Is it a fixture?

Does it stay or can it go? What’s the difference?

It’s an hour before settlement. The matter has gone swimmingly. There’s just the settlement to go and soon the file can be consigned to the “storage” pile. What can go wrong? Silly question really. A lot can go wrong but frustratingly one of the most common causes of a delay in settlement is the final inspection where the purchaser is upset that an item or feature that they had particularly wanted and had assumed would be included has been removed.

The first thing the conveyancer does of course is to rush to the contract to check the list of inclusions (and exclusions) on the front page only to find that the item is not mentioned. Representations are made to the Vendor’s conveyancer. The Vendor says it was never their intention to leave it and from there the argument usually revolves around the marketing campaign, and predominantly, whether or not the item is (was?) a fixture or chattel.

Chattels are the items belonging to the Vendor that can be easily moved, such as furniture or household appliances and are considered to be personal property. If they are not marked as an inclusion in the sale, the Vendor is entitled to remove them when he vacates the property.

A fixture on the other hand is something that is attached to the land in such a way that it becomes part of the land. Therefore, when land is sold, the title to the land will also include all fixtures. Often, deciding if an item is a fixture or a chattel, will depend on:

  • The degree of annexation
  • The intention at the time the item was fixed to the building (or land)
  • The nature of the item; and
  • The purpose of the annexation.

Generally speaking, if the item can be easily moved without causing too much damage to the land or building to which it is affixed, then an argument can be made that it is a chattel. However, if removal of the property will cause damage, then it can be argued that it is a fixture.

In Re May Bros Ltd (1929) SASR 508, Murray CJ said:
“If an article is embedded in the soil or is attached to any building or permanent erection thereon by cement, mortar, solder, bolts, screws, nails, spikes or other permanent fastening, it is a prima facie a fixture unless it has been agreed between the parties or can be inferred from the circumstances, that it was not to be a fixture.”

However notwithstanding the annexation, a fixture can be deemed to be a chattel takin the reasons for the annexation and the intention of the owner when affixing the chattel. In Australian Provincial Assurance Co Ltd v Coroneo, the Court was asked to determine if the theatre seats bolted to the floor, and attached with one another were fixtures or chattels. The Court decided that the seats were chattels, Jordan CJ held:
“The test of whether a chattel which has been to some extent fixed with the intention that it shall remain in position permanently or for an indefinite or substantial period… or whether it has been fixed with the intent that it shall remain in position only for some temporary purpose…”

In Palumberi v Palumberi (1986) NSW ConvR 55-287 two brothers agreed that one brother would sell to the other his interest in property comprising two self-contained flats which they held as tenants in common. There was no discussion regarding inclusions and the selling brother stripped the flat. The Court held the stove and carpet to be fixtures but all the other items where chattels. In his judgement Kearney J. cited several cases including Coroneo and formed the following view:

“It would seem from perusal of these and other authorities in the field that there has been a perceptible decline in the comparative importance of the degree or mode of annexation with a tendency to greater emphasis being placed upon the purpose or object of annexation, or, putting it another way, the intention with which the item is placed upon land. The shift has involved a greater reliance upon the individual surrounding circumstances of the case in question as district from any attempt to seek to apply some simple rule or automatic solution.”

Article courtesy of the NSW Conveyancer Magazine

When to do your final inspection

The Contract for Sale provides for the purchaser to carry out a final inspection of the property before settlement. It is crucial that you carry out this inspection as close to settlement as possible and preferably on the day of settlement.

Why? Imagine this scenario

The very excited purchasers organised with the agent to carry out a final inspection of the vacant dwelling, situated quite some distance from where they reside, on the Saturday before settlement. Apart from an overgrown garden and a less than perfectly clean oven they found the property to be in the same condition as it was when they entered into the Contract. The purchasers were happy to proceed to settlement at noon on the Monday. However, on the Sunday night the dwelling burnt to the ground.

Both the purchasers and the agent were totally unaware of the fire until after settlement had occurred. You can imagine the horror for the purchasers when they arrived at the property with their removal van.

The sting in the tail of this story is that the insurance risk of the home passed from the vendor to the purchasers at settlement. Had the purchasers inspected the property on the morning of settlement they would have discovered the charred remains, refused to settle and the vendor would have had the home rebuilt using his insurance. Instead settlement occurred and the purchasers’ insurance cover did not take effect until settlement, after the fire took place. The purchasers now owned a burnt- out home, have no money to rebuild and owe a large amount of money to their bank!

Whilst it may not always be possible to inspect the property on the day of settlement carry out your inspection as close to settlement as possible and on the morning of settlement do a drive- pass to double check that all is in order.

Rest easy with your conveyance! With over 30 years conveyancing experience and having acted in over 25,000 conveyancing transactions Geoffrey Morgan-Smith Legal and Conveyancing offers you peace of mind on your sale or purchase.

“Or nominee” clauses in contracts

It is not uncommon for a prospective purchaser of a property to ask that the purchaser be shown as e.g.., John Brown or nominee. This is not uncommon in real estate auction situations. There are problems that can flow from such wording and these problems can affect the rights of both the purchaser and the vendor.

It has been held in a recent Victorian case that similar wording creates a situation where the nominated purchaser will have no contractual rights against the vendor in respect of issues arising under the Contract. Similarly the vendor will have no rights against the end nominated purchaser. Further, the vendor’s rights against the purchaser named on the original Contract can be clouded because of the nomination provision.

In New South Wales, a nomination by one purchaser in favour of another purchaser will normally attract additional stamp duty, i.e., stamp duty is paid in full both by the purchaser named on the Contract, and by the purchaser who is nominated and eventually purchases the property.

In order to avoid the impact of double stamp duty, the purchaser when entering into a Contract should ensure that the correct name is shown on the Contract. If there is the likelihood that another person or company will be the ultimate purchaser, the Contract should contain a properly drafted novation clause which will ensure that the rights and obligations of the respective parties under the Contract will be maintained. Double stamp duty will still be incurred but at least the contractual rights and obligations of the respective parties will be clear.

In certain circumstances, stamp duty paid by the original purchaser may be refunded but the rules are complex.

Novation clauses and the associated stamp duty issues are complex. The advice of a competent lawyer should always be sought.

Why bother with a survey?

Land surveys, especially for suburban houses in established suburbs are old hat, aren’t they? Surely, “what you see is what you get” – or conversely what you have owned for years you will be able to sell when you want to as it stands – no?

For many decades – until fairly recently – anyone thinking of selling a house had to have a survey of it, showing where the house, the garage and all other structures on the property stood – and also showing where the fences were and whether there were any irregularities in the fencing or easements or covenants which affected the legal use of the property as it appeared to the naked eye.

However, with the comodification of conveyancing in recent times where conveyancers and lenders do everything “by the numbers” in order to keep the “administration fees” as low as the market wants, the inclusion of surveys in Contracts for Sale has become less and less. Vendors do not want to pay for a new survey and purchasers are being persuaded that they don’t need a survey – they will “own the property” anyway.

If only that were true.

The war stories

What many people, contemplating selling their own property or buying a new property, never hear about, are all of the instances in which sales or purchases go horribly wrong, because of substantial survey defects – e.g. that rear fence is in fact 2 metres onto the old rear lane or the backyard of the adjoining property but no one has bothered to worry about paying to move it/that “shared driveway” that both properties have used has never been made legally secure by cross-easements or cross-rights of way/that new side fence, erected a year ago is in fact up to 300mm on the adjoining property/that wonderful new front privacy wall, with cheerful flower beds in between its pillars, has in fact been built 200 millimetres on to the footpath. The list goes on.

What you think you own and what you may have enjoyed blissfully for decades may not be entirely yours to sell and conversely what the real estate agent and that agent’s glossy brochures and plans portray to you as available for purchase may not in fact be entirely available if you bought the property.

What’s the problem – surely people are going to be reasonable?

No. Many people aren’t reasonable. Many people are unreasonable. Those neighbours that you haven’t got along with for years, and whose recent Development Application to renovate their own property you objected to, can insist on the shared driveway arrangement being terminated/the rear or side fence returned to where the true legal boundary line is or can report your lovely encroaching front privacy wall to the local Council, which will insist that you get it off their footpath area pronto.

Alternatively if you signed a contract as Vendor and the Real Estate market has dropped significantly in recent weeks, your purchasers may be looking for an excuse to get out of that Contract or looking for a substantial adjustment in the Contract Price to account for all of these Survey defects which you or your selling agent didn’t tell them about before they signed the Contract.

Or you have just signed a Contract to buy this property with all of these Survey defects – if you complete that Purchase you are going to eventually have to move that back fence and lose two metres of your backyard/pay for the removal and rebuilding of that encroaching side fence/pay for the demolition of that front privacy wall and garden so that it can be rebuilt inside the front boundary/you are going to lose a large portion of that shared driveway which means that what is left is not going to be enough for you to park your car in the rear carport on this property – you won’t have any off street parking.

This is all fanciful isn’t it? This isn’t what happens in reality – it’s just academic isn’t it? Sorry – it is real and these circumstances arise more often than most of the public ever know about because they don’t watch the court lists every week to see what court cases are running in those courts, because the real estate agents are only interested in “maximising” the sale price irrespective of the consequences, because banks and conveyancers have little or no interest in surveys, and because many people who have been caught in such a dilemma are so ashamed of their stupidity and what it has cost them, that they don’t tell anybody except their very closest family and friends.

What to do?

The answer is simple – if you are thinking of selling a property get an up-to-date survey to make sure that what you think you can sell is actually all yours to sell – without any defects, with all necessary cross-easements, without any unknown covenants on it etc. – it is a simple mode of insurance – an up-to-date survey is your insurance policy against unwanted, time consuming and expensive mistakes.

If you are looking at buying a property then either insist on the vendors providing a survey as part of the Contract, or if not get a survey of your own and ensure that there is a special condition in the Contract to protect you if it turns out that that new Survey discloses any Survey defects in the property. Yes, it is a lot of extra money to pay – sometimes $1,000 or more – but when you are paying $1 million for a house property or even $600,000, $1,000 worth of survey insurance is worth every cent.

And then what?

If you are in any doubts about what survey problems exist on the property that you are about to sell, or are thinking of buying – see an experienced conveyancing solicitor and talk the problems through with her or him. Yes, that advice, from an expert, will cost you some fees, but like the Survey itself, you will save a lot more money, time and energy getting it right the first time.

The importance of easements

Recent experience highlights two important aspects of easements: the need to secure formal easement rights, and whether money has to be spent in order to use an easement.

Neighbour says “Nay”

A client owns a rural property on which she runs a horse stud. For many years, she used a driveway on her neighbour’s property to access parts of her own property, with the neighbour’s consent. There was no easement and nothing in writing, just a friendly oral arrangement with no money changing hands. The client used the driveway for vehicular access to an office, stables and other buildings on her property. Being virtually on the (unfenced) boundary, and facing the neighbour’s property, these buildings can really only be accessed via the neighbour’s driveway. Access is needed for the client to move stock, feed and water around the property. It is not practical for her to create an alternative vehicular access route over her own property.

Problems arose when the neighbour sold his property. The new neighbours swiftly announced their intention to close off our client’s access to the driveway. They have since fenced the boundary, meaning our client has no vehicular access to the relevant buildings. Our client tried to negotiate an easement along the driveway, and has offered to pay the neighbours compensation, but her requests have fallen on deaf ears. She is considering an application for a Court-ordered easement under section 88K of the Conveyancing Act, but the expected legal costs of Supreme Court proceedings are a major deterrent, particularly given the presumption in section 88K(5) that the applicant is to pay the neighbours’ costs of the proceedings.

The lesson: if you rely on access over a neighbour’s property, make sure you formalise your access right by getting an easement registered on title. Your friendly neighbour may move at any time, and the new neighbour may not be quite as friendly!

The bargain that wasn’t

A client purchased a very large acreage property at auction. Prior to auction the client was aware there was no road frontage, but the auction contract disclosed that there is legal access to the property from the public road, via a right of way over a neighbour’s property. No driveway is yet constructed on the easement site, but the client (whose background is in construction) believed there would be no difficulty constructing one at a reasonable cost after he bought the property.

The client felt he’d secured a bargain, as he paid far below the reserve price, until a few weeks later when he got a quote to build the driveway. Due to the land’s topography, a driveway built within the right of way will cost roughly $200,000, far more than he had expected.

The client is now asking his neighbour to vary the route of the easement over some flatter terrain, to reduce the cost of the driveway. If negotiations with the neighbour are not successful, he may need to consider making a section 88K application to the Court.
The lesson, as expressed by the client himself: “I shoulda done my homework!” Legal due diligence only takes you so far. If you are planning to carry out works on the land you are buying, then you need to consider other relevant due diligence, including planning and construction issues.

Boundary Realignment – Not a simple matter

Most neighbours who seek to change the position of their property boundaries underestimate the complexity of the process and the delays often experienced in dealing with their mortgagees and other secured creditors.

Boundary realignment is essentially a re-subdivision of the properties involved and proceeds in the same way as a traditional subdivision of property.

The parties should firstly properly document the agreement and include a full Contract for Sale of Land in relation to the properly changing hands.

Normally the proposed plan of subdivision is first approved by the Local Council and then signed off by all the registered proprietors and their mortgagees and is then lodged for registration at the Lands Dept together with the Certificates of Title of each property and any other necessary related documents (these typically include land transfers, discharges of mortgage, mortgagee consents and new mortgages).

Without the simultaneous registration of such “related documents” the newly issued Titles will note the entitlement of the registered proprietors and their mortgagees of the land gained. This is commonly referred to as a “dual entitlement” and as a result the mortgagee’s security may well be unenforceable if the subdivision is registered without the related documents being registered at the same time.

Accordingly the role of any mortgagees is significant prior to the subdivision being registered and they will normally request new mortgages be entered into and control of all related documents and the registration process.

What happens if a residential property is damaged between exchange and completion?

With the early onset of bushfires this summer you might be wondering what happens if a catastrophic event like a bushfire occurs and a dwelling is destroyed or damaged between exchange and completion of a contract for the sale of residential property.

Who is responsible for the property between exchange and completion?

In the sale of a residential property, risk as to the property does not pass to the buyer until completion of the property. This means the seller is responsible for the property and should retain insurance until the sale completes. The only time this position would be different would be if the buyer took early possession of the property. In this case, the buyer takes on the risk for the property from the day they take possession. This means the buyer needs insurance from that date. In practical terms, a seller should never give a buyer early possession without seeing evidence that the buyer has insurance in place.

If there is damage to the property after exchange but before completion the options available to the parties are governed by the provisions of Part 4 Division 7 of the Conveyancing Act and depend on whether the damage is categorised as substantial or not.

Substantial Damage

If the damage to the property is categorised as substantial the buyer may rescind the contract within 28 days of the buyer becoming aware of the damage. In this case, the buyer will receive their deposit back and is released from any obligations under the contract. An exception to this right is if the damage is caused by a wilful or negligent act or omission of the buyer. This provides some protection to the seller if early possession was granted to the buyer and after the buyer took possession and before completion the buyer caused substantial damage to the property. In that case, if the buyer caused the damage the buyer would have to complete and wear the cost of the damage.

However, if the damage is substantial and the buyer still wants to proceed with the purchase, the seller cannot be forced to perform the contract if it would be just or inequitable to require the seller to complete the sale. For example, if a house was destroyed by fire and a total rebuild were required it would be onerous on a seller to have to claim on insurance and re-build the dwelling. The best course of action would be for the buyer to rescind the contract so that the seller could manage their own insurance claim and any rebuild.

Substantial damage is defined as damage which renders the land materially different from that which the buyer contracted to buy. The definition of land includes buildings and other fixtures. In practical terms, if a residential dwelling was purchased for the purpose of a residential use and it was burnt down and uninhabitable before completion, a buyer would be able to rescind on the basis that the land was substantially damaged.

An example where damage was found not to be substantial so as to invoke the buyer’s right to rescind is Bakhos v Fenner and Anor [2007] NSWSC 641. In this case, there was a fire in a property in Lane Cove which resulted in smoke damage, the windows being shattered, carpets being burnt and two ceilings were sagging from water from the fire fighters. The court found that there had not been substantial damage and the buyer’s attempt to rescind the contract was taken to be a repudiation of the contract and the seller was entitled to retain the deposit.

The circumstances which resulted in this finding were the fact that the structure of the property had not been damaged and the condition of the property before the fire. The property was a 50 year old 2 bedroom brick and tile house which was showing signs of its age. In addition, the seller had fixed the damage within a few weeks and before the required date for completion. The court took the view that these circumstances combined with the buyer having lodged an application to redevelop the property and the buyer’s behaviour (which suggested he had no intention of completing the contract) indicated that it was ‘extremely improbable that the house and the condition of the house were material in the valuation of the property or in [the buyers] decision to buy the property.’ In short, the court took the view that the buyer had purchased the property to re-develop the site so the damage caused by the fire did not result in the land being materially different to that which the buyer had contracted to buy.

Damage which is not substantial

If there is damage to the property after exchange and before risk passes to the buyer the purchase price is to be reduced by a just and equitable amount and, if the purchase price is not reduced on completion, the buyer may recover the amount by which the purchase price should have reduced from the seller as a debt. If a buyer takes early possession they cannot claim an abatement of the purchase price after they take early possession even if the property is damaged.

Tips for buyers and sellers

Buyers

If there is substantial damage after exchange and before completion buyers have options to address the damage either by getting out of the contract or negotiating a price reduction. If the damage is not substantial, buyers are still entitled to negotiate a price reduction.

Ideally buyers should sort out any price reduction before completion as the risks, costs and difficulties associated with pursuing the price reduction after completion may make the recovery of those costs impractical. Although the price reduction applies where damage is not substantial these protections are only to be relied on in the case of significant damage to a property and not something minor. Regardless, these provisions highlight the importance of a thorough pre-settlement completion so that if there is significant damage it can be addressed with the seller before completion.

If you agree to take early possession make sure you do a thorough inspection before taking possession. The act of taking possession passes the risk to the buyer and ends the buyers right to claim for any damage to the property before completion.

Sellers

Keep your insurance in place! Where there is significant damage to a property you are selling (but it is not substantial or it is substantial but the buyer still wants to proceed) you may have to consider a price reduction or to agree to fix the damage before completion. However, sellers can’t be forced to complete the contract if the damage is substantial and it would be just and inequitable for the buyer to require the seller to complete.

Buyers beware – know what you are buying

Buyers must carry out a pre-purchase inspection of a property and not rely on the seller having the property in perfect condition ready for sale.

The latin maxim “caveat emptor” or “buyer beware” still remains an essential buyers obligation today as ever. It is up to the buyer to discover through pre-purchase inspections, the current condition of the property. The most common ones are:

  • Pest Inspections to check for past or present termite activity;
  • Building Inspections for major structural defects;
  • Test that all appliances included in the sale are in good working order like the dishwasher, stove, automated garage door and remote, air conditioning and remotes, electric gates and remotes, intercom system;
  • Pool inspection to know the pool filter and pool equipment are in running order and to see that the protective pool fencing complies with the current legislation.

The buyer can carry out these inspections themselves or pay to have professionals do the inspections and provide a comprehensive report.

When is the best time to do these inspections? It depends on the way the property is marketed. If the property is being sold by auction, then before the auction date. If the buyer has a cooling off period, then before the end of the cooling off period.

The purchaser then will still be able to negotiate with the seller on the price or simply decide not to proceed with the purchase and to look for another property.

Remember it’s buyer beware.

Buyers pre settlement final inspections

Over the years I have experienced a number of very unfortunate events that have happened prior to the day of settlement. In one case vandals broke into a home the night before settlement, had a wild party and as they left, set fire to it.

In another instance a water main further up the road behind the property burst putting ankle deep water through the home just the day before settlement. Or how about this!! A vendor’s removal truck ran over the front wall and gates upon leaving the property and took them out.

Buyers need to make sure the property is in the same condition (fair wear and tear excepted) as it was as the date of unconditional exchange of contracts. All inclusions also need to be checked to see they are in working order, e.g automatic garage door, air conditioner, pool filter etc.

More disappointing discoveries on the final inspection would be to find some of the keys to the doors or window locks are not available. The seller hasn’t removed old building materials from under the house (the seller should remove all of their possessions), or a window has been broken.

These are very annoying matters that may or may not be resolved to the buyers satisfaction.

It is crucial that a buyer make immediate contact with their solicitor or conveyancer to report any problems with their final inspection as settlement will occur otherwise, and that problem could become the buyer’s problem.

P.S. A good piece of advice for all buyers is at the time of negotiating the contract price, is to make sure that they are aware of what is staying with the property and what is being taken by the seller. For example, are the matching curtains in the main bedroom with the bedspread included in the sale, or the ride on mower, or the 108cm television bolted onto the wall in the loungeroom included??

Positive signs in the property market

There are positive signs that the housing market may be emerging from the depressed to flat state it has existed in over the past few years. The Daily Telegraph announced recently that Mortgage demand highest in three years.

With the RBA lowering interest rates to historically low levels and the Australian dollar dropping against the Greenback, signs that the housing industry is in the early stages of recovery will be welcomed. Weekend auction clearance rates remain high with purchasers actively pursuing available properties. As the economy claws it’s way back, interest rate increases may be back on the agenda.

If you are in the market for a new property, here are some tips to ensure you are ready to strike when the right property comes along:

  1. DO get finance approval from your lending institution before you start negotiating on a property or bid at an auction
  2. DO make sure that you ensure you have sufficient finance to cover additional items required to purchase a property such as stamp duty, legal’s, cost of reports moving costs and so on.
  3. DO your Pest, Building and Strata Inspection reports.
  4. DO make sure your solicitor is available at short notice to discuss any urgent matters especially if it is sold at an auction.
  5. DO get your solicitor to review any contract for any premises you are considering buying BEFORE you attend the auction or BEFORE you sign it (if not sold at auction) or BEFORE cooling off expires (at the very least!).
  6. DO NOT attend any Auction without a full loan approval.
  7. DO NOT bid above your maximum available funds if attending an Auction.
  8. DO NOT rely on word of mouth warranties on a property, from the Agent or the Vendor, make sure you undertake the necessary investigations and inspections.
  9. DO NOT buy on impulse, make sure you do your research and know the property and the surrounding area you are looking at buying BEFORE you start negotiations.