ByLawyers News and Updates

Lease – Landlords beware

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

Distress is an ancient common law right entitling a landlord, initially, to seize and retain a tenant’s goods if the tenant failed to pay rent. Eventually the right was extended to permit the landlord to sell those goods if the tenant continued to fail to pay the rent. It would be hard to imagine, perhaps short of flogging, a right more at odds with modern consumer protection principles and, not surprisingly, this right fell by the wayside many years ago, 1948 to be exact. However, as observed by DP. Macnamara in VCAT in Kiwi Munchies P/L v Nikolitis [2006] VCAT 929 “It is staggering the number of agents and solicitors who seem to be ignorant of this fact.”

That case, amongst other issues, considered the consequences of the landlord effectively exercising distress by demanding that a defaulting tenant pay arrears of rent before allowing the tenant to recover the tenant’s goods from the premises. Absent a right to distress, now long since gone, the landlord’s actions in seizing the tenant’s goods amount to trespass and conversion. The result was disastrous for the landlord, with an order for compensation for equipment and stock, at that stage stored in a shed in the landlord’s backyard, of $14,000 in respect of premises that were let for less than $12,000 per year.

The recording of the contractual agreement between the landlord and tenant in that case was less than clear. The arrangement had commenced with a ‘skeleton’ lease of 12 months, was then recorded by a ‘standard’ lease which included an option, and by the time the dispute arose it appears that the tenant was overholding in accordance with the terms of the ‘standard’ lease. The landlord’s agent served a (badly worded) ‘Notice to Remedy’ and subsequently re-entered the premises and changed the locks. Whilst it was common ground that the lease had eventually come to an end, the exact timing of the determination of the lease was not identified and the actions of the landlord, which amounted to distress and were thus illegal, were regarded as having taken place before the lease had come to an end.

This was a distinguishing feature with the recent case of Sharon-Lee Holdings P/L v Asian Pacific Building Corporation P/L [2012] VCAT 546. This is a real David v. Goliath dispute but again centred on the tenant’s failure to pay rent and the seizure by the landlord of the tenant’s equipment and goods. The tenant issued proceedings based on detinue and conversion and if the landlord’s actions amounted to distress then they were unjustified and the tenant would succeed.

The landlord however foreswore the remedy of distress and based its claim on particular clauses in the lease that it claimed created a contractual right for the landlord to remove any of the goods of the tenant from the premises after breach and store them at the cost of the tenant. The landlord did not claim the right to sell the goods, merely that the lease gave the landlord a possessory lien over the goods and thereby a defence to the claim of conversion.

The landlord argued that the possessory lien created by the lease could only come into existence after the lease had been terminated and the landlord had taken possession of the goods. The lease created the contractual right, but it only crystallised after termination of the lease when the landlord actually took possession of the goods. Hence that could not amount to distress, as distress can only be levied during the subsistence of the lease, as had been the case in Kiwi Munchies. This argument was accepted.

The landlord relied upon two clauses in the lease to justify its actions. Whilst one of the relevant clauses referred to the right to remove the tenant’s property as arising after ‘reentry’ (which amounted to termination of the lease), another clause suggested that the lien arose upon mere ‘breach’ by the tenant. The Tribunal concluded that as this clause was capable of giving the landlord the right to seize the tenant’s goods for mere breach that did not amount to termination of the lease, the clause therefore purported to authorise conduct that ‘amounts to distress for rent and is illegal’. It followed that such a clause is contrary to public policy and therefore void. It was irrelevant that the possessory lien had in fact been exercised after termination and therefore did not amount to distress, it was sufficient that the clause purported to authorise such conduct during the term of the lease, which conduct would have amounted to distress.

The Tribunal therefore concluded that whilst the landlord’s conduct had not constituted distress, as it had occurred after the lease had been terminated, nevertheless there was “no contractual or other right to seize or retain the Goods following termination of the Lease, pending payment of outstanding monies owed under the Lease.” The hearing was adjourned to consider the appropriate order, which would have included an order for compensation to the tenant for trespass and conversion.

This case does not mean that a lease cannot include clauses giving landlords contractual rights in respect of tenant’s goods after termination of the lease. It simply means that such clauses must be very carefully drawn.

Addendum: Sharon-Lee Holdings P/L v Asian Pacific Building Corporation P/L [2012] VCAT 546 reconsidered by Supreme Court at Asian Pacific Building Corporation Pty Ltd v SharonLee Holdings Pty Ltd [2013] VSC 11.

Tip Box

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

Pre-packs – Do they have a place in Australian insolvency practice?

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By O’Brien Palmer

INSOLVENCY AND BUSINESS ADVISORY

First published on the website, www.obp.com.au

You may have noticed the occasional reference in the media to fraudulent phoenix activity and attempts by government agencies such as ASIC (Australian Securities and Investments Commission) and the ATO (Australian Taxation Office) to ‘crackdown’ on serial offenders, particularly in the building and construction industry. Phoenix activity typically involves the transfer of the business assets of a company to a new entity, with creditors being left behind with no real prospect of payment.

There has been recent discussion in the profession about the distinguishing features of a phoenix and a bird of a different feather known as a ‘pre-pack’. In the United Kingdom, pre-packs are a legitimate and accepted means to phoenix the business of a company. In Australia, there is no formal pre-pack procedure although variations of the process are often used by those who specialise in the area, particularly in the turnaround sphere. Where this occurs, the bona fides of the directors are often treated with scepticism. However in many instances, the transfer of assets from one company to a related entity may in fact be in the best interest of all stakeholders of the insolvent company.

In this newsletter, we explore phoenix activity and examine the pre-pack concept.

What is a phoenix company?

A phoenix company is usually considered to be one which is established to carry on the business of an insolvent company, using the assets and employing the staff of the insolvent company, but without accepting liability for its debts. In most cases, the members and directors of the phoenix company are the same or at least related to those of the insolvent company. The business rises from its burden of debt in a new corporate entity, using the same or a similar name, but the creditors of the insolvent company are left to recover what they can for the amounts owed to them through the liquidation process.

Is phoenix activity fraudulent?

Current legislation does not explicitly prohibit phoenix activity. However the process is one that can be easily abused with the result that the activity is often referred to as being fraudulent. Examples of phoenix activity generally considered to be fraudulent include:

  1. transferring the business and/or assets of a company to a new entity for less than fair market value and/or on terms considered to be uncommercial;
  2. establishing a corporate structure for the express purpose of defeating creditors by incurring liabilities through that company whilst keeping assets safe in a related entity;
  3. deliberately incurring company debt immediately prior to the transfer of the business and/or its assets, without having any expectation that the company would be able to pay that debt.

In order to combat such activity, remedies are available within the Corporations Act, which has a number of provisions dealing with breach of duties by directors as well as provisions designed to protect creditors in the event of insolvency. Proven breaches of these provisions can result in civil and/or criminal penalties. Furthermore, the ATO is strengthening its powers using the director penalty notice regime by providing disincentives to fraudulent phoenix activity by making directors personally liable in certain circumstances for their company’s unreported unpaid superannuation and pay-as-you-go withholding amounts.

The applicable provisions of the Corporations Act are as follows:

  1. If the phoenix sale of a company’s business and assets is for less than fair market value or on terms considered to be uncommercial, then it may be challenged as an uncommercial transaction (section 588FB), as an unreasonable director-related transaction (section 588FDA), or as a transaction to defeat creditors (subsection 588FE(5)).
  2. If the sale is not in the best interest of the creditors, the directors may have breached their duties to the company and its creditors. These duties include the duty to act with care and diligence (section 180), to act in good faith and for a proper purpose (section 181) and to not improperly use their position or any information obtained because of their position to gain advantage for themselves or cause detriment to the company (sections 182 and 183). Should it be proven that the breach of any of these sections occurred with either deliberate intention or recklessness, then the breach may result in criminal liability for the director/s (section 184).
  3. Pursuant to subsection 598(2), where the court is satisfied that a person is guilty of fraud, negligence, breach of trust or duty and the company has suffered loss or damage as a result, the court may make such orders as it thinks appropriate in relation to that person.
  4. If employees and employee entitlements are not handled correctly, the director risks committing the criminal offence of entering into a transaction with the intention of avoiding employee entitlements (section 596AB).
  5. If the directors do not prevent all unnecessary liabilities from being incurred once they realise a company may be insolvent, or likely to become insolvent, then they may have breached their duty to prevent insolvent trading (section 588G) and risk being held personally liable for those debts. If the failure to prevent liabilities from being incurred is proven to be dishonest, then the breach may constitute a criminal offence (section 588G(3)).

Proponents of pre-packs argue that, if properly completed, directors will avoid breaching the above legislative provisions.

What is a pre-pack?

A pre-pack is a sale process through which the sale of the business and/or assets of an insolvent company is agreed prior to the appointment of an insolvency practitioner, whose task is to review the sale terms and, if thought appropriate, ratify the sale. The model adopted in the United Kingdom has elements that would not be considered acceptable under Australian law and practice. For example, in the United Kingdom, an insolvency practitioner will work with management to arrange the sale of the business and assets and, after those arrangements have been made, he or she will then be formally appointed as administrator. The conflict of interest is obvious. The pre-pack model, modified to suit the Australian environment, has three distinct steps, namely:

  1. Preparation
  2. The directors will have the business and assets of the company valued by a reputable valuer. The sale of the company’s business and assets should be based on this valuation to ensure that fair market price is obtained.
  3. The directors should prevent all non-essential debts from being incurred. In doing so, they will reduce any exposure to insolvent trading.
  4. Execution
  5. The directors then arrange the sale of the company business and/or assets to another entity, for fair market value. A conditional contract would be executed together with an agreement to operate the business under licence. To prevent the appearance of any impropriety, the completion of the contract should be subject to ratification by an administrator who would in the ordinary course seek creditor input.
  6. The employees of the company would ordinarily be transferred to the new company, which will accept responsibility for their accrued entitlements.
  7. The business continues being operated by the new company.
  8. Ratification
  9. The insolvent company then appoints an administrator (or possibly a liquidator), who will investigate the sale, test the market if appropriate, and report to creditors. The expectation of management is that the sale will be ratified. If that transpires then the administrator will complete the sale.
  10. If the sale is not ratified, then the contract will be rescinded. Responsibility for operating and selling the business would then revert to the administrator.

Importantly, the insolvency practitioner to be appointed administrator should not advise on the process. This ensures that, following appointment, the administrator can act, and be seen to act, independently of those involved in the transaction.

If, for some reason, a sale was completed prior to appointment, then it is likely that the company would be wound up by way of a creditors’ voluntary liquidation. In those circumstances and as in any winding up, the liquidator would review the sale, and in the event it is found to be unreasonable, then he may, if commercial to do so, seek to overturn the sale under the voidable transactions provisions of the Act. The liquidator would then realise the assets for the best price possible.

Why pre-pack and not administration?

The voluntary administration regime was introduced in 1993, and was designed to provide a flexible mechanism for a company’s affairs to be administered in such a way that maximises the chances of the company or its business remaining in existence or, if that is not possible, results in a better return to creditors. It does this by imposing a moratorium on the company’s creditors, giving an administrator time to investigate the company’s affairs and consider a proposal for the company’s debt to be compromised. The proposal can take many forms and, if accepted by creditors, the company will then enter into a Deed of Company Arrangement (DOCA).

As the legislative framework for flexible restructure is already in place, then why bother with a pre-pack sale? Critics of the voluntary administration process argue it is cumbersome, intrusive, costly and detrimental to the business. Proponents of pre-packs claim they offer a better chance for existing management to save their business and for creditors to maximise their return. They say pre-packs do this by:

  1. ensuring the continuation of the business in a new entity;
  2. preserving the goodwill of the business and its suppliers and customers;
  3. maximising the value of company business and assets;
  4. avoiding a costly trade-on administration pending a sale.

In addition, creditors should have the comfort of knowing the sale is subject to review and ratification by an independent administrator. However, there are other considerations that need to be taken into account, namely:

  1. The company will still have go through the administration process and bear the consequential costs of the administrator possibly testing the market and dealing with enquiries which may extend to entering into negotiations for the sale of the business and assets.
  2. The appointment of an administrator and the subsequent winding up of the company will still leave the directors exposed to potential claims under the Corporations Act – for example, claims resulting from trading whilst insolvent. This means that the directors may still have to consider propounding a DOCA as part of the pre-pack process, further adding to the costs that might be incurred.
  3. The directors or owners of the entity acquiring the business and assets will need to arrange funding not only of the agreed purchase price but also ongoing working capital. In many instances buying the business and assets of a company will not be a practical option.

Conclusion

The debate surrounding phoenix activity continues, in which the cost to the community is contrasted with the efficiency and other benefits of the pre-pack process. Should directors who phoenix the business of their companies be held more accountable? Or should the interests of creditors in an increased commercial return supersede government concerns over the director’s bona fides? The government is considering further legislative amendments to inhibit deliberate, cyclic, fraudulent phoenix activity. In this regard you might be aware that earlier this year, the government introduced what is commonly called the Similar Names Bill, which sought to amend the Corporations Act to make a director of a failed company personally liable for its debts where the related entities had the same or similar names. We understand this Bill has made no progress but it is an indication of the government’s intentions.

Whilst the voluntary administration regime already provides a mechanism for the restructure of a company’s business, it is often criticised. Proponents of pre-packs argue that a pre-pack sale of a company’s business will in many instances deliver better results than can be achieved through a standard administration, and that sufficient safeguards already exist within the Corporations Act to protect creditors’ interests. We consider that, in certain circumstances, a formal pre-pack process may be more effective than voluntary administration. We also consider that the concept deserves to be further explored.

This article was written by O’Brien Palmer insolvency authors. They are a specialist practice with national affiliations, focusing on corporate and personal insolvency and business recovery. They are committed to assisting solicitors help their clients understand and navigate the complex realms of insolvency.

The ATO rises and ups the ante – ATO granted new powers to pursue directors

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By O’Brien Palmer

INSOLVENCY AND BUSINESS ADVISORY

First published on the website, www.obp.com.au

The Tax Laws Amendment (2012 Measures No.2) Bill 2012 received royal assent on 29 June 2012 and has commenced operation. This bill extends the existing director penalty notice (DPN) regime to make directors personally liable for their company’s unpaid superannuation in addition to pay as you go (PAYG) withholding amounts. This legislation acts retrospectively in respect of PAYG liabilities. It is more urgent than ever that directors be aware of the PAYG and superannuation liability position of their companies to ensure they do not become personally liable for the debts of those companies.

The new regime enables the Australian Taxation Office (ATO) to take action under the DPN system for all PAYG and superannuation debts that remain unreported and unpaid from 29 June 2012, including PAYG liabilities incurred prior to the commencement of the bill, which remain unreported for more than three months. Further, directors who fail to comply with their reporting requirements may become liable to pay the new PAYG withholding non-compliance tax, which can be set-off against PAYG credits due to directors. If directors have not reported on these liabilities for the period ending 31 December 2011, it is already too late.

Although it may take some time for the ATO to implement and utilise these new powers, company directors are risking increased enforcement action if they fail to deal with outstanding tax and superannuation liability now. The following is a guide to the director penalty notice regime and a summary of the changes which have taken effect.

Directors to become personally liable for unreported PAYG

Where a company’s PAYG liabilities remain unreported to the ATO for more than three months after the due date, the ATO may make directors personally liable immediately; and, although still required to issue a DPN prior to commencing enforcement action, the appointment of an administrator or liquidator to the company will no longer prevent directors from becoming personally liable for the company’s tax debt. The due date for reporting purposes depends on the company’s PAYG withholding amounts:

  • small withholders – $25,000 annually or less, 28 days after quarter end; and
  • medium withholders – $25,001 to $1 million annually, 21 days after month end.

Most companies which haven’t reported to the ATO on PAYG liabilities for the quarter ending 31 March 2012 will have until 21 July 2012 to report, or their directors risk being made personally liable for the amounts outstanding. For the June 2012 quarter, the final date will be 21 October 2012. Lodgement dates vary from month to month and companies lodging via a tax or BAS agent have an extra month.

Directors to become personally liable for unreported superannuation guarantee charge

Where a company has not paid superannuation by the 28th day after the end of each quarter, it is required to lodge a superannuation guarantee charge (SGC) statement by the 28th day of the following month – that is, in the second month. In circumstances where the statement is not lodged on time, the ATO can now make directors personally liable for outstanding superannuation, by issuing a DPN. This includes making directors liable based on estimates of SGC owing, rather than merely on reported figures, and liability will arise three months after the relevant lodgement date. Therefore the lodgement date for a June 2012 quarterly SGC statement would be 28 August 2012, with personal liability arising from 28 November 2012.

PAYG withholding non-compliance tax

In certain circumstances, directors and associates of directors will be prevented from obtaining PAYG credits in their individual tax returns where the company has failed to pay withheld amounts to the ATO. These amounts will be the lesser of the amount that the company has failed to remit to the ATO or the amount of tax withheld by the company from the director’s income.

The new DPN regime

In order to recover a director penalty from a director (in respect of PAYG or superannuation) the ATO must issue a DPN and wait until the expiration of 21 days from the date of the notice to commence proceedings. Personal liability is not triggered if within 21 days of the issue date:

  • the company complies with the obligation;
  • an administrator is appointed to the company; or
  • the company is placed into liquidation.

The critical change is that, where three months has lapsed since the due date, and the underlying liability remains unreported and unpaid, there is no relief from the director penalty by placing the company into administration or liquidation.

Therefore, the key issue under this new regime is that, in order to avoid personal liability, all liabilities should be reported no later than three months after the due date.

What do these changes mean?

To ensure directors do not become personally liable for company debts, directors should take the following steps:

  • ensure that business activity statements and other reporting requirements are lodged with the ATO within the required timeframes;
  • ensure that PAYG and superannuation amounts are reported and remitted to the ATO and relevant superannuation funds within the required timeframes;
  • increase the monitoring and awareness of their company’s taxation and superannuation liabilities, and act promptly where problems are identified;
  • increase the communication with the ATO where debts have been incurred beyond the company’s ability to meet them within the required timeframes;
  • seek immediate advice from their accountant or an insolvency practitioner at the first signs of trouble; and
  • if a DPN is received, then immediate compliance is required to ensure that the corporate veil is not pierced.

Sheriff’s sale – Part 1

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

A sheriff’s sale is one of the true curiosities of the world of property law – to borrow a phrase, ‘a riddle wrapped up in an enigma’. The urban myth conjures up visions of the dastardly sheriff riding in on his pitch-black steed to wreak havoc on the ‘innocent’ villager. As a recent case confirms, there is not likely to be a Robin Hood in the wings waiting to swoop in at the last minute to set things right; indeed, quite the contrary.

Kousal v Suncorp-Metway Limited [2011] VSC 312 cast the defendant bank in the role of an innocent bystander seeking the direction of the court. The plaintiff was the purchaser from the sheriff and sought to require the defendant to make the certificate of title to the property available to allow for registration of the transfer from the sheriff. Herein lies the reason why the matter had proceeded to this point: the owner of the property and person most likely to suffer the harsh consequences of the sheriff’s sale was not a party to the proceedings and had steadfastly failed to take appropriate steps to protect his interests. As a consequence the law, like a steamroller, had followed its unrelenting course to ‘justice’ and the case became another episode in the tales of sheriff’s sales.

The story began as a simple debt claim in the Magistrates’ Court. A creditor claimed payment from the debtor (the ‘innocent villager’ in our tale). Irrespective of the merits of the claim, it appears that the debtor did not contest the claim and judgment was entered. This failure to engage in the legal process, repeated time and again, by the judgment debtor is the true cause of the problems that arose as, whilst many such judgments go unenforced, this judgment debtor was the registered proprietor of real estate and thus susceptible to the sheriff’s sale procedure.

The judgment of the Magistrates’ Court was raised to the Supreme Court and a writ of seizure and sale was issued. These were previously known by the far more exotic – and perhaps appropriately theatrical – name of fieri-facias, commonly abbreviated to fi. fa. This writ calls upon the sheriff to sell the judgment debtor’s assets and account to the creditor for the proceeds of sale to the extent of the judgment and costs, and to the judgment debtor for any balance. The likelihood of a mortgage to a third party, the role played by the defendant bank in this case, serves to add a further complicating factor. The sheriff only has power to sell the interest of the judgment debtor in the property, and therefore any sale is subject to all encumbrances affecting the property at the time of sale. Thus the mortgagee bank was not liable to lose the protection of its mortgage; it was simply being asked in these proceedings to make the title available to allow for the registration of the transfer of the interest of the judgment debtor by the sheriff to the plaintiff.

The plaintiff had entered the fray as an existentialist Robin Hood. Rather than fight off the sheriff and return the villager’s home, the plaintiff became the purchaser at the sheriff’s sale, first bidding $100 and finally $1000 for the right to take a transfer from the sheriff. Given that the property was apparently valued in excess of $600,000 and the mortgage was around $400,000, the prospect of a $200,000 profit appeared to be good shopping.

At this point the sheriff’s sale process appears to have gone feral. A person can lose their home, in which they have an equity of $200,000, and the judgment creditor, who initiated the process, stands to receive nothing, as the sale price of $1000 would not even cover the sheriff’s costs. Whether the villager is an idiot or not, that cannot be justice. Mukhtar AsJ. also expressed concern in relation to this outcome and repeated a call first made in 1982 for a review of this procedure, which appears to be ‘ill adapted to modern conditions’.

Without doubt, the judgment debtor/registered proprietor should have done more to help himself. He sought the assistance of a private lawyer, but regarded that as too expensive. He followed the usual trail around the various free legal services, but appeared to weary of the travel. No doubt a lack of English greatly affected his understanding of the significance of the documents that he received, but by the end he would have needed a wheelbarrow to transport them and yet he still came before the court and shrugged his shoulders, unable to see the steamroller diligently rolling towards him. Mukhtar AsJ. made orders that ensured that the process could not proceed without coming to the attention of the person most affected by the orders, even though not a party to these particular proceedings, but in the end concluded that ‘[t]he Court can do no more’ (para 41).

Mukhtar AsJ. identified a number of areas of concern in relation to the sheriff’s sale process:

  1. that the prospect of a sale being made without any reserve price can lead to a perception that the property is being sold under value and call into question the duty of the sheriff to the judgment debtor to sell for the ‘best price’ (para 35);
  2. that the application for a sale without reserve, which can be made after an unsuccessful sale with a reserve, should not be made ex parte, but rather with notice to the judgment creditor;
  3. that consideration should be given to holding sheriff’s sales on-site, rather than at the sheriff’s office, with additional advertising. The implication is that a sheriff’s sale ought more resemble a traditional auction; and
  4. that, in appropriate circumstances, a court may need to set a ‘not below’ price, something of a misnomer in a ‘no reserve’ auction.

Tip Box

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

Breach of section 32

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By Russell Cocks, Solicitor

Published in 2011, First published in the Law Institute Journal

The Vendor’s Statement required by the seller of real estate pursuant to s 32 of the Sale of Land Act 1962 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 Vendor’s 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) requires the vendor to include in the Vendor’s Statement an Owners Corporation Certificate, issued pursuant to s 151 Owners Corporation 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 subsection (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 Vendor’s 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 & anor [2000] VSC313 suggesting that vicarious liability was not appropriate and that only personal liability was relevant. Fifty-Eighth Highwire v Cohen and Anor [1996] VicRp 57 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 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:

(a) that the Vendor’s Statement had not misled 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 Vendor’s Statement had not influenced the purchaser’s decision.

Ginnane J. held that if the information required by subsection (3A) had have been included in the Vendor’s 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.

(b) 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 enlivened 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 subsection (3A) was not saved by subsection (7).

Tip Box

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

Subdivision – Off the plan sales – Best endeavours – Part 1

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

The sale of land ‘off the plan’ is a common occurrence in the property market. Its principal virtue is that it provides certainty to both vendor (as to the sale) and purchaser (as to the eventual purchase) of the subject property. Whilst there may be some delay in relation to the eventual settlement, which cannot occur until the proposed plan of subdivision is registered at the Land Titles Office, both parties can be confident that, upon registration, the contract will proceed to settlement on the agreed terms.

Off the plan sales are common in a variety of circumstances, but the two principal scenarios are:

  1. sales of vacant land; and
  2. sales of homes.

Land sales

These sales generally fall into one of two categories:

  1. small-scale subdivisions, perhaps only creating as few as two lots; or
  2. large-scale subdivisions, including ‘greenfield’ sites, creating multiple lots.

Whilst projects in these two categories can have enormous differences in scale – from 2 lots to 1000 or more lots – the same legislative framework guides the subdivisional process (Subdivision Act 1988 (Vic)) and the same legislative framework regulates the vendor’s obligations, and purchaser’s rights, on sale (Sale of Land Act 1962 (Vic)).

Pursuant to the Subdivision Act, the vendor is required to satisfy the local council, acting in a supervisory capacity, that the proposed plan satisfies all of the subdivisional requirements of council and service authorities; and, when satisfied, council will seal the plan and provide a statement of compliance. These documents are then lodged with the Land Titles Office and, in the normal course of events, the plan is registered and settlement may take place.

The Sale of Land Act prohibits completion of the sale until registration of the plan, imposes pre-contract requirements and creates during-contract rights, which are essentially designed to protect purchasers.

The 2008 contract of sale, widely used for sales generally, adopts these broad guidelines; and it is possible to create a contract for an off the plan sale relying on the particulars of sale and general conditions alone, without the need for any special conditions or annexures. This is particularly so for small-scale developments, although larger-scale subdivisions involving substantial earthworks may require the inclusion of a plan showing ‘works affecting the natural surface level’: s 9AB Sale of Land Act.

Home sales

Again, these sales generally fall into one of two categories:

  1. small-scale subdivisions, creating just a few lots for sale; or
  2. multi-unit subdivisions, including high-rise developments.

The same subdivisional and registration processes apply to these developments, with the added complication that councils generally will not issue a statement of compliance until construction of the development is complete.

Such contracts envisage the construction of improvements on the land during the contract, and a special condition will usually be added to the effect that the contract is not a major domestic building contract and that the vendor will enter into a major domestic building contract with a registered builder. The extent of detail provided to the purchaser in respect of the improvements to be erected is not regulated and may vary from reliance by the purchaser on a glossy brochure provided by the vendor (which is not included in the contract) to a full copy of the major domestic building contract (including specification) that the vendor has or will enter into. It is fair to say that purchasers ‘take on faith’ that the vendor will ultimately deliver to the purchaser at the expiration of the contract the product, in all its glory, that was touted as being sold when the purchaser entered into the contract.

Once the contract has been signed and the project is underway, the purchaser enters purgatory – a state of perpetual waiting. Even if the project is a mere land subdivision, ages can pass before the plan is registered. If a home is being constructed, long periods of inactivity cause concern. The default period between contract and settlement (14 days after notification of registration of the plan) is 18 months, but contracts can adopt another period and contracts spanning 60 months are common.

A recent case has considered the vendor’s obligations in terms of completion of the project within the required period: Joseph Street Pty Ltd & Ors v Tan & Anor [2010] VSC 586. The project was a relatively small development by the vendor of six units. The contract completion, or sunset, period was 15 months, and the vendor had entered into a contract with a registered builder for construction of the units. Regrettably, the builder ‘went broke’ and the project was substantially delayed while the vendor put other construction arrangements in place. The sunset period expired, the vendor rescinded the contract and the purchaser sought specific performance. No doubt, given the rising housing market, the property had appreciated and both parties sought to take advantage of that situation.

To succeed, the purchaser had to establish that the vendor was in breach and thus not entitled to rescind. The purchaser sought to do so on the basis of a breach by the vendor of an express contractual obligation to use ‘best endeavours’ to complete the contract within the sunset period. It was also agreed that such an obligation was an implied term of the contract. The court concluded that the true cause of the delay was the collapse of the builder, an occurrence that was beyond the control of the vendor. The vendor had therefore fulfilled its contractual obligations to use best endeavours and was entitled to rescind, thereby retaining the (more valuable) property.

Tip Box

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

Deposit release – Why take the risk?

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

Land deposits must be held in trust pending settlement or prior release: s 24 Sale of Land Act. Vendors (and particularly their agents) often seek prior release pursuant to s 27 of the Act. A recent case has raised the possibility that release of the deposit may also have some unexpected consequences for the purchaser’s legal rights against the vendor.

Pamamull v Albrizzi (Sales) Pty Ltd (No 2) [2011] VSCA 260 concerned an attempt by a purchaser to avoid a contract of sale of land on the basis that an encroachment on one boundary constituted a defect in title. The purchaser had purported to rescind the contract shortly prior to settlement, but the vendor had rejected that purported rescission, had in turn rescinded the contract, resold the property at a loss and issued proceedings against the purchaser for forfeiture of the deposit and the loss on resale.

The trial came on for hearing in the Supreme Court but the purchaser was not in a position to proceed. His solicitor applied to withdraw and the purchaser sought an adjournment, which was opposed by the vendor. The purchaser’s defence had been based on the partial encroachment onto the land sold by an adjoining property constituting an easement over the property sold which should have been disclosed in the Vendor Statement. The failure to disclose was said to justify statutory avoidance by the purchaser. The judge granted the purchaser a short adjournment but then found in favour of the vendor, however the purchaser was given the right to return in two days to show why judgment should not proceed.

The purchaser returned in the company of the inimitable Wikramanayake SC, who informed the court that the Vendor Statement argument was ‘wrong’ and ‘of no merit’ but that the purchaser had a good defence based on an argument that the partial encroachment over adjoining land by the land sold constituted a defect in the vendor’s title entitling the purchaser to rescind the contract. That argument was not accepted, essentially as the judge was not satisfied that there was any evidence before him as to this encroachment, and judgment was confirmed.

The purchaser appealed to the Court of Appeal and, in relation to the argument concerning the failure of the judge to grant a longer adjournment, was successful. The Court of Appeal held that it would have been reasonable to grant an adjournment of two weeks to allow the purchaser to retain and instruct new solicitors. However the Court of Appeal decided nevertheless that, as the purchaser’s claim had such little chance of success, it would be futile to order a retrial and judgment was confirmed.

The Court of Appeal considered the defect in title argument and the analysis followed the traditional route of starting with Flight v Booth [1834] EngR 1087 to establish that a substantial error or misdescription in title boundaries may constitute a defect in title such as to justify avoidance. This however depends upon the subject matter of the transaction, requiring reference to the contract of sale, which in turn brings into play any contractual conditions that relate to misdescription. This contract contained what might be described as a traditional ‘identity’ condition which seeks to forgive any misdescription but which will always be subject to the Flight v Booth limitation in relation to a ‘substantial’ error. The Court of Appeal concluded that the contractual terms forgave a minor error and that the error in this case was ‘not of such substantiality as to found an entitlement to avoid’.

There is nothing unusual in this analysis except that the Court of Appeal also referred to the fact that the purchaser had agreed to release of the deposit and in doing so ‘was deemed to have accepted title’ and might thereby be regarded as having ‘waived those rights or elected to proceed under the contract.’ The proposition was not considered at length but must be taken as a warning to purchasers that consent to release of the deposit may constitute an acceptance of title and thereby prevent any subsequent argument based on a substantial defect in title.

A purchaser who signs a deposit release that includes reference to accepting title will thereby lose the ability to thereafter claim a title defect. Further, signing a deposit release that does not refer to acceptance of title might arguably be deemed to be implied acceptance. Section 27(2)(b) does not provide that a purchaser who releases the deposit thereby accepts title, but it does provide that the deposit release procedure is only available ‘where the purchaser has accepted title or may be deemed to have accepted title’. Thus a purchaser who signs a release may face an argument that the purchaser has impliedly accepted that the statutory precondition to release has been satisfied. Whether some all embracing statement to the effect that the purchaser does not accept title, will save the purchaser is uncertain.

Consenting to release immediately upon sale would be outright dangerous, but consenting at any time prior to settlement would appear to expose a purchaser to an unnecessary risk. Failing to fully inform the purchaser of this risk would constitute professional negligence.

Tip Box

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

Co-owners – Joint tenancy or tenancy in common

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

The recent decision in Sacks v Klein [2011] VSC 451 considered the well known distinction between joint tenancy and tenancy in common and the impact of the death of a co-owner. It confirmed that whilst co-owners may be registered as joint tenants (legal joint tenants) equity may nevertheless impose an equitable tenancy in common by way of a trust.

Generally speaking, VCAT (Victorian Civil and Administrative Tribunal) has almost exclusive jurisdiction over applications relating to co-owned land under Part IV of the Property Law Act 1958. However, pursuant to s 234C(2) the courts retain jurisdiction in relation to co-ownership disputes in de facto property situations, testator’s family maintenance claims and partnership disputes. This dispute potentially came within one or both of the latter two categories, although the issue of jurisdiction was not discussed in the judgment. Indeed, no reference was made to the Property Law Act and the proceedings were conducted as an application for a declaration of trust.

The important distinction between joint tenancy and tenancy in common presents upon the death of one of the co-owners. In a joint tenancy, the deceased’s interest in the property passes to the surviving owner pursuant to the right of survivorship. In a tenancy in common, the deceased’s interest passes to the deceased’s estate.

In Sacks v Klein, two brothers (D aged 30 and M aged 29) purchased a property in 1994 as an investment and were registered as joint tenants. M died in 2005 and D lodged a survivorship application and became registered as sole proprietor by survivorship. M’s administrator issued an application on behalf of M’s estate for a declaration that D held the property on trust for himself and the plaintiff as tenants in common in equal shares.

Hargrave J. set out various principles discerned from previous cases:

  1. Where property is conveyed to two or more persons who are named as transferees without further specification as to whether they are to hold the title as joint tenants or tenants in common, they are deemed by operation of s 33(4) of the Transfer of Land Act 1958 (Vic) to hold the legal estate as joint tenants. However, s 33(4) of the Act does not preclude the operation of equity.
  2. Unless there is evidence to indicate the transferees held a different intention, equity will follow the law.
  3. Irrespective of the position on the certificate of title, equity may intervene to impose a tenancy in common.
  4. Equal provision of purchase money points to a joint tenancy.
  5. Where the co-owners are partners or participants in a joint undertaking, tenancy in common will prevail.
  6. A common intention by the co-owners to acquire the property as joint tenants is not conclusive.

Analysing the evidence, Hargrave J. concluded that the brothers had purchased the property as a joint undertaking. The mortgage loan was made to them jointly and severally. The fact that it was D’s idea to invest in the flat was not to the point. He chose to invite M to participate in a joint purchase of the flat with the express purpose of long-term profit being made by each of them. Likewise, the fact that D assumed responsibility for the investment and arranged for the property to be leased, maintained and renovated was not to the point. Notwithstanding that M had lived overseas the entire time the property was jointly owned, he was to be regarded as a ‘silent partner’ in a joint undertaking, a conclusion that would point to a tenancy in common, even if no formal partnership existed.

However, Hargrave J. accepted that there was evidence that at the time of purchase the difference between joint tenancy and tenancy in common was explained to D and that he in turn explained it to M, who agreed that the property should be purchased as joint tenants. On this basis His Honour concluded that at the time of purchase the co-owners intended to hold the property as joint tenants.

Thus His Honour was faced with a subjective joint tenancy, based on the stated preference of the co-owners as revealed by their registration on the title, as opposed to an objective tenancy in common, based on the nature of the relationship between the co-owners. In such a situation the stated intention (as revealed on title) of the parties will prevail unless ‘there is evidence, even slight evidence, to indicate an intention to divide the property between the joint tenants’. His Honour found that there was evidence of such an intention, being:

  1. the property was an investment;
  2. the income and expenses were divided equally; and
  3. M had acknowledged a ‘moral obligation’ to D’s family in the event of D’s death.

The plaintiff’s application for a declaration of trust was successful.

Tip Box

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

The impact of Bamford on trust deeds and trust resolutions

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By Greg Vale, Binetter Vale Lawyers

Subscribers to our Companies, Trusts, Partnerships and Superannuation product, and LEAP Office users, will be acquainted with the content written by Greg Vale, a By Lawyers author.

Following the Bamford decision Greg circulated a letter to his clients, which is reproduced below for your information.

Our trusts take into account this decision.

Getting it right – the impact of Bamford on trust deeds and trust resolutions

On 30 March 2010 the High Court handed down its much awaited decision in Commissioner of Taxation v Bamford; Bamford v Commissioner of Taxation [2010] HCA 10.

In response to Bamford on 2 June 2010 the ATO released a Decision Impact Statement (‘DIS’) and Practice Statement Law Administration PS LA 2010/1, which outlines how the ATO will treat the determination of trust income.

The High Court decision and ATO response are significant and affect every trust in Australia. In particular they affect how trust deeds and income distribution resolutions must be drafted to obtain the optimum tax outcome.

The significance of the High Court’s reasoning in Bamford is that it confirms that it is possible to define and modify ‘trust income’ through the drafting of one’s trust deed. The advantage of being able to define and modify trust income is that it can create circumstances which remove adverse tax consequences or even allow more beneficial tax outcomes to be achieved.

Although the ATO accepts that Bamford means that trust deed clauses can be used to define trust income and can thus influence how the net income of a trust will be taxed, it provides a series of caveats, including the potential application of the general anti-avoidance rule or trust stripping rules in circumstances involving a deliberate mismatch between income entitlements and tax outcomes.

Great care is required in the drafting of the yearly income distribution resolutions. Following Bamford, there is a clear benefit in ensuring that one’s trust deed confers sufficient powers to allow a trustee to determine trust income in each income year. Accordingly, in relation to the 2009/2010 income year and onwards, we consider that all trustees should undertake the following steps in light of Bamford.

Step 1 – Trust deed review

Trustees should review the trust deed in conjunction with their tax and legal advisors to determine whether:

  1. The trust deed defines trust income and if so, how the definition operates to determine its capacity to minimise adverse tax consequences going forward;
  2. The trust deed provides the trustee with adequate powers to modify trust income, including the power to reclassify items as income or capital and vice versa and allocate expenses and losses as appropriate;
  3. There are appropriate streaming provisions and whether they are adequate going forward.
Step 2 – Consider amending the trust deed

Where the trust deed does not contain an adequate definition of trust income or powers to enable the trustee to stream or modify what constitutes trust income, then trustees should consider whether it is beneficial to amend the trust deed to resolve these deficiencies. Tax and legal advice should be sought prior to amending the trust deed so as to avoid any adverse tax consequences. For example, the ATO have already flagged the issue of trust resettlements in this context.

Step 3 – Review the drafting of the trustee resolutions

Trustees should review how they draft their distribution resolutions to ensure that an appropriate tax outcome will be achieved.

Binetter Vale Lawyers can carry out the necessary review of your client’s trust deeds and provide advice as to the appropriate amendments in the wake of the decision in Bamford and considerations to take into account when drafting income distribution resolutions for a total of $250 (unless advised otherwise in advance). Separately, for an additional charge to be advised as part of the trust deed review, we are able draft the relevant deeds of amendment and provide tax and legal advice on the issue of resettlement as appropriate.

Further, any deeds of amendment will be accompanied with advice as to the types of resolutions appropriate for that deed.

Tip Box

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

Land tax – Part 2

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

Last month’s column considered the imposition of land tax and its adjustment at settlement of a conveyancing transaction.

Land tax is distinguished from other outgoings by four attributes:

  • thresholds, below which tax is not imposed;
  • aggregation of ownership;
  • an increasing rate of tax based on value; and
  • exemptions.

The combination of aggregation and the increasing rate of tax expose a purchaser to a liability to contribute to ‘excessive’ land tax in some circumstances, and last month’s column explained how the ‘single holding’ basis of adjusting protects purchasers in this regard.

Principal place of residence exemption

Land may be exempt from land tax on the basis of the principal place of residence (PPR) exemption. A property owned and occupied by a ‘natural person’ is exempt from land tax. This is irrespective of the land value of that property and means that land tax is rarely a factor in residential conveyancing. But ‘unusual’ transactions present from time to time, and it is probably the unfamiliarity with land tax in the residential environment that creates problems.

The key to understanding this exemption is that it is based on the current use of the property, not an intended use. If the current use is as the vendor’s PPR, then the property is exempt for the current year. The upside of this for a purchaser is that, if the vendor has established the PPR exemption, it will not be taken away in the current year and no adjustment is necessary, even if the purchaser does not intend to use the property as a PPR. The purchaser will be liable for land tax in the subsequent year, but not in the year of acquisition.

The downside is that, if the vendor has not established the PPR in the year of sale, the purchaser will still be obliged to adjust land tax (on a single holding basis) even if the purchaser intends to occupy the property as the purchaser’s PPR. The exemption will not be available until the subsequent year.

This scenario can also arise if the vendor has purchased before selling. The vendor settles their purchase and advises the State Revenue Office that their new property is their PPR. If they retain ownership of their ‘old’ property beyond 31 December in that year, the old property is likely to be assessed for land tax as it is no longer exempt as a PPR. Disputes may arise at settlement of that property in the new year as the vendor’s statement, prepared at the time of sale, will very likely not reveal a potential land tax liability as it was prepared in anticipation of the sale of the PPR in the previous taxing year.

Special land tax

Land tax at a premium rate is imposed on some properties owned by trustees, and the land tax threshold in respect of such properties is $25,000 rather than $250,000. This means that a purchaser of such a property would, perhaps unexpectedly, face an obligation to adjust land tax in the year of acquisition, notwithstanding that the purchaser is a natural person and would not ordinarily be liable for land tax. This situation is covered by GC 15.2(c) of the 2008 prescribed contract of sale, which provides that adjustments are to be effected on the basis that ‘the vendor is taken to own the land as a resident Australian beneficial owner’. On that basis the premium rate does not apply and the threshold is $250,000. Adjustments would therefore be effected on a single holding basis, with the normal threshold and standard rates. In this manner, the burden of special land tax falls on the vendor, not the purchaser.

Special conditions

The 2008 contract of sale is an industry standard, but its use is not compulsory. It is permissible for a vendor to change the method of adjustment of land tax by special condition, and purchasers must be careful to check whether this has been done in any particular contract. Property developers in particular may seek to transfer responsibility for land tax to a purchaser from the date of contract rather than from the conventional date of settlement. This can have the effect of requiring the purchaser to bear an unexpected land tax burden and, if coupled with removal of the ‘single holding’ basis of assessment, can have a significant downside for a purchaser, particularly in the case of a long settlement period that may extend beyond 31 December. This exposes the purchaser to a share of land tax in the year of contract and the whole of the land tax, at the vendor’s rate, in the year of settlement – often a nasty surprise.

Tip Box

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

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