Don’t (or maybe do) think twice: purchaser cooling off rights
A cooling off period can be a saving grace to a purchaser of residential property who no longer wishes to proceed with the transaction. Issues can arise where a purchaser exercises a right to cancel the purchase during the cooling off period but then decides instead to proceed with the purchase. Does the contract survive? What happens to any deposit which has been paid? The Supreme Court has addressed such a situation in the case of Stewart v White.[1]
The facts
The Stewarts were the purchasers, and the Whites the vendors, of residential property near Gisborne. Less than 24 hours after signing a contract to purchase the property a water pipe burst and caused the ceiling at the property to partly collapse. Not surprisingly, the Stewarts sought at the first instance to withdraw from the purchase.
In communicating his intention to withdraw, Mr Stewart handed a letter to the Whites’ real estate agent two days after signing the contract. The letter referred to the damage to the property and cited the ‘cooling off provisions’ in the contract. The cooling off provisions were those which section 31 of the Sale of Land Act 1962 (Vic) (Act) included in the contract. Section 31 permits a purchaser to terminate a contract of sale within three clear business days of signing the contract.
The day after handing his letter to the Whites’ agent, Mr Stewart sent an email to the Whites’ solicitors which stated, in effect, that:
he no longer wished to terminate the purchase;
he had intended that his letter ‘be held in escrow whilst [he and his wife] got over the shock’ arising from the damage to the property; and
he wanted the Whites to ‘disregard’ his letter.
Following this, the Stewarts appeared to act in a manner consistent with a desire to proceed with the purchase, for example in paying the balance of the purchase deposit and electing to waive certain rights they otherwise had as purchasers. As the settlement date approached, however, the Stewarts again had a change of heart and wrote to the Whites’ solicitors to reaffirm their desire to ‘cancel and withdraw from the sale at this time’.
Settlement never occurred. After negotiations between the parties stalled the Stewarts sued for the return of their deposit.
The Court’s consideration
The matter was heard before Macaulay J. In determining which party was entitled to the deposit money, a key issue for the Court’s determination was the effect of the Stewarts’ cooling off letter. Where a purchaser validly exercises the cooling off right, section 31(4) of the Act entitles the purchaser to a return of any money paid under the contract (although the vendor is entitled to keep the greater of $100 or 0.2 percent of the purchase price). If the Stewarts’ cooling off letter was valid, they prima facie would be entitled to a refund of their deposit.
At trial, the Stewarts argued that they had validly terminated the contract pursuant to their cooling off rights. The Whites submitted that the Stewarts had not terminated the contract during the cooling off period in circumstances where the Stewarts had sent a letter but then had insisted that the letter was to be held ‘in escrow’ and had asked that the Whites ‘disregard’ the letter.
In determining the effect of the Stewarts’ cooling off notice, Macaulay J considered the requirements in section 31 of the Act. Section 31(2), which sets out the substantive requirements for termination during the cooling off period, states:
‘Where a purchaser under a contract for the sale of land signs that contract he may at any time before the expiration of three clear business days after he has signed the contract give notice to the vendor that he wishes to terminate the contract and where he has signed that notice and given it in accordance with the provisions of this section the contract shall be terminated.’
There are a number of elements in that provision — the timing of ‘three clear business days’, the concept of ‘giving notice to the vendor’, and so forth — and the Court unpicked these in its analysis. The Court then looked to whether section 31 contemplated an arrangement where a cooling off notice could be held in escrow or otherwise be capable of being withdrawn by a purchaser.
Can a cooling off notice be held ‘in escrow’?
His Honour held:
‘I am of the opinion that a s 31 cooling off notice cannot be given in escrow. Or, to put it differently, the legal effect of a s 31 cooling off notice cannot be deferred or suspended, once given, pending the satisfaction of a condition.’[2]
Turning to the wording of section 31, his Honour considered that a plain reading of its text — including the statement that upon proper exercise of a cooling off right the contract in question ‘shall be terminated’ — meant that the cooling off mechanism did not permit ‘any qualification or condition, and none should readily be implied’.[3]
His Honour also noted section 31(8), which states:
‘Any provision in the contract or in any other document whereby any right conferred by this section on the purchaser is excluded, modified or restricted shall be void and of no effect.’
His Honour concluded:
‘Parliament deliberately made the legal consequence of termination dependent upon the existence of five objective facts. It would be inimical to that scheme to allow a qualifying mechanism that depended upon the intention of one of the parties.’[4]
In other words, his Honour found that to allow a purchaser to have a cooling off notice held in escrow or otherwise subject to the purchaser’s control after being given to the vendor was not only inconsistent with the technical requirements for termination but also inconsistent with the legislative intent of the cooling off scheme. His Honour also observed that it would be without ‘policy merit’ to permit a letter purporting to exercise a cooling off right to be held in escrow and that ‘[t]here is no warrant to imply any additional protection for the purchaser against a rash decision to give a cooling off notice’.[5]
Can a cooling off notice be withdrawn?
Moving beyond the escrow question, Macaulay J asked the question: ‘can a purchaser who has given a s 31 cooling off notice unconditionally simply withdraw the notice within the three-day period?’.[6] His Honour answered ‘no’, noting the complications that might arise were cooling off letters permitted to be withdrawn.
Having found that the Stewarts’ purported escrow arrangement was without force, the Stewarts’ cooling off letter was effective under the Act and the contract had been validly terminated. On that basis, the Stewarts prima facie were entitled to a return of their deposit.
Anticipating such a finding, the Whites submitted that even if the Stewarts had validly terminated the contract pursuant to their cooling off rights the contract had been reinstated by the Stewarts’ subsequent conduct. The Whites pointed in particular to the email in which the Stewarts asked that they ‘disregard’ the cooling off notice. Macaulay J found, however, that to the extent the email constituted an offer to reinstate the sale contract the Whites had not accepted that offer; the contractual foundation had not been laid.
The Whites also argued, in the alternative, that the Stewarts were estopped from denying the existence of a valid sale contract on the basis the Stewarts had proceeded to pay the remainder of the deposit and had waived certain purchaser rights under the contract. However, Macaulay J held that the Whites had not proved their case in this respect since, amongst other things, they had not demonstrated any detrimental reliance on the Stewarts’ conduct.
In circumstances where:
the Stewarts had validly exercised their cooling off rights, there being no legal basis for their cooling off letter to be held in ‘escrow’ or otherwise withdrawn (even if the Stewarts had at one point in time intended to);
the contract had not been resurrected; and
the Whites were not entitled to retain the deposit pursuant to equitable principles (namely, estoppel),
the Court ordered the return of the Stewarts’ deposit.
Comment
The Court’s decision in Stewart v White clearly refutes any suggestion that a cooling off right, where validly exercised, somehow can be put on hold — held ‘in escrow’, as it were — or withdrawn. The facts of the case illustrate the potential pitfalls in the proper exercise of cooling off rights and serves as a reminder of the need to think carefully when thinking twice.
[1]: [2020] VSC 116.
[2]: Ibid [40] (emphasis in original).
[3]: Ibid [41].
[4]: Ibid [45].
[5]: Ibid [46].
[6]: Ibid [49].