Developers Beware… of your Marketing Agent’s Advertising!

[Author – Tim ODwyer]

The Supreme Court of New South Wales recently ruled that the buyers of an off-the-plan property were entitled to a rescission of their contract and a deposit refund because the estate agent for the developer had engaged in misleading and deceptive conduct. These inexperienced investor-buyers had relied on baseless representations in newspaper advertisements that the value of the inner city terrace units being marketed by the agent would double in five years.

A major law firm soon issued a media release suggesting that, in a falling market, off-the-plan buyers might try to get out of deals done years earlier by relying on pre-contractual mis-representations. Property developers and their agents were warned “to carefully check the wording of their advertisements or other representations” to make sure they were “based in fact”, while any statements regarding future value must have a “reasonable basis” with further information being provided to qualify those representations.

However when sellers’ agents get found out on their porkies, some buyers will still settle but later sue the lying agent. (See: Were Hoges & Linda Dudded By A Dodgy Agent?) The following report from the Australian Capital Territory concerns a marketing agent, a developer and others who faced lawsuits from disgruntled buyers years after they had settled on their investment purchases.

“Rarely do we have the opportunity to offer such a unique investment in one of Canberra’s most famous establishments.”

No, these were not the words of some spiv trying to sell gullible tourists bogus shares in Canberra’s Australian War Memorial or the National Gallery. Rather this statement was part of a brochure complied some time ago for the marketing of units in the about-to-be-upgraded Canberra International Hotel.
This brochure detailed for its investor readers anticipated supply and demand for ACT hotel/motel accommodation, financial projections, guaranteed leasing and management arrangements, cash flows, expected pre-tax profits, investment returns and likely capital gains.

In due course, a Judge of the ACT Supreme Court ruled that the statement in question was a “mere puff” (as was an invitation to “participate in one of the strongest growth industries in Canberra”), so nothing about this brochure (titled Investment Report Canberra International Hotel) nor any of the other marketing activities constituted misleading or deceptive conduct.

So judgement was given for the defendants in three rescission and damages actions brought by some original purchasers of hotel units. The now unsuccessful plaintiffs, whose proceedings under the ACT’s Law Reform (Misrepresentation) and Fair Trading Acts and Sections 51A, 52, 82 and 84 of the Trade Practices Act were heard together, claimed that the hotel developer, the marketing agent and others induced them through misrepresentation and false/misleading conduct to invest in units. As a result of these alleged breaches of the local and federal fair trading and consumer protection laws the investor-plaintiffs further claimed to have suffered financial losses for which they sought compensation.

In a lengthy judgement His Honour considered how this ill-fated accommodation and conference venue in the national capital was sold in 1993 by a mortgagee in possession to the strata-developer Filaria Pty Limited, before extraordinarily and disastrously involving two hotel management businesses being carried on in competition in the same building. The Judge also reviewed the Australian case law relating to false/misleading representations in property sales, and took into account these remarkable propositions from the Courts:

  • A representation is not necessarily misleading or deceptive if predicted events do not occur.
  • A company may act honestly and reasonably yet still contravene Section 52 (misleading or deceptive conduct) of the TPA because intention is not essential for a breach of that section.
  • The question for a Court is not simply whether people were mislead.
  • A representation is not necessarily misleading or deceptive if predicted events do not occur.
  • The Court decides if conduct is misleading or deceptive on the particular facts and in light of the incidents and character of commercial behaviour.
  • It is acceptable not only that puffery is part of the ordinary stuff of commerce but also that some evasion is expected from people resisting disclosure of confidential information.
  • Silence may be misleading if you do not tell the other person something you know in circumstances where you have a duty to disclose or where the other person reasonably expects you to be forthcoming.
  • Misleading or deceptive conduct must induce or be capable of inducing error.
  • Claimed losses must be caused and materially contributed to by the misleading conduct.
  • Later losses may be recoverable if culpable conduct induces not only the initial purchase but also subsequent activity in relation to a property.

Despite media stories across Australia over recent years about real estate rip-offs and investment scams, the Judge found here that before and at the point of sale the developer, its advisers and its agents had been neither dishonest nor deceitful. In 1993 the units were in fact worth what investors paid for them. Although some units were resold afterwards at higher prices, the Court heard evidence that values subsequently declined as occupancy rates fell “due to the election of a Coalition government…, downsizing the public service, a slowdown in the local economy and an increased number of serviced apartment developments throughout Canberra.”

Unfortunately the continuing investors’ further capital and income losses were sustained much later. These were, in the Judge’s words, “substantially attributable to management decisions taken some five years or more after the units were purchased, and to the plaintiffs’ failure to provide funds for maintenance of the hotel in the years prior to trial.”

The former Canberra International Hotel now operates (“under new management”) as “Pavilion on Northbourne”.

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