Refalo v Gatt [2021] NSWSC 926 | Case summary

Communications between the parties' solicitors

The analysis necessary for the determination of the proper construction of clause 5(b) will be assisted if the material parts of the communications between the parties' solicitors are considered first.
On 5 December 2019, defendants' solicitor informed the solicitor who was retained by the parties jointly to act in respect of the probate of the two wills that it was the defendants' position that they would prefer all the assets to be realised, the other trusts wound up, and the estates distributed as to a one seventh share to each of them beneficially.
The defendants' solicitor added in a letter to the probate solicitor dated 18 February 2020: … The Deceased's properties need to be sold unless there is an election pursuant to clause 5(b) of the Deceased's will. Our clients in their capacities as principal beneficiaries of the testamentary trusts do not intend to make an election pursuant to clause 5(b) of the Deceased's will. As far as our clients are aware, none of the other principal beneficiaries of the testamentary trusts has made an election. Accordingly, our clients in their capacity as executors require that all Deceased's properties to be listed for sale forthwith. If any of the executors refuse to join in the sale of the Deceased's properties, we are instructed to commence proceedings pursuant to section 84 of the Probate and Administration Act and UCPR 54.3, and seek the removal of any executor who resists for jeopardising the due administration of the Deceased's estate.
This is a clear statement of position by the defendants that they did not make an election to exercise the right granted to them by clause 5(b). Moreover, notwithstanding that the effect of the joint appointment of the parties as executors, and clause 5(a), was that the parties were given an express right to retain assets, the defendants threatened to take proceedings for the removal of the plaintiffs as executors if they did not agree to sell all of the assets in the estates.
On 19 February 2020, the then solicitor for the plaintiffs, being the predecessor of the plaintiffs' present solicitor, advised the defendants' solicitor that the plaintiffs had not declined to make an election under paragraph 5(b) of the will. The solicitor said: "We put you on notice that we are currently considering whether we will make a paragraph 5(b) election and we note the timeframe put on such an election in paragraph 5(b)(1) of the Will".
On 19 June 2020, the plaintiffs' present solicitor advised the defendants' solicitor, in relation to Edgewood Park: … Our clients are interested in receiving that property as part of their inheritance which would see the property being transferred to our clients as part of their entitlement… In those circumstances, our clients feel that it is appropriate now for the parties to proceed with valuations as anticipated including the water licences, with the price being determined in accordance with clause 5(b)(ii)(A) by two independent valuers, one to be appointed by the purchasing executors and trustees, and the other by the remaining executors, for the purpose of the sale. Please confirm that your clients are content to proceed on that basis, and as soon as that response is received, we will advise you of the independent valuer our clients intend to approach, and if you could similarly advise as of the independent valuer your clients intend to approach. …
The use of the expression: "Our clients are interested" is to some degree equivocal in relation to the exercise of the right in clause 5(b).
The next communication that is in evidence is an email from the plaintiffs' solicitor to the defendants' solicitor dated 29 June 2020. The email includes: "… Our clients are somewhat surprised at your clients' changed position in respect of the Edgewood Park property." It seems likely that the solicitor was advised of that change in the discussion on the previous Friday between the solicitors that is referred to in the first paragraph of the email. The plaintiffs' solicitor asked whether the defendants were serious in their desire to purchase Edgewood Park "notwithstanding their previous written position that they had no interest in acquiring any of the Estate or Trust properties" (emphasis in original), to indicate the price at which the defendants were prepared to purchase the property.
The defendants' solicitor responded by letter dated 30 June 2020, in which he said: … Edgewood Park We note your clients' interest in receiving this property as part of their inheritance. Our clients are likewise interested in receiving this property as part of their inheritance. The will does not deal with that scenario. Our clients are not prepared to toss a coin for it. We will have to discuss a mechanism for resolving that. If the property is to be sold on the open market with liberty to either camp to treat my clients are content for it to be listed conjointly with Cutcliffe and Century 21… Our clients do not wish to co-own this property with your clients. Please advise where your clients stand in relation to this.
This letter is a statement on behalf of the defendants that they were interested in acquiring Edgewood Park as part of their inheritance, but only on the basis that they would be the proprietors and the plaintiffs would be excluded. The reference to the will not dealing with that scenario is an acknowledgement that the position that the defendants wanted to achieve was not one that accorded with the will.
On 16 July 2020, in a letter to the defendants' solicitor, the plaintiffs' solicitor noted that the defendants had not responded to her request to indicate the price that they were prepared to pay for Edgewood Park.
The defendants' solicitor's response, on 1 August 2020 was: 7.1 We note that your clients continue to be surprised by our client's interest. Each of the executor beneficiaries has the same right under the will. Please refer to without prejudice letter following.
This letter prompted a formal response on 10 August 2020 from the plaintiffs' solicitor to the defendants' solicitor, as follows: We refer to our previous communications in respect of Edgewood Park and hereby formally put you on notice that our clients, [the plaintiffs] choose to acquire the Edgewood Park property… Pursuant to clause 5(b)(2): [the letter then sets out the terms of that provision governing the determination of the price]. Our clients intend to appoint Lyn Savage to value the Property. Can you please advise us within 7 days of the identity of the valuer to be appointed by your clients (the "remaining executors"). Please note, it is not our clients but your clients, the remaining executors, who wish to sell the Property. Our clients are content for the Trustees to continue to own the Property as joint tenants. We note that your clients object to that and seek that the Property be sold. In those circumstances, our clients give notice pursuant to clause 5(b) and we look forward to receiving your response in relation to the details of the remaining executors' valuer within 7 days.
This letter was an explicit attempt by the plaintiffs to exercise what they have called the testamentary option created by clause 5(b).
The plaintiffs made it clear that they were prepared to continue to own Edgewood Park jointly with the defendants.
By letter dated 31 August 2020 to the plaintiffs' solicitor, the defendants' solicitor stated: 3. Edgewood Park We note that you have served us with an election. We have retained Mr Matthew Curtis of Curtis valuations… As a result of there now being contemporaneous sales evidence…it is highly likely that the property will be out of the reach of both camps. Please bring this sales evidence to the attention of your valuer.
This response clearly treated the plaintiffs' solicitor's 10 August 2020 letter as being a formal election under clause 5(b). There was no challenge to the effectiveness of that election. The response did not, however, operate as an election by the defendants under clause 5(b), as it still treated the plaintiffs and the defendants as being in different "camps", and plainly implied that Edgewood Park would be purchased by either the plaintiffs or the defendants. The letter also notified that the defendants had appointed their own valuer as required by clause 5(b)(2)A.
Then, between 19 September 2020 and 15 December 2020, in numerous emails, the plaintiffs' solicitor 'chased' the defendants' solicitor to advise when the defendants would be in a position to exchange their respective valuations. She was advised by the defendants' solicitor, on the latter date, that the defendants had withdrawn the retainer of their valuer and proposed to instruct a new valuer.
The plaintiffs' valuer provided a valuation of Edgewood Park as of 2 September 2020 at $12,400,000. The defendants' new valuer valued the property at $12,040,000 as at 4 February 2021.
On 24 March 2021, the plaintiffs' solicitor proposed to the defendants' solicitor that the value of Edgewood Park should be at the midpoint between the two valuations, which was $12,220,000.
By email dated 31 March 2021, the defendants' solicitor rejected the plaintiffs' offer to pay $12,220,000 for Edgewood Park, and responded: … I am instructed to reject the offer set out therein and propose the following counteroffer: 1. The Edgewood Park property be transferred to my clients at the pro-rated price equivalent to $13.5m, subject to the same satisfactory tax advice as proposed by your clients. 2. If 1 is not accepted the property be sold to the purchaser represented by [named real estate agent] for $15m as per the attached unsolicited offer. …
The defendants' solicitor had received on 18 March 2021 an unsolicited offer to purchase Edgewood Park for $15,000,000.
On 7 April 2021, the plaintiffs' solicitor responded to the defendants' solicitor by letter that stated, in effect, that clause 5(b) of the will gave the plaintiffs a right that they had exercised and: "… This is not an item for negotiation. Our clients complied with the Will's directions and began the process, your clients have no right to express an interest now that we have exchanged and obtained valuations. In other words, we are already inside the operation of clause 5(b) and must proceed to the next step, which is the conclusion of the valuation and the contract for purchase…" The letter then required the defendants to advise whether they preferred the two valuers to seek to reach a consensus on the valuation, or whether a third valuer should be appointed in accordance with the wills.
The defendants' solicitor responded to this letter on 14 April 2021, saying: 1. The will does not require giving of written notice to retain the property or any time limit on expressing any interest in retaining the property. Clause 5(b) merely says if some executors wish to sell the property and others do not, then the executors who wish to keep it must contract to buy it within 12 months of a written request by the other executors. The only written notice is required by the other executors and the only time period is 12 months after the other executors give the written notice. In any event, our clients indicated their interest in the property in our letter to you of 30 June 2020. That was subsequently acknowledged by you. … 3. … The mechanism set out in the will expressly provides that the procedure applies "if some executors wish to sell and others do not" and "the executors who wish to keep" are required to contract within 12 months of written request by the "other executors". Therefore, the procedure may not apply if all executors wish to keep, and there are no "other executors." There is no deadlock provision. The will may not be able to be construed to imply a deadlock provision because it is inconsistent with the express terms of the will that says that the process only applies if there are two sets of executors. The will may not be rectified to include a deadlock when there is no evidence that the testator ever gave instructions or ever contemplated that all of the executors may wish to keep the property. …
This response encapsulated the defendants' position that clause 5(b) did not apply if all of the parties wished to keep Edgewood Park, and in any event, if only some of the parties wished to keep the property, their right to enter into a contract of purchase depended upon whether the parties who wished to sell requested the parties who wished to buy to enter into a contract for that purpose.
I should record that the plaintiffs relied on certain statements made by the defendants' solicitor to the valuers that they retained. Although those statements evidence the solicitor's understanding of the position adopted by the defendants, I do not think that they can be relied upon by the plaintiffs to prove the conduct of the defendants in the exercise of their duties as executors in respect of the implementation of clause 5(b), as there was no evidence that the statements had been conveyed to the plaintiffs.

Application of clause 5(b)

The first requirement for the application of clause 5(b) is that a particular property be an asset of the estate of the particular testator. Edgewood Park satisfies that requirement.
The chapeau to clause 5(b) distinguishes between assets that all executors wished to sell or retain on the one hand and assets as to which the wishes of the executors differed. The expression in the chapeau "the following procedure is to apply" means, by reason of the words "is to", that the procedure is mandatory.
The expressions "others do not" in the chapeau and "The Executors who wish to keep the asset" in sub-par (1) divide the executors into two classes. There may be executors who wish to sell and executors who wish to keep, and there is no basis for distinguishing the rights of the executors who are in a particular class. Furthermore, the executors themselves choose which class to be in. It follows that, depending upon the choices of the individual executors, the number of the executors in an individual class may be between 1 to 6 and 3 to 4. If all of the executors choose to sell or keep a particular asset then clause 5(b) will not apply. It follows that up to 6 executors may choose to keep an asset, and if they do, they must be content to own the asset with however many other executors choose to keep it. Clause 5(b) does not provide for the possibility that some executors can choose to keep an asset on a basis that excludes the entitlement of other executors to also choose to keep the asset.
It follows that, where clause 5(b) speaks of executors who wish to keep an asset, that means executors who choose to keep an asset on the basis of equality of ownership with whichever other executors choose to keep that asset. If any executors wish to keep a particular asset on terms that exclude other executors who make the same choice, the first executors are not relevantly executors who wish to keep the asset within the meaning of clause 5(b).
In the present case, it is clear that the plaintiffs made their election to keep Edgewood Park by their solicitors' 10 August 2020 letter. As that letter stated that the plaintiffs were content to continue to own Edgewood Park with the defendants, the plaintiffs satisfied the criteria for being "The Executors who wish to keep the asset" within the meaning of clause 5(b).
Initially, by means of the defendants' solicitor's 18 February 2020 letter to the parties' probate solicitor, the defendants elected to be executors who wished to sell all assets in the estate, including Edgewood Park.
However, before the formal election made by the plaintiffs on 10 August 2020, by means of their solicitor's 30 June 2020 letter to the plaintiffs' solicitor, the defendants purported to change their position by stating that they wished to retain Edgewood Park. However, that was on the clear basis that the defendants would become owners and the plaintiffs would be excluded. The defendants have not subsequently changed that position.
The position that the defendants have adopted is inconsistent with their being "The Executors who wish to keep the asset" within the meaning of clause 5(b), as the wills do not recognise a class of executors who wished to keep an asset on the basis that other executors who also wished to keep the asset are excluded.
The executors have, by their own choices, divided themselves into classes who, for the purposes of clause 5(b), wished to keep or wished to sell Edgewood Park. Those classes consist of the plaintiffs on the one hand and the defendants on the other. The defendants' initial position was clearly that they wished to sell Edgewood Park. They then changed their position, but not to a position that made them executors who wished to keep that asset within the meaning of clause 5(b). Accordingly, they were not at the time of the hearing included in the class of executors who wished to keep Edgewood Park. The parties did not address the issue of whether executors are permitted by the wills to change their position to become executors who wished to keep an asset before the contract required by clause 5(b) is exchanged.
It is not necessary for the Court to determine the effect of clause 5(b) in relation to when the executors were required to make their choices in respect of particular assets, or whether the executors have a right to change their minds, and if so, what the cut-off date is for any change of position. That is because the executors did in fact make their choices for Edgewood Park, and because they did not change their positions before the hearing.
No issue was raised at the hearing as to whether the sale of an asset to the executors who wished to keep it would be to the executors in their personal capacities or their capacities as trustees of their individual testamentary trusts. The reference in clause 5(b)(2)(A) to the valuers being "appointed by the purchasing executor and trustee" (emphasis added), suggests that the purchasing executors are required to do so in their capacities as trustees of the testamentary trusts.
The parties did not raise any issue or make any submission concerning the significance of the words "with such Contract to contain the usual settlement time and terms and conditions". As the terms of the contract will be an issue that only arises after the price has been determined by the mechanism set out in clause 5(b)(2), that is not an issue that has yet arisen, and the plaintiffs have not sought any relief in respect of it.
The heart of the remaining difference between the parties lies in the meaning and significance of the words "within twelve (12) months of a written request by the other Executors" in clause 5(b)(1).
The plaintiffs' case is that these words have the effect that the contract contemplated by clause 5(b)(1) must be entered into within 12 months of the formal election by the purchasing executors to exercise the testamentary option. As the plaintiffs' case is that the testamentary option was exercised on 10 August 2020, the contracts must be exchanged by 10 August 2021. This possibility was the ground upon which the plaintiffs sought and were granted expedition of the hearing of the separate questions that are now before the Court.
It is difficult to accept this aspect of the plaintiffs' case. It seems clear that clause 5(b)(1) requires that the purchasing executors are to do something with respect to the purchase of the asset within 12 months of some event, but the words used do not identify that event as being the date of the plaintiffs' election to exercise the testamentary option. That would have been a sensible date for the testators to have chosen, but it is not the natural meaning of "a written request by the other Executors".
The defendants submit that the use of the words "a written request by the other Executors" has the effect that clause 5(b) simply does not create a testamentary option. It is an essential aspect of an option, however the option is created, that a right is granted in favour of a party who may wish to acquire an asset to make an election to do so on the particular terms established by the source of the option, whether that be a contract or a will. According to the defendants, there is no testamentary option in the present case, because it is not the purchasing executors who are given the choice, but rather it is the other executors, who are the defendants themselves.
The defendants' submission is that clause 5(b)(1) merely provides a mechanism to deal with the possibility of a deadlock between the executors in exercising their powers in clause 5(a)(1). In relation to a particular asset in the estates, there may not be unanimity as to whether the asset should be sold or retained. If there is a divergence of views between the executors, then the price of the asset must be determined in accordance with clause 5(b)(2) and then, if the executors who want to sell the asset serve a written request on the executors who wish to retain the asset, the latter executors must enter into a contract at the price determined, and complete the contract within 12 months of the request.
As I see it, the problem with this interpretation of clause 5(b)(1) is that it destroys the practical efficacy of this part of the wills, as it vests the power as to whether the asset is sold in the executors who wish to sell it rather than the executors who wish to buy it. The executors who wish to sell can thwart the executors who wish to buy by first disagreeing with them on the issue of whether the asset should be sold - by deciding that it should be sold - and then, after the parties have been put to the expense of valuing the asset, the executors who decided that it should be sold have a discretion as to whether the sale should not take place.
The question is: What other part of clause 5(b)(1) were the words "within twelve (12) months of a written request by the other Executors" intended to qualify? The defendants submit that those words were intended to qualify "are to contract to buy the asset", so that, without a written request by the executors who want to sell the asset, the executors who wish to buy have no right to a contract to buy.
I do not accept that this is the proper construction of clause 5(b). The "other Executors" are not given a right to request the "Executors who wish to keep the asset" to enter into a contract, in the sense that, absent a request, the latter executors have no right to buy the asset. Clause 5(b) states that those executors "are to contract to buy the asset". That is, by use of the word "are", a mandatory effect of the clause once the executors have divided themselves into classes who wish to keep or sell the asset. The other executors' entitlement to request concerns the timing of the entry by the purchasing executors into the contract. The words: "with such Contract to contain the usual settlement time and terms and conditions within twelve (12) months of a written request by the other Executors" mean that the contract must be made within that period, not that there will be no contract if there is no request. The contract must contain "the usual settlement time", which will govern the completion of the contract by the purchasing executors.
The purpose of clause 5(b) is to permit executors who wish to sell a particular asset to trigger a process that requires the other executors to decide whether they wish to keep the asset, and if they do so to take steps to put themselves in a position to purchase the asset by entering into a contract with all of the executors within 12 months. Absent such a mechanism, it would be necessary for the executors to act unanimously. If one executor decided that he or she wished to sell an asset, then that executor would be an "other Executor" for the purpose of clause 5(b). That executor, either alone or with other executors of like mind, could then make a request to all other executors, who would have to enter into a contract within the 12 month period, or let the opportunity pass. A period as long as 12 months may be explained by the number of assets in the estates, and the possible need for different groups of executors to work through the process of deciding which assets to sell and which to keep. The use of the word "request" in clause 5(b) is more apposite to refer to the process of entering into the contract, rather than the right to do so.
I consider that this construction of clause 5(b) is justified by an analysis of the wording, as I have carried out above, as well as by the need to give the wills a sensible practical effect.
The likelihood that this construction accords with the real intention of the testators is amplified by some simple considerations of the surrounding circumstances and the scheme that the testators adopted in formulating their wills.
In the process of construing the terms of a will, it will be appropriate for the Court to consider whether any basic scheme can be discerned as to the outcome intended by the testator as to the distribution of her or his estate. The Court will, where it can, strive to interpret the wording of the will to give effect to such a scheme where it is revealed. As Campbell JA (with whom Macfarlan and Young JJA agreed) said in Fairbairn v Varvaressos (2010) 78 NSWLR 577; [2010] NSWCA 234 at [19]: [19] As Powell J said in Coorey v George (Powell J, 27 February 1986, unreported) at 14, in a passage approved by Bryson J in Perpetual Trustee Co Ltd v Wright (1987) 9 NSWLR 18 at 33, in construing a will: "[O]ne's task is, first, if it be possible, to ascertain, what was the basic scheme which the deceased had conceived for dealing with his estate, and, then, so to construe the will as, if it be possible, to give effect to the scheme so revealed."
The Court is also entitled to put itself in the position of the testator, and to consider all material facts and circumstances known to the testator with reference to which they may be taken to have used the words in their wills - the so-called "armchair principle". The classic statement of this principle is found in the judgment of Blackburn J in Allgood v Blake (1873) LR 8 Ex 160 at 162: The general rule is that, in construing a will, the Court is entitled to put itself in the position of the testator, and to consider all material facts and circumstances known to the testator with reference to which he is to be taken to have used the words in the will, and then to declare what is the intention evidenced by the words used with reference to those facts and circumstances which were (or ought to have been) in the mind of the testator when he used those words… [T]he meaning of words varies according to the circumstances of and concerning which they are used.
As I have noted above, the testators accumulated substantial wealth between them. The testators acquired a significant amount of real property, whether in their own names or in trusts: see for example the discussion of the estate properties in the plaintiffs' solicitor's letter to the defendants' solicitor dated 19 June 2020. This real property formed a substantial proportion of the testators' estates.
I would infer that the testators had a love of owning real properties, or at least held the view that the ownership of real property was a prudent way to maintain their wealth.
The testators had seven children and decided to leave their estates to their seven children in equal shares, as beneficiaries of testamentary trusts, after the payment of a number of legacies to other beneficiaries. They did not decide to instruct their executors to sell the assets in their estates and distribute the proceeds to their children. In practical terms, they left it to their children to decide which assets to sell and which assets to keep. They did not do that by including in their wills a mechanism for deciding the issue, such as by majority vote. Although they left the decision to their children, they did so in a way that limited the children's choice to remaining as owners of each asset in the estate in common with any other child who made the same choice. Children could only be in or out in respect of the ownership of each asset in the estate.
That suggests to me that it is most likely that the testators wished to keep alive the possibility that some of their children would choose to continue with the approach of maintaining their wealth by holding real property, and furthermore, just as the testators most likely developed attachments to particular properties, the possibility would be kept alive that the children, who also had such attachments, could band together to retain their inheritance by maintaining common ownership of particular properties.
The only significance of these considerations is that they amplify the probability that the testators wished to establish by their wills an effective mechanism whereby the children who wished to retain an asset could effectively do so by making an election and by paying a price reflecting a share of their inheritance, determined by an independent process of valuation.
The construction of clause 5(b) for which the defendants contend would undermine the scheme intended by the testators, as it would empower children who were not prepared to retain a particular asset in common with other children who were prepared to do so to prevent the latter children acquiring the asset.
The result is that the plaintiffs are entitled to declaratory relief to the effect that they have validly exercised a testamentary option to acquire Edgewood Park.
It follows that, as the only outstanding step in the determination of the price is the implementation of clause 5(b)(2)(B), if the parties cannot agree on the price, the plaintiffs are entitled to an order against the defendants as executors that they instruct their valuers to appoint a third independent valuer as umpire.
It probably also follows that, if the defendants are not willing to enter into a contract in appropriate terms whereby the parties jointly sell Edgewood Park to the plaintiffs, the plaintiffs are entitled to an order that the defendants cooperate in doing so. However, that is not an issue that has been dealt with in these proceedings, and no agreement has yet been reached concerning the terms of the contract.
The parties have not yet made submissions as to the form of the orders that should be made. As it is desirable that the Court makes in these proceedings whatever orders are necessary to resolve all disputes between the parties, in a way that will facilitate the administration of the wills, the parties should confer as to the orders that should be made to give effect to these reasons. The parties are invited to submit draft short minutes of order to my Associate, and, if necessary, arrangements can be made to relist the proceedings.
I will hear the parties on the issue of the cost of the proceedings. 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. Decision last updated: 30 July 2021

Refalo v Gatt

At a glance

Court

Decision date

Before

Source

Judgment (7 paragraphs)

Parties

Cases Cited (4)

Cited By (1)