When does a refusal of a further offer from a defaulting purchaser amount to a failure to mitigate?

When a purchaser defaults under a contract for the sale of real estate, the vendor can retain the deposit under the standard terms of the contract for the sale of real estate in Victoria. The vendor can then attempt to re-sell the real estate. When the property market is in uncertain times, the vendor may not achieve the same sale price the second time around. The contract provides that the vendor can sue the defaulting purchaser for the shortfall on the resale. The vendor must take into account the deposit that has been retained. 

The question often arises: "Did the vendor mitigate his or her loss on the resale?" 

In the South Australian Supreme Court, this issue arose in circumstances where the defaulting purchaser offered to purchase the property in question for the original price, provided the forfeited deposit formed a part of the purchase price.

The Court was called on to determine whether, by rejecting that offer, the vendor had mitigated her loss, when the property was later sold at auction for less than the previous offer?

In Murphy v Mitanovski - BC201207009; [2012] SASC 158, the relevant chronology was:

• 14 February 2010: contract for sale of a (South Australian) residential property;
• 2 July 2010: Settlement due; purchasers failed to complete;
• 20 July 2010: vendor served a notice requiring the purchaser to complete the contract;
• 30 July 2010: vendor served a further notice requiring the purchaser to complete the contract; 
• Around August 2010: vendor rented out the property to cover some ongoing losses (she had purchased a new home in anticipation of settling the sale of the property);
• 27 August 2010: vendor terminated the contract and forfeited the deposit ($10,000 of $782,000); 
• August 2010: property withdrawn from the market;
• 22 September 2010: original purchasers offered to purchase the property for the original purchase price, provided the retained deposit was credited against the price; 
• the new offer was rejected;
• late October 2010: property again advertised for sale through a new agent;  
• 20 November 2010: the property was sold at auction for $750,000 (a shortfall of $32,000 over original sale price).

The vendor sued the defaulting purchaser for the difference between the original sale price and the price at auction ($32,000), plus costs (including the costs of bridging finance to allow the vendor to complete the purchase of her replacement property), less the forfeited deposit.

Appeal decisionThe Supreme Court dismissed the appeal from the original Magistrates Court decision to dismiss the claim.

Proof of loss
The vendor’s loss in these circumstances is the difference between the contract price and the market value of the land at the due date for completion (2 July 2010).

Although there was no direct evidence of the value at 2 July 2010, the court accepted that in this case the November 2010 auction price could be used as such evidence, noting that the value of similar homes does not ordinarily fluctuate significantly over a four-month period.

The purchasers unsuccessfully argued that:

• there was a general decline in real estate values in 2010 ( in other words, the November 2010 price was not a substitute for the 2 July 2010 value);
• the property was marketed for auction as “re-released” and “definite sale”, which contributed to the failure to achieve the best possible price; and
• the purchasers’ September offer of $782,000 suggested that the 2 July 2010 value was $782,000, and so there was no loss suffered. It also suggested that the auction failed to achieve the best price.

Mitigation
White J of the Supreme Court of South Australia held that refusing the purchasers’ September offer was not unreasonable (at paragraphs 50 and following):

… a plaintiff should not be required to accept an offer from a defaulting party if the acceptance would involve a negation or abandonment of the rights which the plaintiff has under the contract against the defendant.

However, the Court found (at paragraphs 58 and following) that the vendor's obligation to mitigate her loss was ongoing and the vendor failed to take reasonable steps to mitigate her loss in and from October by failing to enquire whether the purchasers wished to renew their offer (after the September offer was declined) when the vendor’s agent estimated the property would sell in the range $670,000–$730,000.

In these circumstances, it would have been reasonable for the [vendor] to have instructed [the agent] to enquire whether the [purchasers] were still interested in buying the house at $782,000 and, if so, to provide some evidence of their ability to complete the contract … I think it likely that the [purchasers] would have renewed the offer.

... It is understandable that the appellant had concerns about the respondents’ reliability and financial capacity. It is understandable that she did not wish to experience again the uncertainty and difficulties which had occurred in July in relation to the completion of the contract. However, by October the appellant had already moved out of her home into new premises. Any delays by the respondents would not have caused the personal inconvenience which she no doubt experienced in July.

Relevance in uncertain times
As the property market in Victoria is still uncertain about where it is heading (up or down), it seems that the issue of losses by vendors on re-sale is likely to be tested. In light of this decision, defaulting purchasers will be looking very closely at the circumstances of the re-sale and deciding whether to challenge the vendor's efforts to obtain the best possible price on the re-sale.

W G Stark

Hayden Starke Chambers

Are there any proposed changes to section 32 (vendor) statements in 2012?

On 31 October 2012, the Minister for Consumer Affairs, Michael O’Brien, released a discussion paper into the efficiency and effectiveness of s 32 of the Sale of Land Act 1962: “The discussion paper invites community and stakeholder debate around the effectiveness of section 32 and how this section might be reformed for the benefit of both the buyer and seller.”

As readers of this blog will know, section 32 requires anyone selling land in Victoria to disclose certain prescribed information about that land by providing a vendor statement to prospective purchasers. That information includes title details and restrictions, services available and connected, and any notices issued by any government authorities that affect the land.


The review will examine vendor statements and consider whether all of the required information is appropriate, and whether there are alternative methods available for disclosing this information prior to sale. The review will also examine the volume and complexity of the information being disclosed.

Mr O’Brien said:

“In the 30 years since vendor statements were introduced the amount of information required to be disclosed has grown, as has the size of the document. It’s appropriate to take stock and ask if we’re doing this the best way possible. I encourage consumers, land owners, industry professionals and other relevant stakeholders to engage in this review to deliver lower costs, while maintaining consumer protections.”

The discussion paper is available at www.consumer.vic.gov.au/section32review, and the closing date for submissions is 20 December 2012.

W G Stark

Hayden Starke Chambers

Can the sheriff sell land in Victoria without a reserve - part 2?

In my earlier post of today, I referred to the final chapter in the long-running saga involving the $1,000 purchase of the equity in a property worth over $150,000 (see Zhou v Kousal [2012] VSC 187 and the related cases of Kousal v Suncorp-Metway Ltd [2011] VSC 312 and Wu v Ma [2011] VSC 208).

The sale in that case was ultimately set aside by the Supreme Court [see Zhou v Kousal] on the basis that the sum for which the debtor's interest was sold was so far below his equity as to amount to no sale. 

Recently, Associate Justice Lansdowne of the Supreme Court of Victoria was called upon to make an order for a sale of land by the Sheriff at auction without reserve - see JG King Pty Ltd v Kim Ngan Thi Do [2012] VSC 545. 

Her Honour ordered that the Sheriff sell the relevant property without reserve, but subject to Supreme Court approval. 
Her Honour concluded (at paragraph 18) that sale subject to court approval is the best means to protect the interests of the plaintiff (judgment creditor), the defendant (debtor and property owner), the Sheriff and the purchaser. 

In view of the disastrous result in the Kousal cases, the decision in JG King Pty Ltd v Kim Ngan Thi Do was probably inevitable; in my opinion it is now unlikely that the court will ever allow an unrestricted sale by the Sheriff without reserve in Victoria.

W G Stark


Hayden Starke Chambers

Can the sheriff sell land in Victoria without a reserve - part 1?

In my post of 14 March 2012, I referred to a paper on recent developments that I had recently presented. 

One of the topics covered in the paper was the long-running saga involving the purchase of the equity (worth over $150,000) in a property for $1,000 (see Wu v Ma [2011] VSC 208 and the related case of Kousal v Suncorp-Metway Ltd [2011] VSC 312).

In Zhou v Kousal [2012] VSC 187, Vickery J was called upon to deal with the aftermath of that sale by the Sheriff.

Background 

Zhiping Zhou was the registered proprietor of the relevant property. He was born in Shanghai China in1962. He immigrated to Australia in 1989 on a student visa following the 4 June 1989 uprising in Tiananmen Square in Beijing. He obtained permanent residency in Australia in 1993 and became an Australian citizen in 1998.

Zhou graduated with a Bachelor’s Degree in mechanical engineering in China. Since graduation and immigrating to Australia, he worked principally in the area of building and construction.

Zhou built a house on the Property himself, as the owner builder. A Certificate of Occupancy was issued in 2006. The house is built of brick and has five bedrooms, and is a good house. The property was valued at approximately $630,000.

The property was mortgaged, and the mortgagee was owed in excess of $450,000. There were unpaid council rates of nearly $8,000.  The judgment creditor was owed in excess of $100,000. 

The sale

After several applications to the Supreme Court, and an earlier failed auction, the Sheriff purported to sell the equity in the property at a second auction without reserve for the highest bid, which was $1,000 made by Mr Kousal.

After the sale, Zhou issued proceedings against Mr Kousal, the Sheriff, the mortgagee, the judgment creditor and the Registrar of Titles. 

Zhou sought a declaration that the Sheriff breached his legal duty by selling his interest in the Property at the Auction for an amount which was illusory, unfair, unreasonable in that it bore no relation to the evident worth of his interest in the Property, and he sought an order that the purported sale be set aside. He also sought damages against the Sheriff. 


Vickery J noted (at paragraph 30) that: 

... although the Order of Mukhtar AsJ expressly authorised the Sheriff to conduct a sale of the Property without a reserve price, this was not an unfettered authority to sell at any price which could be obtained. The Order expressly directed that any such sale must be conducted in a manner which did not “derogate from, or relieve the Sheriff of a duty at law to the owner of the land when exercising a power of sale”.

His Honour rejected Zhou's claim that he suffered a special disability by reason of his limited understanding of English, which made the transaction by Mr Kousal unconscionable. In fact, Zhou had been involved in the purchase of at least 10 pieces of real estate in Victoria since 2000, and appeared to be an experienced property developer. 

Vickery J specifically found that Mr Kousal was not acting unconscientiously when trying to enforce his purchase of the equity in the property from the Sheriff. 

His Honour proceeded to analyse the conduct of the sale by the Sheriff and concluded that the Sheriff was in breach of his common law duty and his duty under the Sheriff Act.

Relying on that breach of duty by the Sheriff, Vickery J set aside the sale by the Sheriff, on the basis that the sum for which the debtor's interest was sold was so far below his equity as to amount to no sale.


W G Stark


Hayden Starke Chambers

Are there any cases decided under the PPSA 2012 - part 2?

Re Barclays Bank PLC [2012] NSWSC 1095 (24 August 2012) has become the second case (after Hastie - see my post of 12 September 2012) to consider the Personal Property Securities Act (PPSA) in some detail (although the case is quite short - 19 paragraphs, and relates only to an application to extend time for registration of a financing arrangement, in order to perfect the security interest under the PPSA).

Barclays Bank PLC provided a loan facility for 8 million pounds to Sportingbet PLC. As part of that facility, an Australian subsidiary of Sportingbet, Centrebet, was required to provide security to Barclays. As a part of that security arrangement, Centrebet executed a General Security Deed on 24 April 2012.

Under the Corporations Act, a financing statement under the PPSA (which the General Security Deed would be) was to be registered within 20 business days of the relevant deed coming into force.

Despite specific advice from its Australian lawyers, the UK counsel for Barclays overlooked the registration requirement and failed to take steps to register the deed until 9 August 2012, around two months after the last day on which it should have been registered to avoid 'vesting' under section 588FL(2).

Section 588FL(2) provides that a security interest will 'vest' unless it is registered before the latest of several events, the relevant ones of which were:

• 20 business days after the security agreement came into force; or
• a later time ordered by the court under section 588FM.

As a result of this oversight, Barclays applied (unopposed) to the NSW Supreme Court for an order under section 588FM extending the time for registration of the relevant deed to 9 August 2012.

Section 588FM(2) provides that the court may make an order fixing a later registration time where it is satisfied:

• that the failure to register the collateral by the required time was accidental, inadvertent or not of a nature to prejudice creditors or shareholders; or
• that it is just and equitable to fix such a later time.

Sections 588FL and 588FM were introduced into the Corporations Act by the Personal Property Securities (Corporations and Other Amendments) Act 2010 (Cth) (Amending Act). At the same time, section 266 (relating to the registration of charges with ASIC) was repealed.

Justice Black noted (at paragraph 4) that:

The terms of s 588FM are broadly similar to the circumstances in which the court could previously extend the time for lodgement of notice of a charge under s 266(4) of the Corporations Act, and the authorities as to that section will assist in guiding the exercise of the court’s discretion under s 588FM. 

Justice Black was satisfied that Barclay’s failure to register their security interest was ‘accidental or inadvertent’ within the previously understood meaning of those terms. 

Justice Black took notice of the fact that Barclay’s UK counsel had:

- had limited experience in finance transactions, 

- received limited training in the PPSA regime, and 

- only become aware of the timeframe for registration in July 2012, some 2 months after the registration window had actually expired. 

Although noting that the UK counsel could have acted more promptly (paragraph 10) after becoming aware of the registration timeframe, Black J was satisfied that Barclay’s counsel did not then appreciate the potentially serious consequences of late registration. In this regard, Black J expressly acknowledged that such errors are unsurprising during the transition to the PPSA regime.

In considering whether it was appropriate to exercise the court’s discretion, Black J noted, applying principles referred to above under the old section 266, that it was relevant that Sportingbet and Centrebet did not oppose the application, Centrebet was in a strong financial position, there had been no material change in Centrebet’s financial position during the delay period, no security had been granted to third parties during the delay period and no material debt had been incurred during the delay period.

Accordingly, Black J was satisfied that late registration would not prejudice the position of Centrebet’s creditors or disturb or affect any accrued or accruing rights.

WG Stark
Hayden Starke Chambers

How does a court determine whether the negotiations for a lease have ceased and agreement has been reached?

In BBB Constructions Pty Ltd v Aldi Foods Pty Ltd [2012] NSW 224, the New South Wales Court of Appeal considered the situation of parties that had been involved in lengthy negotiations relating to an agreement for lease. Ultimately, the potential tenant walked away from the negotiations, and the potential landlord/ developer sued.

The Court had to decide whether negotiating parties can assume they are bound to an agreement prior to the final signing and exchange of documents.

If parties engage in lengthy negotiations, both in writing and orally, it can be very difficult to know whether they have actually reached an agreement. The courts have concluded that once the negotiations reach agreement on all primary terms (for example, in a lease that would mean the parties, the property, the price and the period of the lease), there is a binding agreement.

In this particular case, Aldi Foods P/L, entered into negotiations with BBB Constructions Pty Ltd, which owned a parcel of land that had been approved for a residential and commercial development. Aldi proposed that it would lease a part of a building on the site that was not in fact part of the original design for the site.As a part of its proposal, Aldi wrote: 'this offer is subject to Aldi board approval'.Aldi and BBB then negotiated extensively to try and finalise an agreement for lease.

While the parties were still negotiating, BBB actually commenced construction works on the site and spent significant amounts of money accommodating Aldi's requirements. Throughout the negotiations, Aldi's negotiator stated a number of times to BBB that the agreement for lease would be signed imminently. 

Despite final copies of the agreement for lease being sent by BBB's lawyers to Aldi in May 2007, a number of issues remained outstanding. 

Possibly due to frustration with the progress of the negotiations, in May 2007, after months of negotiations, BBB entered into preliminary discussions with Aldi's competitor IGA. However, the discussions went nowhere.

In July 2007, BBB's lawyers once again sent final documents to Aldi. Aldi's board did not approve the proposal and informed BBB that it would not be proceeding with the agreement for lease. 

BBB sued Aldi alleging it mislead or deceived BBB or its conduct was unconscionable.

In dismissing BBB's appeal from the dismissal of its claim by the NSW Supreme Court, the Court of Appeal (Basten and Barrett JJA and Sackville AJA) unanimously held that:

• BBB was not misled or deceived because the purpose of the ongoing negotiations was to produce an agreement for lease that was acceptable to both parties and that BBB knew that Aldi's board's approval was a pre-condition to Aldi's commitment. Further, BBB's conduct in relation to its dealings with IGA were not consistent with BBB's argument that it had relied on Aldi's alleged misleading and deceptive conduct;
• BBB had not been induced into believing that an agreement for lease would be executed, as both parties displayed a mutual assumption that the negotiations would continue until a final agreement was produced, and that each party would then make a final decision as to whether they would preceded; and
• as the parties were commercially sophisticated businesses who had employed lawyers to safeguard their own interests, any expense incurred by BBB in constructing the basement (which was to be occupied by Aldi) was for BBB's own commercial advantage. Accordingly, Aldi's conduct was not unconscionable.

Conclusion 

When engaging in negotiations of any kind, it is important to recognise that you may become legally bound to the deal if you are not extremely careful in addressing the issue of when you have reached an agreement.

It is always a good idea to state in writing early for example "We will not be bound by any agreement until formal documents are signed and exchanged".

W G Stark 
Hayden Starke Chambers

PPSR data migration issues update September 2012

This  is a note from the PPSR announcements page.

 

ASIC ARBN/ACN fix

Implementation of the ASIC ACN/ABN data fix (known as CR089) was completed in June. This resulted in changes to 885, 238 registrations migrated from the Register of Company Charges, to replace grantors identified on the PPSR by an ABN with the same grantors identified by an Australian Company Number (ACN), where the grantors had both an ABN and an ACN. As noted on the Announcements page at www.ppsr.gov.au, among the registrations affected were 484 registrations that should have had grantors identified by ARBN (not ACN). The majority of the affected grantors are foreign companies, but included is a small set of Australian non-companies (for example, cooperatives) which should be identified by ARBN. A programmatic solution to substitute ARBN for ACN for the affected entities (known as CR093) was successfully completed on 14 September 2012.

It is still recommended that anyone who had a charge registered at ASIC should check that it is now properly registered on the PPSR. 

W G Stark 
Hayden Starke Chambers 

Can the Commissioner of Taxation receive the proceeds of sale of land in priority to a registered mortgagee?

The recent Full Federal Court decision in Commissioner of Taxation v Park [2012] FCAFC 122 related to an attempt (successful as it turned out) by the ATO to extract a tax payment from a taxpayer from the sale of property in priority to the registered second mortgagee. Although it seems that the decision may be confined to the peculiar circumstances of the case, alarm bells will surely be ringing throughout the lending community about the case.

The dispute was about the priority between the second mortgagee and the Commissioner, who had served the purchasers with a garnishee notice relating to tax debts owing by the vendor. 

The relevant facts of the case were as follows:

• Mrs Bassili, an individual, owned a property at Fig Tree Pocket in Queensland;
• On 19 January 2010 Mrs Bassili and two purchasers entered into a 30 day contract for the sale of the property for $1,675,000;
• The property was mortgaged to National Australia Bank by registered first mortgage, which, at the time of sale, secured approximately $1,289,000;
• Mrs Bassili had also granted a second mortgage to Instyle Developments P/L which, at the time of sale, secured approximately $430,200, meaning there would be a shortfall at settlement of the sale;
• Mrs Bassili was also indebted to the Commissioner for $75,508.64 for a tax debt. The Commissioner had commenced proceedings in the District Court in Queensland, and claimed the balance owing to him was this sum; 
• After the execution of the sale contract but before settlement, on 11 February 2010, the Commissioner issued a s260-5 notice to the purchasers referring to the price payable under the contract of sale, and demanding that the amount owing to the Commissioner ($75,508.64) be paid from funds owing by the purchasers to Mrs Bassili; and
• On 5 February 2010, prior to Mrs Bassili's Bankruptcy, a trustee (Mr Park) had been appointed to take control of Mrs Bassili's property pursuant to section 50 of the Bankruptcy Act 1966 (Cth).  She was eventually bankrupted on 23 April 2010. 

Therefore the dispute was about which claim to the balance of the purchase price took priority. On its face, a registered mortgagee, as a secured creditor, should have priority over the ATO, which is an unsecured creditor. 

However, the settlement of the sale of the property was delayed due to the dispute. To solve the impasse, the second registered mortgagee released its mortgage in exchange for an undertaking that the balance of proceeds of sale would be paid into its solicitors' trust account pending resolution of the dispute.

The Federal Magistrates' Court found in favour of the second registered mortgagee. 

The Commissioner appealed to the Full Court of the Federal Court.

Full Court decision 

The majority of the Full Federal Court (Jessup and Katzmann JJ) found that the Instyle mortgage granted security over the freehold interest in land and did not extend to the right to receive the sale proceeds of the property owing to the registered proprietor.  

Accordingly,  Instyle did not have a beneficial interest in the money owing under the contract of sale.  

As the Commissioner's s260-5 notice required the purchasers to pay their debt to Mrs Bassili by payment to the Commissioner, the Commissioner was able to jump the queue ahead of Instyle.  

The problem for the mortgagee was that the purchasers did not actually owe anything to Instyle as mortgagee.  Mrs Bassili owed money to the mortgagee and the purchasers owed money to Mrs Bassili.  

According to the majority, there was never a point in time when the amount payable by the purchasers became owing to the mortgagee.  

The court recognised that the position would have been different if Instyle had been enforcing its security against the property. 

Siopis J dissented agreeing with the original judgment of the Federal Magistrates Court.

Conclusion

Many mortgages in Victoria include a clause allowing the mortgagee to appoint a receiver to collect money on its behalf, and a clause charging the proceeds of sale in favour of the mortgagee. In those circumstances, the same situation should not arise here. 

If there is a priority dispute arising with the Commissioner of Taxation, the advice to the lender must be: Never release a registered mortgage without actually receiving payment of the amount secured by the mortgage; a payment into the lender's trust account pending the resolution of the dispute will not be enough. 

In an insolvency situation, if the borrower owes money to the Commissioner, and there will be a shortfall to the mortgagee on the settlement of the sale, the lender should not release the mortgage unless it receives the whole of the balance of the proceeds of sale. 

If an impasse results, the mortgagee could take over the sale (assuming the mortgage is in default and appropriate notices have been served), and complete the sale as mortgagee in possession. In those circumstances, no money will be payable by the purchasers to the vendor, and so compliance with the garnishee notice will not be required.

W G Stark

Hayden Starke Chambers