Liberty Grove (Concord) Pty Ltd v Yeo & Ors

Beard v Drummoyne Municipal Council (1969) 71 SR(NSW) 250 Eighth SRJ Pty Ltd v Merity (1997) 7 BPR 15,189 Flight v Booth (1834) 1 Bing NC 370 ((1834) 131 ER 1160) CASES CITED : Lucas & Tait (Investments) Pty Ltd v Victoria Securities Limited [1973] 2 NSWLR 268 Micos v Diamond [1970] 72 SR(NSW) 392 Sargent v ASL Developments Limited (1974) 131 CLR 634 Torr v Harpur (1940) 40 SR(NSW) 585

Liberty Grove (Concord) Pty Ltd - Plaintiff/Cross Defendant (1)/First Cross Defendant (2) Siew Yong Yeo - First Defendant/First Cross Claimant (1) and (2) PARTIES : Hung Hong Lim - Second Defendant/Second Cross Claimant (1) and (2) Kelmarsh Pty Ltd - Third Defendant Alexander Tees - Second Cross Defendant (2)

R.I. Bellamy - Plaintiff/Cross Defendant (1)/First Cross Defendant (2) COUNSEL : J.A. Darvall - First & Second Defendants/Cross Claimants N/A - Third Defendant N/A - Second Cross Defendant

Morgan Lewis Attorneys - Plaintiff/Cross Defendant (1)/First Cross Defendant (2) SOLICITORS : B.J. Macree - First & Second Defendants/Cross Claimants J.S. Lukas & Co - Third Defendant N/A - Second Cross Defendant

6054/05 Liberty Grove (Concord) Pty Ltd v Yeo & Ors

1 By a contract dated 16 December 2004, the Plaintiff agreed to sell to the Defendants a parcel of vacant land, 160 Queen Street, Concord ("the Land"), for a price of $490,000. 2 The Plaintiff claims that:

• it validly terminated the contract on 7 March 2005 consequent on the failure of the Defendants to comply with a notice to complete served by the Plaintiff on them on 14 February 2005;

• it is entitled to forfeit the deposit of $24,500 paid by the Defendants under the contract;

• it is entitled to damages for the Defendants' breach of contract in the sum of $211,000, being the difference between the contract price and the price at which the Plaintiff was able to resell the Land to a subsequent purchaser. 3 By their Defence and Cross Claim, the Defendants claim that:

• they were entitled to rescind the contract by a Notice of Rescission dated 2 February 2005 because the Plaintiff failed to disclose the existence of a latent defect in title to the Land, namely a drainage pipeline running beneath the surface of the Land;

• by reason of their valid rescission of the contract, they are entitled to return of the deposit and to the payment of costs and expenses of investigating title;

• in the alternative, even if they have not validly rescinded the contract, the Plaintiff should be ordered to repay the deposit pursuant to s.55(2A) of the Conveyancing Act 1919 (NSW).

• the Plaintiff has failed to mitigate its damages because it entered into a contract for the sale of the Land on 18 August 2005 at a price which was too low. 4 The Plaintiff responds that:

• the existence of the drainage pipe is not a defect in title giving a right of rescission;

• if the existence of the drainage pipe is a defect in title giving a right to rescission, the Defendants irrevocably elected against rescission and affirmed the contract by a letter dated 25 January 2005. The issues

• is the existence of the drainage pipe such a substantial defect in title as to entitle the Defendants to rescind at common law;

• if the Defendants were entitled to rescind, did they irrevocably elect against rescission by their solicitor's letter of 25 January 2005;

• if the Defendants have not, but the Plaintiff has, validly rescinded the contract, what are the damages to which the Plaintiff is entitled;

• has the Plaintiff failed to mitigate such damage;

• should the Plaintiff be required to repay the deposit under s.55(2A) of the Conveyancing Act. The facts

6 The relevant facts are not in dispute. In 1994 the Plaintiff acquired a large parcel of land at Concord for the purpose of redevelopment. The development site, in effect, straddles the railway line. To the east of the railway line is the Land, which is approximately 850m2 in area, having dimensions of approximately 45m by 18m. The Plaintiff acquired the Land because it was obliged to provide a pedestrian walkway from the main development site, which is on the west side of the railway line, to Queen Street. It was the Plaintiff's intention to provide the walkway by creating the appropriate easement over the Land. The easement was created on 17 December 2004. 7 After creation of the easement, the Plaintiff had no further use for the Land and wished to sell it, subject, of course, to the easement for the walkway. Prior to December 2004, the Plaintiff placed the Land in the hands of real estate agents and a contract for sale was prepared by the Plaintiff's solicitors. 8 The Defendants agreed to buy the Land and contracts were exchanged on 16 December 2004. A deposit of five percent of the purchase price, namely $24,500, was paid to the Plaintiff's agent. I will come shortly to the relevant terms of the contract. 9 The Defendants wished to build a two storey house on the Land. While they were inspecting the Land on 9 January 2005, they noticed a metal grate near the footpath to the front of the property. They had not noticed the grate on previous inspections because it had been covered by furniture and rubbish. They began inquiries with Sydney Water as to whether there was any problem with drains running through the Land. 10 On 12 January 2005 the Defendants obtained from Sydney Water a diagram which showed the presence of a drainage pipe affecting the Land. They were told that the pipe did not belong to Sydney Water. 11 They then made inquiries of the Council. On 14 January they were provided with a diagram which showed that the drainage pipe, which is some 750mm in diameter, cuts straight across the Land from east to west and connects with a drainage pipe running through the Plaintiff's development site on the western side of the railway line. The location of the pipe was confirmed by a further diagram provided by the Council on 19 January. 12 There is no easement for the drainage pipe registered on the title to the Land. The survey plan attached to the contract for sale did not disclose it; neither did a certificate under s.149 of the Environmental Planning and Assessment Act 1979 (NSW) which was attached to the contract. The Plaintiff says that it did not know of the existence of the drainage pipe at the time that the contracts were exchanged. 13 On 20 January the Defendants obtained a quote for the redirection of the pipe at a cost of $34,045. On the same day the Defendants' solicitor wrote to the Plaintiff's solicitor enclosing requisitions on title and adding the following: "2. Please also advise the exact position of the Council drain on the property which is not shown in the contract or within the survey as we are instructed that previously the Real Estate Agent advised our clients prior to exchange and our instructions that there would be no potential problem with any proposed building on the property in relation thereto either in terms of obtaining Council consent or any costs involved. Please be advised that if the drain is in the middle of the property and would be required to be moved in the event of any building being erected that our clients hereby seek compensation pursuant to the contract. The exact quantum will be advised a.s.a.p. Please note that Council have advised that the only way to discover the exact position of the drain would be to undertake on site investigation.

3. Would you please therefore, in light of 2 above obtain your clients instructions as to whether they would be prepared to reduce the contract price commensurate with a reasonable estimate of the cost to move the drain pipe which we understand is 600mm in diameter." 14 On 25 January the Plaintiff's solicitor provided answers to the requisitions on title and added: "The vendor is not required to provide any compensation to your client in respect of this drain. Please refer to clause 5 of the contract for sale." 15 Also on 25 January, the Defendants obtained another quote for the redirection of the pipe at a cost of $38,000. On the same day their solicitor wrote to the Plaintiff's solicitor as follows: "1. We have been advised by Canada Bay Council that the position of the Council drain on the property which is not shown in the contract or within the survey as being towards the centre of the property although the exact position could not be determined without on site investigation. As referred to previously, we are instructed that the Real Estate Agent advised our clients prior to exchange and prior to our instructions that there would be no potential problem with any proposed building on the property in relation thereto either in terms of obtaining Council consent or any costs involved. Please be advised that given that it is likely that the drain is required to be moved in the event of any building being desired to be erected that our clients hereby seek compensation pursuant to the applicable provisions of the contract in the amount of $40,000.00, the estimated quantum having been advised by Licenced [sic] contractors to be of this amount. Our clients instruct that cl 5 does not refer to any claim for compensation referred to elsewhere within the contract and in any case requisition was made within reasonable time pursuant to cl 5.3, quite apart from this factor our clients instruct that the compensation is derived by reason of the misrepresentation(s) made by your clients agents. Our clients therefore also instruct your answer to qu 14 is misleading as the contract makes no reference to the drain the subject of this correspondence.

2. Would you please therefore, in light of 2 [sic] above obtain your clients' instructions as to whether they would be prepared to reduce the contract price commensurate with the reasonable estimate of the cost to move the drain pipe which we understand is 600mm in diameter." 16 On 31 January 2005, the Defendants engaged another firm of solicitors. On 2 February those solicitors wrote to the Plaintiff's solicitors enclosing a Notice of Rescission of the contract founded upon the Plaintiff's failure to disclose the existence of the pipe crossing the Land and preventing the construction of a building. The Notice claimed the return of the deposit. 17 By a letter dated 3 February, the Plaintiff's solicitor denied the validity of the Defendants' Notice of Rescission and reserved its right under the contract. 18 On 14 February the Plaintiff's solicitor served a fourteen day Notice to Complete. The Defendants failed to comply with the Notice and, on 7 March 2005, the Plaintiff gave notice terminating the contract and forfeiting the deposit. The terms of the Contract

19 The contract relevantly provides: " 6. Error or misdescription

6.1 The purchaser can (but only before completion) claim compensation for an error or misdescription in this contract (as to the property, the title or anything else and whether substantial or not).

6.2 This clause applies even if the purchase did not take notice of or rely on anything in this contract containing or giving rise to the error or misdescription.

6.3 However, this clause does not apply to the extent the purchaser knows the true position.

The purchaser can make a claim (including a claim under clause 6) before completion only by serving it with a statement of the amount claimed, and if the purchaser makes one or more claims before completion -

7.1 the vendor can rescind if in the case of claims that are not claims for delay - 7.1.1 the total amount claimed exceeds 5% of the price; 7.1.2 the vendor serves notice of intention to rescind ; and 7.1.3 the purchaser does not serve notice waiving the claims within 14 days after that service ; and

7.2 if the vendor does not rescind , the parties must complete and if this contract is completed - 7.2.1 the lesser of the total amount claimed and 10% of the price must be paid out of the price to, and held by, the depositholder until the claims are finalised or lapse; 7.2.2 the amount held is to be invested in accordance with clause 3; 7.2.3 the claims must be finalised by an arbitrator appointed by the parties or, if an appointment is not made within 1 month of completion, by an arbitrator appointed by the President of the Law Society at the request of a party ; 7.2.4 the purchaser is not entitled, in respect of the claims, to more than the total amount claimed and the costs of the purchaser; 7.2.5 net interest on the amount held must be paid to the parties in the same proportion as the amount held; and 7.2.6 if the parties do not appoint an arbitrator and neither party requests the President to appoint an arbitrator within 3 months after completion, the claims lapse.

10 Restrictions on rights of purchaser 10.1 The purchaser cannot make a claim or requisition or rescind or terminate in respect of - 10.1.1 the ownership or location of any fence as defined in the Dividing Fences Act 1991; 10.1.2 a service for the property being a joint service or passing through another property, or any service for another property passing through the property ('service' includes air, communication, drainage, electricity, garbage, gas, oil, radio, sewerage, telephone, television or water service); 10.1.3 a wall being or not being a party wall in any sense of that term or the property being affected by an easement for support or not having the benefit of an easement for support; 10.1.4 any change in the property due to fair wear and tear before completion; 10.1.5 a promise, representation or statement about this contract, the property or the title, not set out or referred to in this contract; 10.1.6 a condition, exception, reservation or restriction in a Crown grant; 10.1.7 the existence of any authority or licence to explore or prospect for gas, minerals or petroleum; 10.1.8 any easement or restriction on use the substance of either of which is disclosed in this contract or any non-compliance with the easement or restriction on use; or 10.1.9 anything the substance of which is disclosed in this contract (except a caveat, charge, mortgage or writ).

10.2 The purchaser cannot rescind or terminate only because of a defect in title or quality of the inclusions.

SPECIAL CONDITIONS … 5. NO RELIANCE/EXCLUSION OF WARRANTIES

(a) The purchaser warrants that: (1) it has: (A) inspected the property and fully informed itself as to the existence, nature and extent of any structure, building, pipe work, sewer line or other improvement located on or beneath the surface of the land; and (B) investigated all representations, warranties, promises and statements (if any) made by the vendor or anyone on its behalf in relation to the suitability of the property for the conduct of any business. … 9.3 Omissions Except as otherwise expressed in this contract or implied by section 52A of the Conveyancing Act 1919 (NSW) and the Conveyancing (Sale of Land) Regulation, the purchaser takes title subject to and must not make any objection, requisition or claim for compensation, in respect of or rescind or terminate this contract or delay completion because of any matter not disclosed or inaccurately disclosed or described in this contract." Whether a defect in title

20 The Defendants say that the presence of the drainage pipe constitutes a latent defect in title which was so substantial that they were entitled to rescind the contract and that they validly did so by their Notice of Rescission dated 2 February 2005. There is no dispute that if the drainage pipe does constitute a defect in title, that defect was latent. 21 The Defendants rely on the line of authority founded on Flight v Booth (1834) 1 Bing NC 370, at 377, ((1834) 131 ER 1160) and summarised in Torr v Harpur (1940) 40 SR(NSW) 585. They say that the nondisclosure of the drainage pipe in the contract so far affects its subject matter in a material and substantial way that it may reasonably be supposed that, but for the failure to disclose, the Defendants might never have entered into the contract. If the omission to disclose has that character, the law provides that a purchaser is not compelled to resort to compensation clauses in the contract but may rescind: see Torr v Harpur (supra) at 589-590; Beard v Drummoyne Municipal Council (1969) 71 SR(NSW) 250; Micos v Diamond [1970] 72 SR(NSW) 392. 22 In the present case the Defendants point to the following circumstances evidencing that the presence of the drainage pipe constitutes a defect in title. First, the drainage pipe runs through the centre of the Land. Common sense, not to mention Council's building regulations, indicates that it would be very difficult to build around it. Second, the cost of the repositioning of the pipe was between $35,000 and $38,000. Third, when the Plaintiff, having rescinded the contract for sale to the Defendants, endeavoured to resell the Land with full disclosure of the drainage pipe, the best price it could obtain was $315,000, that is, $175,000 less than the purchase price under the contract with the Defendants. 23 The Plaintiff says that no evidence has been adduced to establish that the drainage line is the subject of an easement or quasi-easement. The Plaintiff says that the drainage line may exist by right of a licence revocable at the will of the owner of the Land from time to time and that such a revocable licence is not a defect in title. 24 I am unable to accept the Plaintiff's submission. The ownership of the drainage line has not been established, despite inquiries by the parties. It was certainly in existence when the Plaintiff acquired the Land in 1994 because the drainage line is shown in engineers' drainage drawings and plans which were submitted to the Council in support of the Plaintiff's Development Application in 1995 and 1996. It is clear that the drainage line carries a substantial volume of water and that its continued existence is necessary. 25 Further, when the Plaintiff in April 2005 sought the Council's permission to remove the pipeline from the Land, the Council refused, asserting that the line had been installed by it pursuant to s.241 of the Local Government Act 1919 (NSW). 26 In my opinion, the continued existence of the pipeline, at the very latest since 1994, and the purpose for which the Council insists on its continued use and presence on the Land, place the pipeline in that category of rights which may be called quasi-easements. 27 In my view the facts to which the Defendants point, and to which I have referred above, amply support the conclusion that the drainage pipeline constitutes a substantial latent defect in title which would justify the Defendants in rescinding the contract. Election

28 The question now arises whether the Defendants elected against rescission. To constitute an irrevocable election between inconsistent rights, a party with knowledge of the facts giving rise to the inconsistent rights must unequivocally do or say something consistent with the exercise of only one of those rights: see, for example, Sargent v ASL Developments Limited (1974) 131 CLR 634. 29 The Plaintiff says that the Defendants' letter of 25 January 2005 constituted an unequivocal and irrevocable election to affirm the contract, rather than exercise the right of rescission which they had by reason of the latent defect in title. The Plaintiff points out that, by the time that letter was written, the Defendants knew of the existence of the drainage pipe and the cost of its removal. If knowledge of the existence of their inconsistent legal rights arising from those facts is required, that knowledge is supplied in that all of the relevant facts were known to their solicitor, who was their agent in the conveyancing transaction and who must be assumed to have advised them on their rights in relation to the purchase and under the contract. 30 The Defendants say that for two reasons there was no election made by the letter of 25 January. First, they say, the Defendants did not have two inconsistent rights between which to choose. Special Condition 9.3 of the contract deprived them of any right to rescind or to claim compensation under the contract. Therefore there was neither a right to rescind, nor a right to claim compensation under the contract. 31 If this submission is correct, it leads to the conclusion that the Notice of Rescission of 2 February 2005 given by the Defendants must be invalid in any event because that right of rescission had been taken away by Special Condition 9.3 of the contract. 32 However, I do not think that this submission is correct. I do not think that Special Condition 9.3, which is to be construed against the Plaintiff, is directed to remove a right of rescission afforded by the common law for a defect of title of the kind discussed in Flight v Booth and Torr v Harpur. To effect such a drastic and unfair foreclosure of rights against a purchaser, clearer words would be required than are employed in Special Condition 9.3. 33 In my view, as at 25 February 2005, the Defendants had a choice between rescinding the contract and reclaiming their deposit or, on the other hand, affirming the contract in all of its terms and making a claim for compensation under Clause 7. As the Plaintiff points out, the choice is not between rescinding and making a compensation claim which is bound to succeed; rather, it is between rescission and making a claim in accordance with the terms of the contract, whether or not the claim succeeds. 34 The Defendants' second submission is that the letter of 25 January did not clearly and unequivocally elect for a compensation claim under the contract rather than rescission. They point to paragraph 2 of the letter which requests a reduction of the purchase price. The Defendants say that this is an offer to treat for a new contract, which could only be made if the existing contract had been rescinded. 35 I am unable to accept this submission. The words of paragraph 1 of the letter are clear. The Defendants, "hereby seek compensation pursuant to the applicable provisions of the contract in the amount of $40,000". Then follows a submission about why certain of the contractual terms are inapplicable in the circumstances of the case. In the light of paragraph 1, paragraph 2 is to be read as a suggestion as to how the claim for compensation might be accommodated - perhaps in a way which could save the Defendants some stamp duty if a new contract was entered into at a lower purchase price. 36 In my view, the Defendants' letter of 25 January 2005 constitutes an irrevocable election to affirm the contract. It follows that their Notice of Rescission of 2 February 2005 was invalid and that the Plaintiff validly terminated the contract on 7 March 2005. The Plaintiff is therefore entitled to damages for the Defendants' breach of contract, being the difference between the contract price at which the Plaintiff sold the Land to the Defendants, and the price at which it sold to a third party in August 2005. Mitigation

37 There was some perfunctory evidence that, after rescinding the contract with the Defendants, the Plaintiff had declined an offer for the Land of $430,000. The terms of that offer and the reason for its refusal by the Plaintiff were not explored in the evidence or in submissions. I cannot in those circumstances conclude that the Plaintiff acted unreasonably in refusing the offer so that it can be held to have failed to mitigate the damages flowing from the Defendants' breach of contract. Return of deposit

38 The Defendants claim return of the deposit under s.55(2A) of the Conveyancing Act 1919 (NSW). The Plaintiff says that there is no reason to make such an order. 39 The Defendants say, first, that they were placed in a very difficult situation through no fault of their own when they discovered that land on which they hoped to build a house was so adversely affect by the existence of a drainage pipeline. Secondly, they say, the Plaintiff knew of the existence of the drainage pipeline by reason of the knowledge of its engineers who, in 1995 and 1996, certainly knew of its existence. Third, the Defendants say that if the Plaintiff were to retain the deposit, it would derive an undeserved windfall because the price payable by the Defendants for the Land under their contract with the Plaintiff was $175,000 more than its market value when the existence of the drainage pipe had been disclosed, as evidenced by the price at which the Plaintiff was able to resell the Land in August 2005. 40 I do not find it necessary to decide whether the Plaintiff, through its engineers' knowledge in 1995 and 1996, had in 2004 imputed knowledge of the existence of the pipeline. In my view, the other two considerations upon which the Defendants rely amply warrant the conclusion that it is just and equitable to order that the deposit be repaid. In reaching that conclusion, I am guided by the decision of the Court of Appeal in Lucas & Tait (Investments) Pty Ltd v Victoria Securities Limited [1973] 2 NSWLR 268 at 272 and, particularly, by the decision of Young J, as his Honour then was, in Eighth SRJ Pty Ltd v Merity (1997) 7 BPR 15,189 at 15,2001. Orders

41 It will be necessary for the parties to bring in Short Minutes of Order reflecting these reasons for judgment. I will then hear argument as to costs.

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