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Special Conditions in a Contract for the Sale of Land - Brennan V O'Meara [2009] NSWSC 1374 (11 December 2009)

CaseFlash 19 January 2010

On 11 December 2009, Davies J of the Supreme Court of NSW examined the meaning “become mentally ill” in relation to the Special Conditions in a Contract for the sale of land.

Facts

The Plaintiff/Vendor entered into a Contract for the sale of a property; however, the Contract was not completed by the Defendant/Purchaser on the due date and consequently the Vendor issued a Notice to Complete on 30 January 2009.  On the same day, the Purchaser issued a Notice of Rescission on the basis of clause 33(a) of the Contract (mental illness).  The Vendor then served a Notice of Termination following the Purchaser’s failure to complete in accordance with the Notice to Complete.

Issues

The primary issue in the case involved assessing the validity of the Vendor's Notice of Termination and further to that, the Purchaser’s Notice of Rescission.  This involved consideration of whether the Buyer had “become mentally ill”, within the meaning of clause 33 which provided:

without in any way limiting, negating or restricting any rights or remedies which would have been available to either party at law or in equity …should either party…prior to completion:
a) die or become mentally ill then either party may rescind this Contract …’

In addition, the Court examined the Buyer’s claim that he was entitled to a refund of some of the monies paid to the Seller as a result of his early occupation of the land, and whether clause 47 (payment for early occupation) amounted to a penalty.

“Become mentally ill”

  1. Meaning:

The Court noted that there is no definition of “mentally ill” in the context of the Contract, nor is there authority on what amounts to it for the purposes of the clause, though a similar clause was considered in Karfoal Pty Ltd v Lorence [2002] NSWSC 204.  Ultimately, the Court’s view was that the clause is targeted at events which cause an impediment to the fulfilment of contractual obligations.  Therefore, the words “mentally ill” must entail a condition that causes a delay in fulfilment of contractual obligations.

The Court noted that the definitions of “mentally ill’ in section 14 and of “mental illness’ in section 4 of the Mental Health Act 2007 are useful as a guide to the meaning of the words ‘mentally ill’ in clause 33 of the Contract, however the requirements of those sections do not have to be met for the purposes of clause 33.  The mental illness must be of a magnitude that impedes the fulfilment of contractual obligations brought about by entry into the Contract.

Present case -

Several medical expert opinions were tendered and the Buyer was characterised as possessing an anxiety disorder; though still able to, “deal in a reasonably competent fashion with ordinary affairs such as planning for the future, working out how to provide for himself, and his family, working out how to earn income and how to look after capital.” The Purchaser did not lack mental capacity to engage in commercial or legal transactions, and this was evidenced through his instructions given to his mortgage fund and the real estate agent.

  1. Timing of the mental illness:

The Court considered it necessary that the mental condition arise prior to completion as the word “become” in clause 33 impliedly reflected a transition between the date of the Contract and its completion.

The Court reiterated that if a party was relying on becoming mentally ill prior to date of the Contract, then the principle of dealing with a mentally ill person in good faith and for valuable consideration, without knowledge of the condition, would apply – thus, making the contract valid Molton v Camroux [1948] EngR 611.

Present case -

The Court noted, from the Purchaser’s own acknowledgement, that his illness had been present from at least 1997 and consequently, it could not be said that he became mentally ill after the date of and prior to completion of the Contract.

Penalty

  1. Return of the deposit

Whilst not formally included in the pleadings, the Court considered the Purchaser’s argument as to the partial return of the deposit to the Purchssr, under clause 19 (rescission of Contract).

The Purchaser submitted that clause 47 was a penalty because the Purchaser paid $1,000 per week for occupation of and adjistment on the property, though a fair market figure would have been $500; however, the latter figure was rejected on the basis that the Purchaser lacked expertise on the market for agistment fees; the Puchaser's submission were not expert evidence in accordance with Matika v Sprowles (2001) 52 NSWLR 705.

The Court held that there was no penalty involved as there was no evidence that $1,000 per week was a penalty rate; the agreement was a legitimate bargain and the clause did not allow for a lump sum or liquidated damages to be payable in the event completion did not occur.

Held

The Termination Notice issued by the Vendor was effective, and the Notice of Rescission issued by the Purchaser was invalid and of no effect.  The Purchaser was ordered to pay the costs of the proceedings.


Brian Ambler, Partner
Sydney

CaseFlash 19 January 2010
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