Be aware of the differences in recourse – contract law (between buyers and sellers) and tort law (involving 3rd parties)

I have had a very challenging year from a cashflow perspective, and I think there are some lessons in my experience that perhaps others can learn from without going through the heartache  

I purchased a property which settled early this year. Six weeks after settlement I discovered a problem with the drainage that was estimated to cost up to $150K to repair. (Over 20% of the property purchase price.) I was told this should have shown up in searches. So I rang my conveyancing solicitor. Yes, it had shown up in searches, but "we didn't understand the significance and didn't think it was important" and they hadn't provided the search results to me. No worries, I thought, when this is all over I'll sue my conveyancing solicitor for professional negligence.

But my primary focus all year has been to try to salvage the situation. I went back to the lender and asked if we could have extra money for the drainage works. Answer: "no, and now the security is not worth as much as we valued it at a few weeks ago and now we're considering calling in the loan". Fabulous. Long story somewhat shorter – we managed to resolve the issue with lesser works required, but overall this still cost me about $80K extra. That's $80K that we didn't have, and had to borrow on short-term commercial finance at 4.85% PER MONTH. We went as close to bankrupt as we ever care to experience. Whilst the viability of the overall project was still good on paper, we had major cashflow challenges getting it completed.

Recently, having completed the project,  I start pushing harder with suing the conveyancing solicitor for professional negligence. He had violated the terms of agreement by a) not performing the searches during the unconditional period (even though he cashed my cheque for searches 5 weeks prior to the contract becoming unconditional), and b) not providing me with the search results anyway.

In summary, the legal outcome is this: if the VENDOR had been negligent, eg had told me the drainage was fine when in fact it wasn't, then I could get all these costs covered, because I didn't get what I contracted for with the vendor, and the contract would be enforced in accordance with contract law.

But, because it was a 3rd party who was negligent, damages are assessed in accordance with tort law, whereby you are not restored to the position that you had contracted for, but to the position that you would be in if the 3rd party had not acted negligently. So, in my case, if I had known about the drainage issue, I would almost certainly have cancelled the contract. However, because my asset is now worth significantly more than "$80K plus the purchase price", the court takes the view that I have gained because of my solicitor's negligence, and therefore even though he'd be found to have been negligent, my damages would be assessed at nil.   There are some possible means of establishing damages – eg if I could prove that if I'd known I could have negotiated a price reduction from the vendor, or if I could prove that I would have invested in an alternative project instead that would have made more profit – but these are obviously highly speculative figures and I don't want to risk incurring another $60K in legal costs on such a tenuous position.

So, you can be blameless and still have to suck up $80K of costs, the stress of nearly going bankrupt, and your previously flawless payments history being destroyed… and have no recourse. I don't want to sound too much like a whiner, as this has ultimately been a very profitable project but it's just incredible to me that you can be put into such a situation through somebody else's negligence and they're not held accountable. It's the damage to our payments history that peeves me the most, as I'm now compromised in my ability to proceed in my primary career as a property investor until I clean up our payments history.

The lessons?

1) Make sure that all searches are conducted during the conditional period, and that your solicitor provides you with the results.

It is common practise to just say "nothing showed up", but don't take their word for it, as they pretty much can't be held accountable. If I'd known whilst the contract was conditional about the drainage problem, I believe that I could have gotten the vendor to agree to a price reduction, or an extension on settlement until the problem had been scoped, or various other options. I could at least have had my contingency finance in place, instead of finding out when I'd already maxed out all our credit cards etc on other renovation works etc and nobody would lend us money anymore

2) See if you can get away with insertion of a clause into the contract of sale to the effect that the vendor warrants that the property is fit for purpose xxx, or that the vendor warrants that the property has all necessary infrastructure and is compliant with all government regulations for purpose xxx. You'd be highly unlikely to get such clauses agreed to, but it would have saved me if I had gotten away with it. You can only try!

I hope this helps somebody else! Boy, have I learnt a LOT this year…. Sorry this is so long, thanks for sticking with me this long.

Warmest regards, Tracey in Brisbane