Dorothy Jonns & Anor v Kim Seong Tan & 2 Ors

Supreme Court of NSW|1999-06-11|Before: Santow J

New South Wales Supreme Court CITATION : Dorothy Jonns & Anor v Kim Seong Tan & 2 Ors [1999] NSWSC 648 CURRENT JURISDICTION : Equity FILE NUMBER(S) : 2531/99 HEARING DATE(S) : 11/06/99 JUDGMENT DATE : 11 June 1999

Dorothy Jonns & Nick Savvas (Ps) PARTIES : Kim Seong Tan (D1) Cenijade Pty Limited (D2) Felderri Pty Limited (D3) JUDGMENT OF : Santow J

COUNSEL : P P O'Loughlin (P) M T Bonnell (Sol) (D2) SOLICITORS : Peter Townsend (P) Mallesons Stephen Jaques (D2) CATCHWORDS : EQUITY - Right of first refusal or pre-emption to tenant under lease - Right fructifies - Option then granted to third party or nominee on constructive or actual notice of right - Does tenant's right of pre-emption as either a mere equity or as an equitable interest prevail over nominee at least on a prima facie basis to maintain injunction - Is the fructified right then still a mere equity or has it become an equitable interest in property - Unconscionable for holder of option on notice of right of pre-emption to prevail - Specific performance versus damages as an adequate remedy Bahr v Nicolay No. 2 (1988) 164 CLR 604 Beneficial Finane Corporation Ltd v Multiplex Constructions Pty Ltd (1995) 36 NSWLR 510 Breskvar v Wall (1971) 126 CLR 367 Fraser v Walker [1967] 1 AC 569 CASES CITED : Garcia v National Australia Bank Limited (1998) 155 ALR 614 Mackay v Wilson (1947) 47 SR(NSW) 315 Sterns Trading Pty Limited v Shteinman (1988) NSW Conv R 55-414 Tanzone v Westpac [1999] NSWSC 478 Transfield Properties v Amos Aked Swift Pty Ltd (1994) 36 NSWLR 321 Walker Corporation Limited v Pateman Pty Ltd (1990) 20 NSWLR 624 DECISION : Injunction continued

Jonns.11June99 - 30 June, 1999: Dorothy Jonn & Anor v Kim Seong Tan & 2 Ors 8 REVISED - 30 June, 1999 IN THE SUPREME COURT OF NEW SOUTH WALES IN EQUITY

No. 2531/99 DOROTHY JONNS & NICK SAVVAS Plaintiff KIM SEONG TAN First Defendant CENIJADE PTY LIMITED Second Defendant FELDERRI PTY LIMITED Third Defendant

JUDGMENT - ex tempore 11 June 1999 INTRODUCTION 1 The Plaintiffs as holders of a right of first refusal seek a continuance of the injunction restraining the Second and Third Defendants from exercising the option, granted to the Third Defendant or its nominees, to purchase certain land consisting of Shop 11 in a shopping centre in Neutral Bay. The injunction was granted on an ex parte basis against the Second and Third Defendants. This was on the basis that the Third Defendant had nominated the Second Defendant as entitled to exercise the option. Though they were both on notice of to-day's proceedings, only the Second Defendant attended to-day's proceedings.

FACTUAL BACKGROUND 2 The Plaintiff is the lessee of the relevant shop and the First Defendant the lessor and registered proprietor. The lease was granted on 25 August 1995 and was subsequently extended on 20 May 1998. It gives the Plaintiffs a first right of refusal ("right of pre-emption") in the event of property becoming "available for sale", such to "be on the same terms as any offer to sell to any other person or company". 3 On 8 April 1998 during the continuance of the lease the First Defendant granted an option to purchase to Felderri Pty Limited, the Third Defendant. That option was in terms permitting its exercise by either Felderri or its nominee. On 4 March 1999 the Second Defendant, Cenijade Pty Limited was nominated. There is no evidence presently before me that the Second and Third Defendants are associated, other than as may be implied by that fact. 4 The exercise date for the option expires on 8 July 1999 and the option remains unexercised. Its exercise depends on continuance of the injunction. The Second Defendant contends that it should be lifted as the basis for its grant and continuance has not been made out. This is on the basis that

(i) there is no prima facie case made out for the grant of the injunction, as a mere equity constituted by the right of first refusal cannot prevail over the prior equitable interest conferred by the option at least so far as its nominee is concerned,

(ii) the Plaintiffs in the events that happened would not be entitled to specific performance of their claimed right, itself a mere equity, to acquire the relevant property by virtue of a right of pre-emption contained in their lease, and

(iii) the balance of convenience favours lifting the injunction.

But as to (iii) it was conceded that an early final hearing prior to expiry of the option on 8 July 1999 obviates any damage that the Second Defendant might otherwise suffer, whereas lifting the injunction would irremediably deny the Plaintiffs their rights, if they have any, save for damages. 5 The pre-emptive rights are conferred in the following terms: "1. Should the lease premises be available for sale during the term of this lease, including any option periods, the Lessor agrees to grant to the Lessee a first right of refusal to purchase the lease premises. 2. Such right of refusal shall be on the same terms as any offer to sell to any other person or company and will be open for acceptance by the Lessee for a period of 14 days from the date of offer by the Lessor." 6 It is not in dispute for the purpose of the present proceedings, that the pre-emptive right was triggered when the option was first granted. Nor was it seriously contested that the option constituted an offer to sell to either the Third Defendant or its nominee, being in the events that happened the Second Defendant. Finally, it was not disputed for the present proceedings that failure to match the option terms by making them available to the Plaintiffs breached their lease and in particular their right of pre-emption. The Plaintiffs for their part do not dispute that the option conferred an equitable interest in the property on the Third Defendant and then upon its nominee the Second Defendant. While the Defendants do not dispute that the Plaintiffs have at least an equity to enforce their right of pre-emption against the First Defendant, they do dispute

(b) that upon its first becoming exercisable, it became not just an equity, but an equitable interest in the property. 7 On 4 November 1997 the Plaintiffs wrote to the First Defendant making clear that their preferred alternative was to purchase the shop "thereby guaranteeing our tenure and giving us the platform in which to take steps to improve the performance of the body corporate and the management of the centre". There followed an offer of $135,000 but that offer it is clear was not pursuant to any exercise of a right of first refusal. Nonetheless this evidence does suffice to establish that the property had a special value to the lessee, at least on a prima facie basis.

PRIMA FACIE CASE 8 It was not disputed, at least for the purpose of the present proceedings, that the Second and Third Defendants must be taken to be on notice of what I will call for convenience the right of pre-emption. This was because the option included as an annexure a contract for sale of the relevant property attaching to which was a folio identifier that in turn referred to the Plaintiffs' registered lease. This concededly put the Second Defendant on notice of its terms, including the right of pre-emption. Nor could it be really disputed that the Second Defendant must have been on notice that the right of pre-emption had been triggered by the grant of the option to the Third Defendant. The Second Defendant knew it was acquiring no more than the Third Defendant could confer by virtue of the very option agreement pursuant to which the Second Defendant was nominated. Thus on a prima facie basis, at least, the Second Defendant must be taken to be on notice not only of the right of pre-emption but also that it had been triggered, with the result that by its terms the lessee was entitled to an offer in the same terms as that constituted by the option itself. Whilst there is no evidence either way as to the actual state of knowledge of the Second Defendant beyond that, certainly it could fairly be said that the Second Defendant was on constructive notice of these matters and thus on enquiry as to whether the Plaintiffs had exercised their right of pre-emption or waived it. 9 Whether a right of pre-emption constitutes a mere equity prior to the event triggering it has been settled by the authorities. Such an unfructified right of pre-emption was described in the following terms by Street J in Mackay v Wilson (1947) 47 SR(NSW) 315 at 325: 'But an agreement to give 'the first refusal' or 'a right of pre-emption' confers no immediate right upon the prospective purchaser. It imposes a negative obligation on the possible vendor requiring him to refrain from selling the land to any other person without giving the holder of the right of first refusal the opportunity of purchasing in preference to any other buyer. It is not an offer and in itself it imposes no obligation on the owner of the land to sell the same. He may do so or not as he wishes. But if he does decide to sell, then the holder of the right of first refusal has the right to receive the first offer, which he also may accept or not as he wishes. The right is merely contractual and no equitable interest in the land is created by the agreement." 10 Here however, the event triggering the right of pre-emption can be taken to have occurred. That in turn poses the question which is more difficult and controversial, namely whether, a right of pre-emption so triggered becomes equivalent to an option and thus from that time of its fructification confers an equitable interest over the relevant property. I dealt with that question in Transfield Properties v Amos Aked Swift Pty Ltd (1994) 36 NSWLR 321 at 341 where I concluded that such a right of pre-emption did, on triggering confer an equitable interest coincident with its fructification: "The more difficult and controversial question is whether, when the right of first refusal is, as it were, triggered by the relevant contingency, so as to then constitute an option to the grantee to exercise such right and thereby acquire the relevant property, subject to compliance with the terms of the right of first refusal, does from this point the grantee of the right of refusal have an equitable interest in the land? Thus it might said that there is no difference in principle between the situation of an option at the outset, which confers an equitable interest in land and an option which arises later upon the triggering of a right of first refusal, other than their temporal order."

The judgment then reviews the authorities at some length and concludes as above.

11 Kearney J in Sterns Trading Pty Limited v Shteinman (1988) NSW Conv R 55-414 held similarly: "Once the right of first refusal had been triggered it was converted to an option to purchase giving the grantee an equitable interest in the land capable of defeating a later equitable interest in a competition of priorities."

12 Brownie J in Walker Corporation Limited v Pateman Pty Ltd (1990) 20 NSWLR 624 preferred the other view, that a right of pre-emption was - and remained - a mere personal contract never capable of conferring an interest in land. Young J in Beneficial Finance Corporation Ltd v Multiplex Constructions Pty Ltd (1995) 36 NSWLR 510 however concluded (at 526): "… I should accept the view that whilst a right of pre-emption or right of first refusal does not per se constitute an interest in land, it may be in certain circumstances that one can say that the grant of such right together with contingencies which have happened will mean that there has been by those combined actions the grant of an option which does constitute an interest in land."

13 It can be seen that the balance of opinion, at single judge level in NSW, favours the view that a triggered right of pre-emption confers an equitable interest in land, though no Court of Appeal judgment has finally settled the issue. 14 But whether or not the right of pre-emption in the present case remains a mere equity or has become with its triggering an equitable interest, I am satisfied that, on a prima facie basis, the outcome is that the Plaintiffs have established sufficient of a prima facie case to maintain their interlocutory relief. Were the Plaintiffs simply to have a mere equity, there is a serious question to be tried as to whether the equitable interest conferred by the option now residing in the Second Defendant should prevail, by reason of the unconscionability inherent if it were to prevail. That is because the Second Defendant must be taken to be on notice of the triggering of the right of pre-emption such that, on a prima facie basis it would be unconscionable for the Second Defendant thereafter to enforce its rights under the option. In that respect, the position of the Second Defendant is arguably analogous to a bank which relies upon a secured guarantee given by a wife at the behest of her husband who fails to understand it in an essential respect. Notwithstanding that the bank may have no actual knowledge of that fact and recognising that the High Court has eschewed resort to constructive notice in favour of the doctrine of unconscionability, the bank will be precluded from enforcing the wife's guarantee on the basis that this would be unconscionable. The wife's mere equity prevails over the bank's equitable interest, though the bank could have avoided that result by taking the reasonable steps which have been laid down by the authorities; see most recent Garcia v National Australia Bank Limited (1998) 155 ALR 614. 15 It may be said however that the present case differs from the spousal guarantee analogy because there is no equivalent to taking such reasonable steps as a basis for defeating the equity. It might be argued that this renders the analogy inapplicable. While recognising that argument may be raised, I do not consider that it precludes at least a prima facie case to the contrary. That is a matter for argument at a final hearing. More recently, Windeyer J in Tanzone v Westpac [1999] NSWSC 478 at para 39 dealt with the matter similarly in broad principle in these terms, when considering an equity of rectification of a lease of which a purchaser of the lease had notice: "The benefits of the lessee's covenants run with the land on sale of the reversion Conveyancing Act 1919 s117. That does not make the assignee of the reversion a contracting party with the original lessee. Nevertheless it was accepted, correctly, that although an equity of rectification of a lease is a "mere equity" it is available or would bind a purchaser taking with notice of the equity, perhaps because it is attached to an equitable interest in land; Smith v Jones [1954] 2 All ER 823 Downie v Lockwood [1965] VR 257; Equity and Law Life Assurance Society Limited v Coltness Group Limited (1983) 267 EG 949; Meagher Gummow & Lehane Equity Doctrines and Remedies 3rd Ed 429."

16 He too was dealing with a mere equity, this time constituted by a right of rectification. It arose however in the very different circumstance where the other party against whom it was to be exerted was able to resort to the indefeasibility of a registered title. Though in that case the equity of rectification did not prevail over the titleholder by reason of indefeasibility, it is also the case that indefeasibility does not automatically bring to an end personal claims at law or in equity: see, for example, Fraser v Walker [1967] 1 AC 569; Breskvar v Wall (1971) 126 CLR 367; Bahr v Nicolay No. 2 (1988) 164 CLR 604. 17 The present case is in any event a stronger one, as indefeasibility of title does not arise to defeat the equity. 18 Were the position that the Plaintiffs have not just a personal equity but one which on fructification rose to the level of an equitable interest, then the contest would be then between two equitable interests, the first in point of fructification being that of the Second Defendant and the second being the Plaintiffs. The question then is whether the Second Defendant is to be treated as having so conducted itself as to be postponed to the Plaintiffs by reason of having at least constructive notice of the circumstances whereby the Plaintiffs derive their interest. Alternatively the matter can be put in terms of unconscionability as before. Either way the result favours the Plaintiffs, at least on a prima facie basis

DAMAGES AN ADEQUATE REMEDY AND BALANCE OF CONVENIENCE 19 I turn now to whether the Plaintiffs have sufficiently established that damages would not be an adequate remedy. Accepting as I do that there is a serious question to be tried as to the Plaintiffs having an equitable interest in the relevant property, and in circumstances where it has a special value to them, I conclude they have sufficiently established that damages would not be an adequate remedy. 20 As to balance of convenience, the early hearing date prior to expiry of the option clearly tilts the balance of convenience in favour of the Plaintiffs.

Orders 21 Accordingly, I make the following orders

(i) The Plaintiffs' existing injunction should continue until further order together with their undertaking as to damages.

(ii) Costs should follow the event and be awarded to the Plaintiffs.

(iii) I set the matter down before me for argument on a final basis on 6 and 7 July 1999.

(iv) The parties are to file all affidavit evidence upon which they intend to rely with the Plaintiffs doing so by 24 June 1999 followed by the Defendants by 2 July 1999 and the plaintiffs in reply by 5 July 1999, with copies to my associate.

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