Elsewhere Investments Pty Ltd v Oksa

Background facts 6Mr and Mrs Long agreed to buy the guesthouse and restaurant business conducted at Leura House by a contract dated 27 March 2008. The purchase price was $300,000. Of that amount, $154,000 was attributed in the contract to goodwill and the balance was attributed to equipment, which essentially consisted of the contents of the guesthouse. At the same time, the defendants granted Mr and Mrs Long a lease, which was registered, for 5 years with two 5 year options (the Long lease). 7Clause 9.2(a) of the Long lease provided: At the end of the lease the landlord must purchase the tenant's property. The expression "end of the lease" is defined in cl 1.1 to mean "the expiry date or the date that the lease is terminated as a result of default". "Tenant's property" is defined to mean "all property, plant and equipment, fixtures and fittings owned and used by the tenant in the operation of the tenant's business excluding any items of property that are the landlord's property". "Landlord's property" is defined essentially to mean all property owned by the landlord. Significantly, under cl 9.2(a), and subject to an exception referred to below, the defendants were required at the end of the lease to repurchase the contents of the guesthouse. Clause 9.2 contained a mechanism for determining the price for the equipment that the defendants were required to buy under cl 9.2(a). 8Clause 10.4 of the Long lease provided: ENTRY BY LANDLORD ON ABANDONMENT (a) If the tenant vacates or abandons the motel during the term there will not be a re-entry, forfeiture or waiver of the landlord's rights to recover in full all the rent and other moneys payable under this lease if the landlord or the landlord's agents: (i) accepts the keys; or (ii) enters the motel for the purpose of an inspection; or (iii) enters the motel for the purpose of showing the motel to prospective tenants; or (iv) enters the motel for the purpose of advertising the motel for re-leasing. (b) This lease will continue in full force and effect until the date from which a new tenant or licensee actually commences to occupy the motel, or the expiry date, whichever is the earlier. Any entry by the landlord until that date is deemed to be an entry by the licence of the tenant. (c) This clause does not apply if the landlord has: (i) by written notice, accepted the tenant's surrender of the lease; or (ii) served a formal notice of forfeiture on the tenant; or (iii) served a formal notice of re-entry on the tenant. 9Clause 11.2 relevantly provided: The tenant is in default of this lease if: (a) it breaches an essential term of this lease; or (b) it fails to pay any money within 7 days of the due date; or (c) it repudiates its obligations under this lease: or (d) an insolvency event occurs in respect of the tenant; or ... "Insolvency event" is defined broadly in cl 1.1. It clearly includes the bankruptcy of the tenants. 10An exception to the defendants' obligation to repurchase the contents of Leura House is created by cl 12.3 of the Long lease. That clause provided: If the tenant vacates the motel before the end of the lease the landlord may treat the tenant's property as abandoned and deal with it in any manner the landlord sees fit. 11In connection with the acquisition of the business, Mr and Mrs Long arranged for Longcill to borrow the sum of $240,000 from NAB to be used towards the purchase price of the business. Previously, on 22 February 2007, Longcill had granted NAB a fixed and floating charge over all of its assets. It is common ground that the charge secured the repayment of the $240,000 loan. Mr and Mrs Long also guaranteed the loan. 12On 17 April 2008, the defendants, Mr and Mrs Long and NAB signed the Deed of Consent. The recitals to the Deed of Consent record that Mr and Mrs Long had agreed to grant NAB a mortgage over the lease. By cl 10, the defendants consented to NAB's mortgage. It is unclear from the evidence whether that mortgage was ever granted, but, having regard to the terms of the Deed of Consent, the likelihood is that it was. No mortgage to the NAB was registered. 13Clauses 1, 2 and 3 of the Deed of Consent were in the following terms: 1 The Lessor will not vary the Lease or accept a surrender of the Lease without the prior written consent of the Bank. 2 Subject to clause 3, the Lessor will not: (a) exercise or seek to exercise any right which may become available to the Lessor to determine the Lease; (b) re-enter the Premises; (c) suspend the performance of any of the Lessor's obligations under the Lease; or (d) waive any breach of the Lease by the Lessee; without obtaining the prior consent of the Bank. 3 If the Lessee fails to remedy a breach of the Lease within the time specified under the Lease (the Failure), the Lessor must serve notice of the Failure on the Bank (the Notice) and must allow the Bank 7 days to rectify or arrange for rectification of the breach before exercising the Lessor's rights under the Lease. 14Under cl 4, the defendants acknowledged that the appointment of a receiver or manager by the Bank under its mortgage or entry into possession by the Bank did not itself constitute a breach of the lease. Clause 9 provided: The Lessee agrees that nothing done by the Lessor or the Bank in accordance with this Deed will waive or negate in any way the rights of the Lessor or the Bank that would have otherwise arisen against the Lessee. 15The lease to Mr and Mrs Long commenced on 28 April 2008 and, on 29 April 2008, Mr and Mrs Long commenced trading. Originally, there was a dispute whether they did so in their personal capacities or as employees or directors of Longcill. However, at the hearing of this matter, Mr Martin, who appeared for Elsewhere Investments, conceded that Mr and Mrs Long operated the business and acquired its assets. 16The business was not a success. On or about 6 January 2010, Mr and Mrs Long left Leura House, leaving a sign on the front door saying that the business had ceased trading and that all enquiries should be directed to the landlords. At the same time, they sent a circular letter to a number of suppliers. The circular letter was in the following terms: It is with regret that we have to inform you that Leura House has had to cease trading due to bank foreclosure of our business loan. Other financial difficulties arising from the Global financial climate and a downturn in the tourism industry here in the Blue Mountains has lead to this difficult decision being made. The company is being put into liquidation and the remaining directors have filed for personal bankruptcy. The letter was signed by Mr and Mrs Long. 17On 11 January 2010, Dr Annishka Oksa, one of the defendants, wrote to Mr and Mrs Long and Longcill. Dr Oksa pointed out that rent was 3 weeks in arrears, that she had been unable to contact Mr and Mrs Long by telephone and that Mr and Mrs Long had removed their personal possessions from Leura House. The letter concluded: We can only conclude that you have abandoned the business and defaulted on the lease. As a result, we the Landlords have formally taken over the business to protect the trading reputation of Leura House. However, we must remind you that according to the lease conditions you are responsible for all rental payments until another tenant can be found. 18In accordance with that letter, the defendants re-took possession. They began trading and again listed the business for sale. 19Mr Long became bankrupt on 31 August 2009 and Mrs Long became bankrupt on 22 January 2010. Longcill was placed into liquidation and ultimately, on 20 November 2011, it was deregistered. 20As I have said, Elsewhere Investments entered into the Business Sale Contract on 16 June 2010. The schedule to the contract stated that the contract was subject to the grant of a new lease. Clause 28 of the contract provides: 28.1 This clause applies only if this contract says the sale is subject to the grant of a new lease. 28.2 The parties intend that the landlord is to grant to the purchaser a lease of the premises - 28.2.1 in the form of the proposed lease of premises attached to the contract; or 28.2.2 ... 28.3 If the landlord does not grant a lease in accordance with this clause - 28.3.1 by the completion date, the purchaser can rescind; or 28.3.2 by the 90th day after the contract date, a party can rescind 28.4 A party cannot rescind under clause 28.3 after the landlord has granted a lease in accordance with this clause. 21Clause 10.1 of the contract relevantly provides: The vendor promises that, to the best of the vendor's knowledge and other than as disclosed in this contract - 10.1.1 the vendor has full authority and capacity to enter into this contract and sell the business. 10.1.2 the vendor has absolute title to the business. 10.1.3 the business is not subject to any charge, encumbrance, lease, mortgage or other liability or security. ... 10.1.6 there is no subsisting breach by the vendor of a lease franchise agreement, or other agreement with a third party which would entitle the lessor, franchisor or third party to terminate the agreement or refuse to grant an option to renew the agreement or refuse to transfer the benefit of the agreement to the purchaser. 22Clause 23 of the contract deals with rescission generally. It provides: 23.1 If this contract expressly gives a party a right to rescind, the party can exercise the right - 23.1.1 only by serving a notice before completion; ... Although the clause does not expressly say so, the limitation in cl 23.1.1 on the right to rescission must be read subject to the specific right of rescission conferred by cl 28.3. 23Special Condition 37 states: Completion of this Contract is subject to and conditional upon the lease currently registered on the title being removed prior to the date for completion. 24On 18 June 2010, the solicitors for the defendants wrote to the solicitors for Elsewhere Investments concerning the lease to Mr and Mrs Long. The letter said: We refer to exchange of Contracts in this matter and advise that, in relation to the removal of the current registered Lease from the title, it is necessary for the Certificate of Title for the property to be produced at the LPI by the mortgagee (Westpac Banking Corporation). Even if this is done "urgently", we would expect it would take at least 2-4 weeks. As well, the bank will later have to produce the Certificate of Title again for the new Lease to be registered. In the circumstances, we suggest that our client's request for the removal of the current registered Lease, and the lodgment of the new Lease to your clients, be lodged for registration at the same time. Please confirm urgently that this course is acceptable to you and your clients. 25It is not clear from the evidence whether the solicitors for the plaintiff replied to that letter. However, on 24 June 2010, they wrote to Mr Maher and Ms Abraham, the directors and owners of Elsewhere Investments, drawing their attention to the fact, among other things, that, because of the inability of Westpac to produce the certificate of title on settlement, the surrender of the lease to Mr and Mrs Long and registration of the lease to Elsewhere Investments "will occur simultaneously in the weeks following settlement". In addition, on 30 June 2010, the solicitors for the defendants wrote to Elsewhere Investments' solicitors dealing with a number of issues that had been raised by the solicitors for the plaintiff. In relation to the lease to Mr and Mrs Long, the letter stated: In relation to your requirements at settlement we note as follows:- ... (c) The existing Lease will be removed simultaneously with the registration of the new Lease as indicated in our previous correspondence. The mortgagee will give its consent to the new Lease when we send the Lease to them for their consent and they will produce the Certificate of Title for registration of the new Lease and removal of the old Lease. 26Settlement occurred shortly afterwards. At that time, Elsewhere Investments paid the total purchase price and the following day it took possession of the premises. 27As I have said, the business did not perform well. In June 2011, Elsewhere Investments fell behind in rent payments and an amount due for insurance and, on 9 June 2011, the defendants served a formal demand for the amount outstanding. Elsewhere Investments' solicitors responded to that demand on 22 June 2011. They indicated that Elsewhere Investments would pay the amount outstanding. They also stated that, if the defendants attempted to retake possession, Elsewhere Investments would commence proceedings seeking, among other things, relief against forfeiture. 28Other disputes arose between the parties, which were the subject of a letter from Elsewhere Investments' solicitors dated 8 November 2011. One of the concerns raised in that letter related to the lease to Mr and Mrs Long. On that subject, the letter said: The lease remains unregistered and the previous tenant's lease has not been removed from title. It was condition of the purchase of the business that the lease be removed prior to completion and this was not done. 29In fact, the defendants had prepared a request to the Registrar-General for removal of the Long lease on or about 23 June 2010, which was supported by a statutory declaration sworn by Mr Milan Oksa, another of the defendants, on 23 June 2010. The statutory declaration relevantly said: 2 On the 6th day of January, 2010, the lessors peaceably and lawfully re-entered and recovered possession of the land. 3 The tenants had broken the Lease as they had failed to pay rent for more than seven (7) days (clause 11.2(b)) and they had also abandoned the premises (clause 10.4). 4 The requisite time had elapsed between the breach of the Lease and the date of re-entry as the rent was then about twenty-one (21) days overdue. 30For reasons which are not explained by the evidence, the relevant certificate of title was not produced until 26 April 2012 and the lease to Mr and Mrs Long was not removed from the register, and the lease to Elsewhere Investments recorded on the register, until 22 June 2012. 31On 31 July 2012, the solicitors for Elsewhere Investments wrote to the defendants. The letter alleged that Elsewhere Investments had been induced to enter into the purchase contract "as a consequence of various oral and written representations made by you including with respect to the condition of the premises, its expected turnover, the way in which the premises could legally be used and its rating". The letter also alleged that the defendants were in breach of various provisions of the lease. It continued: Our client has been misled and is not going to be bound by the contract any further. Our client intends to now commence proceedings seeking a return of its costs of purchasing the business together with its consequential loss. Our client will be vacating the premises today and will make arrangements to return the keys to you or your representative. 32On 1 August 2012, the solicitors for the defendants replied to that letter. They treated Elsewhere Investments' solicitors' letter as a repudiation of the lease, accepted the repudiation and terminated the lease. 33On 3 September 2012, the solicitors for Elsewhere Investments sent an email to NAB. That email said in part: Our client is in dispute with the landlord of the business Leura House and now believes it has been sold assets in which the landlord (who is also the seller of the business) held no good title. We have also seen reference to a Deed of Consent giving NAB an entitlement to take possession of the premises, and take a mortgage over the Lease of premises, should it's [sic] customer default. This Deed also apparently places obligations on the landlord such as the obligation to make notifications which appear to have been unfulfilled by them. We now seek advice from NAB as to it's [sic] position and would like to discuss these matters with you. NAB did not respond to that email. 34Ms Abraham says that she did not become aware of the Deed of Consent until early 2013, after these proceedings had been commenced.

Mr and Mrs Long's lease 45The claim based on the Long lease depends on 3 propositions. The first is that the Long lease was never validly terminated. The second is that Elsewhere Investments did not obtain a good title by registration of its lease because that registration is liable to be set aside for fraud. The third is that, having regard to those matters, Elsewhere Investments is entitled to exercise a contractual right of rescission. 46There are difficulties with each of these propositions. 47Elsewhere Investments bears the onus of proving that the Long lease was still on foot at least up until the time the lease to Elsewhere Investments was registered, since it bears the onus of proving that it was entitled to rescind the Business Sale Contract and that entitlement depends on the existence of the Long lease: see Massoud v NRMA Insurance Ltd (1995) 62 NSWLR 653 (657n) at 660 per McLelland CJ in Eq. 48At common law, a lease cannot be terminated by the unilateral act of the lessee, including by abandonment of the leased premises. It is necessary for the abandonment to be accepted by the lessor, which usually involves "proof of something in the nature of a resumption of possession by the lessor": see Andrews v Hogan [1952] HCA 37; (1952) 86 CLR 223 at 252 per Fullagar J; see also Siggers v Scott (1951) 68 WN (NSW) 131 at 132 per Kinsella J. Those principles were modified somewhat by the provisions of cl 10.4 of the Long lease. That clause provided that certain conduct by the defendants (such as acceptance of the keys or the taking up of possession in certain circumstances) was not to be treated as an acceptance of Mr and Mrs Long's abandonment of the lease. On the other hand, the clause made it plain that the lease terminated when a new tenant entered into possession if not before. 49In the present case, the right of termination was also affected by the Deed of Consent. If the defendants had sought to terminate the lease for non-payment of rent without first giving NAB an opportunity to remedy the breach, the notice of termination may have been invalid: Needlegrove Investments Pty Ltd v Thakral Brighton Hotel Pty Ltd [2007] NSWSC 89. In the present case, the termination arose from abandonment by Mr and Mrs Long and the taking of possession at some stage or another by the defendants. It did not depend on a notice but on the legal effect of the conduct of the parties. But even in that case, NAB may have been entitled to relief against forfeiture: see Commonwealth Development Bank of Australia v Eagle Hotels Pty Limited [1990] ANZ ConvR 100; (1990) NSW ConvR 55-506. That relief, however, is equitable in nature and subject to the defences of laches and acquiescence: for discussion, see P W Young, C Croft and M Smith, On Equity, 2009, Law Book Co, [17.80]ff. Consequently, the position was that the lease came to an end as a result of the abandonment by Mr and Mrs Long and entry into possession by the defendants. NAB may have had a right to relief against forfeiture, but that right itself was subject to the defences of laches and acquiescence. 50There is a question in this case whether the defendants formally re-took possession of Leura House in January 2010 and so purported to terminate the lease at that time or whether they merely entered into possession for the purpose of advertising the business for sale, with the result that the lease remained on foot until a new tenant entered into possession. Dr Oksa's letter dated 11 January 2010 suggests that the defendants intended to take the latter course. Mr Oksa's statutory declaration that was lodged in support of the application to have the Long lease removed from the register suggests that they took the former course. 51It is not necessary to resolve that question. It is plain that Mr and Mrs Long were in breach of the lease by no later than 6 January 2010 and that, in breach of cl 3 of the Deed of Consent, the defendants failed to give notice of that breach to NAB. 52In my opinion, Elsewhere Investments has not discharged the onus it bears of proving that NAB had an existing right in the property which entitled it to reinstate the lease, with the result that the defendants could not give it a good title. In particular, it has not discharged its onus of establishing that NAB retained a right to seek relief against forfeiture. In order to do that, it would need to establish that NAB was not guilty of laches or acquiescence in circumstances where it never sought relief against forfeiture. It is not sufficient for Elsewhere Investments simply to point to the fact that the defendants did not notify NAB of Mr and Mrs Long's breaches of the lease. 53In any event, although the evidence is scant, the likelihood is that NAB was aware by about January 2010 that Mr and Mrs Long had abandoned Leura House. The circular letter distributed by Mr and Mrs Long said that they were forced to close the business because the bank had foreclosed on its loan. Faced with a default under its loan, it is inconceivable that NAB would not have considered its rights, including any rights in respect of the Long lease. The likelihood is that NAB discussed the default with Mr and Mrs Long and was told that they could not continue to operate the business if the bank called up the loan. That conclusion can be more readily inferred from the fact that Mr Long swore an affidavit in the proceedings for Elsewhere Investments but the affidavit was not read and no explanation was offered for why he did not give evidence: see Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298. It is plausible that NAB chose not to exercise its rights under the Deed of Consent. In the circumstances, that would have required it to take over the conduct of the business and pay any arrears in rent. It is reasonable to infer that it found that to be an unpalatable option. That inference is consistent with the fact that, when Elsewhere Investments' solicitor drew NAB's attention to the fact that the defendants had not complied with the Deed of Consent, NAB took no action. The likelihood, then, is that by about January 2010, NAB was aware that Mr and Mrs Long were in breach of the lease and that it would need to exercise its rights under the Deed of Consent if the lease were to remain on foot. Knowing those things, NAB chose not to exercise them or, at least, failed to do so. In either case, in my opinion, by June 2010 it had lost its right to relief against forfeiture through laches. It must have anticipated that the defendants would either seek to operate the business themselves or attempt to resell it. It could not stand by and permit that to happen and at the same time maintain that it had a right to remedy any default on the part of Mr and Mrs Long and commence operating the business itself. The Deed of Consent itself gave NAB only 7 days in which to make a decision once it had been served with a notice by the defendants. Although there may be a question of how long it was entitled to delay exercising its rights under the Deed of Consent knowing that Mr and Mrs Long had vacated Leura House where it had not been given notice of a default, in my view it was not entitled to delay beyond June 2010. 54Consequently, the position was that, at least by the time Elsewhere Investments took possession of Leura House, the lease to Mr and Mrs Long had been terminated and any right NAB had to relief against forfeiture had been lost. By that stage, the defendants were in a position to grant Elsewhere Investments a valid lease. 55As to Elsewhere Investments' second proposition, even assuming that NAB's right to obtain relief against forfeiture survived following completion of the Business Sale Contract, Elsewhere Investments obtained an indefeasible lease on registration of its lease. Indefeasibly is conferred by s 42(1) of the Real Property Act, which relevantly provides: Notwithstanding the existence in any other person of any estate or interest which but for this Act might be held to be paramount or to have priority, the registered proprietor for the time being of any estate or interest in land recorded in a folio of the Register shall, except in case of fraud, hold the same, subject to such other estates and interests and such entries, if any, as are recorded in that folio, but absolutely free from all other estates and interests that are not so recorded ... The section goes on to list a number of exceptions. However, it is not suggested that any of those exceptions apply in this case. 56Elsewhere Investments submits that the fraud exception applies. However, it is well established that the fraud exception only applies where the fraud can be "brought home to" the person who claims the registered interest: see P Butt, Land Law, 6th ed, Law Book Co, [20.68], citing Frazer v Walker [1967] 1 AC 569; Breskvar v Wall [1971] HCA 70; (1971) 126 CLR 376. There is no suggestion that the fraud in this case, if there was any, can be brought home to Elsewhere Investments. 57As to the third proposition, Elsewhere Investments submits that its right of rescission arose from breaches of cls 10.1.1, 10.1.2, 10.1.3 and 10.1.6 of the Business Sale Contract, from cl 28.3 and from special condition 37. 58However, cls 10.1.1, 10.1.2, 10.1.3 do not confer a right of rescission. Those clauses contain promises by the defendants. The promises may be essential in the sense that breach of them entitled Elsewhere Investments to terminate the contract. But, if what Elsewhere Investments did on 31 July 2012 was to terminate the contract on the basis of those breaches, that would simply discharge it from future performance of the contract. It would not permit it to recover the purchase price. The breaches may also have entitled Elsewhere Investments to claim damages. But no claim for damages is made. That is not surprising because Elsewhere Investments got all it bargained for under the contract. 59Clause 28.3 gave Elsewhere Investments a right to rescind if "the landlord does not grant a lease in accordance with this clause". However, cl 28.4 states that that right is lost once the lease is granted. In my opinion, a lease is not granted in accordance with cl 28 until it is registered, since until then it is not indefeasible. 60The defendants take issue with the contention that the letter dated 31 July 2012 was a notice of rescission. However, in my opinion, it was. Although the letter did not use the word 'rescission', it contained an assertion that, by reason of the matters referred to, Elsewhere Investments was not bound by the contract and was entitled to a return of the purchase price. In substance, that was an assertion that the contract had been rescinded. 61The defendants also take issue with Elsewhere Investments' claim that it is entitled to rely on the circumstances it now does to justify its rescission on 31 July 2012, when it did not know of those matters at the time it purported to exercise its right of rescission. The defendants accept the principle stated by Dixon J in Shepherd v Felt & Textiles of Australia Ltd (1931) 45 CLR 359 at 377-8 that a party who terminates a contract is entitled to rely on any ground of termination which in fact existed at the time, whether the party was aware of it or not. However, in their submission, that principle only applies in the case of termination for breach. It does not apply where a party sought to rescind a contract from its start. 62I do not accept that submission. The issue was considered by Hamilton J in Rivat Pty Ltd v B & N Elomar Engineering Pty Ltd [2007] NSWSC 638; (2007) 13 BPR 24, 473 at [57]ff. After reviewing the authorities, he concluded that the principle stated in Shepherd v Felt & Textiles of Australia Ltd applied equally to a contractual right of rescission. In my opinion, he was correct to do so. As Hamilton J pointed out, a number of authorities express the principle as applying where a party "refuses to perform a contract" (see, eg, Foran v Wight [1989] HCA 51; (1989) 168 CLR 385 at 406 per Mason CJ); and it is difficult to see why different principles should apply where a party exercises a contractual right of rescission rather than a contractual right of termination. 63Nonetheless, the lease in this case was registered before Elsewhere Investments purported to exercise a right of rescission. As I have explained, Elsewhere Investments obtained an indefeasible lease at that time. For that reason, any right it had under cl 28 to rescind was lost. 64Elsewhere Investments also relies on special condition 37. It submits that the effect of that special condition is that completion never occurred because the Long lease was never validly removed from the title. That, however, is not the effect of the clause. The word "completion" is not defined in the Business Sale Contract. However, cl 20 of the contract sets out in some detail what is to happen at completion; and it is clear that the expression is to be understood in its usual sense as meaning the time when each party is to deliver the consideration due from it under the contract. That clearly occurred on or about 30 June 2010, when Elsewhere Investments paid the purchase price and commenced operating the business. 65Special condition 37 relieved the parties of an obligation to complete until the Long lease was removed from the title. It is clearly a condition that was included for the benefit of Elsewhere Investments and could be waived by it. It is equally clear that that is what Elsewhere Investments did. There is a suggestion in Elsewhere Investments' evidence that its directors did not know at the time of settlement that the lease to Mr and Mrs Long was still on the title. However, that suggestion cannot be reconciled with Elsewhere Investments' solicitors' letter dated 24 June 2010. In any event, the knowledge of its solicitors is clearly to be imputed to it: see Barecall Pty Limited v David Hoban [2010] NSWCA 269 at [17] per Allsop P (with whom Macfarlan JA and Handley AJA agreed). Knowing that the Long lease was still on the title, Elsewhere Investments chose to complete. It is bound by that choice. In any event, even on its own analysis, completion must have occurred at the time the Long lease was removed from the register. By cl 23.1.1, it lost any right of rescission it had at that time, if not before.

At a glance

Court

Decision date

Before

Catchwords

Source

Catchwords

Judgment (8 paragraphs)

Parties

Legislation Cited (3)

Cases Cited (15)

Cited By (1)