Buying a unit in a community titles scheme: A little known ‘escape clause’

Standard contracts to purchase residential property in Queensland contain a number of clauses that allow buyer or seller to terminate the contract after it is formed. There is a little known statutory provision that also allows a buyer to terminate the contract.

Current law relating to sales of real property contains provisions aimed at consumer protection. This includes lots in community titles schemes (also known as strata titles). For an existing lot, sellers must give a potential buyer a disclosure statement (s 206(1) Body Corporate and Community Management Act 1997 (Qld) (BCCMA)). The required content of the statement has varied over the years.

Crucially for sellers, certain failures in the disclosure statement give the buyer the statutory right to terminate the contract. One ground is if the statement is inaccurate and the buyer would be materially prejudiced (s 209(1) BCCMA). This ground aligns with a consumer protection purpose.

But buyers can also terminate the contract if the seller does not sign the disclosure statement (s 203(3) BCCMA: “The disclosure statement must be signed by the seller.”)

In the 2009 case of Pazcuff Pty Ltd v Farmilo (1) the Supreme Court held that the contract was validly terminated because the disclosure statement was not signed by the seller or a person authorised by the seller at the time the contract was formed.

Pazcuff Pty Ltd entered into a contract to purchase 6 lots in a community titles scheme from the Farmilos. The Farmilos’ solicitors sent the contract documents, including an unsigned disclosure statement, to Pazcuff’s solicitors on 31 October. On 4 November Pazcuff signed the contract. On 5 November the Farmilos signed the disclosure statement. Before settlement Pazcuff terminated the contract on the grounds that the disclosure statement had not been signed. It may have been that Pazcuff wanted to terminate the contract for other reasons. Nevertheless, Pazcuff was able to do so on what might be called a technicality.

It is not uncommon for disclosure statements to be produced by a third party, typically one of the many businesses offering these services. It is also not uncommon for the statement to be provided to the buyer by the real estate agent without signature.

While this might seem a small and immaterial omission, as Pazcuff showed, it is an omission that can have significant consequences.

Courts seem likely to interpret this provision strictly, in line with its consumer protection function. The Court of Appeal in Menniti v Winn (2) said that. “the role of s 206 is to provide information to enable the purchaser to make an informed decision on whether to proceed with the contract.” The Court in Pazcuff held that the wording of s 206 meant that there had to be personal verification by the seller of the statement.

The personal verification can be by the seller, or by an agent authorised to act on the seller’s behalf (s 205D(2)(b) BCCMA). The authorisation must be specific. It was not sufficient in Pazcuff that the disclosure statement was under cover of a letter signed by the Farmilo’s solicitor. It seems unlikely that a general authority for a real estate agent would meet the personal verification standard.

In summary, sellers and those acting for them should be aware of this potential ‘out’ for buyers. The prudent approach is for the seller to always sign the disclosure statement.