Are there any recent cases about a mortgagee's duty under section 420A of the Corporations Act when exercising their power of sale during the pandemic?

Readers will recall that I posted about a Queensland decision that dealt with a mortgagee exercising its power of sale during the pandemic (see here: https://melbournepropertylaw.blogspot.com/2021/06/are-there-any-recent-cases-about.html). 

Yesterday, I posted about the Supreme Court of Victoria dealing with a similar scenario (see: https://melbournepropertylaw.blogspot.com/2023/01/are-there-any-recent-victorian-cases.html). 

In Manda Capital Holdings Pty Ltd v PEC Portfolio Springvale Pty Ltd [2022] VSC 381, M Osborne J dealt with a dispute about whether the mortgagee in that case had exercised its power of sale in accordance with section 420A of Corporations Act 2011 (Cth).  

The lender advanced $6.39 million pursuant to a loan agreement.  The borrower mortgaged land at 2–10 Springvale Road, Springvale and 1690 Centre Road, Springvale (‘the Property’) as security for the Loan.  The second defendant provided a personal guarantee and indemnity in support of the Loan and further charged his interest in a property located at 6 Raymond Road, Seaford as security for the loan.  After the borrower fell into default under the Loan Agreement, the lender exercised its rights as mortgagee to enter into possession of the Property.  The lender subsequently sold the Property for $7 million pursuant to a contract of sale dated 22 December 2020.  The sale settled on 23 March 2021.  The principal and interest owed on the Loan exceeded the proceeds of sale from the Property.

The lender commenced proceedings against the borrower seeking the repayment of outstanding debt after the lender (as mortgagee in possession) sold the security property just subsequent to Melbourne’s second pandemic-induced lockdown in 2020 and the proceeds did not satisfy the mortgagee's debt. 

The borrower admitted default under the loan agreement and accepted the outstanding debt. However it counterclaimed against lender, contending that sale of the property breached the duties imposed by section 420A. The counterclaim alleged that if the lender had complied with section 420A of the Corporations Act, it would have achieved a sale price of $7.8 million (the market value outlined the borrower's expert evidence) leading to the secured debt being satisfied in full. 

The Court considered whether the best price had been obtained in exercising power of sale in circumstances where the price achieved was less than the outstanding liability to mortgagee. The court also considered the effect of COVID-19 lockdowns on property market.

Justice M Osborne noted that the parties agreed on the relevant legal principles to be applied, summarised by the Court of Appeal in Boz One Pty Ltd v McLellan [2015] VSCA 68 (Whelan, Santamaria and Kyrou JJA):

As the authorities illustrate, what must be done to comply with this general obligation will depend on the circumstances of each case, including the nature of the assets being sold and the circumstances of the chargor. In deciding whether a controller’s failure to take a particular step constitutes a breach of s 420A(1)(a), that step should not be considered in isolation. Rather, the court should consider the controller’s conduct as a whole in the context in which the controller was required to make decisions about which steps to take and which steps not to take. The controller’s conduct must be looked at holistically by reference to the dynamic circumstances that the controller faced at the relevant time.

Here, the ‘dynamic circumstances that the lender faced at the relevant time' were the COVID-19 pandemic and associated lockdowns. Therefore (as always) the crucial issue was the steps taken by the lender to sell the property.

The essence of the borrower’s case was that the mortgagee contravened s 420A of the Act by failing to take all reasonable steps to sell the Property for market value.  In particular, the borrower alleged that:

(a) the sales campaign was too short;

(b) the proposed advertising strategy was inapt in that it gave undue prominence to the fact of the sale being a mortgagee sale; and

(c) the mortgagee should have extended the campaign into 2021 in light of the quality of the offers that it had received rather than entering into the Sale Contract.

M Osborne J noted at paragraph 13 that:

"Whilst it is clear that s 420A of the Act imposes a more rigorous statutory duty upon a mortgagee or other receiver in relation to its power of sale than that provided by the general law duty of good faith (Boz One Pty Ltd v McLellan [2015] VSCA 268 at [157]), the more rigorous duty imposed by s 420A does not detract from the common law principle that a mortgagee may sell at the time of its choosing and does not have to wait until a time when a better price might be obtained (Investec Bank (Australia) Ltd v Glodale Pty Ltd [2009] VSCA 97; (2009) 24 VR 617, 627 [48] (Neave and Redlich JJA and Forrest AJA)."

Justice M Osborne made the following relevant findings:

The four-week expression of interest sales campaign was entirely adequate, if not best practice, in the circumstances.

The agents employed were experienced real estate agents, with expertise in development sites in inner suburban Melbourne.

The sales campaign attracted considerable interest. The evidence was that prospective buyers did not withdraw because they did not have sufficient time to undertake an assessment of the property (due to COVID-19 restraints). Rather, they withdrew because they were told that the vendor was seeking a price of $7 million or more, where the buyers’ interest was generally at a price of up to $6 million.

The sales campaign obtained the $7 million sale in a difficult and unpredictable market, which was within the range of the agent’s estimate and exceeded the market value as assessed in the valuation obtained from an independent expert prior to entering into the sale contract.

There was no breach of section 420A of the Act by not extending the sales campaign – the expert evidence preferred by the Court was that readvertising in 2021 would suggest to the market that the late 2020 sales campaign failed, removing the competitive tension from the sales process. In addition, it would result in significant risk, noting the additional interest accruing under the loan (about $110,000 to $130,000 per month). 

The emphasis in the advertising campaign on the fact of the mortgagee sale was entirely consistent with usual practice and had obvious commercial advantage – The evidence (of the lender's experts) that it is common for properties to be advertised as mortgagee sales, indicating a motivated vendor and is not simply testing the market was preferred. One of the experts considered that this was particularly appropriate for the property during the COVID-19 lockdown and opined that without a mortgagee sale tag, it may have been perceived by many in the market that the vendor had an elevated view of the property’s worth.

Justice M Osborne considered the expert valuation provided by both parties, and although he accepted the lender's experts' evidence, in fact one of the borrower's experts was not very different from the ultimate sale price (having given a range of $7,260,000 to $8,300,000). Despite that range, the borrowers asserted that the valuation showed that the security property was worth $7.6m. The Honourable Justice dismissed that assertion as an oversimplification. He also noted at paragraph 78:

"Valuation is often described as an art, not a science, and it is well understood that two valuers acting competently could come to different conclusions as to the value of a particular property on a given day.  Absent any challenge to each valuer’s choice of comparable sales which did not occur in the present case, I am not in a position to prefer the evidence of one over the other.  Rather, I conclude that the difference between their two valuations is simply a product of reasonable judgment by appropriately qualified persons." 

Conclusion

This decision is a further example of the difficulties faced by a dissatisfied borrower in trying to pursue a claim against a mortgagee alleging failure to comply with its legislative duties. The Court emphasised that the mortgagee’s conduct as a whole will be considered with reference to the ‘dynamic circumstances’ faced when determining if the duty under section 420A has been complied with. 

Obtaining contemporaneous valuations, using reputable agents and carefully considering independent advice from those agents will carry considerable weight in the face of borrower dissatisfaction without much more.

WG Stark

Hayden Starke Chambers

Can an Owners Corporation pass a rule that prevents a particular use of a lot in Victoria?

It is relatively common for Owners Corporations to seek to restrict the use to which a lot in a building subject to a subdivision can be put. 
 
Both the Supreme Court of Victoria and the Victorian Civil and Administrative Tribunal have found that an owners corporation rule seeking to prohibit a particular type of use of a lot is an invalid rule which is beyond the owners corporation’s rule making power provided for by the Owners Corporation Act 2006 (Vic) (Act).

For example, in Lawandi v Owners Corporation 21842D (Owners Corporations) [2015] VCAT 1810 (20 October 2015), the owners corporation sought to prevent the Applicant from using the relevant premises for residential purposes in a building which was primarily used for commercial purposes. 

The owners corporation introduced a new rule by Special Resolution which provided:

A lot owner or occupier must not use the lot, or permit it to be used, for residential or other accommodation, whether short term, long term or otherwise.

In considering the rule, the Tribunal closely considered the wording of section 138 of the Act and Schedule 1 of the Act. 

VCAT Vice President, County Court Judge Davis, found that the matters which an owners corporation may make rules about are confined to the subject matter in Schedule 1 of the Act. 

Clause 5 of Schedule 1 of the Act (relating to lots) was found to enable an owners corporation to make rules regulating the external appearance of lots or activities being carried out on a lot so far as they impact on common convenience or common areas, but did not extend to prohibiting a particular use of a lot.

Vice President Judge Davis found:

[T]he power under the Act in an OC to make rules “for and with respect to” a “change of use of a lot” cannot be construed to allow an OC to make a rule prohibiting the change of use of a lot.  Rather, the power is to be construed as a power to make rules for and in respect of any change of use of a lot that are necessary for the carrying out of its functions under the Act.

Rules limiting types of uses within buildings affected by owners corporations are common in inner city developments. 

However, it seems that attempts to restrict the use of a lot in are likely to be ineffective (for example the Republic Tower at 299 Queen Street, Melbourne (the subject of Morrish v Republic Tower Body Corporate [2004] VSC 56) and the Watergate Building in the Docklands (the subject of Owners Corporation PS501391P v Balcombe (Owners Corporations)[2015] VCAT 956)). 

The cases have important ramifications for owners corporations and members of owners corporations. 

Careful consideration needs to be given about the potential invalidity of any owners corporation rule which seeks to prohibit a lot from being used for a particular purpose, such as a residential use or a commercial use, and a member’s obligation to comply with a rule of this nature.

WG Stark

Hayden Starke Chambers

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

At paragraph 25, their Honours also held that:

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

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

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

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

At paragraph 51 of his judgement, Justice Gageler noted:

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

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

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

Conclusion 

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

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

WG Stark

Hayden Starke Chambers

How far above ground level can an owner of land enforce their rights of ownership?

In Janney v Steller Works Pty Ltd [2017] VSC 363, (2017) 53 VR 677, Justice Riordan of the Supreme Court of Victoria was asked to consider the extent of a landowner's right to possession of the airspace over their land, and their ability to control entry onto their land. 

The circumstances of the case were that the neighbour was proposing to interfere with the landowner's right of possession by incursion into airspace over that land through the operation of a construction crane sailing over the land at times during a proposed 11 month construction period. The proposed construction was of a four-storey building comprising 27 dwellings above a basement car park on neighbouring properties at Foam Street and Ormond Road, Elwood ("the Construction Site"). 

The developer served a notice purporting to protect works on the Construction Site, which included the use of the crane during the construction. 

In fact, the relevant Building Regulations did not apply to the proposed crane; in any event, the landowners objected to the proposed notice, stating among other things that: "We are very concerned about the safety of our family if/when the crane boom is over our property."

The landowner and the developer engaged in extensive correspondence prior to the court proceedings. The landowner noted that they owned the airspace above their property and that the proposed crane use would be a trespass. They sought compensation to allow them to relocate to a similar property in Elwood for the duration of construction, or alternatively that construction proceed without a crane. The developer rejected this proposal. 

The landowner applied for an injunction to restrain the developer from engaging in the threatened incursion. 

At paragraph 28 of his judgment, Riordan J noted:

The fact that the plaintiffs’ rights as the owner of land extends into airspace is trite. On one view, the owner’s rights extend to protecting not only the land but the sky space above the land stretching the limits of the atmosphere and the soil beneath the surface down to the centre of the earth (The Latin maxim: cujus est solum, equs est usque ad coelom et ad inferos. See Bernstein v Skyviews & General Ltd [1978] 1 QB 479, 485). The issue of whether such rights are limited to the prevention of incursions that ‘[interfere] with that part of the airspace above [the] land which is requisite for the proper use and enjoyment of that land’ (Graham v K D Morris & Sons Pty Ltd [1974] Qd R 1, 4) (such that, for example, claims in trespass cannot prevent aircraft flying over property), has been said to await a definitive ruling from the High Court (Anthony P Moore, Scott Grattan, Lynden Griggs, Bradbrook, MacCallum and Moore’s Australian Real Property Law (Thomson Reuters, 6th ed, 2016) 812 [16.140]).

Despite noting the absence of High Court authority, Justice Riordan concluded that even applying the more restricted view, the incursions of the crane, while in weathervaning mode, constituted an actionable trespass. 

He set out his reasons at paragraph 30. 

He noted that the case of Graham v K D Morris & Sons Pty Ltd [1974] Qd R 1 was a similar fact situation. The judge concluded in that case that the invasion of the plaintiff’s airspace by the projection of the crane jib was a trespass and the overhanging crane interfered with that part of the airspace above the land which is requisite for the proper use and enjoyment of that land. The judge in that case also noted that any hardship which the defendant will suffer [as a result of the injunction] has been brought about by its own negligence and its cavalier and high-handed attitude.

In Anchor Brewhouse Developments Ltd v Berkley House (Docklands Developments) Pty Ltd [1987] 2 EGLR 173, Scott J granted a permanent injunction to restrain a tower crane from weathervaning over the plaintiffs' land. 

Scott J rejected the defendant’s argument that there was no trespass and said:

• •  
    What is complained of in the present case is infringement of air space by a structure positioned upon a neighbour’s land. The defendant has erected tower cranes on its land. Attached to each tower crane is a boom which swings over the plaintiffs’ land. The booms invade the air space over the plaintiffs’ land. Each boom is part of the structure on the defendant’s land. The tort of trespass represents an interference with possession or with the right to possession. A landowner is entitled, as an attribute of his ownership of the land, to place structures on his land and thereby to reduce into actual possession the air space above his land. If an adjoining owner places a structure on his (the adjoining owner’s) land that overhangs his neighbour’s land, he thereby takes into his possession air space to which his neighbour is entitled. That, in my judgment, is trespass. It does not depend upon any balancing of rights.
  • 
    
  • 
    
  • 
    
  • He also noted that:
  • 
    
  • 
    
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  • It is not, in my view, accurate to say that no harm is being done to the plaintiffs by the trespassing cranes. 
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In London & Manchester Assurance Co Ltd v O & H Construction Ltd (1989) 2 EGLR 185, Harman J also considered a swinging crane, in that case over the Albion Wharf on the Thames. His Honour said:

• •  
    It is, in my view, beyond any possible question on the authorities and the law that a party is not entitled to swing his crane over neighbouring land without the consent of the neighbouring owner.

At paragraph 32, Riordan J noted that by legislative amendments, New South Wales, the Northern Territory, Queensland and Tasmania have provided for the statutory imposition of an easement by the courts to promote land development. That has not happened in Victoria.

The Honourable Justice Riordan concluded at paragraph 33 that:

Even without the authorities, I would conclude that the weathervaning was neither a trifling nor de minimus interruption of the plaintiffs’ rights. The evidence established that the plaintiffs live on the property with their two children. This is not a case ... where the property is used purely for commercial purposes. Collapses of cranes are not unknown. I accept the plaintiffs’ evidence that the plaintiffs and their children may be well justified on leaving their home if very strong winds were forecast ... Owners of property should not have to live with the fear that at any time the boom of a crane may be above their home and the risk (however small) that it may crash down on their family.

He also concluded (at paragraph 34) that:

Neither in money terms is the encroachment insignificant. As Lord Selbourne pointed out in Goodson v Richardson, an interest in land may have ‘precisely the value which that power of veto upon its use creates’.

At paragraph 35, he concluded that:

An encroachment into airspace raises a strong prima facie entitlement to an injunction. He referred to the decision of AL Smith LJ in Shelfer v City of London Electric Lighting Co, to the following effect: 

Many judges have stated, and I emphatically agree with them, that a person by committing a wrongful act … is not thereby entitled to ask the Court to sanction his doing so by purchasing his neighbour’s rights, by assessing damages in that behalf, leaving his neighbour with the nuisance, or his lights dimmed, as the case may be. 

In such cases the well-known rule is not to accede to the application, but to grant the injunction sought, for the plaintiff’s legal right has been invaded, and he is prima facie entitled to an injunction. 

In the result, Riordan J granted the injunction restraining the developer from allowing the tower crane to swing onto the plaintiff's land. 

Conclusion 

As the recent construction boom in Victoria has continued despite the impact of COVID-19, it seems likely that cavalier builders who wish to use construction cranes without considering the effect on neighbours may have to face the possibility that they will be restrained from those actions. 

The take away from these decisions is that builders and developers who propose to construct with the assistance of a tower crane will need to ensure that they obtain their neighbours' permission for any intrusions over the neighbours' air space, prior to the commencement of construction.  

WG Stark 

Hayden Starke Chambers

Can a gift of land during the donor's lifetime defeat a claim against his or her estate after death? - follow up

Further to my post of 22 September 2020 (see: https://melbournepropertylaw.blogspot.com/2016/01/can-gift-of-land-during-donors-lifetime.html), Teri Konstantinou has written an article about a recent NSW Court of Appeal decision (Mentink v Olsen - [2020] NSWCA 182) in which the trial judge set aside a gift by a dying mother to her daughter. See https://www.linkedin.com/pulse/mentink-v-olsen-2020-nswca-182-elefteria-teri-konstantinou/?trackingId=ZhuaYDE6QPOJRPO5pBsdNw%3D%3D

The background was that the mother was terminally ill, aged 75 years, and she was survived by her husband and daughter of a previous marriage. 

In the course of the deceased's life time, she gifted the sum of $2.2m to her daughter in. The widower sued his step daughter alleging that she procured this money from her mother by placing undue pressure and influence on the deceased and by contriving her mother's change of mind to gift that money to her. In so doing, the widower argued further that his step daughter had taken advantage of her mother's vulnerability in unconscionable circumstances.

The Trial judge agreed; so did the Court of Appeal. 

The Court of Appeal found that the real issue was that the daughter could not be satisfied that her mother was capable of making the decision to gift this money to her without any accounting or legal advice. That advice was critical to ensure that the deceased understood whether or not it was her money to gift at all. It followed that the daughter could not be satisfied that her mother gave due and proper consideration to the question whether it was in her best interests to make the gift to her daughter.

Conclusion 

As I noted in the previous post, it will most likely be necessary, for a gift to be effective, to have a medical report confirming that the gift maker is of sound mind, as well as to document the reasons for the gift. 

It would also be useful to have the gift receiver not involved in the transaction. Instead, the gift should be documented by an independent lawyer, who is acquainted with the gift giver, or who at least meets with the giver and satisfies themselves about the circumstances of the gift, and the fact that the gift giver is not being unduly influenced by the donee, and provides the giver with legal advice about the legal effect of the gift. 

Finally, it now appears that it would also be useful to have the gift giver obtain independent financial and accounting advice, as well as legal advice, prior to entering into the transaction, if it is to be saved from attack after the gift giver dies. 

WG Stark 

Hayden Starke Chambers

Can a gift of land during the donor's lifetime defeat a claim against his or her estate after death?

In the case of Daunt v Daunt [2013] VSC 706, the plaintiff and the defendant were twin brothers and sons of the deceased.

While he was alive, the deceased and his wife (the twins' mother) gifted real property to one son as a joint tenant with the deceased, by executing a transfer in the appropriate form. The consideration for the transfer was described as “I desire to make a gift”. 

Upon the death of the father, the title vested solely in that son by survivorship.  This meant that the property did not form part of the deceased’s estate, and could not be subject to a Part IV claim.  The surviving proprietor lived at the Wandong property at the time of the proceeding. 

The plaintiff made a claim against the estate in the Supreme Court of Victoria alleging (amongst other things) that the defendant had unduly influenced their father.

Associate Justice Daly found that the brother lacked standing to make a claim.  This was due to the fact that the plaintiff was merely a disappointed beneficiary under his living mother’s estate.  Consequently, the only person who could make such a claim was their mother. 

The Court of Appeal (Redlich, Santamaria and Kyrou JJA) dismissed the disappointed brother's appeal (see Daunt v Daunt [2015] VSCA 58). 

Daly As J went on further, however, to make comments as to how she would have decided the case had the plaintiff in fact had standing. 

Her Honour concluded that there was no undue influence in this case as the transfer had been a voluntary gift where the transferor had fully understood the consequences of the transfer.

The case came about because the plaintiff lodged a caveat over the title to a property at Junction Road, Heathcote Junction (“Wandong property”). 

The defendant (as surviving registered proprietor) applied to remove the caveat on the basis that the plaintiff did not have the interest in the Wandong property that he claimed. The plaintiff issued the proceedings to justify the caveat.  

At paragraph 40, Her Honour noted that the question of the standing of an actual or potential claimant under Part IV of the Administration and Probate Act 1958 (Vic) has been the matter of some debate, and that debate had yet to be resolved. 

 In Mataska v Browne [2013] VSC 62, McMillan J approved of the view adopted by the Full Court of the Supreme Court of Queensland in Hogarth v Johnson (1987) 2 Qd R 383. While McMillan J stated [at paragraph 53] that: 

A contingent Part IV interest, without more, is insufficient to support standing. 

she found in an application by a child of the deceased to remove the executor of the deceased’s estate in circumstances where the executor was the sole beneficiary of the deceased’s estate, but also the recipient of a gift of the bulk of the assets of the deceased shortly prior to her death, a potential claimant under Part IV of the Act had sufficient standing to make the application for the removal of the executor, and the appointment of another executor for the purpose of investigating the circumstances in which the gift was made.

Daly As J also noted at paragraph 45 that:

... regardless of the standing of the plaintiff, now is the opportune time to determine, on the basis of the evidence before the Court, whether the Transfer of Land ought to be set aside on the basis that the Transfer of Land was procured by the defendant’s breach of fiduciary duty, exertion of undue influence, or unconscionable conduct. The plaintiff and the defendant have filed and served extensive written evidence ...

Continuing on with that analysis, she found at paragraph 47  that there was no factual basis for alleging that the defendant breached his fiduciary duty as power of attorney for his parents by procuring the Transfer of Land: the Transfer of Land predated the defendant’s appointment as an attorney for each of his parents. She also noted that there is no overarching doctrine at law that an adult child otherwise owes a fiduciary duty to his or her parents. 

In her analysis of whether the defendant procured the Transfer of Land by exerting undue influence, Daly As J adopted the principles articulated in Christodoulou v Christodoulou [2009] VSC 583 at [70], where Kaye J stated as follows:

The basic principles relating to the concept of undue influence are uncontroversial. In equity, a transaction, whereby a donor transfers property to a donee (or recipient), is voidable, if it is shown to be the result of undue influence exercised by the recipient over the mind of the donor. There are two categories of cases of undue influence. The first category of cases arises where it has been positively proven that the transaction in question was produced by actual influence exercised by the recipient over the donor. ... The second category of case is where there has been shown to be an antecedent relationship between the donor and the donee, which is such as to raise a presumption that the donee has relevant influence over the donor. In such a case, the court will set aside a voluntary gift, unless it is proven by the donee that the gift was a spontaneous act of the donor in exercise of an independent and informed will. In this category of case, the law has recognised particular relationships which automatically raise a presumption of influence, including the relationship of doctor and patient, solicitor and client, guardian and ward, and parent and child (where the gift is by the child to the parent). However, the classes of relationships, in which the presumption arises, are not fixed and inflexible. In essence, where there is found to be an antecedent relationship between the parties, which gives the recipient of the gift “authority or influence over the donor from the absence of which it is proper that he [or she] should be protected”, the law will presume that any gift by the donor to the donee was the result of undue influence exercised by the latter.

In this case, the plaintiff alleged that the Transfer of Land was procured by the reason of actual undue influence on the part of the defendant. However, Her Honour concluded that the case fell squarely in the second category of cases: that is, by reason of the facts and circumstances of the relationship between the defendant and his parents, there was an antecedent relationship between the defendant and his parents such as to raise a presumption of undue influence which must be rebutted by the defendant in order to avoid the gift to him effected by the Transfer of Land being set aside.

The antecedent relationship did not arise merely by the defendant being the adult child of Mrs Daunt and Mr Daunt senior. However, it was apparent to Her Honour that, at least in the period after the Black Saturday fires and his parents’ movement into institutional care, his parents had become increasingly dependent upon the defendant’s day to day assistance.

At the time that the Transfer of Land was executed, the parents were becoming increasingly anxious about the potential impact of their ongoing ownership of the Wandong property upon their financial security. It had become clear to them that neither the plaintiff nor the parties' sister were either willing or able to provide them with material and/or practical assistance, despite the defendant’s entreaties in his letters to them, and indeed, their lack of assistance was a major source of disgruntlement to Mrs Daunt in particular. 

Her Honour then noted (at paragraph 55) that the finding that there was sufficient evidence to raise the presumption of undue inference was not intended as a criticism of the defendant or his conduct and motivations in assisting his parents. It was simply a recognition of their potential vulnerability to manipulation of them by him, such that it was necessary for him to demonstrate that the Transfer of Land was executed by his parents freely and willingly. 

Daly As J concluded that the onus rested with the defendant to establish that the execution of the Transfer of Land was “a spontaneous act in exercise of an independent and informed will” on the part of Mrs Daunt. 

At paragraph 57 Her Honour concluded that the defendant had discharged that onus. It was apparent from the evidence of Mrs Daunt that she voluntarily gifted her share of the Wandong property to the defendant, with a full understanding of the consequences of the transaction, and a rational basis for embarking upon the transaction. There was, accordingly, no basis for setting aside the transaction on the basis of any undue influence exercised by the defendant. 

Similarly, Her Honour was unable to find any basis for setting aside the Transfer of Land on the grounds of unconscionable conduct on the part of the defendant. 

Her Honour then noted that in order to establish unconscionable conduct on the part of the defendant, the onus was on the plaintiff who had to establish that:

(a) his parents, and in particular, Mrs Daunt, were under a relevant special disability or disadvantage, which seriously affected their (her) ability to make a judgment as to their (her) own best interests; and

(b) the defendant knew, or ought to have known of that special disability and/or disadvantage, and that special disability or disadvantage affected his parents’, and in particular, his mother’s ability to make an appropriate judgment as to whether the transaction was in their (her) best interests.

At paragraph 61, Daly As J found that the plaintiff’s claim with respect to unconscionable conduct fell at the first hurdle: that is, Mrs Daunt was under no special disadvantage when she made the gift of her share of the Wandong property to the defendant. 

Her Honour went on to conclude that the question of whether Mr Daunt senior was under a special disadvantage or disability was peripheral to the real issue in the proceeding, as Mr Daunt senior suffered no material financial disadvantage by reason of the execution of the Transfer of Land. 

In determining the question as to whether the transaction was fair and reasonable in all of the circumstances, Daly As J concluded, having regard to all of the circumstances, the transfer by Mrs Daunt of her interest in the Wandong property to the defendant was fair and reasonable. 

It was apparent from the evidence that Mr Daunt senior and Mrs Daunt were keen to find some mechanism for maintaining Mrs Daunt’s access to the Wandong property while maximising their ability to receive financial assistance from the Commonwealth Government, and it appeared that objective had been achieved by reason of the Transfer of Land. 

Conclusion

These findings support the use of lifetime (inter vivos) gifts as an effective estate planning tool in some circumstances. 

It will most likely be necessary, for it to be effective, to have a medical report confirming that the gift maker is of sound mind, as well as to document the reasons for the gift. 

It would also be useful to have the gift receiver not involved in the transaction. Instead, the gift should be documented by an independent lawyer, who is acquainted with the gift giver, or who at least meets with the giver and satisfies themselves about the circumstances of the gift, and the fact that the gift giver is not being unduly influenced by the donee. 

WG Stark 

Hayden Starke Chambers