Can a buyer cancel Real Estate Contract if there is a defect?

Yukio Hayashi    25 Oct 2016

Q1: I recently purchased a studio apartment through a real estate agent. It was only recently I found out that a year ago there had been a robbery.  Can I cancel the purchase of the property?

A1: This is a defect generally referred to in Japan. With regards to defective goods in Australia, there are several laws regarding the Sale of Property. First of all, it is the purchaser’s responsibility to investigate the existence of defects before the purchase of any good (Caveat Emptor).

However, when the property is purchased through a real estate agent, there are separate laws which protect buyers of property. For example, under s52 of the Property, Stock and Business Agents Act (NSW) 2002, real estate agents are prohibited from entering into a contract whereby the real estate agent is aware of any ‘defects’ and does not notify the potential buyer. Additionally, there is a similar provision in the Australian Consumer Law (section 18).

‘Defect’ refers to any important criterion considered by a typical purchaser of property. These defects can include ‘Psychological Stigma’ and according to NSW Fair Trading, the situation in which a grave crime has occurred in an apartment can be considered to be “equivalent to a psychological trauma”.

If after the purchase of property it is revealed to be a ‘defective good’, in principle it is impossible to cancel the purchase of property and refund the full purchase amount. However, under the Consumer Protection Act, a lawsuit can be filed seeking compensation. Per section 236, the amount of compensation provided differs based on the difference in the market price and purchase price of the good, assuming the purchaser was aware of the past defects. For example, a year ago, in a robbery case, after considering the effects of the ‘psychological trauma’ it was held that ‘the market price of the property is $600,000”. However, as the real estate agent did not notify the purchaser of the defect, in the case in which the purchaser purchased the property for $750,000, they can sue for the difference of $150,000. However, if the purchaser had purchased the property for $600,000, the individual cannot seek compensation. Apart from nullifying the indemnity contract, the real estate agent may be punished if they were aware that robbery had occurred to the former resident of the property and did not inform the purchaser of such incident (per section 52(1) of the abovementioned Act).

Key Contacts

Yukio Hayashi

Yukio Hayashi

Senior Partner