Melacare International v Daley Investments

20 - - - 1 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

2015/99 MELACARE INTERNATIONAL LTD (In Receivership) v DALEY INVESTMENTS PTY LTD

1 HIS HONOUR : The plaintiff sues for relief against the forfeiture of interests relating to "Round Mountain" a property said to comprise 651.3 hectares in the Copmanhurst Shire with a plantation of tea trees which produce leaf for oil. A Receiver and Manager of the plaintiff was appointed by a secured creditor on 24 March 1999. The defendant granted a lease of the property to Melacare Industries Australia Limited in 1993 for a term commencing on 18 August 1993 and expiring on 30 June 2008. The defendant's title is largely freehold, although one part is a permissive occupancy. The lease was registered 0871322 and a variation dated 7 September 1995 was registered 0871323. The defendant granted to Melacare Industries Australia Limited by Deed dated 17 August 1993 an option to purchase to be exercised by 30 June 2008 on written notice and payment of $100,000, whereon the property was to be sold for $1,000,000. 2 The varied lease and the option were assigned to the plaintiff with the consent of the defendant by Deed of Assignment of 22 July 1997. The plaintiff's obligations were supported by Guarantees of Mr Steven Rose and Mr Harry Hollis 3 The plaintiff claims relief against a forfeiture brought about by a notice delivered by the defendant's solicitors to the plaintiff on 9 April 1999. By claiming relief against forfeiture the plaintiff admits and alleges that the forfeiture was effective. The defendant has since delivered other notices to deal with some perceived possible defect. 4 In Clause 14.1 of the Lease, which deals with default and termination, there is a provision (Clause 14.1(d)) to the effect that there is a default if a Receiver and/or Manager of any of the assets of the lessee is appointed, and in that case it is provided that the lessor may: "(ii) (Determination by Notice): by notice in writing to the Lessee determine this Lease and from the date of giving such notice this Lease shall be absolutely determined;….". These provisions brought about a forfeiture of the leasehold interest when a Receiver and Manager was appointed; a contractual termination of a valuable leasehold with many years to run must be characterised as a forfeiture of an interest in land. 5 Clause 14 of the lease brings about termination after appointment of a Receiver and Manager without the occurrence of any act or omission of the lessee, or any breach by the lessee of an obligation; termination can be effected when the stated conditions exist without any act, omission or breach and sub-section 133E(2) of the Conveyancing Act, 1919 does not apply. The secured creditor has expressed qualified readiness to withdraw the Receiver, but has not done so. Withdrawal would not alter what has happened. 6 In Clause 10 of the Deed of Option there is a provision to the effect that if either party has a Receiver and Manager appointed there has been an act of default and the non-defaulting party may terminate the agreement forthwith by written notice. I would also characterise Clause 10 as bringing about a forfeiture, but in my opinion the jurisdiction to relieve does not extend to the Option because the Deed of Option does not create an interest in land. The characterisation of an option, even when granted for consideration as in this case, as being or not being an interest in land is difficult and the grounds of the characterisation are sometimes obscure. The parties took care to create the option by a separate transaction and did not annex the option to the lease or make it run with the interest of the lessee. It was a personal right of the grantee; this is emphasised by the means adopted for the option to be assigned in a transaction in which the grantor was a party, in substance a further grant of an option. The option conferred no element of control over the land in the period before it was exercised; and this is sufficiently explained by the existence of the lease. No aspect of the option as assigned elevates it into a present interest or distinguishes it from what on its face it is, the grant of a contractual right to acquire an interest in the land at the option of the grantee. For that reason there is no power to grant relief on its forfeiture. The relationship is wholly contractual and takes effect according to its plain terms and effect at law. 7 In any event there is no ground upon which relief against forfeiture of the option ought to be granted, or on which I would exercise any discretionary power to do so. 8 The plaintiff's counsel conceded that the plaintiff has obtained no proprietary interest pursuant to the option, and told me that the plaintiff applies for relief against the forfeiture of the lease only. In my view this concession was correct and no event shown by evidence has created any proprietary interest relating to the option. 9 The Court has power to grant Equitable relief against the forfeiture of interests in land. Where a forfeiture is based on non-payment of rent, relief is granted fairly readily, but on a discretionary basis, on the footing that the right to terminate the lease is security for payment of the rent. The Court's practice in such cases was stated by Hope J in Pioneer Quarries (Sydney) Pty Ltd v Permanent Trustee Co. of NSW Limited (1970) 2 BPR 9562. 10 The plaintiff's claim does not relate to non-payment of rent, and is advanced in the wider context of the power of a Court of Equity to grant relief against forfeiture of interests in land which was considered and expounded by Lord Wilberforce in Shiloh Spinners v Harding [1973] AC 691 at 721-725. His Lordship's observations at pp 722 and following show that there are two heads of jurisdiction; one is where the right to forfeit is essentially to secure payment of money or where relief is granted on the basis of fraud, accident, mistake or surprise; and there is also a debatable area which includes obligations in leases to repair and other obligations concerning the condition of property, covenants to insure, covenants not to assign and cases of waste. These observations have established the view that even in cases under the second head there is power to grant relief where full compensation can be made; the power extends to covenants which were consciously broken, and is discretionary. The second head raises much more difficulty than cases where the lease forfeited was security for payment of money or cases where some established ground for equitable intervention has been proved. In the same case Lord Simon of Glaisdale stated the jurisdiction of Equity more broadly. 11 The law as stated by Lord Wilberforce has been authoritatively accepted in New South Wales; see Kirby P in Minister for Lands and Forests v McPherson (1990) 22 NSWLR 687 at 691-693, including the citations at 693 from Legione v Hateley (1983) 152 CLR 406. Meagher JA agreed on this matter; see 716; and Mahoney JA reached the same conclusion on a different basis. 12 The statutory power to grant relief against forfeiture of leases created by sub-section 129(2) of the Conveyancing Act, 1919 is a discretionary power; there is no need for a lessee seeking relief to show an equitable ground for intervention. To my mind it is doubtful whether s 129 applies in the present case, having regard to its application to a right of re-entry or forfeiture for a breach of any covenant, condition or agreement in the lease. In this case the right of termination relied on does not turn upon any act or omission of the plaintiff or anything which could be called a breach by the plaintiff of a covenant, condition or agreement, or a breach capable of being dealt with by a notice specifying a particular breach and requiring remedy, such as is contemplated by sub-section 129(1). If the condition in which the right of termination occurs it occurs irrespective of any act or omission of the lessee and in circumstances where there cannot be said to have been a breach of a condition, or any breach, by the lessee or otherwise. 13 The defendant's counsel referred me to observations of Cozens-Hardy M R in Rose v Spicer [1911] 2 KB 234 at 241-242, on legislation generally similar to sub-section 129 (2): "When Parliament in 1881 empowered the Courts to relieve against forfeiture for breach of the covenants in a lease a wide discretion was given to the Court either to grant or refuse relief, having regard to the conduct of the parties and to all other circumstances, and in case of relief such terms, including the granting of an injunction to restrain a like breach in the future, may be imposed as the Court in the circumstances thinks fit. I am aware of the danger of defining the mode in which discretionary powers of this nature ought to be exercised. Yet I think it expedient to attempt to lay down some general principles. In the first place the applicant must, so far as possible, remedy the breaches alleged in the notice and pay reasonable compensation for the braches which cannot be remedied. In the second place, if the breach is of a negative covenant, such as not to carry on a particular business on the demised premises, the applicant must undertake to observe the covenant in future, or at least must not avow his intention to repeat the breach complained of. In the third place, if the act complained of, though not a breach of a negative covenant, is of such a nature that the Court would have restrained it during the currency of the lease on the ground of waste, the applicant must undertake to make good the waste if it be possible to do so. In the fourth place, if the act complained of does not fall under either the second or the third head, but is one in respect of which damages, other than nominal, might be recovered in an action on the covenant, the applicant must undertake not to repeat the wrongful act or to be guilty of a continuing breach. In short, subject only to the maxim de minimis, the applicant must come into Court with clean hands, and ought not to be relieved if he avows an intention to continue or to repeat a breach of covenant." 14 As His Lordship's observations show, the statutory power is discretionary and the manner of exercise cannot be prescribed by authority . The Court's attention is directed toward possible remedial measures, and remedial measures should be accepted if they can be expected to be effective, but not if the lessee can be expected to continue or repeat the breach of covenant. His Lordship's attempt to lay down general principles does not control the exercise of the discretion, and is not authoritative in New South Wales. 15 If the plaintiff cannot rely on s.129, the plaintiff must show some Equitable ground such as accident or mistake. There would, I would think, be such a ground if a Receiver were appointed in some circumstances which had no bearing on the lessee's financial responsibility, or on the protection of the interests of the lessor the protection of which is the purpose of the power of termination. The onus is on the plaintiff to show that its exposure to termination was in some sense an accident or a mistake, or that for some other reason it should be relieved in equity against it. This would, I would think, require that the plaintiff show that it is in a financially sound position and that the appointment of a Receiver is not in fact an indication of any circumstances against which the lessor is in need of protection by terminating the lease. 16 The Court does not have a general power to dispense with the contractual entitlements of the defendant. It is necessary to show some ground for the grant of equitable relief; one of the classic grounds such as fraud, accident, mistake or ignorance, or conduct of the defendant which over-reached the plaintiff in some way. It is necessary there should be some basis on which, proceeding by analogy to known grounds on which Equitable relief is granted, the Court should determine that it is unconscionable or inequitable for the defendant to rely on its right of termination. It is not unconscionable or inequitable to rely on a contractual right of termination. 17 To entitle the lessor to terminate the lease simply on the appointment of a Receiver might be thought to be a very strong measure, but it is the measure which the parties to the lease adopted. Its purpose plainly enough was to protect the lessor against being held in a continuing relationship with a lessee which was not financially responsible and was not able to sustain the relationship. The lessor is entitled to take this protection or let it go, at its choice. It is conceivable that there might be cases where it would be unconscionable for the lessee to determine the lease on the appointment of a Receiver because the appointment of a Receiver was not a signal for any concern about the financial responsibility of the lessee, and did not indicate any need for the lessor to protect itself. For example a Receiver of some piece of property might be appointed by order of a Court for some purpose arising in litigation although the lessee was in a completely sound financial position. It is also conceivable that a Receiver of a lessee in a sound financial position might be appointed in some abuse or oppressive use of the power of a third party creditor to make the appointment, and in that case it might be unconscionable for the lessor to rely on the appointment. 18 In the present case however there are very ample grounds for concern about the plaintiff's financial responsibility and its ability to bear the continuing financial burdens which come with the lease. Mr Nicholls, the Receiver and Manager, was appointed on 24 March 1999 by Interstate Mortgage & Investments Pty Limited, which owns a mortgage debenture registered under the Corporations Law. His evidence shows that the plaintiff is in default under that debenture. Mr Nicholls' inquiries were not complete because he has not been provided by the Directors of the plaintiff with the books and records of the company or with a Statement of Affairs, so his evidence was given in approximations, but I am satisfied that the approximations are broadly correct and sufficiently so to be acted on for the purposes of the proceedings before me. 19 The result of Mr Nicholls' inquiries was that he had established that the amount due to the first chargeholder was approximately $3.8 million. The amount may be somewhat less as the evidence of Mr Rose was that he had reduced the interest payable to the first chargeholder by several hundred thousand dollars. However that may be, there are still very significant amounts, in the context of the plaintiff's affairs, overwhelming amounts, owing to the first chargeholder for principal and interest; either over $3 million, or Mr Rose says $2.625 million, for principal as well as unpaid interest, and the plaintiff is in the hands of its first chargeholder for any respite of payment of principal. Mr Rose told me that he expected to pay the outstanding interest out of the proceeds of cropping tea tree on the plantation on Round Mountain; cropping has begun although it has been impeded by rain. Cropping could well produce large sums of cash, depending on the progress of cropping, the rain and the state of the market for the produce. 20 Mr Nicholls' evidence also showed that the amount due to a second chargeholder, Melacare Industries Australia Pty Limited is approximately $3.1 million. This represents money payable for the purchase of the lease and the plantation from the original lessee. Mr Nicholls' evidence also showed that approximately $210,000 was owing to unsecured creditors. The list of unsecured creditors on which this figure was based is not reliable in detail. Mr Rose's evidence was to the effect that he had reduced the unsecured creditors to about $180,000. He expected to pay them in the coming weeks from proceeds of the cropping. 21 An unsecured creditor has brought proceedings to wind-up the plaintiff; after the plaintiff came to terms with the original applicant those proceedings have been continued by another unsecured creditor. On the first day of the hearing before me, 13 May 1999, the Registrar adjourned the winding-up application for two weeks with a view to putting into effect some arrangement for the satisfaction of the substituted applicant. There are many other unsecured debts and they include many debts which a business which was in a position to pay its debts would certainly pay, such as obligations to Telstra, which has cut off telephone and facsimile services for non-payment, and obligations to many suppliers whose co-operation the plaintiff must need continually to conduct plantation operations. The inference is clear that the plaintiff is unable to pay its unsecured debts as they fall due, and is insolvent; indeed Mr Rose's evidence confirmed this by showing that he depends on future cropping operations to meet unsecured debts which have already fallen due. 22 The evidence shows that the plaintiff is not in a financially strong or stable position, as it has large debts, including capital debts, and large sums are overdue for interest on secured debts and also for unsecured debts. 23 Mr Rose's account of how he proposed to deal with the secured debt for interest and his unsecured debts and also his obligations yet to come due to the plaintiff related to funds which he expects to raise from the cropping venture now in progress. His explanation was to my mind of itself a reasonably clear demonstration that the plaintiff is insolvent at present. His plans assume that there will be orderly progress of cropping and realisation of cash for the crop. Mr Rose also gave evidence of some projects for re-financing secured obligations; it is obvious that these projects have not advanced to any concrete position, and that the plaintiff is still confronted by a first mortgagee who has appointed a Receiver and a second mortgagee which has sought repayment. 24 It is I think very significant that the plaintiff not only did not produce in evidence any balance sheet or books of account, but as Mr Rose's evidence makes clear, the plaintiff is quite unable to do that; books of account and a statement of affairs have not been furnished to the Receiver appointed as long ago as 24 March, and the task is still before the plaintiff's accountant to put the books of account into a position where they can be delivered to the Receiver. The substance of the matter is that I have no detailed knowledge or clear view of the plaintiff's financial position, although there are a number of indications that it is probably not in good order. 25 The defendant's counsel referred me to the judgment of Starke J in Direct Food Supplies (Victoria) Pty Ltd v D L V Pty Ltd (1975) VR 358 and in particular to the following passage at 361: "….it emerges quite clearly in my judgment that the plaintiff will be unable to pay its rent in the future or that if it does, at the expense of other creditors, the defendant may well have to disgorge such payments under winding-up proceedings. The same might well apply to any payment I now order to be made by the plaintiff to the defendant as a condition of giving relief against forfeiture. In the circumstances, it would seem to me to be not only pointless but also unjust and inequitable to give the plaintiff the relief sought." 26 It is not open to me to take exactly the same view as it is not clear that the plaintiff will be unable to pay its rent in the future or that the defendant may well have to disgorge any payments under winding-up proceedings. The circumstances in which the plaintiff's financial position is not clear are not to the advantage of the plaintiff's case; although the plaintiff was under a strong and obvious forensic need to establish its financial position and show that it can bear its present and future obligations, it did not do so and indeed the evidence shows that it is not able to do so; its records are not in a position where they can be shown to the Receiver. There actually are winding-up proceedings pending, and after coming to terms with the first applicant the plaintiff is now hoping to settle with the substituted applicant. There are many other unsecured creditors and there are strong grounds for my apprehension that any payments which the defendant receives for future rental under terms which I might impose may have to be disgorged, later or perhaps sooner, under some liquidation or other insolvency arrangement. 27 In these circumstances it is in my view clear that the plaintiff has not been making unconscionable use of its contractual entitlement, but has been proceeding in an appropriate way to protect itself by terminating the leasehold of a lessee which is not in a position to bear the financial responsibilities which come with the lease. 28 The evidence ranges much more widely. There has been a continuous history of default and late payment of rent on the part of the plaintiff since the assignment. It is perfectly clear from Clause 4.1 of the lease that rent is payable monthly in advance on the first day of each month. This obligation was reinforced by the Deed of Assignment, which recorded in Recital L assurances given by Mr Rose himself that the plaintiff would pay the monthly rent on time as well as complying with other matters, and an express contractual promise by the plaintiff in Clause 2.5 to pay the monthly rent by bank periodical deduction authority on the first of each month. The bank periodical deduction authority was withdrawn by the plaintiff after one or two payments, and there has been a long series of defaults in complying with the obligation to pay rent at the contracted time. It is only on rare occasions that rent has been paid at the contracted time, the payments have almost always been late, and there has been a long series of events in which payment was made only after delivery of a demand which pre-figured termination action. 29 Mr Rose's evidence has made it completely clear that late payment of rent has been a deliberate policy adopted with the view to obtaining the advantage of retaining money for as long as is possible and after obtaining legal advice which addressed the remedies available to the defendant in cases of default. In my view the plaintiff has adopted an altogether unsatisfactory approach to the performance of its contractual obligations, notwithstanding the undertaking given by Mr Rose himself in the Deed of Option and the emphasis given by the Deed of Option to the performance of this obligation. In this matter, the importance of which presents itself anew each month, the plaintiff is prepared to meet its obligations only under pressure, and only at a time which suits itself and does not conform to the defendant's entitlement. The adoption by the plaintiff of this policy is a mark of continued financial difficulty and of an irresponsible attitude to obligations. 30 There have been other controversies and litigation between the parties. After proceedings based on a claim by the defendant that the plaintiff was in breach of a repair covenant relating to internal drainage, the defendant obtained access to the property for the purpose of carrying-out drainage works, with the benefit of an injunction granted by this Court, and carried them out. That is to say, the defendant has had the experience that it is not able to obtain compliance by the plaintiff with repair obligations, and was not able to perform remedial work itself until it obtained an injunction. The plaintiff made complaints about the quality and effect of the remedial work performed by the defendant; these complaints were little to the point, and they were not shown to have any substance; the Environmental Protection Agency, which was set in motion in the matter, at least in part by the plaintiff, reached the position clearly recorded in correspondence that it did not contend that the defendant's measures had had an adverse effect on the environment. 31 There have been a number of conflicts between the parties arising out of their relationship under the lease, and the generally conflictual nature of the relationship is adverse to its continuance. There are several matters which require particular attention. The plantation is in a very poor state of husbandry; a report prepared in May 1997 by Mr Wilkie, an agronomist, shortly before the lease was assigned to the plaintiff shows that the state of deterioration was already advanced, and that large tracts of the plantation were unproductive. There is no reason to think that any activity of the plaintiff has improved the position; it seems to be in much the same poor state of husbandry now as it was then. 32 Some special arrangements were made on the occasion of the assignment of the lease to deal with concerns relating to maintenance and the state of the property. Recitals to the Deed of Assignment show that in 1997 the lessor had delivered a notice requiring the original lessee to carry-out work and the work was not carried-out, after which there were a Notice of Determination of the lease and litigation relating to its effect, a second Notice requiring works and another Notice of Determination; and the arrangements for the assignment of the lease followed. Recital L records assurances specifically given by Mr Rose that the plaintiff would pay the rent on time and would repair and maintain the property and otherwise comply with the terms of the lease, and there was an express term of the Deed of Assignment that the plaintiff would pay the monthly rent by bank periodical deduction authority on the first of each month. The second Notice of Breach of Covenant which the lessor had delivered to the plaintiff's predecessor was annexed to the Deed of Assignment, and the plaintiff gave a contractual undertaking to carry-out the work in the second notice within twelve months of settlement of the assignment. 33 Of seven classes of remedial work set-out in that notice it is quite clear that the plaintiff has not carried-out four of them, namely, rebuilding or replacing a concrete block retaining wall, and three requirements for cleaning channels and pipes. Mr Rose offered an explanation for not having replaced the concrete block retaining wall; although the explanation was rather elaborate, the effect of it was that he no longer wished to use the concrete block retaining wall for loading vehicles, that he now had a timber loading ramp elsewhere, and that an expert had told him that the reconstructed retaining wall would not be useful. The short position is that for reasons which he thought sufficient he decided that the plaintiff would not conform with this contractual requirement. 34 With respect to cleaning the channels Mr Rose offered an excuse in terms of a recommendation from an Environmental Protection Authority officer which did not constitute a statutory direction, and which later experience shows could be overcome as the plaintiff with the assistance of an injunction entered the property, carried-out work on the channels, and eventually received correspondence from the Environmental Planning Authority confirming that no adverse action would be taken; the officer who communicated with Mr Rose was " taken off the case ". In this case too the plaintiff did not conform to its contractual obligations and did not find means to do so, although such means could be found. A train of unfortunate events has been set off by the defendant's concern for clearing the channels; Equity litigation and an injunction, work done by the defendant to which the plaintiff ought to have attended in whatever way was proper, and a further damages claim by the plaintiff against the defendant as a result. 35 Other aspects of the relationship under the lease have been very unsatisfactory, although in money value they could be thought of as relatively minor. The plaintiff has not shown real readiness to conform to its obligations relating to time of payment of rent, and this disturbs confidence that the plaintiff will conform with any other obligations, including obligations which I might impose as a term of relief. There is no history of ready and uncompelled compliance with the plaintiff's obligation to pay rent. The plaintiff's counsel offered on its behalf to submit to any terms or give an undertaking which the Court required for performance of obligations under the lease. I lack confidence that such arrangements would be complied with. 36 Another matter, small but potentially very serious, is the long course of difficulties experienced by the defendant in obtaining evidence of insurance; Mrs Daley's evidence shows that the plaintiff did not respond in any reasonable way to its obligations and engaged the defendant in a long series of appearances in a Local Court, plainly with the object of deferring or it may be avoiding a small obligation, and then did not pay $180 for many months until one or two days before the hearing. 37 In view of the plaintiff's poor record of compliance with obligations I do not regard it as just to require the relationship to continue on terms that the plaintiff comply with obligations under the Lease. I see little point in spelling-out in what may well be a long and complicated order obligations with which the plaintiff should already comply, and (it may be) embarking the Court on supervision of them. If the process is elaborate, or if detailed attention by the Court is required to obtain compliance with contractual obligations, it were better that the relationship were not continued. 38 The plaintiff has tenant rights under Clause 19.2 of the Lease which will ensure that it can realise the current crop notwithstanding termination. 39 The history of the relationship of lessor and lessee between these parties is one of continued and studied breach of obligations by the plaintiff, and of continued conflict, involving litigation. These circumstances strongly incline me against any discretionary decision which would have the effect of continuing the relationship and overriding the contractual right to bring it to an end. In my view my discretion should be exercised against any course which would compel the defendant to have continued dealings with the plaintiff. 40 The proceedings are dismissed with costs. *********

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