By Russell Cocks, Solicitor

First published in the Law Institute Journal

Umbers v Kelson confirms a silly decision.

The case concerned a finance condition in a contract for the sale of a business. The wording in that condition is effectively the same as the wording in the finance clause in the standard contract of sale and so the case has important ramifications for contracts for the sale of land.

However the circumstances surrounding the case make it dangerous to regard the decision as strong authority in relation to finance conditions generally and the legal analysis, with respect, appears defective.

THE FACTS

The purchaser had not obtained finance and sought an extension, adding that if the extension was not granted, the vendor ‘may treat this letter as written notice ending the contract’. The vendor in fact was prepared to grant the extension, but the agent failed to communicate that to the purchaser. The parties thereafter treated the contract as at an end, however one month later the agent re-enlivened negotiations and the purchaser undertook a trial of the business.

Negotiations continued for another 2-3 months, during which time the purchaser first stated that he had sufficient cash resources to complete, but then claimed to be unable to obtain finance. Ultimately the vendor resold the property and claimed damages for loss on resale. It is fair to say that the vendor was the innocent party and entitled to succeed.

MAGISTRATES COURT

The initial hearing was conducted on the basis that the parties assumed that the purchaser’s letter had terminated the contract. The issue was raised, but not argued, as it was not in contention. However there was no specific finding by the Magistrate that the letter had ended the contract, although the Magistrate’s reasons were, by his own admission, ‘slightly garbled’.

The decision was based on the purchaser’s subsequent conduct and the vendor was successful on an estoppel argument.

SUPREME COURT

On appeal, the Judge heard all the evidence and then decided that he wanted submissions on whether the letter had ended the contract. He concluded that the purchaser had ‘tried to have his cake and eat it’ and that the letter had not been effective to terminate the contract. It had merely given the vendor the option to do so.

By doing so the Judge decided the case on grounds entirely different to those argued at the hearing and whilst the parties had an opportunity to make submissions, that can be but a poor substitute for arguments in the context of a hearing. The vendor’s willingness to grant an extension is clear evidence that the vendor accepted the letter as capable of ending the contract and an argument based on misleading and deceptive conduct would have been open to the purchaser but could not be pursued in the unusual circumstances of the case.

COURT OF APPEAL

Hansen JA. delivered the judgment of the Court. He confirmed that ‘it is apparent from his reasons’ that the Magistrate concluded ‘that in the absence of a response to the 18 July letter, that the letter operated to terminate the contract’.

He was referred to a number of cases relating to termination notices and relied upon Catley v Watson. That case related to a notice of rescission of a contract of sale of land under the provisions previously contained in Table A and established a test that a reasonable person ‘would be left in no doubt as to its meaning’ and that the reasonable person would have ‘knowledge of the relevant circumstances of the transaction’ in making that decision.

His Honour concluded that the letter failed that test, that it left determination of the contract up to the vendor and was thereby equivocal. But the facts are entirely against this conclusion. The purchaser clearly thought that the letter ended the contract if an extension was not granted and the vendors also did so and they tried, unsuccessfully, to grant the extension. The representatives of the parties at the hearing assumed that to be the case, as did the Magistrate. It was only the afterthought of the Judge on appeal that first doubted the question and the test applied appears to be more the test of ‘a reasonable judge’ with years of finely tuned analytical skills, rather than ‘a reasonable person’. To penalise the polite use of the phrase ‘you may treat this letter as’ in lieu of ‘this letter is’ smacks of a legalistic, rather than reasonable test.

Further, the analogy with rescission notices appears misplaced. A notice terminating a contract based on a finance condition is a positive notice that takes immediate effect – it ends the contract instantly (unless an extension is granted). A rescission notice is a negative notice given upon default and will only end the contract if the other party fails to remedy that default and gives a period of time (usually 14 days) for the default to be remedied. Requiring absolute precision when specifying a breach that a party is required to remedy is reasonable, but imposing such a strict requirement on a notice terminating the contract based on a finance condition is a false analogy. The operative event has occurred – finance has not been obtained. The vendor is not required to take action, so absolute precision is not required. That failure to be absolutely precise results in sudden death cannot be the outcome anticipated by ‘a reasonable person’.

The right result may have been reached, but by a wrong, and dangerous, route.

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

Many contracts for the sale of land are subject to the purchaser obtaining approval of a loan. In most cases the purchaser will have undertaken preliminary inquiries in relation to the availability of finance and the application process will be something of a formality and result in an approval. Occasionally the purchaser will have overestimated their ability to borrow, or the financier will be dissatisfied with the security property, and the application will be unsuccessful. In those circumstances the contract comes to an end and any deposit paid is usually refunded.

Justice Smith in the Supreme Court of Victoria in the recent case of Umbers v Kelson [2008] VSC 348 had cause to consider the meaning of a relatively common form of finance condition that provided as follows:

“This contract is subject to the lender approving the finance of the purchase of the business by the approval date or any later approval date allowed by the vendor. The purchaser may end the contract if a loan is not approved by the approval date only if the purchaser has

1. made immediate application for the loan;
2. has done everything reasonably required to obtain the approval of the loan;
3. serves written notice ending the contract on the vendor on or before two business days after the approval date; and
4. is not in default under any other condition of this contract when notice is given.

Money must immediately be refunded to the purchaser if the contract is ended.”

The approval date specified in the contract was within one month of the date of the contract.

This form of finance condition is similar, but not identical, to the condition set out in the standard contract of sale of real estate. As can been seen by reference to ‘the business’ in the condition, it comes from a contract for the sale of a business, rather than land but, for all intents and purposes, it has the same meaning and effect as the standard finance condition in the contract of sale of real estate (now General Condition 14).

If the loan is not approved by the approval date it is common practice for the solicitor for the purchaser to write to the solicitor for the vendor to seek an extension. Such a request, without more, is presumed to place an obligation on the vendor to respond, hopefully with an extension, but if not then with notification that the contract has come to an end. Such a course of action is potentially hazardous as the vendor might not promptly respond and then claim that the purchaser has not exercised its right to end the contract within the specified time and has now lost that right.

A more cautious approach is for the solicitor for the purchaser to write, within the specified time, advising that finance has not been approved and that the purchaser accordingly ends the contract unless the vendor agrees to an extension of time for approval. Readers are no doubt nodding in acknowledgement that that is indeed their practice, or perhaps thinking that it will become their practice in light of the previous paragraph.

Unfortunately that practice did not meet with the approval of Smith J. The words used were:

“We seek an extension of one month…In the event that an extension is not agreed to, you may treat this letter as written notice ending the contract.”

His Honour concluded that this formula failed to terminate the contract in the event that the vendor did not agree to the extension. The purchaser tried to “have his cake and eat it” and so the vendor’s inaction simply meant that the finance condition expired and the contract became unconditional as to finance.

Arguably a letter that stated ‘in the event that an extension is not agreed to, the contract is ended’ would achieve the desired result, but it seems unfortunate that the courteous mode of expression adopted by the solicitor for the purchaser should lead to an outcome entirely outside of the anticipation of the parties.

Exercising an abundance of caution, perhaps the process of making a request for an extension of time for approval of finance ought to be separated entirely from the termination process, so that the purchaser does not risk the possibility of trying to “have its cake and eat it”. Thus a request for extension should be made by or on the day set for approval and another letter sent terminating the contract if that extension is not received within 2 days of that request. However, adopting His Honour’s style of colloquial analysis, perhaps the purchaser might then be accused of “playing with fire” as now there is not one crucial date to be complied with, but two.

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

One of the fundamental concepts in relation to a contract of sale of land is that the contract must be in writing and signed by the parties (or at least ‘the party to be charged’). This requirement can be traced back to the Statute of Frauds of 1677 and can now be found (if you know where to look) in s 126 of the Instruments Act. The requirement that a contract be signed was designed to prevent fraud by preventing one party to an agreement claiming or denying that an enforceable contract existed in situations of uncertainty. By requiring a signature the law created certainty.

The world has come a long way in 350 years and we are now in the electronic age. Indeed, in relation to contracts for the sale of land, we are now in the age of electronic conveyancing and the long awaited EC system has been operational since November 2007 and conducted its first settlement in May 2008. Independently of any title registration system, there are various commercial transactional providers, such as EBAY, that facilitate buying and selling of assets as valuable as aeroplanes and, as reported recently in the press, are now facilitating the sale of real estate. Communication between representatives such as estate agents, lawyers and conveyancers is now consistently undertaken electronically and the question of whether a contract of sale of land that has been signed and exchanged electronically is enforceable will no doubt occupy the attention of a Victorian Court in the not too distant future. The question therefore will be; is a contract of sale of land enforceable if it is signed electronically?

A preliminary distinction needs to be made between a digital signature and an electronic signature. A digital signature involves an encryption device and implies the existence of an authentication network standing behind the signature. This is the process utilized in Electronic Conveyancing for execution of the transfer and involves a trusted third party signing the transfer of land on behalf of the parties. This no doubt satisfies the requirements of the Statute of Frauds.

On the other hand, an electronic signature stands alone and acts purely as a representation of the signature of the party. It is not made by hand, as is the case of a traditional signature, but rather is formed by the placing of the hand on a key, or even conceivably by voice recognition software generating the appropriate ‘keystrokes’. Does a party who ‘signs’ an email that in all other respects constitutes an enforceable contract of sale of land become bound by that electronic signature?

At common law (including the Statute of Frauds) the answer is ‘no’. But s 126 of the Instruments Act was amended in 2004 to provide that the requirements of s 126 ‘may be met in accordance with the Electronic Transactions (Victoria) Act 2000’. This Act in turn provides in s 9 that the requirement of any law for a signature is ‘taken to have been met in relation to an electronic communication if’:

1. the signature identifies the person and indicates approval of the information;
2. the method of communication was appropriate in the circumstances; and
3. the person has consented to the use of electronic communication.

Thus it may be concluded that where two parties to a contract communicate with each other electronically then, subject to any other underlying contractual limitations, any agreement that they reach in relation to the sale of real estate will be binding on them when they have each sent to the other an electronic communication (email) that includes an electronic representation of their signatures. This would be satisfied by the mere typing of the name of the party at the end of the communication and certainly by the inclusion of a more formal ‘signature box’.

However it is relatively rare for parties to communicate directly in relation to the negotiations for the sale of real estate. Usually estate agents will be involved and also party representatives such as lawyers and conveyancers. Parties will not be bound by the actions of these participants in the process unless those third parties are authorised in writing by the party. However such an authorization could itself be communicated electronically. Thus, not only will a party who electronically signs a contract be bound to that contract, a party will also be bound if the party’s representative has been electronically authorised to sign on behalf of the party and does in turn electronically sign the contract. It is certainly possible to conduct the whole contractual process in cyberspace.

A few cases in Australia and England have considered these issues and there are no doubts that arguments can be raised on the way. However, essentially it appears that even concepts – such as the importance of signed documents – going back as far as the 17th Century are capable of adapting to the electronic age.

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 caveat is the Torrens system’s safety valve. The principle of indefeasibility allows an interest in land, once registered, to effectively destroy competing interests, but the caveat gives a competing interest holder a momentary chance to assert their interest. Unfortunately, caveats are not used frequently enough.

Callinan J. recently said:

It used to be the practice of careful conveyancers, acting for persons acquiring registrable estates or interests in Torrens title land, to lodge with the officials in charge of the Register, a caveat as soon as the agreement for the relevant dealing was made, in pre-emptive protection of their clients’ prospective legal estates or interests pending completion of their agreements and registration of the instruments perfecting them.

Colloquial evidence from the Titles Office suggests that caveats are lodged in respect of only about 25 per cent of transfers, so purchasers are engaging in high risk tactics. There can be no excuse for not lodging a caveat in a commercial transaction, but presumably caveats are not lodged in residential transactions because of the cost. The Titles Office fee is $47.30. A fair charge for preparing and lodging a caveat might be $50, so for the sake of $100 purchasers risk having their interest in the land defeated and solicitors are risking a negligence action as a result.

Black v Garnock is a recent example of the risks involved. A purchaser’s claim was defeated by a subsequent Sheriff’s writ. The failure to caveat was certainly not the only reason the purchaser lost, but that failure was heavily relied upon by the majority in the High Court in finding against the purchaser. The practical result was that the purchaser, who had completed the transaction in the face of the writ, would be required to pay out the judgment creditor’s claim so that the purchaser’s transfer could proceed to registration. No doubt the purchaser will seek compensation from their solicitor.

Sheriff’s writs are relatively rare, but competing claims arising during the life of a contract are common and the failure to caveat can cost a purchaser (and the solicitor) dearly. Preston-Lalor Credit Co-op Ltd v Razzi and Bunning Building Supplies P/L v Sgro are cases where ‘innocent’ purchasers were unable to proceed to registration as a result of a caveat lodged during the period between settlement and lodging of the purchasers’ transfer, in the latter case, just 35 minutes before. Both cases involved typical domestic conveyancing scenarios and the purchasers did not caveat. In a perfect world of ‘instant registration’ at settlement, this would not occur. But the reality is that even when solicitors lodge for registration there is a time delay, and colloquial evidence suggests that when lenders take the documents for lodging, delays of up to six months are not uncommon. When you realise that the person in front of you in the queue at the Titles Office might be lodging a competing caveat, there is good cause not to sleep at night.

There is just no sense in exposing the purchaser (and solicitor) to this risk, particularly when the antidote is so cheap. Acknowledging that an extra $50 in a competitive residential conveyancing marketplace might mean the difference between receiving instructions and not, at least advise those clients who do instruct you that they should give you instructions to lodge a caveat. In your first letter explain that there are risks of competing interests arising during the contract period and that a caveat provides protection from those interests. Consider offering not to charge for preparing the caveat, but seek authority to include the fee in your disbursements. Even if the client does not give those instructions, you have warned them and you may then enjoy a good night’s sleep.

Just another short note on caveats – a recent case, Riverview Projects Pty Ltd v Elleray & Anor [2007] VSC 150, acknowledged the right of a ‘domestic partner’ to lodge a caveat against a property owned not by the other domestic partner but against a property owned by a company substantially controlled by the other domestic partner and in which the caveator had no interest. This caveat was permitted notwithstanding that the caveator had previously acknowledged in writing that the caveator did not, and would not in the future, have any interest in that property.

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 lease (as opposed to a licence) undoubtedly creates an interest in land in favour of the tenant. A lease for more than three years may be registered on the title to the land and a lease for any period entitles the tenant to lodge a caveat. Registration of the lease will require production of the certificate of title and, in the normal course of events, an order to register from the registered proprietor. This implies a degree of co-operation between landlord and tenant and is usually only achieved in the context of negotiations when the lease begins, as anytime thereafter the landlord is not obliged to cooperate and is unlikely to do so. A caveat does not require production of the title nor formal consent of the landlord and for this reason is a ‘simpler’ way of recording the tenant’s interest. That it is not often utilized flows from the statutory recognition of tenants in possession as paramount interests.

A registered proprietor/landlord may feel affronted that their otherwise unencumbered title is weighed down by such a caveat lodged by a tenant, but there is no basis for such an objection. This feeling of discontent is often further aroused in a landlord when a lender to the tenant seeks to obtain some security for the loan made to the tenant. The landlord may be offended that its title bears the blot of a debt to a third party, but again no objection can be taken as just as the lease creates an interest in land, so too can that interest be encumbered. However the landlord is not obliged to consent to or co-operate with such a scenario and a lender to a tenant that seeks consent to the mortgage of lease or to its registration may find that the landlord simply refuses to consent or to make the title available. However a lender’s caveat can be lodged without the landlord’s consent or production of the title, so a lender may lodge a caveat claiming an interest as mortgagee of the leasehold estate.

A landlord might seek to prevent such a situation arising by including a condition in the lease that declares such action to be a breach of the lease making it liable to termination, but such a solution seems to far outweigh what is essentially a cosmetic problem.

The recording of the interest of a tenant or a lender to a tenant, either by way of registration or caveat, often causes problems when the freehold interest-holder in the property seeks to mortgage or sell the property. A lender over, purchaser of, or lender to a purchaser of, the freehold conventionally desires a ‘clear’ title, but the interests of the tenant and/or tenant’s mortgagee are registered or recorded and are viewed by some as a ‘blot’ on the title. Whilst a careful analysis of the legal situation should result in the lender or purchaser acknowledging that they take subject to the lease (and any subsequent mortgage of that lease) regrettably ‘careful analysis’ is rarely an apt description of the conventional demand for a clear title, particularly in relation to a lender. The vendor/borrower of the freehold is then between a rock and a hard place with its new lender, purchaser or purchaser’s lender demanding that the lease/mortgage of lease be removed and the vendor/landlord having no right to insist upon removal of those (temporary) encumbrances. There is no solution other than a careful explanation that the tenant/tenant’s mortgagee has the right to maintain the registered/recorded interest and that the vendor/landlord sells subject to those interests. In a sale situation it is prudent to include such an acknowledgement in the contract, although that will simply mean that the problem of convincing a purchaser’s lender of the need to settle without a ‘clear’ title passes from the vendor to the purchaser.

The problem is exacerbated by the common habit of caveators lodging caveats that forbid dealings ‘absolutely’. It is possible to include limited restrictions in caveats, such as ‘unless such instrument is expressed to be subject to my claim’ but regrettably the standard form provides ‘absolutely’ as the default claim and it is rarely changed. This means that even if the registered proprietor is able to convince its lender, purchaser, or lender to its purchaser that their transaction can proceed subject to the lease or mortgage of lease, the caveat acts as an absolute prohibition. This must then be explained to the tenant/mortgagee and arrangements made for replacement of the caveat with a caveat claiming a limited interest. Caveators in such situations are generally loath to act as there is ‘nothing in it for them’ but the threat of proceedings to have the caveat removed (and claim the cost of such proceedings) may encourage co-operation. Courts have shown a dislike for the inappropriate use of absolute restrictions.

A caveator may consent to a dealing. This might even apply in the case of an absolute prohibition and may provide a compromise between withdrawal and disputation. The consent will mean that the dealing takes priority over the caveat and whilst that might remain attractive to a tenant, who is independently protected as a paramount interest, it might not be attractive to a mortgagee of the lease. In any event, if a caveator is asked to consent, the caveator would be entitled to claim reasonable legal costs in respect of that consent.

Tip Box

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