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

Are there any cases about the Victorian retail tenancies moratorium due to the Covid-19 pandemic?

In C B Buffet (Burwood) Pty Ltd v Delloyd Pty Ltd [2020] VCAT 1234 VCAT member Kincaid heard an application for an injunction to restrain a landlord from taking possession of retail premises. 

The case is of interest as it considered the application of the moratorium on rent in retail leases introduced by the Victorian government for the Covid-19 pandemic. 

As readers will know, in order to establish an entitlement to interlocutory injunctive relief an applicant must first demonstrate that there is a serious question to be tried as to its entitlement to relief. In respect of this question, the applicant must make out a prima facie case in the sense of demonstrating that, in the circumstances, there is a sufficient likelihood of success at trial, in respect of the question, to justify the preservation of the status quo pending the determination of the parties’ rights at trial. This does not mean that the applicant has to establish that it is more likely than not that it will succeed at trial. How strong the probability needs to be depends upon the nature of the rights asserted, and the practical consequences likely to flow from the relief sought.

An applicant must also establish that the balance of convenience favours the granting of an injunction. The Tribunal should take whichever course appears to carry the lowest risk of injustice should it turn out to have been wrong, in the sense of granting an injunction to a party who fails to establish its right at trial or failing to grant an injunction to a party who succeeds at trial.

Background

The tenant alleged that it operated a Chinese buffet style restaurant, and that it suffered a decline in business “from around January 2020” due to the Covid-19 pandemic.

The member stated that it was noteworthy that in late January 2020 the first Australian cases of Covid-19 were reported, mainly incoming travellers from China. The first Australian death from Covid-19 was reported on 1 March 2020, and the WHO declared the pandemic on 11 March 2020. News reports at the time indicated, however, that by early February 2020 Chinese restaurant businesses in Melbourne had substantially lost their customer base, and by mid-February 2020 many well-known Chinese restaurants in Melbourne had been forced to close.

The tenant gave evidence that in “early February 2020” its business was closed.

On 13 March 2020 the tenant received from the landlord a notice of default, which required the tenant to remedy certain defaults within 14 days. 

On 27 March 2020 the landlord took possession of the premises due to the non-payment of rent and other outgoings claimed in the notice of default.

On 29 March 2020 the National Cabinet announced a set of principles by which there should be a moratorium on evictions of commercial and residential tenants over the next six months for tenants who were unable to meet their commitments due to the impact of the Covid-19 pandemic. The principles were formalised on 3 April 2020, and were subsequently contained in what was called the National Cabinet Mandatory Code of Conduct-SME Commercial Leasing Principles During Covid-19 (the “Code of Conduct”).

These principles subsequently became the subject of legislation in Victoria (the “Covid-19 legislation”), comprising:

(a) COVID-19 Omnibus (Emergency Measures) Act 2020 (the “Act”), which came into operation on 25 April 2020;

(b) COVID-19 Omnibus (Emergency Measures)(Commercial Leases and Licences) Regulations 2020 (the “Regulations”), made 1 May 2020 under section 15 of the Act, but taken to have come into operation on 29 March 2020; and

(c) Coronavirus Economic Response Package (Payments and Benefits) Rules 2020 (the “Rules”), which came into effect on 9 April 2020.

In summary, the Regulations provide that where a tenant has an “eligible lease” as defined in section 13 of the Act, it is entitled to avail itself of a rent relief regime as described in the Regulations. When promulgated, the Regulations were to expire on 29 September 2020, but they have since been extended.

One of the requirements for qualification as an “eligible lease” was that the lease was in effect on the day the first regulations made under section 15 of the Act came into operation. That date was 29 March 2020. The landlord submitted that the lease, having been brought to an end on 27 March 2020, did therefore not qualify as an eligible lease. 

The landlord also submitted that this was relevant when considering the tenant’s alternative claim for relief against forfeiture, and the liabilities the tenant would have to meet as the usual condition of granting relief.

Interestingly for our purposes, the tenant alleged that the landlord was not entitled to re-enter the retail premises other than by having first complied with the provisions of the Act and the Regulations.

Regulation 9(2) of the regulations provides:

A landlord under an eligible lease must not evict or attempt to evict a tenant under the eligible lease to whom sub-regulation [9(1)] applies.

As noted, an eligible lease under the Act, being a lease that therefore had the protection of the rent relief provisions of the Regulations, was one that was in effect on 29 March 2020. The Tribunal found in this case that there was no serious question to be tried concerning the right of the landlord to bring the lease to an end by re-entry on 27 March 2020, and as a consequence the Tribunal found that there was no serious question to be tried concerning the right of the tenant to the protections against ejectment provided by the Covid-19 legislation.

As well as injunctive relief, the tenant claimed in the alternative relief against forfeiture. 

The landlord submitted that as to the future rent, the tenant may not be able to pay it for months or years as its capability of doing so, being linked to the tenant’s turnover, would require the tenant promptly to operate at the same level as the period prior to the onset of the Covid-19 pandemic. 

The Tribunal concluded that the tenant did not intend to seek relief from its obligation to pay rent and outgoings pursuant to the Covid-19 legislation, such that the amount of rent payable by the tenant until its business started operating again would be a matter for determination, failing agreement between the parties.  

The Tribunal accepted the evidence of the tenant’s director to the effect that the tenant is enrolled in the JobKeeper Scheme, and that the director is an “eligible business participant” engaged in the business of the tenant and entitled to receipt of the Jobkeeper payment. The Tribunal also accepted that the tenant qualified for the JobKeeper Scheme, as “carrying on business” in Australia on 1 March 2020, notwithstanding the landlord having taken possession of the premises on 27 February 2020. 

However, the Tribunal concluded that in regard to the tenant's obligation to pay rent and other amounts in arrears as a condition of the granting of relief against forfeiture, there was no serious question as to whether the tenant was entitled to take advantage of the rent relief provisions contained in the Covid-19 legislation. The Member accepted the landlord's submission that the lease was not an “eligible lease” within the meaning of section 13 of the Act because there was no serious question as to whether it was in effect on 29 March 2020. The tenant would therefore not be entitled to any rent relief or relief from any liabilities under the Covid-19 legislation.

Ultimately the Tribunal granted the tenant’s application for relief against forfeiture on the basis that all rent and outgoings that would otherwise have been paid by the tenant to the landlord to the date of the decision, had the landlord not taken possession when it did, must be paid by the tenant as a condition of granting relief.

This case shows the analysis that the Tribunal must undertake in order to determine whether a case falls within the moratorium granted by the  Code of Conduct and the Act and regulations created under it. 

W G Stark 

Hayden Starke Chambers