"Material Facts" - new (and onerous) vendor disclosure obligations

But what are the implications for vendors and purchasers?

As of 1 March 2020 vendors in Victoria (and their agents) became subject to more stringent disclosure obligations when selling real estate.

What’s changed?

Prior to the 1 March 2020 amendments Section 12 of the Sale of Land Act (“the Act”) made it an offence for a vendor to (amongst other things) “fraudulently conceal any material facts” to induce a person to buy land.

On 1 March 2020 that section was amended to make it an offence to “knowingly conceal any material facts”. That small change substantially lowers the threshold to be overcome before a vendor would be found to have breached that provision. Section 12A was also added to the Act granting Consumer Affairs Victoria the power to issue guidelines to assist vendors and their agents in understanding what a ‘material fact’ is likely to be.

What is a material fact?

On 1 March 2020 Consumer Affairs published its first set of guidelines detailing what may constitute a “material fact” (the guidelines themselves are not determinative but Section 12A(2) notes that a Court “may have regard to” the guidelines; they are likely to be highly persuasive).

The guidelines extend well beyond the information otherwise required to be disclosed by a vendor when selling land (Section 32 of the Sale of Land Act has long imposed obligations on a vendor to disclose certain information to a purchaser regarding the property in the document known as a ‘vendor’s statement’).

The guidelines can be accessed here: https://www.consumer.vic.gov.au/housing/buying-and-selling-property/selling-property/preparing-to-sell-your-property.

The guidelines give some examples as to what a material fact may be. Notable examples include:

• a defect in the structure of the building;

• the presence of combustible cladding or asbestos;

• a significant event at the property such as a flood or bushfire;

• building work completed without a permit;

• that the property has previously been used for the manufacture of substances such as methyl amphetamine; and

• that an act of 'extreme violence', such as a homicide, has taken place on the property.

What does this mean for a purchaser?

While a failure to disclose a material fact in the circumstances above is an offence and exposes a vendor to significant financial penalties ($19,826.40 at the time of writing), a purchaser who has purchased a property where the vendor has concealed a material fact does not have a clear right to seek rescission of the contract or damages following settlement.

However, Section 48A of the Act ‘extends and applies’ the protections afforded by the Australian Consumer Law and Fair Trading Act 2012 (ACL) to breaches of the Sale of Land Act.

The effect of Section 48A of the Act was best summarised in Han v Pirrie (Civil Claims) [2019] VCAT 1996:

A person who suffers loss, injury or damage because of a contravention of a provision of the Sale of Land Act 1962 … may recover the amount of the loss or damage or damages in respect of the injury by proceeding against any person who contravened the provision or was involved in the contravention.

Section 216 of the ACL also gives rise to the right to seek:

An order that the whole or part of a contract between the accused and the injured person …affected by the contravention…is void.

The cumulative effect of section 48A and the new 12(d) and 12A is that a failure to disclose to a purchaser what is described by the Consumer Affairs guidelines as a ‘material fact’ may now be used to seek rescission of a contract or damages.

Why this matters

This is a potentially significant shift. The concept of ‘caveat emptor’ (buyer beware) lies at the heart of property law in Australia. Section 32 disclosure requirements go some way to imposing obligations on a vendor to disclose matters relating to property but these changes might see a radical shift in the ordinary position – imposing positive obligations on vendors to disclose myriad, broad ranging and undefined matters relating to the property.

Taking combustible cladding as a case in point – the presence of combustible cladding on a building is not itself a matter that must be disclosed under Section 32 of the Act. A vendor only has disclosure obligations under Section 32 if a relevant authority has issued a notice in respect of the cladding. Pre-1 March 2020 a vendor with knowledge of cladding on their building but who had not received a notice could simply stay silent – the amended Section 12(d), read together with Section 48A and the Consumer Affairs Guidelines now likely shift that position, requiring a vendor to positively identify the cladding to a purchaser, failing which not only will the vendor have committed an offence but will leave the purchaser an avenue to terminate the contract and/or sue for damages.

How can we help?

Ideally, future amendments to the Act would clarify the rights of purchasers when material facts have been knowingly concealed. In the absence of such amendment, the most prudent avenue for purchasers remains to ensure that they always undertake appropriate due diligence prior to signing a contract of sale.

However Section 48A of the Act provides purchasers with a possible claim against a vendor and vendors should accordingly ensure they familiarise themselves with the Consumer Affairs guidelines and make full disclosure of any materials facts adverse to the property known to them to avoid liability under section 12(d).

Eastern Bridge can advise purchasers pre-contract on what questions they should be asking of the vendor and post-contract on what their rights might be if they discover a material fact not previously disclosed. Eastern Bridge can advise vendors on what their disclosure obligations are and of what the potential consequences of non-disclosure might be.