ByLawyers News and Updates

When the grim reaper comes knocking

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By O’Brien Palmer

INSOLVENCY AND BUSINESS ADVISORY

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

‘There is always death and taxes: however, death doesn’t get worse every year’– author unknown

Based upon our recent experiences, it would appear that the Australian Taxation Office (‘ATO’) is becoming much more aggressive in relation to the collection of overdue PAYG and taxes. More particularly, we have:

  • noticed an increase in the number of winding up applications filed by or on behalf of the ATO.
  • been provided with copies of notices issued by mercantile agents engaged by the ATO to recover debts that had only recently become overdue.
  • met with directors who have been served with a Director Penalty Notice (‘DPN’) pursuant to Section 222AOE of the Income Tax Assessment Act.

This aggressive attitude adopted by the ATO will in all probability impact adversely on thousands of Australian businesses already suffering from poor cash flow.

According to an article which appeared in The Australian newspaper on 20 May 2010, credit reporting agency, Dunn & Bradstreet, has reportedly downgraded the risk profiles of almost 80,000 companies after watching payment terms deteriorate in the first quarter of this year. The expectation is that many of those businesses are now more likely to experience financial distress over the next year.

In light of the foregoing, we thought it timely to comment upon the weapons in the ATO’s arsenal for the recovery of taxation liabilities owed by corporate debtors.

Director Penalty Notices

A discourse on DPN’s is outside the scope of this newsletter. Suffice to say that a director in receipt of a DPN has fourteen days from the date of the notice in which to cause the company to undertake one of the following alternative courses of action:

  • discharge the debt in full, or
  • enter into an arrangement with the ATO for the payment of the debt, or
  • appoint an Administrator or Liquidator to the company.

If the director(s) fail to comply with the DPN by not causing the company to undertake one of the alternatives set out above within the specified time period, then each director is liable to pay by way of penalty an amount equal to the unpaid debt.

The DPN is a powerful weapon that should focus the attention of the directors on addressing the problems affecting the financial position of their company. Directors who neglect to deal with a DPN could face personal financial consequences that could be significant. Yet notwithstanding this, we have encountered a number of directors who for a variety of reasons have ignored a DPN whilst others have convinced themselves as to the viability of their businesses and accepted personal liability totally ignoring the advice of their accountants and/or solicitors. We do not monitor what later happens to those that we meet, however in some cases it has been brought to our attention that the outcomes have been disastrous for those concerned.

It is therefore vital that directors maintain a working knowledge of the financial position of the company under their control particularly when it comes to cash flow and the incurring of taxation and other liabilities. The reality is that a company under financial stress will often defer payment of taxation liabilities thus preserving cash for other outgoings considered more vital. This approach may well ease cash flow constraints short term. However, the unpaid taxation liabilities remain and will continue to accrue. In our experience, directors who proactively seek to address the problem in a timely and considered manner are likely to achieve a more satisfactory outcome as compared to those who seek to find a solution under direct pressure from the ATO.

Statutory Demands

Like any creditor, the ATO can issue a Statutory Demand under Section 459E(2)(e) of the Corporations Act (‘the Act’) for payment of a debt within 21 days after service. The debtor company must within the time period specified either pay the debt in full or make an application to the Court to have the demand set aside pursuant to Section 459G of the Act. Alternatively, the debtor company can take pre-emptive action by:

  • appointing an Administrator. Such an appointment is normally made in circumstances where there is some prospect of a Deed of Company Arrangement (‘DOCA’) being propounded; or
  • appointing a Liquidator to wind up the affairs of the company.

If no action is taken by the directors in response to the Statutory Demand, then almost certainly the ATO will commence winding up proceedings.

There are many and varied reasons why directors fail to respond to a Statutory Demand. In many instances, the companies in question will have ceased to trade and have no assets in which case the directors will often not care if the company is liquidated. Other companies will be trading and have assets. It is not uncommon for directors of these companies to simply ignore the Statutory Demand by putting it into the ‘to-hard basket’. For others, the Demand may not be received. One reason for that might be the failure by the Company to notify ASIC of a change in the address of its registered office.

Winding Up Proceedings

The serving of a winding up summons will certainly focus the attention of the directors especially if the business conducted by the company is considered to be viable. In these circumstances, the directors will urgently seek advice as to their options under the Act. By that stage, the options are not what they were.

One option might be to attend Court and oppose the application to wind up. However, as the Statutory Demand has expired, there is a presumption of insolvency pursuant to Section 459C(2)(a) of the Act. Therefore, if the directors want to oppose the application, then they will have to satisfy the Court that the company is in fact solvent and that there is some compelling reason why it should not be wound up. Proving solvency can be difficult and the process is likely to be costly.

The directors may consider they have the option of pre-empting the ATO by appointing their own Liquidator. However, pursuant to Section 491 of the Act, a company cannot be wound up voluntarily if an application has been filed to wind up the company in insolvency. Therefore this is not an option available to the directors.

Another option available to the directors is to appoint an Administrator to take charge of the affairs of the company. Whilst technically possible, there is a complication. Pursuant to Section 440A of the Act, the Court is to adjourn an application to wind up a company already in administration, if the Court is satisfied that the continuation of the administration is in the interest of creditors.

The complication arises from the interpretation of the phrase ‘the Court is satisfied’. In our experience, this means that there will need to be evidence put before the Court that will lead the Court to conclude there is a real likelihood that a DOCA will be propounded and that the return under the proposed DOCA will be greater than if the company was wound up. From a practical point of view, it is not always possible to settle upon the likely terms of a DOCA within the time left before the winding up application is heard. In addition, the costs of attending Court and presenting a case can be significant.

In light of the foregoing, it is imperative that Statutory Demands are dealt with within the stipulated time period as this keeps all options open to the debtor company thus giving it the best chance of achieving an optimum outcome.

In the event a company is wound up by order of the Court, then all is not lost. Pursuant to Section 482 of the Act, the Court has the power to stay or terminate the winding up. For such an order to be made, the applicant which is usually the directors, will need to satisfy the Court that the company is solvent and should be allowed back into the market place.

Section 260-5 Notices

Another weapon available to the ATO is the issuance of a notice (commonly referred to as a ‘garnishee’) pursuant to Section 260-5 of the Income Tax Assessment Act which allows the ATO to collect monies from third parties in satisfaction of taxation liabilities due by other entities.

We dealt with this subject matter in a newsletter issued in April 2006, a copy of which can be found on our web site. For the purposes of this newsletter, all we can state is that we have not encountered any such notices over recent times.

Conclusion

The team at O’Brien Palmer is committed to assisting our contacts help their clients understand and navigate the complex realms of insolvency. As part of that commitment, we would be pleased to answer any of your questions regarding our services. We also offer a complimentary and obligation free initial consultation to establish the nature of the problem and the manner in which we can be of service.

Covenant – Removal of covenants 2

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

Property lawyers of a certain vintage have been much influenced by two ‘parks’ and may, from time to time and no doubt due to their vintage, get those parks confused.

The first in time and perhaps in memory is Ellenborough Park, a park in London that is the subject of the case cited as Re Ellenborough Park [1956] Ch 131, which concerned the proprietary nature of easements. The second is MacArthur Park, a park in Los Angeles and the subject of the song of the same name written by Jimmy Webb and recorded by Richard Harris in 1968. Both Re Ellenborough Park and MacArthur Park have also been the subject of review and revisits from time to time, with the law following the traditional path of developing a line of authority and the song suffering from the desire of others to impress their own style on an icon, the disco version released by Donna Summer in 1977 being perhaps the worst example of the latter.

Exploring the concept of confusion a little further, lawyers of all vintages often confuse the legal principles associated with easements with those of their closely related legal ‘cousin’, covenants. Re Ellenborough Park explored the proprietary nature of easements, confirming that a correctly established easement is indeed a proprietary right, as opposed to a mere personal or contractual right. Covenants are likewise recognised as proprietary rights and thus enforceable against ‘all of the world’, as opposed to mere contractual rights that are only enforceable against contracting parties.

Interest in covenants in recent years has principally arisen in a negative way – how to get rid of them. Covenants are essentially private town planning instruments and the nature of modern society has been to transfer the role of town planning from the private to the public domain. Hence there is a tension between the private proprietary rights created by the recognition of the proprietary nature of covenants and the ambitions of town planners who seek to create a modern, integrated metropolis utilising existing infrastructure.

This tension leads to mini-battles on street corners between pro-development forces and their opposition, who are intent on preserving the essentially anti-development nature of private covenants.

Greenwood v Burrows (1992) V ConvR 54-444 is generally regarded as the starting point for any analysis of the extent of proprietary protection for covenants in Victoria. That case concerned an application for removal or variation of a covenant pursuant to s 84 Property Law Act 1958 (Vic.) and it is fair to say the case adopted a pro-covenant standpoint and established a high threshold for any applicant seeking removal or variation. This view prevailed until Stanhill P/L v Jackson [2005] VSC 169, when Morris J. signalled a change in attitude. This new approach adopted a pro-planning policy, with recognition that individual proprietary rights might need to be subject to the greater good that was to be achieved by the implementation of an overarching planning policy. However the joy of the pro-planners was short lived as Fraser & Ors v Di Paolo & Anor [2008] VSC 117 and Vrakas v Registrar of Titles [2008] VSC 281 returned to the hardline proprietary rights approach and rejected removal or variation applications.

However, the worm may have turned again, or at least popped its head above the ground. Koller v Rice [2011] VSC 346 is a judgment of Dixon J. that permits the variation of a ‘single dwelling’ covenant to allow for a second dwelling. Single dwelling covenants are probably the most common covenant that is the subject of these applications to remove or vary, as that covenant strikes at the fundamental public planning aspiration of developments that seek to utilise existing infrastructure. By definition, if one dwelling already exists on the land such as to bring into play the operation of the covenant, then the land has the benefit of infrastructure and ought to be further developed.

Dixon J., whilst recognising the proprietary nature of the covenant, also noted:

The State Planning Policy framework encourages development within the existing urban fabric to take full advantage of transport facilities, infrastructure and community facilities.

After an analysis of the recent cases and an adoption of the principles set out in Vrakas (which had refused the application), Dixon J. concluded that this was a suitable case to allow for a dual occupancy development on a site that had been intended to be limited to a single dwelling, notwithstanding the objection of an adjoining neighbour.

Two facts of this case can be seen to strongly favour the variation:

  1. the proposal was a simple increase from one dwelling to two;
  2. it was a corner block and thus lent itself to separate entry for the second dwelling.

Whether the case signals a revival for the pro-planners or simply another false dawn remains to be seen.

Tip Box

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

Covenant – Removal of covenants 1

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

A covenant, in the widest sense, is merely an agreement, or a term or condition of an agreement. Thus contracts include covenants, mortgages include covenants, and leases include covenants. But considered in the context of real estate, covenants have a particular meaning; being agreements that relate to the use of land. In this respect covenants epitomize the distinction between a contractual right, that only binds the parties to the contract and a proprietary right, that binds all the world.

This promotion of covenants from a mere contractual right to the lofty heights of a proprietary right came relatively late in the history of English (and Australian) law. It was not until the mid-19th century that the law recognised that a contractual agreement between two landowners could bind a third party (indeed, all third parties). Initially these agreements constituted the earliest attempts at town planning and despite the fact that government has essentially taken over that role, there is no doubt that private covenants still have a role to play in Australian property law. Most commonly in practice a covenant will be encountered that will restrict the use of a particular piece of land, typically by restricting how the land may be used (no quarrying), the number of dwellings that may be constructed on the land (not more than one), or the method of construction of buildings on the land (brick or brick veneer). It can be seen that the objective of such covenants was to maintain the ‘standard’ of housing developments and covenants were typically used by subdividers for this purpose. However times change, and the ideal housing development of the 1940s or 50s may not satisfy the needs of a modern society intent on high density development in areas presently serviced by infrastructure, such as around railway lines.

Thus lawyers are often consulted by a client whose land is presently affected by a covenant and who wants that covenant removed or varied, or by a client who is considering purchasing land affected by a covenant and wants advice as to the possibility or removal or variation. This might be as simple as a client who wants to know whether a ‘no quarrying’ covenant prevents the construction of a swimming pool (it doesn’t), to a client who wants to construct a number of units on a property affected by a ‘single dwelling’ covenant.

If the proposed use of the land is prohibited by the covenant there are four avenues open for removal or variation of the covenant.

Agreement

The owner of the land benefiting from the covenant may agree to its removal or variation. This will require formal documentation and registration at the Land Titles Office pursuant to s 88 Transfer of Land Act. This is a relatively simple process where there is one benefiting owner, or a small number of benefiting owners, but is impractical where many surrounding owners share the benefit, which is common in subdivisional covenants.

Court

Property rights are amongst the most fundamental rights in society and the courts have traditionally been a bastion in relation to those rights. A person affected by a covenant is entitled to apply to the court for removal or variation of the covenant pursuant to s 84 Property Law Act and whilst the courts have traditionally been loath to undermine the rights of the benefiting landowner, recent judicial pronouncements have been less proscriptive and more inclined to consider the push for higher density housing in areas serviced by existing infrastructure.

Municipal council

As town planning contracted from an exercise dabbled in by developers to an integral function of government, municipal councils became the central point of government focus. Subject to state government supervision, municipalities are at the coalface of planning and are invested with the power, amongst other things, to vary or remove private covenants. However pressure from lobby groups, such as Save Our Suburbs, has resulted in considerable restrictions being placed on the exercise of this power. This has resulted in a general tendency of municipal councils to refuse applications and force the applicant to appeal to VCAT, where a reasonably pro-development bias prevails.

Planning scheme

The final possibility, albeit virtually impossible, is for the planning scheme that governs the location of the land that is affected by the covenant to be amended to allow for removal or variation of the covenant.

The law in relation to covenants, and their removal or variation, is another example of why the practice of conveyancing is anything but a ‘form filling-in’ exercise. Lawyers need to be pro-active in meeting their client’s needs in this area and be ready to provide quality advice. None of the above methods of removing or varying a covenant are easy, but they are all about providing your client with high quality service for a fair reward.

Tip Box

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

Rescission – Costs on rescission

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

Receipt of a rescission notice is often a time of great stress in a conveyancing transaction. Such a notice is issued when a party defaults in performance of a contractual obligation (usually settlement) and gives the defaulting party 14 days to remedy the default. The party issuing the notice is entitled to claim costs (including legal costs) arising out of the default. What do you do if the legal costs claimed appear to be excessive?

Some practitioners appear to regard the opportunity to issue a rescission notice on behalf of their client as the legal equivalent to winning Tattslotto; however the right to claim costs in respect of rescission is subject to the normal rules governing costs generally, and so the defaulting party will only be liable to pay to the vendor a reasonable amount in respect of cost arising from the default and issue of the rescission notice.

The assessment of these costs commences at the point of default, when the solicitor for the non-defaulting party begins to take action that would not have been required if the matter had have proceeded in the normal manner. Costs must be calculated on an item remuneration basis (unless otherwise agreed), and thus there is an objective yardstick. These additional costs might be expected to include:

  • attendance/letter upon/from defaulting party to be informed of default;
  • attendance/letter upon/to client informing of default and seeking instructions;
  • issue of rescission notice and service; and
  • attendance/letter upon/to client to advise that default remedied.

The defaulting party is obliged to pay for the costs of the other party that result from the transaction ‘running off the rails’ and any costs associated with getting it back ‘on the rails’, but not for those matters that comprise the normal steps taken by the parties in a conveyancing transaction. Once the default is remedied the parties organise settlement in the normal way and these attendances are a normal part of the conveyancing transaction.

The above scenario envisages a quick ‘return to the rails’ and, on an item remuneration basis, it would be difficult to imagine the additional work required as a result of the default adding up to more than $200 or so. However, the process is rarely as smooth as this. Generally there are a number of additional attendances after issue of the rescission notice and before return to normality that cannot be strictly costed at the time the rescission notice is issued as they have not yet been incurred. For this reason there is a generally accepted allowance of $400 for costs on a rescission notice that allows for a reasonable level of consultation with the client before issue of the notice and a reasonable level of attendances after issue of the notice and before final settlement. There is not much science involved in this rule of thumb, but it does provide a good practical solution to a situation that often needs to be resolved in a stressful, time-poor environment.

No doubt there are particular cases where an amount in excess of $400 is justified. If the defaulting party vacillated before default, resulting in additional attendances by the nondefaulting party’s solicitor or if the
‘re-railing’ process involves many additional attendances, then the non-defaulting party might claim a higher amount. However the guiding principle must always be item remuneration, and it is not just a matter of plucking a figure from the sky. The client is entitled to be consulted and kept informed, but a client who rings every hour on the hour to inquire about progress cannot expect to have the costs arising from those attendances reimbursed. Likewise, a solicitor who rushes off to counsel for advice and draws documents that end up being superfluous may not be entitled to claim those costs.

If a claim for costs is made in a fairly typical scenario that the defaulting party believes to be excessive, it is recommended that the defaulting party offer to pay the generally accepted figure of $400 (or such other amount that may appear reasonable) without the need for more than a lump sum bill. However, if this offer is not accepted, the defaulting party cannot allow the issue of costs to further delay settlement and ought to settle by paying the amount claimed and, at the same time, request an itemised bill in accordance with Legal Profession Act s 3.4.36 and indicate that an application to review the bill will be made to the Taxing Master after settlement, in accordance with s 3.4.38.

Tip Box

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

Executor’s commission 3 – A fiduciary duty

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

Rescission – Consequences of rescission 1

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

A recent Magistrates’ Court case SDC (Vic) Pty Ltd v. Davies and others [2010] VMC 3 has considered an issue relating to the consequences of rescission of a contract of sale of land.

Whilst such decisions are not binding on other courts, the fact that they are now reported on AustLII means that they are more available for consideration and the fact that the doyen of Victorian property law barristers (P.N. Wikrama S.C.) appeared makes the case even more significant. Additionally, the case was described as dealing with an issue on which ‘there was no direct authority’ in Victoria.

The purchaser defaulted under the contract by failing to pay the balance of purchase price on the due date. The vendor had granted a number of extensions, but eventually the contract was terminated by a Rescission Notice served by the vendor. The deposit was forfeited and the property resold at a small loss. Whilst the judgment does not provide full details of the damages suffered by the vendor, it appeared clear that the forfeited deposit was well in excess of any actual loss suffered by the vendor.

The first issue concerned a payment, in addition to the deposit, that the purchaser paid to the vendor as part of an agreement to extend the date for settlement. Regrettably for the vendor this was described at the time of payment as ‘paid towards the purchase price’. As a consequence the Court ordered that the payment was to be refunded to the purchaser after the contract was rescinded by the vendor, as the vendor ‘cannot have the land and its value too’. Forfeiture of the ten percent deposit was authorised by the contract, but not this additional amount, beyond ten per cent, which was held to be an unjust enrichment on the part of the vendor.

The lesson to be learned from this part of the case was that a vendor who agrees to extend time for performance in return for a payment must ensure that the payment is expressed to be in consideration for the extension of time, and not part payment of the purchase price. An analogy can be drawn with key-money in a retail tenancy environment. Key-money is prohibited (and must be repaid) but expressing the payment as consideration for an additional term provided by the landlord means that the character of the payment changes from key-money to a payment in consideration for a valuable right – additional time. So too a payment in excess of the deposit that is made in consideration for an extension of time for settlement may be retained, even if the contract is ultimately rescinded by the vendor.

The main point of the case, and the one that was said to have no direct Victorian authority, was the characterisation of the vendor’s claim for penalty interest. Because of the extensive (agreed) delays, this amount exceeded (by coincidence) the amount the vendor was ultimately ordered to repay to the purchaser on the first issue, and so provided a convenient counterclaim for the vendor.

The vendor argued that the entitlement to interest arose out of a specific term, Condition 4 of Table A of the Seventh Schedule of the Transfer of Land Act that was incorporated into the contract, in the contract, that this entitlement survived the rescission of the contract and that it did not form part of the vendor’s damages arising from the rescission. This argument posited that such damages might be constituted by a loss on resale, payment of additional rates, payment of an additional estate agent’s commission etc. but that the contractual right to interest stood apart from these damages and constituted a distinct legal entitlement in addition to any other losses claimed by the vendor arising out of rescission.

The purchaser, represented by Wikrama S. C., argued that the right to interest was to be characterised as part of the vendor’s right to damages arising out of Condition 6 of Table A and that once the rescission procedure is invoked, interest is subsumed into the vendor’s general right to damages pursuant to that Condition. The significance of this argument is the well accepted principle that a vendor must give credit for the forfeited deposit and is only entitled to claim damages beyond the deposit if those damages exceed the forfeited deposit – Carpenter and Anor v McGrath and Anor [1996] NSWSC 411. Whilst the vendor had suffered a small loss on resale and other losses such as additional rates etc., those losses did not exceed the forfeited deposit and so the vendor had no claim for those losses. By holding that the contractual right to interest was to be characterised as part of the vendor’s general damages under Condition 6, the Court decided that the forfeited deposit also had to be allowed against that interest and that the vendor would only have an additional claim, beyond the deposit, if the damages (including interest) exceeded the forfeited deposit.

The vendor’s right to interest arises upon default and if settlement occurs the purchaser is obliged to pay this interest in addition to the purchase price. However, if the rescission procedure is invoked and the contract is ultimately rescinded, the vendor’s right to interest is not a separate and distinct legal right, but rather is part of the vendor’s general right to damages. This decision is likely to apply to Conditions 26 & 28 of the 2008 prescribed form of contract.

Tip Box

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

Lease – Retail lease

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One for the Little Guy

By Russell Cocks, Solicitor
First published in the Law Institute Journal

The recent case of Xiao v Perpetual Trustee Company Limited and Macquarie Office Management Limited [2008] VSC 412 is a typical ‘David versus Goliath’ scenario, with the outcome complying with biblical expectations.

Xiao (the tenant) operated a café/restaurant in the ground floor of a substantial office building that was owned by Perpetual (the landlord) and managed by Macquarie (the manager), which employed an estate agent to manage tenancies (the agent). The tenant had paid $320,000 for the business in 2006, taking over a lease due to expire on 30 September 2008. Importantly the lease provided for an option of five years and the question to be decided by the Court was whether the tenant had validly exercised the option. If not, the tenant would be obliged to vacate the premises on 30 September 2008.

Jurisdiction

Most disputes involving retail premises, as these premises were, are heard in VCAT. An exception exists if the tenant is seeking relief against forfeiture and the Court was satisfied that a claim for relief against forfeiture of an option came within this exception. Once the jurisdiction of the Court is enlivened, appropriate remedies, such as a declaration or specific performance, become available.

The option

The central issue was whether the tenant had exercised the option within the applicable time limits. Certainly the tenant had exercised the option, on 19 June 2008, but the landlord argued that this was inoperative as it was outside of the applicable time limit. The provisions in the lease required the tenant to exercise the option ‘not less than six (6) months prior to the expiry of the Term’. The term was due to expire on 30 September 2008, so the lease required the tenant to exercise the option prior to 31 March 2008 and there is no doubt that the tenant’s notice on 19 June failed to comply with this time limit. However the tenant sought to rely upon the landlord’s overriding statutory obligation (s 28 Retail Leases Act) to give notice to the tenant of the need to exercise the option. The Act requires the landlord to give this notice to the tenant between 6 and 12 months before the last day for exercise of the option; in this case between 30 September 2007 (6 months before the last day) and 30 March 2007 (12 months before the last day). Failure by the landlord to give notice within these time limits results in the tenant being entitled to exercise the option at any time within 6 months of the landlord in fact giving the notice.

Notice

The landlord was ‘late’ with the option notice. The agent purported to send the option notice to the tenant on 4 December 2008, meaning that the ‘statutory extension’ gave the tenant 6 months from that date (4 June 2008) to exercise the option. On 12 June the lawyers for the landlord wrote to the tenant advising that the tenant had lost the right to exercise the option, as the tenant had failed to exercise the option within 6 months of the option notice and that the tenant was required to vacate the premises at the expiration of the term, namely 30 September 2008. The tenant gave notice of exercise of the option on 18 June and shortly after issued these proceedings seeking enforcement of the option.

At this point the judgment entered ‘the twilight zone’ as far as practising lawyers (and agents) are concerned – an intimate analysis of the minutia of service. Nobody wants to think that a document that they have served may in fact be held to have not been served, but that was the outcome in this case. The landlord’s responsibility was to ‘notify’ and the Court held that that meant that the information had to in fact come to the attention of the tenant. It was not the act of the landlord ‘serving’ the document that was the touchstone; rather it was proof of the fact that the information had reached the tenant that was necessary. The agent gave evidence that the notice had been posted to the tenant, both in the normal mail and by registered mail, on 4 December 2007. But the Court was not satisfied that the normal mail letter had been received (or indeed posted) and was satisfied that the tenant had not collected the registered mail until 31 December 2007, which was when the landlord had fulfilled the obligation to ‘notify’. This made the tenant’s exercise of the option on 19 June 2008 within the 6 months extended period for exercise and thus enforceable.

The Court drew the crucial distinction between ‘service’ and ‘notification’, placing a higher onus in respect of the latter. However it also concluded that even if the lower threshold of ‘service’ was all that was required, then ‘service’ had not been achieved as the letter referred to 3 June 2008, whereas 6 months from ‘service’ would have been 6 or 7 June, depending upon the definition of ‘service’ adopted. As Maxwell Smart would say, ‘Missed by that much!’

The outcome was a win for the little guy, who would have, perhaps unfairly, lost a business that had cost a significant amount of money. No doubt that did not influence the outcome, but nevertheless it is a pleasing happenstance.

Tip Box

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

Estate agent’s commission – Money for nothing

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

Victorian estate agents might be contemplating adopting this famous Dire Straits song as their new anthem after the recent Court of Appeal decision of Icon Property P/L v Wood [2008] VSCA 123, a decision handed down on 26 June 2008.

Wood engaged Icon to sell an apartment. A purchaser signed a contract and paid a deposit by a cheque which was subsequently dishonoured. The vendor rescinded the contract and sued the purchaser for losses, but the purchaser was the typical ‘man of straw’ and the vendor recovered nothing.

In the meantime the agent sold the property to a second purchaser and that transaction settled in due course. When the agent accounted to the vendor, commission was deducted in respect of both the first (failed) sale and the second sale. The vendor issued proceedings in VCAT claiming a refund. The vendor gave evidence that the agent had agreed prior to the second sale that only one commission would be charged and the vendor appears to have been fairly convinced that that was the case as an attempt by the vendor to ‘discuss’ the question of commission with the agent resulted in an intervention order against the vendor. Nevertheless VCAT did not accept that evidence and found that the agent was entitled to commission on the first sale. However VCAT held that the agent did not hold an authority pursuant to s 49 Estate Agents Act to charge commission on the second sale and ordered a refund in respect of that commission.

Perhaps there was some justice in this result as the vendor made the sale and the agent made a commission. But when considered in the context of the first sale alone, the agent made the commission even though the vendor did not make the sale. Whilst this was the outcome, perhaps it was not the decision. Judge Bowman stated that ‘ultimately it was basically agreed between the parties’ that the agent was entitled to the first commission and although he said ‘in my view, that approach is correct’ there does not appear to have been any argument on the point, much less reference to authority.

Victorian estate agents have long been a protected species. The general common law principle of agent’s entitlement to commission requires the sale to be completed before the agent is entitled to a commission and this is the law in other States of Australia. But a long line of Victorian authority has established an agent’s entitlement to commission at an earlier point in time, generally referred to as ‘when a purchaser signs a document capable of becoming an enforceable contract’ if that document is subsequently signed by the vendor. This recognises that it is the agent’s function to find the purchaser and it is then for the vendor to complete the transaction. On this basis an agent will be entitled to commission if the vendor ‘lets a purchaser out of a contract’ or the contract falls over as a result of the action, or inaction, of the vendor, such as a defective Vendor’s Statement, resulting in the purchaser avoiding the contract. But this is not an absolute right and an agent will not be entitled to commission if the sale ‘goes off’ because a special condition (such as a loan condition) is not satisfied.

No Victorian case has considered an agent’s right to commission where effectively no deposit has been paid because the cheque bounced, but it has been considered in New Zealand where it was decided that an agent who failed to collect the deposit (or accepted a dishonoured cheque for the deposit) was not entitled to commission. This seems to be an eminently sensible result, as expecting a vendor to pay a commission when no deposit is paid seems ludicrous, and no less so if the deposit is constituted by a rubber cheque. Agent’s authorities in the past included reference to a 10% deposit. The fact that that requirement seems to have ‘fallen off’ the current authority does not reduce the implied expectation of a vendor that a purchaser will have shown an intention to be bound to the contract by paying the universally accepted deposit of 10%. In specific circumstances a vendor might agree to a lesser deposit, but the normal expectation, and an implied term of the retainer, would be payment of 10% (and not by a rubber cheque!).

The agent unsuccessfully appealed to the Court of Appeal, which confirmed the lack of authority in respect of the second commission. As such, the issue of the first commission was not a subject of the appeal, although none of the judges seemed to have a problem with the first commission and Redlich JA in brief reasons accepted the agent’s entitlement to the first commission. Virtually none of the authorities were discussed (other than in footnotes) and the case, despite first appearances, should not be regarded as authority that a rubber cheque will justify commission. The Fat Lady has not begun to sing the anthem.

Tip Box

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

Estate agent – Agent beware

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

Estate agents have always been given a degree of ‘poetic licence’ when it comes to describing the property that they are retained to sell on behalf of a vendor. To describe a property as ‘immaculate’ Walker & Anor v Masillamani & Anor [2007] VSC 172 – or as having ‘perfect presentation’ (Mitchell v Valherie (2005) 93 SASR 76) does not mean that the property is perfect in every aspect and completely free of all defects. Such sales descriptions fall within the definition of ‘mere puffery’ and the courts expect a prospective purchaser to exercise a reasonable level of cynicism when balancing such descriptions with the physical condition of the property revealed by inspection.

However, two recent cases indicate that courts will not be so lenient and extend such licence to an agent who is describing the sales process, rather than the subject matter of the sale.

Bovino P/L v The Casey Group Holdings P/L [2010] VSC 391 concerned the sale of a caravan park for $8.6m. The agent submitted the property to two prospective purchasers and both purchasers made offers that were subject to the purchaser obtaining planning approval to redevelop the land. The agent concentrated his attention on the ultimate purchaser and evidence was given that the agent left a voice message on that purchaser’s phone to the effect that:

‘There is another purchaser’ and

‘You will have to make an unconditional higher or better offer’

The purchaser responded with a higher offer that, importantly, was not conditional upon planning approval.

The purchaser thereafter sought to avoid the contract on a number of grounds and the vendor sued for specific performance of the contract. Ultimately the issue came down to the question of whether the purchaser could characterise the conduct of the agent as ‘misleading and deceptive’ within the meaning of the Trade Practices Act (superseded by the Competition and Consumer Act – see schedule 2 item 18). The evidence as to the substance of the representations was accepted, principally because it appeared to have been confirmed in a later email by the agent to the vendor when discussing a request for an extension of time for performance. The agent wrote that he had ‘put a fair amount of pressure on them (the purchaser) to go unconditional’. The Judge relied upon this as confirmation that the agent had suggested that the existence of another purchaser meant that the purchaser would miss the property if the purchaser did not make an immediate, higher, unconditional offer and that such conduct by the agent was misleading and deceptive and justified avoidance of the contract by the purchaser.

Astvilla P/L v Director of Consumer Affairs Victoria [2006] VSC 289 concerned similar concepts under the Victorian Fair Trading Act, although the offence was committed by an in-house sales employee of the vendor rather than an external estate agent. The Court held that the creation of a false sense that the property was ‘a very popular house’ and could be sold ‘five times over’ (when in fact it had been on the market ‘for years’) and a false sense of urgency requiring immediate signing and payment of a deposit was misleading and deceptive conduct.

These representations related to both the property itself (that it was ‘popular’) and the sales process (that urgency was required). The representations relating to the property ‘went beyond mere puffery’ and those representations alone would have justified a finding of misleading and deceptive conduct, but the representations in relation to the need for urgency as the property might be sold to another purchaser were also factors in the decision.

Agents should therefore beware. Advising prospective purchasers that there are other willing purchasers competing for the property may amount to misleading and deceptive conduct unless the agent is able to prove the truthfulness of that representation. Auctions are all about exposing competing purchasers to the marketplace, as are private or boardroom auctions, but representing that there is genuine competition for a property when that is not the case may cross the line.

Other issues in bovino

Specific performance

The vendor sought specific performance of the contract. That remedy is discretionary and only granted if damages would not suffice. Whilst ordering a vendor to specifically perform a contract by transferring a particular property is a relatively common order, Abraham v Johns [2010] VSC 33, an order that a purchaser specifically perform a contract by paying the contract price is rare. Such an order ‘could require the continued supervision of the Court to ensure the fulfilment of the contract. Ibid at para 79. Damages will generally be the appropriate order against a purchaser. After all, the vendor is only interested in receiving the contract price; it is irrelevant where the money comes from.

Impecuniosity

As the purchaser successfully avoided the contract, the availability of an order for specific performance was not an issue; however judicial comment was made on the purchaser’s defence against such an order. The purchaser argued that they did not have the funds to complete the contract – that it was a typical ‘two dollar company’. That impecuniosity was shared by the guarantor (Clinton Casey) who claimed that his principal asset was an entitlement to share in distributions from a discretionary trust and therefore effectively valueless. The Judge found such arguments to be ‘without substance: Bovino P/L v The Casey Group Holdings P/L [2010] VSC 391 at para 70. They might also be of considerable concern to anyone engaging in commercial transactions with defendants.

Tip Box

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

Contract – Trust transactions

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

The concept of a trust has a long history in the law. Its greatest claim to fame is as a weapon by which the conscience of Equity could master the harshness of the Common Law. Whilst the Common Law might demand that T be regarded as the legal owner of Blackacre, Equity would impose a trust in favour of B, and T would be deemed to hold that bare legal interest on behalf of B, the true beneficial owner.

Modern legal theory now accepts the merger or fusion of Common Law and Equity into one seamless, but organic, set of principles, however this theory relies on the concepts developed in our legal past. The concept of the trust developed from this imposition of an amorphous relationship between trustee and beneficiary to include a variety of the strain that was in fact intentionally created and indeed recorded in written form, often in a testamentary document but equally so in a document intended to have immediate effect. Sub-groups involving multiple beneficiaries and the possibility of discretionary or changing beneficiaries evolved, but one constant remained: a trust is a vehicle, it is not a legal entity. The law recognises natural persons (in two genders) and corporations (in a variety of forms) as legal entities and a trust falls into neither category. The trustee is a legal person, the beneficiary is a legal person, but the trust itself has no legal capacity or liability.

As a consequence of this principle the Torrens system of recording ownership of land has an aversion to the trust. It is possible to register the legal ownership of the trustee on a Torrens title and it is even possible to record the interest (by way of caveat) of the beneficiary, but (in Victoria at least) it is not possible to record the trust. Section 37 Transfer of Land Act states that ‘The Registrar shall not record in the Register notice of any trust’ and the Land Victoria Lodging Book (p 1.11) states that ‘Any reference to trustees is in conflict with Section 37 … and is not acceptable’.

However trusts, with either natural persons playing the role of trustee or, more often, a corporate trustee, are common occurrences in day to day transactions, with many people employing a trust for superannuation purposes or as a tax minimisation device or in the hope of limiting legal liability. Appreciating that a trust is not a legal entity is important at two stages of a conveyancing transaction – contract and transfer.

The trustee is the legal owner of the property and will be shown as such on the certificate of title without any reference to the trust in accordance with s 37. Thus the description of the vendor in a contract of sale will usually be correct, as that description will be taken from the title. However the description of the purchaser is a more arbitrary exercise and unfortunately is often entrusted to participants in the process who do not appreciate the niceties of the law, such as estate agents, conveyancers and accountants (and, dare I say it, some lawyers). This will lead to the purchaser being (incorrectly) described as ‘The Fred Nerk Superannuation Trust” or “The Frederica Nerk Family Trust”. Is such a contract enforceable?

The purchaser does not ‘exist’ as far as the law is concerned, it is a non-entity. Only legal persons can sue and be sued, so there is no purchaser for the vendor to sue if the vendor wishes to enforce the contract against a defaulting purchaser. Equally, if the vendor does not wish to proceed, there is no legal entity capable of enforcing the rights of a purchaser – there is no-one who can sue the vendor. In the absence of an argument based on rectification (a very limited legal remedy) there is a real risk that the contract will ‘fall over’, with consequent liability for that disaster falling on those advisers who allowed the purchaser to be incorrectly described. The correct description of the purchaser is to name the trustee – perhaps ‘Fred Nerk’ or ‘Frederica Nerk Pty Ltd’. Further describing the purchaser ‘as Trustee of the Fred Nerk Superannuation Trust’ or ‘as Trustee of the Frederica Nerk Family Trust’ is superfluous, but not fatal, and sometimes placates the uninformed.

Whilst reference to the capacity of the purchaser in the contract (‘as trustee for…’) is permissible, that cannot carry over to the transfer of land. That document must name a legal person – the trustee (either natural or corporate) as the transferee and cannot include reference to the trust. Otherwise, on the basis of s 37, the Registrar will refuse to register the transfer, and we don’t want to go there.

Tip Box

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

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