Lees v Kennerley - [2020] NSWSC 630 - NSWSC 2019 case summary — Zoe

NSWNSWSC

Lees v Kennerley

[2020] NSWSC 630

Supreme Court of NSW|2019-07-19|Before: Slattery J

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At a glance

Source facts

Court

Supreme Court of NSW

Decision date

2019-07-19

Before

Slattery J

Source

Original judgment source is linked above.

Judgment (31 paragraphs)

[1]

Judgment

The plaintiff, Ms Belinda Lees, and the defendant, Ms Gillian Kennerley, are joint registered proprietors of rural property in the Grose Wold district, a western suburb of Sydney close to Richmond ("the Property"). Both Ms Lees and Ms Kennerley have mutual interests in equestrian pursuits. They purchased the Property to pursue those interests together.
But after disagreements the parties' business relationship came to an end. Upon legal advice they each signed a Put and Call Option Deed ("the Option Deed") to provide a mechanism to separate their property and business interests. A simultaneous Collateral Deed regulated the management of the Property and advanced the resolution of their money disputes. The parties also mutually executed a security ("Mortgage A") to secure the obligations that Ms Kennerley assumed under the Option Deed.
In February 2017, Ms Lees purported to exercise a put option arising under the Option Deed to transfer her half share in the property to Ms Kennerley. She claims the right to exercise this put option on the basis of certain alleged breaches of Ms Kennerley's obligations under Mortgage A and possible breaches of the Option Deed itself.
Ms Kennerley disputes that she has breached Mortgage A. And she maintains that required notice of her alleged breach of Mortgage A was not given to her so as to permit her to remedy any alleged breaches. Moreover, she says that the breaches Ms Lees relies upon do not permit Ms Lees to exercise the put option conferred under the Option Deed.
Ms Kennerley also maintains that under the Option Deed she holds the benefit of a call option, which does not expire until 1 July 2020 and that Ms Lees' put option only arises under the Option Deed on that date and expires on 1 October 2020.
This short summary profiles a case of some complexity. The hearing was conducted over two days, 23 and 24 April 2019. After written submissions a further date was allocated for oral submissions on 20 May 2019. Supplementary written submissions were ordered on that occasion and a short further argument took place on 19 July 2019. Mr R.P.V. Carey of counsel, instructed by Geoffrey Neil Rankin of Allens Linklaters, appeared for the plaintiff. Mr S.P. Brennan of counsel, instructed by Christopher Edwards of Christopher M. Edwards Solicitors and Accountants, appeared for the defendant.

[4]

The Property Purchase is Completed - November 2014

Ms Kennerley and Ms Lees completed the purchase of the property on 6 November 2014. They were each issued a Certificate of Title for their half share in the property as tenants in common.
The issues in dispute require a basic understanding of the buildings and outbuildings erected on the Property. The Property comprises 25 acres on which three residential buildings and two detached storage sheds were erected. The parties planned to move into different parts of the property shortly after completion.
The buildings and out buildings on the Property can readily be divided into three which are habitable and two which are not. The residential buildings comprised a cottage, a main residence and a large recreational building with self-contained living quarters which could be used as a residence. The features of these buildings are of some importance to the proceedings and they are described in more detail below. It is convenient to identify these properties both descriptively and by reference to the number of their street address, as the parties did.
The Cottage (157a). Situated on the Property with a street address number 157a was a detached one storey, two bedroom cottage - type residence with a single garage that had been constructed in about 1970. It is referred to in these reasons for convenience as "the Cottage (157a)". At the time of Ms Lees and Ms Kennerley's purchase, the Cottage (157a) was tenanted for $450 per week.
The Residence (157b). The principal residence on the Property is a two storey, four bedroom recon tile house with a swimming pool, a four car garage and an attached two storey single bedroom self-contained granny flat with a double garage. This residence was constructed in approximately 1984. The property sometimes goes by a street number "157" and sometimes "157b" in the documentation. For the purposes of these reasons it will be referred to as "the Residence (157b)".
At the time of purchase of the Property the granny flat in the Residence (157b) was occupied by the son of the vendor and the main residence was separately tenanted at a rate of $600 per week.
The Shed (157c). The third habitable building on the property was a large recreational building which the parties have always simply called "the shed". But it also has a street address, "157c", and for the purposes of these reasons will be referred to as "the Shed (157c)".
The Shed (157c) was constructed with Colorbond or similar external walls and a three bedroom self-contained living quarters were constructed at its northern end. At the southern end of the Shed (157c) were two lockable storage areas attached to the living quarters. The Shed (157c) had been constructed in about 2001. At the time of purchase of the property it was separately tenanted for a rent of $520 per week.
Two other smaller non-habitable agricultural buildings were erected on the Property, a detached hay shed and a detached steel shed.

[6]

Credibility of the Parties

Ms Lees. The Court found Ms Lees to be a measured, articulate witness who gave accurate and reliable evidence. The Court has no reason to doubt that her evidence was honestly given. She was well aware of the need to protect her own financial interests in dealing with Ms Kennerley, who by about March 2016 had left the Property, Ms Kennerley was "a risk" she needed to manage. Ms Lees remained consistent and careful throughout her evidence. No contradictions in her position emerged through her cross-examination.
Ms Kennerley. The Court found Ms Kennerley a puzzling witness to assess. She expressed her views with vigour. But at times she was forced to retract her primary account of the history of the parties' dealings. An example of this is that she said that she had taken out the separate insurance over the Shed (157c) with the NRMA in January 2017. But it subsequently became clear to the Court that Ms Lees had actually taken out this insurance cover over the shed at this time and that there was no support for Ms Kennerley's contention that she was responsible for this particular insurance. This episode demonstrated that Ms Kennerley's convictions about historical events were not always reliable.
Ms Kennerley had a tendency not to answer questions directly but to give her own version of what she thought the questioner really wanted to hear and to add her own account of events even when the question did not call for it. She had a not uncommon tendency in evidence to express her and Ms Lees intentions as mutual or that in general terms "she knew what I meant". She said this for example when seeking to explain why one of the habitable buildings on the property, Shed (157c), was left uninsured. But emails between Ms Kennerley and Ms Lees contradicted these generalities.
The Court assessed her as an honest witness but one who could convince herself that she was right about events, only backing down when confronted with clear evidence to the contrary. As a result, the Court was cautious about relying on her evidence where it was disputed.
The two particular disputed issues between Ms Kennerley and Ms Lees that led to their allegations of breach of their settlement agreement related to the horse arena on the Property and the insurance arrangements about the buildings on the Property. These two issues are prominent in the narrative below but chronologically interleaved with wider disputes between Ms Kennerley and Ms Lees.

[7]

The Horse Arena - May to December 2015

Owners of the property before Ms Lees and Ms Kennerley had applied for development consent to develop the Property by constructing a horse arena, together with other structures. The Hawkesbury Council granted a consent to this development in 2006, but by February 2011 the horse arena was still unconstructed and the 2006 consent lapsed. The construction of a horse arena on the Property was of interest to both Ms Lees and Ms Kennerley and appears to have been one of the features which had attracted them to it. At the time of their purchase, the vendor's agent gave them a copy of the 2006 consent.
Soon after going into possession, the parties obtained quotations for the work necessary to construct the horse arena from Mr Andrew McLaughlin of "Australian Horse Arenas". These quotations dated May and July 2015 were for the excavation of part of the existing sloped land and the use of the excavated material as fill in a "cut and fill" operation to create a level horse arena surface. The quotation was prepared on the basis that the cut and fill would be no more than 600 millimetres above and below the existing surface of the Property and could therefore be undertaken without development consent. Limited cut and fill operations were permissible at that time without development consent under State Environmental Planning Policy (Exempt and Complying Development Codes) 2008 ("the SEPP"), cll 2.29 and 2.30.
The Australian Horse Arenas' quotation was prepared this way because Ms Lees had undertaken some study in civil engineering and had a background in constructing horse arenas previously, so she was aware of the SEPP planning constraints. Ms Lees says, and the Court accepts, that the area of the proposed construction of the horse arena was reasonably level and that she did not think that significant amounts of cut and fill work would be required to construct the surface area of the arena at the proposed site on the Property. But Ms Lees was well aware that if a roof was to be constructed over the area that would require a further development application ("DA").
In early 2015, Ms Kennerley and Ms Lees met Mr McLaughlin, who was prepared to start the excavation work immediately. But he pointed out to Ms Lees and Ms Kennerley that he would construct the surface area differently depending on whether or not it was to be covered by a roof.
That advice led to an early disagreement between the two women. Ms Kennerley wanted to get on with construction of the base surface of the arena, which did not require approval, and add the roof later, when a DA had been obtained. But Ms Lees was worried that this approach would cost more in the long term because of the advice from Mr McLaughlin that he would lay down the surfaces differently for an uncovered arena as against a covered arena. In the end, Mr McLaughlin agreed to design an intermediate surface that would suit both possible scenarios.
Ms Lees was reluctant to do this but ultimately compromised with Ms Kennerley, so construction could start and the roof be added later. Australian Horse Arenas quoted $51,040 inclusive of GST for constructing an arena without a roof on this basis, including all clearing, levelling, drainage installation and the supply of relevant surface materials.
But in June 2015, Ms Kennerley suggested to Ms Lees that the horse arena might be moved to a new site. Both women met Mr McLaughlin again with a view to obtaining a quotation for the new site. Ms McLaughlin advised them that the cost of construction of the arena at the new site would be about the same as the original quotation. He issued another quote for the new site on 15 July 2015 in an amount of $52,040 for the same work.
The new site was heavily overgrown with vegetation. At the time that Ms Lees was looking at it with Mr McLaughlin and Ms Kennerley she did not notice anything about the slope of the land. Ms Lees says, and the Court accepts, that it did not occur to her at that time that the slope of the new site might be markedly different from the old one, such that it might need a cut and fill operation to a degree that might require development approval from Hawkesbury Council.
Ms Lees appeared to the Court to be a conscientious person who would have been alert to the need for development approval if she had appreciated that the work to be done required approval. Australian Horse Arenas undertook the construction work in July/August 2015. As Ms Lees did not move into the Property until September 2015, she did not see the work done. Ms Kennerley and her partner were already in occupation by then. Ms Kennerley denied that she was in occupation during this period but the Court does not accept that denial. Ms Lees therefore left to Ms Kennerley the supervision of the works and the giving of instructions to Mr McLaughlin.
The first that Ms Lees heard about the completion of the works was when Mr McLaughlin telephoned her to say that he had not been paid. Ms Lees contacted Ms Kennerley to find out what was going on about the payment to Mr McLaughlin. Ms Kennerley eventually paid Mr McLaughlin. But Ms Lees was unaware at this time that Ms Kennerley had varied the contract with the Australian Horse Arenas and the payment Ms Kennerley made to Mr McLaughlan was $71,084.25. Ms Lees only found out about this in a later email that Ms Kennerley sent her on 1 December 2015.
But Ms Lees came to learn by late August 2015 that Hawkesbury Council officers had come onto the Property and, in the course of investigating the alleged dumping of asbestos, had asked whether the horse arena at the new site had received development approval. Ms Kennerley reported to Ms Lees that the Hawkesbury Council officer said to her that development approval was needed and that they should go and see the officer at the Hawkesbury Council.
When Ms Lees visited the new arena site on 31 August 2015, she saw that the vegetation had been cleared and significant excavation work had been undertaken. It was apparent to her for the first time that the excavation work that had been done was clearly in excess of the 600 millimetres allowed for under the SEPP. She faced for the first time the fact that development work on the Property had just taken place without development approval.
Ms Lees wanted to rectify the situation. Partly prompted by some informal suggestions from Ms Lees' father, the two women attended at the offices of the Hawkesbury Council. Ms Lees recalls that the person at the Hawkesbury Council told them that the construction was illegal and that steps would need to be taken to obtain the necessary approval retrospectively.
This led to a dispute between Ms Lees and Ms Kennerley. Ms Lees said to Ms Kennerley, "We will have to employ someone to fix this up". But Ms Kennerley said she did "not want to pay the money". She wanted Ms Lees to undertake the work but Ms Lees was too busy to commit the time to that and and did not have the necessary computer software in any event.
This and other matters contributed to the deterioration in the relationship between the two women. The topic of doing necessary work and putting in a supplementary DA was not further discussed between them.

[8]

Ending the Relationship - December 2015 to March 2016

By the end of 2015, Ms Lees and Ms Kennerley had fallen out completely and all trust between them had been lost. By December 2015, Ms Lees wanted to end their relationship, as soon as possible. On 1 December 2015, Ms Lees wrote in measured terms to Ms Kennerley in effect signalling the end of the relationship.
There had been sharp disagreements between the pair by this time. But one of the more notable features of Ms Lees' correspondence is that, despite that disharmony, her letter to Ms Kennerley was calm and measured. It is one of the means by which the Court judges her credibility. The email is set out here in full: "Dear Gillian, I note your comment that you will be much relieved to have no association with me what so ever. I agree that it is impossible for us to continue to operate as partners, and that the partnership agreement has effectively been terminated by conduct. You no doubt understand that no one could work with you, and absorb the amount of criticism you are levelling at me, whether or not you consider it justified, or accept your putting work in train without consultation with your partner and without first obtaining necessary council approvals. One thing I must insist on is that you remove the asbestos you buried in the land as I cannot leave a health hazard In place. Please advise your proposal regarding removal by return letter, failing which I will have to arrange to have it removed. Of necessity I will not be able to obtain a fixed quote as I have no idea as to the quantity involved, but I will not depart from the property until this unlawful dumping Is rectified. I will not agree to any further work being done in relation to the arena and will not contribute anything more financially. I also want to wind up our affairs as soon as practicable and as you have said you are prepared to buy, I am prepared to sell my interest in the property to you or your nominee at an appropriate price. I will work towards this end constructively and hope you will join with me in doing so. You have not complied with my request to let me have copies of the two valuations you have obtained. Production of these valuations is obviously necessary to enable us to work out a dissolution of the partnership and I request you to make copies available as soon as possible, and advise the price at which you or your nominee is prepared to purchase, and if applicable how long will be required to obtain finance approval . I will only agree to sell at full commercial value, and unless we agree upon the price, the property will have to be sold on the open market. Whichever way this goes I hope realisation of the property can be achieved by agreement between us as otherwise I will have no option but to take all steps available to me at law, which would involve us both in delay and extremely high costs. Would you please note that as the partnership has broken down I have withdrawn my half of the bank balance from the partnership account, being $4,000 and leave it to you to draw down your half share, bearing in mind that direct payments will still need to be covered. So it would be sensible to leave a few hundred dollars in the partnership account for joint expenses. Yours faithfully Belinda Lees"
This email is also significant in putting forward several of Ms Lees' allegations against Ms Kennerley, some of which are of later significance. First, the letter insists "that you remove the asbestos you buried in the land as I cannot leave a health hazard in place". Ms Lees is clearly placing responsibility on Ms Kennerley for this conduct.
Second, the letter alleges that Ms Kennerley was "putting work in train without consultation with your partner and without first obtaining necessary Council approvals". This is connected with Ms Lees' declaration that she is not prepared to agree "to any further work being done in relation to the arena and will not contribute anything more for financially". Combined, these are statements that support Ms Lees' account that Ms Kennerley had gone ahead and undertaken work on the arena without Hawkesbury Council approval.
Ms Kennerley did not reply to this letter. She was a less formal person than Ms Lees, not one inclined to write correspondence defensively to protect her position. Even allowing for that, Ms Kennerley was a person who could stand her ground and her lack of any significant disputing response to this email supports the Court's inferences in Ms Lees' favour about its contents on these two matters.
It took some months for what had been recognised in Ms Lees' letter of 1 December 2015 to be realised. The relationship had clearly broken down. Ms Lees began to organise to leave the Property. She moved out and ceased to occupy any part of it by March 2016.
After March 2016, negotiations between the parties commenced with a view to finalising a legal separation of their financial interests. This was not completed until early September that year.

[9]

The Horse Arena - January 2016 to April 2016

Ms Lees met Hawkesbury Council officers at the new arena site on 5 January 2016 to see what could be done about the non-compliant development. Ms Kennerley was not there. Relations between them were by then so poor that this is not surprising. The Hawkesbury Council officers advised Ms Lees that a full DA would be required to rectify the non-compliant development. By this time, Ms Lees was corresponding with Ms Kennerley's solicitor. She recorded the outcome of this meeting and subsequent conversations with the Hawkesbury Council officers in an email sent to Ms Kennerley's solicitor on 25 January 2016. That email is set out below: "… An engineer, Ron (surname not known), and town planner, Sanzida Alam, from Hawkesbury Council attended the site today to inspect the arena. Your client will remember that when we spoke with the duty officer at Council in the hope of avoiding prosecution and obtaining consent, the lady was not sure if we should make application under section 96 or file a new DA but ultimately recommended a section 96. However, Ron and Sanzida told me today that they will not accept the section 96 which we filed and that we must file a new DA. They could see that the original arena and associated structures were never built. Sanzida said we could probably credit the Sec 96 application fee towards the DA fee. She has asked me to write a letter in two weeks' time requesting that we withdraw the s 96 application. We would then have three months to put in a development application. After inspecting the arena, the engineer, Ron, told me we need to do the following in order to get a DA: 1. engage a surveyor to take contours and create the cross sectional drawings for the DA 2. reduce them height of the stone wall surrounding the arena to 600 mm or less 3. Decrease the angle of the batten surrounding the arena to 1:3 4. turf the batten 5. show agg drain detail and swale locations. Then, he said he would stamp the retrospective work is approved. Do you agree to me submitting the withdrawal letter to council? As your client has organised the work performed on-site to date and previously complained about my wanting involvement in the arena, I assume your client would like to organise the five items mentioned above, in order to get an approval. Is that correct? If so, I require advice as soon as possible as to when can she have the work done. I have not had a response from you about the sales contract being drawn up by Mark Cotter. The Sydney real estate market is fragile at the moment and Justine Popple has advised us that the market is slowing. So it is imperative that we list the property on the open market ASAP which obviously cannot be done until a form of contract is prepared. Your decision is holding things up. So please reply to my email by no later than close of business today as we are in danger of missing the market, and there may be a purchaser who has no interest in the arena."
The letter is significant in recording Ms Lees' concerns that they had limited time to put in a DA to rectify the situation and that practical steps needed to be taken to achieve this. But the thrust of this letter was motivated by the existing poor relations between Ms Lees and Ms Kennerley. Ms Lees wanted to know when Ms Kennerley would have the necessary work done.
After Ms Lees vacated the Property in March 2016, Hawkesbury Council issued an infringement notice addressed to the registered proprietors of the Property. The only one available in the evidence is the one addressed Ms Lees on 13 April 2016. But another one must have been issued in identical terms to Ms Kennerley on the same date. Ms Kennerley has not admitted receipt of such a document but the Court finds she was aware of the Hawkesbury Council infringement notice from about the time it was issued.
The infringement notice was enclosed with the letter dated two days later, 15 April 2016. The infringement notice was as follows: "Infringement Notice [number not published] - Development without Development Consent - other - Individual Dear Ms Lees Hawkesbury City Council advises that the above Infringement Notice is issued to you after Council Officers attended your premises at 157 [the Property], Grose Wold after receiving a complaint. Council Officers observed that a horse arena approximately 20mts x 60 mts with a cut in the natural earth to a depth of approximately 2 mts at the property. After further enquiries and consulting with Council Records it was found that no Development Application had been made with Hawkesbury Council and the works undertaken are works that would require approval from Hawkesbury City Council. As a result the Infringement Notice is issues pursuant to the provisions of the Environmental Planning and Assessment Act 1979 and is attached hereto for your attention. EPA - 76A(1)(a) - (Development without development consent - any other case - Individual) Council has included a copy of 'A Guide to the Fines and Processing and Enforcement System' for your information and assist you in this matter. Should you wish to make further representations concerning the attached information notice, please forward these to the Director State Debt Recovery Office, P O Box 786 Strawberry Hills NSW 2012 The State Debt Recovery Office will contact you in due course as to the outcome of your request."
The covering letter gives more general information about how the alleged infringement could be rectified. The covering letter from Council provided as follows: "Dear Ms Lees, Council has received concerns relating to unapproved earth works (Horse Arena) at the premises. This type of works is development that requires consent from Council. A search of Councils records has been unable to located approval for these works at the premises. It appears that a breach of the Environmental Planning and Assessment Act 1979, has occurred, being the importing of fill and unapproved earth works at the premises. To remedy the situation your co-operation in this matter is appreciated. Council requires you to reinstate the land to the state prior to the earth works at the premises within 28 days from the date of this letter. Failing to reinstate the land to the state prior to the earth works at the premises within the requested time frame may result in Council issuing a Notice of Intention to issue an Order under the Environmental Planning and Assessment Act 1979. Should you require any additional information or assistance in regard to this matter, you are invited to contact the undersigned at the below phone number who is familiar with the issues raised."
It is clear from this correspondence that the breach alleged was "unapproved earth works" and that the remedy required was "to reinstate the land to the state prior to the earth works at the premises within 28 days from the date of this letter".
Nothing was done between April and September 2016 to address the Council's 13 April 2016 Infringement Notice or the 15 April 2016 letter's suggested remedy of reinstatement. Ms Kennerley agreed in cross-examination that she told Ms Lees in January 2017 that she (Ms Kennerley) would be responsible for dealing with the Hawkesbury Council in relation to the horse arena. Ms Lees says that Ms Kennerley said to her that Ms Kennerley did not want her (Ms Lees) to have anything to do with the horse arena. The Court accepts Ms Lees' evidence on this. That is why from about late 2016 Ms Lees backed away from doing anything about the horse arena.
Ms Kennerley suggested in answer to cross-examination that she had given instructions for a further development application to be made to cover the arena with a roof to a Mr Mike Besley and that he did lodge such an application. She contended that she tried to contact Ms Lees on many occasions about this, as did her lawyer. There is no objective evidence that any further development approval was ever obtained. In the absence of such evidence, the Court infers that the situation set out in the 13 April 2016 Infringement Notice has continued at the property. But ultimately Ms Kennerley agreed in evidence, and the Court accepts, that she had not done anything to get a DA approval or done anything to try and have the site approved, as the situation was "without further change". She was definite that she had not obtained a DA approval and that too is another basis to infer that nothing had been done.
As nothing was done about the horse arena at the Property, a "Penalty Reminder Notice" was issued from the Office of State Revenue on 21 May 2016 in an amount of $1,500, with a due date for payment of 21 June 2016. The offence alleged was summarised as "development without development consent - other - individual". The Property was identified and the offence date was described as 28 July 2015, which would appear to be the day the Hawkesbury Council officer first came out to the Property and noticed the non-compliant earth works at the new horse arena site.

[10]

The Insurance Arrangements Before 2 September 2016

The parties are also at issue about whether or not Ms Kennerley was in breach of her mortgage obligations by failing to insure buildings on the Property for their full insurable value in Ms Lees' name. Ms Kennerley's obligation to make adequate insurance arrangements arose as at 2 September 2016 when the settlement documents of that date were signed. But the course of the insurance arrangements that are relevant to the breach commenced two years before September 2016 and continued into 2017 after the signing of the settlement documents. This section of these reasons discusses the course of the insurance arrangements before the September 2016 settlement.
Ms Kennerley arranged to insure the buildings on the Property through NRMA from about November 2015 and probably as early as November 2014 when the parties took possession. The evidence conflicts as to the precise nature of these arrangements. Ms Kennerley claimed in evidence that she had visited the offices of NRMA with Ms Lees to effect appropriate insurance in November 2015. Ms Lees denied having attended NRMA with Ms Kennerley at any time. The Court prefers Ms Lees' version of this evidentiary conflict based on a comparison of Ms Lees and Kennerley's oral testimony.
The contemporaneous documentary evidence better supports Ms Lees' version that Ms Kennerley alone made the insurance arrangements for the buildings on the Property in late 2015. Some contemporaneous documents throw light upon the nature of any agreement that Ms Lees and Ms Kennerley reached about insuring the Shed (157c) and about whether the parties jointly visited an NRMA office or not. Ms Kennerley says that the parties agreed not to insure the Shed (157c). Ms Lees said they made no such agreement.
Each of the parties contended that emails exchanged between 30 October 2015 and 1 November 2015 supported her own version of the agreement about the insurance on the Shed (157c). Analysis of these emails tends rather more to support Ms Lees' account of their agreement, an account which the Court otherwise prefers in any event.
On 30 October 2015, Ms Kennerley emailed Ms Lees as follows: "Hi Belinda, I have arranged for Andrew to move 2 of the soil piles over into our side for landscaping, He will do this Monday Tuesday. When will you slash this front paddock as arranged, weeds are spreading. I am seeing NRMA on Tuesday. Gill"
Ms Lees replied later the same day in some detail to each of the subjects which had been raised by Ms Kennerley in her email as follows: "Hi Gill I have hired a bobcat this weekend, so I don't need to pay Andrew to fix the piles that he's created. I will be spreading out the two beds of dirt that were put in my paddocks. If you'd like to pay Andrew to move two piles of soil to your side, you can have them, but you will have to fit the bill for Andrew. I think Susin's rent should be increased to at least $550 because she has a far nicer house than the shed and she has five acres! Martin and Sue are still paying $525 pw. I told them if they want me to slash their paddock and remove manure, it will cost them $20 pw. I think the same should apply if you want me to slash Susin's paddock. I will slash your big paddock when I do mine, which will be after I fix the dirt beds. I have been paying the insurance on both the cottage and the main house since 2014, so I will need to be reimbursed for that when I have time to add it up. Belinda"
On 1 November, Ms Kennerley replied in the following terms, in what became the last email of this chain of correspondence: "Hi Belinda We will pay half for the insurance for the cottage and house only, Shed not insured. We do not agree to raising cottage rent. Susin only has 3 acres now. Kind regards Gill"
These emails are relevant to two questions: who went to visit the NRMA offices; and what were the arrangements for insuring the Shed (157c). As to the first of these questions, Ms Kennerley's email of 30 October 2015 suggests that she alone was seeing the NRMA "on Tuesday". At one stage she said in cross-examination "we definitely went together" but she could not be definite as to when that was. Then her evidence moved to her saying that "we definitely started this together". But she was ultimately quite indefinite as to when they went in together. Her ultimate evidence, despite some confusion, was that "I went in on my own in 2015". The Court accepts that the parties did not visit NRMA offices together in November 2015 or at any other time.
The other question is whether Ms Lees and Ms Kennerley agreed not to insure the Shed (157c). Ms Kennerley sought to convey to the Court that for a long time prior to November 2016 she had been under the impression that the Shed (157c) was insured with NRMA. But Ms Kennerley's reply on 1 November 2013 tends to support Ms Lees' view that Ms Kennerley had deliberately refused to contribute to any insurance for the Shed (157c). The language of Ms Kennerley's replies strongly suggests that she was refusing to pay for more than half insurance of the Cottage (157a) and the Residence (157b) and that she intended to leave the Shed (157c) uninsured.
In the Court's view, these emails, particularly Ms Kennerley's email of 1 November 2015, represent a clear statement that Ms Kennerley intended the Cottage (157a) and the Residence (157b) to be insured and that she would only contribute to half of their insurance. And by using the words "Shed not insured" she was also expressly declining to contribute anything to the insurance of the Shed (157c). The Court infers she was content from her point of view to leave it uninsured.
When cross-examined, Ms Kennerley sought to rebut this interpretation of her 1 November 2015 email. But her explanations for taking this position are not compelling. Ms Kennerley's interpretation of her own 1 November email was that her intention in November 2015 had been to insure the Shed (157c) as an outbuilding of the Property that people could not live in and could not be tenanted. She said that this had been agreed between her and Ms Lees. The Court then asked her the following question and received the following answer: "Q. Well why did you say, "We will pay half for the insurance for the cottage and the house only. Shed not insured?" Because that seems to indicate the shed was not insured at all and that only what was being insured was, and what you were insisting on only paying half for, was the cottage and the house? A. It does look like that, but we were friends at this time. And she knew exactly what I meant, meaning we'll do it as a, as a building as we always said we would. As we had from the beginning. And that is how I had done it until recently, as a building. Until probably '16 when, when this all occurred. Then I changed it then to 157C and I insured it with the, with the NRMA as that."
It is difficult to understand what "we will do it as a building" really means. Moreover, this answer was not an explanation for why she had so clearly used the words, "Shed not insured". These words do not give any hint of maintaining insurance consistently with her theory that her intention was to insure the Shed (157c) as "an outbuilding that people could not live in". The email is explicit in declining any insurance at all.
Thus, a combination of this email exchange and the Court's conclusion that Ms Kennerley went to the offices of the NRMA in early November 2015 on her own, is a basis to infer that when she did go to the NRMA offices at that time she effected insurance only for the Cottage (157a) and the Residence (157b) but she deliberately decided not to insure the Shed (157c).
Insurance policies were effected with NRMA on Tuesday, 3 November 2015. Two home insurance policies were effected that day with NRMA. Policy 314 identified the "home insured" as the Cottage (157a). In that Policy both Ms Lees and Ms Kennerley were identified as "the insured". The "building's sum insured" in Policy 314 was $246,330. Policy 818 was effected the same day on the Residence (157b), which was identified as the "home insured". Once again both Ms Kennerley and Ms Lees were identified as "the insured" and the "building's sum insured" was $630,000. No policy was taken out at this time to insure the Shed (157c).
Ms Lees made various allegations of breach of Ms Kennerley's obligation to insure all the buildings on the Property for a proper insurable value for the benefit of Ms Lees in conformity with the later settlement documents they made in September 2016. Other detail relating to the adequacy of the insurance policies is dealt with later in these reasons when the allegations of breach are examined.

[11]

The Option Deed - 2 September 2016

The parties' disengagement and settlement negotiations between November and September 2016 led to the signing of a suite of agreements on 2 September 2016. The purpose of these agreements is not difficult to discern. They provide a mechanism to bring the co-ownership relationship to an end, resolve outstanding disputes about past expenditure, regulate the unwinding of the co-ownership relationship, given that Ms Lees had ceased to reside in the Property some six months earlier in March 2016, and provide security to the owner not in possession, Ms Lees, in relation to the Put and Call mechanism in the Option Deed.
The principal document in this suite of agreements was an Option Deed, signed on 2 September 2016. In it Ms Lees (as Grantor) granted Ms Kennerley (as Grantee) a Call Option over Ms Lees' undivided half share in the Property until 1 July 2020 ("the Call Option"). It also conferred on Ms Lees an option to require Ms Kennerley to accept the transfer of Ms Lees' interests in the Property ("the Put Option"), for three months from the expiry of the Call Option on 1 July 2020. Thus the Put Option subsisted from 1 July 2020 until 1 October 2020. But the commencement of this Put Option could be advanced, in the event that Ms Kennerley breached the Option Deed or breached the terms of a mortgage put in place to secure Ms Kennerley's obligations under the Option Deed (Mortgage A). The provisions that achieve these results were much debated between the parties. Relevant parts of them are set out below.
In the Option Agreement, Clause 1 the "Call Option" is defined to mean the option granted in Clause 2 and the "Put Option", the option granted in Clause 3. The associated Call Option Period and the Put Option Period are respectively defined as follows: "Call Option Period means the period commencing on the date of this Deed and ending at 5pm on the Call Option Expiry Date; Put Option Period means the period commencing on the expiry of the Call Option Period or the date upon which the Grantee shall default under the Option Deed or Mortgage A (whichever shall be the earlier) and ending at 5pm on the Put Option Expiry Date;"
The Option Deed provides in Clause 2 for a Call Option and in Clause 3 a Put Option as follows: "2 Call Option 2.1 In consideration of the payment of the Call Option Fee by the Grantee to the Grantor, and of the covenants on the part of the Grantee under this Deed, the Grantor grants to the Grantee an option to purchase the Grantor's Land during the Call Option Period for the price and on the terms and conditions set out in the Contract. 2.2 The Grantee must in order to exercise the Call Option serve the Notice of Exercise of Call Option on the Grantor's solicitor during the Call Option Period or the Call Option will expire. 2.3 The exercise of the Call Option will simultaneously create the Contract between the Grantor and the Purchaser with the deposit calculated in accordance with this Deed. 3 Put Option 3.1 In consideration of the payment of the Put Option Fee by the Grantor to the Grantee, and of the covenants on the part of the Grantor under this Deed, the Grantee grants to the Grantor an option to require the Grantee to purchase the Grantor's Land during the Put Option Period for the price and on the terms and conditions set out in the Contract. 3.2 The Grantor must in order to exercise the Put Option serve the Notice of Exercise of Put Option on the Grantee's solicitor during the Put Option Period or the Put Option will expire; 3.3 The exercise of the Put Option will simultaneously create the Contract between the Grantor and the Purchaser with the deposit calculated in accordance with this Deed. The Put Option will only be exercisable by the Grantor if the Call Option has not been exercised in accordance with clause 2 of this Deed."
Each of the Call Option and the Put Option expire in accordance with a defined expiry date, the "Put Option Expiry Date" and the "Call Option Expiry Date". The Call Option Expiry Date is defined as 1 July 2020. The Put Option Expiry Date means "5pm the day three (3) months after the Call Option Expiry Date".
In addition to a nominal Option Fee of $10, the consideration for the grant of the Option by the Grantor, Ms Lees, is a set of quarterly payments, perhaps intended to operate in part to compensate Ms Lees for Ms Kennerley's occupation of the land prior to exercise of the options. The Option Agreement was structured so that these payments could be credited against the consideration payable upon the exercise of the Option. Clause 4 provides as follows: "4. Quarterly payments 4.1 In consideration of the option granted by the Grantor, the Grantee shall pay to the Grantor's solicitor for the credit of the Grantor equal consecutive quarterly payments of $12,500.00 each on the first day of each quarter commencing on 1sl September, 2017 and continuing until 1st July, 2020 or until exercise of an option under this deed (whichever shall be the earlier). 4.2 The aggregate of such quarterly payments received by the Grantor's solicitor shall be applied in payment of the deposit to be entered in the Contract upon exercise of an option under this Deed, but if the option is not exercised by either party such payments shall be applied in satisfaction of the option fee. 4.3 Any quarterly payments not made on the due date shall bear interest at $8.00 per cent per annum calculated by quarterly rests and shall be secured by Mortgage A. 4.4 The quarterly payments shall be released to the Grantor as and when received by the Grantor's solicitor."
The Option Agreement, Clause 5.1 empowered Ms Lees' solicitor to hold a number of documents in escrow to be deployed depending upon how performance of the Option Deed unfolded. These documents included the following: 1. Contract for Sale of Land in the event of the exercise of the Put Option or the Call Option ("the Contract"); 2. a first mortgage (Mortgage A), designed to secure to the Grantee's, Ms Kennerley's, existing obligations under the Option Deed; 3. Ms Kennerley's Certificate of Title to her share as tenant in common of the Property; 4. an undated transfer of Ms Lees' share of the Property in favour of Ms Kennerley, executed and signed in registrable form ("the Lees Transfer"); and 5. an undated mortgage (Mortgage B), which was executed by Ms Kennerley in favour of Ms Lees over the whole of the Property in fee simple, to secure Ms Kennerley's obligations under the Contract that might be created by the exercise of either the Put Option or the Call Option.
After Clause 5.1 defined and described these various escrow documents, Clause 5.2 set out irrevocable instructions from Ms Kennerley and Ms Lees to Ms Lees' solicitor as to how to deal with them. Clause 5.2 shows the staged manner in which the escrow documents would be deployed: "5.2 The Grantee and the Grantor irrevocably instruct the Grantor's solicitor to hold and deal with the Escrow Documents as follows: 5.2.1 Mortgage A shall not be stamped or registered unless the Grantee is in default of her obligations under this Deed or Mortgage A, and the Grantee's title shall thereafter be held by the Grantor's solicitor to be delivered to the Grantee upon due completion of the contract by the Grantee; 5.2.2 If the Grantee is in default of her obligations under this Deed or Mortgage A, then Mortgage A shall be stamped and registered at the cost of the Grantee and Mortgage A; 5.2.3 The Grantor's title shall be delivered to the Grantee on due completion of the Contract by the Grantee together with the discharge of Mortgage A; 5.2.4 Upon exercise of an option the Grantor's Solicitor is hereby irrevocably authorised and directed by the parties to enter the deposit (if any) calculated in accordance with this Deed in both copies of the Contract, date the Contract and insert the completion date being 42 days after the day of the exercise of the Call Option or the Put Option, whichever applies, date the Transfer and Discharge of Mortgage A on the completion date of the option, and forthwith deliver to the Grantee's solicitors one copy of the Contract and on receipt of the usual undertaking shall lend the transfer to the Grantee's solicitor for stamping prior to completion of the Contract; 5.2.5 The discharge of Mortgage A which shall be dated on the date for completion of the Contract and Mortgage B in duplicate (which shall not have come into force) shall be delivered to the Grantee as purchaser on due completion of the sale by the Grantee; 5.2.6 If the Grantee defaults under the Contract, the transfer and Mortgage B will be stamped and registered by the Grantor at the cost of the Grantee and all monies owing by the Grantee to the Grantor on any account whatever shall be secured by Mortgage B and including interest at $8.00 per cent per annum calculated by calendar monthly rests commencing on the due date for completion of the sale."
There is dispute between the parties as to whether or not Ms Lees was relying upon any act of default under the Option Deed. Although she disclaimed that she was, the issue is of sufficient importance to set out the default provisions. An important aspect of the default provisions of the Option Deed is the requirement upon each party to notify the other of any occurrence of any alleged act of default (Clause 6.3) proposed to be relied upon. Clause 6 provides as follows: "6. Act of default 6.1 If either party: fails to perform her obligations to the other party under this Deed on the due dates; has a receiver, manager, receiver and manager, administrator, statutory manager or similar person appointed (whether by a court or other persons) concerning any of her property, assets, business or affairs; becomes bankrupt, insolvent or enters into a composition scheme or arrangement (whether formal or informal) with creditors; assigns her property, assets, business or affairs for the benefit of her creditors; or has any bona fide distress, execution, attachment or other process made or levied against any of her assets which is not satisfied within seven days after service; then there has been an act of default. 6.2 The non-defaulting party is known as the innocent party. 6.3 Each party undertakes to the other that it will promptly notify, in writing, the other of any event which constitutes an act of default by it. The defaulting party has fourteen (14) days from written notification to rectify the default. 6.4 In the event of either party defaulting under this Deed or under the Contract solicitors costs calculated on a solicitor client basis will be payable by the defaulting party to the other, and in the case of default by the Grantee shall be secured by any mortgage from the Grantee to the Grantor then or thereafter in force."
Upon the occurrence of an act of default under Clause 6 of the Option Agreement, Clause 7 provides to the innocent party various powers to terminate the Option Agreement, as follows: "7. Termination 7.1 Upon the occurrence of an act of default the innocent party may, in her absolute discretion, and at that time or at any thereafter as she may determine do all or any of the following: (a) terminate this Deed; and (b) exercise any other power or right which the innocent party may have under this Deed or Mortgage A or Mortgage B or in law or in equity."
The Option Deed provides for various other unremarkable rights and obligations of the parties: the giving of notices (Clause 8); the burden of stamp duty (Clause 9); confidentiality (Clause 10); and assignment, binding of successors, merger and further assurance, proper law and execution of counterparts (Clause 11). The Option Deed also requires that "time is of the essence under this deed" (Clause 11.6) and deals with GST (Clause 12) and severance (Clause 13).
Annexure B to the Option Deed provides for a Notice of Exercise of Call Option. Annexure C provides for a Notice of Exercise of Put Option. No point is taken in these proceedings that the Notice of Exercise of Put Option used by Ms Lees was other than in accordance with Annexure C.
The Option Deed also annexed the Contract, a Contract for Sale and Purchase of Land 2016 Edition of the Law Society of New South Wales and the Real Estate Institute of New South Wales, in which Ms Lees as vendor sold her interest in the Property to Ms Kennerley for $1,328,040. The Contract set out a date for completion on the 42nd day after the making of the Contract. Other specific provisions of the Contract relevant to issues arising between the parties are dealt with later in these reasons.

[12]

The Collateral Deed - 2 September 2016

The Collateral Deed was made between Ms Lees and Ms Kennerley the same day as the Put and Call Option Deed of 2 September 2016. The Collateral Deed provides for practical aspects of the continuing relationship between Ms Kennerley and Ms Lees at the Property. In the Collateral Deed, Ms Lees is described as the Grantor and Ms Kennerley as Grantee, in the same way as they are in the Option Agreement.
By the time the Option Agreement and the Collateral Deed were made, Ms Lees had left the Property. Until they finally resolved their conflict through the mechanism of the Option Deed, it was contemplated that Ms Kennerley would live at the Property and at her option she could operate a business from it. Ms Lees would vacate the Property and live and conduct business elsewhere. Given their personal differences, this was a logical course. But it meant that some agreed balance needed to be reached to adjust their respective financial positions. The Collateral Deed sought to do this.
The Collateral Deed contemplated (Clause 2) that Ms Kennerley was entitled to rents and profits from the Property and liable to bear its outgoings, as follows: "2. INCOME & EXPENSES From 1 September, 2016, the Grantee is entitled to the rents and profits and is liable for all outgoings including but not limited to rates, water, sewerage, drainage, service and usage charges, land tax and all other outgoings in respect of the property."
Ms Kennerley indemnified Ms Lees from any liability that might arise from her occupation of the Property (Clause 3), as follows: "3. INDEMNITY The Grantee indemnifies and must keep indemnified the Grantor from and against all claims, actions, demands and liability in respect of the Property including but not limited to the horse arena erected on the Property and any burying of asbestos on the property."
The Collateral Deed provided for various practical matters for Ms Lees and Ms Kennerley to advance the resolution of their differences, most of which were about expenditure on the Property. They agreed upon a regime to prove the various items of expenditure each alleged she had undertaken on improvements to the Property up until Ms Lees vacated by 1 April 2016 and a mechanism for expert determination between them of the amount of that expenditure (Clause 4). Ms Kennerley was permitted to assign her rights under the Collateral Deed and the Option Deed (Clause 5), although Ms Kennerley remained personally liable to complete the purchase of Ms Lees' interest in the Property (Clause 6).
In the Collateral Deed the parties further agreed upon the passing of risk in respect of any damage to the Property under Clause 7, as follows: "7. PASSING OF INSURANCE RISK TO THE GRANTEE 7.1 The risk in respect of damage to the property will pass to the Grantee at the date of this Deed. 7.2 The Grantee cannot make a claim or requisition or rescind or terminate or delay completion of the Contract in respect of any loss or damage to the property or to any improvements erected on the property arising from fire, storm, tempest or flood or by any diminution in the value of the property from any insurable cause whatsoever which may occur between the date of this Deed and the completion date of the Contract. 7.3 The provisions of Division 7 of Part 4 of the Conveyancing Act 1919 (NSW) are specifically excluded."
Other machinery clauses in the Collateral Deed provide for severance (Clause 8), assignment (Clause 9), GST (Clause 10), costs and disbursements (Clause 11), notices (Clause 12), that a parties' failure to exercise a power or right did not operate as a waiver, and which must otherwise be in writing (Clause 13), that the governing law and jurisdiction are the Courts of New South Wales (Clause 14), further assurances (Clause 15), and counterparts (Clause 16).

[13]

Mortgage A

Mortgage A is referred to in the Option Deed (Clause 5) as being a first mortgage held in escrow, "in duplicate executed by the Grantee in favour of the Grantor over the Grantee's land". It is not disputed a Mortgage A of that description was created, simultaneously with the Option Deed, to provide to Ms Lees security for Ms Kennerley's performance of her existing obligations under the Option Deed.
Clause 2 of Mortgage A provided as follows: "2. In consideration of the financial accommodation including without limiting the generality of the foregoing monies which shall become due from the mortgagor to the mortgagee under a Put and Call Option Deed granted by the mortgagor to the mortgagee and any other document which may hereafter may be entered into will come into effect between the mortgagor and the mortgagee, the mortgagor, without prejudice to the mortgagee proving any consideration not herein before stated, hereby covenants and agrees with the mortgagee as follows: 2.1 2.1 That the mortgagor will pay to the mortgagee on the due date all monies and other financial accommodation which are or shall become owing from the mortgagor to the mortgagee. 2.2 The mortgagor will pay to the mortgagee all interest on such money as shall from time to time be owing by the mortgagor to the mortgagee as the rate from time to time agreed upon between the mortgagor and the mortgagee. 2.3. The mortgagor will observe the provisions set forth in Memorandum Q860000, which provisions are deemed to be incorporated herein. 2.4 To comply with and perform all laws and regulations (whether Federal, State, Local or of a statutory authority) relating to the mortgaged land/ and in the event of default by the mortgagor, the mortgagee shall have the right,1 remedy and power to obtain all Local or other authority approvals or consents which she considers desirable, at the cost of the mortgagor, and all monies or payments so expended or made shall be repayable by the mortgagor upon demand, and shall be deemed principle monies covered by this security and shall carry interest until such repayments at such higher rate, if any, as maybe shown in the schedule to the mortgage."
Mortgage A, Clause 2.3 refers to Memorandum Q860000 lodged at the Land Titles Office (referred to in these reasons as "the Memorandum"). Clause 2 of the Memorandum provides for the mortgagor's obligations to insure the Property as follows: "2. The mortgage will insure and keep insured against loss or damage by fire all buildings nor or hereafter erected on the mortgaged land in the name of the mortgagee for indemnity of the mortgagee or of the mortgagee and the mortgagor in the full insurable value in some insurance office approved by the mortgagee, and in the event of loss the mortgagee alone shall have power to settle and compromise any claim against any insurance company (without being responsible for any loss occasioned thereby) and the sum received on account of such insurance shall be applicable either in or towards repair or rebuilding or in or towards repayment of the mortgage debt at the option of the mortgagee, and the mortgagor will hand the policy or policies evidencing such insurances and all receipts for moneys paid and other usual evidence of insurance to the mortgagee immediately upon the issue thereof. If at any time the mortgagor is entitled to the benefit of an insurance on the buildings for the time being comprised in the mortgage which is not effected or maintained in pursuance of his obligation aforesaid then all money received by virtue of such insurance shall, if the mortgagee so requires, be applied at the option of the mortgagee either in making good the damage or loss in respect of which the same shall have been received or be paid to the mortgagee and be applied by the mortgagee in or towards repayment of the mortgage debt."
Mortgage A was registered on or shortly after 10 January 2017.

[17]

The Notice to Complete - April 2017

Ms Kennerley failed to complete the purchase of Ms Lees' share in accordance with the Contract within the time allowed, that is by 17 March 2017. As a result, on 27 March 2017, Ms Lees' solicitor served a Notice to Complete on Ms Kennerley, requiring completion of purchase of Ms Lees' share in the property by 13 April 2017.
But Ms Kennerley did not complete the Contract in conformity with the Notice to Complete. Nor has she completed the purchase since then.
Ms Lees says that she was ready, willing and able to complete the Contract at that time and remains ready, willing and able to do so. There is little for her to do to complete the Contract. As a vendor offering vendor finance through Mortgage B, her obligations on completion are limited and the Court has no reason to infer that she was not in a position to complete those reasonably formal obligations as she says she was and is.
As a result of Ms Kennerley's failure to complete the Contract in accordance with the Notice to Complete, Ms Lees contends that she is entitled to have it stamped for the payment of the relevant stamp duty and to lodge for registration two further documents in accordance with Option Deed, Clause 5. These documents are: 1. a transfer in registrable form signed by Ms Lees as transferor and by Ms Kennerley's solicitor on her behalf as transferee, the effect of which would be, upon registration, to transfer Ms Lees' half share in the Property as tenant in common to Ms Kennerley; and 2. a mortgage in the nature of vendor finance signed by Ms Kennerley as mortgagor and Ms Lee as mortgagee over the whole of an estate in fee simple in the property which would vest in Ms Kennerley upon registration of the transfer, being Mortgage B within the Option Deed.
Ms Lees had provided a copy of the transfer and Mortgage B to Ms Kennerley, which was executed for registration but undated at the time that the Option Deed had been executed in September 2016. Ms Lees' solicitors had held them in escrow in accordance with the Option Deed, Clause 5 since that time.

[18]

The Width of Ms Kennerley's Defence

Before the legal issues raised by the pleadings are analysed, it is necessary to identify the issues raised by the pleadings, because the defences available to the defendant were in dispute.
Throughout the conduct of the case, Mr Brennan, on behalf of Ms Kennerley, was cross-examining and raising issues in submissions that Mr Carey, on behalf of Ms Lees, contended were not available on the pleadings. Rather than occupy the limited space of a two-day trial with extensive debate about the width of the pleadings, the Court took the course of allowing the cross-examination to proceed but on the basis that Mr Brennan contended that it was available on his understanding of the pleadings. The dispute about the width of the submissions was left to final submissions.
Aspects of the cross-examination on behalf of Ms Kennerley appeared to suggest the following: that Ms Lees had waived her rights under the Option Deed and Mortgage A; and that considerations in the nature of relief against forfeiture may be available to Ms Kennerley to soften the strict exercise of those rights in contract against her. Moreover, cross-examination on behalf of Ms Kennerley tended to suggest some breach of an obligation of good faith in the exercise of her powers under the Option Deed or Mortgage A, or a breach of an obligation to give notice to Ms Kennerley to allow her to remedy breaches before Ms Lees could rely upon them.
Whether any of these matters were available on the pleaded Amended Defence was in issue. The parts of the pleaded Amended Defence that Mr Brennan contended would carry the burden of these contentions were paragraphs 43, 43A, and 44. Paragraph 44 was added to the existing Defence by consent, creating the Amended Defence, on the first day of trial. Those paragraphs in the final form of the Amended Defence are as follows: "43. With respect to paragraph 43 of the SOC, the Defendant denies the entitlement of the Plaintiff to the relief sought and opposes that relief. Further, the Defendant says that, to the extent the Plaintiff seeks the relief identified at 6 and 7 the proceedings constitute an abuse of process. Particulars On the Plaintiff's pleaded case she is entitled to lodge documents for registration with LPI without any requirement for the declaratory relief sought at 6. The declaratory relief sought by the Plaintiff at 7 constitutes a quasi-claim for damages. 43A. Further, the Defendant says that the declarations sought by the Plaintiff will, if granted, frustrate the Defendant's right to the benefit of the Put and Call Option deed during by preventing the Defendant from exercising the Call Option during the Call Option Period which expires on 1 July 2020. 44. In the alternative, if the Defendant has breached any terms of Mortgage A, the nature and extent of any breach is not such as to entitle the Plaintiff to exercise Clause 7 in the Put and Call Deed (the Termination Clause) or otherwise terminate or violate the contractual rights of the Defendant."
The Court does not accept that the Amended Defence bears the construction that Ms Kennerley seeks to put upon it. Paragraph 44 does not raise any issue of breach of an obligation of good faith in the exercise of Ms Lees' powers under the Option Deed or Mortgage A. Nor does it raise a breach of an obligation to give notice to Ms Kennerley to allow her to remedy breaches before Ms Lees could rely upon them.

[19]

The Issues for Determination

Mr Carey, counsel for Ms Lees, has submitted that the issues for determination raised on the pleadings are the following eight issues. As a result of the determination the Court has made about the width of the Amended Defence, Mr Carey's submissions about the width of the pleadings can be generally accepted. But the main issues in dispute centre around Mr Carey's issues (1) and (2) only. The issues therefore are: 1. Whether Ms Kennerley breached the terms of Mortgage A? 2. If so, whether Ms Lees was entitled to lodge Mortgage A for registration in accordance with the Put & Call Option Deed? 3. Whether Ms Lees validly exercised the Put Option in accordance with the terms of the Put & Call Option Deed, such that the Contract came into existence? 4. If so, whether the Notice to Complete was validly given by Ms Lees to Ms Kennerley in accordance with the Contract? 5. If so, whether Ms Kennerley breached the Contract by failing to complete the purchase of Ms Lees' share in accordance with the Notice to Complete? 6. If so, whether Ms Lees is, upon the discharge of Mortgage A and payment of the relevant duty to the Commissioner for State Revenue, entitled to date and lodge the Transfer and Mortgage B for registration? 7. What monies are secured under Mortgage B? 8. Whether Ms Lees is entitled to the declarations sought in the Statement of Claim?
These eight issues provide a convenient framework for dealing with the legal analysis of the issues in these reasons.
A number of those issues require the Court to construe the terms of the September 2016 suite of agreements, together with the documents held in escrow. Recognising that these are commercial contracts, the Court approaches that question of construction in accordance with the principles the High Court stated in Electricity Generation Corp v Woodside Energy Ltd; Woodside Energy Ltd v Electricity Generation Corp (2014) 251 CLR 640; (2014) 306 ALR 25; [2014] HCA 7 ("Woodside") (at [35]) where the majority (French CJ, Hayne, Crennan, and Kiefel JJ) described the approach to construction of commercial contracts in the following way (omitting footnotes): "The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean. That approach is not unfamiliar. As reaffirmed, it will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract. Appreciation of the commercial purpose or objects is facilitated by an understanding 'of the genesis of the transaction, the background, the context [and] the market in which the parties are operating', unless a contrary intention is indicated, a court is entitled to approach the task of giving a commercial contract a businesslike interpretation on the assumption 'that the parties … intended to produce a commercial result'. A commercial contract is to be construed so as to avoid it "making commercial nonsense or working commercial inconvenience".
In his Honour's dissenting judgment in Woodside, Gageler J compactly expressed the same idea at [53], as follows: "Commercial parties contracting at arm's length are free to agree on terms each considers to be to its own commercial advantage. The terms of their agreement, however, are construed by a court to mean what reasonable commercial parties in their position can be taken together to have meant."
These principles were further restated in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37 at [46]-[52].
This judgment does not call for any further discussion of the principles of the construction of commercial contracts. The Option Deed is a reasonably well-crafted document. Despite the present disputes, its provisions are drafted in a way that conveys clear meaning and, as these reasons show, can be construed in a way that clearly defines the obligations of each party.

[20]

Default Under Mortgage A

Ms Lees alleges four defaults under Mortgage A. Three of these defaults are related to the insurance of buildings on the Property; these are said to be a breach of the Memorandum, Clause 2. The fourth breach alleged is of Clause 2.4 of Mortgage A. Ms Lees contends that Clause 2.4, a provision relating to compliance with local government laws, required Ms Kennerley either to reinstate the area of the horse arena to its previous condition or to obtain development consent for the construction work undertaken by Australian Horse Arenas.
The Court accepts Ms Lees' construction of the Memorandum, Clause 2 as creating three separate obligations related to insurance of buildings on the Property. First, Memorandum, Clause 2 required Ms Kennerley as mortgagor to "insure and keep insured against loss or damage by fire all buildings now…erected on the mortgaged land…in their full insurable value".
Second, Memorandum, Clause 2 required that Ms Kennerley as mortgagor would "hand the policy or policies evidencing such insurance and all receipts for moneys paid and other usual evidence of insurance to the mortgagee immediately upon the issue thereof".
Third, Memorandum, Clause 2 required Ms Kennerley to ensure that Ms Lees' interest as mortgagee were noted on the policy: the obligation of the mortgagor to "insure and keep insured" was one for "indemnity of the mortgagee or of the mortgagee and the mortgagor…and in the event of loss the mortgagee alone shall have the power to settle and compromise any claim against any insurance company" and any sum received on account of such insurance "shall be applicable…at the option of the mortgagee".
In the Court's view, these obligations arise as Ms Lees contends.
The fourth breach of Mortgage A alleged is a failure "to comply with and perform all laws and regulations (with a Federal, State, Local or of a statutory authority) relating to the mortgaged land". The plaintiff alleges non-compliance with Mortgage A, Clause 2.4 because Ms Kennerley failed to observe Hawkesbury Council's requirements in the infringement notice dated 13 April 2016 and the letter of 15 April 2016.
These reasons deal with the insurance issues first. But before dealing with the individual allegations of breach, it is necessary for the Court to provide some more details in respect of the two insurance policies.

[23]

Was the Shed (157c) Insured as at 3 November 2016?

Ms Lees says that on the proper construction of the insurance policies and their relevant Product Disclosure Statement ("PDS") that the Shed (157c) was not insured under either Policy 314 or Policy 818 at the relevant date, 3 November 2016.
A number of basic facts are not in issue about this dispute. The Shed (157c) was located on the co-owned property but as a separately tenanted residence. It was separately tenanted as at 3 November 2016, consistent with that tenancy. It is not in issue that it was an enclosed building that could be locked up. It is accepted for this reason that it could meet the definition of "home" in the PDS applicable to Policy 314 and Policy 318. A "home" is defined in those policies as: "Any enclosed building at your site that has walls and a roof and can be locked up which you use mainly for domestic purposed"
The definition of "home" in the PDS refers to "your site". The PDS defines "site" in the following way: "[As] the land where your home is located in the yard or garden surrounding it that you used primarily for domestic residential purposes, at the address shown on your current Certificate of Insurance. The site includes any land or other area that touches your site and for which any statutory authority has made you responsible, but does not include the nature strip outside your home."
The Certificate of Insurance for Policy 314 describes the Cottage (157a) as the "home insured". Similarly, Policy 818 describes the "home insured" as the Residence (157b), although Policy 818 simply describes it as "157", a not uncommon numerical address description given to the Residence (157b). Given also that the Residence (157b) was the most substantial building erected on the Property, the sum insured of $661,500 compared with $263,818 for Policy 314 indicates that Policy 818 was insuring the larger building. But the address of the Shed (157c) does not appear on either of the insurance certificates. It has a separate address and could have been so indicated but it is not.
So the question of whether the Shed (157c) is covered under these two policies turns on whether it is a building "at your site" within the definition of "home" in the PDS.
The Shed (157c) does not qualify as part of the "site" of either of the other two addresses. It is not used "primarily for domestic, residential purposes at the address shown on [the] current Certificate of Insurance". This is because a separately tenanted building, such as the Shed (157c), could not be used "primarily for domestic residential purposes at the address shown" on either of the insurance certificates of Policies 314 or 818. The Shed (157c) is used for the independent domestic purposes of the tenants.
Ms Lees adduced evidence from her expert, Mr Kenneth Charles Adams. In his valuation report it shows that the Shed (157c) is not immediately adjacent to the other two habitable structures on the property such that it could be inferred that it was on the same site as either of them. Indeed, it is considerably further from either the Cottage (157a) or the Residence (157b) than either of those two buildings are from one another. Ms Kennerley seeks to argue the contrary in final submissions, contending that it is not clear that the Shed (157c) is not on the same site as the other two dwellings. But in the Court's view, the previous analysis is a full answer to that submission.
The Shed (157c) was not insured as at 3 November 2016 in breach of Memorandum, Clause 2.

[24]

Full Insurable Value or Not?

Apart from the question of whether the Shed (157c) was insured at all ,Ms Lees' breach case is also based upon a contention that, as at 3 November 2016, the combined dollar value of Policies 314 and 318 did not reach "full insurable value" as is required by Memorandum, Clause 2.
What is "full insurable value" of a building is simply a reference to its value as a matter of fact in the circumstances of the particular case, as there are many ways in which value can be determined: Roumelli Food Stores (NSW) Pty Ltd v New India Assurance Co Limited [1972] 1 NSWLR 227, at 236-238, (Macfarlan J); Horowitz Holdings Pty Ltd v Plastic Reclaimers (Australia) Pty Ltd (1981) 2 BPR 9,492; [1981] ANZ ConvR 138, at 3 (Needham J).
The two policies provide in their Certificates of Insurance for a "building sum insured". For Policy 818 that was $661,500. For Policy 812 it was $263,818. The PDS of each policy defined the "buildings sum insured" as "the amount of insurance you choose to cover your home". The PDS referred a prospective insured to various aids to calculate the building sum insured. But Ms Kennerley conceded that she had not read the PDS or the Certificates of Insurance relating to "buildings sum insured". Even assuming that the Shed (157c) was included in Policies 314 and 318, the "buildings sum insured" for all buildings insured under the policies was $925,318.
But Ms Lees adduced evidence from Mr Adams about the full insurable value of the buildings on the Property. Mr Adams valued the replacement cost of the buildings on the Property at $1.61 million, a figure considerably in excess of the approximately $900,000 for which several of the buildings had been insured in November 2016. Mr Adams gave clear and reliable evidence based upon his report. His expertise was in valuation, not in insurance. But he had broad experience in dealing with insurers and demonstrated sufficient relevant expertise.
Ms Kennerley did not adduce any expert evidence to counter Mr Adams' evidence. Cross-examination was therefore limited to challenging the assumptions and methodological grounding of Mr Adams' opinion. But the challenges that were mounted did not attack the dollar value of Mr Adams' valuation opinion of $1.61 million to any great degree. These challenges fell well short in numerical value of making up the nearly $700,000 difference between the amount for which the Property had been insured and the amount of Mr Adams' valuation of the replacement value of the property.
Mr Adams' opinion, which the Court accepts, is that the appropriate basis on which to value the buildings on the Property for insurance purposes in this case is "replacement cost". He estimated the replacement cost of the buildings, and other improvements normally considered forming part of the building, at current construction rates.
Mr Adams' cross-examination did not challenge the correctness of his assessment to suggest that some other methodology was obviously more appropriate than replacement cost. There were challenges to small calculations about measuring living areas of less than $5,000. There were challenges to the re-building standards that Mr Adams assumed were applicable, but the effect of choosing these was not quantified. There were challenges to the professional fees involved in re-building of architects and surveyors of up to a total of $55,000. But Mr Adams' opinion and answers in cross-examination supported his assessment of the need for these professional fees to be allowed. The difficulty in general with the cross-examination, as was pointed out at the time, is that it did not seek to quantify, with any particularity, the amount of money that the cross-examiner was seeking to deduct from Ms Adams' valuation. And that has not been done since.
Mr Adams defended his replacement value, effectively explaining it was replacement of what was in place at current construction rates. He was also challenged on his valuation of the Shed (157c). It was suggested to him that valuing it as an approved recreation area might be wrong. The Court is not persuaded that his opinion was wrong. But even if it were wrong, there is no evidence of any resulting adjustment that would need to be made to his valuation figure.
In summary, Ms Kennerley's case did not seek to account for the very substantial difference of about $700,000 between Mr Adams' valuation figure and $1.61 million and the insured sum. The Court concludes that Ms Kennerley failed to arrange insurance for the full insurable value of the buildings on the property in breach of Memorandum, Clause 2.

[25]

(2) Failure to Provide Relevant Policy Documents

Ms Lees alleges that Ms Kennerley failed to provide, as at 3 November 2016, or alternatively 13 December 2016, any current insurance policies or other evidence of insurance to her in accordance with Memorandum, Clause 2. This is, in essence, a contest about what documents were provided by Ms Kennerley to Ms Lees, a factual dispute.
The relevant obligation in Memorandum, Clause 2 is quite demanding. The obligation is for the mortgagor to "hand the policy or policies evidencing such insurance and all receipts for moneys paid and other usual evidence of insurance to the mortgagee immediately upon the issue thereof". The mortgagee must be given three things: the policies; the receipts for moneys paid; and other usual evidence of insurance. Whatever "immediately" may mean in this context it must mean within less than a few days.
Ms Lees has a two-fold complaint of breach of this provision. She says Ms Kennerley failed to comply with it both when Ms Kennerley arranged the amendments to Policies 314 and 318 in mid-September 2016 and again when Ms Kennerley renewed those policies on 3 November 2016.
It is sufficient to focus on the policy renewal on 3 November 2016. The Memorandum, Clause 2 obligation "to insure and keep insured against loss or damage" clearly applies to the moment of renewal. Ms Lees says, and the Court accepts, that from the time Mortgage B was signed on 2 September 2016, until 1 December 2016, Ms Kennerley did not hand her any insurance policy, receipts or other evidence of insurance. Prima facie this is a breach of this obligation in Memorandum, Clause 2 after renewal occurred on 3 November 2016.
But the matter is further complicated by correspondence about the insurance of particular buildings on the Property. Ms Lees telephoned the NRMA on 30 October 2016. She was told that an insurance policy was in place for the Cottage (157a) and the Residence (157b) but that the Shed (157c) was not insured. She was also told that the Shed (157c) could not be included in Policy 818, the policy for the Residence (157b). She was also told by the NRMA officer that she was not noted on the relevant policies as a mortgagee.
Ms Lees gave instructions to her solicitor to act on this information as a breach of Memorandum, Clause 2. Ms Lees' solicitor sent a letter on 1 December 2016 to Ms Kennerley's solicitor as follows: "Belinda Lees advises me that she has not received any policy for building insurance or receipts for insurance premiums paid as required by cl. 2 of the provisions in Memorandum Q860000 which is annexed to Mortgage A as executed by your client. My client phoned the insurance company to ensure at least some cover was in place as the policy which was previously in force over the main buildings expired on or about 3 November 2016. She was advised that not only has her interest as mortgagee not been noted on the policy for indemnity as mortgagee as required by such cl. 2, but her name had been removed entirely from the policy. It is also apparent that not all buildings on the mortgage land are insured under this policy. In any event neither a new nor renewed policy nor any receipts whatever have been delivered to me or my client in clear breach by Gillian Kennerley of the provisions of Mortgage A. I have therefore been instructed to stamp and register Mortgage A. Non-compliance with Mortgage A, apart from being breaches of the actual mortgage are failures to comply with the terms of the Put and Call and Option Deed. I hereby give your client notice on behalf of Belinda Lees that each of the following failures by Gillian Kennerley constitutes an act of default by her under the Put and Call Option Deed namely: (i) not insuring and keeping insured against loss or damage by fire in the name of Belinda Lees as mortgagee (or at all) the recreational building which was tenanted when Belinda Lees vacated the property. (ii) not insuring and keeping insured against loss or damage by fire the outside shed in the name of Belinda Lees as mortgagee (or at all). (iii) not producing any receipts for any Building insurance policy premiums to Belinda Lees for any premiums paid from 3 September 2016 until today. (iv) not producing to Belinda Lees any building insurance policy against loss or damage by fire after expiry of previous cover on or about 3 November 2016. (v) not insuring and keeping insured against loss or damage by fire either of the residences in the name of Belinda Lees for indemnity as mortgagee."
Ms Kennerley's solicitor responded on 13 December 2016, enclosing a range of information including what was described as the "relevant NRMA insurance policies indicating the various buildings are correctly insured". These documents included a Certificate of Insurance and a supplementary PDS for each of Policies 314 and 818, for the Cottage (157a) and the Residence (157b) respectively.
On their face, these documents state they were "issued at 11.30am on 06/12/2016". Although they do not contain the complete policy document, Ms Lees does not now contend any breach of Memorandum, Clause 2 with respect to these policies, covering as they do the Cottage (157a) and the Residence (157b).
Ms Lees complains that no policy documents were provided by Ms Kennerley in respect of the Shed (157c). But that was not a breach of this part of Memorandum, Clause 2, which is only activated in respect of a "policy or policies evidencing such insurances". As the Court has found, there was no insurance for the Shed (157c). That was a separate breach of Memorandum, Clause 2 but not a breach of this provision to provide relevant policy evidence to the mortgagee.
Ms Lees' breach case is that Ms Kennerley did not provide "receipts for moneys paid" to her. There is substance in this contention. The payment schedule for Policy 314 in respect of the Cottage (157a) provides for the monthly payment of insurance instalments stating, "your monthly instalments will continue to be automatically deducted from your nominated account unless otherwise specified" and the monthly instalment for that policy was $110.56. Similarly, in respect of the Residence (157b), Policy 818 was taken out on 3 November 2016, having the same payment structure created with monthly instalments of $234.89. It is clear from these policies that an automatic debit authority was put in place, which would ordinarily generate an electronic receipt. At least two such receipts in respect of each policy should have been available by 13 December 2016, when Ms Kennerley's solicitors wrote to Ms Lees' solicitors on 13 December 2016. A perusal of the many documents forwarded with that letter indicates that no such receipts were provided. Ms Kennerley's case was not able to point to any such receipts.
For those reasons, in the Court's view, Ms Kennerley was also in breach of this part of Memorandum, Clause 2 to "provide receipts and other usual evidence of insurance to the plaintiff".

[26]

(3) Noting Ms Lees' Interest as Mortgagee

Ms Lees contends that the insurance documents that were in place for the buildings on the Property, namely Policies 314 and 318 did not note as at 3 November 2016, when they were renewed, her interest as mortgagee, nor did they grant to her in that capacity control of any settlement process in the event of a claim.
The Memorandum, Clause 2 imposes the obligation to insure "in the name of the mortgagee for indemnity of the mortgagee" or alternatively in the name "of the mortgagee and the mortgagor". This would appear to require that the interest of the mortgagee be noted expressly as mortgagee, or alternatively that the mortgagee's and mortgagor's names could be identified as the insured. But on the latter scenario, in the event of loss, the requirement is that "the mortgagee alone shall have power to settle and compromise any claim against the insurance company". Clause 2 appears to the Court to work satisfactorily if either the mortgagee is specifically noted as mortgagee to the insurer, or alternatively, that the mortgagee appears as the insured but it is clear that in the event of loss the mortgagee alone has the power to compromise the claim.
But Clause 2 requires that when "the mortgagee alone shall have the power to settle and compromise any claim" that that power will not be a matter of dispute between the insurance company, the mortgagee and the mortgagor. The words "the mortgagee alone shall have the power" [emphasis added] makes clear that the result that Memorandum, Clause 2 seeks to achieve is that the mortgagee would not be dependent upon the consent or co-operation of either the mortgagor or the insurance company for the mortgagee to be able to decide whether or not to settle and compromise any claim. That means that the mortgagee's power "to settle and compromise any claim" must be found within the insurance documents. It is that very power that Ms Lees says is lacking in this case.
Such clear power for the mortgagee is needed in a case such as this. Mortgage A is secured over Ms Kennerley's share in the Property. Clause 2 requires that Ms Lees be able to make decisions about compromising insurance claims in respect of Ms Kennerley's share, not just her own.
As has been seen, when the September 2016 settlement occurred, Ms Kennerley changed the policies to remove Ms Lees as an insured. But the policies were renewed in November 2016, adding Ms Lees as an insured again. But Ms Lees was not noted expressly as a mortgagee on the renewed policies. In this case, noting Ms Lees as a mortgagee was important to avoid any ambiguity with the insurer. Ms Lees was a co-owner of the Property. It was correct that she should appear on the policy as a co-owner. But Ms Lees would not be able to deal with the insurers in respect of Ms Kennerley's half interest in the Property unless Ms Lees was noted as a mortgagee on the policy, in accordance with the first alternative mentioned above as being available under Clause 2.
Ms Kennerley conceded that she did not tell NRMA that Ms Lees was a mortgagee in respect of her (Ms Kennerley's) share of the Property.
Thus, in the Court's view, a breach of this aspect of Memorandum, Clause 2 is established. The consequence of the breach had practical significance for Ms Lees. It meant that in the event of a loss Ms Lees would not have been entitled to give a good discharge to the insurer, before moneys would be paid in respect of Ms Kennerley's share of the Property. In short, Ms Lees would have lost control of the settlement claim process, a control that Memorandum, Clause 2 expressly conferred on her.
There was some discussion in submissions about whether rights that were provided to "credit providers" under the PDS of either of the NRMA policies might comply with Memorandum, Clause 2. But in the Court's view, these rights were not enlivened because Ms Lees' position as a credit provider/mortgagee was not notified to the insurer.
Ms Kennerley's submissions emphasised that Ms Lees' name was on the policies. But as the Court's analysis shows, this does not go far enough. It is necessary for her interest as mortgagee to be noted in some way. As that was not done, this is another breach of Memorandum, Clause 2.

[27]

(4) Failure to Reinstate or Obtain DA - Breach of Mortgage A, Clause 2.4

Ms Lees contends that at no time after entering into the Option Deed and granting Mortgage A did Ms Kennerley either take any action to reinstate the Property in accordance with Council requirements, or obtain development consent.
There is no issue between the parties that Ms Kennerley did not take any action to reinstate the construction of the horse arena back to the state that it was before it was developed on the Property. Nor is there any evidence of Hawkesbury Council's consent having been obtained after it issued its Infringement Notice and covering letter on 15 April 2016. The Court infers that no such consent has ever been obtained.
The only question that remains for the consideration of this allegation of breach is whether these circumstances, and the continuing apparent non-compliance with the Hawkesbury Council's notices for reinstatement, was a breach of Mortgage A, Clause 2.4.
The Hawkesbury Council Infringement Notice of 13 April 2016, the Council's covering letter dated 15 April 2016, and the Penalty Reminder Notice dated 21 May 2016 all declare that the parties were in breach of the Environmental Planning and Assessment Act, 1979 ("EPA"), s 76A(1)(a), namely that the development of the arena required consent and was undertaken without consent.
Although these documents refer to EPA s 76A(1), the EPA was amended on 1 March 2018, relocating the substance of this provision to s 4.1(1). The relocated provision is not different in any material sense. Both sections are outlined for convenience below: "76A Development that needs consent (1) General If an environmental planning instrument provides that specified development may not be carried out except with development consent, a person must not carry the development out on land to which the provision applies unless: such a consent has been obtained and is in force, and the development is carried out in accordance with the consent and the instrument. … 4.1 Development that does not need consent (1) General If an environmental planning instrument provides that specified development may be carried out without the need for development consent, a person may carry the development out, in accordance with the instrument, on land to which the provision applies."
The definition of "development" has also been relocated in the EPA, from s 4(1) to s 1.5(1). Section 1.5(1) is outlined below: "1.5 Meaning of "development (1) For the purposes of this Act, development is any of the following: (a) the use of land, (b) the subdivision of land, (c) the erection of a building, (d) the carrying out of a work, (e) the demolition of a building or work, (f) any other act, matter or thing that may be controlled by an environmental planning instrument."
As the SEPP was and remains an "environmental planning instrument" which specifies that "development" may not be carried out except with consent, s 76A(1)(a) (now s 4.1(1)) provides that such development may not be carried out unless such consent has been obtained and is in force and the development is carried out in accordance with the consent and the instrument, relevantly in this case, the SEPP.
But there is no dispute Ms Kennerley did construct the horse arena in 2015 without the development consent she required from Hawkesbury Council pursuant to the SEPP. The breach of s 76A(1)(a) was in turn a breach of EPA, s 9.37 (formerly s 125), which states it is an offence to not comply with the EPA.
Ms Kennerley paid the fine issued by Hawkesbury Council in May 2016, before the signing of the Option Deed. But despite this, there is no evidence to suggest that she has rectified the breach subject of the fine, or that any consent to the development, retrospective or otherwise, has been granted. Failure to comply with the EPA continued after the parties entered into the suite of September 2016 settlement agreements.
A breach of the EPA, is prima facie a breach of Clause 2.4 of Mortgage A, which requires mortgagors to "comply with and perform all laws and regulations (whether Federal, State, Local or of a statutory authority) relating to the mortgaged land". It is not to the point that Ms Lees might also be subject to the same obligations as against the Hawkesbury Council. The point here is that Ms Kennerley has taken on additional obligations as the mortgagor under Mortgage A of contracting to comply with all local laws and she has not.
Both parties are potentially liable to action at the suit of Hawkesbury Council. EPA, s 9.58(5) (formerly s 127A(5)) indicates that the Hawkesbury Council may still proceed in a civil suit against the parties to achieve enforcement. Section 9.58(5) relevantly states: "9.58 Penalty notices for certain offences (cf previous s 127A) … (5) Payment under this section is not regarded as an admission of liability for the purpose of, and does not in any way affect or prejudice, any civil claim, action or proceeding arising out of the same occurrence." The former version of s 9.58(5), namely s 127A(5), stated: "127 Proceedings for offences (5) Proceedings for an offence against this Act or the regulations may be commenced not later than 2 years after the offence was alleged to be committed."
The Council also has open to it the option to pursue a "Development Control Order" (EPA, Schedule 5, formerly Division 2A) or to pursue an injunction from the Land and Environment Court (Division 9.5, formerly Division 3). In the Court's view, Ms Kennerley's failure to either comply with the EPA, seek retrospective approval/consent for the arena, or remove the arena, has left her and Ms Lees open to such civil action.
Ms Kennerley was, and continues to be, prime facie in breach of Mortgage A, Clause 2.4 at the time that the Option Deed and Mortgage A was entered into.
Ms Kennerley's case is that she did not do any development at the Property after entering into the September 2016 settlement agreement and there was no remedial order in place for her to comply with. She points to additional provisions in the contract for sale, which would be entered into upon exercise of the Option Deed (clause 31.1.3), that the purchaser could not make any claim or requisition in consequence of any non-compliance with absence of approvals concerning the arena. But these are not answers to Ms Lees' arguments.
Thus, the Court has found that all Ms Lees' respective allegations of breach of Mortgage A, Clause 2 and Memorandum, Clause 2 are made out. The remaining questions are related to what consequences flow, once those breaches are found.

[28]

Defence Arguments That Any Breach Established Will Have No Consequences

Ms Kennerley raised a series of arguments by way of defence that even if there were breaches found against her, Ms Lees is not entitled to take the further enforcement action she claims.
First, Ms Kennerley argues, citing Arcos Ltd v EA Ronaasen and Son (1933) AC 470, at 480 that any breaches by her are "de minimis" and can be ignored. The de minimis rule is said to be applicable to all transactions in which a breach is alleged, and the Court will not regard or give effect to what are undoubtedly in the view of the Court, trivialities, matters of little moment or of a trifling or negligible nature: Margaronis Navigation Agency Ltd v Henry W Peabody & Co of London Ltd (1965) 2 QB 430 at 444.
The Court does not regard any of these breaches here as being de minimis. For example, if there had been a loss by fire, given the poor relationship between these parties, the failure to note Ms Lees' interests as a mortgagee would have been likely to create significant difficulties for her in resolving any insurance claims.
Second, Ms Kennerley argues that many of the breaches alleged, such as those relating to the horse arena and failing to note Ms Kennerley as a mortgagee of the insured Property with the insurer, if they are breaches, are breaches that would have arisen immediately upon the signing of the September 2016 settlement documents and should not be treated as breaches by the Court.
But at least one answer to this is that it is possible for a party to sign a contract which places that party in breach upon signature, and there are many examples of this: Drama Unit Pty Ltd v Fearndale Holdings Pty Ltd [2018] NSWSC 1895 (Black J). The task of the Court is to construe the contract, look at what was promised, and compare that with the facts to determine whether there was a breach. That may result in a breach occurring at the time of signing.
Third, Ms Kennerley argues that Ms Lees has not exercised her contractual powers in good faith. But such an argument would widen the scope of enquiry considerably in a case such as this and would require clear pleading. The pleading amendment, discussed above, that was allowed on the first day of the hearing does not permit such an enquiry to be conducted.
Fourthly, Ms Kennerley argues that relief should not be granted in this case because it would frustrate her right to the benefit of the Option Deed during by preventing her from exercising the Call Option during the Call Option Period which expires on 1 July 2020.
But this argument does not give proper account of those parts of the Option Deed that allow an acceleration of Ms Lees' Put Option period. The definition of the "put option period" means the period commencing on the expiry of the Call Option period (which would ordinarily be 1 July 2020). But the definition continues with the words "or the date upon which the grantee shall default under the Option Deed or Mortgage A". Here the Court has found that Ms Kennerley, the Grantee, has defaulted under Mortgage A, thereby accelerating the Put Option period to the date of default.
In light of the defaults that have been found by the Court, the date of default under Mortgage A was either 2 September 2016 or alternatively 3 November 2016. That is when the Put Option Period commenced. The more compelling of these dates is the later one. Once the Put Option period commenced, Ms Lees was entitled to exercise her Put Option and she did within the Put Option period.
Fifthly, Ms Kennerley argues that the Option Deed, Clause 6.3 requires Ms Lees to provide notice to Ms Kennerley of any default by Ms Kennerley and to afford her an opportunity to remedy the default within 14 days. Ms Kennerley argues that this is mandatory and was not done, and because the 14 day rectification period was not allowed, Ms Lees cannot exercise any of her rights under the Option Deed or Mortgage A.
There are a number of difficulties with this fifth and final argument. The Court does not find it persuasive.
The first answer is that Option Deed, Clause 6.1(a) shows that Clause 6 as a whole applies only to a default "under this Deed". It does not apply to a default under Mortgage A, or the exercise of rights by Ms Lees under the Option Deed. Ms Lees' right to exercise the Put Option was conditioned not only upon a default under the Option Deed but also on a default under Mortgage A. Moreover, Ms Lees' right to exercise the Put Option, due to the early opening of the Put Option period, was not conditioned upon notice having been given of the default, either under Option Deed, Clause 6.3 or upon Ms Kennerley having failed to remedy a breach the subject of such a notice.
And an unremedied act of default under Option Deed, Clause 6 enlivens the right of termination under Clause 7.1(a). It is expressed to be without prejudice to any other remedy which may be available to the innocent party: Option Deed, Clause 7.1(b). And Clause 6 does not otherwise expressly constrain the rights of either party in the event of an act of default.
Moreover, in the event of a default either under the Option Deed or Mortgage A, Ms Lees' rights under Clause. 5.2 are not expressed to be conditional upon notice having been given under Clause 6.3, or otherwise, or upon Ms Kennerley having failed to remedy a breach the subject of such notice, as might be expected were Clause 6.3 to have the effect for which Ms Kennerley contends.
And in final answer to this argument, a notice of default in relation to the non-insurance of the Shed (157c), the failure to provide evidence of insurance, and the failure to insure in the name of Ms Lees as mortgagee, was in fact given on 1 December 2016, and none of those defaults were remedied by Ms Kennerley.

Lees v Kennerley

At a glance

Court

Decision date

Before

Source

Judgment (31 paragraphs)

Parties

Legislation Cited (1)

Cases Cited (6)

Cited By (1)