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[2011] ACTSC 65
General information, not legal advice.
Supreme Court of the ACT
2011-04-21
Finlay J, Higgins CJ
Original judgment source is linked above.
1. Judgment be entered for the plaintiff for a sum to be fixed.
2. Leave be granted to the parties to address the issue of a Goods and Services Tax Rebate.
3. Leave be granted to the plaintiff to provide a minute fixing the sum concerning the agent's commission and the interest component to be added to the sums so awarded.
1. This matter relates to a contract of sale entered into between the plaintiff and the defendant on 31 July 2007. The property the subject of the agreement was a penthouse unit, being unit 34 Block 26 Section 43, Turner in the Australian Capital Territory.
2. It was a term of the contract that the defendant would pay a price of $1,300,000 on completion but would pay a deposit of $130,000 as part of that price before completion. They paid $51,000.
3. Completion was to take place 14 days after notice was given to the defendants of registration of the applicable units plan.
4. By letter dated 14 December 2007 to the defendant's solicitors, notice was given that
(a) The Units Plan had been registered; and
(b) completion was to occur on or before 4 January 2008.
5. Completion did not occur on that date and the plaintiff served a Notice to Complete on 7 January 2008. It asserted that time was of the essence and specified 2:30pm on 22 January 2008 at a certain place as the time and place for completion.
6. The defendants did not complete and on 30 January 2008 the plaintiff served a Notice of Termination of the contract. Thereafter, it demanded payment of the balance of the deposit. That demand was not met.
7. Consequently, by Originating Claim dated 10 September 2008, the plaintiff claimed a declaration that the deposit was validly forfeited and claimed the balance of $79,000 plus $330 pursuant to clause 2.2 of the contract, as well as interest and damages.
8. By their defence the defendants asserted that completion was declined by reason of the breach of the contract by the plaintiff both as at 4 January 2008 and as at 22 January 2008.
9. In any event, they plead that the plaintiff failed to sell the unit at fair market value.
10. They counter claimed that they had made known to the plaintiff a particular purpose for their purchase of the Unit, namely, to develop a unique, whole-level Penthouse apartment with 360 degree views with separate garaging and lockable storage. It was also to be in accordance with agreed plans and specifications and constructed in a good and workmanlike manner and with materials reasonably fit for the purpose.
11. To quote the allegations and particulars of breach:
In breach of the terms of the Contract as pleaded above, the Plaintiff:
12. Those defects were allegedly notified on 3 and 4 January 2008. They were, allegedly, not rectified as at the final date for completion.
13. The plaintiff replied to the counterclaim citing contractual terms to the effect that the defendants were not entitled to delay completion by reason of minor defects or omissions in the construction of the premises or to make any objection or raise any requisition on title or make any claim for compensation by reason of any minor variation to the plans.
14. The plaintiff asserted that any defects were minor and were rectified prior to completion or were to be remedied within the maintenance period provided, and any variation in plans were also minor, being less than 5% if the value or size of the Unit. It conceded that the location of the car parking spaces and storage areas had been changed but asserted the value and size of the spaces had been enhanced, not diminished.
16. Mr Ward, for the plaintiff, referred in opening to the attempted auction of the unit following the termination notice, on 1 September 2008. It attracted a top bid of only $1,165,000. It was sold subsequently for $1,053,000.
17. The special conditions in the Contract provided, relevantly:
4.1 The Buyer may prepare and submit to the Seller in writing within a period of 3 calendar months from the date of completion or the date of the Buyer taking occupation, whichever is the earlier, ("Defect Liability Period") a list of defects or faults (if any) in the construction of the Unit.
4.2 The Seller will make good at his own expense such defects or faults (collectively called "Defects") that are due to defective or improper materials or bad workmanship.
(a) as soon as reasonably practicable after receiving the notice if the Defects are in or concerning:
(i) electricity supply or distribution;
(ii) sewerage or drainage; or
(iii) any portion of the Unit the defect in which could, or might lead to damage to any of the Buyer's chattels in the Unit or could restrict or interfere with the proper occupation and use of the Unit; and
(b) otherwise within ninety (90) days after receiving the notice.
PROVIDED that the Seller shall not be liable to make good or repair any items of equipment within the Unit which are covered by a manufacturer's warranty, the benefit of which has been assigned to the Buyer.
4.3 Other than for matters directly covered by special condition 4.2(a) the Buyer may submit only one list of defects during the Defects Liability Period.
4.4 The Buyer must make the Unit available at the time or times notified by the Seller, to the Seller or the Seller's tradesmen to permit the rectification of the Defects in a prompt and timely manner.
5.1 The Buyer agrees not to delay completion by reason only that there are minor defects or omissions in the construction of the dwelling.
...
...
7.2 The building works are to be undertaken substantially in accordance with the plans and specifications and the inclusions list attached to this Contract.
7.3 In addition to Annexure Clause "C" Clause C11.5 the Seller is permitted to make variations to:
(a) the plans and specifications (including, without limitation, variations to the configuration of the Unit to accommodate services, riser ducts and other structures) provided those variations:
(i) are in the Seller's opinion reasonably necessary to comply with the Building Code of Australia as applicable in the Australian Capital Territory; or
(ii) are required by any relevant authority; or
(iii) do not reduce the value or size of the Unit by more than 5%.
(b) the layout of the kitchen, bathroom and laundry in the Unit to accommodate services, riser ducts and other structures arising out of final detailed design; and
(c) the inclusions, provided that in the building, the Common Property and in the Unit inclusions of a similar value and equivalent quality are provided.
7.4 The Buyer may make no objection, requisition or claim or delay completion in respect of any variation referred to in special condition 7.3.
...
10.1 Subject to special condition 7, the Unit sold will include a car parking space or spaces as a unit subsidiary or unit subsidiaries in the basement of the Building. The location of the car parking space or spaces shown in the attached Plan and Specifications may be changed by the Seller and the Buyer may make no objection, requisition or claim or delay completion if the location of the car parking space or spaces is changed.
10.2 Subject to special condition 7, the Unit sold will include a storage area as a unit subsidiary in the basement of the Building. The location of the storage area shown in the attached Plans and specifications may be changed by the Seller and the Buyer may make no objection, requisition or claim or delay completion if the location of the storage area is changed.
13.1 The seller agrees to accept payment of the Deposit as follows
(a) As to the sum of $50,000 (being the same sum as referred to as the Premium in put and call option deed between seller as writer and the buyer as taker in respect of the subject property) the parties acknowledge that this sum has been paid and released to the seller as the seller's absolute property.
(b) As to the sum of $80,000 on or before Completion.
13.2 If the buyer fails to comply with special condition 13.1 the buyer will be in default. If the Buyer defaults the balance of the deposit is a debt due and payable to the seller.
19. Mr Loewenstein, for the first two defendants, asserted that the evidence would be that the storage facility actually provided was unsuitable and that the list of defects included items of work that were, in fact, not completed by the settlement date. That is, items that by reason of non-completion were not merely defects in completion. Mr Erskine SC, for the third defendant, took the same position.
20. The first witness was Mr Branko Seselja, a director of the plaintiff company. He stated that his original plan for the subject development had been for two penthouse units. However, after meeting with the defendants in February 2006 the design was changed to a larger single penthouse unit. There were car parking and storage spaces appurtenant to them. On the plan there were three such spaces. The plans were originally designed to provide two spaces for each of the two penthouses. The spaces were in a corner on the lower basement level. One storage space was triangular and the other rectangular on either side of the three car parking spaces. The car spaces were enclosed by roller doors. The storage spaces were fenced off by metal panelling and caging.
21. The defendants came to inspect the penthouse unit before completion. A cap on one of the heating registers was not installed. The pump for the water feature was missing as it needed modification and had not been reinstalled. There was an egg crate fitting missing from the air conditioning system.
22. Mr Seselja prepared a list of those defects and sent it to the project manager and foreman for rectification.
23. It was pointed out by Mr Price, the first defendant, that the curved timber skirting board was not properly finished. The builder was also instructed to fix that defect.
24. Further, on the inspection on 4 January 2008, Mr Seselja noticed a defect on the glass splash-back in the kitchen. He instructed the builder to rectify that defect.
25. There was an issue raised in respect of skylights. They were in the eaves but uncovered. In the result, some parts of the eaves, where they were stopped, had rejected paint applied to the joins. The builder was also instructed to fix that defect.
26. Two other matters were noted, in the bathtub there been some wax deposited upon it. Apparently, someone lit a candle there. The next day it was cleaned off.
27. An issue was raised about the colour of the glass wall in the sauna area. Mr Price said he had wanted clear glass but, Mr Seselja said, that had not previously been requested.
28. Once the contract was formally terminated, the property was prepared for sale. Mr Seselja chose to have the skylight voids covered with perspex at a cost of $1,600. The property attracted a bid at auction in March 2008 of $1.165 million. The reserve price was $1.375 million.
29. As a marketing strategy, the penthouse was furnished with furniture and furnishings, including a piano. It cost $264 to move the piano and $3,360 for hire of furniture. The total expenses incurred by the selling agents, including commission, amounted to $30,625.75.
30. From cross-examination it emerged that the plan annexed to the contract did not specify the walling off of the storage area allocated to Unit 34 (that is, the penthouse).
31. An issue was raised about resolutions passed by the body corporate forbidding storage in the car parking spaces. It seems to me, however, that as a matter of construction that did not prevent the areas designated on the annexed plan for storage being so used.
32. There was, as referred to above, a Notice to Complete issued on 7 January 2008. A further inspection occurred, it seems, on 11 January 2008. Mr Seselja deposed that all defects had been rectified by 18 January 2008.
33. It was suggested by Mr Lowenstein for the first and second defendants, that, to the contrary, only the marking on the bath had been remedied. That suggestion Mr Seselja rejected.
34. Mr Erskine, for the third defendant, obtained a concession from Mr Seselja that, although all items were attended to by 18 January 2008, he could not say that they had been attended to by 11 January 2008.
35. Mr Seselja accepted that, following a request from the defendants, he agreed to install garage roller doors and to separate the storage areas from the car parking spaces. He obtained a quote for $1,600 to do so.
36. Mr Henderson, of LJ Hooker, confirmed the defects found on inspection as Mr Seselja had conceded. He felt they were capable of quick and easy rectification. He confirmed that, between the original contract and the ultimate re-sale, the market had cooled somewhat with considerable competition from similar developments. Nevertheless, he was of the view that the market would then have supported a price of between $1.1 million to $1.4 million.
37. He felt the price of $1.3 million was reasonable at the time of the sale to the defendants. He was "disappointed" with the ultimate sale price of $1.053 million but considered it was the best price then obtainable.
38. That, with the tendered documents, was the evidence.
39. Mr Lowenstein submitted that the presence of the defects precluded the plaintiff giving notice to complete, citing cl 18.3.1 and cl 18.3.2.
40. However, the short answer to that submission was to be found in special condition 5.1. The defendants were not entitled to delay completion because of "minor defects". The defects described were minor and, in any event, I am satisfied that, though not remedied by 11 January 2008, they were remedied shortly thereafter.
41. It was, to my mind, difficult to assert that the defects relied upon could be described as a failure to complete the building work "in a good and workmanlike manner substantially in accordance with the plans and specifications" (cl 14.1). In any event, that obligation is qualified by special condition 5.1. Even the cage provided for the storage area only cost $1,600.
42. Mr Erskine, for the second and third defendants sought to ascribe significance to the Body Corporate resolution concerning storage in car parking spaces. That is, that it was in the context of avoiding fire risk. Thus, he contended, the failure to close off the storage area should be regarded as more than a minor defect in completion. Indeed, until it was fenced off there was a failure practically to provide storage.
43. The next defect highlighted by Mr Erskine was the failure of each of the air conditioning systems and the pump controlling the water feature to have been in working order.
44. It is noteworthy that the evidence of Mr Seselja was that these defects had been repaired by 18 January 2008.
45. Mr Erskine conceded that some defects, assuming them to be properly so categorised, could have come within the scope of the defects liability period for rectification. He included the glass wall of the sauna in that category.
46. Nevertheless, he suggested that the notice to complete was, in effect, premature. He referred to cl 18.3.1 and cl 18.3.2.
47. Mr Ward sought leave to address the issue of the non-functioning of the air-conditioning. It had not been addressed in chief by either party. It had emerged from Mr Henderson's evidence.
48. I granted leave for Mr Ward to call evidence to address that issue. Mr Seselja was re-called. He had a number of complaints from other units to similar effect. The 'defect' was, simply, that the isolating switches for the units had not been turned on. It was therefore "remedied" by those switches being activated.
49. I am satisfied, as a result, that, though attended by the pleaded defects, as at 11 January 2008, the air-conditioning system was capable of working with a simple flick of the relevant switch.
50. Mr Ward referred to a number of authorities. However, to my mind the law is clear. The issue is whether, as at the date of the notice to complete, the plaintiff was in breach of its obligations so as to be disentitled to issue it.
51. In my view, the defects present and complained of were, relevantly minor within the meaning of special condition 5.
52. It follows that, according to cl 18, the plaintiff was entitled, first, to require completion and, second, to terminate the contract upon default.
53. It was not referred to expressly by the defendant's counsel, but I should say that the change of car parking space configuration was, accepting Mr Curtis' report, in no way a diminution of the value of the unit. Indeed, to the contrary, I accept that it enhanced it. Special condition 7.3 precludes this as a relevant defect (see also special condition 7.4).
55. The further question is the measure of damages. The relevant default occurred on 22 January 2008.
56. The contractual entitlement of the plaintiff under cl 19 is to, as it did:
19.1.2 resell the property and any deficiency arising on the resale and all expenses of and incidental to the resale or attempted resale and the Buyer's default are recoverable by the Seller from the Buyer as liquidated damages ...
57. That entitlement is additional to the plaintiff's entitlement to "keep, or recover and keep, the Deposit" (limited to 10% of the price).
58. On 7 September 2010, the matter was adjourned to allow the parties to address the issue of damages. That was addressed in writing.
59. The plaintiff's counsel submitted that of the deposit $50,000 (it was $51,000) was paid. The balance of $130,000 (in fact, $129,000) was not paid. The deficiency on resale was $247,000, that is the difference between the net price under the contract and that obtained on re-sale.
60. In Cloud Top Pty Limited and Anor v Toma Services Pty Limited and Anor [2008] NSWSC 568 (18 June 2008), it was affirmed that a deposit, if not excessive or unconscionable, is not to be regarded as a penalty in equity if lawfully forfeited (see also Luong Dinh Luu v Sovereign Developments Pty Ltd & 2 Ors [2006] NSWCA 40 (10 March 2006)).
61. In the latter case, however, Bryson JA drew a distinction between a deposit simpliciter and a deposit paid by instalments.
62. Nevertheless, in Golden Oceans (NSW) Pty Ltd v Evewall Pty Ltd [2009] NSWSC 674 (13 July 2009) Rein J accepted that a 10% deposit is not a penalty and is recoverable, though part of it may have been unpaid as at the date of default.
63. The terms for payment of this deposit contemplate not only keeping that part of it which was paid but recovering that part which was unpaid. It was contemplated that it would be paid prior to completion. In refusing to complete, the defendants also breached their obligation to pay the balance of the deposit before completion.
64. The defendants' position was that both the deposit and liquidated damages were not recoverable.
65. Second, they contended that the plaintiff had not mitigated its loss by accepting the $1.165 million offer at auction, though it would, no doubt, have been submitted, had that been done, that the market should have been given time to recover or be further explored so that it was an underestimate of the price recoverable on re-sale.
66. Third, they contended, the part payment of deposit was admitted to be $51,000, not $50,000. I accept that submission, as ultimately so did the plaintiff.
67. As to the first point, though acknowledging that cl 19.1 allows for both forfeiture of the deposit, up to 10% of the price, and the reselling of the property with recovery of the deficiency on resale plus sale expenses, the defendants submitted that the deposit must be taken into account in determining the deficiency on re-sale.
68. The defendants cited a decision of Powell J in Taylor & Others v Raglan Developments Pty Ltd (1981) 2 NSWLR 117 to support a view that the plaintiff should not be entitled to both the deposit and the net deficiency on re-sale absent account being taken of the deposit. That was not the point addressed by Powell J. It was whether unliquidated damages included only the losses after crediting the deposit. They did. To similar effect is Carpenter and Anor v McGrath and Anor (1996) 40 NSWLR 39.
69. Sheller JA noted that damages to which a wronged vendor is entitled included the deficiency on re-sale but held that that deficiency is arrived at only after crediting the deposit paid or payable. If the net deficiency does not exceed the deposit then only the sum agreed as the deposit is recoverable.
70. In Zografakis v McCarthy [2007] NSWSC 144 (28 February 2007), Hamilton J came to a similar conclusion.
71. However, that contract provided expressly that where the vendor elects to forfeit the deposit and resell the property, the deficiency on re-sale includes credit for the deposit kept or recovered after allowance of taxes, costs and expenses arising in consequence of the re-sale.
72. Although cl 19.1 of this contract did not expressly so provide, in my view, it has the same effect. The deposit paid or recovered, had completion taken place, would be credited against the price payable. It follows that the deficiency on re-sale is not merely the difference in price (after costs and expenses) but the difference between the deposit paid and that deficiency. If the deficiency is less than the 10% deposit there is no additional sum payable under cl 19.2 but the deposit is and may lawfully be forfeited.
73. Insofar as the 10% deposit exceeds the deficiency, the surplus is not to be regarded as a penalty. That is the effect of Cloud Top Pty Limited and Anor v Toma Services Pty Limited and Anor (supra) and other cases cited on behalf of the plaintiff. Nevertheless, the plaintiff cannot have both the gross deficiency on re-sale and the 10% deposit.
74. The plea of failure to mitigate relies on the difference between the highest bid at auction ($1.165 million) and the sale price in September 2008 of $1.053 million. That demonstrated, as Mr Henderson, the plaintiff's real estate agent attested, the falling market throughout 2008.
75. The test, as the defendants correctly submitted, is whether the steps taken by the plaintiff to achieve the best price reasonably obtainable on re-sale were those of a reasonably prudent vendor.
76. That is the principle derived from Castle Constructions Pty Limited v Fekala Pty Limited & Ors [2006] NSWCA 133 (29 May 2006) and Sherson & Associates Pty Ltd v Bailey & Ors [2000] NSWCA 275 (19 October 2000).
77. What, then, would a reasonably prudent vendor in the position of the plaintiff have done when faced with the auction result?
78. Clearly, the only option for the plaintiff was to negotiate a higher price with the highest bidder, if still interested, or seek the best price available otherwise.
79. The only evidence on that issue came from Mr Henderson. It was his informed opinion that, even after the auction, the property should have commanded a price in excess of $1.1 million. He was "disappointed" with the price obtained but, despite many inspections, no better price was forthcoming than that obtained.
80. In my view, this evidence supports the view that a reasonably prudent vendor, properly advised, would have proceeded as the plaintiff did.
81. I am, therefore, not persuaded that the plaintiff failed to mitigate the loss on re-sale of the property.
82. It follows that the plaintiff is entitled to judgment for the shortfall after accounting for the deposit as paid ($51,000). That shortfall is, therefore, $196,000.
83. The plaintiff is also entitled to the reasonable costs of resale, including agent's commission.
84. The defendants, however, submit that the commission actually paid to the agent was not shown to have been additional to the commission which may have been payable on the original sale had it proceeded to completion. That is, there is no evidence that the agent had earned commission on the original sale.
85. However, on 6 May 2008, the agent wrote to the plaintiff in the following terms:
RE: Sale of 34/5 Gould Street Turner A.C.T Block 26 Section 43 from
As you are aware the purchasers of this property did not complete the sale after exchange of contracts. Under the terms of our Agency Agreement, in particular but not limited to Section 2g) i) & ii) we seek to be indemnified for the amount due under this arrangement. These clauses state the following:
2g) If any such sale is not completed but the principle is entitled to have the deposit forfeited then: i) the principle will take all reasonable steps to
ii) If successful, pay LJ Hooker the success fee so
Based on the sales price of $1 300 000 the fee due is $30 318.75. Please make arrangements to have this fee protected under the terms of our agreement.
86. That fee was payable out of the deposit. However, on re-sale, a similar fee was charged. The total commission payable on the sale was, therefore, increased by that amount. It follows that the deficiency on the re-sale is represented not only by the price difference but also the first commission charged. The net difference, to put the plaintiff back to where it would have been but for the default of the defendants, is represented by the increased agent's fees of $30,625 on the second sale. That included the hire of furniture and furnishings.
87. The defendants object to these expenses being allowed as reasonably and properly incurred. Whilst that issue was not directly addressed in oral evidence, it was plain from correspondence that the agent advised those inclusions to assist the presentation of the unit. The reported comments of persons inspecting the unit tend to support the need for careful marketing. It was an expense reasonably incurred.
88. It was additional to the original expenses of sale because of the defendants' default and the need to try and attract the best price in a falling market.
89. A minor issue is the GST (Goods and Services Tax) component of the expenses. The plaintiff is a business entity and would be entitled to a credit against its taxable income as a property developer (see ss 11.5 and 17.5, A New Tax System (Goods and Services Tax) Act 1999 (Cth)). That produces a credit of $2,784.16. I note that the plaintiff would have been entitled to a similar credit on the first sale.
90. This was not an issue addressed by the evidence. In the absence of evidence that the plaintiff has or will in fact receive a tax rebate, I am not willing to make the allowance sought (see Johnston v Government Insurance Office of New South Wales (unreported, Supreme Court of New South Wales Common Law Division, Finlay J, 2 December 1993); c.f. Cullen v Trappell [1980] HCA 10; (1980) 146 CLR 1) without giving the plaintiff the opportunity to address that issue.
91. I will grant leave to the parties to address that issue and, therefore, provisionally refrain from awarding $2,784.16. I note too that there may have been other taxable transactions, such as the initial claim for commission, which may need adjustment. I grant leave to the plaintiff to bring in a minute fixing that sum and, also, adjusting the interest component to be added to the sums so awarded.
I certify that the preceding ninety-two (92) numbered paragraphs are a true copy of the Reasons for Judgment herein of his Honour, Chief Justice Higgins.
Counsel for the first Defendant: Mr D M Loewenstein
Counsel for the second & third Defendants: Mr C Erskine SC
Solicitor for the Defendants: Meyer Vandenberg Lawyers
Wireton Holdings Pty Limited
Price [2011] ACTSC 65
(1981) 2 NSWLR 117
(1996) 40 NSWLR 39
(1980) 146 CLR 1