Property Developers and Misleading Property Claims

In the recent case of Ackers v Austcorp International Ltd [2009] FCA 432, representations made to potential purchasers and investors in promotional material in off the plan purchases were examined.

Facts

The property was a resort development located on the Central Coast of NSW. The promotional material promised purchasers a guaranteed 7% per annum net return on their investment with “the security of strata title and a ten year lease to Pacific International Hotels”.
Purchasers were told this was a "five star investment". Purchasers borrowed most, if not all, of the purchase price. Less than two years after completing their purchases, the lessee, Mustara Holdings Pty Ltd (Mustara) a subsidiary of Pacific International Hotels Pty Ltd, went into administration. The subsequent operators of the resort paid the purchasers a return of less than 7% per annum.

Senior Austcorp executives were found to have written and approved the promotional material. The applicants claimed that Austcorp itself engaged in conduct that was misleading and/or deceptive which caused them to purchase their apartments and incur financial loss.

Marketing the property

Warren Walker (Walker) worked as a real estate agent at Lamont Bros PRD Realty.

The marketing activities consisted of a promotional brochure, a similar leaflet and confirmatory statements by Walker. The applicants pleaded that the brochure and leaflet assured a net rental return of 7% per annum of the purchase price for ten years. This net rental return would be achieved through the lease of apartments in the resort to Pacific International Hotels for a term of ten years with two further ten year options and, the entity that would lease the apartments in the resort was a well known, well respected and experienced provider of hotel management services. In addition, the applicants claimed Walker informed each of them that a return of 7% per annum was guaranteed for ten years. Justice Rares found that the statements made by Walker were no different in substance to the representations made in the brochure.

The representations made in relation to the property did not match the terms of the lease to Mustara. Each of the applicants said they would not have pursued their purchases if they had realised that Pacific International Hotels’ guarantee was limited to a maximum of 12 months rent under clause 20.9 of the lease to Mustara.

Warranty as to Non Reliance on Representations in the Contract for Sale

The contract for sale included a special condition which stated:

... in entering into this contract he has not relied upon any warranty or representation made by or any other conduct engaged in by the Vendor or any agent or person on behalf of the Vendor except such as are expressly provided in this contract but has relied entirely upon his own enquiries relating to and inspection of the property:
(c) neither the Vendor nor any agent or person on behalf of the Vendor has made any representation or warranty upon which the Purchaser relies as to:
…
(2) any financial return or income derived or to be derived from the property; …
and the Purchaser will not make any Objection in respect of any of the matters referred to in this clause.

Justice Rares rejected the argument that Austcorp could rely on such a special condition to negate the contravention of misleading and deceptive conduct under section 52 of the Trade Practices Act 1974 (Cth). Justice Rares further stated that without full and drank disclosure of the true position of the transaction, such a special condition cannot excuse a corporation from liability. However, he found that special conditions such as this one may have some effect but only where they are utilised in “honest trade and commerce”.

Practical implications:

  1. The outcome of this case and Zhang’s case (which was reported on in our April 2009 newsletter) is one that points to the need for vendors and their agents to be vigilant with any advertising being utilised to sell properties off the plan. All representations must be based on fact and be capable of being backed up with evidence. Any representations as to future values of the property must have a reasonable basis and further details to qualify such representations should be provided.
  2. It is most unlikely now that vendors can rely on clauses in contracts which negate their liability if representations are made that are proven to be untrue unless absolute full and frank disclosure has been made in the contract, for example, those which stipulate that the purchaser has made its own enquiries and does not rely on any vendor representations. If vendors seek to rely on warranties as to non reliance on representations by the purchaser in contracts for sale, then full disclosure will need to be made in the contract as to specific representations that are likely to be made.

 

Written by Simone Nokes, solicitor.