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Bits and pieces

1 January 2010 by By Lawyers

By Russell Cocks, Solicitor

First published in the Law Institute Journal

Property law has been the subject of three legislative pronouncements in 2010, although the changes have tended to tinker around the periphery rather than impose radical change.

Act 1 introduced the following changes:

  1. an Owners Corporation Certificate must be sealed with the owners corporation seal. This section has not as yet been proclaimed;
  2. a tenant may remove buildings and fixtures. This is not a new provision, rather a transfer of this right to the Property Law Act from the Landlord and Tenant Act, which has been substantially repealed and;
  3. permitting transfer of deposit held as stakeholder between legal practitioners, conveyancers and estate agents. This is simply a rewording of an existing provision.

Act 2 proposes the following changes:

  1. permitting an estate agent to purchase a property from a vendor provided that the vendor and a legal practitioner, conveyancer or accountant representing the vendor provide written consent to the transaction. This replaces the current procedure requiring prior consent from the Director, although notice of the transaction must be given to the Director;
  2. increasing the maximum permissible deposit in an off-the plan contract from 10% to 20%;
  3. requiring a WARNING to be added to the front page of an off-the-plan contract advising that the amount of the deposit may be negotiated and that a substantial period of time may elapse between the contract and settlement and that the value of the property may change in that time and;
  4. removing the exception to the cooling off right when a purchaser has obtained independent legal advice. This last proposed amendment (not yet passed) seems inexplicable. It is true that estate agents do use the present exception to remove the cooling off right, but surely the consumer protection objective of the right is satisfied when the purchaser has had legal advice? Typically an agent will ensure that advice is obtained when a sale close to auction date (but more than 3 days before) is proposed. Removing this device will make vendors reluctant to sell prior to auction or introduce the uncertainty of ‘subject to contract’ transactions. It is consumer protection gone mad. As this proposal has not as yet been passed, common sense may prevail.

Act 3 introduced the following changes (effective 1 May 2010):

  1. entitles the Registrar to NOT produce a paper title if the ‘person entitled to receive’ the title requests that no title be produced. Presumably a mortgagee could make such a request;
  2. removes the ability of the Registrar to record the age of a minor;
  3. removes the requirement that lost title applications be advertised;
  4. removes the right to deposit a deed of trust. A trust cannot be recorded on title and the anomalous right to deposit the trust has now been removed;
  5. simplifies the procedure associated with obtaining a vesting order – such as where a transferor cannot be located;
  6. simplifies the procedure associated with obtaining a discharge of mortgage when the mortgagee cannot be located;
  7. repeals s 48, which allowed the adoption of Table A;
  8. prohibits a variation of mortgage varying the length of the term of the mortgage;
  9. changes the period that the Registrar must wait before removing a caveat under s 89A from 35 days to 30 days;
  10. repeals the search certificate and stay orders procedure that appear to have never been used in Victoria and;
  11. amends the ‘Queens Caveat’ provisions by referring to a caveat on behalf of the Crown (rather than ‘Her Majesty’) and specifically empowering the Registrar to remove such a caveat.

Tip Box

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

Filed Under: Articles, Conveyancing and Property, Victoria Tagged With: conveyancing, Conveyancing & Property, property

Deterioration – State of the premises

1 January 2010 by By Lawyers

By Russell Cocks, Solicitor

First published in the Law Institute Journal

The law is objective – based on principles enunciated in cases and set out in legislation, but clients want subjective answers to their immediate problems. Nowhere is this more evident than the simple legal environment of the common or garden conveyancing transaction. It’s easy for the law to proclaim that the property includes fixtures, but not chattels. What the client wants to know is – is the dishwasher a fixture or a chattel?

Unfortunately clients generally cannot afford to have their subjective inquiries answered by a Court. The law is an expensive beast to engage and by and large these disputes typically involve hundreds of dollars, at best. But for the client, this is a big issue and the lawyer is expected to provide the answer.

Dishwasher

Fortunately, one client was prepared to put up the money to find out whether a dishwasher is a fixture or a chattel. Before Farley v Hawkins the generally accepted view was that a dishwasher was a chattel, much the same as a washing machine. But that case decided that when the dishwasher is built into a kitchen bench and its removal will leave a gap in the façade, then the dishwasher is a fixture.

Two recent Victorian cases have also addressed relatively minor issues relating to specific circumstances to provide us with guidance as to how a Court might determine similar disputes in the future.

Major structural defect

Contracts of sale commonly allow a purchaser to obtain a building report as to the condition of the premises and include a special condition making the contract conditional upon the report revealing that the property is not subject to a ‘major structural defect’. Simple enough to say, but what does it mean? Clarke v Mariotis considered this in a conventional house sale when the building report revealed a ‘major concern’ with dampness under the floor of the residential building. The purchaser argued that this was a ‘major structural defect’ within the meaning of the special condition and that the purchaser was therefore entitled to avoid the contract. The vendor disagreed.

The Court accepted that dampness was a matter for concern and could, if unchecked, lead to a major structural defect. Rusting of structural support and rising damp in brickwork were probable consequences. It did not matter that the full extent of those consequences had not as yet manifest or that there might be steps that could be taken in the future to avoid those consequences. The present damp state of the sub-floor was, of itself, a ‘major structural defect’. The purchaser was therefore entitled to avoid the contract on the basis of the special condition.

Deterioration

Another common area of dispute arises after the purchaser undertakes a final inspection of the property in anticipation of settlement. Any one or more of a veritable plethora of complaints can arise from this exercise: broken windows, dirty carpets, abandoned furniture, overgrown garden, a frog pond instead of a swimming pool, the list goes on. These complaints, by definition, arise in the last few days before settlement and the client needs answers. The contract usually requires the vendor to deliver the property ‘in the same condition it was on the day of sale, except for fair wear and tear’ but what does that mean in the circumstances of any particular contract?

Perpetual Trustee Co. Ltd v Lindlirum P/L may assist in answering that question. This was the sale of a commercial property and a fence at the front of the property was removed by a third party between contract and settlement. The usual condition requiring the vendor to deliver the property in the condition sold was not included in the contract, as it was a mortgagee sale; however the purchaser argued that the vendor was obliged to deliver the property in the pre-contract condition as the fence was a fixture. The Court held that the purchaser’s only ‘right was to compensation, if anything’.

Whilst the absence of the usual condition requiring the vendor to deliver the property in the pre-contract condition means that this case is not direct authority for such cases, the Court’s dismissal of the purchaser’s complaint as only giving rights to compensation is indicative that Courts are unlikely to allow a purchaser to use a minor deterioration in the property to avoid the purchaser’s contractual obligation to settle.

Tip Box

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

Filed Under: Articles, Conveyancing and Property, Victoria Tagged With: conveyancing, Conveyancing & Property, property, purchase, sale

Deterioration – A matter of degree

1 January 2010 by By Lawyers

By Russell Cocks, Solicitor

First published in the Law Institute Journal

Disputes often arise in conveyancing transactions as the matter approaches settlement and the purchaser is dissatisfied with the condition of the property. These disputes typically arise after the purchaser has conducted the final inspection allowed by Condition 15 and discovered that the property is not in the condition that the purchaser expected, or that the vendor has not fulfilled a requirement of the contract. Three typical scenarios are complaints by the purchaser that:

  1. the vendor has not removed the ubiquitous car body proudly standing in the driveway or that departing tenants have left assorted furniture and rubbish on the property ;
  2. a window is broken or the air conditioner does not work; and
  3. the vendor has not complied with a special condition requiring the vendor to replace a dilapidated fence or to ensure that all chattels and fixtures are in working or, in the context of a new home, has completed landscaping or touch-up painting.

Whilst these three scenarios sound similar, the results are different and careful analysis of the facts and the applicable law is necessary. General Condition 2.2 requires the vendor to deliver the property to the purchaser at settlement in the condition that it was on the day of sale, with the important exclusion for fair wear and tear. In the first scenario, the property is in an identical condition to how it was on the day of sale. The car body held pride of place in the driveway when the purchaser inspected, or the tenants were in possession in all their glory (including their sundry furniture and accoutrements).

No doubt the purchaser expected the car body to be removed or the tenants to clean up after themselves, but the contract only requires the property to be in the same condition, not a better condition. With hindsight, the purchaser should have demanded a special condition that the car body be removed (but see scenario 3 in this regard).

Scenario 2 is also governed by General Condition 2.2, but the purchaser will need to establish the threshold fact that the window was not broken at the time of contract or that the air conditioner was working at that time. The vendor may well argue that the window was broken last year or the air conditioner hasn’t worked for 2 years and the purchaser bears the heavy burden of establishing that the property is not in the same condition that it was on the day of sale. Video evidence might be conclusive, but is all too rare. Relying on recollection or worse, the evidence of an estate agent, is fraught with difficulties, but assuming that it can be established that the property is not in the same condition, what are the purchaser’s rights? There is authority for the proposition that if the deterioration in the property is of sufficient significance the purchaser may claim compensation by way of a deduction from the purchase price or require the vendor to reinstate the property and refuse to settle until the vendor does so. However most deterioration, including a broken window or non-operative fixture, would not be of sufficient significance to justify deduction or non-settlement and the purchaser would be left with the unsatisfactory remedy of having to sue the vendor for damages for breach of contract after settlement. The purchaser is not entitled to unilaterally make a deduction from the purchase price in respect of such minor matters, although the parties might agree to such a deduction by way of compromise of the purchaser’s right to sue after settlement.

The third scenario goes beyond General Condition 2.2 as the parties have specifically agreed that the vendor has an active duty in respect of the property, not just a duty to maintain it in the condition that it was. If the vendor fails to fulfil that duty, will the purchaser be entitled to make a deduction from the price or refuse to settle? The purchaser would argue that the mere fact that the parties have gone to the trouble of specifically agreeing to this condition shows that the condition must have been important to the parties and so the courts should enforce it. On the other hand, the vendor would argue that terms such as a requirement that chattels or fixtures be in an operative condition at settlement are not essential terms and that the purchaser’s remedy should be limited to an action for damages after settlement.

It is suggested that it is unnecessary to introduce this new test of ‘essentiality’ and that the test applied in scenario 2 in relation to the general condition should also be applied in relation to any special condition. A purchaser ought to be able to enforce its rights, either by way of deduction or delay, if the breach relates to a matter that is of sufficient significance in the context of the transaction. If the matter is not of sufficient significance the purchaser will be required to settle and pursue its rights against the vendor after settlement. This objective test will require subjective application and in relation to any particular case it will all be a matter of degree.

Tip Box

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

Filed Under: Articles, Conveyancing and Property, Victoria Tagged With: conveyancing, Conveyancing & Property, property

Subdivision – Off the plan sales – Not so solid

1 January 2010 by By Lawyers

By Russell Cocks, Solicitor

First published in the Law Institute Journal

The case of Clifford v Solid Investments Aust P/L (Solid) has thrown a scare into Victorian developers. Off the plan sales are an important tool for a land or apartment developers. Such sales allow a developer to undertake a development sure in the knowledge that buyers are waiting to complete settlement of some (or all) of the lots being developed upon completion of the project. Indeed, for most developers, a percentage of off the plan sales is a pre-condition for approval of finance in respect of the project.

Until 1985 off the plan sales were prohibited. The Sale of Land Act required plans of subdivision to be registered at the Land Titles Office before a contract of sale could be entered into. Developers argued that this acted as a brake on development and pointed to the ‘pre-sale’ boom in places like Queensland as proof that presales encouraged development. This industry pressure secured amendments that permitted pre-sales in 1985, subject to the requirement that the plan be registered within 12 months of the contract. This was extended in 1989 to 18 months (the present default period) and in 1991 greater flexibility was granted by allowing the contract to set “another period” in lieu of the default period of 18 months.

Since those amendments pre-sales have indeed boomed and the legislation has found a compromise between protecting off the plan purchasers (particularly in respect of the deposit) and encouraging development. However, as is their want, developers have tended to ‘push the envelope’ and Solid is a timely reminder that statutory rights of purchasers cannot be whittled away by contractual terms.

The contract in Solid sought to give the developer the best of both worlds. It allowed for pre-sale by purporting to comply with s 9AE, but rather than being satisfied with the default period of 18 months, the contract nominated a period of 30 months for registration. Certainly that was authorised by the section, which allows for “another period” and theoretically that period could be any period, for instance 10 years. Market resistance might militate against such an extended period, but 5 year construction period contracts do exist.

However the contract included an additional clause purporting to give to the vendor the ability to extend the date for registration beyond 30 months if the project was subject to any of a variety of delaying factors, including inclement weather. Such clauses are indeed prevalent in pre-sale contracts and it was this clause that the purchasers attacked when the project did go beyond the specified period and the vendor sought to extend for delay.

Bongiorno J. concluded that s 9AE was designed to trade off the developer’s desire for flexibility with the purchaser’s need for certainty. The developer carries the risk of the project but pre-sales allow for risk minimisation. In return the purchaser has a degree of certainty in respect of completion and deposit protection in the meantime. As consumer protection legislation, the contract could not remove or reduce the purchaser’s right to avoid and Bongiorno J. held that the additional condition was in conflict with the fundamental purpose of the section and therefore unenforceable. The condition purported to ‘transfer the risk’ of the project to the purchaser and undermined the certainty that the section was designed to provide for the purchaser. The consequence was that the purchaser was entitled to terminate the contract when the 30 month period expired and to demand a refund of the deposit (or return of the bank guarantee), notwithstanding that the vendor had purported to extend the date for registration of the plan beyond the 30 month period.

The Solid contract altered the ‘default’ registration period from 18 months to 30 months. Most contracts adopt the default period, either by not adopting any other period or (unnecessarily) by confirming the 18 month period within the contract. The very interesting question is whether the decision applies not just to contracts that vary the default period, but also to contracts that adopt the default period (either specifically or by default).

The Solid decision was based on principle. That consumer protection principle had recently been affirmed and may, in respect of s 9AE, be described as entitling the purchaser to ‘certainty’ in respect of the completion date. A condition in a contract that allows the vendor to unilaterally extend that date destroys that certainty and offends s 14, whether the construction period is the statutory default period of 18 months or a period other than the 18 months default period (as in Solid). Otherwise a contract that was silent and thereby adopted the 18 months construction period by default could have an extension condition, but a contract that specifically adopted an 18 months construction period, could not. The offence is not what construction period has been adopted (18 months or some other period) or how it has been adopted (specifically or by statutory default) but rather whether the vendor has the ability to unilaterally extend that period, thereby destroying the purchaser’s right to certainty. Such conditions are offensive, irrespective of the construction period and irrespective of how that period was chosen.

The case was confirmed on Appeal.

Tip Box

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

Filed Under: Articles, Conveyancing and Property, Victoria Tagged With: conveyancing, Conveyancing & Property, property, subdivision

Solicitor – Executor’s commission 2 – A fiduciary duty

1 January 2010 by By Lawyers

By Russell Cocks, Solicitor

First published in the Law Institute Journal

Most property lawyers will also be involved in the administration of deceased estates and, on occasions, may in fact act as the executor of a deceased estate. This is entirely appropriate, as there will always be clients who do not have a close friend or relative who they can appoint to fulfil this role and would prefer to appoint their solicitor, rather than an impersonal trustee company.

Rule 10 of the Professional Conduct and Practice Rules 2005 requires a lawyer to inform the client in writing before the will is signed that the will entitles the lawyer to charge commission and that the client could appoint an executor who might not charge commission. Signing of the will after receipt of that advice operates as client consent to the charging of commission, thereby negating any potential conflict of interest. However, like many other examples of the lawyer-client relationship, simply establishing the relationship on a solid footing does not ensure that problems will not arise thereafter. The recent case of Walker v. D’Alessandro [2010] VSC 15 confirms that the lawyer continues to owe duties to the client and the estate.

The lawyer was appointed as executor of the estate and was authorised to charge commission. The estate consisted largely of cash accounts valued at approximately $1.6m and all of the six beneficiaries were nieces and nephews of the deceased with legal capacity. As the time for distribution approached the lawyer wrote to the beneficiaries advising that, subject to two minor matters, the estate could be finalised and an interim distribution of $1.4m could be made. This letter sought consent from the beneficiaries to the charging of commission at the rate of 3%.

The alternative was for the beneficiaries to require the executor to apply to the Court for an order authorising commission, in which case commission of up to 5% could be awarded. The estate would be liable for the costs of this application and the lawyer was ‘unable to say with any degree of accuracy’ when the distribution might be made.

In these circumstances the beneficiaries all returned the signed consent forms and an interim distribution was made. However some of the beneficiaries thereafter had second thoughts and issued these proceedings to overturn the claim for commission.

The duty owed by the executor to the beneficiaries is perhaps the purest example of the concept of a fiduciary duty. The beneficiary depends entirely on the executor to well and truly administer the estate and distribute the proceeds upon finalisation of the estate. The task of the executor in fulfilling these trust obligations was regarded by the common law as an honorary one, but statutes regulating the administration of estate have long recognised an entitlement to commission to compensate the executor for ‘pains and trouble’: s65 Administration and Probate Act 1958. Importantly, the object of the payment is compensatory, rather than profit-based and the Courts take seriously their supervisory role.

The Court suggested that the lawyer/executor must:

  1. detail the work performed as executor;
  2. differentiate between work performed as executor and legal work;
  3. fully explain the right to have a Court assessment; and
  4. insist upon independent legal advice.

The Court concluded that the executor has failed to satisfy three of these four requirements and had thereby failed to fulfil the fiduciary obligations owed to the beneficiaries. Criticism was also made of the inappropriate use of the potential for delay that an application for Court approval might have caused. There was nothing preventing the executor making an interim distribution pending approval, but the contrary was suggested. This also undermined the beneficiaries’ consent.

The agreement that 3% commission be paid was set aside. This was one of the orders that were initially sought by the beneficiaries and the one which became the focus of the hearing. However the beneficiaries had also sought an order that the lawyer provide an itemised bill of costs in relation to legal work performed for the estate. These costs were in the region of $16-17,000 and whilst one of the obligations propounded by the Court was the need to differentiate between estate work and legal work, no further comments were made in relation to these costs.

However the inherent conflict facing a lawyer in this situation was described In the Matter of the Will and Estate of Mary Irene McClung [2006] VSC 209 as having the lawyer ‘on the horns of a dilemma’. An executor/lawyer who is wearing two hats and seeks to charge the estate in both capacities may expect close scrutiny if challenged before a Court. Whilst it is possible to differentiate between the work performed in those two roles, it is fair to say that a Court will require clear evidence that there is no overlap in charging. Arranging and attending a clearing sale is undoubtedly an executorial role, but arranging a discharge of mortgage is merely legal work. Keeping a clear demarcation line between the two roles and maintaining separate records is an absolute minimum that will be expected if an assessment is undertaken and any suggestion of ‘double dipping’ will be disallowed.

The times they are a’ changing.

Tip Box

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

Filed Under: Articles, Conveyancing and Property, Victoria Tagged With: conveyancing, Conveyancing & Property, estates, property

Executor’s commission 1 – Executor’s commission and the professional executor

1 January 2010 by By Lawyers

By Roz Curnow

A number of recent cases have highlighted the need for care where executor’s commission is sought by a ‘professional’ executor such as a legal practitioner, in particular where the will makes no specific provision for the payment of commission.

A useful starting point for a discussion of a claim for commission by any executor is section 65 of the Administration of Probate Act 1958 which provides that ‘It shall be lawful for the court to allow out of the assets of any deceased person to his executor, administrator or trustee for the time being such commission or percentage not exceeding five per centum for his pains and trouble as is just and reasonable.’

It should be noted here that executor’s commission is effectively an exception to the general rule that a fiduciary cannot profit from his position as executor or trustee, and therefore the courts scrutinise such agreements very closely, are ‘extremely cautious and wary’ in upholding them, and will refuse to enforce them at the slightest sign of unfairness or undue pressure and, in practice, a full five percent overall is rarely awarded. See Bray & Anor v Dye & Anor (No 2) [2010] VSC 152.

Where there are two or more executors, the total commission percentage awarded will be shared between them; although this will not necessarily be evenly distributed between those executors, but may be dependent upon their respective contribution(s).

Then we move on to consider what is meant by ‘pains and trouble’ in terms of section 65. There are many cases containing reference to this: see Re Estate of Zsusanna Gray [2010] VSC 173 for recent commentary. It has been explained by the court in the following terms:

  1. ‘pains’ relates to the responsibility, anxiety and worry generated by the executorial function; and
  2. ‘trouble’ relates to the administration of the estate.

It has also been stated by the court in Patterson v Halliday [2003] VSC 298 that in assessing commission ‘at least’ the following should be considered:

  • the work and judgment involved in the realisation of assets and earning income,
  • the extent of administrative activities,
  • the responsibility generally,
  • the amount of work done not reflected in financial terms,
  • how long the estate was administered,
  • the size of the estate and its capacity to pay,
  • the work of a non-professional character not undertaken by the applicant and performed by professionals, and
  • (the) executors’ pains and troubles relative to the result.

So we can gather from this that an application for commission by any executor is by no means a simple process, and detailed consideration needs to be given to all of the above aspects.

Then we move to an additional overlay of duties imposed upon a legal practitioner who seeks the payment of executor’s commission; including points 3 and 4 below which are particularly relevant where the payment of commission is sought by way of the consent of sui juris beneficiaries rather than by order of the court:

  • A higher level of fiduciary duty: see Dimos v Skaftouros & Ors [2004] VSCA 141.
  • The absence of ‘double dipping’*.
  • The absence of unfairness or undue pressure on beneficiaries*.
  • Evidence that the beneficiaries are ‘fully informed as to any potential benefit to be made by the fiduciary before [they] … give an informed consent to the fiduciary receiving that benefit’ – Bray & Anor v Dye & Anor (No 2) [2010] VSC 152 and cited with approval in Legal Services Commissioner v Hession (Legal Practice) [2010] VCAT 1328 – with disclosure taking into account the beneficiaries’ sophistication, and including at a bare minimum:
    • The work that (the executor) has done to justify the commission. This should be done with particularity i.e. by assessment: Re Estate of Zsusanna Gray.
    • If (the executor) is invoicing the estate for legal fees and disbursements he ought to identify with particularity what constitutes the basis for same i.e. providing the beneficiaries with such information as is necessary to enable them to distinguish between legal work and the performance of executorial functions: see Re McClung (dec’d) [2006] VSC 209. Only then can a beneficiary accurately measure the ‘pains and troubles’ occasioned to the executor beyond the subject matter of those legal fees and disbursements.
    • That the beneficiaries are entitled to have this court assess his (the executor’s) commission pursuant to s 65 of the Act. This needs to be explained fully.
    • That it is desirable that the beneficiaries seek independent legal advice as to their position on this issue of consent. In many cases where the beneficiaries are unsophisticated people and the issues are complex he (the executor) ought to insist upon them receiving independent legal advice and ought not enter into any commission agreement until they have.

* See the cases Re Estate of Zsusanna Gray [2010] VSC 173 and Bray & Anor v Dye & Anor (No 2) [2010] VSC 152 in particular.

We must also note particular professional rules and regulations within the context of the above:

  1. Where a legal practitioner draws a will appointing the practitioner or an associate of the practitioner as an executor, the client must first be informed in writing of any entitlement of the practitioner/the practitioner’s firm/associate to claim executor’s commission; of the inclusion in the will of any provision entitling the aforementioned to charge legal costs in respect to administration of the estate; and, if there is an entitlement by the aforementioned to claim executor’s commission, that the testator could appoint an executor who might make no claim for commission: rule 10, Law Institute of Victoria Limited Professional Conduct and Practice Rules 2005, as emphasised in the Registrar of Probates’ recent Notice to Practitioners “Receiving a benefit under a Will or other instrument” and Re McClung (dec’d) [2006] VSC 209;
  2. Where a legal practitioner receives instructions to prepare a will under which any of the aforementioned may receive a substantial benefit (other than any proper entitlement to commission if applicable, and reasonable professional fees) then the legal practitioner must decline to act and offer to refer the person concerned to an independent legal practitioner: see rule 10 supra, including some very limited exceptions; and, for completeness, see also reference to preparation of any other instrument under which the aforementioned may receive a substantial benefit in addition to reasonable remuneration; and
  3. Relevant information must be included in the (firm’s) Register of Powers and Estates in respect to trust money: regulation 3.3.32 Legal Profession Regulations 2005.

Finally, but not least, any executor, administrator or trustee needs to consider the aspect of personal liability should he or she fail in his or her duty towards the estate. This duty will generally be assessed at a higher level should that executor, administrator or trustee be a ‘professional’ such as a legal practitioner, accountant and the like; and consequently a higher potential for liability may also arise.

Tip Box

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

Filed Under: Articles, Victoria, Wills and Estates Tagged With: estates, Wills

Solicitor – Executor’s commission 1 – Horns of a dilemma

1 January 2010 by By Lawyers

By Russell Cocks, Solicitor

First published in the Law Institute Journal

Lawyers face difficulties as regards charging costs and/or commission when acting as a lawyer to, and executor of, a deceased estate.

Traditionally lawyers practicing in all but large city firms would dabble in property law and wills and estates.

And despite moves during the past couple of decades for lawyers to build practices by concentrating on specific areas of law, these areas remain important income sources for many practitioners in small to medium size firms. However, practitioners who do not deal exclusively in those areas need to be aware of changes brought about by greater regulation of practice standards and supervision by the courts and other authorities.

One such development is the effective prohibition on lawyers acting as both lawyer to, and executor of, a deceased estate and charging both professional costs and executor’s commission. A useful summary of the law in this area was provided in an article in the LIJ in September 2002 at page 77 called “The solicitor-executor”.

Undoubtedly, it was common practice in the past for lawyers to be asked by their clients to act as executor of the client’s estate. The euphemistic reference to “the senior partner for the time being” is well known to lawyers, as is the practice of including a provision that the firm preparing the will would be appointed to act for the estate. However, just as such a provision is unenforceable (Nowakowski v Gajdobraski, unreported Vic Sup Crt, 12 April 1996) so too the habit of appointing a lawyer as executor is subject to much greater scrutiny – at least in relation to the financial consequences of that appointment.

That courts are more prepared than ever to closely scrutinise the lawyer’s role in this area was reinforced in a recent decision (In the Matter of the Will and Estate of Mary Irene McClung [2006] VSC 209) that warned that “[t]he occasion on which a solicitor receives instructions for the preparation of a will for a client by a solicitor can place the solicitor on the horns of a dilemma if the solicitor is asked to act as executor under the will” and described such a situation as giving rise to a “very real potential for a conflict arising between the interests of the client and the interests of the solicitor”.

This scrutiny also extends to the retention of estate funds, with the case of Hill v Roberts, unreported, 21 October 1995 having established that trust funds ought not lie in trust for longer than 14 days.

It is not only the courts that are taking a greater interest in such matters. The Professional Conduct & Practice Rules now require a practitioner to disclose to a client details of any commission or costs clauses included in a will and to advise the client that the client could appoint an executor who might not claim commission (r10.1.1-3.)

It may be concluded that great care must be exercised if a lawyer seeks to act as executor. Given that it is not permissible to charge both commission and costs, consideration should be given to instructing another firm to administer the estate and complete details of all “pains and trouble” should be kept to support a claim for commission.

Alternatively, the executor/lawyer’s firm undertakes the legal work and no claim is made for commission.

Tip Box

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

Filed Under: Articles, Conveyancing and Property, Victoria Tagged With: conveyancing, Conveyancing & Property, estates

Solicitor – Liability for commercial advice

1 January 2010 by By Lawyers

By Russell Cocks, Solicitor

First published in the Law Institute Journal

Lawyers are not financial advisers but, when acting for a client in a commercial transaction, lawyers will be liable for the advice that they give, or fail to give, in relation to the commercial consequences of the client’s decisions.

Two recent Victorian cases have considered the extent of these duties in the context of two reasonably common scenarios. In both cases the lawyers were assisted in their defence by the LPLC, which presumably therefore assessed the lawyers’ conduct as blameless, however in both cases the lawyers were held liable to the client in contract and tort. Whilst both decisions may appear to be ‘harsh’, the lesson to be learned is that lawyers advising clients in commercial transactions must be alive to possible commercial consequences of those transactions and ensure that the client is adequately advised in respect of those consequences. This may not require the lawyer to give that commercial advice, but it will require the lawyer to ensure that the client is aware that the client must seek that commercial advice from experts, such as accountants.

Spiteri was a claim by a client arising from an ‘investment’ transaction whereby the client proposed to lend money to a company undertaking a residential development in the expectation of receiving a share of the profits arising from that development. The development failed and the client sued the lawyer for his losses. The key issue was the security provided to protect the investment. The lawyer’s initial advice was that the security, being shares in the development company, was inadequate. Additional security by way of shares in an associated company, said to have $4m ‘equity’ in another development was offered and an agreement, referred to as a Joint Venture Agreement, was signed. Ultimately both developments failed and the shares and personal guarantees of the directors were worthless.

Undoubtedly the best security in such situations is a mortgage over the land. That this was not available was a red light. Additionally, the loan proposal had morphed into a Joint Venture Agreement. Finally, the ‘equity’ in the other project was never investigated. In describing the retainer the Judge said ‘the solicitor is not expected, nor required, to advise the client about the financial or commercial viability of, or risks associated with, the transaction’ however ‘that advice was “inextricably intermingled” with the obligation of the defendant to exercise reasonable care to advise the plaintiff as to the adequacy of the security’ and that the client ‘should first seek expert advice’ as to the value of the security. In other words, whilst the lawyer is not obliged to give financial or commercial advice, the lawyer is obliged to warn the client that the client should seek such advice from others expert in that field. In Spiteri the lawyer had made it clear that he was not giving that advice, he simply failed to warn the client that such advice was necessary. The ‘equity’ in the second project should have been investigated to ascertain whether it did in fact provide security for the client’s ‘loan’.

Snopkowski was an even simpler fact scenario. The client instructed the solicitor to transfer a half share in a property owned by the client to the client’s wife. The practitioner, aware that such a transaction was exempt from stamp duty, did so with alacrity and rendered a nominal bill. However, as a result of the transaction, the client was obliged to pay Capital Gains Tax and claimed that ‘loss’ from the lawyer. Whilst accepting that the lawyer was not obliged to give taxation advice, the Tribunal concluded that in such circumstances ‘a legal practitioner would advise the client to seek advice from an accountant’ and that ‘[A]t the very least she should have asked whether he had obtained any advice from the accountant concerning Capital Gains Tax and if receiving a negative response should have advised him to do so’.

It is the nature of our society that the extent of a lawyer’s duty to the client, both contractual and tortious, will expand. One response might be to attempt to limit the contractual duty by entering into ‘limited retainers’ but the likely outcome of any such contractual reduction will be a judicial extension of the tortious duty – a yin & yang relationship. Indeed it may be that the duty even extends to informing the client that the tooth fairy does not exist, as a recent NSW case has concluded that ‘the solicitor nonetheless, as part of its duty of care to the client, was obliged to caution the client against the extraordinarily unrealistic rate of return which they expected on their proposed investment’. The client had been promised a return of $275,000 per annum on a capital investment of $150,000. It is not enough to tell the client that the lawyer is not giving financial or commercial advice; the lawyer must recognise situations that expose the client to loss and warn the client that the client must seek advice from other experts.

Tip Box

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

Filed Under: Articles, Conveyancing and Property, Victoria Tagged With: conveyancing, Conveyancing & Property, property, purchase, sale

Vendor statement – Breach of section 32

1 January 2010 by By Lawyers

By Russell Cocks, Solicitor

First published in the Law Institute Journal

The Vendors Statement required by the seller of real estate pursuant to s 32 of the Sale of Land Act is a fundamental document in the conveyancing process. Designed as a consumer protection mechanism, the statement requires the vendor to disclose certain items of relevant information to a prospective purchaser.

Perhaps reflective of a ‘boom market’ in real estate in the new millennium, there have not been many recent cases that have considered this section. Purchasers in such a market are less likely to complain and more likely to take a long-term view that capital growth may remedy minor blemishes. Add to this the uncertainty of legal proceedings and enormous cost consequences of failure, and it is little wonder that contested cases are rare. Nicolacopoulos v Khoury [2010] VCC 1576. The writer’s firm acted for the purchaser plaintiff), therefore comes as a rare treat for the property connoisseur.

The vendor instructed a conveyancer to prepare a Vendors Statement, which formed part of a contract of sale. The property was a lot on a plan of subdivision and it was, as a matter of law, affected by an owners corporation. This was an agreed fact at the hearing but the conveyancer had incorrectly taken the view that the property was not affected by an owners corporation as there was no ‘common ground’. This was apparently a reference to the fact that the subdivision was a two-lot subdivision with both lots having separate road access, so there was no common property. Nevertheless, there was an owners corporation, even if in name alone – the euphemistic ‘inoperative owners corporation’.

In those circumstances s 32(3A) Sale of Land Act 1962 requires the vendor to include in the Vendors Statement an Owners Corporation Certificate issued pursuant to s.151 Owners Corporations Act 2006 and accompanying documents. Failure to do so entitles the purchaser to rescind the contract pursuant to s 32(5), subject to the limitation created by s 32(7). There was no contest that there was a breach of s 32(3A) and a consequent right to rescind pursuant to s 32(5), but the vendor argued that the vendor was saved by s 32(7). To come within the protection of ss (7) the vendor had to prove:

  1. that the vendor had acted “reasonably”; and
  2. that the purchaser was “substantially in as good a position as if all relevant provisions had been complied with”.

The first question raised the issue of the vendor’s liability for the statements in the Vendors Statement. This issue had been the subject of conflicting authority, with Payne v Morrison [1991] V ConvR 54-428 holding a vendor vicariously responsible for the unreasonable (negligent) conduct of an adviser and Paterson v Batrouney [2000] VSC 313 suggesting that vicarious liability was not appropriate and that only personal liability was relevant. Fifty- Eighth Highwire P/L v Cohen [1996] 2 VR 64 had also considered the issue, without needing to reach a decision on the point.

Ultimately Ginnane J. adopted a similar course to Fifty-Eighth Highwire P/L v Cohen and avoided deciding whether vicarious liability was sufficient as he was satisfied that the vendor had been personally negligent and therefore had not acted reasonably. Unlike Paterson v Batrouney, where there had been total reliance on the adviser, Ginnane J. held that the vendor should have been aware of the existence of the owners corporation and therefore bore personal responsibility for ensuring adequate disclosure.

The second issue concerned the consequences of the breach on the purchaser. The vendor made two arguments on this point:

  1. that the Vendors Statement had not mislead the purchaser.

The purchaser’s evidence was that she was particularly interested in the property because the sales brochure began with the words “Say good-bye to the body corporate”. She presently owned a property subject to a body corporate (owners corporation) and she was very concerned that a new property should not be affected by an owners corporation. The vendor argued that the purchaser purchased the property because of the brochure and that the absence of the Owners Corporation Certificate in the Vendors Statement had not influenced the purchaser’s decision.

Ginnane J. held that if the information required by ss (3A) had have been included in the Vendor Statement, then it was likely that the purchaser would have been made aware that the property was subject to an owners corporation and would not have purchased the property.

  1. that the owners corporation was dormant.

The vendor gave evidence that the owners corporation had never met and that no levies had been struck. For all intents and purposes, the owners corporation did not exist.

This argument was not accepted. The mere existence of the owners corporation and the possibility that it could be enlived was sufficient to establish a detriment.

Whilst the issue of detriment was to be determined objectively, the purchaser’s subjective characteristics were a relevant consideration. So too was the fact that Parliament had decreed that certain information was required and, it may be presumed, such consumer protection aspirations are not to be lightly ignored.

The matter came before the Court as a Vendor-Purchaser Summons based on s.49 Property Law Act. As such, the issue for determination was limited to the issue arising from s.32 Sale of Land Act and the question of the negligence of the conveyancer or misrepresentations of the agent were not matters before the Court. Nevertheless, the purchaser was able to establish that the agreed breach of ss (3A) was not saved by ss (7).

Tip Box

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

Filed Under: Articles, Conveyancing and Property, Victoria Tagged With: conveyancing, Conveyancing & Property, property

Vendor statement – Aboriginal Heritage Act

1 January 2010 by By Lawyers

By Russell Cocks, Solicitor

First published in the Law Institute Journal

A conveyancer’s perspective

An excellent summary of the operation of the Aboriginal Heritage Act 2006 (Vic) appears in the June 2008 Law Institute Journal at page 52. This column considers the operation of the Act from the point of view of conveyancing and seeks to identify how the Act might impact on conveyancing practice.

The Act imposes limitations on the use of land – something always of interest to a conveyancing practitioner, whether acting for a vendor, purchaser or lender. From the vendor’s point of view – do I have to disclose this limitation? From the purchaser/lender’s point of view – how will this limitation impact on my ability to enjoy/sell the land?

The fundamental purpose of the Act is to require an owner to prepare a Cultural Heritage Management Plan (CHMP) if the owner proposes to undertake any activity on the land that is prescribed by the Aboriginal Heritage Regulations 2007. From a vendor’s point of view, the only ‘activity’ the vendor is undertaking is selling the land. That is not a prescribed activity, so it would appear that there is no direct affect on a vendor. But what of disclosure? Section 32 Sale of Land Act requires a vendor to disclose various facts in relation to land, including zoning, restrictions and notices. The new Act is certainly in the nature of a planning Act. It does impose restrictions and might result in the service of notices.

However s 32 only requires disclosure of things that fit perfectly into the words used in the section. The requirements of the new Act do not impact on the zoning of the land (which arises from the Planning & Environment Act) and the possible restriction on enjoyment is not in the nature of the restriction referred to in s 32 (easement, covenant or other similar restriction). However a notice served under the new Act would most likely require disclosure, although the mere possibility of a notice would not. The potential for service of a notice is in the nature of a quality defect, akin to the possibility of service of a notice in respect to an illegal structure, and this possibility is usually covered by the principle of caveat emptor or ‘let the buyer beware’.

So, what of a purchaser? From the above it will be seen that a purchaser cannot expect a vendor to disclose information pursuant to s 32 in relation to the new Act, unless a notice has been served. Caveat emptor will apply in most situations in relation to the potential for a notice, but if the vendor is engaged in trade and commerce it might be argued that the Trade Practice/Fair Trading Acts might impose an additional positive obligation on the vendor to disclose the possibility of a notice and that silence in this regard might constitute misleading and deceptive conduct. However such an argument would not apply in the sale of a domestic residence and would only be available if the vendor had knowledge of a real possibility of service of a notice and so it may be concluded that it would not apply to require a vendor to make any reference to the new Act in normal circumstances.

A purchaser is therefore left to its own devices in terms of discovery of the impact of the new Act. Essentially the purpose of the Act is to protect Aboriginal Cultural Heritage by requiring the preparation of a CHMP before certain activities are conducted on land. This is not likely to impact on residential purchasers, but may impact on purchasers of broadacres or any person proposing to change the use of land. The website vic.gov.au/aboriginalvictoria/heritage includes an Aboriginal heritage planning tool that includes maps of affected areas and a description of exempt activities (basically low level residential activities). This website also provides access to the Victorian Aboriginal Heritage Register which, whilst not available for on-line searching, may be searched by way of a written application and payment of a fee (presently $33.10). Whilst a purchaser exercising an abundance of caution might add this certificate to the plethora of other certificates available in relation to a purchase of land, it is suggested that most transactions will not require such an inquiry and that a visit to the website and application of the planning tool will generally reveal that the land is not affected.

Mortgagees have a habit of requiring certificates simply because a certificate is available. It is to be hoped that mortgagees will exercise some subjective judgment before requiring these certificates, certainly in relation to domestic transactions at least. In an environment where costs are perpetually under the microscope, it is to be hoped that another unnecessary cost is not imposed on the conveyancing process.

Tip Box

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

Filed Under: Articles, Conveyancing and Property, Victoria Tagged With: conveyancing, Conveyancing & Property, property

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