Ltd v Hoadley (1985) 3 BPR 9606 – the latter a Court of

Appeal decision, mentioned earlier in this paper) which had been interpreted by many commentators as confirming that a solicitor does not have ostensible authority to bind his or her client to a contract. Longpocket was distinguished on the basis that, in that case, the counterparts were not identical.

Relying on well-known English authorities dealing with the authority of solicitors to choose the method of formation of the contract (in particular,

Eccles v Bryant [1948] 1 Ch 93 and Domb v Isoz [1980] 1 Ch 548), his

Honour held that a solicitor has ostensible authority, whatever his or her actual instructions, to conclude a contract on behalf of his client by exchanging identical counterparts (at [46], [48]). His Honour concludes his analysis on the formation issue as follows (at [51]):

51 So far as I am aware, it is not usual conveyancing practice in this

State to require a solicitor who has been nominated by the vendor or purchaser to act on the vendor’s or purchaser’s behalf to produce evidence of his actual authority to exchange contracts on behalf of his or her client. In my view, the vendor’s solicitors were entitled to assume that Ma & Co had authority to forward by way of exchange the contract which had been signed by the purchasers on the execution page. They were entitled to assume that the purchasers assented to all of the terms in the document so

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Formation of Contract in Real Estate Transactions Tony Cahill forwarded. By holding out Ma & Co as the solicitors who would act for them in effecting an exchange of contracts, the plaintiffs are bound by the conduct of their agent in effecting the exchange.

For these reasons, I conclude that a binding contract came into existence between the parties.

It is somewhat surprising that no reference appears in the judgment to the decision of Iannello v Sharpe, either at first instance ((2006) NSW ConvR

¶56-162; [2006] NSWSC 713) or in the Court of Appeal ((2007) 69

NSWLR 452; 12 BPR 23,887; NSW ConvR 56-179; [2007] NSWCA 61;

BC200701919). There is no suggestion in Iannello that a lack of authority to make amendments to a counterpart could be “cured” by the ostensible authority grounding an exchange of counterparts. If that were so, the dispute in Iannello could have been disposed of much more briefly.

Indeed, with respect, the weight of authority suggests the contrary.

An estate agent was held not to have authority to accept a deposit reduced to 5% of the price in Markson v Cutler & anor [2007] NSWSC 1515

(21/12/07 per Brereton J).

* * * * *

– 51 –

Formation of Contract in Real Estate Transactions

Formation of Contract in Real Estate Transactions

Tony Cahill

Legal Commentator and Author

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Formation of Contract in Real Estate Transactions

Tony Cahill

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Formation of Contract in Real Estate Transactions

Formation of Contract in Real Estate Transactions

Tony Cahill

Legal Commentator and Author

TABLE OF CONTENTS

ABOUT THE AUTHOR

Formation of Contract in Real Estate Transactions

Tony Cahill

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