Completion by Contract or Settlement

Contracts for the sale of units, land and buildings often have special conditions that require things to be done “by completion”. The NSW Court of Appeal recently had cause to consider what that phrase means.

In the decision of Namrood v Ebedeh-Ahvazi [2017] NSWCA 310, the terms of a contract required the seller to comply with council notices and orders “by completion”. The Court of Appeal was required to determine whether this meant compliance was required by the completion date specified on the front page of the contract or merely by the time of actual settlement.

Facts

The seller owned vacant land situated in Cecil Park, Sydney. Prior to putting the property on the market, work on the land was undertaken which the local council did not authorise. The council issued the seller with various notices and orders requiring him to cease work and rectify the property.

The seller decided to sell the property despite not having complied with the notices and orders. The buyer bought the property for $1.46m at auction.

The sale contract contained a special condition which provided that “prior to completion”, the seller will restore the property to the condition it was in before the seller undertook the unauthorised works, carry out a survey to demonstrate that the property had been restored, and provide the buyer with receipts demonstrating that the work had been undertaken.

The contract also provided the seller was to comply with any work order “by completion”.

The completion date stated in the contract was 20 June 2015.

Settlement did not take place on 20 June 2015. It was apparent that the seller had not done the remediation work by this date. The following week, the seller undertook some work to comply with the council notices and orders. He then advised the buyer that he had complied with the conditions under the contract and required the buyer to settle on the revised settlement date of 29 June 2015.

The buyer said he had not received satisfactory evidence of the seller’s compliance with the council’s orders and notices, and served a notice on the seller requiring the seller to comply with his obligations under the contract, failing which the purchaser would be entitled to terminate the contract and recover damages.

On 29 July 2015, the buyer sent a notice of termination.

The seller then provided a notice to settle after demonstrating that the council orders and notices had been complied with. When completion still did not take place, the seller terminated the contract and resold the property to another buyer for $40,000 more than the original contract price.

The seller commenced proceedings seeking declaratory relief that his termination was valid, and that he was entitled to the deposit the first buyer had paid. The buyer cross-claimed.

The primary judge found in favour of the seller (see Ebadeh-Ahvazi v Namrood [2017] NSWSC 399). The primary judge found that the seller was only required to fulfil his obligations by the time of settlement (i.e., the date on which title was conveyed). As such the buyer was not entitled to terminate for breach of the contract.

Decision on Appeal

The buyer appealed but the appeal court dismissed the appeal.

The appeal court found that the primary judge was correct. The requirement for the seller to fulfil his obligations regarding the council notices and orders “by completion” meant by the time completion actually occurred, not the date specified in the contract. Therefore, the seller was not in breach of the contract by failing to fulfil his obligations regarding the council notices and orders by 20 June 2015.

The language of the contract was important. A distinction was drawn between the terms “completion date” (being 20 June 2015) and “completion” (being the date on which title was conveyed). It was clear from the other clauses in the contract that the word “completion” referred to the date of actual settlement of the sale rather than the date initially contemplated by the contract at which settlement would occur. The appeal court found that it would not have made sense to read those references to “completion” as meaning “completion date”.

Practical Implications

The decision illustrates the importance of clearly specifying in the contract when the timing for fulfilment of an obligation arises. Commonly used terms such as “completion date” and “by completion” should not be used interchangeably as they can have different meanings, create confusion and ultimately be determined to mean something different than what you thought.

The case also demonstrates that termination rights should be exercised carefully. The outcome had significant ramifications for the first buyer. The first buyer incorrectly interpreted the term “by completion” and was under the mistaken belief that the seller was in breach of the contract. The buyer’s invalid termination meant the seller was entitled to retain the $146,000 deposit.