Plaintiff v Second Defendant

Supreme Court of Victoria|2008-12-19|Before: BYRNE J

VENDOR AND PURCHASER - Rescission - Notice of Rescission - Notice to Complete - Whether vendor ready to complete - Property subject to charge - Whether vendor discharged securities - Whether purchaser in default by non-payment of balance.

**1 The plaintiff, the Naval and Military Club ("the vendor") seeks the removal of caveat number 808830N from the title to the land situate and known as 27 Little Collins Street, Melbourne and being the land more particularly described in certificate of title volume 9254 Folio 806. The defendant, Southraw Pty Ltd ("the purchaser") on 29 April 2008 lodged a caveat to protect its interest as purchaser of the land under a contract of sale with the vendor dated 16 April 2008. The fact of the contract of sale is not in issue; the case of the vendor is that the contract of sale has been rescinded so that the caveat is no longer maintainable. This is the question for my determination in this litigation.

2 There are in fact two proceedings. In the first, No 9105 of 2008, commenced on 13 October 2008, the vendor contends that the contract of sale was rescinded following the failure of the purchaser to settle following a notice of rescission given on 22 September 2008 which expired on 6 October 2008. The vendor on 14 November 2008 served another notice of rescission which expired on 28 November 2008. In the second proceeding, No 10073 of 2008, commenced on 3 December 2008, it relies upon the failure of the purchaser to settle by that date.

3 Although the vendor has brought the two proceedings by originating motion seeking summary relief, it was accepted that there was little, if any, factual dispute between the parties; the issues arose from the correspondence and the documents which were themselves not in issue. I will therefore determine the rights of the parties.

4 The contract of sale dated 16 April 2008 is one under which the vendor agreed to sell the land to the purchaser for $9.3M on terms that included payment of $500,000 deposit and the balance in 90 days. The intent of the parties was that the purchaser would demolish the existing building and erect a new 24 storey building of which part would be sold back to the vendor for use as its club premises. The contract contained provision for the purchaser to grant a licence to the vendor to occupy the property until 19 January 2009 on which date demolition might commence.

5 Settlement under the contract was due on 15 July 2008. By a deed of variation dated 9 May 2008 the parties agreed that the deposit be paid in three instalments - $10,000 on the date of contract, $90,000 on or before 8 May 2008 and $400,000 upon settlement, the date of which was now fixed at 16 July 2008.**

**6 The purchaser failed to settle on 16 July 2008 and the vendor gave a notice of rescission on 14 August 2008 expiring on 28 August 2008.

7 Notwithstanding this, the parties entered into a second deed of variation dated 9 September 2008 under which the price was increased by $250,000 to $9.55 million and the date for settlement further moved to "9 September 2008 or earlier by mutual agreement".

8 Other changes to the contract of sale made by this second deed were that the vendor agreed to lease the land to PMQS Pty Ltd, a company associated with the purchaser ,for a term from 9 September 2008 to 19 January 2009 at a rental of $1.00.[1] The vendor also agreed to sub-lease the land from PMQS for the same term at the same rental. The purchaser agreed to cause PMQS to sign a lease and sub-lease to be prepared by the vendor to document the terms of these leasehold arrangements. I was told that this variation was introduced to protect the purchaser from liability to pay GST, on the basis that the purchase price was for the business conducted on the property as a going concern.

9 The second deed of variation also modified the Table A Condition 5 by providing that a notice of rescission under that condition might require the breach to be rectified in one day, instead of 14 days as previously provided.[2]

10 By cl 4.11, the parties also agreed that time remained of the essence:**

The parties agree that time shall remain [of] the essence of the Contract and Deed as varied herein notwithstanding any agreements between the parties in relation to the extensions of time as evidenced by this document, or any further extensions of time on which the parties may agree.

11 The purchaser again failed to settle by the extended completion date of 9 September and a fresh settlement date was arranged for 19 September. The circumstances of this deferment and the reasons offered at the time by the purchaser for not settling on 9 September are not altogether clear. Neither party placed contemporaneous material before me, relying rather upon what was subsequently contended. Such evidence as I had showed only that the date for completion was extended by the solicitor for the vendor to enable the purchaser to put its finance in place. Evidence of this arrangement appears from an email from Peter Justin Byrne, the partner of the firm of solicitors acting for the vendor, to the solicitors for the purchaser dated 15 September 2008:

We refer to our discussions last week and confirm your advice that your client is aiming to complete settlement of this transaction on Friday 19 September 2008.

We note that under the Second Deed of Variation your client was due to settle the matter on 9 September 2008 and any discussion and arrangements regarding any other date are without prejudice to our client's rights under the Contract and the First and Second Deeds of Variation.

And on 18 September 2008 in a letter to the solicitors for the purchaser, Mr Byrne wrote:

Our instructions are that unless your client is able to provide satisfactory proof, to the complete satisfaction of our client, that your client will be in a position to complete settlement on 19 September 2008 by 12 noon today, then our client will instruct us to issue a Rescission Notice. In this regard we draw your attention to cl 2(b) of the Second Deed of Variation. Following the expiry of the Rescission Notice our client will require your client to withdraw its Caveat and will immediately commence negotiations with a third party or third parties.

**12 Settlement was not achieved on 19 September. James Lionel Vallis, a director of Southraw, says in his affidavit sworn 21 October 2008 that the vendor was unable to settle because a deed of priority had not been agreed and, perhaps, because of a failure to agree the terms of the lease and the sub-lease which were required under the second deed of variation.[3]

13 Under the contract of sale and the deed which formed part of it, the vendor, by cl 8, was entitled to security from the purchaser to secure payment of certain damages which might be payable to the vendor. The provision contemplated that this security would rank after the purchaser's mortgages to its financiers. By cl 8(c)(i) the vendor was obliged to execute another deed with each of the prior mortgagees, called in the papers a deed of priority, giving them sufficient and prior security to enable the purchase and development to be financed.

14 Mr Byrne said in his affidavit, and this was not challenged, that he had a draft deed of priority showing Capital Finance Ltd as the first financier, providing $9.1 m and the builder, LU Simon, as second financier, providing $11.5 m. It appears from Mr Byrne's letter of 18 September that there remained matters the subject of negotiation with Capital Finance but that the identity of the second financier had not been resolved following the withdrawal of LU Simon as financier. It is not clear when or how the matters with Capital Finance were resolved; the identity of the second financier, GAP Mortgage Facilitators Pty Ltd, was not revealed by the purchaser until 12 November. In a further affidavit filed on 8 December, Mr Vallis mentions that, as at 2 December, the second financier had again changed, this time to Greala Capital Pty Ltd, a company incorporated as recently as 21 October 2008 with a paid up capital of $6.00. Nothing was said in the material filed on behalf of the purchaser to elucidate this change. I conclude that the purchaser was not entitled to refuse to settle on 9 September on the ground that the vendor had not executed a deed of priority, including the priority of the as yet then unknown second financier.

15 The requirements of cl 2(b) of the second deed of variation were simply that the club leased to PMQS the land and that PMQS leased it back. The rental and the term were set out. The provision contemplated that the vendor would prepare both documents to record the transaction and that the purchaser would cause PMQS to execute them. The difficulty which existed about the vendor's drafts was that the solicitors for the purchaser insisted that they also contain the terms of the licence set out in Schedule 3 to the contract of sale. Although cl 18 of the contract of sale, which provided for the licence was not amended or deleted by the second deed of variation, it must be that it was no longer part of the agreement as it stood following the making of the deed. The purchaser was not entitled to refuse to settle on this ground. I should add that this contention was not pressed as an obstacle to the later failed settlements.

16 It follows from this that neither of the reasons suggested by Mr Vallis has been shown to warrant the failure by the purchaser to settle on either of 9 or 19 September. For present purposes, I fasten upon 9 September. Subject to one matter,[4] I find that, by not settling on that date, the purchaser was in default. The consequence of such a default would be that interest at the contractual rate would run from that date and continue to run until the default was cured in terms of Special Condition 7.1 of the contract of sale.

17 The vendor on 22 September 2008 gave a second notice of rescission asserting the purchaser's default in payment of the balance on 9 September and requiring the purchaser to remedy the breach within one day. The purchaser failed to comply with this notice of rescission so that the vendor took the position that the contract was at an end.

18 It was on this basis that the vendor commenced the first proceeding to remove the caveat. The purchaser resisted this application on a number of grounds including:**

(a) The vendor had not provided a lease and sub-lease as required by cl 2(c) of the second deed of variation.

(b) The vendor had not agreed to the terms of the purchaser's finance documents.

**19 When the matter came on before me in the Practice Court on 22 October 2008 a further difficulty appeared to face the vendor. The matter was then stood down to the next day, and then further adjourned by consent to 6 November. The difficulty was this. Settlement was due on 9 September 2008. It seemed very likely that this extension of the time for settlement from 9 September might have had the effect that, notwithstanding cl 4.11 of the second deed of variation, the time for settlement was no longer of the essence and that, accordingly, the vendor was not entitled to give the second notice of rescission on 22 September 2008 when the purchaser failed to settle on 9 September.

20 It is important at this point to distinguish between two legal aspects of the purchaser's failure to settle on 9 September 2008. First, if unjustified, it constituted a breach of the contract of sale putting the purchaser in default. As will be seen, this question of the purchaser's default remained of importance, notwithstanding the later attempts made by both parties to achieve settlement, because, a consequence of this default was that the purchaser would be liable to pay interest running from 9 September at the penalty rate fixed by Table A Condition 5.[5] Second, although it was arguable that the indulgence granted by Mr Byrne to accept a late settlement had the consequence that the time for settlement had ceased to be of the essence: it remained a term of the contract but not a term a breach of which would entitle the vendor to rescind.

21 When a term such as the provision for completion in this case ceases to be of the essence, it can have that characteristic restored by the giving of a notice to complete within a reasonable time. And so, notwithstanding that it continued to maintain that the contract of sale was at an end, the vendor on 24 October 2008 gave a notice to complete and to pay all moneys due on completion on 12 November 2008.

22 Counsel for the purchaser pointed, correctly, to the paradox created by this notice to complete. The vendor required the purchaser to complete a contract which it, the vendor, contended no longer existed and warned the purchaser that a failure to complete would entitle it, the vendor, to terminate the no longer existing contract of sale. The solicitors for the purchaser responded on 28 October by contending, rightly in my view, that the giving of the notice meant that the vendor accepted the position of the purchaser that the termination on 23 September was not effective. In their letter, they analysed the legal effect of the vendor's conduct as an election to abandon the position which was crucial to the first proceeding which sought to remove the caveat. And then, having made this good point, the solicitor for the purchaser fell into the same paradox. They contended that, so long as the first proceeding remained on foot and that the vendor maintained that the contract of sale was terminated, the notice to complete was ineffective. To my mind this position was not open to them so long as their client, the purchaser, contended that the contract of sale was still on foot.

23 In Rona v Shimden Pty Ltd[6] the vendor under a contract of sale claiming to have terminated the contract, gave notice to complete which was expressed to be without prejudice to its contention that the contract was terminated. White J analysed[7] the position in this way:**

The giving of a notice to complete may give rise to an estoppel which precludes the party giving the notice from asserting that the contract has been terminated. Here, the purchaser did not do anything consequent upon the service of the notice which could create such an estoppel. Estoppel aside, the service of a notice to complete without prejudice to a prior notice of termination takes effect as an offer to revive the agreement capable of being accepted by performance in accordance with the terms of the notice to complete.[8]

Counsel for the purchaser before me sought to distinguish this case from the present by pointing out that the present vendor's notice to complete was not expressed to be without prejudice to its contention that the contract was terminated. Counsel for the purchaser opened their submissions on 22 October with the powerful image that a person cannot have both the egg and the halfpenny too. This is, of course, correct, and it is no less so where the person claims to have both the egg and the halfpenny without prejudice.[9]

**24 I analyse the legal position of the parties following the giving of the notice to complete on 24 October as follows. Assuming the vendor had lost any right to terminate for failure to settle on 9 September by granting the extension and thereby putting time at large, its assertion that the contract was at an end was itself a repudiatory breach which the purchaser might have accepted, thereby bringing the contract to an end. This it did not do, so that the contract remained on foot. In any event, the vendor's giving of the notice to complete, containing as it did statements that it was "ready able and willing to complete", was a confirmation of the continuing existence of the contract. If, for example, the purchaser responded to the notice by tendering the appropriate sum, the vendor could not have refused to settle. So long as it maintained the notice to complete it was not open to the vendor to deny the contract. The contract was, therefore, still on foot. The first proceeding ought to have been abandoned or dismissed. This did not occur.

25 The first application came on before me again on 6 November. On that occasion, counsel for the vendor finally accepted that the contract was still on foot. The application was adjourned to 27 November and later, by consent, to 4 December, by which time the second application had been brought. The two matters were then set down for hearing together on 8 December.

26 I am satisfied, in all the circumstances, including the prior history of settlement appointments, that the time fixed in the notice to complete of 24 October was reasonable, so that it had the consequence of restoring the position that time for completion was of the essence. The notice expired on 12 November without settlement and on 14 November the vendor gave a third notice of rescission. This notice recited that the completion date for the contract was 9 September and that the purchaser's default was a failure to pay the price on that date or in accordance with the notice to complete on 24 October, that is, on 12 November. The notice threatened rescission in the event that the defaults were not cured within 14 days, that is, by 28 November. The solicitor for the purchaser responded by letter dated 17 November contending that this notice was invalid.**

**27 A further date for settlement was appointed for 21 November 2008. Settlement did not take place on that date when the purchaser's representatives attended but refused to tender payment of the balance of the price. Before me, two reasons were offered as justifying the purchaser's failure to settle; the vendor did not give a clear and unencumbered title to the property sold and, second, the vendor insisted upon payment of penalty interest calculated from 9 September 2008.

28 The question of title related to a number of items which the purchaser maintained were fixtures and which were therefore part of the subject matter of the sale. The subject matter of the contract was the land; no chattels were included. The contract also provided that the vendor, prior to 19 January 2008, was entitled to remove any items of fixtures and fittings whatsoever and that it should not be liable for any damage to the building occasioned by their removal.[10] This is not surprising, for the purchaser intended to demolish the existing building after that date.

29 The land was at the time of the contract of sale encumbered by a mortgage to the National Australia Bank. In addition, the vendor had granted 18 charges over various items on the club premises including a two fixed and floating charge over all of its property.

30 Sometime in or before June 2008 the solicitors for the purchaser had drafted a form of consent to be executed by each of the chargees. Each of the chargees then executed this form of consent in respect of its various securities. The consents were all in the following form:**

The Secured Creditor consents to each of the transactions contemplated by the Contract of sale of Real Estate and the Deed between The Naval Military Club and the Southraw Pty Ltd each dated 17 April 2008 including the sale of the property by the Club to Southraw in consideration of the payment of the price by Southraw at completion in the amount of $9,300,000 plus GST (Sale Proceeds).

The Secured Creditor undertakes to Southraw that upon payment of the Sale Proceeds it will provide a discharge or release, as appropriate, of its Security interest to the extent it applies to the property in registrable form and that it will not at any time do anything that may make the Contract or Deed void, voidable or unenforceable for any reason.

This document does not limit the Secured Creditor's right to require the Club to pay the Sale Proceeds to the Secured Creditor in accordance with the Security Interest.

On 19 November, two days before settlement, the solicitors for the purchasers advised that they required upon settlement a Form 312, Form of Discharge or Release of Property from a Charge, in respect of each of the 18 charges. The response of the solicitors for the vendor was to deny the purchasers' entitlement to insist upon this since the charges related to chattels which were not the subject of the sale.

**31 At settlement, these Form 312 documents were demanded and not produced. There was a dispute as to what was said about these matters by the vendor's representative. It seems clear, however, that she maintained that the purchaser was not entitled to insist upon the Form 312 documents.

32 Again, the position of the vendor was not correct. It is true that most of the charges covered chattels and no discharge for these was required. There were, however, two fixed and floating charges over the whole of the property of the vendor. Under these charges the creditor held a fixed charge over any fixtures and equipment of the vendor. The chargor in each case agreed not to dispose of the charged property without the consent of the chargee. This consent the vendor had; it did not, however, have a document releasing the property. So that with respect to these and those charges over the fixtures, the consent was not sufficient. Indeed, the chargees in the consents themselves, agree to provide a discharge upon payment of the debt by the vendor upon settlement. I should mention, too, that the purchaser contended that I should conclude that many of the items which were the subject to the other charges were in fact fixtures and were therefore part of the subject matter of the sale, leaving to one side the entitlement of the vendor to remove them prior to 19 January 2009. Evidence was led on behalf of the vendors showing them not to be fixtures. It is not necessary that I resolve this issue and I do not attempt to do so. It is sufficient that the fixed and floating charges ought to have been released and they were not. The purchaser was for this reason entitled not to settle on 21 November.

33 The second ground for refusing to settle concerned the sum payable by the purchaser. The purchaser provided a statement of adjustments under which the balance payable was $9,460,778,27. In two respects this statement was challenged.

34 First, the vendor had adjusted the outgoings, not as at the date of settlement, but as at 19 January 2009, when the lease and sub-lease terminated and possession would be given. This was justified by reference to the lease and the sub-lease under which the vendor had lessor and sub-lessee agreed to pay the outgoings or to reimburse the lessee and sub-lessor, PMQS, for the payment of them. Counsel for the vendor argued that these obligations arose from an agreement between their client and PMQS, not the purchaser. The response of counsel for the purchaser was that, upon settlement, their client would become the legal owner of the land and would stand in place of the vendor as lessor. This may be so. The fact remains that the obligation of the vendor to pay outgoings is not one owed to the purchaser under the contract of sale. Although the amount in question was small, an extra $3,000 or thereabouts, the purchaser was in error in its adjustments. But this was an error in favour of the vendor so that it is of little consequence.

35 The real area of dispute was the insistence of the vendor that the purchaser include in the settlement statement an amount of approximately $250,000 for penalty interest calculated from 9 September 2008, the date fixed for settlement under the second deed of variation. This contention depended upon the purchaser being in default for not paying the balance of the price on 9 September.

36 I return to the settlement appointed for the 21 November. Notwithstanding the position which they held with respect to the two matters of difference arising out of the purchaser's statement of adjustments, the solicitors for the vendor on 21 November wrote to the solicitors for the purchaser agreeing to accept on settlement later that day payment calculated in accordance with the purchaser's statement of adjustments, but on the basis that they did so under protest and reserving the vendor's rights.

37 I conclude that the purchaser was entitled to refuse to settle on 21 November for the reason that the releases of the charges were not in order.

38 The notice of rescission of 14 November still had a week to run before it expired on 28 November. Notwithstanding its contention that the purchaser had no entitlement to require the Form 312 documents, the vendor obtained them and, having advised the solicitors for the purchaser, appointed as a settlement time 2 pm on 28 November 2008. Notwithstanding that it was the obligation of the purchaser to prepare and deliver a statement of adjustments the vendor's solicitors prepared their own statement and forwarded it on 27 November to the solicitors for the purchaser. The statement included the amount of $269,260 penalty interest so that the amount payable on settlement was $9,732,280.48. The solicitors for the vendor responded on 27 November with their own settlement statement showing a balance owing of $9,459,612.18. Again, the two points of difference between the statements of adjustments were the vendor's insistence on payment of penalty interest and the purchaser's insistence that the outgoings should be adjusted as at 19 January 2009. A further suggested obstacle to settlement on this date was the failure of the purchaser to produce a deed of priority and subordination in respect of the financiers but this was not a matter which the purchaser might rely on to avoid settling.

39 At 1 pm or thereabouts, an hour prior to the time of settlement, the solicitors for the purchaser proposed the settlement should take place not at 2 o'clock but at 3.30pm. They said that Capital Finance was unable to attend settlement before this time. The solicitors for the vendor declined to adjust the appointment, observing that under Special Condition 8.3 of the contract of sale a settlement which occurred after 3 pm would be deemed to have occurred on 29 November by which date the notice of rescission would have expired. The representatives of the vendor attended settlement at 2 pm but there was no appearance on behalf of the purchasers or its financiers. The settlement accordingly did not take place.

40 It is clear that, by the time of this settlement appointment, the discharge of the charges as an obstacle to settlement had been overcome by the provision of the Form 312 documents. Accordingly, this provided no good reason for the purchaser not settling on 28 November.

41 The only outstanding matter, therefore, was the amount demanded by the vendor in its statement of adjustments, and, in particular its insistence upon the payment of penalty interest by reason of the non-payment of the balance on 9 September.

42 It is at his point that I return to the matter which I have placed to one side arising out of the earlier failed settlements.[11] The question of the sufficiency of the consents by the chargees was not raised by the purchaser at the time of the 9 September settlement; indeed it was not raised until the eve of the 21 November settlement. I have concluded that the purchaser was correct to refuse to complete for this reason on that day. It would follow that the purchaser was entitled not to settle earlier, on 9 September, without receiving releases. True it is that this was not a live matter on 9 September. Nevertheless, having concluded that the attitude of the vendor upon this point was a good reason for the purchaser to refuse to settle on 21 November, it must follow that this would also have been a good reason for a refusal two months earlier. The further consequence is that the purchaser cannot be in default for not paying the balance of the contract sum on a date when the vendor was not ready and able to comply with its obligations.

43 I have hesitated over this because it was, I think, not raised in this context in the course of argument. I have considered, too, the impact of the letter of 21 November from the solicitors for the vendor regarding their readiness to accept cheques drawn in accordance with the purchaser's statement of adjustment. In the correspondence leading to the abortive settlement on 28 November I see no repetition of this offer. The strong impression it gives is that each party was standing on its rights as each saw them. I must therefore conclude that the purchaser was being required to attend a settlement where an unjustified demand for payment would be made. In these circumstances, it was entitled not to attend for no good purpose.

44 And so the time prescribed in the third notice of rescission came and went without settlement. Whether the vendor may assert as a consequence that the contract is at an end must depend upon its being ready and willing to settle. For reasons which I have set out above, I conclude that it was not. The contract remains on foot.

45 Each of the applications, therefore, must be dismissed.**

[4] See par 42 below.

[5] See contract of sale special condition 7.1(c).

[8] Lohar Corporation Pty Ltd v Dibu Pty Ltd (1976) 1 BPR 9177 at 9184, 9187

[9] Haynes v Hirst (1927) SR (NSW) 480 at 489, per Long Innes J.

[11] See par 15 above.

At a glance

Court

Decision date

Before

Source

Judgment (65 paragraphs)

Parties