Robert J Garvey, Solicitor

The Supreme Court of Queensland has affirmed the freedom to contract in a decision favouring a vendor terminating a contract and keeping the deposit when the buyer failed to meet a deadline. The buyer argued there was an instalment contract (within the meaning of section 71 of the Property Law Act 1974 requiring the vendor to give formal notice before terminating because the contract contained a special condition allowing early release of deposit from the selling agent to the seller. The judgment analyses the meanings of deposit and instalment contract. Their definitions in the Property Law Act are as follows.

deposit means a sum–

(a) not exceeding 10% of the purchase price payable under an instalment contract; and

(b) paid or payable in 1 or more amounts; and

(c) liable to be forfeited and retained by the vendor in the event of a breach of contract by the purchaser.

instalment contract means an executory contract for the sale of land in terms of which the purchaser is bound to make a payment or payments (other than a deposit) without becoming entitled to receive a conveyance in exchange for the payment or payments

The early payment to the vendor was less than 10% of the purchase price, but the buyer argued once there was any early release of deposit to the vendor, the deposit was no longer “liable to be forfeited” within the meaning of the definition of deposit, thus converting the contract to an installment contract. However, the Court found the buyer still had a contractual right for return of this money if, say, the vendor breached the contract and therefore was still liable to be forfeited. That the payment would be retained by the vendor in circumstances other than the buyer’s default, for example frustration, does not alter that it was liable to be forfeited on breach of contract by the buyer and thus retained its character as a deposit. At paragraph 27 KEANE JA wrote:

It has long been recognised that the essential characteristic of a deposit in a contract for the sale of land is that it is susceptible to being forfeited by a buyer to a seller upon the buyer’s breach. Its essential character is that of a payment guaranteed to the vendor in the event that the purchaser fails to complete the contract. The possibility that the deposit might be lost to the buyer for other reasons as well is not apt to deny its essential character as a guaranteed payment. The circumstance that the purchaser’s entitlement to recover the payment may be lost by virtue of events other than the breach of contract by the purchaser does not detract from the character of the payment as a guaranteed payment to the vendor. Indeed, the circumstance that a payment made by a buyer may be forfeited to the seller by reason of events additional to the buyer’s breach serves to strengthen the character of the payment by the buyer as a guaranteed payment to the vendor

The decision also comments on the legality of early releases of deposits under section 384 and 385 of the Property Agents & Motor Dealers Act 2000.

384 When payments may be made from trust accounts

(1) An amount paid to a trust account must be kept in the account until it is paid out under this Act.

(2) An amount may be paid from a trust account only in a way permitted under this Act.

385 Permitted drawings from trust accounts

(1) A licensee may draw an amount from the licensee’s trust account to pay the licensee’s transaction fee or transaction expenses in relation to a transaction only if–

(a) the amount is drawn against the transaction fund for the transaction; and

(b) the licensee is authorised to draw the amount under this section.

(2) The licensee is authorised–

(a) to draw an amount from the transaction fund to pay a transaction expense when the expense becomes payable; and

(b) when the transaction is finalised, to draw an amount from the transaction fund that is equal to the difference between–

(i) the balance of the transaction fund; and

(ii) the total of the licensee’s transaction fee and any outstanding transaction expense;

to pay the person entitled to the amount or in accordance with the person’s written direction; and

(c) to draw the licensee’s transaction fee from the transaction fund when the amount, if any, mentioned in paragraph (b) has been paid and when the transaction is finalised.

(3) For subsection (2)(b) or (c), if a dispute about the transaction fund arises, the transaction is not taken to be finalised until the licensee is authorised to pay out the transaction fund under section 388.

(4) The licensee must pay an amount mentioned in subsection (2)(b) to the person entitled to it or in accordance with the person’s written direction–

(a) if the person asks, in writing, for the balance–within 14 days after receiving the request; or

(b) if the person has not asked, in writing, for the balance–within 42 days after the person first had the right to the balance.

(5) In this section–

transaction expenses means the expenses the licensee is authorised to incur in connection with the performance of the licensee’s activities for a transaction.

transaction fee means the fees, charges and commission payable for the performance of the licensee’s activities for a transaction.

transaction fund means the amount held in a licensee’s trust account for the transaction.”

The Court rejected the implication the deposit could only be released on settlement by distinguishing that under section 378(1), money might be received by a licensee, either “for a transaction”, or “with a written direction for its use”. The Court concluded that the prohibition in section 385(2)(b) only relates to money paid to a licensee “for a transaction” and not “with a written direction for their use”. At paragraphs 34 to 36 KEANE JA wrote:

There is no provision in the PAMDA which expressly purports to deny the effect of the written direction for the use of the moneys referred to in s 378(1)(b). Equally, there is no provision in s 384 or s 385 which expressly authorises compliance with such a direction. From these circumstances, I would conclude not that a written direction by all parties entitled to the money is sterilised by implication by the terms of s 384(2) or s 385(2)(b), but that the PAMDA simply assumes that the licensee may comply with such a written direction. That is hardly surprising: the obligation to comply with the directions of the owner or owners of funds arises under the general law of agency outside the PAMDA. The PAMDA does not purport to limit the directions which a principal may lawfully give to an agent with the consent of the other persons with whom the principal is involved in relation to the title to that money. So far as the provisions of s 384(2) of the PAMDA is concerned, while no provision of the Act expressly authorises for the payment by a licensee in accordance with the direction of all those with a claim to the moneys, that does not mean that the Act does not permit such a payment. Section 384(2) must, I think, be understood as recognising that compliance with a written direction as to the use of money expressly referred to in s 378(1)(b) is permitted by the PAMDA. There is nothing in the Act to prohibit compliance with a written direction of the kind contemplated by s 378(1)(b) which, as I have said, takes its legal force from the general law. Compliance by a licensee with a written direction is thus permitted by the Act. Where, as the purchaser argues is the case here, the parties have agreed in writing upon the final and absolute disposition of the moneys which have been paid into the trust account of a licensee, there is no occasion for the trustee to abide the finalisation of the transaction.

The Court thought it would be an odd result if, to achieve early release of deposit, the parties had to nominate a deposit holder who was not a licensee under the PAMDA.

The new transfer duty marginal rates replace 7 progressive rates with just 4 plus the abolition of duty for property under $20,000. Overall there in an increase of duty payable on the purchase of property valued over $590,000, although when combined with a residence concession, there is a reduction in duty payable for homes under $1 million.

The new rates effective from 1 July 2008 are as follows.

1. Transfer duty on dutiable property up to $20,000 will be abolished.

2. Between $20,001 and $100,000 duty will be 1.5%.

3. Between $100,001 and $500,000 duty will be $1,050 plus 3.5%.

4. Between $500,001 and $700,000 duty will be $17,325 plus 4.5%.

5. Over $700,000 duty will be $37,125 plus 4.5% .

The principal place of residence concession threshold will increase to $350,000.

From 1 September 2008 the threshold for the first home buyers transfer duty exemption is increased to $500,000.

Mortgage duty will be abolished from 1 July 2008.

The Land Tax threshold of $600,000 for the unimproved land value remains unchanged, however the current 5 land tax rates have been replaced with just 3, overall reducing land tax where the unimproved value is less than $3 million. Above that the rate of 1.25% is unchanged.

Read the relevant budget papers here: http://www.budget.qld.gov.au/budget-papers/2008-09/bp2-5-2008-09.pdf