The recent QLD Supreme Court decision of Sentinel Citilink Pty Ltd v PS Citilink Pty Ltd [2018] QSC 239 (the “Citilink Case”) raises some critical issues for property lawyers in completing Land Registry Form 1 & Form 24.
“Adjustments to Balance Purchase Price” – REIQ contracts and Form 1 & 24
The contract in the Citilink Case was a standard REIQ commercial contract amended by special conditions for land and buildings in Queensland with a Purchase Price of $81,200,000.
It contained a special condition (SC11.12) that provided that “[a]t settlement, the Seller must pay to the Buyer, by way of an adjustment to the balance Purchase Price payable on settlement of this Contract, an amount equivalent to the value of any outstanding Incentives”.
It also contained the standard land tax provision (cl15.6) “[i]f land tax is unpaid at the Settlement Date and the Office of State Revenue advises that it will issue a final clearance for the Land on payment of a specified amount, then the Buyer may deduct the specified amount from the balance of the Purchase Price at settlement and must pay it promptly to the Office of State Revenue”.
The question in the case was not what amount should be paid at settlement (both parties agreed on that amount) but was in fact what amount should be shown as Consideration at Item 4 of the Form 1 Transfer document and on Item 4 of the Form 24.
Bond J determined that, given the construction of the adjustments provision in the special condition, “[t]he contract did not anywhere in terms oblige the buyer to pay $81,200,000 to the seller” and that “the promise to pay “the balance of the Purchase Price” expressed in cl 4.1 was a promise to pay the amount obtained after –
(a) deducting the deposit which the parties contemplated would be paid on the date the buyer signed the contract and would be paid to the seller at settlement by the deposit holder; and
(b) deducting the adjustment contemplated by SC11.12 (and cl 15.6 in circumstances where that applied).”
The Seller argued that the adjustment “was merely an adjustment which took place at settlement which should be regarded as equivalent to the usual apportionments for rates and outgoings, and not affecting the assessment of “the balance of the Purchase Price”.”
Bond J rejected that contention, stating that the adjustment contemplated by the special condition was “of a different character to the sort of apportionments for rates and outgoings contemplated by the operation of cll 14 and 15 (with the possible exception of land tax in the discrete circumstances provided for in cl 15.6). That must be so because the contract did not simply oblige the seller to pay the amount of the outstanding incentives or to indemnify the buyer in respect of them (which language might have justified the usual apportionment which takes place on settlement). Rather, it used language specifically referring to “the balance Purchase Price payable on settlement” “.
Bond J also considered whether the special condition must have resulted in an adjustment to the Purchase Price and noted that “it was an inevitability (and not just a possibility) that the amount paid by the buyer would be a lesser amount, because it was an inevitability (and not just a possibility) that there would be an adjustment required by operation of SC11.12 if the contract was to proceed to settlement, and the seller was to have complied with its obligations in relation to the extant leases and the extant incentive arrangements.”.
Critically:
Clause 2.6(6) of the Contract for Houses and Residential Land (15th Edition) provides that “[i]f any Outgoings are assessed but unpaid at the Settlement Date, then the Buyer may deduct the amount payable from the Balance Purchase Price at settlement and pay it promptly to the relevant authority”, where “Balance Purchase Price means the Purchase Price, less the Deposit, adjusted under clause 2.6” and where clause 2.6 contains all usual adjustments for rates, water, rent etc.
Clause 2.6(6) of the Contract for Residential Lots in a Community Titles Scheme (11th Edition) is on the same terms, followed by the additional words “or the Body Corporate, as appropriate”, where “Balance Purchase Price means the Purchase Price, less the Deposit, adjusted under clause 2.6” and where clause 2.6 contains all usual adjustments for rates, body corporate levies, water, rent etc.
Clauses 2.5(5) REIQ Contract for Commercial Lots in a Community Titles Scheme (5th Edition) provides that “[i]f land tax is unpaid at the Settlement Date and the Office of State Revenue advises that it will issue a final clearance for the Lot on payment of a specified amount, then the Buyer may deduct the specified amount from the Balance Purchase Price at settlement and must pay it promptly to the Office of State Revenue” where “Balance Purchase Price means the Purchase Price, less the Deposit, adjusted under clause 2.5” and where clause 2.5 contains all usual adjustments for rates, body corporate levies, water, land tax, rent etc.
Each of these versions of the standard REIQ contracts contain terms that, following Bond J’s construction of the contract in the Citilink Case, would require the consideration expressed on the Form 1 and 24 to be recorded as the Purchase Price, less the Deposit and less any adjustments under the respective adjustment clauses.
While Bond J’s decision largely relates to a special condition on slightly different wording (e.g. there is no “if, then” in the special condition from the contract in the Citilink case), Bond J extrapolated his construction of the contract terms to also apply to the land tax provision, which is, as shown above, almost identical with the wording of the standard adjustments clauses in the other standard REIQ contracts.
In each case the standard clauses refer to a deduction from the Balance Purchase Price – so according to Bond J, the ‘adjusted’ Purchase Price should be recorded on the Form 1 as Consideration.
This would be quite a radical change from what is current practice in conveyancing, particularly in the residential conveyancing space, for both practitioners preparing Form 1 & 24 and financiers collecting these at settlement.
Other Comments
Bond J notes that the parties could have done more to try to resolve the matter, such as including a written description of the Consideration at Item 4 of the Form 1 or, if there was not sufficient space, attaching a Form 20 setting out the actual Consideration given the Consideration was not easily broken down into one single number.
This may have allowed the matter to settle, avoiding costly litigation, time, stress etc.
Bond J also determined that he did not need to decide what amount Transfer Duty ought to be assessed on. His view was to leave this as a separate (potentially quite complex) legal question, as the contract and Form 1 & 24 didn’t require that question to be resolved by the parties before settlement and was therefore not relevant to the matter being determined.
Our Legal Practitioner Director, Simon LaBlack, is one of only 29 Accredited Specialists in Property Law in Queensland. He acts as a Court-appointed statutory trustee for sale and consults to other law firms on complex property related matters. He has extensive experience in Property Law in Queensland having personally handled thousands of Property Law matters. He has led multiple teams consisting of lawyers and paralegals, with a specific focus on the training of legal staff and the implementation of effective systems and processes to improve outcomes for both his clients and his team.
Important Disclaimer: The material contained in this publication is of a general nature only and is based on the law as at the date of publication. It is not, nor is it intended to be, legal advice. If you wish to take any action based on the content of this publication, we recommend that you seek professional advice.