6/11/2019 Allens: Publication: Focus: Real estate spruiking has its limits

Allens

Real Estate

FOCUS: REAL ESTATE SPRUIKING HAS ITS LIMITS

25 FEBRUARY 2009
In brief: The New South Wales Supreme Court has found that representations by
real estate agents as to the future value of an off-the-plan property must have a
reasonable basis. If those representations are relied on, even in 'an imprudent
gamble', the purchaser may be entitled to an order for rescission. Partner Victoria
Holthouse (view CV) and Lawyer Usha Joyrama report on a recent NSW Supreme
Court decision.

Background
The decision
Conclusion

HOW DOES IT AFFECT YOU?

In a falling property market, off-the-plan purchasers may seek to avoid completing

contracts entered into years earlier, and may seek to rely on pre-contractual
representations for an order for rescission of that contract.
Property developers and their agents need to carefully check the wording of their
advertisements or other representations to make sure they are based in fact. There
must be a reasonable basis for making representations as to future value: if
statements in relation to future value are made, then further information to qualify
those representations should be provided.
If a contract is rescinded, both the agent (as stakeholder) and the vendor may be
liable to the purchaser for the return of the deposit.

BACKGROUND

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In May 2003, Mr Zhang and Ms Liu (the purchasers) read an advertisement for a building in
a development known as Victoria Park in Zetland, placed by Sydney Advance Realty (the
agent) in two newspapers. The agent was engaged by VP302 SPV Pty Ltd (the vendor) to
market the Victoria Park development.

The advertisement was mostly in Mandarin and, translated, it relevantly stated:

Victoria Park BRAND NEW OFFER FORM

One area which was acclaimed by Sydney Morning Herald to be the number one
district amongst three areas which is going to double in value in five years...

Extremely low property management fees (around $410 for two bedrooms) in
gardenesque living environment...

Extremely convenient transportation, a modern multi-functional building combining

residential, commercial, retail, entertainment and community services. Offer job
opportunities to 8,000 to 10,000 people. A reliable guarantee for leasing
opportunities...

Our well trained investment consultant will provide service, professionally analyse
your financial status, answer all your inquiries with regards to the investment and
tax, set your future investment plan, help you easily step onto your path to
wealth....

The same statements were also made in various other advertisements.

On 11 September 2003, at the peak of the market, the purchasers exchanged contracts for
an off-the-plan purchase of a property in the Victoria Park development at Zetland.

The vendor appointed 21 July 2005 as the date for settlement. However, by the time the
contract was due to be settled, the market had fallen substantially from its level at
September 2003. The purchasers refused to complete the contract and argued that they
were induced to enter into the contract by misrepresentations made by the agent, and that
they were entitled to avoid the contract on that basis. The matter went to trial.

THE DECISION

In the case of Zhang v VP3O2 SPV Pty Ltd & Ors ([2009] NSWSC 73), Justice White
concluded that the verbal evidence of the purchasers and Ms Huo (an employee of the
agent) was unreliable. Nonetheless, His Honour concluded that Ms Huo emphasised the
property market generally and said that the units in the Victoria Park development had
shown substantial capital appreciation. His Honour also went on to say that Ms Huo did not
do anything to qualify the representations the agent had made in the newspaper
advertisements that the area's value was expected to double in five years.

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His Honour further found that the agent, in making representations in the advertisement in
mid-2003 that the development site would double in value within five years, did not provide a
reasonable basis for that prediction. In fact, the article in the Sydney Morning Herald that the
agent was referring to was well out of date, as it was published in February 2002, and since
then the property market had substantially grown and the market for apartments in the
Zetland/Waterloo area was now saturated. In any event, all the author of the article had
stated was that higher priced new developments would increase the values for the suburb as
a whole, not that highly priced new developments would themselves double in value in five
years.

His Honour concluded that the statement in the advertisement was to a future matter and
that there was no reasonable basis for predicting the doubling of the value of properties in
the Victoria Park development. Without any reasonable grounds, it was misleading and
deceptive.

His Honour concluded that the advertisement by the agent materially contributed to the
purchasers' belief that the property value would double in five years. The agent, acting as an
agent of the developer, was found liable under section 52 of the Trade Practices Act 1974
(Cth) for misleading and deceptive conduct.

CONCLUSION

The judge found that, even though it was 'an imprudent gamble' for the purchasers to enter
into a contract they could not afford to complete, that gamble was induced by misleading
advertisements and encouraged by the agent. The purchasers relied on the representations
and were entitled to an order for rescission and the return of the deposit. Both the vendor
and the agent were liable to the purchasers for the return of the deposit.

FOR FURTHER INFORMATION, PLEASE CONTACT:

Victoria Holthouse David McLeish

Partner, Sydney Partner, Melbourne
You can leave a comment on this
Ph: +61 2 9230 4303 Ph: +61 3 9613 8954
publication below. Please note, we
Victoria.Holthouse@allens.com.au David.McLeish@allens.com.au
are not able to provide specific
legal advice in this forum. If you
would like advice relating to this topic, contact one of the authors directly. Please do not
include links to websites or your comment may not be published.

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