Bavulo Pty Limited v Zhang Property Pty Limited

HEADNOTE [This headnote is not to be read as part of the judgment] The appellant purchaser, Bavulo Pty Limited, and the respondent vendor, Zhang Property Pty Limited, entered a contract for the sale and purchase of land for a strata title unit in Strathfield (Contract). The date for completion was set as 3 July 2023. As the sale was to occur subject to an existing tenancy, cl 24.4.3 required Zhang to provide a notice of attornment "at least 2 business days before the date for completion". On 3 July 2023, Bavulo's solicitors informed Zhang that settlement could not occur on time due to a lack of funds. The next day, Zhang issued a notice to complete and, following Bavulo's non-compliance with the timetable in that notice, it terminated the contract. The primary judge, Peden J, rejected Bavulo's claim seeking specific performance and declaratory relief. The principal issue before her Honour, and the only issue on the appeal, was whether Zhang was disentitled from issuing the notice to complete because of its failure to provide a notice of attornment in accordance with cl 24.4.3. The Court (Griffiths AJA, Payne and McHugh JJA agreeing) dismissed the appeal, holding: (1) Whether a breach of contract will disentitle a party from issuing a notice to complete will depend on whether the relevant obligation is properly characterised as a condition precedent to performance or otherwise is such that its breach will give rise to a right in the other party to terminate: [1] (Payne JA); [2] (McHugh JA); [29]-[32] (Griffiths AJA). HG & R Securities Pty Ltd v Sayer [2009] NSWSC 427; (2009) 14 BPR 27,045; Neeta (Epping) Pty Ltd v Phillips (1974) 131 CLR 286; [1974] HCA 18; Malouf v Sterling Estates Development Corporation Pty Ltd [2002] NSWSC 920; Kraguljac v A & B Property Developments Pty Ltd (No 2) [2012] SASC 1, considered. (2) In this case, the obligation to provide a notice of attornment under cl 24.4.3 of the Contract was not something that was related, in the sense of a condition precedent, to completion of the sale. That is supported by the fact that the Contract contemplated the possibility of the provision of a notice of attornment after completion and imposed a separate obligation on the vendor to pay to the purchaser any rent monies received by the vendor after completion. Nor did the Contract make time of the essence with respect to the service of the notice of attornment so as to give the counterparty a right to terminate: [1] (Payne JA); [2] (McHugh JA); [33]-[38] (Griffiths AJA).

JUDGMENT

1. PAYNE JA: I agree with Griffiths AJA.
2. MCHUGH JA: I agree with Griffiths AJA.
3. GRIFFITHS AJA: This appeal concerns the validity of a notice to complete in respect of a contract for the sale and purchase of land issued by the respondent vendor, Zhang Property Pty Limited, to the appellant purchaser, Bavulo Pty Limited. The appeal has a narrow focus. The specific issue is whether Zhang was entitled to issue that notice to complete and, following Bavulo's non-compliance with the timetable in that notice, to terminate the contract. At the time of issuing that notice, Zhang was said to be in breach of several provisions in the contract; in particular, the requirement that a notice of attornment be served and held in escrow at least two business days prior to the date for completion. The primary judge (Peden J) held that the notice was validly issued and, accordingly, dismissed Bavulo's suit for specific performance and other declaratory relief (see Bavulo Pty Limited v Zhang Property Pty Limited [2024] NSWSC 879 (PJ) (orders made 19 July 2024)).
4. For the following reasons, I propose that the appeal be dismissed, with costs.

Relevant background summarised

1. The parties entered into a contract for the sale and purchase of land dated 23 December 2022 (Contract). The Contract was in the form of the Law Society and Real Estate Institute contract for sale, 2022 edition. The subject matter of the Contract was a strata title unit in Strathfield. The "date for completion" was defined in the Contract as being "190 days after the contract date". That date was Saturday 1 July 2023. By operation of cl 21.5, that date was shifted to the next business day: 3 July 2023.
2. Clause 15 of the Contract stated that the parties must complete by "the date for completion" and, if they did not, a party can serve a notice to complete if that party is otherwise entitled to do so.
3. The sale was to occur subject to an existing tenancy, which was being used as a Korean restaurant.
4. Around 20 February 2023, Bavulo's solicitors sent a number of requisitions to Zhang's solicitors. Relevantly, requisition 55(e) sought confirmation that a notice of attornment (in respect of the existing lease) would be provided upon completion. Answers were provided on 22 February 2023. The request for confirmation was "[n]oted subject to the Contract". (The words "subject to the Contract" possibly refer to the inconsistency between requisition 55(e) and cl 24.4.3 of the Contract, which obliged Zhang to provide a notice of attornment "at least 2 business days before the date for completion".)
5. At 4.44pm on 3 July 2024, being the completion date, Bavulo's solicitors informed Zhang that they had "not received any source funds necessary to complete the purchase" and accordingly did "not expect settlement to occur today".
6. That caused Zhang, on 4 July 2023, to issue the impugned notice to complete: it required settlement to occur by 3.30pm on 19 July 2023. (No point is taken that the time to complete given by the notice was unreasonable.)
7. At 10.23am on 19 July 2023, Bavulo's solicitors again told Zhang that they could not complete due to insufficient funds. They requested that the completion date be further postponed to 31 July 2023, in consideration for which Bavulo would release $1.35 million (about 50% of the purchase price) to Zhang.
8. That request was refused by Zhang. Completion did not occur on 19 July as required by the notice to complete. Accordingly, on 21 July 2023, Zhang served a notice of termination, which specified as the only basis for termination Bavulo's non-compliance with the notice to complete.
9. In correspondence dated 25 July 2023, Bavulo's solicitors requested Zhang to withdraw the termination notice on the basis that Zhang had failed to comply with certain obligations under the Contract. Bavulo's solicitors sent further correspondence the next day offering, on a without prejudice basis, to "proceed to settle by Friday, 28 July 2023 (or such other date as agreed between the [parties] in writing)".
10. On 29 August 2023, Bavulo commenced the present proceeding below, seeking specific performance of the Contract and declaratory relief.

The primary judgment

1. The principal argument before the primary judge, now reagitated on appeal, was that Zhang was not entitled to issue the notice to complete because, at the time of issuance, it was in breach of contract (relying in particular on Carrapetta v Rado [2012] NSWCA 202; (2012) 16 BPR 30,997 at [27]). Several breaches were identified. Only one remains relevant on the appeal; namely Zhang's failure to provide a notice of attornment in respect of the existing tenancy prior to completion (contrary to cl 24.4.3).
2. Clause 24 of the Contract relevantly stated (noting that all italicised words are defined terms in the Contract): 24 Tenancies 24.4 If the property is subject to a tenancy on completion - … 24.4.3 the vendor must give to the purchaser - • at least 2 business days before the date for completion, a proper notice of the transfer (an attornment notice) addressed to the tenant, to be held by the purchaser in escrow until completion; …
3. As mentioned earlier, requisition 55(e) was on its face inconsistent with cl 24.4.3, in that it sought confirmation that a notice of attornment would be provided by the completion date rather than two days prior to completion. No point was taken about this.
4. The primary judge's reasoning in respect of the effect of Zhang's failure to provide a notice of attornment may be summarised as follows.
5. First, the primary judge summarised the principles concerning the validity of notices to complete at PJ[24]-[38], including authorities such as Sandpiper Kooragang Pty Ltd v Fortis Products Pty Ltd [2020] NSWSC 1256; (2020) 19 BPR 40,689; Neeta (Epping) Pty Ltd v Phillips (1974) 131 CLR 286; [1974] HCA 18; Carrapetta; McNally v Waitzer [1981] 1 NSWLR 294; HG & R Securities Pty Ltd v Sayer [2009] NSWSC 427; (2009) 14 BPR 27,045; and Chandos Developments Pty Ltd v Mulkearns [2008] NSWCA 62; (2008) 13 BPR 25,321.
6. For the purposes of the appeal, it is important to note her Honour's analysis and application of relevant principles as identified in HG & R Securities and Chandos v Mulkearns. The primary judge referred at PJ[31] to the judgment of Ward J (as her Honour then was) in HG & R Securities, where, at [98], Ward J elaborated upon the requirement that the giver of a notice to complete must be "free of relevant default". The reference to "relevant default" implicitly acknowledged that not all breaches of contract will disentitle the defaulting party from issuing a notice to complete. Ward J said that a disentitling breach is one "which is relevant to or connected with the securing of completion", citing Neeta.
7. The primary judge also referred to Giles JA's judgment in Chandos v Mulkearns (Beazley and McColl JJA agreeing), which identified similar principles to those in HG & R Securities. Under the contract for sale of land there, the vendor was required to comply with any obligations under the lease "to the extent it is to be complied with by completion"; however, the rights created by this clause were said to "continue after completion". Although the vendor had not repaired the roof "by completion" it was held that the vendor was not in breach of contract at the time the notice was issued because that obligation could be met before or at completion. Furthermore, because the obligation was expressed to "continue after completion" Giles JA held that satisfaction of the obligation was not a condition precedent to performance of the purchaser's obligation to complete by payment of the purchase price.
8. The primary judge also referred at PJ[41] to Santangelo v Yates Holdings Victoria Pty Ltd [2022] NSWSC 397; (2022) 20 BPR 42,615, where Slattery J held that a vendor's failure to provide a notice of attornment prior to completion did not invalidate a notice to complete issued by the vendor. Her Honour noted at PJ[41], relevantly, that the contract in Santangelo (in the form of the Law Society and Real Estate Institute contract for sale, 2019 edition) contained a provision preserving the purchaser's right to receive the notice of attornment post-completion. Provisions to a similar effect were present in the Contract here (see cll 20.8 and 20.12).
9. Secondly, the primary judge acknowledged that the Contract here differed from that in Santangelo. That is because there was no express identification in cl 24.4.3 of that earlier edition of the standard form contract concerning the timing of the vendor's obligation to give an attornment notice. The primary judge considered, nevertheless, that the same conclusion should be reached here as in Santangelo.
10. The following clauses in the Contract were of particular significance to her Honour's reasoning (see at PJ[43]-[44]): 1. Clause 21.6, which provided that "[n]ormally the time by which something must be done is fixed" but, subject to any other provision in the Contract, was "not essential", which meant that time in cl 24.4.3 was not essential. 2. Clause 20.8, which provided that various rights - including those conferred under cl 24 - continued after completion, whether or not other rights continue. That clause was to be viewed in conjunction with cl 20.12, which provided that each party "must do whatever is necessary after completion to carry out the party's obligations under this contract". 3. Clause 24.4.3 itself (the terms of which are set out at [16] above), which anticipated that the notice of attornment would be held in escrow, showing that the notice had "no practical work to do until after completion" (PJ[43]). 4. Other provisions, including cll 14.2 and 52.6(b), which required the vendor to pay to the purchaser any rent received from the tenant after completion, thereby protecting the purchaser from a failure by the vendor to provide the notice of attornment prior to completion. Clauses 14.2 and 52.6 stated: 14.2 The parties must make any necessary adjustment on completion, and - 14.2.1 the purchaser must provide the vendor with adjustment figures at least 2 business days before the date for completion; and 14.2.2 the vendor must confirm the adjustment figures at least 1 business day before the date for completion. … 52.6 Rent and all other moneys paid or payable to the vendor by tenants or occupants of the property ("lease moneys") will be apportioned on completion between the vendor and the purchaser in the following manner: (a) the vendor will be entitled to all lease moneys payable in respect of the period up to and including the date of completion and the purchaser will be entitled to all lease moneys payable from the date after that date; (b) where in respect of any particular tenancy or licence, or agreement for tenancy or licence, lease moneys have been paid to the vendor in respect of a period expiring after the date of completion, the vendor will allow to the purchasers a proportion of those lease moneys equal to the proportion that the number of days remaining in the period after the date of completion bears to the total number of days in the period; (c) if any lease moneys are in arrears, the purchaser will allow those arrears to the vendor.
11. The primary judge concluded at PJ[45] (emphasis added): I do not consider the promise to provide the notice of attornment could have any effect on the purchaser completing on time: see eg Chandos v Mulkearns; HG & R v Sayer. It was not a pre-condition to completion.

Analysis and disposition

1. As mentioned earlier, the primary judge referred to Slattery J's reasons in Santangelo in reaching her conclusion that a failure to provide a notice of attornment under cl 24.4.3 did not invalidate the notice to complete. Bavulo takes issue with that approach, emphasising that Santangelo was a "no default" case. It submits that the reason why the notice to complete in Santangelo was valid was because there was no breach of contract. There was no breach of contract because, unlike here, the relevant clause did not specify any time by which the notice of attornment needed to be provided.
2. Bavulo's contention has some force in the sense that nothing in Slattery J's reasons is directed to the effect on the validity of a notice to complete of a breach by the issuing party of its obligation to provide a notice of attornment by a specified time. A similar point can be made about the primary judge's reference at PJ[35]-[36] to Chandos v Mulkearns.
3. More is needed, however, to disturb the primary judge's findings on this point. Her Honour outlined two further reasons for upholding the notice to complete as valid at PJ[44]-[45]: (i) if a notice of attornment was not provided, the purchaser's interests in respect of rent paid after completion were contractually protected; and (ii) the serving of the notice of attornment "could [not] have any effect on the purchaser completing on time".
4. Not all breaches of contract will disentitle a party from issuing a notice to complete. Some principle is required to determine which breaches will have a disentitling effect. The primary judge was aware of this, as is reflected in her Honour's reference to Ward J's elaboration of the relevant principles in HG & R Securities at [98] which, for completeness, is as follows (emphasis added): The requirement that the giver must be free of relevant default was considered in Neeta and in Collingridge v Sontor (1997) 141 FLR 440. The nature of a breach which disentitles the issuer of notice to complete was said to be one which is relevant to or connected with the securing of completion (Neeta). In Collingridge v Sontor it was said that a party's breach disentitles that party from giving a notice to complete only where it goes to time or to completion. (So, for example, in Lindgren, Time in the Performance of Contracts (2nd ed) it is said that a party's breach will not preclude that party from giving a valid notice to complete where the breach has ceased to be of any operative effect in the progress towards completion or cannot reasonably be said to be the cause of the other party's failure to complete.)
5. Earlier, in Malouf v Sterling Estates Development Corporation Pty Ltd [2002] NSWSC 920, Young CJ in Eq considered that whether a party was entitled to issue a notice to complete depended on their being "free from any relevant breach of contract which may have provided the purchaser a good excuse not to complete by the due date" (at [36]) (emphasis added).
6. Some of the relevant authorities were surveyed by Kourakis J in Kraguljac v A & B Property Developments Pty Ltd (No 2) [2012] SASC 1. Having observed that those authorities were concerned with "interdependent obligations of vendors and purchasers on which settlement is dependent", his Honour stated (at [92]): … In my view, the effect of these authorities is as follows. First, a notice to complete or settle can not effectively be relied on by a party who has himself or herself failed to perform an obligation on which the settlement is contractually dependent. In such a case the other party is not obliged to settle because, on a proper construction of the contract the condition on which the obligation rests has not been satisfied. Secondly, the party serving the notice must be in a position to perform any still executory obligations by the date he or she has nominated for settlement. In my view, it must also be the case that a party in breach of an essential term, or who has otherwise repudiated the contract, can not invoke contractual provisions which demand performance of the other party's obligations on pain of loss of the benefit of the contract. That rule is necessary to avoid an otherwise irreconcilable conflict between the right to terminate, which is enlivened by a failure to comply with a notice to complete given by the contract, and the common law right to terminate of the other party.
7. In other words, a party is not entitled to issue a notice to complete where (i) it has failed to carry out a condition precedent to completion; (ii) it is not willing and/or able to perform any remaining executory obligations; and (iii) it must not have breached the contract in such a way so as to give rise to a right in the other party to terminate.
8. Bavulo submits that the express requirement in cl 24.4.3 that a notice of attornment be provided prior to completion demonstrates that the giving of an attornment notice was connected with securing completion. This is said to be fortified by the requirement that the notice be held in escrow. It also says that the provision of a contractual safeguard in the case of a failure to provide a notice of attornment did not diminish the importance of the primary obligation to provide such a notice.
9. In support it identifies three cases - Carr v Keys-Arenas (1981) 2 BPR 9498, Jillinda Pty Ltd v McCourt (1983) 3 BPR 9199 and Doyle v Howey (1990) 6 BPR 13,401 - where it contends that a vendor's failure to provide a certificate under s 70(1) of the Strata Titles Act 1973 (NSW) at least seven days before completion rendered invalid its notice to complete. That provision (which is now found in s 184 of the Strata Schemes Management Act 2015 (NSW)) authorised specified persons (including the owner of a lot or a person authorised by such an owner) to obtain from the owners corporation in a strata scheme a certificate in respect of various matters, including in relation to the amount of any regular periodic contributions for a particular lot and whether there were any unpaid contributions.
10. In circumstances where the purchaser of a lot would become jointly and severally liable for unpaid financial contributions, it is appropriate to view the vendor's obligation to provide such a certificate no less than seven days prior to completion as a condition precedent to completion.
11. The importance to a purchaser of obtaining such a certificate prior to completion was emphasised by McLelland J in Carr v Keys-Arenas at 9499-9500, where his Honour said that the importance is demonstrated by such provisions as ss 59(4), 60(3)(b) and 70(3) of the 1973 Act. Respectively, those provisions: 1. impose joint and several liability on a lot proprietor for unpaid contributions; 2. impose liability on a lot proprietor to pay to the body corporate its costs in carrying out work under s 60 on a lot or common property; and 3. state that any certificate given under s 70(1)(c) is conclusive evidence of the matters stated therein.
12. McLelland J's judgment was upheld on appeal.
13. It may be accepted that, where there is a sale of land subject to an existing tenancy, the execution of a notice of attornment is an important mechanism in transferring the rights and obligations under that lease to the new landlord. But here, unlike the certificate considered in the three cases referred to above, it is not something that is related, in the sense of a condition precedent, to completion of the sale. The fact that the Contract contemplates (in cl 20.8) the provision of a notice of attornment after completion is indicative of this non-conditionality. The same may be said about cl 52.6(b) which imposes a separate obligation on the vendor to pay to the purchaser any rent monies received by the vendor post completion. To a lesser extent, so does the fact that the notice of attornment is to be held in escrow. The position may be different if the Contract had made time of the essence with respect to the service of that notice: but that is because Zhang's failure to perform an essential obligation would give the counterparty a right to terminate.

Conclusion

1. For these reasons I propose the appeal be dismissed, with costs. In these circumstances, it is unnecessary to address Zhang's amended notice of contention.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 11 February 2025