"Claw back" of lease incentives thrown into doubt

Landlords often offer incentives to a tenant to encourage the tenant to enter a lease. Common incentives are rent free periods and contributions to the fit out. The logic behind the inducement is that the landlord will benefit because the tenant will occupy the premises for the term of the lease. Landlords sometimes require a “claw back” provision in the lease so that if the landlord terminates the lease before the expiry of the term the lease incentive (or part of the lease incentive) must be repaid.

The enforceability of “claw back” clauses has been thrown into doubt by the decision of the Queensland Supreme Court in GWC Property Group Pty Ltd v Higginson [2014] QSC 264.

In GWC the tenant and the landlord entered into a lease and on the same day entered into an incentive deed. The incentive deed was recited to “supplement the lease” and recited that the landlord had agreed to, among other things, contribute to the tenant’s fit-out and  grant a rent abatement. The incentive deed also provided for repayment of part of the landlord’s contributions if the lease was terminated (other than by expiry of the term or the lessor’s default) or if the tenant parted with possession without the landlord’s consent. The obligation to repay was guaranteed by guarantors.

The landlord terminated the lease after the leased premises were abandoned by the tenant. The court decided that:

(a)          the lease and the incentive deed had to be construed as if they were one document;

(b)          the obligation to repay only arise if there a termination;

(c)           the tenant could be obliged to repay the landlord’s contributions for reasons other than the tenant’s breach – for example where the tenant went into liquidation or following a natural disaster;

(d)          the repayment obligation should not be viewed as a restitutionary payment;

(e)          in addition to contractual damages for breach of the lease, the  landlord was entitled, by the repayment clauses, to recover substantial additional payments;

(f)           the repayment obligation were not a genuine pre-estimate of damage.

The court decided that the obligation to repay landlord’s contributions was a penalty and was therefore not enforceable.

The case contains a good discussion about the law of penalties. Thanks to Tony Burke of Burke & Associates Lawyers Pty Ltd for alerting me to GWC.

Mortgagor verification requirements in force in Victoria

Since 24 September 2014 a mortgagee in Victoria has been required to take reasonable steps to verify the authority and identity of a person executing a mortgage as mortgagor to ensure that person is the same person who is the registered proprietor of the land that is the security for the payment of the debt. See: s.87A(1) of the Transfer of Land Act 1958.

If the Registrar is satisfied that the mortgagee did not take reasonable steps and the registered proprietor of the land did not grant the mortgage the Registrar may:

(a)   if the mortgage has not been registered, refuse to register the mortgage; or

(b)   if the mortgage has been registered remove the mortgage from the Register.

See: s.878A(3)

If the mortgage is removed from the Register the mortgagee no longer has an indefeasible interest in the mortgaged land and the mortgage is void. See: s.84A(5).

A mortgagee is considered to have taken reasonable steps taken to have to verify the authority and identity of a person executing a mortgage if it has taken steps consistent with any verification of identity and authority requirements:

(i)            determined by the Registrar under s.106A; or

(ii)          set out in the ‘participation rules’ within the meaning of Electronic Conveyancing National Law (Vic).

The Registrar has not yet made a determination under s.106A.

The participation rules refer to a face to face interview in the case of an individual and the sighting of identification documents such as a passport, birth certificate, Medicare card, drivers licence. See: schedule 8 “Verification of Identity Standard”. Where the mortgagor is a company confirmation of the existence and identity of the body corporation by a search of ASIC’s records must be undertaken together with reasonable steps to establish who is authorized to sign or witness the affixing of the common. The identity of the person affixing the common seal must also be verified. There are also provisions for the establishing the identify and powers of attorneys acting on behalf of mortgagors.

Mortgagees should establish procedures to ensure that they can comply with the new procedures also maintain records that prove they have complied with the new procedures.

Second Notice to Complete Revives Terminated Agreement

A vendor who has terminated a contract for the sale of land should be wary of serving a second notice to complete because service of the second notice revives the agreement that has been terminated.

In Rona v Shimden [2005] NSWSC 818 a 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 at [86] analysed the position as follows:

“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: Lohar Corporation Pty Ltd v Dibu Pty Ltd (1976) 1 BPR 9177 at 9184, 9187.”

In Naval and Military Club v Southraw [2008] VSC 593 Byrne J accepted this analysis. See: also Portbury Development Co Pty Ltd v Ottedin Investments Pty Ltd & Ors [2014] VSC 57.

Franchisor's internet trading breaches restraint clause

Franchise agreements often restrict the franchisor from selling the franchised product in the territory in which the franchisee operates. 

Franchisors that engage in internet selling might be acting in breach of such clauses. 

This issue was highlighted in a recent appeal in New South Wales from the decision of a Magistrate to award damages against a franchisor. See: Video Ezy International Pty Ltd v Sedema Pty Ltd [2014] NSWSC 143.

In Video the franchisee operated a franchise business renting and selling DVDs. A company related to the franchisor operated a website from which customers could order DVDs. The franchise agreement precluded the franchisor from carrying on a “trade or business involving the rental and/or sale of video products or any other business of a similar nature within the territory of the franchise” (restraint clause).

The franchisor contended that the online business did not breach the restraint clause because it did not refer to the rental and sale of DVDs “into” the territory of the franchisor: a business could undertake transactions in a place without it being correct to say that the business is “within” that place. The court rejected the franchisor’s contention on the basis that it was “artificial” and did not give the phrase “within the territory” its natural and ordinary meaning.

The court dismissed the franchisor's appeal. The franchisor and the related company operating the website were treated as one entity and found liable for breaching the restraint clause and an implied duty to act in good faith and for unconscionable conduct under the Australian Consumer Law.

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From 31 July 2014, liability limited by a scheme approved under Professional Standards Legislation

Beware lodging caveat 'without reasonable cause'

Section 118 of the Transfer of Land Act 1958 and s.74P of the Real Property Act 1900 (NSW)  provide for payment of compensation to a party who has suffered “damage” (TLA) or “pecuniary loss” (RPA) where a person lodges a caveat “without reasonable cause”. In New South Wales s.74P also extends to a caveator who, without reasonable cause, refuses or fails to withdraw a caveat after being requested to do so. 

See: s.74P(1)(c).

As to the meaning of "reasonable cause" in Bedford Properties Pty Ltd v Surgo [1981] 1 NSWLR 106 Wootton J said at 109:

The drastic nature of the power is relevant in considering what is "reasonable cause" for its use, just as the dangerous character of a thing is relevant to deciding what is reasonable care in handling it. 

Before exercising such a power, a person can reasonably be expected to get proper advice, and be reasonably sure of his ground. 

If he does not, he may find that he has acted at his peril. 

This is all the more so when he knows, as Mr Richards knew, and indeed intended, that his action will prevent an important transaction involving a large sum of money.

In the recent case of  Arkbay Investments Pty Ltd v Tripod Funds Management Pty Ltd [2014] NSWSC 1003  http://www.austlii.edu.au/au/cases/nsw/NSWSC/2014/1003.htmlw

Robb J said it was "salutary to record" Wootton J’s observations in deciding that a caveat had been lodged without reasonable cause and had caused pecuniary loss.

In Arkbay there was no evidence that when the caveator lodged the caveat it had an honest belief on reasonable grounds that it had an interest in the relevant property. His Honour held that the lodging of the caveat had caused loss by reason of a delay in the settlement date for sale of the property.

At [17] Robb J said:

"The onus is on the plaintiffs to show that the caveator acted without reasonable cause. For there to be reasons not necessary that the caveator actually have a caveatable interest, but it is necessary that the caveator have an honest belief based upon reasonable grounds that the caveator has such an interest. Wootton J in Bedford Properties noted at 108  that an honest belief on the part of the caveator based on reasonable grounds may not be sufficient to provide a reasonable cause for lodging or maintaining a caveat, if the caveat is lodged "not for the protection of his interest but for an ulterior motive and without regard to its effect on transactions to which the caveator had agreed."

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Implied term that vendor must act in a reasonable manner when selling land pursuant to liquidated damages clause

What duties does a vendor have in selling land pursuant to a liquidated damages clause in the sale contract following a default by the purchaser?

There are three possibilities:

(a)  if a vendor acts unreasonably in failing to minimise loss arising from a purchaser’s breach, any damages will be reduced to the extent that the vendor’s loss would have been reduced had the vendor acted reasonably;

(b)  the duty imposed on a vendor is similar to that imposed on a mortgagee exercising a power of sale granted under a security, the duty being to act in good faith;

(c)  there is an implied term in the contract for the sale of duty that a vendor will exercise the power of resale in a reasonable manner.

In Portbury Development Co Pty Ltd v Ottedin Investments Pty Ltd [2014] VSC 57 Garde J rejected the first two possibilities and held that there was an implied term in the contract that the vendor would act reasonably in the exercise of its power of resale and that this implied term extended to all aspects of the resale. The contractual provision considered by the court was general condition 28.4 of the general conditions which provides:

“If the contract ends by a default notice given by the vendor:

1. the deposit up to 10% of the price is forfeited to the vendor as the vendor’s absolute property, whether the deposit has been paid or not; and
2. the vendor is entitled to possession of the property; and
3. in addition to any other remedy, the vendor may within one year of the contract ending either:
4. retain the property and sue for damages for breach of contract; or
5. resell the property in any manner and recover any deficiency in the price on the resale and any         resulting expenses by way of liquidated damages; and
6. the vendor may retain any part of the price paid until the vendor’s damages have been determined and may apply that money towards those damages; and any determination of the vendor’s damages must take into account the amount forfeited to the vendor.”

His Honour held that the implied duty to act in a reasonable manner in exercising the power of resale did not mean that a vendor had to put the interests of the defaulting purchaser ahead of his own. At [175] His Honour said:

“Where the interests of a vendor and the purchaser in breach are in conflict, for example as to the urgency or method of the resale, the vendor is entitled to prefer his own interests to those of the purchaser in breach, provided that in so doing the vendor acts in a reasonable manner. The obligation on the vendor to act in a reasonable manner has been held to apply to price, time of resale and conduct in the form or method of resale. It would also extend to the terms of resale to be offered by the vendor.”

Author: Robert Hays Barrister subject to copyright under DMCA.

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