Case Update: Termination Of Contract Upheld Because Of Buyer’s Failure To Meet Due Date

Contracts for the sale of residential and commercial land will often include certain conditions inserted for the benefit of a buyer.  However, in Queensland, time is of the essence in relation to these conditions.  The importance of buyers meeting the due dates of contractual conditions is demonstrated in the recent Queensland case of International Palace Pty Ltd v Novaheat Pty Ltd^[1].

Background – International Palace Pty Ltd v Novaheat Pty Ltd

On 17 June 2015, International Palace Pty Ltd (‘Buyer’) entered into a written contract with Novaheat Pty Ltd (‘Seller’) to purchase vacant industrial land at Loganholme for $750,000 plus GST (‘Contract’).  The Contract was in the standard REIQ form with a number of special conditions including the following:

“This contract is subject to and conditional upon due diligence period to be satisfied on or before 40 days from contract date.”

The 40-day period expired on 27 July 2015 (‘Due Date’).  At 5pm on the Due Date, after receiving no notification whether the Buyer was satisfied with its due diligence, the Seller’s solicitors faxed a letter to the Buyer’s solicitors terminating the Contract on the basis that the Buyer was in breach of the Contract.

The next day, the Buyer’s solicitors emailed the Seller’s solicitors disputing that the Buyer was in breach.  The Buyer’s solicitors then notified the Seller’s solicitors on 29 July 2015 that the Buyer was satisfied with its due diligence.  In response, the Seller’s solicitors advised that time was of the essence of the Contract and as such, the Buyer’s failure to give notice by the Due Date entitled the Seller to terminate the Contract.

On 13 August 2015, the Buyer lodged a caveat over the Seller’s property claiming an interest in it as purchaser under the Contract.  On 7 September 2015, the Seller’s solicitor pointed out that even if the Contract remained on foot, the Buyer had failed to pay the balance deposit in accordance with the terms of the Contract and therefore terminated the Contract again.

The Buyer subsequently commenced legal proceedings in the Supreme Court of Queensland (‘Court’) against the Seller on seeking to enforce the Contract.  The Seller counter-claimed against the Buyer seeking a declaration from the Court that its termination was valid.

Decision

The Court was faced with the proper construction of the due diligence special condition. While it was submitted by the Buyer that there were no cases that dealt with the construction of similar clauses, the Court considered this did not hinder it from making a determination.^[2]  In constructing a clause in a commercial contract, the Court followed previous authorities that the special condition must be constructed to avoid it making “commercial nonsense or working commercial inconvenience”.^[3]

The Court agreed with the Seller’s interpretation of the special condition that the Buyer had 40 days to either terminate the Contract or waive/satisfy the condition.  Since the Buyer failed to do either of these things, the Contract was voidable by either party at the end of the 40-day period provided it was not itself in default.^[4]

As such, the Court found that the Seller had validly terminated the Contract regardless of the fact that the condition had been inserted for the benefit of the Buyer.^[5]  Once the Seller had terminated the Contract, it was too late for the Buyer to subsequently waive the condition.^[6]  However, the Seller conceded that the deposit should be returned to the Buyer.^[7]

Implications for buyers and sellers

This case is an important reminder that due dates in contracts are not arbitrary and must be taken seriously. A failure by a buyer (or its solicitors) to give notice by a due date may result in the seller terminating the contract.  Sellers should also ensure that if they wish to terminate a contract on this basis, notice of termination should be given before a buyer satisfies or fulfils the particular condition.

The case also is an important reminder that special conditions in a contract should have sufficient details to contain the intentions of the parties.  The dispute in this case could have been avoided if the parties had have included further provisions in the special conditions.

If you would like further advice about contracts or other matters relating to buying or selling property in Queensland, please contact us and one of our experienced property lawyers will be able to assist.

[1] [2016] QSC 75.
[2] Ibid at [26].
[3] Ibid.
[4] Ibid at [34].
[5] Ibid at [37].
[6] Ibid at [36].
[7] Ibid at [45].