Zele v Clark

Application for specific performance

1. Mr Clark took three points under this heading. I will deal with them in turn.
2. First, Mr Clark submitted that damages would be an adequate remedy. He stated that other properties which would apparently be suitable to the Zeles are available in the Wyong area. The property in question had no peculiar value and was not being used for the purposes of any business.
3. Mr Clark referred in his submissions to searches showing the availability of other properties in the Wyong area, but he produced no actual evidence of this. In any event there is a more fundamental objection to the submission.
4. It is well established that in considering whether to grant specific performance of a contract the courts regard individual pieces of land as unique. [1] Therefore, it is no answer for the vendor in a specific performance suit to say that other similar properties nearby would or might equally suit the purchaser's requirements. Mr Clark's first point fails.
5. Mr Clark's second point was that completion of the contract would involve him in hardship. This contention was only partially developed in submissions. It is hard to understand when Mr Clark voluntarily signed a contract under which he would have to give up vacant possession of the land on 31 January. In any event, again, it is unnecessary to consider the point in any more detail. Mr Clark conceded that his submissions about hardship were unsupported by any concrete evidence.
6. Mr Clark's third point and the one which requires the most consideration was that specific performance would be futile. Mr Clark claims that the property is encumbered by debts which collectively well exceed the amount of the purchase price. His contention is that in these circumstances it will not be possible to complete the sale and therefore specific performance should be refused.
7. The evidence before me shows that there are two registered mortgagees on the title. The first is Pepper Finance Corporation Limited ("Pepper"). It has a mortgage which was registered in 2019 and which secures all moneys owing to it from Mr Clark. Since the proceedings have begun Pepper has issued a notice of default under section 57(2)(b) of the Real Property Act 1900. That notice was issued on 24 May this year. It claims an amount due of $850,000. There appears to be no dispute as to the validity of this mortgage or that the amount claimed by Pepper is in fact owing.
8. The second registered mortgage is dated, and was registered on, 23 March this year. This was a week after the notice to complete upon which the Zeles rely in these proceedings expired. The mortgagees under the mortgage are three proprietary companies ("the Mezzanine Lenders"). The mortgage document refers to a loan of $300,000. The loan agreement is said to have commenced on 29 October last year. In the usual way there are two interest rates, one a lower and one a higher rate which would presumably apply in the case of default. The lower rate is 24% and the higher rate is 48%. These rates are of course well above prevailing market rates for home lending.
9. Also, on 23 March this year a caveat was lodged by a company called D & D Lumsden Earthmoving Pty Ltd ("Lumsden Earthmoving"). The caveat claims an interest in the property as an equitable charge pursuant to a settlement agreement. The agreement appears to have arisen out of a development project. It provides for payments to be made over a period of time by way of settlement of Lumsden Earthmoving's claim against Mr Clark for work done on the development. The time for the first of those payments has passed but the evidence does not indicate whether any payment was made.
10. Although, as I have stated, the notice to complete expired on 16 March, the Zeles had not lodged a caveat to protect their interests by 23 March when the Mezzanine Lenders' mortgage was registered and the Lumsden Earthmoving caveat was lodged. But by 30 March a caveat had been lodged to reflect the Zeles' interests as purchasers.
11. This was followed by two further caveats dated 17 June. The caveators are Stephen Bernard Clark and Marilyn Kay Clark. Presumably they are related to the defendant, but the evidence does not identify how. In each case, the caveat claims that the caveator has advanced a loan to Mr Clark pursuant to a loan agreement which charges the property as security for payment of the loan. The amounts allegedly due are not clear from the evidence, but both of the loan agreements refer to a sum of $200,000 having been provided by way of "prior consideration".
12. The law on this subject is, I think, clear. The Court will refuse specific performance if satisfied that it will be futile to make such an order. The onus of demonstrating futility lies on the defendant. I think that caution should be applied in a context such as this in refusing specific performance on the basis of a vendor's asserted inability to complete the transaction.
13. I earlier expressed this view in Ryde Ex Services Memorial and Community Club Ltd v Kaloriziko Ryde Pty Ltd [2017] NSWSC 1576, where I discussed some of the cases. Neither party took issue with what I said in that decision. The context was somewhat different, but one of the concerns which I raised (at [29]) was that if the Court is too ready to accept assertions by a vendor that the contract cannot be completed, then an order for specific performance would cease to be something granted almost as a matter of course in cases of sale of property. It would also lead to unprofitable disputes about the likelihood or otherwise of the defaulting party being able to complete.
14. It is quite clear in the circumstances that there will be insufficient funds from the purchase by the Zeles to satisfy all of the creditors of Mr Clark, or alleged creditors of Mr Clark, who claim to have a security interest in the property. But the question is not whether those creditors or alleged creditors will be paid in full. The question is whether they can or will do anything to frustrate the sale taking place.
15. In the case of Pepper, there seems no reason to suppose that there will be any difficulty. Pepper is the first ranking mortgagee and the amount of the purchase price comfortably exceeds the amount owing to it. Pepper itself has taken the first step towards exercising its power of sale on default. On the face of it, sale to the Zeles in accordance with the contract would save Pepper the time and trouble of forcing a mortgagee sale itself. There is every reason to think that Pepper will cooperate.
16. The Mezzanine Lenders are in the same position. Even at the higher rate of interest, and even assuming the $300,000 has been fully drawn, on the face of it there will be more than enough to satisfy the Mezzanine Lenders' claims after Pepper is paid out. Furthermore, the Mezzanine Lenders are in the position of being a second mortgagee. They cannot prevent Pepper from exercising its power as first mortgagee and selling the property. Again, I see no reason to think that they will not cooperate in the sale.
17. The caveators are in a different position since clearly there will be some risk, depending on the value of the Mezzanine Lenders' claim, that they will not be paid out completely. Particularly is this so for Stephen Clark and Marilyn Clark, the June caveators.
18. I will deal first with the position of the first caveator, Lumsden Engineering. Lumsden Engineering cannot reasonably expect to be paid out more than is left after prior creditors are paid. The real interest that it has is to see that the property fetches its maximum value. There is no suggestion that the property the subject of these proceedings was sold at an undervalue. Accordingly, there is no reason to think that Lumsden Engineering would resist a proposal that, subject to any dispute which might arise between Mr Clark and Lumsden Engineering about the validity of its security, it should be satisfied out of whatever is left.
19. In this regard it is relevant that Lumsden Engineering is not a registered interest holder but only a caveator. If a lapsing notice is issued on the caveat to facilitate settlement, the obligation will be on Lumsden Engineering to bring its own proceedings claiming specific performance of the obligation to create and register a charge. That could be an onerous and expensive process. Even if it is carried out, Lumsden Engineering will at best be a third‑ranking security holder. Like the Mezzanine Lenders, it will have no right to insist that the sale be delayed in the interests (if they exist) of achieving a higher price.
20. The same observations apply to the June caveators. In fact, they apply even more forcefully because there is no doubt that the June caveators, whose caveats postdate the caveat by the Zeles, will be postponed to any equitable interests that the Zeles may have.
21. In these circumstances, I am not satisfied that an order for specific performance is futile. There may be conveyancing complexities which arise from dealing with the various secured creditors or allegedly secured creditors, but the Court's power to give directions can be used to overcome those difficulties.
22. In particular, directions may be needed for lapsing notices to be issued on the caveats. If those lapsing notices do produce disputes as to entitlement or priority of security of other security holders, and those security holders object to the sale, then mechanisms exist for them to be joined to these proceedings to enable any necessary questions of entitlement and priority to be determined.
23. As I have already said, I am not satisfied that even if there are issues about entitlement and priority, such issues need to be determined in these proceedings. It may be that arrangements will have to be made for the proceeds of sale after payment out of undisputed mortgagees to be held in Court, but none of that will necessarily be an obstacle to the completion of the sale. I have already mentioned the power of the Court to make directions, but in the last resort it may be that any difficulties are best addressed by the appointment of a receiver in aid of the order for specific performance. [2]

Conclusions and orders

1. I have concluded that the contract is valid and enforceable and that specific performance should be granted. I will make a declaration and an order for specific performance in due course. (The parties addressed on the form of orders and costs)
2. The orders of the Court are: 1. Declare that there is a binding and enforceable agreement between the Plaintiffs and Defendant in the terms set out the contract for the sale and purchase of land relating to Registered Plan Lot [XX] Deposited Plan 10543, known as [XX] Wyong in the state of New South Wales, dated 17 December 2021. 2. Order that the Defendant specifically perform and carry into execution the agreement referred to in order 1. 3. Reserve for further consideration: 1. the form of any directions required to give effect to the order for specific performance; 2. any claim for damages for past breach of contract; and 3. costs. 1. Adjourn the proceedings for mention in the Expedition List on 15 July 2022.

Endnotes

1. Dougan v Ley (1946) 71 CLR 142 at 150.
2. Caird Seven Pty Ltd v Attia and Shopsmart Pharmacy Franchising Pty Ltd (No 3) (2016) 92 NSWLR 457 at [17]-[18]. 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: 14 July 2022