Undertaking as to damages must not be a ritual or a formality

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Parties seeking injunctions are required to offer an undertaking as to damages as the price for the injunction. All too often the undertaking is given lightly and without an understanding of the potential consequences.  If the person against whom the injunction is granted succeeds at trial and has suffered loss or damage the consequences can be severe. The inquiry is not whether the actual loss suffered was foreseen at the time the undertaking was given, but is whether loss of a kind actually sustained could have been foreseen.

In Love v Thwaites [2014] VSCA 56 the Court of Appeal upheld a trial judge’s order that the party who obtained an injunction pay damages and interest of more than $5,000,000 pursuant to an undertaking. This disastrous outcome was the consequence of the appellant seeking and being granted an interlocutory injunction restraining the Roads Corporation from demolishing a property. The appellant gave the usual undertaking as to damages. During the proceeding the appellant had been asked to consent to the discharge of the injunction but the requests were refused. After the appellant’s proceeding was dismissed and the injunction discharged there was then a trial to determine the damages suffered by the Roads Corporation resulting from the granting of the injunction. The trial judge[1] set out the principles governing the assessment of damages as follows:

“30. In Davinski Nominees Pty Ltd v I&A Bowler Holdings Limited, Kaye J described the basis for the assessment of damages on an undertaking to the court as uncontroversial: damages flowing directly from the injunction and which could have been foreseen when the injunction was granted, following the decisions of the High Court in Air Express Limited v Ansett Transport Industries (Operations) Pty Ltd and European Bank Limited and Robb Evans of Robb Evans & Associates.

31.  In Air Express, Aickin J held that in a proceeding of an equitable nature ‘the damages should be those that flow directly from the injunction and which could have been foreseen when the injunction was granted’. On appeal, Barwick CJ agreed with the reasoning of Aickin J. Gibbs J identified the generally accepted view to be that ‘the damages must be confined to loss which is the natural consequence of the injunction under the circumstances of which the party obtaining the injunction has notice’ adding that ‘the party seeking to enforce the undertaking must show that the making of the order was a cause without which the damage would not have been suffered’. Stephen J referred to the court having the power, as far as monetary compensation allows, to make good the harm of which the grant of the injunction was a cause and that but for it he would not have suffered. Mason J said ‘generally speaking, so long as the claim for damages is not trivial or trifling, an enquiry should be directed and the defendant will be entitled to recover the loss which is the natural consequence of the grant of the injunction.’ The causal connection between the damage and the injunction is to be identified from the purpose for which the undertaking as to damages is designed to serve. That object is to protect a party from damage sustained in the event that it emerges that the plaintiff is not entitled to the relief sought. Its purpose is not to protect the defendant from damage otherwise sustained.

32.  In European Bank, the High Court, in a joint judgment, affirmed Air Express, restating the significance of the nature of the undertaking. It is not a contract between parties or some other cause of action upon which a party could sue, but is given to the court for enforcement by the court. The joint judgment emphasised the phrase ‘which could have been foreseen’. It is well established that for damage to be reasonably foreseeable it need only be damage of a type or character that is foreseeable or damage of a type or character that could not be considered unlikely.Roads Corporation submitted that the tortious concept ‘reasonable foreseeability’ is a wider concept than the contractual ‘reasonable contemplation’. The High Court in European Bank makes it clear that the inquiry is not whether the actual loss suffered was foreseen at the time the undertaking was given, but is whether loss of a kind actually sustained could have been foreseen. "

(citations omitted)

The Court of Appeal dismissed the appeal. The Court accepted that the concept of mitigation of damage applied (at least by analogy) in this case.

Tate JA said at [62]:

“While there is no suggestion that the usual undertaking was here given lightly, the consequences that have flowed from the failure of Mr Love to make out his case at trial have been significant. In my view, these consequences provide a salutary lesson to practitioners and their clients to appreciate the conditions governing the grant of an interlocutory injunction. The usual undertaking carries serious risks; it would be wholly erroneous to view it as no more than a ritual or a formality.”

[1] Love v Thwaites (No. 4) [2012] VSC 521

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Mortgagor fails in last minute bid to stop auction

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Bill Stark has posted an interesting article on his blog about a case concerning a defaulting mortgagor's last minute unsuccessful attempt to prevent the sale of the mortgaged land. See: Melbourne Property Law Blog.  Attempts by mortgagors to prevent  sales proceeding are rarely successful and the price for an injunction preventing a sale proceeding is usually payment of the amount owing into court. In the case analysed by Bill (Pearl Beach Property Administration Pty Ltd v Wisewoulds Nominees Limited [2014] VSC 113)  the mortgagee advertised the property for sale at an auction with an expected price range of $3,900,00 - $4,200,000.

The day before the auction the borrower "sold" the land for $5,000,000; however, the mortgagee did not consent to the proposed sale preferring to go to auction. The borrower sought an injunction on the day of the auction alleging that the mortgagee had breached its duty to act "in good faith and having regard to the interests of the mortgagor" under s.77(1) of the Transfer of Land Act 1958 and/or its obligations to the mortgagor under s.420A of the Corporations Act. The alleged bad faith was the mortgagee marketing the property for sale in a price range that was less than the valuation of $4,800,000 allegedly obtained by it. Despite the mortgagee not appearing at the hearing of the injunction  the injunction was refused.

Justice Dixon  held at [21] that "It was not properly open to infer a want of good faith or want of reasonable care in the conduct of the proposed sale from the fact that the property has been advertised as available within a range that is below the sworn valuation".  His Honour said that under quoting did not mean that the property was likely to be sold at an undervalue at auction.  There is authority that a mortgagee is  not bound to withdraw a property from auction merely because private offers are made  See: Southern Goldfields Ltd v General Credits Ltd (1991) 4 WAR 138. See also Qorum Pty Ltd v Younger (1995) NSW Conv R 55-738 (BC9504362).  While it is usual for a mortgagee to sell mortgaged property by auction it is not a breach of duty by the mortgagee if property is sold by private contract. See: s77(1) of the TLA.

However, where land is sold by private contract it is desirable for the mortgagee to obtain one or more estimates of the value of the mortgaged property from competent estate agents. See: Croft and Hay The Mortgagee's Power of Sale, 2012, para 6.2.

It is not a breach of duty merely because land is sold by private contract without advertising: the question is always whether the land sold in good faith and for a fair price. See: Vasiliou v Westpac Banking Corporation (2007 19 VR 229. The critical issue is the price obtained and not the presence or absence of advertising. See: Vasiliou at [63].

A mortgagee may also not be acting in bad faith by proceeding with an auction despite the existence of a lucrative offer for private sale if there is no evidence that the purchaser will be able to perform its obligations under the contract. See: Esanda Finance Corporation Ltd v C Conti (unreported, Supreme Court of Queensland, 15 January 1993, BC9303066).

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No easy answers to whether premises are "retail premises"

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It is often difficult to determine whether premises are “retail premises” within the meaning of s 4 of the Retail Leases Act 2003 Act. Section 4(1) provides that “retail premises” means premises that:

“under the terms of the lease relating to the premises are used, or are to be used, wholly or predominantly for –

(a)    the sale or hire of goods by retail or the retail provision of services.”

One difficulty that arises is that the definition excludes premises that are “intended for use as a residence” with the result that it is not always clear  whether premises such as motels, serviced apartments and caravan parks are “retail premises”.  In the recent decision of String v Gilandos Pty Ltd [2012] VSC 361 Croft J highlighted that there are no easy or broad brush answers: in each case the terms of the lease and the nature of the premises needs to be examined carefully.

His Honour was required to decide whether leases by owners of units in an apartment/resort  complex to the operator of the resort were “retail premises leases” within the meaning of the Retail Tenancies Act 1986, the Retail Tenancies Reform Act 1998 and the 2003 Act. The operator paid rent to the owners and rented the units to members of the public. The units were used as “serviced apartments” and the members of the public did not know who the owners were. From at least 2007 to January 2012, no member of the public had stayed at the units on a permanent or semi-permanent basis and members of the public had only occupied the units for a day or few days at a time. His Honour determined (at [42]) that the units were used for short-term holiday accommodation in a manner difficult to distinguish in any meaningful way from the manner in which motel and hotel rooms were used.

At [47] His Honour considered the meaning of “serviced apartments” and said:

The term or description “serviced apartments” seems to be a relatively modern one; which probably accounts for the lack of assistance from dictionaries. Thus it cannot be assumed that this term or description has any settled meaning. Consequently it is only a term or description that derives meaning – other than in a very general sense – from the particular circumstances in which it is used; and, in most cases with respect to particular premises. This is, in my view, clear from the cases in which the term or description has been considered.

After reviewing the authorities, Croft J said at [52]:

Thus these cases indicate that there may be very fine distinctions between use of premises as a motel on the one hand or as a serviced apartment or serviced apartment complex on the other hand. The observations by the various courts and tribunals with respect to motels and serviced apartments indicate that the characteristics of both types of premises can overlap, thus adding to difficulties in characterising the mode of usage. A clear example is to be found in St Kilda City Council v Perplat Investments Pty Ltd [(1990) 72 LGRA 378] where Young CJ observed that, while it was open to the Tribunal to make a finding of fact based on the evidence before it that the proposed building would be used as serviced apartments, in his view, the proposed buildings looked more to be a motel.

Following Wellington v Norwich Uniton Life Insurance Society Limited [1991] 1 VR 333 and similar cases (at [58]), His Honour held that that the “ultimate consumer” test was the “touchstone of retailing, whether goods or services” and (at [65]) that members of the public were ultimate consumers for fee or reward (being fees paid for accommodation) and the units were used “wholly or predominantly for the carrying on of a business involving the sale or hire of goods by retail or the retail provision of services”.  Thus, each of the leases were “retail premises leases”.

At [65] His Honour said:

Motels, hotels or resort complexes, generally speaking, provide retail services for fee or reward, including the hiring out of rooms. They may also sell food, liquor and other beverages, by retail, at any restaurant faculty provided. In any event, the hiring out of rooms or units for fee or reward to members of the public clearly constitutes the provison of retail services.

His Honour stressed that in each case the nature of the premises had to be analysed together with the manner in which the occupancy was provided. His Honour said at [68]:

I should, however, sound a note of caution in relation to this finding by emphasising that whether or not premises described as “serviced apartments” is to be characterised as “retail premises” depends upon the particular circumstances, including the nature of the premises, the manner in which occupancy is provided and the nature of that occupancy (see Meerkin v 24 Redan Street Pty Ltd [2007] VCAT 2182 (Deputy President Macnamara); though see Bradfield & Ors v QOB Tenancy Pty Ltd (Retail Tenancies) [2012] VCAT 755 (Senior Member Davis) where the parties took the common view that the serviced apartments ought to be considered as retail premises for the purposes of the 2003 Act (see paragraph [82]) .  As I have said, the term or description, “serviced apartments”, is not a term of art. Rather, it is a term or description of premises which connotes a range of possibilities. At one end of the range one would find premises managed and occupied in a manner indistinguishable from a motel or hotel and at the other end premises indistinguishable from long term residential accommodation, separately let but with the attribute of being serviced. In the former case it would be expected that the Acts would apply on the basis that the premises are “retail premises” and in the latter case they would not, any more than they would to any block of residential units. In between there are a range of possibilities each of which may have different consequences in terms of the application of the Acts.

As to the exclusion from the definition of “any area intended for use as a residence”, His Honour said at [64]:

For the sake of completeness I observe that the Retail Leases (Amendment) Act 2005 amended the 2003 Act to include the words “not including any area intended for use as a residence” in the provisions defining the meaning of “retail premises”. In my view, the expression residential accommodation connotes accommodation of this type which is occupied with a degree of permanence. I observe that, consistent with this view, the Full Federal Court of Australia said, in Marana Holdings Pty Ltd v Commissioner of Taxation (2004) 141 FCR; 214 ALR 190; [2004] FCAC 307 (“Marana Holdings”) that: [citation omitted]

"It may be that the expression “residential accommodation” is sometimes used to describe short-term accommodation in an hotel or a motel. We are not sure that any such usage is as common in Australia as the Court of Appeal in Owen v Elliott [(Inspector of Taxes) [1900] 1 Ch 786] considered it to be in England. We would have thought that such accommodation is more often described as “temporary accommodation”, “holiday accommodation” or perhaps as “hotel accommodation” or “motel accommodation”".

Although Marana Holdings was not a retail leases case this statement is, in my view, one of general application. In the present case the agreed facts are that the Plaintiffs’ Units have been used as only temporary accommodation by its occupants,[citation omitted] so no issue arises with respect to the possibility of residential use.

The agency exception

His Honour also considered a claim by the operator the units were not "retail premises" because the employee or agency exception applied. Section 4(2)(b) of the 2003 Act exempts premises where the tenant is “carrying on” a business “on behalf of the landlord as the landlord’s employee or agent”. After a comprehensive consideration of the terms of the leases His Honour at [69] – [95] rejected the operator’s claim that it was carrying on a business as the landlord’s agent.  Helpfully, His Honour at [94] said:

….in my view, the agency exception only applies if the tenant and landlord relationship is merely incidental to the agency relationship. So even if I am wrong in finding that there is no agency relationship, it cannot be said that the landlord and tenant relationship between the Plaintiffs and the Defendant is incidental to the agency relationship.

(italics added)

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Consequences of repeal of Fair Trading Act

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In yesterday's post I stated that the Fair Trading Act 1999 had been repealed effective 1 July 2012 and replaced with the Australian Consumer Law and Fair Trading Act 2012.  Many commercial disputes brought in VCAT were "consumer and trader" disputes within the meaning of s.107 of the FTA. Chapter 7 of the new Act preserves the "consumer and trader" dispute regime.  Note should be taken of s.3(2) which provides that unless the contrary intention appears the words and expressions used in the new Act have the same meaning as they have in the Australian Consumer Law. This means, for example, that in deciding whether a dispute is a "consumer and trader" dispute recourse will have to be had to the definition of "goods" and "services" in s.2 of the Australian Consumer Law.

Section 8 of the new Act provides that the "Australian Consumer Law text" applies as a law of Victoria.  The expression "Australian Consumer Law Text" is defined in s.7 as meaning, among other things, schedule 2 to the Competition and Consumer Act 2010 (Cmlth), being the Australian Consumer Law. Thus, when considering, for example, a potential claim for misleading or deceptive conduct recourse must be had to s.18 of the the Australian Consumer Law and not to any provision in the new Act.  VCAT has jurisdiction to hear and determine disputes under the Australian Consumer Law and thus the full suite of remedies available under the Australian Consumer Law can be utilized in VCAT. See: s.224 of the ACLFTA.

Readers should also note that the Landlord and Tenant Act 1958 will be, but has not yet been, repealed by the ACLFTA with the consequence that the law concerning uncollected goods left in premises at the termination of a lease remains in Part IVA of the Landlord and Tenant Act. When Part IVA  is repealed Part 4.2 of the ACLFTA will be the statutory source of the law in Victoria concerning uncollected goods.

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Tenants need the protection of s.146 of the Property Law Act

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I have had a number of queries about a recent post concerning N.C.Reid & Co v Pencarl Pty Ltd [2011] VCAT 2241. In Reid Judge O'Neill held that before re-entering leased premises the landlord did not have to serve a notice that complied with s.146 of the Property Law Act 1958. 

The lease permitted the landlord to re-enter if the guarantor became bankrupt.  Section 146 requires service of a notice where a right of re-entry or forfeiture under any proviso or stipulation in a lease or otherwise arising by operation of law for "a breach of any covenant or condition in the lease, including a breach amounting to a repudiation". 

Judge O'Neill held that there was no "breach" and therefore a notice under s.146 was not required. If the case of  Reid stands it has major implications for tenants who will lose the protection afforded by s.146. 

Judge O'Neill does not appear to have been referred to authorities that might have persuaded him to adopt a different interpretation of s.146. For example, the application of the reasoning applied by McLelland J in Della Imports Pty Ltd v Birkenhead Investments Pty Ltd (1987) NSW Conv R 55-538 might have resulted in a different outcome.  

McLelland J had to consider a lease that permitted the lessor to enter premises and determine the lease without notice if the lessee entered into liquidation or was wound up. His Honour held that the right of re-entry under the lease was a "right of re-entry or forfeiture under any proviso or stipulation in a lease, for a breach of any....condition in the lease", within the meaning of s.129 of the Conveyancing Act 1919 (being the NSW equivalent of s.146) and which could not be enforced unless and until the lessor gave notice  under s.129 and in respect of which the tenant could apply for relief against forfeiture. 

His Honour held that a provision in a lease that provided for re-entry on the happening of an event, regardless of whether or not there was any obligation on the lessee to prevent that even happening, was a "condition" within the meaning of s.129 and that the word  "breach" in s.129 was equivalent to non-fulfilment".  His Honour held that this interpretation was supported "by the evident policy of the provision [ie s.129 in NSW or s.146 in Victoria] which would otherwise be manifestly inadequate for the protection of lessees which it obviously is intended to confer". 

 If Reid is the law in Victoria s.146 will need to be amended.

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Meaning of "terms contract" examined

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Any practitioner who acts for vendors and purchasers of land should have a good understanding of what is and what is not a “terms contract” for the purpose of the Sale of Land Act 1962. The Act prohibits certain types of “terms contracts” and a purchaser can avoid contracts entered into in contravention of the Act. In an important decision, Dixon J in Ottedin Investments Pty Ltd v Portbury Developments Co Pty Ltd [2011] VSC 222  considered the definition of “terms contract” that has applied since 31 October 2008. Section 29A provides:

“(1) For the purposes of this Act a contract is a terms contract if it is an executory contract for           the sale and purchase of any land under which the purchaser is -

(a) obliged to make 2 or more payments (other than a deposit or final payment) to the                     vendor after the execution of the contract and before the purchaser is entitled to a                     conveyance or transfer of the land; or

(b)entitled to possession or occupation of the land before the purchaser becomes entitled to a        conveyance or transfer of the land.

  (2) In subsection (1)- deposit means a payment made to the vendor or to a person on               behalf of the vendor before the purchaser becomes entitled to possession or to the             receipt of rents and profits under the contract; final payment means a payment on the                 making of which the purchaser becomes entitled to a conveyance or transfer of the                   land.” (italics added)

Before 31 October 2008 a “terms contract” was an executory contract under which the purchaser is;

 (a) obliged to make two or more payments to the vendor after execution of the contract and before the                purchaser was entitled to a conveyance or

(b) entitled to possession or occupation of the land before becoming entitled to a conveyance or transfer.             The definition of “deposit” and “final payment” in s29A have a much wider meaning.

In Ottedin the purchaser, in December 2008 contracted to purchase land for $6.5 million and paid a deposit of $325,000 with settlement due in December 2009 upon which the purchaser became entitled to transfer and vacant possession of the land. The purchaser was unable to settle.

 By deed the parties deleted the particulars of sale and substituted new particulars under which the price remained the same but the settlement date was changed to December 2010, the deposit became $1,325,000 with $325,00 due on the day of sale and $1,000,000 due in January 2010 (increased deposit).

There was also a provision for a contingent interim payment of $3,675,000 with a final payment of $1,500,000 due at settlement.

Ottedin defaulted and sought to avoid the contract under s29O(2) of the Act on the ground that the contract was a “terms contract” that did not comply with the Act’s requirements concerning terms contracts.

The contention was that apart from the initial deposit of $325,000 and the final payment, the contract (as varied) was a terms contract because it obliged the purchaser to pay two or payments after the execution of the contract, being the balance of the deposit ($1,000,000) due in January 2010 and the interim payment of $3,675,000.

Dixon J rejected the purchaser’s contention. His Honour held that both the initial $325,000 and the increased deposit were each obligations to pay the “deposit” within the meaning of s29A.

His Honour held that the contingent interim payment of $3,675,00 (which was not paid) was either a deposit or became part of the final payment but its characterisation did not matter because even if it was an interim payment before settlement, there was still only one payment.

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Tenancy in common trumps joint tenancy

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When property is purchased in joint names and one party dies the question of whether the proprietors held the land as joint tenants or tenants in common invariably arises. 

The answer is significant because if the parties were joint tenants the whole of the land remains with the surviving joint tenant. The law concerning joint tenancies and tenancies in common was recently reviewed in detail in Sacks v Klein [2011] VSC 451. 

In Sacks two brothers purchased a flat as as joint proprietors as an investment. The mortgage loan was made to them jointly and severally. One brother died and the survivor claimed to be entitled to be registered as the sole proprietor and was so registered.

The administrator of the deceased’s estate sought a declaration that the survivor held the land on trust for himself and the plaintiff as tenants in common in equal shares. Sacks contains an excellent summary of the relevant legal principles and provides a good example of the analysis that needs to be undertaken in determining what the parties’ intentions were when the land was purchased. In summary the legal principles are:

(a)  Where  property is conveyed to two or more persons who are named as transferees without further                specification as to whether they hold the title as joint tenants or tenants in common, they are deemed by        operation of s.33(4) of the Transfer of Land Act 1958 to hold the legal estate as joint tenants. But that        section does not preclude the operation of equity.

(b)  In the absence of evidence that the transferees hold a different intention, equity will follow the law.                  However, equity favours tenancies in common and even “slight circumstances” are enough to indicate            that the parties do not intend to hold property as joint tenants.

(c)  Prima facie, the provision of purchase money in equal shares is consistent with an intention to hold                  property as joint tenants. But equity will presume an intention to hold the beneficial interest as tenants in          common where, among other things, a mortgage is made to them jointly, or where the property is                  acquired by partners or participants in a joint undertaking.

(d)  The application of the equitable presumption was not confined to formal business structures; an informal        joint business venture or undertaking would still give rise to equities leaning towards a tenancy in                    common of the beneficial interest.

(e)  The equitable presumption may be rebutted by evidence of a common intention by the co-owners to              acquire the property as joint tenants; the common intention must be actual and not presumed. If there is          ambiguity at to the existence of a common intention the court will lean towards a construction which              creates a tenancy in common rather than a joint tenancy.

(f)  If the parties describe their interests in words which suggest distinct shares are to be held, their words             prevent the creation of a joint tenancy. The evidentiary threshold needed to establish a division is easily         met because:

"....anything which in the slightest degree indicates an intention to divide the property must be hold to abrogate the idea of a joint tenancy and to create a tenancy in common" (Robertson v Frazer (1871) LR 6 Ch A 696 at 699).

Hargrave J  held that the brothers purchased the land as a joint business undertaking and therefore the equitable presumption of tenancy in common applied with the consequence that the survivor had to rebut the presumption by “clear and cogent” evidence. Despite finding that the brothers agreed to be registered as joint tenants Hargrave J held that the brothers intended to divide their interests in the flat equally and therefore the administrator’s claim succeeded.

Thanks to Elizabeth Michael for mentioning this case to me.

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Author: Robert Hays Barrister subject to copyright under DMCA.

Deposits in sales of land

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In general a contractual provision that requires a party in breach of contract to pay or forfeit a sum of money is unlawful as a penalty unless such provision can be justified as being a payment of liquidated damages being a genuine pre-estimate of the loss which the innocent party will incur by reason of the breach.

One exception to this general rule is the provision of the payment of a deposit by the purchaser on a contract for the sale of land. Ancient law has established the forfeiture of such a deposit (customarily 10% of the contract price) does not fall within the general rule and can be validly forfeited even though the amount of the deposit bears no reference to the anticipated loss to the vendor flowing from the breach of contract.

The special treatment given such deposits derives from the ancient custom of providing an earnest for the perform of a contract in the form of giving either some physical token of earnest (such as a ring) or earnest money. The special treatment given to deposits could be open to abuse if parties could avoid the rule that renders penalties unenforceable by attaching the label "deposit"  to any penalty. 

The courts have held that parties cannot label an extravagant sum as a "deposit" and thereby avoid the sum being a penalty. See: Stockloser v Johnson [1954] 1 QB 476 per Denning LJ at 491; see also Workers Trust Bank v Dojap Ltd [1993] 1 AC 573.  The Workers Trust case contains an interesting discussion about deposits in land sales.

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