Valid Termination of Contract, and the Question of Whether a Clause was a Penalty

The case of Cole v Raykir Holdings Pty Ltd [2019] NSWSC 1017 considered whether a vendor had validly terminated a contract for the sale of land, and whether the deposit clause was a penalty.

The plaintiffs arranged via contract to sell land to the first defendant, with the second defendant to be guarantor of the purchaser’s obligation. The contract required a payment of a 10% deposit, with 5% payable on exchange and the balance upon completion, and the deposit clause provided for a payment of the full amount of the deposit in the event of the purchaser’s default.

The defendants were unable to complete the purchase because they could not obtain the finance. The plaintiff then filed a notice to complete upon the defendant, and upon its expiry terminated the contract. They sought damages payment of the remaining balance of the deposit. The defendant argued that the notice to complete was invalid for not giving sufficient time for completion and that the accelerated payment clause was unenforceable as a penalty.

The Court held that the notice period given for the notice to complete was valid and as time was of the essence, the notice of termination was also valid. The defendant’s inability to pay on time amounted to a refusal to perform and repudiation of the contract.

On the question of the penalty, the Court held that while an accelerated obligation to pay is not itself penal, the provision may not have been in the true nature of a deposit as it was not an “earnest or guarantee of performance.” The plaintiffs, however, were successfully awarded damages for their claim in an amount equal to the balance of the deposit.

Valid Termination of a Contract for Breach of an Essential Time Stipulation

The recent case of Alexakis v Wan [2021] NSWSC 367 considered a contract for the sale of land, where the deposit was due to be paid in two instalments. The question was whether the second instalment was required to be paid on 4 August 2019, or by 31 August 2019, based on the construction of the contract. This was determined under s 181(1)(d) of the Conveyancing Act 1919 (NSW) which defined a ‘month’ as a ‘calendar month’ as per the definition in s 21 of the Interpretation Act 1987 (NSW).

The vendors were thereby entitled to terminate the contract on 5 August 2019. The breach of the contract brought about by the purchaser’s mistake gave the vendors a right to terminate, as the mistake was not caused by the conduct of the vendors, nor did they contribute to the mistake.

The breach was held to be a serious breach of an essential time requirement, and it was not unconscientious for the vendors to rely upon that breach in their termination of the contract. The plaintiff was denied equitable relief and the forfeit of the deposit of 5% of the purchase price was not found to be unjust or inequitable in the circumstances.

Recent Dispute Involving a Contract for Sale of Property in a Strata Title Building

The recent case of Charitou v The Owners – Strata Plan No 10394 [2021] NSWSC 392 considered a dispute under a contract for the sale of part of the common property in a strata title building. The plaintiff purchaser occupied one of the units as a tenant of the owner and entered the contract to acquire the common property and convert it into a flat. However, the contract was never completed as the completion of the purchase was conditional upon a plan of re-subdivision for the new flat being registered. The works requested by the purchaser to convert the common property into a residential space within 12 months, with a maximum extension period of 18 months. The purchaser applied for a development approval but encountered difficulties in obtaining it within the time. The purchaser’s solicitors wrote to the Strata Corporation’s solicitors to obtain confirmation that the contract was still on foot, but the conversion works were never undertaken.

The plaintiff commended proceedings initially seeking specific performance, and then later seeking damages for breach of contract. The Strata Corporation cross-claimed for a declaration that they had validly terminated the contract.

The Court held that the plaintiff was not entitled under the terms of the contract to an extension of the date for completion beyond the time stipulated, and that in any event, he had also failed to demonstrate that the Strata Corporation had repudiated its obligations under the contract.

Covid-19 Regulations Update

This is a reminder that the Corporations (Coronavirus Economic Response) Determination (No.3) 2020 expired on 21 March 2021, meaning that the pre-COVID requirements under the Corporations Act 2001 (Cth) (Corporations Act) apply in relation to the execution of documents by company officers and the holding of company meetings.

A company wishing to execute a document under s 127 of the Corporations Act may not do so electronically, unless the company has a constitution which empowers them to sign agreements electronically.

However, ASIC published a media release on 29 March 2021 stating that it would adopt a temporary ‘no action’ position in relating to the convening and holding of virtual meetings, but this does not affect the position on no electronic signing under the Corporations Act.

Equitable Lienee Able to Sue Mortgagee for a Sale at Undervalue

The recent case of Condon, in the matter of Rayhill v Australia and New Zealand Banking Group Ltd [2020] FCA 1674 considered the rights of a Bankruptcy Trustee with an equitable lien over mortgaged land. The Trustee claimed that it had standing to sue the mortgagee (ANZ) for a breach of their equitable and statutory duties not to sell the property at less than true value.  

ANZ sought an order to summarily dismiss the Trustee’s proceeding on the basis that the Trustee had no reasonable prospect of success, he had no standing and that he had not previously asserted the claim.

The claim required consideration of whether the holder of an equitable lien over real property has standing to bring a claim against the mortgagee for selling the property at less than market value. The Court held that the equitable lien conveys an equitable interest in the property, so there was no merit in ANZ’s contention that the Trustee had no standing to sue them for breach of their equitable duty as mortgagee in possession in selling the property. ANZ’s application for summary dismissal failed.

A Clarification on Types of Assets and Estate Planning

The distribution of an asset will depend upon the type of asset, and how it is owned. The four main types of assets are personal, joint, trust and superannuation.

Personal assets are those held in one’s personal name, such as a bank account or a registered Certificate of Title. Upon the death of the owner, the ownership of these assets falls to the estate and will be distributed in accordance with a Will, or, absent a Will, in accordance with intestacy rules.

Joint assets are held jointly with another person, and upon the death of one of the joint owners, the rule of ‘survivorship applies,’ whereby the survivor will assume the full interest of the asset.

Trust assets are legally held and controlled by a trustee for the benefit of a beneficiary or beneficiaries. The legal or beneficial owner depends on whether the trust was fixed or discretionary and whether the deceased was the trustee, appointor, or beneficiary. The distribution is governed by the trust deed.

Superannuation is a type of trust asset, but will not automatically form part of a personal estate. Superannuation is generally handled separately and can be paid pursuant to a binding or non-binding death benefit nomination, or according to the determination of the trustee. It can also be paid directly to dependents or to one’s estate.

Compulsory Acquisition of Sub-Stratum Land

Traditionally, compulsory acquisition of land entitles an owner of an interest in land to compensation. However, acquisition of sub-stratum land may result in no compensation or limited compensation being payable by an acquiring authority. The compensation payable in respect of sub-stratum acquisition varies in each state and territory. In NSW, the Land Acquisition (Just Terms Compensation) Act 1991 (NSW) andTransport Administration Act 1988 (NSW) regulate compensation for the compulsory acquisition of substratum interests in land. Under these Acts, a landowner’s entitlement to compensation for tunnel and rail infrastructure facility acquisitions does not arise until it can be established that the surface of the overlying soil is disturbed, or the support of that surface is destroyed or injuriously affected by the construction of the relevant public infrastructure.

Current litigation before the NSW Land and Environment Court, involving substratum acquisitions for the Sydney Metro project, is expected to clarify clear whether these circumstances capture the detrimental impacts on the development potential of the land above and acquired stratum or are limited to impacts on the overlying land in its present condition.

As sub-stratum acquisitions become more frequent in urban areas, it is likely that there will be increases in and refinement of the jurisprudence on the existing regimes as they apply to these types of acquisitions. Advice on this evolving area of law is important where there is a potential for detrimental impacts on above ground land uses.

Case Demonstrating the Requirement for Contracts for the Sale of Land to be in Writing

The recent case of Irvine v Dowling [2021] NSWSC 119 considered the writing requirements of an agreement to purchase an Estate property, and the entitlements of three siblings in relation to their father’s estate. Dowling was the registered proprietor of a Property of the estate, which she held on trust for herself and her siblings as beneficiaries of the estate. Dowling claimed that she was entitled to buy the Property as the highest bidder pursuant to a written Agreement between the three siblings that the property should be sold to the highest bidder by a private auction between themselves using written bids. Subsequently, the siblings agreed orally to a process of verbal bids (the Verbal Bid Agreement).

Another sibling, Irvine, commenced proceedings to have Dowling removed as executor due to her delay in administering the Estate. The case required the application of s 54A(1) of the Conveyancing Act 1919. Dowling claimed that she was entitled to purchase the property and that she had been ready, willing and able to complete that purchase.

The parties agreed that the written Agreement was valid and binding. It was a valid under s 54A because the successful bidder was required to enter a written contract to buy the property on specified terms. However, the Verbal agreement was not enforceable as it was a ‘purported variation’ because it sought to change the bidding method of the agreement but was not in writing (as required under s 54A). The Court held that while Dowling’s delay had been a breach of the Agreement, no party had purported to accept that breach and terminate the Agreement. She was thus entitled to purchase the property but, on equitable grounds was required to pay interest for her delay.

Contract for the Sale of Land – Dispute About a Penalty Clause

The recent case of Blanco v Wan [2021] NSWSC 273 involved a contract for the sale of land where the purchaser agreed to pay $205 000 (10% of the price) by instalments as a deposit. The purchaser paid $80 000 soon after exchange, and the remaining 125 000 was payable ‘on or before settlement’ or ‘upon default.’

The purchaser failed to complete the contract, so the vendor terminated it and sought to recover the $80 000 paid as well as the unpaid $125 000. The court held that the initial $80 000 was a deposit, and hence the principles concerning penalty provisions did not apply. The $125 000 was not a deposit because it was not payable at a time when it would be an earnest of performance, and that in substance it was a penalty. The amount was held to be extravagant and disproportionate to the interest of the vendor sought to be protected.

Separately, the purchaser claimed that the contract should be set aside as being unjust under the Contracts Review Act 1980 (NSW). However, this claim failed because there was no material inequality of bargaining power and because the purchaser had an adequate appreciation of the contract’s terms, and it did not operate in an unconscionable, harsh, or oppressive manner.

Offers, Acceptance and the Intention to be Legally Bound by Contract

The recent case of Hillam v JPSF Pty Ltd [2017] NSWSC 1510, considered whether a binding oral agreement existed between the parties in an agreement for a lease.

The Applicant in this case, Hillam, sought a declaration and order that a valid and binding lease existed by way of oral agreement with the respondent, and that the lease had been partly performed.

The court considered the fact that the only meeting between the applicant and respondent was when the applicant met with the LJ Hooker agent of JPSF on the premise. The agent made an offer for a new lease to the applicant, but the court found that this offer did not amount to an oral agreement because the agent had no legal authority to make any oral offer of lease to Mr Hillam. Nevertheless, a ‘Proposed Lease’ was received by the applicant. However, it was not executed until such time when the offer to lease had been withdrawn by the respondent.

The Court held that the parties had not intended to enter binding legal relations, whether oral or written, and as there was no execution of a formal lease document, there was no contract. The application was dismissed. This case demonstrates the importance of ensuring all elements of contract formation are satisfied to have a binding contract.