Subdivisions, minimum areas and cancellation of contracts

old_contractThe Supreme Court decision in Mana Property Trustee Limited v James Developments Limited gives some useful advice about minimum area clauses which developers/purchasers entering pre-sales contracts should consider. This case is also useful when considering what to do when there is a breach of an essential term in an agreement for sale and purchase.

The Court found for the developer, i.e. the purchaser incorrectly cancelled the agreement for sale and purchase.

The purchaser had signed up to buy a section and in clause 18.3 it was agreed that the section “must not be less than 4.7150ha”. The section was in fact only 4.6990 ha when settlement was first called for. This was held to be a breach by the developer of an essential term of the contract. Although the clause had not expressly been agreed as essential, the Court decided that the use of the word “must” in a clause that otherwise allowed an adjustment of the purchase price if the area was deficient, meant that the clause was intended to ensure a purchaser should not be obliged to take a piece of land with an area less than 4.7150ha.

The lesson here, if including a minimum area clause, consider the areas carefully and the consequence if it is not met. A developer will be required to comply with it and if breached, a purchaser will have a right to cancel.

So the purchaser won on that point and was entitled to cancel for breach of an essential term. However, it all went wrong for the purchaser because of the way the contract was cancelled. The purchaser didn’t give a settlement notice before cancelling. It proceeded assuming the breach of the essential term gave an immediate right to cancellation. But, the usual settlement notice procedure was included in the contract and importantly, although clause 18.3 was essential, the time for settlement was not. As it turned out, the developer was in fact able to deliver a title of at least 4.7150ha on the 12th working day after the purchaser issued it’s notice of cancellation (as it purchased some land from Council and effected the boundary adjustment in time). The cancellation was therefore invalid.

So breach of an essential term in an agreement for sale and purchase gives a right to cancel, however unless the time for performance is also essential the way to cancel is to give a settlement notice, wait 12 working days (or whaetevr period the contract proivides for) and if the breach has not been remedied, then cancel.

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