By Russell Cocks, Solicitor

First published in the Law Institute Journal

Recurring outgoings, such as rates and taxes, are adjusted between the parties as at the settlement date. This right/obligation has long been a part of the standard form contract of sale of land and its present incarnation is general condition 15. Whilst requiring apportionment of outgoings between the parties at settlement, the general condition does not specify the actual method of adjustment and logically there are two such methods.

If the vendor has paid the outgoings in advance then the adjustment is achieved by simply calculating the number of days after settlement that the vendor has prepaid and allowing an appropriate amount, calculated at a daily rate, by way of addition to the purchase price. If the vendor is in arrears as at settlement, it may appear simple to likewise calculate an amount on a daily basis and deduct that amount from the balance of purchase price paid to the vendor. The problem with this method is that the purchaser is then immediately in arrears in respect of the outgoings and the vendor may be entitled to argue that a debt issued in the name of the vendor remains outstanding.

It is therefore arguably ‘more correct’ to adjust on a ‘rates paid’ basis so that, even if the vendor has not paid the outgoings, the adjustments are prepared on the basis that outgoings are paid and the full amount (or balance outstanding) is deducted from the amount due to the vendor and remitted by the purchaser (after sighting by the vendor) to the rating authority. This complied with s 175 Local Government Act 1989 which (previously) required a purchaser to pay any outstanding rates in full after settlement.

The advent of quarterly charges for rates is a relatively recent consideration that may justify a review of past practices, at least in relation to rates or instalments of rates which are not presently due and payable. In this regard s 175, whilst still requiring payment of any arrears in full, now entitles a purchaser to the benefit of any instalment payment plan that was available to the vendor.

When rates were properly regarded as an annual charge it was appropriate that adjustment was made on an annual basis, calculated by reference to the number of days between the end of the rating period and the date of settlement. This accorded with s 53 Supreme Court Act 1986 which, whilst not applying directly to rate adjustments, indicates that apportionment is generally conducted on a daily basis. However such logic is equally applicable to a daily adjustment in respect of a period of time of less than a year, such as a quarter.

Water rates were also in past times assessed on an annual basis and therefore usually adjusted on that basis, but s 139 Water Industry Act 1994 now allows the Minister to authorise annual, half yearly or quarterly payments and it is fair to say that quarterly instalments are the rule. Most water authorities now issue separate assessments for service and related charges, which are adjustable; and usage, which is not adjustable as the authority accepts liability for recovery of the usage charges from the outgoing vendor. However, as of 1 July 2013 City West Water has reverted to treating existing usage charges as a charge on the land, thereby passing responsibility back to purchasers to allow such charges as an adjustment at settlement and remit payment to the authority after settlement. Other authorities may well follow suit.

The other common outgoing requiring adjustment is owners corporation fees. Section 28 Owners Corporations Act 2006 makes the owner for the time being responsible for payment of fees and therefore, whilst they are not a charge on the land as rates are, effectively the purchaser becomes liable for payment in the same way as rates. The Act does not specify how fees are to be levied and it is fair to say that, whilst annual and monthly fees are sometimes levied, the most common method is quarterly, including annual fees payable quarterly. It is also fair to say that it is normal to adjust owners corporation fees on a quarterly basis when they are levied on that basis.

It may now be time to step into the world of quarterly payments and adjust all rates and outgoings that are assessed on a quarterly basis, on that basis. This will add the complication that not all quarters are equal (most, but not all, are 92 days) but this additional calculation may be justified to achieve an adjustment process that accords with current assessment regimes.

Tips

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

By Russell Cocks, Solicitor

First published in the Law Institute Journal

GST needs to be at the forefront of every property lawyers mind when dealing with the sale (supply) of real estate.

If the transaction relates to ‘residential premises’ then GST does not apply, but it does apply if those ‘residential premises’ are ‘new residential premises’ or are not ‘premises’ – that is, vacant land. The guiding presumption in the residential environment is that GST does not apply unless the property falls into one of the specific categories.

Conversely, when dealing with commercial real estate sold during the course of an enterprise, GST ordinarily applies unless the transaction is the sale of a ‘going concern’ or a ‘farming business’. Thus the guiding presumption in the commercial environment is that GST does apply unless the property falls into one of the specific categories.

The final consideration is, if GST is a factor in the transaction, does the margin scheme apply and, if so, do the parties want to use the margin scheme?

More than a decade after the introduction of GST most practitioners have a fair understanding of GST and the introduction of the 2008 standard contract now requires the parties to address the GST issue at the start of the transaction by imposing a presumed GST outcome in default of use of the boxes to prescribe a different outcome. However, even if practitioners have a good understanding of GST, it is still possible for disputes to arise based on the faulty understanding of the parties to the transaction.

Booth v Cityrose Trading P/L (ACN 077934671) [2011] VCAT 278 arose because the vendor sold ‘new residential premises’ and sought to recover GST in addition to the price. The purchaser argued that the contract either did not provide for the addition of GST to the purchase price or, if it did so provide, that the contract should be rectified. The contract was pre-2008 and included, as was common at that time, a very poorly worded special condition that the tribunal concluded did mean that GST was to be added to the price. However the tribunal considered the surrounding circumstances of the transaction and concluded that at the time the contract was signed, which was the relevant time for determining the intention of the parties, the director of the vendor who signed the contract on behalf of the vendor did not intend that GST should be added, as his evidence was that he had not thought about GST. This is despite there being evidence that the vendor’s manager did intend the contract to be plus GST when he gave instructions for preparation of the auction contract. Presumably, if the manager had have signed the contract, then GST would have been payable and the decision appears to be limited to its facts. An alternative basis for the decision based on misleading and deceptive conduct also confirms the importance of all of the facts, not just the written word, and that courts will hold parties to their agreement even if the contract needs to be rectified to achieve that outcome.

Duoedge P/L v Leong & Anor [2013] VSC 36 also arose due to a misunderstanding by the parties as to the GST consequences of the contract. The property was existing ‘residential premises’ and therefore GST exempt. The purchaser intended to undertake a commercial redevelopment of the site and the parties incorrectly concluded that this meant that GST did apply. The undoubted intention of the parties was that the price was GST inclusive and the plus GST box was struck out. The vendor provided a tax invoice and it was intended that the vendor would account to the Australian Taxation Office for the GST and that a refund of the GST would be made by the ATO to the purchaser. However the vendor made annual GST returns and so when the purchaser sought a refund after three months the ATO had not received the GST from the vendor and inquired into the transaction, concluded that it related to existing residential property and denied the purchaser’s claim for a refund on the basis that it was not a taxable supply.

The purchaser sought a refund from the vendor and, despite success in the Magistrates’ Court, lost on appeal. The court interpreted the contract as allocating risk in respect of payment of GST and, in this case, allocating that risk to the vendor. It followed that, if no GST was payable, the vendor was entitled to keep the GST. Dixon J. suggested that the purchaser would be able to ‘recover’ the GST by the application of the margin scheme to any resale, as the ATO had concluded that the purchase was on a no-tax basis, thereby qualifying the purchaser to sell on the margin scheme.

The ‘winner’ here was the vendor who had an extra 10%. But the purchaser would get that money back on resale by applying the margin scheme, so the purchaser was no worse off.

The ‘loser’ was the ATO, which would ultimately get less money from the purchaser’s resale, but that was because the original sale was not taxable. The vendor’s gain simply arose from the false expectation of the parties that GST was payable on the original transaction. The ATO lost something it did not want.

Tip Box

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

By Russell Cocks, Solicitor

First published in the Law Institute Journal

The issue of which party, landlord or tenant is responsible for the cost of essential safety measures and associated annual reports in relation to leased commercial premises is causing controversy.

Essential safety measures include such services as:

• air conditioning;
• fire protection; and
• exits.

An article published in April 2012 86 (04) Law Institute Journal p. 28 by Mermelstein & Redfern (LIJ article) stated boldly that ‘These costs must be met by the landlord’ and a paper presented in October 2012 by Robert Hay, Barrister for Leo Cussens Property Law Conference, and available on Hay’s blogsite The Property Law Blog (Hay article) takes the opposite view.

The LIJ article bases its conclusion on the Building Act 1993 and the Building Regulations 2006. This regime imposes obligations on landlords (as ‘owners’) in respect of essential safety measures, both in relation to maintenance and reports. The article concludes that the owner is responsible for maintenance of essential safety measures pursuant to regulations 1205 and 1217 and for the preparation of annual reports pursuant to regulations 1208 and 1214. The article then refers to s 251 Building Act, which provides that, if the owner fails to carry out essential safety measures, then the occupier (tenant) may do so and is entitled to set-off the cost against rent without objection from the landlord.

The Hay article takes no objection to this analysis but rejects the proposition that any of the above supports the conclusion that the owner is not able to contractually pass on the cost of essential safety measures to the tenant, provided that the owner does in fact carry out the work. Hay’s point is that the Building Act regime is primarily directed at establishing responsibility for performance of the work, not payment. Section 251, which is concerned with payment, only operates when the owner fails to do the work and has no role to play when the owner does the work. Hay therefore concludes that an appropriately worded lease may allow the landlord to recover the cost incurred by the landlord in respect of essential safety measures, both as to maintenance and reports.

The LIJ article relies on Chen v Panmure Hotel P/L (Retail Tenancies) [2007] VCAT 2464 as support for the proposition that the owner is responsible for the cost of essential safety measures, however that was a case where the owner had not undertaken the work, so s 251 had a role to play. The owner sought an order that the tenant pay the essential safety measures compliance costs but VCAT refused to make such an order as the tenant would have been entitled to set-off those costs pursuant to s 251. The case is authority for the proposition that an owner who does not pay the cost of essential safety measures cannot require the tenant to do so. It is not authority for the proposition that an owner who does pay the cost of essential safety measures is unable to recover the cost from the tenant.

Subsequently, McIntyre & Anor v Kucminska Holdings P/L (Retail Tenancies) [2012] VCAT 1766 has considered the question, concluding that, whilst a lease may provide that a tenant is responsible for compliance with essential safety measure obligations, s 251 means that ‘the landlord must reimburse the tenant for the costs associated therewith’. Again, this was a case where the work had not been done.

Hay’s argument depends upon the landlord undertaking the work and then seeking reimbursement from the tenant but, as is pointed out in McIntyre, the tenant is entitled to possession of the premises and therefore in a better position to comply with essential safety measures. Any lease condition authorising the landlord to undertake essential safety measures will need to address the landlord’s right to access the premises for that purpose.

Retail Leases Act

The Retail Leases Act could include a prohibition against the landlord recovering the cost of essential safety measures from the tenant, as it does in respect of recovery of land tax, but it does not. Therefore, theoretically Hay’s argument may apply to a retail lease. However it does include an obligation on the landlord to maintain the premises: s 52. The LIJ article cites Café Dansk P/L v. Shiel & Ors (Retail Tenancies) [2009] VCAT 36 as authority for the proposition that the landlord is forbidden by s 51 Retail Leases Act from recovering from the tenant the cost of repairs required by s 52. Presuming that essential safety measures fall within the general obligation to maintain imposed by s 52, a landlord would appear to be responsible for essential safety measures and cannot recover the cost from the tenant.

Hay suggests that it may be possible to overcome Café Dansk by reference to the Explanatory Memorandum, which appears to suggest that the parties are free to negotiate allocation of cost in respect of s 52 repairs but, until challenged, the case stands as authority for the proposition that any essential safety measure that can be classified as ‘maintenance’ within the meaning of s 52 will be the responsibility of the landlord.

Tip Box

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

By Russell Cocks, Solicitor

First published in the Law Institute Journal

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

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

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

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

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

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

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

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

Tip Box

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

By Russell Cocks, Solicitor

First published in the Law Institute Journal

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

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

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

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

Off the plan contracts

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

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

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

Domestic contracts

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

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

Conclusion

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

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

Tip Box

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

By Russell Cocks, Solicitor

First published in the Law Institute Journal

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

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

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

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

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

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

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

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

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

Tip Box

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

By Russell Cocks, Solicitor

First published in the Law Institute Journal

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

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

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

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

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

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

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

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

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

Tip Box

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

By Russell Cocks, Solicitor

First published in the Law Institute Journal

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

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

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

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

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

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

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

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

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

Tip Box

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