Plaintiff v Defendants

Plaintiff v Defendants - [2011] VSC 242 - VSC 2011 case summary — Zoe

[61]

(a) It is almost 9 months since the Receivers advertised the commencement of a process to find a suitably qualified and capitalised replacement responsible entity for the Schemes on 7 September 2009. No party saw merit in attempting a restructure.

(b) Any replacement responsible entity forming its won [sic] view as to the commercial opportunity for recapitalising the Schemes will need to reflect on the fact that some external leases were terminated many months ago, some internal head leases have already been terminated, almost all internal leases are in default, some areas have not been planted, and the economies of scale on managing the forestry estate as a whole no longer exist as a result of the fragmentation of responsibility of the schemes.

(c) To that end, any proponent should have regard to the solvency and viability reports that accompanied the Notices, which reports identified funding deficiencies of approximately $33 million and $20 million respectively across the life of the Schemes. This obviously assumed that all head leases continued and the Schemes were not restructured, but reflected the economies of scale achieved by Great Southern.

(d) The experience with convening meetings to replace GSMAL as responsible entity of other schemes suggests that the ability of proponents to requisition scheme meetings, put well formulated proposals to Growers and achieve the requisite majorities is challenging, to say the least.

(e) The interests of the Great Southern landlords and their creditors are not served by deferring termination where events of default exist, and waiting indefinitely for a proposal to be formulated, and approved, pending an application for relief from forfeiture. Nor is it incumbent on them to do so.

(f) If growers wish to prevent termination of the head leases, then in advance of a proposal to replace the current responsible entity, GSMAL should be put in funds to cure any curable events of default. This could be achieved in a far shorter period of time than the appointment of a replacement responsible entity in order to give effect to any desire on the part of the growers to remedy the defaults. If your clients wish to pursue this alternative you should speak to the liquidators of GSMAL.

(g) Our clients cannot draw any reasonable comfort as to the preservation of head leases until an enforceable undertaking is given by an entity of substance that relates to all property the subject of each internal head lease.

(h) Further, we do not understand why it is necessary for any relief from forfeiture application to await the proponent being appointed as the replacement responsible entity. GSMAL already has an existing ability to seek relief from forfeiture, as do Growers themselves.

(i) We presume that any proponent will have regard to the issue of whether members with forfeited woodlots (by reason of termination of head leases) are entitled to vote at meetings of growers, and if so, how their interests should be valued. You will recall that the Receivers obtained directions on these issues from the Supreme Court of Victoria.

(j) To the extent that a proponent is considering replacing GSMAL as RE in anticipation of realising value out of a sale of the land estate assets, they should note that while the Receivers currently propose to realise the land estate in due course, that sale may or may not involve the sale of timber in connection with the schemes in general or these Schemes in particular, and may not require a surrender of head leases and subleases for value. Further, the proponent should not assume that the Receivers are committed to realising all of the land estate in any sale.

[92]

The determination of every case depends upon its own facts. The meaning of the agreement between the parties must be discovered objectively. Where there is suggested ambiguity or vagueness or where it is urged that a term is illusory, it may sometimes be both necessary and appropriate to have regard to extrinsic evidence in order to give meaning to that to which the parties have agreed: see, eg, Kell v Harris (1915) 15 SR (NSW) 473 at 479; 32 WN (NSW) 133 at 136 and Raffles v Wichelhaus [1864] EngR 150; (1864) 2 H & C 906; 159 ER 375.
The court will endeavour to uphold the validity of the agreement between the parties: see Hillas & Co Ltd v Arcos Ltd. The court will attempt to avoid frustrating the wishes of the contracting parties so far as those wishes may be ascertained from the agreement between them: see Meehan (at 589); see also Barwick CJ in Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd [1968] HCA 8; (1968) 118 CLR 429 at 437 where his Honour said that: "... In the search for that intention, no narrow or pedantic approach is warranted, particularly in the case of commercial arrangements."
But the court will not do so, where, in effect, it is asked to spell out, to an unacceptable extent, that to which the parties have themselves failed to agree. Nor will the court clarify that which is irremediably obscure. Most particularly, the court will not accept for itself a discretion which the parties have, by their agreement, reserved to one or other of them. To do so would not be to effect the contract but to change it: Kofi-Sunkersette Obu v A Strauss & Co Ltd [1951] AC 243 at 250 (PC).
Views will differ about the classification of the challenged provision and whether the court can or cannot give effect to it. Usually, there is no objectively right decision in these cases. That fact is illustrated by the frequency with which there are strongly expressed differences of judicial opinion concerning whether the case falls on one side of the line or the other. So it was in Placer Development where Kitto, Taylor and Owen JJ found that a clause in an agreement with the Commonwealth relating to a conditional entitlement to a subsidy was unenforceable. Menzies and Windeyer JJ dissented. Likewise in this case, Hope JA and Allen J have reached their respective views that the clause fell on one side of the line. Respectfully, I differ and agree with McHugh JA.
Nevertheless, the differences of result are not simply the result of differing judicial opinion based on nothing more than personal predilection. True, it is possible that behind the willingness of courts to fashion with precision a term which the parties have failed or neglected to clarify could be analysed in terms of differing fundamental attitudes concerning the role of courts in disturbing the economic relations of contracting parties. I say no more of that. Alternatively, it has been suggested that the willingness of courts to give content to the expression "subject to finance" in land title conveyancing transactions derives from the special nature of such transactions. In them, judges, familiar with the incidents of such contracts, feel confident that they can fill the gaps which the parties have left. In other cases, less familiar, they do not: see, eg, the comment by Professor K C T Sutton,"Certainty of Contract" (1977) 7 Qld Law Soc J 5 at 11. However that may be, the court will pay regard to features of the agreement, of the relationship between the parties and of relevant external reference points in order to determine whether the term which is challenged can or can not be sustained.
Matters which have been considered relevant in the determination of these cases include the following:

[123]

(1) The statutory provisions applicable in each State are remedial in nature and should be construed as for the sole benefit of the lessee. The authorities relied upon by Primary to establish that the statutory requirements exist for the protection of tenants and to preclude forfeiture of a tenant's interest in property within the sphere of the section's operation except in accordance with its terms are usefully summarised in Macquarie International Health Clinic Pty Ltd v Sydney South West Area Health Service;[4] Fletcher v Nokes;[5] Fox v Jolly;[6] Progressive Mailing House v Tabali;[7] World Best Holdings Ltd v Sarker.[8]

(2) Consequently, the provisions must be interpreted by reference to their remedial object and purpose.

(3) The parties to a lease may not contract out of the benefit conveyed on the lessee by the statutory provisions.[9]

(4) Strict compliance with the requirements for a statutory notice is a precondition to an effective forfeiture or re-entry.[10]

(5) The statutory notice provisions in each relevant jurisdiction include three broad elements:

(a) Where the lease and breaches within the sphere of its operation, the provisions require a compliant notice before termination.

(b) The notice must specify the particular breach complained of; and if the breach is capable of remedy, require the lessee to remedy the breach; and in any case, require the lessee to make compensation in money for the breach.

(c) That following the service of a compliant notice the landlord may only terminate the lease if a reasonable time has been given to remedy the breach, if it is capable of remedy, and to make reasonable compensation in money, to the satisfaction of the lessor.

(6) When drafting their notices, the lessors had failed to comply with their primary obligation to describe the particular acts or omissions of the alleged breach (and any demand for compensation) fairly, precisely and with such reasonable certainty that the lessee was not left in any doubt as to what was alleged against it and what was required to avoid forfeiture.[11]

(7) A notice of default must be particularised so that the lessee is informed of the 'particular condition of the premises which he was required to remedy'.[12]

(8) The lessor must draft the notice as if the lessee were an uninformed stranger. In other words, the lessor was not entitled to make assumptions as to the subjective knowledge of the lessee in order to remedy omissions in the notice.

(9) The statutory provisions required each lessor to serve compliant notices of default on each sub-lessee, or in the present cases, the growers.

[171]

Now the schedule is attacked on several grounds. It is said that it does not tell the tenant what it is he ought to do in order to remedy the breach of which the complaint is made. I am not prepared to accede to that view of the schedule. But even if it did not, I can find nowhere in the section any words which cast upon the landlord the obligation of telling the tenant what it is that he must do. All that the landlord is bound to do is to state particulars of the breaches of covenants of which he complains and call upon the lessee to remedy them. The means by which the breach is to be remedied is a matter for the lessee and not for the lessor. In many cases specification of the breach will of itself suggest the only possible remedy. For example, complaint that a covenant to paint or to paper has been broken can only be met by painting and papering. But it does not follow that this is always so. A particular covenant to keep the roof watertight, if broken, would be sufficiently defined by a reference to the covenant, a statement that the roof had not been kept watertight, and that the tenant was required to remedy the omission; the means by which this could be accomplished would be for the tenant to determine.[18]

...

I think the notice which is to be given under s.14 ought to be such a notice as will enable the tenant to understand with reasonable certainty what it is which he is required to do. I do not mean that the landlord need go through every room in a house and point out every defect. But the notice ought to be so distinct as to direct the attention of the tenant to the particular things of which the landlord complains, so that the tenant may have an opportunity of remedying them before an action to enforce a forfeiture of the lease is brought against him.[19]

...

I have only to add that it would be very unfortunate if, in every case where a landlord was serving notice under s.14, he should feel himself bound to obtain a surveyor's detailed specification of the work to be done. It would greatly increase the cost which, if the work were performed by the tenant before proceedings were instituted, would fall on the landlord, or, if the tenant were compelled to obtain relief, would, by the Act of 1892, fall upon the tenant.

I am glad to think that no such obligation is imposed by the statute.[20]

[182]

He must specify the particular breach of the covenant in question. What he has to do is to give a notice specifying the particular breach of a covenant in the lease of which he makes complaint. If the breach complained of be breach of a covenant to repair, the obvious intention of the Legislature is that the attention of the tenant shall be particularly called to the particular condition of the premises which the tenant is required to remedy, so that he may remedy it if he be so minded. The right of re-entry or forfeiture arises upon neglect on the part of the tenant to remedy it if he be so minded. The right of re-entry or forfeiture arises upon neglect on the part of the tenant to remedy the condition of the premises to which his attention is thus called. It is not, for instance, sufficient that the lessor should give the tenant notice that he has broken the covenant to repair. The tenant is entitled to know how he is said to have broken it. For instance, that he has broken it by not reglazing broken windows, or by not rebuilding a demolished party wall, or by not keeping the roof in proper repair. But the lessor is not bound to go on and say the broken windows are situate at such and such places or the repair which the roof requires is to replace so many tiles or slates found in such and such positions. The notice must be one which calls the tenant's attention to the particular condition of the premises which is alleged to be defective. It need not identify every defect in the conditions to which attention is called. The breach of a covenant must arise by either doing or neglecting to do some act. The particular breach complained of is specified when the act which the tenant has done or which the tenant has neglected to do is specifically pointed out. This is done when the lessor says you have not repaired the roof or you have not glazed the windows. The argument has largely proceeded in my opinion upon a confusion between two things which are distinct, namely, specifying the particular breach complained of and giving particulars of the breaches complained of.

[222]

Before the passing of the Conveyancing Act of 1881, a right of re-entry reserved in a lease conditional upon breach of a covenant to repair could be enforced by the landlord at common law without the tenant having opportunity to meet the complaint, and often without his knowing that the breach had in fact occurred. It is true that the Courts of Equity attempted to mitigate the harshness of this procedure, and in several reported cases restrained the landlords from exercising their rights where the breach was one which, by accident or surprise, the tenant had been unable to rectify. There was, however, no general rule relating to such relief on which reliance could be placed. In these circumstances the Conveyancing Act of 1881 was passed, and it was to extend and render certain the rights of tenants in such cases that s 14 of that statute was framed. Sub-s 1 of that section is in the following terms:-

"A right of re-entry or forfeiture under any proviso or stipulation in a lease, for a breach of any covenant or condition in the lease, shall not be enforceable, by action or otherwise, unless and until the lessor serves on the lessee a notice specifying the particular breach complained of, and, if the breach is capable of remedy, requiring the lessee to remedy the breach, and, in any case, requiring the lessee to make compensation in money for the breach, and the lessee fails, within a reasonable time thereafter, to remedy the breach, if it is capable of remedy, and to make reasonable compensation in money, to the satisfaction of the lessor, for the breach."

The effect of this sub-section is plain. The right of re-entry which the lessor enjoys on the breach of a covenant is not capable of being exercised against the lessee until the conditions in that sub-section have been satisfied. If such condition were not satisfied and entry were attempted at common law, such entry would be a trespass; if proceedings were instituted to obtain possession they would be instantly demurrable. That is the meaning of the phrase, "shall not be enforceable by action or otherwise." Now the conditions precedent which the lessor must perform are these. He must serve a notice, and that notice must specify the breach of covenant which is the subject of complaint. That is, he must point out the covenant which he says is broken, and he must specify the breach of which he complains. He must also call upon the lessee to remedy the breach, and if he requires compensation in money he must ask for it. After this has been done a reasonable time must elapse in which the lessee has the opportunity of complying with the requirements of the notice. It is only when this has been done, when the time has expired, and the work is incomplete, that the landlord can proceed to the assertion of his rights. [36]

[260]

In Re Investa Properties Ltd [2001] NSWSC 1089; (2001) 187 ALR 462 at [11] Barrett J said that ss 601FS(1) and 601FT(1) were drafted in a particularly economical way but appeared to be intended "to cause an incoming responsible entity to step into the shoes of its predecessor". However, he observed that nowhere in Div 3 was there a reference to "property". And he suggested that Div 3 did not seem to affect a statutory form of vesting or assignment of property generally. Barrett J contrasted this with the provisions of s 601FC(2) that declared that the responsible entity holds scheme property on trust for scheme members. "Scheme property" and "property" are defined in s 9 as including contributions of money or money's worth to the scheme and any legal or equitable estate or interest, (present, future, vested or contingent) in real or personal property of any description (including a thing (or chose) in action) acquired directly or indirectly with the proceeds of such contributions of money or money's worth: Re Investa [2001] NSWSC 1089; 187 ALR 462 at [11]- [12]. Barrett J did not need to decide the question of the precise operation of ss 601FS and 601FT.

I agree with Barrett J's initial description of those sections as enabling the new responsible entity to step into the shoes of the old. Scheme property can be held in the name of a responsible entity in accordance with the provisions of the scheme. A trustee always has rights, obligations and liabilities, defined by the terms of the trust, in respect of trust property. I am of opinion that Div 3 of Pt 5C.2 provides for an automatic statutory novation in favour of the new responsible entity in respect of all rights, obligations and liabilities of its predecessor. The novation also applies to all contracts and any other documents to which the former responsible entity was a party (ss 601FS(1), 601FT(1)). The evident purpose of Div 3 is to facilitate a change of responsible entity occurring in such a way that the conduct of the scheme is not disrupted. Of course, ss 601FS(2) and 601FT(2) recognise that the former responsible entity retains any rights, obligations and liabilities that had accrued, or applied, to it prior to the change. The change in responsible entity becomes effective when ASIC's records name the new responsible entity in place of the former under s 601FJ. However, any property right requiring registration, such as in Torrens title land, held by the former responsible entity will vest in equity in the new responsible entity immediately on the creation of the new ASIC record by force of Div 3 of Pt 5C.2, but will only vest in law when it is registered (see s 1336(3)).

It is vital that the words "rights, obligations and liabilities" in Div 3 of Pt 5C.2 be given a broad construction so as to achieve the evident legislative purpose of facilitating an immediate and seamless change of the responsible entity of a scheme whenever ASIC records the new entity's name in its record of a registered scheme.

Timbercorp argued that the words "in relation to the scheme" in s 601FS(1) covered only rights arising from or forming part of the matrix of legal relationships making up the scheme, including those derived from its constitutional documents. It suggested that those words should not be given too broad a reach and that s 601FT(1), because it worked with s 601FS(1), was implicitly confined to documents concerning the scheme.

I reject that argument. The expression "in relation to" is of wide and general import and should not be read down in the absence of some compelling reason to do so: Fountain v Alexander [1982] HCA 16; (1982) 150 CLR 615 at 629 per Mason J. In Syncap Management (Rural) Australia Ltd v Lyford [2004] FCA 1352; (2004) 51 ACSR 223 at [46] RD Nicholson J held that "in relation to" as used in s 610FS(1) was an expression of wide import and signified no more than some relationship or connection. As Lindgren J noted, however, the rights, obligations and liabilities of the former responsible entity to which each of ss 601FS(1) and 601FT(1) apply, are impliedly limited to those capable of having an ongoing operation after the change in responsible entity: Re Huntley Management Ltd; Australian Olive Holdings Pty Ltd v Huntley Management Ltd (2009) 76 ACSR 256 at [85].

Ordinarily, the scheme would give the responsible entity a legal, and possibly a larger, right to hold scheme property, such as land, in its name. But, by force of ss 601FJ, 601FS(1) and 601FT(1) that right necessarily passes to the new responsible entity on a change becoming effective. In most cases one could expect that control and ownership of scheme property finds its ultimate source in the scheme constitution. Ordinarily, that will identify the basis on which scheme property is held by the responsible entity.

I am of opinion that ss 601FS(1) and 601FT(1) create a means of ensuring that rights to hold, and rights "in relation to", scheme property pass to and vest in the new responsible entity. This is because ss 601FJ, 601FS(1) and 601FT(1) cause all rights of the former responsible entity "in relation to the scheme" to pass to the new one once changed: cf City Pacific Ltd (in liq) v Ballandean Investments Pty Ltd [2010] QCA 113; (2010) 78 ACSR 110 at [23]- [26], per Holmes JA with whom McMurdo P and Chesterman JA agreed and Capelli v Shepard [2010] VSCA 2; (2010) 4 BFRA 210; 264 ALR 167 at [143], [148] per Dodds-Streeton and Mandie JJA and Byrne AJA; Treecorp Australia Ltd (in liq) v Dwyer [2009] FCA 278; (2009) 175 FCR 373[PDF] at [46], [48] per Gordon J. Likewise, those sections novate obligations and liabilities of the former responsible entity "in relation to scheme property" in the new responsible entity. The language of those provisions suggests that the Parliament had novation, not merely assignment, in mind: (1969) 120 CLR 365[PDF] at 388-391 per Windeyer J especially at 388; see too Goodridge v Macquarie Bank Ltd ; at - where I discussed the distinction between novation and assignment in contract.

Here, the statutory scheme in Div 3 of Ch 5C.2 is clearly intended to apply to a change of, and effect a transfer between, responsible entities in all situations so as to ensure that the incoming one has the fullest and most effective control of the whole of the scheme and scheme property at the instant that s 601FJ gives effect to the change. This will be achieved by giving a purposive and broad construction to the expression "in relation to the scheme" in applying ss 601FS and 601FT. [54]

[287]

(1) The tenant ceased management activities in relation to the plantations with the collapse of the Group. Its position, publicly stated by the receivers and subsequently the liquidator, was that it did not have the funds to continue management of the plantations.

(2) When notices of default were ultimately served on the tenant it did nothing. There was no application for relief against forfeiture and no attempt to recommence management activities in relation to the plantations. The tenant did not contradict its earlier position namely, that it did not have the funds to undertake management activities.

(3) Following termination, the tenant made no application for relief against forfeiture.

(4) While it might be argued that Primary did not delay in bringing an application for relief against forfeiture, the failure of the tenant to make any such application following the service of notices of default, although explicable having regard to its financial position, should be taken into account as a factor militating against the grant of relief.

(5) Against a background of inaction by the tenant, the landlords commenced to undertake a sales process in respect of the land on 10 June 2010. On 17 December 2010 they entered into a contract of sale for the land. That contract was due for completion on 27 January 2010 but was delayed because of caveats lodged by Primary. The delay is causing substantial financial prejudice to the landlords.

(6) The grant of relief against forfeiture would have the effect of rewriting the commercial bargain between the landlords and the tenant. The rent payable under each lease is calculated as a percentage of the proceeds of sale of the trees at harvest. Primary is in effect 'cherry picking' plantations and leases for its restructured scheme.

(7) The financial capacity of Primary to undertake the restructured project, perform the necessary remediation works and achieve a return for investors is at best, uncertain. The plantations, as a whole, have only marginal viability and the likelihood is that the scheme will fail. Thus, the landlords will be tied to a tenant for perhaps 10 or 15 years, if renewal options are exercised, at a reduced rental.

(8) Some of the leases are for land used in schemes other than the 2007 Scheme for which Primary is now Responsible Entity. Thus, Primary's application for relief against forfeiture is based upon an interest in only part of the lease. Any application for relief against forfeiture, in such circumstances, must be an application made by all tenants. If and insofar as Primary may be taken to have a right to make application for relief against forfeiture, such right is confined to only those parts of the lease applied in the 2007 Scheme. The tenant is not an applicant in respect of the balance.

[300]

In my opinion the CWSA (the water supply contract) is an "entire" agreement and does not accommodate an apportionment. There are several indications of this. First, there is the point made by Huntley that AOL could not, consistently with its contractual obligations, have reduced the amount of its liability by irrigating only certain Groves or Projects.

Second, there is the impracticability of different REs having access to Lot 11 and the Pumping Equipment and Reticulation Equipment on it (owned by AOL) to irrigate the different Projects for which they were hypothetically responsible.

Third, there are the references to "the Projects" (in the plural) in, for example, cl 7.1(a)(i) and the definition of "Land" in the Dictionary (Sch 1) as "the land from time to time on which Projects are established, excluding the Water Land." The references suggest all of the Projects and all of the Land as a whole.

Fourth, I construe the CWSA as providing for supply from the Lagoon, yet the evidence shows that it is not physically possible for all of the Projects in the Groves to be supplied from the Lagoon in equal measure. Projects 5 and 6 could not be irrigated from the Lagoon because there was no pipe work across Speers Creek to convey the water to those Projects. More precisely, the evidence was that of the land the subject of Projects 5 and 6, the Lagoon could irrigate only 18% of Project 5, because it is only that 18% that is on the north-western side (the Lagoon side) of Spiers Creek.

The CWSA is to be construed in the light of the physical environment to which it was directed, and in the light of the evidence just mentioned it would not have made sense for the parties to have agreed that the water from the Lagoon was to be treated as supplied on a per Project or per Grove basis when, generally speaking, water from the Lagoon could not irrigate certain Groves at all.

It will be noted that while this fourth point is relevant to the construction of the CWSA, even if severance was possible it would also militate against the per hectare formula adopted by AOHL.

For the above reasons it was not open to AOHL to sue Huntley on the basis of a liability to pay a pro rata part of a CPI-adjusted base fee of $1,490,000. [68]

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