Default Notices in Property Law
Settlements may not always go as they are supposed to. Sometimes, a buyer can sign a contract but then fail to meet their obligations under contract or a purchaser may no longer be willing to settle on the settlement date. Under such circumstances, it becomes imperative for the aggrieved party to terminate the contract. However, to terminate a contract for the other party’s default, a party is usually required to provide a written default notice to the buyer. The parties using a standard form contract provided by Law Institute of Victoria, would usually need to ensure that the default notice clearly and unambiguously:
Identifies the other party’s default
Provides the defaulting party time to remedy their default
However, the contract can often be amended to include special conditions. If this is the case, those conditions must be satisfied for the default notice to be valid. Although serving a default notice may seem to be simple exercise, they are often misunderstood and serving an invalid default notice may put you at the risk of breaching the contract yourself.
U108 Pty Ltd v Fan & Anor [2010] VSC 12 (‘U108’)
The case of U108 Pty Ltd v Fan & Anor [2010] VSC 12 (‘U108’) is illustrative in this regard. In this case the plaintiff issued two recission notices with covering letters a day apart from each other. The second notice specified the wrong date for remedying the default, the covering letter for both the notices specified the wrong due date and both notices referred to the clause 28 as the basis of terminating the contract but clause 28 did not exist in the contract. Moreover, both notices required the purchasers to tender the net balance of the purchase price of the property within 14 days while the contract required full purchase price at settlement as the vendors had accepted a bank guarantee instead of a deposit.
The court held that the default notices were invalid. In making in decision, Hargrave J emphasised that default notice must clearly and unambiguously contain the information required by the contract. An objective test is used to determine if the default notice is clear and unambiguous. The court considers what a reasonable person in the position of the parties would have understood the words of the notice to mean by reference to the text of the agreement, the surrounding circumstances known to the parties, and the purpose or object of the transaction. In this case, Hargrave J held that as the default notices had provided different due dates for remedying the default, a reasonable person in the position of purchaser to entertain a doubt as to this essential feature of the rescission notices.
Will a default notice with errors always be invalid?
No, not every default notice with some errors would be considered invalid. As highlighted in the case of U108, the validity of a default notice is determined objectively. In some cases, a default notice will be valid despite the presence of some errors in them.
For instance, in the case of Mediratta v Clerk [2019] VSC 685 (‘Mediratta’), the purchaser entered into a contract for the sale of land which was due on 30 June 2018. The purchaser failed to settle and on 3 July 2018 and the vendor issued a Notice of Default and Rescission. The purchaser contended the Default Notice was not clear and unambiguous as the contract stipulated the due date to beb30 June 2018, but item 7 of the default notice stated the purchaser was in default as he failed to settle on 2 July 2018. The vendor, however, successfully argued that the default notice was clear and unambiguous as a reasonable reader wound have known that the due date was 30th June 2018, which was a Saturday and the settlement had to be extended to the next business day being 2 July 2018.
Takeaways
As noted, not all default notices with errors will prove to be invalid. However, precaution is always better than the cure. Therefore, it is necessary that any default notice is carefully drafted by a property lawyer who clearly and unambiguously provides information that complies with the conditions of the contract. Some important components of such default notices may be:
Serving the default notices in accordance with the contract
Clearly identifying the default
Clearly stating what must be done to rectify the default
Refer to the authority to terminate the contract
State the consequences of not rectifying the default
