Wrong keys after settlement? Buyers may be responsible for rectification costs

In the recent Supreme Court of Victoria decision of Sohtra v Peddi [2023] VSC 262, the Court confirmed that buyers are generally responsible for ensuring that the property details described in a contract of sale accurately reflect the property to be conveyed and may be liable for rectifying any errors at their own expense, leaving them to bear the additional cost and inconvenience of pursuing a contribution from sales agents or conveyancing solicitors who may share some responsibility for the error.

Circumstances

The seller had subdivided a property at 54 O’Reilly Road, Tarneit, Victoria into two mirror units. Lot 1, on the western side, became designated 54B whilst Lot 2, on the eastern side, became 54A. 

The seller engaged a sales agent to sell one of the units and to lease the other. The seller did not instruct the sales agent as to any preference between which unit was to be sold and which unit was leased. In the course of this engagement, it appears the sales agent confused which unit which was described as 54A and 54B.

The sales agent had shown the buyers through an inspection of 54A but reported to the seller that the buyers had agreed to purchase 54B. The buyers later entered a sale contract for 54B but took possession of 54A upon settlement. Neither the seller, buyers, nor the sales agent were aware of this state of affairs until several years later when the seller attempted to sell 54B.

The buyers, who by that point were leasing 54A to their own tenants, subsequently refused to vacate 54A or engage with the seller to resolve the situation, leading to proceedings being issued by the seller to regain possession.  

Decision

In this case, the sale contract was in the standard form approved by the Law Institute of Victoria and the Real Estate Institute of Victoria.

In seeking to determine liability, the Court had regard to the terms of the contract of sale.

Specifically, General Condition 3 of the sale contract, titled ‘Identity of the Land’, provided that:

“3.1 An omission or mistake in the description of the property or any

deficiency in the area, description or measurements of the land, does

not invalidate the sale.

3.2 The purchaser may not:

  (a) make any objection or claim for compensation for any alleged

misdescription of the property or any deficiency in its area or

measurements; or

  (b) require the seller to amend title or pay any cost of amending

title.”

The Court found that General Condition 3 was unambiguous insofar as it provided that the responsibility for conducting proper due diligence as to whether the sale contract reflected the intended lot to be purchased rested with the buyers, such that the buyers were prevented from claiming that the contract was invalidated on grounds of error or otherwise pursuing a claim against the seller where the property conveyed was not as described by the written contract.

On this basis, the Court made orders for the seller to recover possession of 54A, including recovery of any and all rental monies and profits generated on the property, together with a special order for costs on an indemnity basis in circumstances where the buyers had refused to engage in reasonable attempts to resolve the situation.

It is unreported whether the buyers subsequently took steps to attempt to recover those costs from the sales agent.

Conclusion

Although this is a Victorian decision, it serves as a cautionary tale of wider application - that is, that the parties to any real property transaction, as well as their sales agents, should be conscious of how their particular sale contract allocates the responsibility of ensuring that the property is described as intended, and is fit for purpose.

Relevantly, the REIQ Contract for Houses and Residential Land contains a standard clause which provides that where there is a mistake or omission in describing the property or the seller’s title to it, which is material, the buyer may terminate the contract by notice to the seller given before settlement.  However, where the mistake or omission is immaterial, or where the error or omission is material but the buyer elects to complete the contract, the buyer’s only remedy against the seller is for compensation, but only if claimed by the buyer in writing on or before settlement. 

It is well established that a sales agent owes a duty to exercise due skill when preparing a contract of sale and may be exposed to claims where they fail to discharge their duty in that regard. However, sales agents are not retained to perform the role of a qualified legal practitioner charged with advising upon the terms of sale contracts.  Therefore, the parties to a contract ought to seek the advice of an appropriately qualified legal practitioner to assist in identifying whether the certificate of title or any land transfer documents reflect the intended transaction.

Buyers who retain possession of a property without entitlement expose themselves to significant cost consequences if they refuse to meaningfully engage in efforts to rectify any error in the registration of the property.

Agents who become aware that they have been involved in a transaction that does not reflect the intended purchase are urged to take early legal advice to assist them, and their clients, to navigate the process of rectifying a mistaken transaction in order to avoid a costly and protracted dispute.

Read about a case study where an agent's commission was examined by the Surpreme Court here.

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