Australia: Is it repudiatory for a vendor to erroneously claim interest after issuing a notice to complete?

Mehmet v Carter[2017] NSWSC 1067

Interest for delayed completion

A fraught situation can arise where a land sale contract fails to complete and where its terms entitle the vendor to interest on the balance of the purchase price if this failure was not the vendor's fault (often regardless of whether it was also the purchaser's fault). This then prompts the vendor to serve a notice to complete appointing a new date for settlement and the vendor's settlement figures include a component for interest on the balance of the purchase price for the period between the two completion dates.

Depending on why completion failed - for instance if the purchaser had what it considered as being a genuine basis not to complete, or if the purchaser lacked the wherewithal to complete, but believes that funds will soon become available, so that the purchaser is not prepared to simply walk away and forfeit its deposit - the purchaser is likely to contend that due to a default by the vendor (which will need to be articulated) the purchaser was not obliged to have completed on the first completion date.

What then should the vendor do about claiming interest? Put another way, if the vendor insists on being paid interest at completion, but is not entitled to any interest, is the vendor exposing itself to a claim that it is repudiating the contract by only performing it in a manner inconsistent with its terms? If so, the vendor risks having the contract terminated and becoming liable in damages to the purchaser for the sake of what may be a relatively small amount of money. This issue, whilst not entirely new, was just considered in Mehmet v Carter [2017] NSWSC 1067.

Completion, notification of registration and the Aboriginal object

The completion of a sale of land contract was to occur on the later of two dates: 5 August or 14 days after the vendor notified the purchaser that title was registered in his name as an executor, by way of a transmission application, following the death of the registered proprietor.

The transmission was registered on 17 June but not notified until 4 August. No issue was taken with this and the parties worked toward a 5 August settlement as though obliged to do so by the contract.

Settlement did not occur on 5 August. The purchaser contended that the vendor was not proffering good title due to there being an undisclosed 'Aboriginal object' on the land. Pursuant to legislation, its presence was said to restrain the purchaser's ability to develop the land.

The vendor issued a notice to complete nominating 10 September as the completion date. The notice was issued with draft settlement figures that included a component for interest payable by the purchaser from 5 August. This was said to be payable pursuant to a special condition that entitled the vendor to interest if settlement did not occur "without default by the vendor".

On 10 September, both parties attended settlement, but there was no completion, again due to the presence of the Aboriginal object.

The next day, the vendor issued a further notice to complete nominating 28 September for settlement and several days later issued draft settlement figures. These figures included payment of interest by the purchaser from 5 August.

On 23 September, the purchaser asserted that the vendor was not entitled to have issued the notice to complete since he was unable to convey good title and further that the vendor was unable to claim any interest because he had not previously been in a position to convey good title. The vendor was also said to have repudiated the contract by manifesting an intention to only perform the contract in a manner inconsistent with its terms, essentially concerning the obligation to convey good title. The vendor persisted with his notice to complete and maintained his entitlement to interest.

On 25 September, the purchaser purported to accept the vendor's alleged repudiation and terminate the contract. Because the time for completion had not passed, the repudiation was founded upon an anticipatory breach.

On 6 October, the vendor contended that the purchaser had had no basis to terminate and that his conduct was itself repudiatory. The vendor then purported to terminate.

The decision

The matter proceeded to court, each party asserting the other was wrong, and with attention focused upon whether the Aboriginal object affected the vendor's ability to convey good title. This question was decided in favour of the vendor - the presence of an Aboriginal object was not a defect in title (a matter of interest in itself, but not considered here).

The purchaser, in order to maintain the lawfulness of his termination, claimed that even if the Aboriginal object did not affect the vendor's ability to convey good title, the vendor was never in a position to have demanded interest from 5 August. This was because completion was not to occur until the later of 5 August or 14 days after the registration of the transmission was notified. Since notification of the transmission only occurred on 4 August, completion was not to occur until 18 August. That is, on any view of it, the vendor was asserting a right to something it was not contractually entitled to receive – interest from 5 August.

The court was required to consider whether it could be inferred, from the vendor's conduct in insisting incorrectly on an entitlement to interest from 5 August that the vendor had repudiated the contract. That is, would the vendor's conduct convey to a "reasonable person in the position of the [purchaser] that the [vendor was] renouncing the contract". The court found no such inference:

• It was correct that the vendor was not entitled to interest from 5 August. However, the parties acted as though 5 August was the date for completion and completion did not occur on that date because of the Aboriginal object issue. The argument between the parties after this time, including in respect of interest, was postulated upon the consequences of there being an Aboriginal object on the land. It had never been suggested that 5 August was not the original date for completion due to the failure to notify the registration of the transmission or some other basis to show that completion did not occur due to a default by the vendor
• Considering DTR Nominees Pty Ltd v Mona Vale Homes Pty Ltd (1978) 138 CLR 423, a party may assert an incorrect construction of a contract prior to the time for performance, but in fact would be willing to perform in accordance with the correct interpretation if explained to them. However, the purchaser's argument as to why interest was not payable was not articulated upon 5 August not being the first completion date, but because the purchaser had not been obliged to complete due to the Aboriginal object. In the absence of a clear enunciation of the contract being put to the vendor, and where repudiation is based upon anticipatory breach, it is difficult for a court to conclude that the vendor would have persisted with his erroneous construction
• In the terms of the argument between the parties, the vendor was in fact correct in asserting that a conveyance with the Aboriginal object on the land delivered good title, which was the only reason why completion did not occur on 5 August
• The parties' conduct in acting as though 5 August and then 10 September were contractual dates for completion justified the vendor's belief that he could issue notices to complete. Given that a court should not lightly infer repudiatory conduct, there is no basis to find that a reasonable person in the purchaser's position would have considered the vendor to be repudiating the contract.

Given the above, the purchaser was not entitled to purport to terminate the contract on 23 September and the vendor was entitled to accept this conduct as repudiatory and himself terminate.

Some consideration, including merger

This note began by posing the question as to what a vendor should do about claiming interest if the purchaser has a tenable argument that completion failed due to the vendor's default.

While the vendor may have been correct in the stance he took in Mehmet v Carter, the purchaser's point was certainly arguable and had the facts only been marginally different could have resulted in the purchaser being entitled to have terminated.

Perhaps a different and more prudent approach would have been not to insist upon interest at completion, but for the vendor to reserve its position. That is, the vendor would reserve their rights, such as they are, in reliance upon the terms of the contract and, if so minded, to sue for interest following completion.

One further issue here for a vendor is to ensure that such rights survive completion of the contract. This is because normally the ability to bring a claim merges on completion to enable finality, meaning that an effective non-merger clause will need to be considered. The purpose of such a clause is to make it clear that the parties intended the relevant rights to survive post completion. (See also Carrapetta v Rado [2012] NSWCA 202, where the notice to complete did not contain interest figures, and Neeta (Epping) Pty Ltd v Phillips (1974) 131 CLR 286, where it did and which also concern issues where a vendor insists upon the payment of interest as a condition of completion. Concerning merger, see Fu v Bucasia Pty Ltd [2014] NSWSC 325 and the authorities it cites – in this case the relevant clause was not determinative).

This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.