By Katherine Gardner LLB, LLM (Hons), Senior Content Specialist
Two recent cases concerning the enforceability of Options to purchase as part of “rent to buy” transactions highlight their complexity. Apparently, this type of transaction has more commonly been used in commercial transactions up to now. However, it is becoming increasingly popular in order for landlords to provide a more affordable option for tenants seeking to eventually become the registered proprietor of the property over a longer term. Practitioners therefore need to be familiar with the regulatory framework in Part 4 , Division 9 of the Conveyancing Act 1919 (NSW), and the relevant cases.
In Le v Tran (2017) NSW ConvR 56-374; NSWSC 632, the Supreme Court of NSW upheld the validity of a combined option to purchase and a residential tenancy (Lease Option), despite the complexity of the agreements and the fact that English was not the purchaser/grantee’s first language. Further, the owner/grantor was acting on behalf of the registered proprietor pursuant to a Power of Attorney.
More recently, the vendor/grantor of an Option to purchase pursuant to a “rent-to-buy” lease option validly rescinded the Options on the basis of a mistake of their own making, ie the attachments were deficient: Sieve-Storm v Murphy (2017) NSW ConvR 56-375;  NSWSC 1800.
Sieve-Storm v Murphy
The Grantor of an Option to purchase pursuant to a “rent-to-buy” lease option validly rescinded the Options on the basis of a mistake of their own making, ie the attachments were deficient. Section 66ZI(1) of the Conveyancing Act 1919 (Act) provides a right of rescission for the failure to attach the required documents to the Option to purchase, to both parties, rather than just to the Grantee, purchaser who presumably had no hand in preparing the Option to purchase documentation. Although there were many defects in the purchaser/grantee’s Exercise Option Notices, it had unwittingly acted in accordance with the Options to fulfil its financial obligations oblivious to their inherent defects.
Parties to an option to purchase residential property need to ensure that they strictly comply with the obligations in Pt 4 Div 9 of the Act, if they are to be valid and capable of enforcement. This decision demonstrated how strictly the legislative requirements must be complied with in order to ensure their validity and enforcement.
Unenforceable options — failure to exercise the options
In Sieve-Storm Pty Ltd ACN 160 562 354 as trustee for Affordable Property Trust v Murphy  NSWSC 1800, Emmett AJA held that the two options each relating to a separate property were void and unenforceable for the following reasons:
- the grantee’s (purchaser, Sieve-Storm, plaintiff) Notice of the exercise (Exercise Notice) of the options and their service on the Grantor (vendor, Murphy, defendant) failed to comply with the statutory requirements of s 66ZG–66ZK of the Act. Such non-compliance rendered the options void pursuant to s 66ZG
- even if the Exercise Notices were valid, the Options to purchase had been validly rescinded by the Grantor, on the basis that the required documents (s 66ZI(2)) were not all attached (s 66ZI(1))
- although the court determined that it was unnecessary for it to deal with the grantee’s Estoppel claim, reasons were given for its refusal:
- the grantee did not provide any evidence that she was induced to enter into possession or make payments towards the property by the conduct of the grantor
- rather, it was found that the grantee made the payments to the grantor in accordance with the terms of the Option 
- similarly, the grantee’s equitable claim for restitution on the basis of the unjust enrichment of the grantor failed because the grantee had admitted that she had sub-let the two properties which were the subject of the “rent-to-buy” lease options for an amount that exceeded the payments to the grantor (ie the grantee had made a profit).
|Failings of the Exercise Notices|
|Property||Sent to wrong address||Referred to wrong Option Agreement||Wrong name of Purchaser||Option condition not met||Contract for |
described the land
Le v Tran
This judgment focused on the facts surrounding the parties’ conduct with respect to them entering into a “rent to buy” transaction consisting of an Option to purchase agreement and a standard residential lease (collectively, a Lease Option) and whether it had been validly terminated by the plaintiff (owner/ grantor of the Lease Option), Mr Le.
The court did endorse the Lease Option documentation as being valid and enforced its terms for repayment when the defendant (tenant/ grantee of the Lease Option), Ms Tran defaulted on her repayments. Mr Le served default notices for non-payment under the Lease Option seeking repayment within 14 days and when these were not complied with, he subsequently served termination notices. Service of these notices on Ms Tran was found to have been effective.
Further, the Lease Option was found to have been validly executed and enforceable. Ms Tran argued that in negotiations, she had been misled by Mr Le and that there had been unconscionable conduct in his actions and therefore the Lease Option was void for uncertainty and unenforceable.
Lease Option validly executed and terminated and enforceable
The court held for Mr Le finding that the Lease Option had been validly executed and terminated.
The claim for an equitable remedy to set aside the Lease Option on the basis of unconscionable conduct failed due to the following relevant facts:
- although English was not Ms Tran’s primary language she was found to be a businesswoman who had requested that the rent-to-buy transaction proceed
- she had refused the assistance of an interpreter (because she was busy with her other businesses)
- she was familiar with business transactions and understood the nature of the agreements that she was entering into.
- although the up-front lump sums payable as part of the Option fees were substantial, these would off-set the ultimate purchase price for the property when Ms Tran exercised the Option to purchase.
- Ms Tran instructed her solicitor to lodge a caveat over the property after executing the Lease Option demonstrating her understanding of the nature of her interest and her competency.
This decision demonstrates that the courts will enforce a fairly sophisticated Lease Option where the parties to the agreement are found to have been equipped with the requisite knowledge to appreciate their rights and obligations. Despite there being some disparity between their level of familiarity with this type of rent to buy transaction with respect to residential property. Further, Mr Le was acting under a power of attorney on behalf of the owner and was not the actual registered proprietor of the property.
There are some marked differences between the facts of these cases but both turned on whether the owner/grantor had validly rescinded and terminated the Options. In both cases, the court found that they had, with dire financial consequences for the purchaser/grantees. Both claims for equitable relief were denied.
The cases demonstrate the courts’ willingness to strictly apply the regulatory provisions concerning options in Pt 4 Div 9 of the Conveyancing Act 1919 (NSW), where failure to attach the requisite documentation renders the option invalid. Whilst at the same time, it will uphold and enforce sophisticated Lease Option agreements, so long as both parties are capable of understanding the implications of the bargain.
This means that parties to such “rent to buy” transactions should first engage experienced legal practitioners to advise them of their obligations, check that the documentation is compliant and guide them through the process to ensure that the option is validly exercised so that the property can ultimately be purchased and any financial benefit realised.
New commentary has been inserted into CCH’s New South Wales Conveyancing Law & Practice – “Option to Purchase residential property” (5-120 to 5-147).