Most off-the-plan property contracts contain terms that permit a 5% variation in the final area of the property to that shown on the disclosure plans given to the buyer pre-contract. The intention of those contract terms is that the buyer must accept the variation in area and is not allowed to withdraw from the contract or seek compensation from the developer as a result of the increase or decrease in the area of the property.
This 5% tolerance is generally accepted by developers and buyers alike as the benchmark for determining whether a change will materially prejudice the buyer and there is often a specific term in the contract, in which the buyer acknowledges that the buyer will not be materially prejudiced by any change in the area of 5% or less.
However, a recent Victorian Supreme Court decision in Burger v Longboat Holdings Group2 Pty Ltd (Burger) has proven otherwise. In that case, the court found a reduction of 4.4% in the area of the lot ‘materially affected’ the lot and allowed the buyer to rescind the contract.
In Burger, whilst the reduction in area was only 4.4%, the reduction resulted in the area of the master bedroom being reduced by around a quarter and the change also created unusable space and a ‘reduction in the size of the light court outside the master bedroom’. The court considered that the impact of the light reduction to the master bedroom in conjunction with the size reduction meant the lot had been ‘materially affected’, such that the buyer’s rescission of the contract was valid. The rescission was allowed even though the contract contained a specific acknowledgement by the buyer that any amendment to the plan altering the area of the property by 5% or less would not materially affect the property.
In Queensland, the Body Corporate and Community Management Act (the “Act”) permits a buyer to terminate an off-the-plan contract within 21 days after being advised of a change to anything contained in disclosure statement that was given to the buyer prior to entering into the contract, but only if the buyer would be “materially prejudiced” if the buyer were required to complete the contract.
What might constitute material prejudice will differ in each case, however it is clear that courts will not be swayed by a contractual term in which the buyer agrees that a particular variation or amendment will not amount to material prejudice.
This case highlights the discretion of the courts in considering the 5% tolerance in off-the-plan contracts. Perhaps a timely reminder to developers and purchasers alike, that changing a plan after sale contracts have been signed creates risk for the developer that the change will cause material prejudice for the buyer and trigger a right of termination. Not even the most well drafted off-the-plan contracts can set aside the buyer’s termination rights under the Act and ultimately, the court will use its own judgment to determine whether material prejudice exists and whether relief ought to be granted.
We can expect this Victorian case to be relevant to cases that may come before the court in Queensland, so watch this space. For now, buyers should be aware of all contract terms before signing and seek legal advice to minimise any risk. For developers, be diligent in your design and planning phase before you go to market and do your utmost to minimise changes to the development once contracts have been entered into.
If you require specific advice in relation to your off-the-plan contracts, please contact our Commercial + Property team for assistance.
For further information please contact Amanda Tolson, Director.
The assistance of Jade Scheuerle, Law Clerk in researching this article is gratefully acknowledged.