By Russell Cocks, Solicitor

First published in the Law Institute Journal

Prior to the introduction of the 2008 copyright Contract of Sale of Real Estate it was common for a vendor to include a standard form guarantee in a proposed contract and to require directors of a corporate purchaser to personally guarantee the performance of the contract by signing that guarantee at the time that the contract was executed by the company.

However the copyright 2008 contract introduced a standard general condition (GC) that was designed to overcome the need for a guarantee to be included in the contract. GC 20 provides ‘The vendor may require one or more directors of the purchaser to guarantee the purchaser’s performance of this contract if the purchaser is a proprietary company’. thereby creating a right in favour of the vendor, at any time during the continuance of the contract, to require the director to sign a guarantee.

But what if, when subsequently required to enter into such a guarantee, the director refuses or fails to do so? The vendor’s rights pursuant to the contract are limited to the parties to that contract, essentially the purchaser. If the vendor is to enforce the right created by the contract, the vendor must establish a right against the directors of the company that exists outside of the contract, as the directors are not parties to the contract.

It is submitted that the vendor can successfully establish such a right based on the general principles of unconscionability, both at common law and in their statutory form. There can be no doubt that a corporate purchaser is engaging in trade and commerce when entering into a contract of sale of land and the directors, as the human force behind the company, are equally so engaged. Trade practices law has undergone considerable development in recent years with the states adopting the Australian Consumer Law, including a general duty to act in good faith.

It is submitted that a director of a company who causes the company to enter into a contract containing GC 20 will be found to be making a representation to the vendor that the director knows that the vendor is relying on the director signing a guarantee if called upon to do so and a refusal or failure to sign the guarantee will constitute unconscionable conduct and entitle the vendor to remedies directly against the director. This argument is strengthened by the High Court decision in Toll (FGCT) P/L v Alphapharm P/L [2004] HCA 52 to the effect that parties engaged in trade and commerce are taken to have read and understood the meaning and effect of contractual documents, specifically GC 20.

Corporations have no ‘life’ of their own. They are creatures of statute and are only capable of acting on the basis of the decisions made by their officers. Those decisions are to be made, in the case of multi-director companies, by the directors in formal or informal meetings of the directors. A vendor is therefore entitled to assume that a contract that, on the face of the document, is signed on behalf of a corporation has been read by the relevant officers of the corporation and that those officers are thereby aware of the terms of the contract. The directors will thereby be taken to be aware of the vendor’s entitlement to call for directors’ guarantees, and to thereafter refuse or fail to sign the guarantee when called upon to do so is unconscionable.

A disappointed vendor might also consider relying on the High Court case of Houghton v Arms [2006] HCA 59 where employees of an insolvent defendant were held liable for misrepresentations made by the corporation. It might be argued that by signing a contract including GC 20 the corporation is representing to the vendor that the directors will sign a guarantee when called upon to do so in the future and that the directors have accessorial liability for that representation such as to make the directors directly liable to the vendor. If the purchaser company fails to fulfil the contract the vendor may seek damages against the directors, not on the basis of a signed guarantee, but rather on the basis that the failure of the directors to sign the guarantee is a breach of the company’s representation to the vendor that the directors would sign and that the directors are personally responsible for that misrepresentation.

Alternatively, a disappointed vendor might appoint a liquidator to the insolvent company and pursue the directors who refused to sign the guarantee on the basis of the directors’ duties to the company. By authorising the company to enter into the contract the directors exposed the company to the possibility of loss. By not signing the guarantee when called upon to do so, and ultimately honouring the guarantee, the directors, in breach of their duty to the company, are responsible for the company’s loss, being the debt to the vendor arising out of the contract.

Tip Box

Whilst written for Victoria this article has interest and relevance for practitioners in all states.

By Russell Cocks, Solicitor

First published in the Law Institute Journal

Australian property law in general, and conveyancing in particular, were dominated for two centuries by the common law principle of caveat emptor (let the buyer beware) which gave very little protection to a purchaser against misrepresentations by the vendor. The age of the consumer, which began with protection against encyclopedia salesmen jamming their foot in the door in the 1960s and became serious with the Commonwealth Trade Practices Act of 1974 (TPA), has been chipping away at caveat emptor for nearly 50 years and, somewhat reluctantly, the states jumped on the consumer protection bandwagon with their respective fair trading Acts.

The Australian Consumer Law (ACL) is, to some extent, the culmination of that process and seeks to provide an Australia –wide template and has been adopted by all jurisdictions to govern most of the issues that arise in a consumer protection environment. Whilst there is a nominal jurisdictional limitation of $40,000, the Australian Consumer Law applies if the transaction relates to personal, domestic or household use and there are specific provisions in the Australian Consumer Law concerned with real estate contracts.

Understanding the application of the Australian Consumer Law is not made any easier by the method used to adopt the former Trade Practices Act principles as universal legislation. The Australian Consumer Law is a Schedule of the Competition and Consumer Act 2010, an Act primarily designed to establish the Australian Competition and Consumer Commission and it is not until s 130 of that Act (Part XI) that reference is made to the Australian Consumer Law as being Schedule 2 of the Act. The Australian Consumer Law was adopted by Victoria as the Australian Consumer Law (Vic) by s 9 Fair Trading Act.

Whilst the Commonwealth’s jurisdiction was limited to corporations acting in trade or commerce, the Australian Consumer Law (Vic) applies to corporations and individuals ‘carrying on business within Victoria’ or ‘persons ordinarily resident’ in Victoria (s 13 Fair Trading Act).

Off the plan contracts

Such contracts have traditionally been subject to the Trade Practices Act as they invariably involve corporations engaged in ‘trade or commerce’ and the Fair Trading Act as, irrespective of the corporate character, the vendor is ‘carrying on a business’. The ACL has prohibitions relating to ‘misleading and deceptive conduct’ (Part 2-1 s 18), ‘unconscionable conduct’ (Part 2-2 s 20) and ‘false and misleading representations’ in relation to the sale of land (Part 3-1 s 30) and each of these apply if the vendor is engaged in trade or commerce, as would be the case in an off the plan contract.

The adoption of the Australian Consumer Law was not meant to be a law reform process, more in the nature of consolidation, but the opportunity was taken to expand the application of the concept of ‘unconscionable conduct’ in two respects (second reading speech). No longer is it necessary to prove a ‘special disadvantage’ and statutory unconscionability, whilst based on the ‘unwritten law’, is not limited to the existing state of the law and may be expanded by the courts.

Shortly prior to the adoption of the Australian Consumer Law, prohibitions were introduced against unfair contract terms and these were adopted by the Australian Consumer Law (Part 2-3 s 23). Whilst it is intended that these provisions will regulate the relationship between business and consumers and therefore undoubtedly apply to off the plan contracts, the section, unlike the other prohibitions, makes no mention of ‘trade or commerce’ as a precondition.

Domestic contracts

The requirement for ‘trade or commerce’ meant that the sale of a domestic residence did not create any Trade Practices Act obligations on a domestic vendor. However the unfair contract terms prohibitions in the Australian Consumer Law appear to operate whether the transaction is in trade or commerce or not, and so it may be that those prohibitions apply to contracts of sale of domestic properties.

As such sales invariably utilise a standard form contract, usually based on the 2008 prescribed contract, the general conditions of which may be saved from scrutiny by s 26(1)(c) as provisions permitted by law (the regulations), any special conditions may be subject to attack.

Conclusion

Special conditions may offend the unfair contract terms prohibitions such as giving the vendor the right not to proceed with a contract, to change the layout of the property sold or to accelerate the purchaser’s liability to pay land tax all of which may appear in various contracts, including off the plan contracts.

Additionally special conditions that specify high rates of penalty interest or potential loss in the case of default that are common in domestic contracts may offend the unfair contract terms prohibitions.

Tip Box

Whilst written for Victoria this article has interest and relevance for practitioners in all states.

By Russell Cocks, Solicitor

First published in the Law Institute Journal

The Torrens system (s 89 Transfer of Land Act 1958) allows third parties interested in land to record that interest on the title to the land by lodging a caveat. Unlike normal dealings that are registered on title, a caveat is ‘recorded’ on title. Consequently, the recording of a caveat in no way improves the status of the interest which is recorded, unlike the registration of a dealing which grants the registered interest indefeasibility.

A caveat entitles the caveator to be notified of any proposed dealing with the title and provides the caveator with the ability to establish the priority of the caveator’s interest over any competing interest by issuing proceedings within 30 days of receiving notice. But the real impact of a caveat in the world of conveyancing is the negative effect that the recording of the caveat on a title has on any transaction involving that title. Any prospective purchaser of the land, and particularly any prospective financier of a purchaser, will not proceed with the transaction if a caveat remains recorded over the title.

Thus a vendor who wants a proposed sale to proceed will be obliged by the purchaser to ‘free’ the land of the burden of the caveat by production of a withdrawal of caveat at settlement. In the normal course of events this is within the ability of a vendor, who arranges for a payment to the caveator from the settlement proceeds and a withdrawal is produced by the caveator in return. But what is the situation when the settlement proceeds are not sufficient to satisfy the caveator’s claim?

This situation often arises where the vendor is suffering mortgage stress and negotiates a sale in anticipation of receiving sufficient funds at settlement to discharge the mortgage and any other claims over the land, but finds that the effluxion of time between contract and settlement and increasing interest, costs, fees and charges result in a shortfall.

The registered mortgagee demands repayment in full, or at least the whole proceeds of sale if there is a shortfall, and there are no excess funds available to satisfy a caveator. Is the caveator obliged to nevertheless provide a withdrawal of caveat so that the settlement can proceed?

A caveator who refuses to withdraw in such a situation is entitled to argue that the caveator is merely insisting on its legal rights and should not be obliged to surrender those rights for no compensation. On the other hand, it could be argued that such a caveator is adopting a ‘dog in a manger’ attitude – if I am not going to get paid then no-one is. A party interested in having the matter proceed to settlement could issue proceedings pursuant to s 90(3) Transfer of Land Act 1958 for a declaration that a withdrawal be provided on the basis that there are no excess funds available for the caveator and the ‘balance of convenience’ favours the settlement proceeding.

There is some authority for this proposition in the New Zealand case of Pacific Homes Ltd (In Receivership) v Consolidated Joinery Ltd [1996] 2 NZLR 652 where a caveat was ordered to be removed because ‘there is no practical advantage in maintaining it’. However that was in the context of a mortgagee sale and s 91(2A) Transfer of Land Act 1958 now applies in a mortgagee sale environment to defeat caveats claiming money that were lodged subsequent to the mortgage. The analogy may however still apply in respect of caveats claiming something other than money, for example, a terms contract.

There may also be some support for the proposition that the caveator should withdraw provided by the case of Capital Finance Australia Limited v O’Bryan Group P/L [2003] VSC 355. That case concerned a warrant of sale and seizure that had been lodged by a creditor and was holding up settlement of a sale that was being supervised by the mortgagee. It was clear that the proceeds of the sale would not repay registered mortgages, let alone satisfy the claim of the judgment creditor who had lodged the writ. The mortgagee successfully sought the removal of the warrant to allow the sale to proceed on the basis that there was no realistic prospect of the warrant achieving anything for the creditor and that other parties were suffering detriment from the delay.

Legal proceedings involve expenditure of substantial amounts of money in an environment that is, by definition, money-poor. An alternative is to negotiate a compromise whereby the pain is shared. The party likely to receive the biggest benefit, usually the mortgagee, might recognise that the delay and cost associated with reverting to a mortgagee sale justifies agreeing to a part payment to the caveator and the caveator might recognise that a compromise is advisable as forcing a mortgagee sale will result in automatic removal of the caveat.

Tip Box

Whilst written for Victoria this article has interest and relevance for practitioners in all states.

By Russell Cocks, Solicitor

First published in the Law Institute Journal

The Torrens system (s 89 Transfer of Land Act 1958) allows third parties interested in land to record that interest on the title to the land by lodging a caveat. Unlike normal dealings that are registered on title, a caveat is ‘recorded’ on title. Consequently, the recording of a caveat in no way improves the status of the interest which is recorded, unlike the registration of a dealing which grants the registered interest indefeasibility.

A caveat entitles the caveator to be notified of any proposed dealing with the title and provides the caveator with the ability to establish the priority of the caveator’s interest over any competing interest by issuing proceedings within 30 days of receiving notice. But the real impact of a caveat in the world of conveyancing is the negative effect that the recording of the caveat on a title has on any transaction involving that title. Any prospective purchaser of the land, and particularly any prospective financier of a purchaser, will not proceed with the transaction if a caveat remains recorded over the title.

Thus a vendor who wants a proposed sale to proceed will be obliged by the purchaser to ‘free’ the land of the burden of the caveat by production of a withdrawal of caveat at settlement. In the normal course of events this is within the ability of a vendor, who arranges for a payment to the caveator from the settlement proceeds and a withdrawal is produced by the caveator in return. But what is the situation when the settlement proceeds are not sufficient to satisfy the caveator’s claim?

This situation often arises where the vendor is suffering mortgage stress and negotiates a sale in anticipation of receiving sufficient funds at settlement to discharge the mortgage and any other claims over the land, but finds that the effluxion of time between contract and settlement and increasing interest, costs, fees and charges result in a shortfall. The registered mortgagee demands repayment in full, or at least the whole proceeds of sale if there is a shortfall, and there are no excess funds available to satisfy a caveator.

Is the caveator obliged to nevertheless provide a withdrawal of caveat so that the settlement can proceed?

A caveator who refuses to withdraw in such a situation is entitled to argue that the caveator is merely insisting on its legal rights and should not be obliged to surrender those rights for no compensation. On the other hand, it could be argued that such a caveator is adopting a ‘dog in a manger’ attitude – if I am not going to get paid then no-one is. A party interested in having the matter proceed to settlement could issue proceedings pursuant to s 90(3) Transfer of Land Act 1958 for a declaration that a withdrawal be provided on the basis that there are no excess funds available for the caveator and the ‘balance of convenience’ favours the settlement proceeding.

There is some authority for this proposition in the New Zealand case of Pacific Homes Ltd (In Receivership) v Consolidated Joinery Ltd [1996] 2 NZLR 652 where a caveat was ordered to be removed because ‘there is no practical advantage in maintaining it’. However that was in the context of a mortgagee sale and s 91(2A) Transfer of Land Act 1958 now applies in a mortgagee sale environment to defeat caveats claiming money that were lodged subsequent to the mortgage. The analogy may however still apply in respect of caveats claiming something other than money – for example, a terms contract.

There may also be some support for the proposition that the caveator should withdraw provided by the case of Capital Finance Australia Limited v O ’Bryan Group P/L [2003] VSC 355 . That case concerned a warrant of sale and seizure that had been lodged by a creditor and was holding up settlement of a sale that was being supervised by the mortgagee. It was clear that the proceeds of the sale would not repay registered mortgages, let alone satisfy the claim of the judgment creditor who had lodged the writ. The mortgagee successfully sought the removal of the warrant to allow the sale to proceed on the basis that there was no realistic prospect of the warrant achieving anything for the creditor and that other parties were suffering detriment from the delay.

Legal proceedings involve expenditure of substantial amounts of money in an environment that is, by definition, money-poor. An alternative is to negotiate a compromise whereby the pain is shared. The party likely to receive the biggest benefit, usually the mortgagee, might recognise that the delay and cost associated with reverting to a mortgagee sale justifies agreeing to a part payment to the caveator and the caveator might recognise that a compromise is advisable as forcing a mortgagee’s sale will result in automatic removal of the caveat.

Tip Box

Whilst written for Victoria this article has interest and relevance for practitioners in all states.

By Russell Cocks, Solicitor

First published in the Law Institute Journal

A caveat is a document authorised by s 89 Transfer of Land Act 1958 (Vic.) as a means by which a person claiming an interest in the land of another person can record that interest on the title to land owned by that other person. The virtue of a caveat is that it serves to give notice to the world of the interest of the caveator and generally means that a person dealing with the registered proprietor of the land will require that the caveat be satisfied prior to completion of any transaction. A caveat is often used by a person who is owed money by the registered proprietor to provide quasi-security for that debt.

A caveat must be supported by a caveatable interest in the land and whilst a simple debt owed by the registered proprietor to a creditor will not, of itself, create a caveatable interest, a debt supported by a charging clause will do so. Thus a document that records the debt and charges the land with repayment of that debt will justify a caveat.

Lawyers perform services for clients and are entitled to charge costs for those services. Many lawyers enter into costs agreements with clients in respect of those costs and those costs agreements may include a term whereby the client charges the client’s land, or the client’s interest in the land of another, with payment of those costs: Porter & Anor v Bonarrigo [2009] VSC 500. Prudently, the costs agreement would also include a term whereby the client acknowledges that the lawyer may lodge a caveat over that land to secure payment of those costs.

There may be an argument that the lawyer in such circumstances should advise the client to seek independent legal advice in relation to the proposed charge and caveat, but that is a matter for another day.

In passing it may be noted that the caveat may be lodged against a property even if the client is only one of the registered proprietors and indeed may be lodged against the property of a person other than the client, if it can be established that the client also has an (unregistered interest) in that property, for instance, by way of a constructive trust.

Thus caveats are common in family law disputes where one party may not have access to funds but does have an interest (either registered or unregistered) in matrimonial property. However the case of Brott v Shtrambrandt [2009] VSC 467 highlights a potential problem with such caveats, particularly in the family law area. Beach J. held that lawyers’ costs agreements are, in appropriate circumstances, subject to what was then the Consumer Credit (Victoria) Code, arising out of the Consumer Credit (Victoria) Act 1995, the current equivalent of which is the National Credit Code, arising out of the National Consumer Credit Protection Act 2009 (Cth).

The code is designed to regulate consumer lender. At first glance one might wonder how a costs agreement can constitute lending, but the various definitions in the Act mean that deferral of payment of a debt constitutes the giving of credit and any agreement to secure the payment of that debt constitutes a mortgage. If the agreement includes a provision whereby ‘a charge is or may be made for providing the credit’ then the code applies. Lawyers are entitled to charge interest on unpaid accounts (Legal Profession Act 2004 s 3.4.21(4)) and a costs agreement that provides for the payment of interest will be a ‘credit contract’. A lawyer’s practice clearly satisfies the requirement that the credit be provided in the course of business and so, provided the client is a ‘natural person’ or a ‘strata corporation’ and the ‘credit’ is provided for personal purposes, the costs agreement will be subject to the National Credit Code. These two latter requirements makes the code particularly relevant in a family law environment, but it will apply to all clients who operate as a personal, as opposed to corporate, entity in other than a business environment.

A costs agreement may therefore be a ‘credit contract’ and also constitute a ‘mortgage’ under the National Credit Code. Section 44(1) of the code requires a mortgage to ‘describe or identify the property which is subject to the mortgage’ and subsection (2) provides that ‘a provision in a mortgage that charges all the property of the mortgagor is void’. Thus a provision in a costs agreement that fails to identify the charged property or seeks to charge all the property of the client will be struck down and any caveat lodged pursuant to such a costs agreement will be susceptible to challenge.

This decision later played out in Shtrambrandt & Anor v Hanscombe & Ors [2012] VSC 102. Beach J. had identified the successful legal challenge to the caveats lodged pursuant to the costs agreement independently of arguments advanced by the parties. By that stage Shtrambrandt was self-represented but he had been represented by various solicitors and barristers in the proceedings over several years and he sued those lawyers for failing to have identified this defence. After a 13-day trial in relation to this and other issues Ferguson J. decided that, given the novelty of the argument, the lawyers had not been negligent in failing to identify that defence.

Tip Box

Whilst written for Victoria this article has interest and relevance for practitioners in all states.

By Russell Cocks, Solicitor

First published in the Law Institute Journal

This column is concerned with two cases on entirely different topics, but connected by a similarity in the name of the principal parties and the fact that they are recent decisions in the Real Property List of VCAT, a jurisdiction that is growing in importance for property lawyers. Pavlovic v GEADSI Nominees P/L [2012] VCAT 997 (Pavlovic) concerns an easement and Pavlovich v Pavlovich [2012] VCAT 869 (Pavlovich) concerns co-ownership.

Pavlovic took place in a fairly conventional inner suburban setting. The two protagonists were neighbours, with Pavlovic having purchased his property in recent years with the intention of renovating and living in the property and GEADSI having constructed three units on the adjoining property some 15 years previously. At that time GEASDI had obtained from the then owner of the Pavlovic property consent to construct a stormwater drain across the Pavlovic property and a stormwater pipe had been constructed such as to take the stormwater from the GEADSI land through the Pavlovic land and to a laneway at the rear. This pipe was below the surface of the ground and Pavlovic was not aware of the pipe when he purchased the property as it was not recorded as an easement on the title, not evident to a physical inspection and he was not otherwise been informed of its existence.

Pavlovic intended to construct improvements in the backyard and discovered that the soil was so saturated that it would be necessary to remove the soil at a cost of $15,550 before commencing construction. Additionally, it would be necessary relocate the pipe to prevent the ongoing saturation of the soil below the improvements. Pavlovic wanted the pipe removed. He commenced these proceedings for an order pursuant to s 16 Water Act 1989.

GEADSI argued that the pipe constituted an implied easement and that Pavlovic, as subsequent purchaser, was bound by that easement. The Tribunal rejected that argument, effectively finding that the consent given by the previous owner did not create a proprietary right and was not enforceable against subsequent owners. An argument based on a prescriptive easement was rejected on the basis that the right to use the pipe arose by consent. The recent case of Kitching v Phillips [2011] WASCA 19 was referred to. Effectively, the Tribunal was of the view that the original temporary solution to the drainage problem should not be allowed to impact on the proprietary rights of the new owner – a glowing endorsement of fundamental Torrens principles. GEADSI was ordered to pay the costs of removing the saturated soil and to remove the pipe.

Pavlovich on the other hand concerned an application by a co-owner pursuant to the ‘partition provisions’ of the Property Law Act 1958, specifically s 228. The parties to the proceedings were registered joint tenants and, unusually, the application was not for a ‘partition’ as that word is generally understood but rather a transfer from one co-owning joint tenant to the other joint tenant. Whether VCAT had power to do so occupied the first portion of the judgement, with a conclusion that the power conferred by s 228 did indeed authorise such a transfer.

The parties were mother and son. There was evidence that as part of a downsizing exercise the mother had purchased a property but was unable to gain temporary finance, so the son was added as a joint tenant. Shortly after, the loan was repaid from the proceeds of sale of the mother’s original property and so the subject property was owned as joint tenants, although the son had effectively made no financial contribution.

Ten years later the mother applied for an order that the son transfer his interest in the property to the mother. The mother argued that it had always been intended that the son would do so when the loan was repaid. The son argued that it had been agreed at the time that the son would remain as joint tenant and then ‘inherit’ the property upon his mother’s death as gifts were made to other siblings that would be ‘offset’ by the son taking the property. Essentially the issue was a factual one and the Tribunal accepted the mother’s version.

The Tribunal concluded that whilst the son was a legal joint tenant, beneficial ownership resided entirely with the mother, therefore the son was ordered to transfer his interest in the property to the mother so that she would become sole legal and beneficial owner. Concern was raised, but dismissed, that because the Tribunal was therefore finding that the son had no beneficial interest, he could not be a co-owner within the meaning if the Act and VCAT therefore had no jurisdiction.

This is similar to an argument raised in Garnett v Jessop [2012] VCAT 156. Jessop was the sole registered proprietor and Garnett sought partition on the basis that he had made contributions and therefore held an equitable interest on the basis of a constructive trust. VCAT dismissed a submission that only legal (registered) owners qualify as ‘co-owners’ within the meaning of the Act and held that a party claiming an equitable interest is a ‘co- owner’ and therefore entitled to seek partition.

Tip Box

Whilst written for Victoria this article has interest and relevance for practitioners in all states.