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Contract price rebates - agent & buyer exposure to liability

There is no technical legal obstacle to inserting a sale price in a contract reference schedule and specifying elsewhere that the seller will accept a lesser sum. The reduction in price is commonly called a rebate.

However if undisclosed, a price rebate is potentially a fraud on the buyer’s lender. Depending on the seller’s finance terms, it might also need to be notified to the seller’s financier.

But what if the rebate is fully disclosed in contract documentation? Can it still be misleading, deceptive or fraudulent?

This depends on the purpose of the rebate. If the arrangement is simply to maintain a floor in list prices for future sales in the same development, the rebate will offend. According to one judge, a rebate clause "…can be inserted for no purpose other than to mislead persons such as lending authorities and purchasers of other units in that development. Unreal stated consideration for price reduction, does not improve the position." *

Subsequent buyers at the list price who were not offered a rebate would often be able to terminate their purchase contracts or, if they settle, to recover from the developer the “over payment” and other losses.

As another recent case** shows, even parties who gain no benefit from the price arrangements eg agents, also carry potential civil liability to those misled.

In the case, the buyer convinced the seller not to bank the deposit cheque and to await payment of the balance purchase price for several months following settlement. This was concealed from the bank who advanced the full amount of its low doc loan at settlement. The buyer defaulted under the mortgage and its obligation to pay the balance purchase price. The bank sued the buyer, seller and a witness to the contract signatures for its losses.

Because the rebate was undisclosed, the court unsurprisingly ruled in favour of the bank against the buyer/borrower. However the bank also obtained judgment against the seller and the witness because each of their conduct was misleading and deceptive. It was irrelevant that the seller had no intention to mislead and had himself been defrauded by the buyer.

Thus even parties who innocently participate in a contract price rebate arrangements expose themselves to the risk of litigation from subsequent buyers. Those who assist, even merely by witnessing a contract, can also be liable if they have knowledge of the arrangement. The liability of these parties – agents, buyers etc - might become particularly relevant if the developer has become insolvent.

The court also found in this case** that the specification of the sale price in the contract constituted a representation that such price was the “market price” – a result that may have even wider implications, where for example, valuers rely on the contact price to assess other properties.

Rebates that are fully disclosed and are proportional to the commercial reasons for which they are offered are unlikely to have any of the adverse consequences referred to above.

* Miro v Fu Pty Ltd, NSW Supreme Court 26/09/03
** CBA v Hilellis, NSW District Court 13/02/09

For all conveyancing and contract enquiries email Peter Carter or call him on 1300 LAW LAW (1300 529 529).

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