Huang v Ceylan

Supreme Court of NSW|2018-02-09|Before: Parker J

Judgment

These proceedings concern a contract for the sale of a residential apartment at Ryde in Sydney. The contract was dated 26 August 2016. The defendant, Pelin Ceylan, was the vendor. The first plaintiff, Kai (known as "Kevin") Huang and the second plaintiff, Zuyi Chen, were the purchasers. Mr Huang and Ms Chen are husband and wife.
The building development containing the apartment appears to have been constructed in 2012. The development approval pursuant to which the building was constructed provided for the apartment to contain two bedrooms. But by the time the purchasers inspected the apartment in July 2016 it contained three bedrooms and the apartment had been advertised on this basis.
The purchase price under the contract was $900,000, with a deposit of $90,000. The deposit was paid in accordance with the terms of the contract. On 26 September 2016, solicitors acting for the purchasers served a notice purporting to rescind the contract. The ground for the notice of rescission was an allegation that the internal wall creating the third bedroom in the apartment was illegal. The vendor did not accept that the notice of rescission was valid and served a notice to complete on the purchasers, which was not complied with. Subsequently, the vendor purported to forfeit the purchasers' deposit, and gave formal notice of termination of the contract.

Breach of warranty

The external walls of the apartment form a rectangular shape, with the shorter sides running approximately north-south and the longer sides running approximately east-west. The entrance is at the eastern end and there is an outside terrace at the western end. A hallway runs from the entrance at the eastern end, and opens out into a dining and living area at the western end. At the eastern end, there are two bedrooms (which I will refer to as bedrooms 1 and 2) on opposite sides of the hallway. Bedroom 1 is larger and is on the northern side; bedroom 2 is on the southern side.
In evidence is the original plan for the apartment for which development approval was given. The plan was numbered A-012G. A later version of this plan was later produced, numbered A-012H was referred to in the construction certificate. Counsel for the vendor submitted, based on the Court of Appeal decision in Burwood Council v Ralan Burwood Pty Ltd (No 3) [2014] NSWCA 404 that the construction certificate plan (A-012H) superseded the development application plan (A-012G) and was deemed to be part of the development approval. This was not disputed by counsel for the purchasers.
Plan A-012H showed, next to bedroom 2 on the southern side of the apartment, a roughly square area designated as a "media room". This area was shown as surrounded by walls on three sides; to the south, the external wall of the apartment; to the east, the wall of bedroom 2; and to the west, a wall, aligned with the wall of bedroom 2, creating a partition between the area and the lounge/dining area to the west. But the north side of the "media room" had no wall and was open. Opposite it, on the northern side, was a laundry cupboard and a bathroom. The laundry cupboard aligned with the southern edge of bedroom 1 but the bathroom was set back to some extent. Next to the bathroom was a kitchen area enclosed on three sides, open to the dining and living area.
As mentioned, the apartment at the time of the sale had been converted into a three bedroom apartment, with a wall constructed along the northern side of the former "media room", thereby enclosing it. The photographs which are in evidence show no sign of any alteration works, but counsel for the defendant pointed to the statement in the construction certificate to the effect that the apartment had been built in accordance with Plan A-012H. It appears to be common ground that this is what happened and an alteration to turn the "media room" into a third bedroom must have been made at some point between 2013 and 2016.
After signing the contract but before completion, the purchasers discovered that the approved development plan had originally provided for two bedrooms only. The purchasers learned of this as a result of inquiries made by a valuer who had been retained to value the property for finance purposes. The valuer was apparently told of it by a representative of the local Council, the City of Ryde.
A formal request was made on behalf of the purchasers that the Council investigate whether the third bedroom had been approved. In January 2017, the Council advised that the alteration of the plan did appear to require approval. The Council confirmed this conclusion in March.
Subsequently, in July, the Council issued a formal notice of proposed order to the vendor (who of course remained in possession after the purchasers refused to complete the contract). The notice stated the Council proposed to serve on the vendor an order under the Environmental Planning and Assessment Act 1979, s 121B. That section empowers the Council to order the vendor "to do or to refrain from doing a thing specified in the following Table if the circumstances specified opposite in column 2 of the table exist and the person comes within the description opposite in column 3 of the Table". The specific Table Item relied upon was item 15. Columns 1, 2 and 3 for that Table Item provide: Column 1 Column 2 Column 3 To comply with a development consent The development consent has not been complied with Person entitled to act on the development consent or person acting otherwise than in compliance with the development consent

The notice gave a period of 14 days within which the vendor or the vendor's legal representative might make representations to the Council in writing as to why the proposed order should not be given, or as to the terms of or period of compliance with the order. It stated that if no representations were made, the Council would proceed to serve the order.
There is no evidence as to whether any representations have been made by the vendor or whether the Council has taken any further action. Clearly it remains open to the Council to do so. At the hearing, I expressed concern at the prospect of the Court making a finding for the purposes of these proceedings about the Council's entitlement to issue a s 121B order, and a possibly inconsistent finding being made in subsequent proceedings involving the Council. But neither party sought to have the Council joined to these proceedings. On reflection, it seems to me that the party at risk of inconsistent findings is the vendor. Given that the vendor has not sought to have the Council joined and wishes to proceed to determination of the purchasers' claim against her, that is the course which I should take.
Marinkovic v McGrath Engineering Pty Ltd [2004] NSWSC 571 was a case, like this one, involving statutory warranties under the Conveyancing Act s 52A(2). A mezzanine floor had been constructed at the property in question despite lack of council approval, but the Council had stated in a letter that it had decided to take no further action about the breach. JC Campbell J (as his Honour then was) nevertheless decided that there was a breach of the statutory warranty. He said (at [45]): … the existence of the mezzanine floor was, in my view, a matter that would justify the making of an upgrading or demolition order. It has that characteristic even though the Council, in its 1992 letter, had stated an intention to do nothing about the matter. The Council has statutory responsibilities, which it cannot prevent itself from exercising by any estoppel.
Thus it is not essential in this case for the purchasers to demonstrate that the Council will take action in accordance with the notice which has been issued, or will proceed to issue any order at all. Rather, the question is whether it would be open to the Council to make a valid order which answers the description of an "upgrading or demolition order" in the statutory warranty: see Marinkovic at [48]. Counsel for the vendor did not dispute this analysis.
Counsel for the plaintiff submitted that the notice issued by the Council constituted "evidence of the existence of" a "matter" for the purposes of the statutory warranty. I think this analysis is an over-complication. Consistently with the view taken by Campbell J, I consider that whether or not the Council takes action is not determinative. In my view, the relevant "matter" depends upon the state of the building itself.
Counsel for the purchasers submitted that it was significant that there was no evidence from the purchasers (who, counsel submitted, might be expected to know) as to how and when the alteration was made enclosing the "media room" depicted in Plan A-012H. For his part, counsel for the vendor observed that officers of the Council had not been called by the purchasers, although the purchasers' legal representatives had earlier foreshadowed doing so. Both counsel appeared to suggest that a Jones v Dunkel inference should be drawn against the other party.
In my opinion, there is no room for any Jones v Dunkel inference in this case. The question of whether a "matter" exists which means that there is a breach of the term implied by s 52A(2) is to be determined as a matter of law based on the objective facts. The opinions of the Council officers are not relevant; nor does it matter when or why the alteration was made.
The question must be determined as at the date of the contract, namely 26 August 2016. The legislative starting point as at that date was the Environmental Planning and Assessment Act 1979, s 76, which provided: 76 Development that does not need consent (1) General If an environmental planning instrument provides that specified development may be carried out without the need for development consent, a person may carry the development out, in accordance with the instrument, on land to which the provision applies. Note Environmental assessment of the development may nevertheless be required under Part 5. (2) Exempt development An environmental planning instrument may provide that development of a specified class or description that is of minimal environmental impact is exempt development. (3) If development is exempt development: (a) the development may be carried out, in accordance with the instrument, on land to which the provision applies without the need for development consent, unless that land: (i) is a declared area of outstanding biodiversity value under the Biodiversity Conservation Act 2016 or declared critical habitat under Part 7A of the Fisheries Management Act 1994, or (ii) is, or is part of, a wilderness area (within the meaning of the Wilderness Act 1987), and (b) Part 5 does not apply to the development. A provision made under subsection (2) has no effect at any time during which the land is land to which paragraph (a) (i) or (ii) applies.
The Environmental Planning and Assessment Regulation 2000, cl 43 provides that development consent is required for alteration or extension of buildings and works. Clause 45 provides that development consent is required for change of an existing use. Given the assumption by both parties that the apartment was first constructed in accordance with Plan A-012H and was then altered, these provisions are engaged. Counsel for the vendor conceded that no consent had been obtained for the alteration of the "media room" but contended that the alteration did not require approval because it was an exempt development.
The State Environmental Planning Policy (Exempt and Complying Development Codes) 2008, Division 1, Part 2, Subdivision 26, provides: 2.51 Specified development (1) A minor internal building alteration for the replacement or renovation of: (a) a doorway, wall, ceiling or floor lining, … is development specified for this Code if it is not constructed or installed on or in a heritage item or a draft heritage item. 2.52 Development standards The standards specified for that development are that the development must: … (b) not include a change to the configuration of a room, whether by removal or an existing wall, partition or other means, and (c) not cause reduced window arrangements for light and ventilation needs, reduce the size of a doorway or involve the enclosure of an open area, and …
The vendor relied on the provisions of cl 2.52. According to counsel's submission: … the extension of the wall does not change the configuration of any room by removal of an existing wall, partition or other means as nothing has been removed and the configuration of the media room remains unchanged.
Counsel went on to submit that: … the extension of the wall did not cause reduced window arrangements for light or ventilation needs or reduce the size of any doorway or involve the enclosure of an open area. The living room area was always divided from the media room by a wall shown in Plan A - 102H and the fact that the media room came to have a double doorway into the hallway does not constitute enclosure of an open area.
I do not accept this submission, for two reasons. In the first place, cl 2.52 is not determinative. That clause deals with relevant development standards. But cl 1.15 provides that a particular development is only exempt if it is a "specified development" and it complies with the relevant "development standards" for such a development. This means that unless the alteration to the "media room" complied with cl 2.51, cl 2.52 would never come into play. In my opinion the alteration did not comply with clause 2.51. It involved the construction of a new wall (containing a doorway), rather than the replacement or alteration of an existing one.
Secondly, if I am wrong in this view, I do not accept that the alteration complied with cl 2.52. As depicted in Plan A-012H, the "media room" was not a room at all. Admittedly, the partition wall on the western side had the effect of screening it from the southern side of the living dining area, but it was fully open to the hallway. It was not enclosed; sound and light from that area would pass through the rest of the open areas of the unit, and vice versa. In my opinion, the walling off of the "media room" was indeed the "enclosure of an open area" for the purpose of cl 2.52.
As mentioned, the order foreshadowed by the Council in the notice issued to the vendor in July 2017 was an order under s 121B Table Item 15. For the purposes of the statutory warranty set out in cl 1(d) in Part 1 of Schedule 3 to the Regulations, the phrase "upgrading or demolition order" is defined in cl 2(d). That definition does not include Table Item 15. Furthermore, the proposed order referred to Plan A-012G, rather than Plan A-012H which is the applicable one.
In the light of the principle in Marinkovic, however, this does not matter. The definition in cl 2(d) includes s 121B, Table Items 12 and 13, which provide as follows: Quote Column 1 Column 2 Column 3 To do what? In what To whom? circumstances 12 To do such things as are specified in the order to restore premises to the condition in which they were before building was unlawfully erected or before work was unlawfully carried out (a) Building has been unlawfully erected, and an order No 2 has been given requiring the building to be demolished or removed The owner of the premises, any person entitled to act on a development consent or complying development certificate or any person acting otherwise than in compliance with a development consent or complying development certificate (b) Work has been unlawfully carried out 13 To do such things as are necessary to bring into compliance with relevant development standards any building or part of a building that has been unlawfully erected Building has been unlawfully erected and does not comply with relevant development standards The owner of the premises

Given my conclusion that the alteration of the "media room" was a non-compliant development, it would be open to Council to, under Table Item 12(b) or 13, make an order requiring removal of the wall and the reinstatement of the apartment in accordance with Plan A-012H.
I therefore uphold the argument for the purchasers and conclude that there was a breach of the statutory warranty. The purchasers are entitled to succeed on this ground.

Return of deposit under s 55(2A)

In view of the conclusion I have reached, it is not necessary to decide whether the purchasers would otherwise have been entitled to the return of the deposit under Conveyancing Act s 55(2A).

Conclusion and orders

For these reasons, I conclude that the purchasers were entitled to rescind the contract on the basis of breach by the vendor of the statutory warranty set out in Sch 3 Part 1 cl 1(d) of the Conveyancing (Sale of Land) Regulations 2010. The purchasers are thus entitled to a refund of their deposit.
The purchasers have succeeded in obtaining relief from the Court and, on the face of it, are therefore entitled to an order for costs. But counsel for the purchasers was not in a position to present their full case in the course of the scheduled half day hearing on 30 January, and required an adjournment to tender further documents and to put forward further written submissions. In view of the small amount of money involved, it is particularly important that the costs awarded in the case be proportionate and I do not think that the purchasers should be able to recover the additional costs that were incurred as a result of the deficiencies in the way their case was initially presented. Accordingly, I propose to order that the costs payable by the vendor be limited to the period up to the hearing on 30 January 2018 and not include costs associated with the tender of the further evidence and the further written submissions. I will grant liberty to each party to apply in case either wishes to argue for some different costs order.
The orders of the Court are:
Declare that the plaintiffs, by their notice of rescission dated 26 September 2016, validly rescinded the contract for the sale of land between the defendant as vendor and the plaintiffs as purchasers dated 26 August 2016.
Order that the defendant take all steps reasonably open to her to procure return of the deposit paid pursuant to that contract to the plaintiffs, together with any interest which may have accrued on that deposit.
Order that the cross-claim be dismissed.
Order that the defendant pay the plaintiffs' costs of the proceedings, limited to the period up to the hearing on 30 January 2018.
Grant liberty to apply with respect to Order 4, such liberty to be exercised within 21 days.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 13 March 2018

Conveyancing (Sale of Land) Regulations 2010(NSW)

Environmental Planning and Assessment Regulation 2000(NSW)

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