Gray v Latter [2014] NSWSC 122

A husband and wife purchased a property from friends using vendor finance, which required repayment of all outstanding principal after 2 years and was secured by a mortgage.

The court found that the vendors knew that the property was not worth the contract price, even though they may not have known its precise worth and their statement as to the property’s worth would have reassured the purchasers that the property was worth what they had agreed to pay for it. The court found that the purchasers did not investigate the property’s worth because they trusted the vendors, having become friends. The court accepted expert evidence that the price significantly exceeded the value at the time.

The court rejected the Code defence because it found that the vendors did not buy the property for investment purposes and so were not engaged in a business. The court also rejected the misrepresentation claim on the basis that the vendors were not engaged in trade or commerce and in any case there was no reliance because the purchasers were prepared to pay whatever the vendors asked.

As regards the Contract Review Act defence, the court held that the Act applied to private contracts between individuals even though it was not the typical case and also applied to educated English-speaking adults who were not disabled. The court treated both the purchase contract and the mortgage as the one transaction and said:

I consider that the public interest of preventing unjust dealings which offend against community standards of business morality militates in favour of a determination that the transaction was unjust. An asking price sought in circumstances where there was a personal relationship between the vendor and purchaser, substantially closer than arms length, ought not be in excess of what could reasonably be regarded as a fair market value. A vendor would be entitled to specify a price in the upper end of the range in the expectation that there could be some negotiation to reduce the figure but ought not nominate an exorbitant asking price. I do not consider her view to be at odds with community standards of business morality. A vendor ….ought not nominate an exorbitant asking price. …In the instant case, the defendants purchased the property for a gross overvalue. Although such disparity does not of itself prove unfairness it tends to show that unfair use was made of an occasion.

The court found the following factors relevant to the contract being unjust:

  1. that the contract price 50% higher than its value was not reasonably necessary for the protection of the vendors’ interests because they had no legitimate interest in obtaining an indemnity for all their costs of relocation, together with a sizeable profit margin;
  2. no financial advice was obtained by the purchasers; and
  3. the vendors used unfair tactics in dealing with the purchasers taking advantage of their trust and friendship (knowing one purchaser was unsophisticated and would pay whatever they wanted and the other purchaser trusted them); and
  4. giving the purchasers a false sense that the property was worth what they paid, they could afford the loan and would be able to refinance after two year she period of vendor finance was insufficient for the principal repayments to bridge the gap between the exorbitant purchaser price and the value of the property and default after two years inevitable (given refinance would be impossible).

The court said:

Although the vendors may not have actually set out to trick the purchasers, they exploited their trust and the associated vulnerability. This occurred in circumstances where the purchasers were not able to protect their own interests since they did not have the capacity to assess the true commercial effect of the contract.

The court found the contract for sale and mortgage to be unjust.

The court reduced the consideration for the purchase of the property and directed a variation of the mortgage to reflect its true value giving credit for principal payments made to date and permitted the purchasers to refinance or to pay the outstanding principal within 90 days, failing which the vendors would be entitled to possession but only if they repaid the purchasers $150 per week, because the $300 per week loan repayment was $150 in excess of the occupation fee of $150/week charged. The figure of $150 for an occupation fee appeared reasonable to the court since it was the figure that the parties agreed for the purchasers’ occupation between exchange and completion.

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