RESCINDING CONTRACT FOR SALE OF LAND ON THE BASIS OF MENTAL ILLNESS
Mental illness has become increasingly prominent in Australia. According to the Law Society of NSW, one in five Australians suffers from a mental illness each year. If we do the math, this means that almost half of the Australian population has experienced a mental illness at some point in their lives.
In Brennan v O’Meara  NSWSC 1374 (‘Brennan’), the purchaser’s (Mr O’Meara) right to rescind an exchanged contract prior to settlement was raised. The purchaser cited his mental incapacity as the reason for rescission pursuant to a special condition in the contract:
‘… 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…’.
The vendor, Mr Brennan disputed Mr O’Meara’s right to rescind, claiming that Mr O’Meara did not ‘become mentally ill’ as per the special condition and hence the clause was not satisfied.
The Court first considered the definition of a mentally ill person according to Section 14 of the Mental health Act 2007 (NSW) (‘MHA’):
‘… 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.
Following on, the Court decided that to ‘become’ mentally ill, Mr O’Meara’s mental illness must not be pre-existing. The Court also concluded that the purpose of the special condition was to account for any event which would hinder the performance of contractual obligations. As such, Mr O’Meara’s rescission was invalidated by the Court as he was not mentally ill within the meaning of the special condition.
Since Brennan, most incapacity provision within a contract for the sale of land now contains a definition of ‘mental illness. However, the issue of mental health remains complex and the question remains unanswered – to what extent such a provision should be narrowly interpreted in order to adequately consider the circumstances unique to a person’s mental illness?
To assist vendors and purchasers, consider the following with your solicitor or conveyancer when entering into a contract for sale:
- Consider including a special condition pertaining to mental illness that is separate from the incapacity provision dealing with death and insolvency;
- Consider your choice of words carefully (i.e. ‘become mentally ill’, ‘diagnosed with a mental illness’, etc);
- Include sufficient details surrounding mental health in the context of law, including references to the MHA; and
- Consider including a procedural condition for automatic rescission, for example, having a contract automatically rescinded when parties receive notice of a mental health diagnosis.