Are there any recent cases about Section 9AC of the Sale of Land Act and material changes to plans of subdivision before registration?

The property market for the sale of apartments in Victoria, Australia has become more challenging recently. 

Lockdowns and other restrictions resulting from COVID-19 such as density limits and mask wearing combined with absent foreign buyers, as well as general concern about the viability of some projects, caused banks to impose limits on off-the-plan lending. Further, stamp duty increases have also helped to create downward pressure on values. Finally, we now have upward pressure on interest rates adding to the uncertainty in the apartment market. 

In August 2021, Associate Justice Matthews was called upon in the Supreme Court of Victoria to decide an application in relation to Section 9AC of the Sale of Land Act 1962 (see Burger & Ors v Longboat Holdings Group 2 Pty Ltd [2021] VSC 469).

Readers will be aware of the decisions in Besser and Lockwood (see my post of 3 May 2013 - here https://rb.gy/rs1otu) where purchasers of property off the plan were held to be entitled to rescind after material amendments were made to the plans. 

Facts in Burger Case

Between when contracts were signed and the plan of subdivision was lodged for registration, the developer made several changes to the Plan. These included:

• decreasing the area of the apartment (predominantly the master bedroom by 4.39%).
• reducing the size of the light court resulting in a decrease of natural light into the master bedroom.
• reducing the size of the common property by vesting part of it in the local council as a council reserve.
• decreasing the area of common property 1 by creating common property 2. Common property 2 was converted into a roof terrace, which the purchaser as a member of common property 1, could not access. Prior to the change, all owners were able to access the roof terrace (however, prior to the changes to the Plan, that terrace was inaccessible to everyone).
• changing the size and location of the car spaces, including reducing the size of one car space by 11% and relocating the other from the top of a car stacker to the bottom.

The developer notified purchasers of the changes (as it was required to do). However, it had not notified the purchasers of several interim alterations. 

In response the purchasers of two lots purported to terminate their contracts in accordance with section 9AC of the SLA. 

The developer refused to accept each termination and refused to return the deposits on the basis that the changes to the Plan did not materially affect the purchasers’ lots. Developers have traditionally relied upon a less than 5% change in apartment area is being the benchmark to determine that the lot has not been materially affected. 

Her Honour disagreed with the developer's position and upheld the termination of each of the contracts by the purchasers and declared that the respective purchasers were each entitled to have their deposits refunded.

Court's conclusions

In reaching her decision, Matthews As J considered whether each of the changes made to the Plan materially affected the purchasers’ lots. 

In her deliberations, the Associate Justice rejected the developer's arguments that there was only a "modest change" to the size of the master bedroom and the total reduction in the size of the lots of 4.39% was less than a 5% reduction in size. The developer argued that a 5% variation had previously been held as "generally regarded as tolerable". In that regard, the developer relied on the decision of County Court Judge Kennedy (as Kennedy JA then was) in Birch v Robek [2014] VCC 68. In that case, the developer had a similar clause in which purchasers acknowledged that a 5% reduction in size did not materially affect the plan. However Judge Kennedy concluded in that case that the purchaser was entitled to rescind the contract and have the deposit paid returned (the change in area in that case was 12%). 

It goes without saying that County Court decisions are not binding on the Supreme Court of Victoria. However, Judge Kennedy has since been promoted and is now a Justice of Appeal in the Court of Appeal, at least implying that her decisions should be given more weight. 

The developer also relied upon the decision of Teague J in Buckley v DRK [1993] ANZ ConvR 423, where Justice Teague was disposed to see 5% for a suburban allotment at least in a general sense as being if not the most appropriate balance point, then at least a better one than 2% or 10%. 

Readers will note that the wording used by Justice Teague is not exact, and certainly left open room for argument in later cases about whether the arbitrary nature of 5% was sufficient to dispose of a claim that the plan had not been materially changed. 

Matthews As J concluded:

• Decrease in area - a change in an area of less than 5% can be material, depending upon the location and nature of the change and its effect. 
• In this case the Court commented that a reduction in size of almost 4m2 (which effectively reduced the size of the master bedroom by a quarter), ‘to a master bedroom that could hardly be described as palatial prior to the change, is clearly material’ (paragraph 79). 
• Additionally, the Court agreed with the purchaser’s argument that the change was exacerbated by the creation of the alcove which created unusable space, making it very difficult for typical bedroom furniture to be manoeuvred into the room. The changes also impacted the ‘attractiveness of the room’.
• Despite providing no expert opinion of the light flow, and the vendor disputing that the size of the light court between the plans had changed, the Court was satisfied the change had materially affected the lots. The Court acknowledged while the change in the light court in isolation may not have been material, in combination with the changes to the master bedroom, the flow of light in to the bedroom was sufficiently impacted.
• The presence of a special condition where the purchasers agreed that a decrease of less than 5% was not material, standard in many off-the-plan contracts, did not protect the developer in these circumstances. 
• Light court change - this change was not significant on its own. However, when it was combined with the changes to the master bedroom size, it did materially affect the lots.
• Creation of council reserve - once the council reserve was created, the purchasers no longer had exclusive rights over the area. This change on its own materially affected the lots. 
• Change in common property - although the size of the newly created common property 2 was relatively small in the context of the development, the loss of potential use of the terrace was not insignificant and as a result materially affected the purchasers’ lots. 
• Car space changes - these changes did not affect the type of car that could use the car spaces. Her Honour concluded therefore that these changes did not materially affect the purchasers’ lots.

Matters to consider 

The decision in Burger confirms that no matter what provisions are included in a contract of sale (including the now common acknowledgement that a change in area of less than 5% is not material) it is not possible to contract out of section 9AC.

In reality, the practical impact of any change will always need to be assessed to determine if a change is material.

In those circumstances, developers should include in their contracts of sale off plan, plans of subdivision that are finalised as much as possible and endeavour to keep changes to a minimum. 

They should also engage with purchasers affected by material changes to manage the impact of those changes. 

Whilst many changes are obligatory in order for the proposed plan of subdivision to be accepted by council, it is always recommended that developers obtain legal advice on the specific changes before they are made to the Plan to manage any risk that a purchaser may rescind.

Since material changes to a plan of subdivision can entitle a purchaser to rescind their off-the-plan contract lawfully, any such rescission can impact a developer's pre-sales and financing arrangements, resulting in reductions to total pre-sales amounts, as well as potential breaches of conditions in development facility agreements.

Developers need to be acutely aware of their financier's conditions in relation to purchasers' rights to rescind contracts and obtain legal advice when entering into financing arrangements which are conditional upon a development's pre-sales.

Developers should also ensure compliance with the strict timeframes set out in Section 9AC, and notify purchasers of changes and potential changes early in an attempt to manage the impact of those changes. 

Clearly, communication with purchasers is key. 

Conclusion

While the case turns on its own facts, this decision still sounds a warning to developers in increasingly difficult times. 

The decision confirms that the attempts by many developers to impose an arbitrary figure of 5% variation on purchasers as being not material will not always be successful.  

WG Stark

Hayden Starke Chambers

Is it a good idea to use a template or precedent form of lease?

The High Court decision in Gee Dee Nominees Pty Ltd v Ecosse Property Holdings Pty Ltd [2017] HCA 12; (1987) 261 CLR 544; 91 ALJR 486; 343 ALR 58 (29 March 2017) (Kiefel, Bell, Gageler and Gordon JJ with Nettle J dissenting) highlights the risks involved in poor drafting of legal documents and using template documents that are not suitable for the required purpose. 

Here we have a transaction nominally within the jurisdiction of the Magistrates Court of Victoria that has had a Victorian Supreme Court trial, an appeal to the Court of Appeal of the Supreme Court of Victoria, an application for special leave to the High Court of Australia, and a High Court of Australia appeal, no doubt at a cost that significantly outweighed the entire cost of the transaction. 

In total, nine judges examined the lease in this case, and three of them found in favour of the tenant. 

The case concerned the construction of a lease by which the land was leased for a term of 99 years, commencing in 1988.

The landlord had wished to sell and the tenant wished to purchase the leased land for a consideration of $70,000 but they were precluded from doing so because of town planning restrictions.

The contracting parties, therefore, sought to achieve a similar result to a sale, by amending a standard 1980 printed form instrument of a farm lease, with the rent for the entire 99-year term ($70,000) being paid upon entry into the lease. 

The parties agreed to an amendment to clause 4 of the Lease, which contained certain words from the original template struck out, and replaced with:

4. [The Lessee] will pay all rates taxes assessments and outgoings whatsoever which during the said term shall be payable by the tenant in respect of the said premises.

Clause 4 of the agreement (relating to outgoings) was ambiguous. The clause could be read as imposing on the lessee an obligation to pay all rates etc; it could also be read as confining that obligation to those that are payable by the tenant.

In 1993, the original landlord sold the property (subject to the lease) to Ecosse Property Holdings Pty Ltd. In 2004, Gee Dee Nominees Pty Ltd took a transfer of the lease from the original tenant. Therefore, neither of the original parties to the transaction was a party to the litigation. 

Justice Croft (a highly respected property lawyer) found (see [2014] VSC 479) in favour of the landlord. He concluded (at paragraph 47) it was:  

… entitled to a declaration that the Lease on its proper construction provides that the defendant shall pay all rates, taxes, assessments and outgoings whatsoever in respect of the leased land, including land tax. 

On appeal to the Court of Appeal [2016] VSCA 23 (Santamaria, Kyrou and McLeish JJA), only Kyrou JA found in favour of the landlord. Santamaria and McLeish JJA are also highly respected lawyers, and they agreed with the tenant’s interpretation of the lease. 

Somehow, the High Court granted special leave to appeal. Interestingly, Gageler J noted that the case involved no point of disputed legal principle or question of public importance: [45].

In any event, to resolve the ambiguity in clause 4, the majority of the High Court  (Kiefel, Bell and Gordon JJ, and Gageler J in a separate judgment, with Nettle J dissenting) turned to the commercial purpose that the parties sought to be achieved by entering into the lease.

Kiefel, Bell and Gordon JJ (at paragraph 23), held that: 

The Court of Appeal majority's analysis lacks any reason that sounds in commercial sense for the parties to have chosen to amend the usual covenant respecting liability for rates, taxes and other outgoings contained in the standard form with a view to increasing the potential financial burden imposed on the lessor.

At paragraph 25, their Honours also held that:

... the lease does not provide an option to renew or to purchase for a nominal sum at the end of the term. The significance of this omission is suggested to favour the conclusion that the parties bargained for the lessor to bear the expense of any imposts levied on it as owner taking into account the value to the lessor of the reversion. An alternative view is the omission was inadvertent; neither the parties nor their advisers turning their minds to how matters might stand in 2087. Kyrou JA was drawn to that explanation. So are we. A surrounding circumstance of which the reasonable businessperson would be aware is that the lessor company was in receivership. It must be accounted highly unlikely that a receiver would agree to burden the lessor company with uncertain financial obligations over the term of a ninety-nine year lease. 

Finally, they concluded (at paragraphs 26 - 27):

The Court of Appeal majority's conclusion failed to give effect to the clear statement of the parties' objective in entering the agreement. It makes no commercial sense, having regard to that objective, for the lessor to remain liable for the payment of rates, taxes and other outgoings over the term of the lease. That is especially so where the lessor has taken as consideration for the lease the land value, with no provision for future adjustments. The lessor would have been exposed to uncertainties including the effect that any change of (lawful) land use by the lessee might have had on the amount of any rates, taxes and other outgoings.

On its proper construction cl 4 imposes on the lessee the obligation to pay all rates, taxes, assessments and outgoings whatsoever that are payable during the term of the lease in respect of the land. This construction accords with the commercial aim of the parties that the lessee assume the position of owner, so far as a lease may provide, with all of an owner's liabilities.

At paragraph 51 of his judgement, Justice Gageler noted:

Clause 4 can only be so construed for what it is: a clumsily tailored variation of an ill-fitting off-the-shelf precedent. To bring linguistic and grammatical precision to its construction would be to burden the clause with more weight than its jumble of words will bear.

Nettle J, who dissented in the High Court, is another highly respected judge. 

This case confirms that either party's interpretation of the ambiguous term of the lease could have ultimately succeeded. 

Conclusion 

The decision is an extreme example of the results that can flow from poor drafting of legal documents and using template documents that are not suitable for the required purpose. 

As a result, it sounds a warning to all lawyers tasked with drafting leases and contracts of sale of real estate: be judicious in the use of precedents and consider carefully whether the particular clause is fit for the purpose for which you are trying to employ it. 

WG Stark

Hayden Starke Chambers

Can parties to a mortgage agree to contract out of the statute of limitations?

1. In Price v Spoor, [2021] HCA 20, the High Court handed down a decision on 23 June 2021 about whether the parties to a mortgage could agree to contract out of the operation of the Queensland equivalent of the Limitation of Actions Act, 1958, and whether such an agreement was contrary to the public policy underpinning the Act.

Background facts

2. On 2 July 1998, Law Partners Mortgages P/L loaned $320,000 to Alan Leslie Price, Allana Mercia Price, James Burns Price and Gladys Ethel Price.

 

3. To secure the loan, Alan Leslie Price and Allana Mercia Price mortgaged land that they owned at Minden, west of Brisbane and Rosewood, near Ipswich in Queensland to Law Partners Mortgages P/L, and James Burns Price and Gladys Ethel Price mortgaged land that they owned at Tallegalla, near Ipswich in Queensland to Law Partners Mortgages P/L. 

4. The loan was not repaid on the due date, 2 July 1999. The parties negotiated a further agreement by which, among other things, the loan was extended to 2 July 2000.

5. A part of the mortgaged land was sold in November 2000, resulting in payment of accrued interest, legal costs, and a reduction of the principal loaned by $50,000. As at April 2001, the principle outstanding was therefore $270,000. 

6. Christine Claire Spoor and Kerry John Spoor were the trustees of a small pension fund. They became the mortgagees as successors in title to Law Partners Mortgages P/L.

7. In 2017, the mortgagees served notices under the Queensland Property Law Act requiring repayment of the principal, and accrued interest. They claimed over $4 million, including interest at the rate of 16.25% per annum, compounded monthly.

8. After the notices expired, the mortgagees sued the borrowers for repayment of the money loaned (plus interest) and sought to recover possession of the remaining security properties. 

9. The borrowers contended that the mortgagees were statute-barred from enforcing rights under the mortgages as a result of the expiry of the relevant time period under Queensland equivalent of the Limitation of Actions Act, 1958. 

10. Two of the borrowers further pleaded that the mortgagees’ titles under the mortgages had been extinguished pursuant to a provision in the Act, which provides, in effect, that where the time prescribed by the Act within which a person may bring an action to recover land has expired, the person’s title to that land “shall be extinguished”.

11. The mortgagees replied that the borrowers did not have the benefit of the Act as they had agreed, pursuant to clause 24 of the mortgages, that they would not plead any defence under the Act in proceedings to enforce the mortgagees’ rights as mortgagees.

12. Clause 24 was in the following terms:

RESTRICTIVE LEGISLATION

The Mortgagor covenants with the Mortgage[e] that the provisions of all statutes now or hereafter in force whereby or in consequence whereof any o[r] all of the powers, rights and remedies of the mortgagee and the obligations of the Mortgagor hereunder may be curtailed, suspended, postponed, defeated or extinguished shall not apply hereto and are expressly excluded insofar as this can lawfully be done.

Queensland Supreme Court

13. At first instance, Dalton J in the Supreme Court of Queensland [see [2019] QSC 53] refused the mortgagee’s application to strike out the borrowers’ defence as it related to the Statute of Limitations, and as a result entered judgment for the borrowers on the basis of their defence that the Statute of Limitations applied. Later, her Honour also made orders for the execution by the mortgagees of releases of the two mortgages. 

Queensland Court of Appeal

14. The Court of Appeal of the Supreme Court of Queensland (Gotterson JA with whom both Sofronoff P and Morrison JA agreed) [see (2019) 3 QR 176; [2019] QCA 297] allowed the mortgagees’ appeal, overturned the trial judge’s orders and gave judgment for the mortgagees in reasons handed down on 17 December 2019, later including ancillary orders for possession of the security properties. 

15. At paragraphs 18 to 19 of Gotterson JA’s decision, he noted that: 

[18] Accordingly, in the view of the learned primary judge, there was no reason to doubt the validity of a borrower’s promise in a loan or mortgage document never to raise a limitations defence to an action to recover monies due to the lender. However, her Honour drew a distinction in the case of a promise not to raise a limitations defence in an action to recover possession of land.

[19] In summary, relying on observations of Mason CJ in Verwayen, the learned primary judge reasoned that a provision such as s 10(1)(a) of the Limitations Act conferred a benefit upon an individual in the nature of a statutory right to plead a certain defence, which could be waived. By contrast, s 24(1) thereof operated to extinguish rights, and not merely to confer a benefit. Hence, her Honour held, it was not open to parties to contract against the operation of that section. Further, here, s 24(1) had operated to extinguish the mortgagee’s title to the mortgaged land before the current proceedings had been commenced. Thus, clause 24 was incapable of altering the extinguishment of that title. 

16. At paragraph 34 of the Court of Appeal’s decision, Gotterson JA noted:

There appears to be no Australian authority in which separate consideration has been given to whether a contractual provision not to plead a limitations defence entered into for consideration before a cause of action to which it might be pleaded has arisen, is void as against public policy. However, judicial observations at the highest level in this country suggest that such a provision is not, for that reason, void.

17. Further, at paragraph 36 (emphasis added):

In [Verwayen], Brennan J said of the “right” … that it was introduced solely for the benefit of a defendant who must plead it before it is effective and who may waive it. Consistently with this, French CJ, Crennan, Keifel and Bell JJ in Westfield Management Ltd v AMP Capital Property Nominees Ltd [2012] HCA 54; (2012) 247 CLR 129 at 143-144 more recently said:

... a person upon whom a statute confers a right may waive or renounce his or her rights unless it would be contrary to the statute to do so. It will be contrary to the statute where the statute contains an express prohibition against ‘contracting out’ of rights. In addition, the provisions of a statute, read as a whole, might be inconsistent with a power, on the part of a person, to forego statutory rights. It is the policy of the law that contractual arrangements will not be enforced where they operate to defeat or circumvent a statutory purpose or policy according to which statutory rights are conferred in the public interest, rather than for the benefit of an individual alone. The courts will treat such arrangements as ineffective or void, even in the absence of a breach of a norm of conduct or other requirement expressed or necessarily implicit in the statutory text.

18. And at paragraph 38:

As both Mason CJ and Brennan J expressed it, what is conferred by a limitations statute is a right on a defendant to plead as a defence the expiry of a limitation period. The right is conferred on a defendant as an individual. As such, an individual may contract for consideration not to exercise the right, or to waive it, as a defendant.

19. At paragraph 64 of the judgment, after analysing the High Court’s decision in Verwayen dealing with the waiver of reliance on the statute of limitations in that case, Gotterson JA concluded:

These statements are, to my mind, illustrations that according to ordinary usage, the word “defeat” aptly describes the effect of limitation provisions.

20. At paragraphs 65 to 66, the Honourable Justice of Appeal concluded:

I infer from these references that their Honours considered that a limitation provision was the means whereby the cause of action was defeated, notwithstanding that it was for a defendant to plead it for that to happen. In other words, they did not consider that a need for the provision to be triggered by a pleading of it has the consequence that the provision is not the means by which the cause of action is defeated.

Unlike the learned primary judge, I have, therefore, concluded that clause 24, according to its terms, does apply to provisions in the Limitations Act by which the enforcement of a right, power or remedy of the mortgagee might be defended by the mortgagor and thereby defeated. Relevantly, those provisions include ss 10(1)(a), 13 and 26(1). 

21. The final finding of the Court of Appeal was in paragraph 76, as follows:

It follows that the [mortgagees]’ titles as mortgagee will have been extinguished under s 24(1) only if the s 13 period of limitation has expired in respect of them. In my view, it has not in this case. That is because, consistently with these reasons and as it was open to the parties to agree, clause 24 has at all times operated to exclude s 13 from applying to the mortgages. Thus, as between mortgagor and mortgagee, the period of limitation prescribed by s 13 has never applied and hence has never expired.

22. In those circumstances, the appeal was allowed unanimously. 

High Court

23. The borrowers obtained special leave to appeal to the High Court. 

24. As a result of the grant of special leave, the principal questions to be determined by the High Court in the appeal were whether:

a. clause 24 of each of the mortgages was void and unenforceable as contrary to the public policy underpinning the Act; and

b. section 24 of the Act operated automatically to extinguish the mortgagees’ title at the expiry of the time period.

High Court’s decision

25. The High Court unanimously dismissed the appeal from the Queensland Court of Appeal. Kiefel CJ and Edelman J delivered joint reasons. Gageler and Gordon JJ (in a joint judgment) substantially agreed with Kiefel CJ and Edelman J, as did Steward J separately. 

26. Kiefel CJ and Edelman J noted (at paragraphs 9 to 11 of their reasons – emphasis added): 

In WorkCover Queensland v Amaca Pty Ltd [2010] HCA 34; (2010) 241 CLR 420 at 433 per French CJ, Gummow, Crennan, Kiefel and Bell JJ, … explained the effect of statutes of limitation by reference to what had been said by Gummow and Kirby JJ in The Commonwealth v Mewett (1997) 191 CLR 471 at 534-535; see also The Commonwealth v Verwayen (1990) 170 CLR 394 at 404 per Mason CJ. In Mewett, their Honours said that in the case of a statute of limitations in the traditional form a statutory bar does not go to the jurisdiction of the court to entertain the claim but rather to the remedy available, and therefore to the defences which may be pleaded. The cause of action is not extinguished by the statute and unless a defence relying on the statute is pleaded, the statutory bar does not arise for the consideration of the court.

What was said in Mewett accords with the reasons of Mason CJ in The Commonwealth v Verwayen (190) 170 CLR 394 at 405. Speaking there of then s 5(6) of the Limitation of Actions Act 1958 (Vic) (which provided "No action for damages for negligence ..., where the damages claimed by the plaintiff consist of or include damages in respect of personal injuries to any person, shall be brought after the expiration of three years after the cause of action accrued”) his Honour said that although the terms of that provision are capable of being read as going to the jurisdiction of the court, limitation provisions of this kind have not been held to have that effect. Instead they have been held to bar the remedy but not the right and thereby create a defence to the action which must be pleaded (Citing Dawkins v Lord Penrhyn (1878) 4 App Cas 51 at 58-59; The Llandovery Castle [1920] P 119 at 124; Dismore v Milton [1938] 3 All ER 762; Ronex Properties Ltd v John Laing Construction Ltd [1983] QB 398; Ketteman v Hansel Properties Ltd [1987] AC 189 at 219. These statements have been applied with approval on a number of occasions in this Court (Georgiadis v Australian and Overseas Telecommunications Corporation (1994) 179 CLR 297 at 305; Berowra Holdings Pty Ltd v Gordon [2006] HCA 32; (2006) 225 CLR 364 at 372 [20], 373-374 [24]-[25]; Brisbane City Council v Amos (2019) 266 CLR 593 at 615-616 [49]; Minister for Home Affairs v DMA18 (2020) 95 ALJR 14 at 18 [4], 23 [30]; 385 ALR 16 at 19, 26. Mason CJ went on to observe that since the right to plead a limitations defence is conferred by statute a contention that the right is susceptible of waiver "hinges on the scope and policy" of the Act. The same may be said of the question whether a person may abandon the statutory right to plead a defence of limitation, by agreement.

27. The borrowers relied upon the public interest in the finality of litigation as being the public policy behind the Statute of Limitations. 

28. Kiefel CJ and Edelman J rejected that argument, holding:

Mason CJ concluded (The Commonwealth v Verwayen (1990) 170 CLR 394 at 405-406) that by giving defendants a right to plead the expiry of the relevant time period as a defence, rather than imposing a jurisdictional restriction, the purpose of the Victorian Limitation Act could be discerned as one to confer a benefit on individuals "rather than to meet some public need which must be satisfied to the exclusion of the right of access of individuals to the courts". It was therefore possible, in his Honour's view, to "contract out" of statutory provisions of that kind.

29. At paragraph 35 of the joint judgement, Kiefel CJ and Edelman J held:

A defendant may bargain away the statutory right and that bargain may be enforced.

30. Justices Edelman and Gordon agreed with the judgment of Kiefel CJ and Edelman J and noted that the principal question in the appeal was whether clause 24 of the mortgages in question was void and unenforceable as contrary to the public policy underpinning the [Qld Limitation Act]. 

31. Their opinion (at paragraphs 38 - 40) was:

… That question raises a preliminary point of contractual construction and a subsidiary question about the appropriate relief if a party breaches a covenant not to rely upon a limitation defence.

32. Steward J noted at paragraph 66 of his judgment (in respect of construing the meaning of the terms of a contract): 

… there was no onus on the respondents to establish that their construction of cl 24 is correct. The issue of construction is a question of law (Deane v City Bank of Sydney [1904] HCA 44; (1904) 2 CLR 198 at 209 per Griffith CJ, Barton and O'Connor JJ), to be objectively determined having regard to the text and context of the contract, and the commercial purpose or objects which it was intended to secure (Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37; (2015) 256 CLR 104 at 116 [46] [47] per French CJ, Nettle and Gordon JJ). 

33. At paragraphs 76 and 78 of his judgment, in considering whether the parties could contract out of the Statute of Limitations, Steward J noted: 

Two relevant propositions may be extracted from the reasons of Mason CJ in Verwayen.  [First] Whether or not a person can waive the defences conferred by a particular Statute of Limitations depends on the scope and policy of that Act; the test is whether the applicable provisions are "dictated by public policy" and were enacted "not for the benefit of any individuals or body of individuals, but for considerations of State” [at CLR 405]. If so, they cannot be excluded by contract. But if the benefit conferred by statute is otherwise private in nature, the law may permit the parties to exclude it.

…

78. The second proposition is that Parliaments have chosen to implement the public policy of finality in litigation by conferring on defendants a right to plead an applicable Statute of Limitations defence, rather than by imposing a restriction on jurisdiction (Verwayen at CLR 405). In that respect, no party disputed that it had been long established that the language used in the Limitation Act – an action "shall not be brought" – was a reference to a defendant having the capacity to plead a defence of limitation and not to the extinguishment of any underlying rights of a plaintiff (Brisbane City Council v Amos (2019) 266 CLR 593 at 599 [7] per Kiefel CJ and Edelman J). On that basis, Mason CJ in Verwayen concluded, for the purpose of considering whether the defences conferred by a Statute of Limitations (The Court in Verwayen was concerned with the Limitations of Actions Act 1958 (Vic)) may be waived, as follows (Verwayen at CLR 405-6] – emphasis added)):

"I conclude that the purpose of the statute is to confer a benefit upon persons as individuals rather than to meet some public need which must be satisfied to the exclusion of the right of access of individuals to the courts. On that basis, it is possible to 'contract out' of the statutory provisions, and it is equally possible to deprive them of effect by other means such as waiver. Put differently, the provisions are procedural rather than substantive in nature, which suggests that they are capable of waiver".

34. And at paragraph 88:

Once it is accepted that the policy of finality in litigation is one that is statutorily entrusted to each defendant, it follows that the limitation defences may be waived. It also follows, as a matter of logic and principle, that a party may agree to promise not to invoke those defences as part of the contractual bargain. 

35. Ultimately, all 5 members of the High Court who heard the appeal determined that it was permissible for the parties to agree to contract out of the provisions of the Limitation Act and that such an agreement was not contrary to public policy. The High Court also found that s 24 of the Limitation Act did not operate automatically to extinguish the respondents’ title at the expiry of the limitation period.

36. The Court noted that the provisions of the Limitation Act do not act as a statutory bar to bring proceedings or operate automatically to extinguish title, but instead give a party a defence.

37. Ultimately, the Court concluded the Limitation Act conferred rights on individuals rather than fulfilling any public need and therefore the contractual provision under which the borrowers waived their rights under the Limitation Act was effective.

Conclusions 

38. The Limitation of Actions Act 1974 (Qld) is similar to the Limitation of Actions Act, 1958 (Vic) (although the time limits are slightly different – 12 years to sue on a mortgage in Queensland, compared to 15 years in Victoria). 

39. The case shows the importance of borrowers obtaining proper advice about the terms of any loan documentation before borrowing (in particular, relating to terms like waiving any limitation rights). 

40. On the other hand, the decision should give lenders confidence that properly drafted loan documentation will protect their right to recover debts, even if there has been a very lengthy delay in taking action. 

41. It has been noted by other commentators that the decision did not deal with whether this type of contractual provision may be held void if it is ultimately found to be an unfair contract term under the Australian Consumer Law or under state legislation dealing with unfair contract terms.

WG Stark

Hayden Starke Chambers

Who is responsible when external cladding fails in an apartment tower during a fire - Court of appeal?

Further to my post about the fall out from the Lacrosse Tower fire in VCAT (see:  https://melbournepropertylaw.blogspot.com/2020/01/who-is-responsible-when-external.html), the Court of Appeal recently handed down its decision on the appeal from VCAT. 

In Tanah Merah Vic Pty Ltd v Owners' Corporation No 1 of PS631436T [2021] VSCA 72, Beach, Osborn JJA and Stynes AJA upheld most of the decision of Judge Woodward, sitting as a Vice President of VCAT. 

The Court of Appeal has undertaken a very detailed analysis about the factual matrix and the obligations undertaken by each of the parties to the litigation. In a joint judgment, Beach and Osborn JA and Stynes AJA also set out a detailed summary of the findings made by Judge Woodward in VCAT. 

The Court of Appeal's decision upholds the Tribunal's finding that the builder, LU Simon, breached warranties implied into the Design & Construct Contract by sections 8(b), (c) and (f) of the Domestic Building Contracts Act, 1995. The Court of Appeal also upheld the Tribunal's finding that each of the builder's consultants (the fire engineer, the architect and the building surveyor) and the tenant who started the fire failed to exercise reasonable care and that these failures were a cause of loss to LU Simon. 

However, the Court allowed one ground of appeal by the building surveyor, Gardner Group P/L. 

The proportions of liability found by VCAT to apply were 33% to the building surveyor; 39% to the fire engineer; 25% to the architect; and 3% to the tenant. 

In a costs judgment on 7 June 2021, the Court of Appeal noted that in its view the apportionment of responsibility in the case should be:

Gardner Group (building surveyor): 30 per cent; 

Ellenberg Fraser (architect): 25 per cent; 

Thomas Nicholas (fire engineer): 42 per cent; and 

Mr Gubitta (tenant): 3 per cent.

In other words, the fire engineer's responsibility was increased by 3% and the building surveyor's responsibility was decreased by that amount. 

Combustible Aluminium Composite Panelling (ACP) is installed in many buildings across Australia, and promises to be a difficult area for building owners, owners corporations, builders and their consultants (building surveyors, architects and fire engineers) for many years to come. 

The City of Melbourne Building Surveyors have been very active in issuing Building Notices and Building Orders in respect of various high rise residential buildings with ACP's following on from 2 apartment fires in the Melbourne CBD and Docklands. 

Further, the Victorian State Government has also been actively involved in trying to clean up the issue. 

The upshot of the Court of Appeal's decision is that builders and their advisors who have used or recommended ACP's that are non compliant with the requirements of the Building Act 1993 and the Building Code of Australia will most likely be found to be responsible for the cost of removing and replacing those panels. That liability will arise when claims are made against a builder pursuant to statutory warranties concerning the suitability of materials, compliance with the law and fitness for purpose arising under Domestic Building Contracts Act 1995 subsections 8(b), (c) and (f).

WG Stark 

Hayden Starke Chambers

Are there any recent cases about a mortgagee's duty of good faith in selling secured property in pandemic times?

The Supreme Court of Queensland (Holmes CJ) has recently considered the duty of a mortgagee in selling a secured property in uncertain economic times (ie during a pandemic). 

In HSBC Bank Australia Ltd v Wang & Ors [2021] QSC 58, the Court considered an application to remove a caveat lodged by the registered proprietors of a property on Hope Island on the Gold Coast in Queensland. 

The caveator/registered proprietors had bought the property in 2009 for $9 million with loan funds ($4.5 million) obtained from the mortgagee, which were secured by a registered first mortgage. The mortgage went into default, and the lender obtained default judgment for possession of the property, and took possession by warrant on 1 December 2019. 

The lender sold the property for $5,510,000 after advertising it for sale at a time when Queensland's international and state borders were closed, with settlement due 18 December 2020.

The caveator/registered proprietors lodged the caveat after the sale, and just before settlement on 17 December 2020. 

The caveat claimed that the registered mortgagee had sold the property in breach of the mortgagee's duty to act in good faith towards them, because the mortgagee had sold in a pandemic, had sold too rapidly, had not waited until the property market improved and sold at a significant undervalue.  

The mortgagee had obtained a valuation of the property in January 2020 in the range of $5,500,000 to $7,200,000. The valuer noted that the property was bought in 2009 at the peak of the market, and that it had been poorly maintained since then. He recommended an extended sales and promotion period of 6 to 12 months, noting that a shortened time frame and forced sale conditions would significantly reduce the potential sale price. 

In July 2020, a further valuation was obtained, noting the significant deterioration in the market at that time (due to the pandemic), and the resulting reduced market value of the property. 

An auction took place in early August 2020; the reserve price was $6,750,000. The highest bid at the auction was $4,500,000 and it was passed in. 

Eventually, the property was sold a little over a month after the auction for $5,510,000. This price was accepted as it was the best offer received, and it was significantly higher than the highest bid at the auction, despite a significant marketing campaign. The property had not received much interest and had a good deal of negative feedback about its current state. Further, there was uncertainty about the economy in general and the prestige property market in Queensland in particular. 

The registered proprietors obtained expert valuation evidence that challenged the lender's valuation, noting in his opinion that the land was valued at around $6 million when it was sold, and the improvements at the property increased the value to over $10 million. 

The Court then proceeded to analyse a mortgagee's duty of good faith to its borrowers, and noted that Griffiths CJ in the High Court in Pendlebury v Colonial Mutual Life Assurance Society Ltd [1912] HCA 9; (1912) 13 CLR 676 described the duty of good faith as meaning that the mortgagee must not: 

    ...recklessly or wilfully sacrifice the interests of the             mortgagor.

Recklessness would be demonstrated by a mortgagee who failed to take:

    ...obvious precautions to ensure a fair price and was careless as to whether one was obtained (at CLR 680).

In this case, the borrowers alleged that was exactly what happened in the circumstances. 

The lender on the other hand argued that merely because valuation evidence indicated a higher market value did not establish that there was a serious question to be tried as to a breach of the duty of good faith. 

The borrower's complaint was essentially that the marketing period was truncated because the applicant accepted the second respondents’ offer within weeks of the auction. The judge concluded (at paragraph 27) that there was not an arguable case that, in doing so, the lender breached its duty of good faith.

The Court concluded that this case was an instance in which, given the extensive advertising and marketing of the property prior to the auction, the sale price which the mortgagee was able to achieve was a better guide to market value than the valuation evidence.

The Court also noted that a sale at an inadequate price does not demonstrate a lack of good faith. It is necessary to show that the mortgagee’s failure to take reasonable steps to obtain a proper price was so serious as to be characterised as unconscionable conduct.

The mortgagee had accepted the offer of $5,510,000 in a context in which its own valuer had valued the property prior to the auction (at the lower end) at $5,000,000.

The court pointed out that a mortgagee is “...entitled to sell at the time of his choice and without waiting for a time which a selling owner might consider more propitious” And, indeed, there was no reason to suppose that a more propitious time was pending.

The judge found that the lender sold at a time when, with international borders closed and state borders being closed to different regions at different times, there was no reason to suppose that any improvement in the market was imminent.

It seemed that at the time of the sale, buyer sentiment was becoming more unfavourable. 

The judge concluded at paragraph 33 that in the context of the mortgagee’s efforts to sell and the uncertainty of conditions, neither the low price achieved nor the failure to wait can conceivably justify an inference that the applicant acted other than in good faith, and there was nothing to support the contention that the lender was not acting in a genuine belief that accepting the offer was in the best interests of all concerned, including the borrowers.

The Supreme Court of Queensland also concluded that the balance of convenience tipped against allowing the caveat to remain in place. The borrowers did not want to retain the property; instead they urged its sale. 

Further, they did not pay into court the arrears owing on the mortgage so as to provide the lender with certainty of recovery. It seemed probable that the mortgagee would, if it had to re-sell at the time of the hearing, achieve at least a price which would meet the amount secured, but there was some risk that it would encounter difficulty finding another buyer within any reasonable time frame. 

Whilst the caveators gave the usual undertaking as to damages, they were in China at the time of the hearing (not Australia) and there was no evidence at all as to their means of meeting such an undertaking. 

Indeed, the Court found that it would seem to follow that if they had means available in this country they would have taken steps to negotiate some arrangement with the lender concerning the arrears of the debt so as to prevent the property’s sale; but nothing of the sort occurred.

The purchasers had taken various steps towards moving from their home in Sydney to the property, and enrolled their son in a school, which he then attended, in its vicinity. 

One of the purchasers remained in Sydney with possessions still packed and waiting to be transported, while the other purchaser and their son were living in temporary accommodation at the Gold Coast. They remained ready and willing to complete the contract. 

The Court accepted that the purchasers faced considerable inconvenience should their purchase not proceed.

Conclusions 

First, a low sales price will not of itself demonstrate a lack of good faith. The mortgagee's conduct must be so unreasonable as to rise to the level of unconscionable conduct.

Secondly, in light of the uncertainty and significant market disruption in 2020 as a result of the pandemic, the price offered and accepted for the property was better evidence of the property's market value than the valuations obtained by the respective parties.

It seems in these difficult economic times that we are likely to see more actions by lenders in taking possession of, and selling security properties. 

Whilst borrowers are unlikely to be satisfied about the results of a mortgagee's auction, it seems that it will be very difficult for a borrower to establish a lack of good faith where the only issue is the low sale price achieved by the lender. 

WG Stark

Hayden Starke Chambers

Can I enforce an unregistered restrictive covenant?

In Paragreen v Lim Group Holdings P/L [2020] VSCA 84, the Court of Appeal (Tate, Kaye and Niall JJA) examined whether the respondent could enforce an unregistered restrictive covenant over a laneway against registered proprietors of land which included part of the laneway. 

Background facts

The applicants were the registered proprietors of a property in West Melbourne. The respondent was the registered proprietor of the neighbouring property. The applicants’ property included a strip of land (‘the laneway’) on its western side, which abutted the property of the respondent, and which was subject to a registered easement of carriageway in favour of the respondent’s land.

The respondent purchased its property with the intention of erecting a multi-unit development on it.

The laneway was immediately to the east of the respondent’s property. 

In the course of the development, the respondent’s contractors made extensive use of the laneway in order to carry out the work.

The respondent commenced proceedings in the County Court against the previous owner of the applicants' property. Those proceedings were resolved by an agreement contained in Terms of Settlement. They provided (among other things) that the previous owner would cease to park vehicles on the laneway.

By a contract made in 2009, the previous owner sold the laneway and the applicant's property to a property developer.  

In due course, the developer applied to redevelop and subdivide the applicants' property and a property next door. The development was to consist of three dwellings. The Plan of Subdivision depicted unit 3 as covering the northern section of both the applicants' property and of the laneway. In effect, it included some 9.68 metres of the northern section of the laneway. The two other units in the vendor's development abutted the laneway, with vehicle garages accessed from the laneway. The Plan of Subdivision depicted the section of the laneway that was adjacent to those two units as ‘common property’. The Plan of Subdivision noted that the laneway was subject to the easement of carriageway in favour of the most easterly of the four lots owned by the respondent.

By a contract of sale made in 2011, the applicants purchased the northern most unit in the subdivision from the developer. The contract of sale included a Vendor’s Statement provided pursuant to s 32 of the Sale of Land Act 1962, which annexed a number of documents including the Terms of Settlement.

When the applicants took possession of their property, the right of way was an open laneway. The applicants were a young married couple, and in the years that followed they had two children. During that time, there were a number of intrusions and attempted break-ins to the applicants’ property. The applicants were concerned about their security, and they erected a gate inset two or three metres from their southern boundary across the right of way. At one stage, they also placed a chicken coop, with some chickens in it, and some children’s play equipment on it.

In response, the respondent commenced the proceedings in the County Court, based first, on its rights under the easement, and, secondly, on rights that it claimed to have against the applicants pursuant to the Terms of Settlement, which it alleged contained an unregistered restrictive covenant in the laneway, which precluded the applicants from parking their motor vehicle on it.

The judge, who heard the trial of the proceeding held that the Terms of Settlement contained a restrictive covenant over the laneway, and that notwithstanding that it was unregistered, the applicants were bound by it because it would be fraud, for the purpose of s 42 and s 43 of the Transfer of Land Act 1958, for them to disregard its terms. 

The respondent claimed (among other things) that the applicants had notice of the Terms of Settlement and the covenants at the time that they purchased their property, and, further or in the alternative, the applicants took title to their property subject to the Terms of Settlement and covenants. 

In response, the applicants raised a number of different defences to the claim based on the Terms of Settlement. They included that at the time at which they took title to the land, the respondent had not lodged any caveat on the title to that land, and accordingly the applicants took a transfer of the land free from any unregistered interests or encumbrances by reason of the operation of s 42 and S 43 of the Transfer of Land Act. 

The evidence

The only relevant evidence given at trial was given by the second applicant. 

The advertisements for the sale of the property stated that it had a car parking space appurtenant to it (the applicants were only considering properties that had a car parking space). When the Applicants purchased the property they believed that they were getting a car parking space on it. The existence of that car parking space was ‘factored into’ the amount of the Applicants' offer to the vendor.

As a result of receiving the Vendor’s Statement, the Applicants knew of the Terms of Settlement between the previous owner and the respondent. However, they believed that the terms were a ‘private agreement’ between the previous owner and the respondent. The vendor never asked the applicants to agree to be bound by the terms. 

Reasons for judgment

The registered easement

The trial judge noted that the easement was only appurtenant to the most eastern lot owned by the respondent, and considered that the activities that the respondent intended to carry out on the right of way were for the benefit of all the four titles, without discrimination between them. Thus, the intended use of the right of way, by the respondent, was excessive. 

The judge further considered that the right of carriageway of the respondent over the easement did not entitle it to use the carriageway for the purpose of carrying out maintenance and construction works on the dominant tenement. His Honour further considered that the gate, installed by the applicants, did not constitute an unreasonable interference with the respondent’s right of way over the easement. Accordingly, he concluded that the present use made by the applicants of the part of their land comprising parts of the laneway did not constitute an unreasonable interference with the respondent’s rights as owner of the dominant tenement. 

The judge further noted the evidence that over a period of time the applicants had parked various vehicles on their portion of the right of way. He accepted the contention, made on behalf of the applicants, that there was no reason for the respondent or its licensees to traverse the area to the north of the gate installed by the applicants. Accordingly, the use of that area by the applicants, to park their vehicle, did not constitute an unreasonable interference with the rights of the respondent under the easement.

The unregistered restrictive covenant

The trial judge held that the Terms of Settlement constituted a restrictive covenant, although not registered under the Transfer of Land Act. 

The judge then held that the Terms of Settlement formed part of the Vendor’s Statement that was received by the applicants before they purchased the property, and the applicants therefore ‘took with notice of this promise not to park’.

The trial judge concluded that the effect of clause 7 of the Terms of Settlement, and of S 79 of the Property law Act 1958, was that the Terms of Settlement should be regarded as promises made by the applicants as successors in title to the previous owner.

s 42 and s 43 of the Transfer of Land Act

In respect of the reliance by the applicants on s 42 and s 43 of the Transfer of Land Act 1958, the trial judge referred to the High Court decision in Bahr v Nicolay (No 2) [1988] HCA 16; (1988) 164 CLR 604, and the decision of Vickery J in Body Corporate No 12870 v Aldal Pty Ltd (2010) 29 VR 81. He noted that the applicants did not suggest that they were unaware of the existence of the Terms of Settlement. His Honour concluded that the Terms of Settlement were an ‘assumption’ which ‘underlay’ the contract of sale to the applicants, so that it would be fraud, for the purpose of s 42 and s 43 of the Transfer of Land Act 1958, for the applicants to disregard them. 

Three of the grounds of appeal were directed to the conclusion by the judge that it would be fraud, for the purposes of s 42 and s 43 of the Transfer of Land Act, for the applicants to disregard the Terms of Settlement.

The Court of Appeal 

At paragraph 75 of their joint judgment, the Court of Appeal concluded that three points were clear from an analysis of the judgments in Bahr v Nicolay, as follows:

First, the High Court confirmed the long-standing principle that the exception of fraud, in s 42 and s 43 of the Transfer of Land Act, refers to actual fraud, that is, dishonesty or moral turpitude. A finding of equitable or constructive fraud is of itself insufficient to constitute fraud under the Transfer of Land Act, unless the conduct of the registered proprietor, as such, involves actual dishonesty.

Secondly, the registered proprietors in that case purchased and took title to the property in question with the knowledge and understanding, and having acknowledged, that they were bound by the unregistered interest of the plaintiffs, so that the acquisition by them of their registered interest in the property was subject to the right of the plaintiffs to repurchase the property from them.

Thirdly, in Bahr, each of the five judges held that those facts gave the plaintiffs an in personam right in equity against the registered proprietors, that was justiciable at the suit of the plaintiffs. Only two members of the Court — Mason CJ and Dawson J — went further and found that the conduct of the registered proprietors in denying the right of the plaintiffs to repurchase the property from them, constituted actual fraud within the meaning of the Transfer of Land Act.

The Court of Appeal concluded that plainly, the facts of the present case are not only different, but may be materially distinguished, from those that were before the High Court in Bahr. 

The judge was correct to note that the contract of sale expressly incorporated the Vendor’s Statement, and that General condition 1.1 of the contract provided that the applicants purchased the property subject to ‘any encumbrance shown in the Vendor’s Statement‘. However, it was at that point that his Honour’s analysis broke down. Cl 1 of the Vendor’s Statement, under the heading ‘Restrictions’, provided that information concerning any easement, covenant ‘or other similar restriction’ affecting the property was ‘set out in the attached copies of title document(s)’. Clause 8 of the Vendor’s Statement defined the phrase ‘documents concerning title’ in terms of three specific categories, namely, an authorised reproduction of the folio of the register, the proposed plan of subdivision, and the title plan. Relevantly and importantly, those categories did not include the Terms of Settlement. Axiomatically, as a matter of construction of the relevant contractual documents, the applicants, by signing the contract of sale with Mr Ryan, did not thereby undertake or agree to be bound by the obligations contained in the Terms of Settlement.

Further and importantly, the evidence in the case, on which the judge found the assumption which underlay the contract of sale to the applicants, went no further than the contractual documents. There was no evidence, at all, of the kind adduced in Bahr. Importantly, there was no evidence that the applicants gave an assurance or undertaking to the developer, or to his agent, of the kind that the registered proprietors gave in Bahr.

At paragraph 82, the Court of Appeal noted that the evidence in the case did no more than establish knowledge by the applicants of the Terms of Settlement when they purchased their unit. As s 43 of the Transfer of Land Act, and longstanding authority, including Bahr, make clear, that evidence was insufficient to bind the applicants as registered proprietors of the unit, or to form a basis for a finding of fraud.

The Court of Appeal noted that in the conclusion to his reasons, the judge found that it would be ‘contrary to good conscience’ for the applicants to disregard the Terms of Settlement, which was the foundation of his conclusion that the applicants’ conduct, in disregarding the Terms of Settlement, would be fraud for the purpose of s 42 and s 43 of the Transfer of Land Act. 

At paragraph 84 the Court concluded, three points may be clearly made concerning that conclusion.

First, it would seem that the judge erroneously conflated what might, conceptually, be the basis of an in personam claim in equity, in an appropriate case, with actual fraud under the Transfer of Land Act. As the High Court recognised in Ferguson, not all species of fraud, which attract equitable remedies, will amount to fraud for the purpose of the Transfer of Land Act. The two concepts are materially different and distinct from each other. 

Secondly, in any event, there was no foundation in the evidence for a finding that it would be ‘contrary to good conscience’ for the applicants to not consider themselves bound by the Terms of Settlement, and, in particular, to exercise their legal right, as registered proprietors, to park their vehicle in the section of the laneway owned by them.

Thirdly, the conduct of the applicants, in exercising that right, could not, on any analysis of the facts, be found to constitute actual fraud (that is, dishonesty or moral turpitude) for the purpose of the Transfer of Land Act. Nor, the Court of Appeal added, could it be sufficient to be the foundation of some kind of claim in equity. 

The Court of Appeal concluded that the trial judge erred in holding that the respondent had established fraud, under s42 and s 43 of the Transfer of Land Act, comprising the conduct of the applicants in disregarding the Terms of Settlement. 

Conclusion 

The case is of interest due to the Court of Appeal's analysis of the requirements that need to be established in order to make a successful claim alleging fraud under s 42 and/or s 43 of the Transfer of Land Act. 

They confirmed that knowledge of an unregistered instrument (in this case a restrictive covenant) and choosing to ignore that unregistered instrument does not amount to fraud. As the cases have held for more than a century, fraud under the Transfer of Land Act means actual fraud, that is, dishonesty or moral turpitude. A finding of equitable or constructive fraud is of itself insufficient to constitute fraud under the Transfer of Land Act, unless the conduct of the registered proprietor, as such, involves actual dishonesty.

WG Stark

Hayden Starke Chambers