KEY POINTS:
Each week, national law firm Simpson Grierson answers commercial property questions which can be emailed and headed "Prime Asset Question". This week's question is answered by senior associate Daniel Kelleher and associate Corrie Wilkinson, who can be contacted at daniel.kelleher@simpsongrierson.com and corrie.wilkinson@simpsongrierson.com. The information contained in Prime Assets is intended to provide general information in summary form current at the time of printing. The contents do not constitute legal advice and should not be relied on as such. Specialist advice should be sought in particular matters.
Q. I have an agreement to purchase three commercial units directly from a property developer. The first stage of the development has been completed to a high standard and the units I have chosen are to be built during the second stage of development. I have recently received a letter from the developer stating they have run into financial difficulties due to the recent increases in construction costs. The letter says the developer has three options:
* Compromise the standards, quality and size of the Stage 2 units.
* Cancel Stage 2 altogether.
* Obtain my agreement to increase the purchase price of the units.
The letter finishes with a statement that the developer is not prepared to finish the Stage 2 units if it cannot achieve the same quality achieved in Stage 1. I cannot afford nor do I want to pay any more money, what can I do?
A. Without seeing the entire letter and a copy of your agreement, it is a little difficult to state with certainty what rights you may have. However, assuming your agreement is fairly standard and the letter does not contain any other qualifying statements, there is one statement which is crucial to your situation.
The developer has said it is not prepared to complete the Stage 2 units unless it can at least match the level of quality achieved in the completion of Stage 1. And from the facts, they cannot match the quality at the current contract price due to the increase in construction costs.
This appears to be a clear message that proceeding with Stage 2 at the prices provided for under the agreement is no longer possible. This decision seems to have been made by the developer, who appears to believe there is no realistic alternative for completing Stage 2 other than to seek support of Stage 2 purchasers like yourself.
The courts are likely to hold that a reasonable person in your position would conclude that the developer does not intend to perform its obligations in a manner substantially consistent with the agreement.
In such circumstances, when a party makes it clear by words or conduct that it does not intend to perform its obligations under a contract, the party will be taken to have repudiated the contract.
A repudiation by the vendor entitles you to cancel the agreement pursuant to the Contractual Remedies Act 1979. You do not necessarily have to cancel the agreement but if you do decide to, your intention to cancel must be clearly communicated to the other party. This is best done in writing. A breach of contract in this manner will also entitle you, as the innocent party, to maintain an action for damages.
We assume you have already paid a deposit towards the purchase of these units so you will be entitled to the return of the deposit upon cancellation (unless your agreement states otherwise).
The alternate approach to accepting repudiation is to affirm the contract. This will keep the contract alive and both parties will remain liable to perform their respective obligations under the contract. This approach allows the developer the chance to perform in accordance with what had originally been agreed in the contract.
Should the developer then not be in a position to perform its obligations, you may then be in a position to sue for specific performance.
By affirming the contract, you will have no right to recover damages for breach of contract in respect of the earlier repudiation.
Whether an action amounts to repudiation is not a matter to be lightly inferred so you should seek advice from your solicitor before taking any action.
