Wednesday, 21 October 2015

Can a landlord recover lease incentives from a defaulting tenant or its guarantor?

The High Court decision in Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205 has renewed interest among lawyers in the legal doctrine of contractual ‘penalties’.  In GWC Property Group Pty Ltd v Higginson & Ors [2014] QSC 264, the Supreme Court of Queensland had to consider the issue of contractual penalties in relation to lease incentives and their attempted claw back by the landlord.


In GWC Property Group Pty Ltd v Higginson & Ors, Dalton J of the Supreme Court of Queensland had to deal with the aftermath of the liquidation of an incorporated firm of solicitors.

There were three documents executed by the parties evidencing the arrangements:

(a)   The incorporated firm of solicitors had leased the premises, commencing on 11 November 2010 for a term of seven years, with three further options from the landlord’s predecessor in title;

(b)  The parties (the firm, the landlord’s predecessor and the guarantors) had executed a document described as an “Incentive Deed”; and

(c)   The defendants (as guarantors) had executed a guarantee of the debts and obligations of the firm to the landlord’ predecessor pursuant to both the lease and the Incentive Deed.

The landlord’s predecessor transferred the title to the landlord; in 2013, the landlord terminated the lease. The firm failed to repay the incentives on termination of the lease, in accordance with the terms of the deed. 

Claw back by landlord of incentives

There was no claim made against the firm under the Incentive Deed or the firm and the guarantors under the lease.

The case involved a claim by the landlord against the guarantors for repayment of the amount of incentives (of $1.2 million), which the firm received pursuant to the provisions of the Incentive Deed, as a part of the leasing arrangement, and failed to repay upon termination of the lease.

The Queensland Supreme Court decided (following Andrews v ANZ) that the attempted “claw back” of the incentives given to the firm was based upon “clauses which are wholly penal” (paragraph 51) and therefore they should not be enforced.

In her analysis, Dalton J rejected the plaintiff’s assertion that the sums claimed were not in fact penalties; rather, the plaintiff argued that the repayments it sought were properly viewed not as punitive payments on breach but as restitutionary repayments (paragraph 28). The Honourable Justice Dalton rejected this argument, on the basis (at paragraph 30):

… it seems to me that all three payments contended for by the plaintiff share the characteristic that had the tenant not breached the lease agreement, or had it breached the lease agreement only in ways which did not move the landlord to terminate, the sums of money claimed in this proceeding would never have been payable. These sums are not analogous to the acceleration of a delayed payment of monies which will eventually be paid if the contract is fully performed. … They are pecuniary obligations which will never arise except on termination.

At paragraph 33, Dalton J noted:

The plaintiff’s argument is simply that it is suing for a contractual sum due on a specified event. The difficulty is that the specified event is termination of the lease on breach by the tenant and, even on the pre-Andrews’ law, such a clause was subject to review as a penalty …

At paragraph 36, Dalton J noted:

The repayment clauses … of the Incentive Deed sought to give the landlord an advantage which it would not have had if the lease were performed according to its terms. Before the lease and Incentive Deed were signed the landlord was in the position that its potential tenant would contract only on the basis that it received abatements and a fit-out. The impugned clauses do not restore the landlord to that pre-contractual position; they give it an advantage which it would never have had if the lease had uneventfully run its term.

At paragraph 39, her Honour noted:  

To establish that they are penal, the defendants needed to show that the impugned clauses stipulated for repayments which were extravagant and unconscionable in comparison with the maximum loss that might be suffered on breach of contract. The test is an objective one not related to the parties’ states of mind. Matters are to be judged as at the time the contract was made.

She then concluded:

In my view the repayment clauses here do impose obligations which are substantially in excess of any genuine pre-estimate of damages. In addition to contractual damages for breach of the lease, the landlord was entitled, by the repayment clauses, to recover monies to which it would never have been entitled had the lease run its course. In effect, it was entitled to recover as though the tenant had agreed to the rent and signage fees without any abatement, and as though it had not been necessary for the landlord to pay the fit-out incentive in order to complete the bargain with the tenant. It is true that all three impugned clauses limit repayment to specified times, rather than require repayment for the whole period relevant to contractual damages. Nonetheless, the repayment clauses meant that on termination the landlord was entitled to damages for breach of the bargain it had made, and substantial additional payments by reference to a bargain it had not made.

[40] There was evidence on the application before me from a Mr Douglas on behalf of the plaintiff to the effect that the benefits given to the tenant by way of fit-out contribution and abatement in the Incentive Deed reflected prevailing market conditions. This is the very point. Only with those substantial financial concessions did the landlord obtain the lease it did. It is entitled to damages for breach of that lease but it is not entitled to extra payments on the basis that it might have obtained a higher price for its premises had the market conditions been better for it. It is not to the point that Mr Douglas opines that the fit-out may not be attractive to future tenants, or that future tenants might also require incentives such as those contained in the Incentive Deed. The parties’ bargain was that the landlord would own the fit-out. If the landlord has difficulty in re-letting the premises, that fact will be adequately reflected in its contractual damages.

As readers will be aware, incentives in commercial leases in Victoria (and in most other parts of Australia) are now very common, and landlords have tried in various ways to protect those incentives from insolvent tenants.

The decision in this case confirms that the common law (and equitable) principles of penalties will have a serious effect upon a landlord's attempt to recover those incentives. 

Ultimately, the decision should force landlords to rethink the strategy of providing incentives to tenants up front. If the incentive cannot be recovered from a defaulting tenant, it may be commercially more sensible for the landlord to retain ownership of incentives such as fit outs, even if it means that the rental received is slightly lower than under an incentive-driven arrangement. 

An alternative may be to attempt to claw back only those incentives that are provided up front (here, the landlord tried to claw back a rent reduction and singage fee reduction as well as its predecessor's contribution to the fit out). However, even that may still be a 'penalty' if it is not a genuine attempt to assess the actual loss that the landlord may suffer in the future if the lease is breached. 

W G Stark 
Hayden Starke Chambers 

Tuesday, 20 October 2015

Are there any recent Victorian Supreme Court cases in 2015 about fraud under the Torrens legislation?

In Perpetual Trustees Victoria Ltd v Xiao Hui Ying & Anor [2015] VSC 21, the Supreme Court of Victoria considered the doctrine of indefeasibility of a mortgage of a property in circumstances where the mortgagee has become registered by fraud and the owner is innocent of the fraud. 

The fact that a borrower’s signature is forged on a mortgage would not, in the absence of fraud by the lender, affect the lender’s ability to rely on a registered mortgage, due to indefeasibility of title under the Transfer of Land Act, 1958. 

In modern times, most banks enter into ‘all monies’ mortgages, so that they can seek repayment of all debts at the time that the mortgage is repaid. The complication is that this requires the parties to enter into loan agreements at the same time as executing the relevant mortgage documents.

The relevant terms of the loan agreements are where the obligations to repay are located, not in the mortgage itself.

In New South Wales (and New Zealand) there are numerous cases that have concluded that mortgages in such circumstances secure nothing because the signature on the loan agreement has been forged, making that agreement void. This means there is no amount secured by the loan agreement. This in turn meant that no money was secured by the ‘all monies’ mortgage, and as a result the mortgage ought to be discharged without any payment by the registered proprietor who did not commit any fraud.

A number of earlier Victorian Supreme Court decisions had declined to follow the New South Wales cases on this point. They concluded that a lender’s title obtained on registration of a mortgage was not defeated unless the lender was involved in or knew about the fraud.

In Perpetual Trustees Victoria Ltd v Xiao [2015] VSC 21, Hargrave J of the Supreme Court of Victoria concluded that where the underlying loan agreement on which a lender relies is forged, the lender cannot rely on its registered ‘all monies’ mortgage, even in circumstances where the lender had no knowledge of the fraud.

You should bear in mind that the decision turns on the facts of the case; however, in today’s modern lending environment, the facts are not uncommon.

The decision
A summary of the factual background is as follows:
a.     The first defendant (Ms Xiao) was born in China in 1960 and on moving to Australia met the husband, the second defendant (Mr Fitzgerald). Ms Xiao gave evidence that she spoke limited English and relied on Mr Fitzgerald.
b.     Mr Fitzgerald required finance to make an investment in a Chinese restaurant in Burwood. He was the registered proprietor of a property in Vermont, however he had a poor credit history and knew that he was unlikely to get finance in his own name. He therefore transferred the Vermont land to Ms Xiao, subject to a “re-transfer” document and a deed of trust, which were contested at trial.
c.     Mr Fitzgerald then went about obtaining finance from the plaintiff through a mortgage originator, Capital Securities (Aust) Pty Ltd (Capital). Mr Fitzgerald obtained a loan in the name of Ms Xiao from the plaintiff lender that was secured over the Vermont property.
d.     The originator dealt directly with Mr Fitzgerald, but failed to verify that Ms Xiao was the borrower or the accuracy of the loan application
e.     Justice Hargrave found that Ms Xiao was a pawn in Mr Fitzgerald’s fraud, in that Mr Fitzgerald acted fraudulently in obtaining the loans.  He did not tell Ms Xiao he was obtaining the loans, he forged her signature on the loan documents, mortgage and related documents and otherwise falsified the loan application
f.      The originator assisted Mr Fitzgerald by falsely witnessing Ms Xiao’s signature and providing a valuation prepared by Mr Fitzgerald to the trust manager when it knew Mr Fitzgerald was not independent.
g.     There was a subsequent default on the loan and the plaintiff took steps to enforce its mortgage. Justice Hargrave considered himself bound to follow the reasons of the New South Wales Court of Appeal in Perpetual Trustees Victoria Ltd v English and Anor [2010] NSWCA 32 and Perpetual Trustees Victoria Ltd v Cox [2014] NSWCA 328 where the relevant mortgage and loan documents were in similar terms. The New South Wales decisions held that, whilst the mortgage document may have had indefeasibility under the Torrens legislation, the mortgage secured nothing as the loan documentation had been forged.

Key points
In determining whether the mortgage secured the repayment of the loan, Hargrave J decided (at paragraphs 82 and following):
82 The fact that Mr Fitzgerald forged Ms Xiao’s signature on the mortgage did not, in the absence of fraud by Perpetual, of which there was no suggestion, affect the indefeasibility of the mortgage when registered.
83 Indefeasibility, however, extends only to the covenant for payment contained in the mortgage.
84 Whether any, and if so what, amount is secured by a covenant for payment contained in the mortgage is a matter of contractual interpretation. Where the covenant for payment appears on the face of a forged mortgage, or in a document expressly incorporated by reference in the mortgage, the indefeasibility of the mortgage on registration will extend to the covenant for payment as properly construed.
85 The covenant for payment in this case is one step removed from the mortgage. The forged mortgage expressly incorporated a memorandum of common provisions, which contained a covenant for payment by reference to amounts owing under any other agreement between Ms Xiao and Perpetual — present or future. That drafting device is unexceptional and will be given effect where such an agreement can be identified. However, whether such a covenant is effective in the circumstances of this case — where the agreements to which it refers are forged — requires consideration.

The Honourable Justice Hargrave then conducted an analysis of the documents between the parties. 

Relevantly, Hargrave J noted:
a.     In the absence of fraud by a lender, the lender has the benefit of the mortgage once it is registered.  However, that protection extends only to the covenant for payment contained in the mortgage
b.     In this case, the covenant for payment was one step removed from the mortgage, and was found in the memorandum of common provisions
c.     The mortgage provided that it was given in consideration of and to secure loans, advances or financial accommodation provided by Perpetual to the borrower (the wife).  However, no loans were provided by Perpetual to the wife as she was unaware of the loan documents and they were forged.

The thrust of the New South Wales’ decisions was that, where the loan agreement on which the lender relies is forged and therefore void, there is no ‘secured agreement’ and therefore no ‘secured money’, being the terms commonly appearing in common provisions. In particular:
a.     In Perpetual Trustees Victoria Ltd v English & Anor [2009] NSWSC 478, the New South Wales Court of Appeal considered that a mortgage secured nothing where a husband forged his wife’s signature on the mortgage and loan agreement as there was no agreement between the lender and the borrower at the time the mortgage was executed;
b.     In Perpetual Trustees Victoria Ltd v Cox [2014] NSWCA 328, the Court of Appeal in New South Wales held that a mortgage secured nothing, even though the mortgage itself was not forged.  The court considered that it was sufficient that a direction to draw down one of three facilities under the terms of the mortgage had been forged.

In contrast, in Solak v Bank of Western Australia Ltd [2009] VSC 82, the Supreme Court of Victoria had reached a contrary conclusion on the basis that the reference to ‘you’ in the mortgage, memorandum of common provisions and loan agreement was the forger purporting to be the registered owner of the property.

Justice Hargrave declined to follow the Solak decision on the basis that it was 'plainly wrong'.

Prior to Solak, in Vassos v State Bank of South Australia [1993] 2 VR 316, the Supreme Court of Victoria held that title obtained on registration of a forged mortgage cannot be defeated on the grounds of fraud if the mortgagee was not a party or privy to the fraud. In Pyramid Building Society (in liq) v Scorpion Hotels Pty Ltd [1998] 1 VR 188, the Court of Appeal followed the Vassos decision, albeit in slightly different circumstances.

The Perpetual v Xiao decision rejected the earlier Victorian cases and adopted the New South Wales position.

However, Justice Hargrave went on to find in the particular circumstances that Ms Xiao held the loan on trust for Mr Fitzgerald. Hargrave J also found that Mr Fitzgerald was liable to Perpetual for defrauding it. The combined effect of these conclusions was that while the mortgage secured nothing and was held on trust by Ms Xiao for Mr Fitzgerald, Perpetual was entitled to have the value of the land applied in discharge of Mr Fitzgerald’s liability to it as a fraudster.

Justice Hargrave also found that Ms Xiao did not authorise Mr Fitzgerald to sign the loan agreements and she could not ratify the loan agreements as they were forged. In particular, the court confirmed that a forged loan agreement is a nullity and is incapable of ratification.

Justice Hargrave also found that the plaintiff was not prevented from enforcing the loan by reason of unconscionable conduct by the mortgage originator.  The court considered that the originator had acted unconscionably.  However, ultimately, the court held that Perpetual itself did not act unconscionably and was not liable for the originator’s actions.

On 27 May 2015, the Court of Appeal refused leave to appeal (see [2015] VSCA 124). This means in effect that we now have Court of Appeal authority in this state that the decision of Justice Hargrave is the law in Victoria.

The decision makes it clear that the benefit of a registered mortgage can be lost even where a lender has no knowledge of any fraud. Perpetual was left effectively unsecured and was saved only by the unusual circumstances, which led to the finding that the husband retained a beneficial interest in the land.

The decision is also a warning for lenders who use third party mortgage originators. The court rejected legal criticisms of Perpetual’s business model and the trust manager’s failure to make inquiries with the originator about the loan. However, in practice the originator’s conduct caused Perpetual to lose the benefit of its mortgage.

Whilst fraud is often very hard to detect, lenders need to ensure their systems minimise the risk of loans being granted in fraudulent circumstances.

W G Stark
Hayden Starke Chambers 

Monday, 19 October 2015

Are there any recent High Court cases in 2015 about fraud under the Torrens legislation?

In Cassegrain v Gerard Cassegrain & Co Pty Ltd [2015] HCA 2, the High Court of Australia considered the scope of indefeasibility of a transfer of a property into the name of joint proprietors, where one joint proprietor has procured the transfer by fraud and the other is innocent of the fraud.

Claude and Felicity Cassegrain were dairy farmers.  Their dairy farm was owned by a company, which had a number of directors. Claude was one such director. Felicity was not. 

In 1993 Gerard Cassegrain & Co Pty Ltd settled legal proceedings brought against CSIRO on the basis that it was paid the amount of $9.5 million. Entries were then made into the company's accounts to create a loan of $4.25 million owing by the company to Claude Cassegrain, one of the directors. In the court proceedings it was accepted that Claude had no entitlement to any part of the compensation and that there was never any moneys owing to him by the company.

In 1996, Claude and his sister, the directors of the company, transferred the dairy farm to Claude and Felicity as joint tenants and fraudulently debited the purchase price of $1 million from the fictitious loan from Claude in the company’s books.

In 1996 Claude's siblings brought oppression proceedings against him in the Federal Court. The Federal Court held that Claude's conduct in relation to recording a loan of $4.25 million and drawing down on that loan was oppressive and unfairly prejudicial to the other shareholders in the company.

In 2000 for a consideration of $1 Claude transferred his interest in the dairy farm property to Felicity.
Subsequently further proceedings were brought seeking to have the whole of the property re-transferred to the company. 

The claim was that:
a.     Claude had fraudulently effected the transfer of the property;
b.     Claude had acted as Felicity's agent for the purpose; and
c.     Felicity's interest in the property was tainted by Claude's fraudulent conduct.

The High Court noted that it was not alleged that Felicity was a participant in or had notice of Claude's fraudulent conduct.

The relevant sections of the New South Wales legislation (which is similar to the Western Australia legislation) provide that:
S.42 The registered proprietor ... of an interest in land ... shall except in case of fraud, ... hold the same, absolutely free from all other estates and interest that are not so recorded.
S.118 Proceedings for the possession or recovery of land do not lie against the registered proprietor of the land, except as follows:
Proceedings brought by a person deprived of land by fraud against:
A person who has been registered as proprietor of the land through fraud; or
A person deriving (otherwise than as a transferee bona fide for valuable consideration) from or through a person registered as proprietor of the land through fraud.

There is no equivalent to section 118 in Victoria. 

The Court concluded that Claude taking the steps necessary to procure registration of the transfer from the company to Felicity and himself as joint tenants showed no more than that Claude had performed tasks that were for the advantage of Felicity. This alone did not show that his fraud was within the scope of any authority she had given to him. Without further evidence it did not show that knowledge of his fraud was to be imputed to her.

In this case Claude, but not Felicity, was registered as proprietor of an interest in land (as a joint tenant) through fraud. The joint interest which Felicity acquired was indefeasible.

However, by a second transfer, Felicity derived from Claude an interest as tenant in common as to his half. Felicity derived that interest from a person who was registered as proprietor of that interest through fraud. As Felicity was not a transferee for valuable consideration the Court held that the second transfer should be reversed.

The High Court’s findings
The High Court accepted that Claude’s interest in the farm had been acquired through fraud.  However, the Court held (with Keane J dissenting) that Felicity had acquired her interest as joint tenant without actual fraud on her part or on the part of an agent for her, and so her joint title in the farm was indefeasible under the usual principles in such cases as Frazer v Walker, Breskvar v Wall, and Bahr v Nicolay (No. 2)

Claude was not her agent in the relevant sense. Though he was the cause of her acquisition of an interest, he was not acting within the scope of any authority she had given him.  The High Court applied and approved the approach of Street J to the determination of who is an agent for the purposes of fraud within the meaning of the Torrens legislation, in Schultz v Corwill Properties Pty Ltd  [1969] 2 NSWR 576.  To be an agent, a person must be acting within the scope of some authority given by the registered proprietor such that knowledge of the fraud by the agent would be imputed to the registered proprietor.

Nor was it any answer that Felicity was a joint tenant such that she and Claude were regarded in law as having a single indivisible estate in the whole of the land. Although Keane J dissented on this point, the majority held that the statute as interpreted by the Courts for well over 100 years provided that only actual fraud on her part could defeat her interest in the land, even as a joint tenant.  The statute took priority over mere theoretical considerations derived from speculation on the nature of a joint proprietor’s title.

There was, however, as noted, a second transaction that required consideration by the Court.  Claude subsequently transferred his joint interest to Felicity, so that she became owner of the whole fee simple interest in the dairy farm.  She was a volunteer, as the transfer was for no consideration ($1).  In NSW, s.118(1)(d) of the Real Property Act provides for the title of a volunteer only to have the benefit of indefeasibility on a deferred basis: that is to say, if a registered proprietor was not a transferee for value, the transfer could be set aside if it had been procured by fraud on the part of someone else.  This was exactly what had happened in the transfer to her of Claude’s joint half interest. 

The second part of the decision is thus not of direct application in Victoria, as it turned on a specific statutory provision in NSW that we do not have here.  In Victoria, the question whether a volunteer acquires an indefeasible title is somewhat problematic, given that there are two strong single judge decisions to the effect that indefeasibility only applies to transferees for value (King v Smail [1958] VR 273 per Adam J and Rasmussen v Rasmussen [1995] 1 VR 613 per Coldrey J).  Against this, there are two Court of Appeal decisions in NSW on provisions in the Real Property Act, which are remarkably similar to those in our Transfer of Land Act. Those decisions held that volunteers obtain the same protection under the Act as transferees for value.  A dictum of the High Court that appears to endorse this view (Bogdanovic v Koteff (1988) 12 NSWLR 472; Farah Constructions Pty Ltd v Say-Dee (2007) 230 CLR 89 at [198]).  A decision of the Victorian Court of Appeal is probably required to resolve the matter definitively once and for all. However, as readers will know, decisions of the New South Wales Court of Appeal are very persuasive here, if not binding.

In any event, in Victoria, the same result may have been reached by way of an in personam action against Felicity under s.172 of the Property Law Act, 1958 on the grounds that Claude’s transfer of his half interest to her was probably a disposition of property with the intent to defeat creditors.

W G Stark

Hayden Starke Chambers

Friday, 16 October 2015

Fraudulent activity in Property transactions 2015

Today I gave a talk to the Leo Cussen Property Law Conference 2015 entitled: "Liar Liar - Fraudulent activity in Property transactions." 

The talk covered the recent High Court decision about indefeasibility of title and fraud in Cassegrain v Gerard Cassegrain & Co Pty Ltd [2015] HCA 2, and the recent Supreme Court of Victoria decision of Hargrave J in Perpetual Trustees Victoria Ltd v Xiao Hui Ying and Anor [2015] VSC 21, which deals with fraud and indefeasibility of registered mortgages.

A copy of the paper is available from the Leo Cussen Institute (see: and will be available to subscribers at 

W G Stark 
Hayden Starke Chambers  
16 October 2015