Mental illness as a basis to rescind a contract for the sale of land

More than a decade has passed since Brennan v O’Meara [2009] NSWSC 1374. It concerned whether a purchaser had a right to rescind a contract for the sale of land as a result of his ‘mental incapacity’ after exchange and prior to settlement. Since that time, the incidence of mental illness in Australia has increased. Important questions loom regarding the extent to which mental illness must still be an ‘impediment’ to completing the contract to validly rescind it based on a ‘mental illness’ special condition. When the next contested matter presents itself, how will the pendulum swing?

The current law in NSW

In Brennan v O’Meara, Mr Brennan, the vendor, and Mr O’Meara, the buyer, had negotiated a settlement of about 13 months. Mr O’Meara had early possession of the land. Various mishaps occurred including an altercation with a neighbour, the rejection of his finance application and the global financial crisis loomed large. These, and other matters, aggravated his existing mental health issues. Mr O’Meara served a notice to rescind pursuant to a special condition on the basis that he had ‘become mentally ill’. The special condition provided:

‘… should either party… prior to completion… die or become mentally ill, then either party may rescind this Contract by notice… thereupon this Contract shall be at an end…’ (emphasis added).

Mr Brennan disputed the validity of the notice. The Court identified that the issue to determine was whether O’Meara had satisfied the special condition; namely, whether Mr O’Meara had ‘become mentally ill’ within the meaning of the special condition.

The contract did not contain a definition of ‘mentally ill’. But the Court considered section 14 of the Mental Health Act 2007 (NSW) (‘MHA’). It provided, ‘a person is a mentally ill person if the person is suffering from mental illness and, owing to that illness, there are reasonable grounds for believing that care, treatment or control of the person is necessary (a) for the person’s own protection from serious harm or (b) for the protection of others from serious harm’. Section 4 of the MHA defined ‘Mental Illness’ as ‘A condition that seriously impairs, either temporarily or permanently, the mental functioning of a person and is characterised by the presence in the person of any one or more of the following symptoms (a) Delusions; (b) Hallucinations; (c) Serious disorder of thought form; (d) A severe disturbance of mood; (e) Sustained or repeated irrational behaviours indicating the presence of any one or more symptoms referred to in paragraphs (a)–(d).’

The Court approached the construction of the special condition from two perspectives. First, the special condition required Mr O’Meara to have ‘become’ mentally ill (i.e. it was not sufficient if he had a pre-existing mental illness). Secondly, the purpose of the special condition was directed at events which caused an impediment to the fulfilment of contractual obligations. Davies J observed that it would not be sufficient for a person wishing to take advantage of such a provision to merely point to a diagnosis of mental illness because it may be of a ‘nature or magnitude that does not cause any impediment to the fulfilment of the contractual obligations’ (at 41) (emphasis added).

Influential in the Court’s reasoning was the decision in Karfoal Pty Ltd v Lorence [2002] NSWSC 204 dealing with an almost identical provision. In it, one of two joint vendors died between the date of contract and completion. Gzell J held, ‘the provision cannot be enlivened on the basis of the death of one of the joint tenants… The provision is aimed at a death that creates an impediment to the fulfilment of contractual obligations’ (at [13]) (emphasis added).

In Brennan v O’Meara, the evidence did not show Mr O’Meara was unable to function or deal with his affairs. As such, the Court held his notice of rescission was invalid because he was not mentally ill within the meaning of the special condition, i.e. his diagnosed mental illness did not cause an ‘impediment’ to the fulfilment of his contractual obligations.

A similar factual situation presented a few years later in Coppa v Barnett [2012] NSWSC 490. Ms Coppa, the purchaser, sought to rescind a contract for the sale of land with Mr Barnett, the vendor. Ms Coppa relied upon a very similar special condition. Stevenson J held that the term ‘mentally ill’ was not defined in the contract but found that the ‘context to which the expression was used… suggests that the mental illness must be of a nature that causes an inability, or at least an impediment, on the part of the relevant party to fulfil their contractual obligations’ (at [50]) (emphasis added).