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Wife’s title as joint proprietor with husband not defeasible by reason of husband’s fraud

In Cassegrain v Gerard [2015] HCA 2 the High Court of Australian had to decide whether a wife’s title as a joint proprietor with her husband was defeasible by reason of the husband’s fraud. The case contains an interesting discussion about when the fraudulent acts of an agent can be attributed to the principal and also the nature of a joint tenancy.

Section 42(1) of the Real Property Act 1900 (NSW) provides that the estate of a registered proprietor is paramount. It provides that, subject to some exceptions:

“Notwithstanding the existence in any other person of any estate or interest which but for this Act might be held to be paramount or to have priority, the registered proprietor for the time being of any estate or interest in land recorded in a folio of the Register shall, except in case of fraud, hold the same, subject to such other estates and interests and such entries, if any, as are recorded in that folio, but absolutely free from all other estates and interests that are not so recorded“. (emphasis added)

Section 118(1) provides that:

“Proceedings for the possession or recovery of land do not lie against the registered proprietor of the land, except as follows:

(d)       proceedings brought by a person deprived of land by fraud against:

(i)        a person who has been registered as proprietor of the land though fraud; or

(ii)       a person deriving (otherwise as a transferee bona fide for valuable consideration) from or through a person registered as proprietor of the land through fraud.”

The vendor transferred the land to the husband and wife as joint tenants for consideration to be satisfied by debiting the husband’s loan account with the vendor. The husband knew that the vendor did not owe him the amount recorded in the loan account. The husband then transferred his interest in the land to his wife for a nominal consideration. The questions were whether the wife’s title, first as joint proprietor with her husband, or second deriving from or through her husband under the subsequent transfer, was defeasible by the vendor.

Much attention was given in argument to whether the husband was the wife’s “agent”. In Assets Company Ltd v Mere Roihi [1905] AC 176 at 210 Lord Lindley that:

“the fraud which must be proved in order to invalidate the title of a registered purchaser for value … must be brought home to the person whose registered title is impeached or to his agents. Fraud by persons from whom he claims does not affect him unless knowledge of it is brought home to him or his agents.” (emphasis added)

The argument was about whether the fraud was “brought home” to the wife because the husband was fraudulent and was her “agent”. It was not disputed that the husband acted fraudulently in both the first and second transfers.

The court rejected the contention that the husband’s fraud could be sheeted home to the wife as a matter of agency. The court referred to the statement by Street J in Schultz v Corwill Properties Pty Ltd 1969] 2 NSWR 576 where his Honour said :

“It is not enough simply to have a principal, a man who is acting as his agent, and knowledge in that man of the presence of a fraud. There must be the additional circumstance that the agent’s knowledge of the fraud is to be imputed to his principal. This approach is necessary in order to give full recognition to (a) the requirement that there must be a real, as distinct from a hypothetical or constructive, involvement by the person whose title is impeached, in the fraud, and (b) the extension allowed by the Privy Council that the exception of fraud under s 42 can be made out if ‘knowledge of it is brought home to him or his agents’.”

There was no evidence that the wife was knowingly engaged in the husband’s scheme to deprive the vendor its land for nothing.

The majority (French CJ, Hayne, Bell and Gaegler JJ) held that the wife’s title as joint tenant was not defeasible by showing that the husband had acted fraudulently because the fraud had not been brought home to her.

Keane J dissented on this issue. His Honour decided that the land was acquired by the wife and the husband as joint tenants and as joint tenants they acquired a single estate. The title was acquired by fraud “sheeted home” to the wife, not because the wife claimed the title through her husband, but by virtue of the joint tenancy of the single estate to which they were entitled.

The vendor succeeded in recovering the land because the whole court  decided that s.118(1)(d)(ii) applied: the wife had acquired an interest as tenant in common as to half from the husband who had been registered as proprietor through fraud.

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Tenants should dispute rent nominated by landlord within time period specified in the lease

Tenants should dispute the rent specified by a landlord at a rent review date within the time specified by the lease. Dire consequences can follow if the time periods are ignored . The rent review process for setting the market rent commonly provides for:

  • the landlord to propose the new rent and, if the tenant does not object within a specified period of time, the rent proposed by the landlord is the new rent;
  • the rent to be determined by a valuer if the tenant objects to the rent proposed by the landlord.

The question often arises whether time is of the essence in the construction of clauses concerning rent reviews.

The starting point is the House of Lords decision United Scientific Holdings Ltd v Burnley Borough Council (1978) AC 904. In Mailman & Associates Pty Ltd v Wormald (Aust) Pty Ltd (1991) 24 NSWLR 80 (CA) Gleeson CJ referred with apparent approval to a summary of the effect of United Scientific in the judgment of Slade LJ in Trustees of Henry Smith’s Charity v AWADA Trading and Promotion Services Ltd (1983) 47 P & CR 607, 619 as follows:

“(1)      Where a rent review clause confers on a landlord or tenant a right for his benefit or protection, as part of the procedure for ascertaining the new rent, and that right is expressed to be exercisable within a specified time, there is a rebuttable presumption of construction that time is not intended to be of the essence in relation to any exercise of that right.

(2)       In a case where the presumption applies, the other party concerned may, if he wishes to bring matters to a head after the stipulated time for the exercise of the right has expired, give to the owner of the right a notice specifying a period within which he requires the right to be exercised, if at all; the period thus specified will if it is reasonable then become of the essence of the contract …

(3)       The presumption is rebuttable by sufficient ‘contraindications in the express words of the lease or in the interrelation of the rent review clause itself and other clauses or in the surrounding circumstances.’ …

(4)       Though the best way of rebutting the presumption is to state expressly that stipulations as to the time by which steps provided for by the rent review clause are to be taken is to be treated as being of the essence (see United Scientific Holdings Ltd v Bunley Borough Council per Lord Diplock [[1978] AC] at 936, and per Lord Salmon [[1978] AC] at 947), this is not the only way. Any form of expression which clearly evinces the concept of finality attached to the end of the period or periods prescribed will suffice to rebut the presumption. The parties are quite free to contract on the basis that time is to be of the essence if they so wish.”

The authorities make it plain that it is a question of construction of a lease whether there is express or implied rebuttal of the presumption that time is not of the essence

In Mailman the rent review provision the lease allowed the tenant a specific time to dispute the lessor’s assessment of the market rent and spelt out the consequence of failing to dispute the assessment within than time. There was no clause stating that time was of the essence. The relevant clauses were as follows:

“Prior to the expiration of fourteen (14) days…[from the service of the lessor’s notice], the Lessee may, by notice in writing, dispute the amount set out..[in the Lessor’s notice}…(clause 2.02(b))”

Another clause provided that if the lessee did not serve a notice of dispute within the prescribed time it was deemed to have agreed that the amount set out in the notice was current market rental.

The Court of Appeal held unanimously that the lease evidenced an intention that the 14 day time stipulation was of the essence. The decisive factor was the deeming of the tenant to have agreed to the rent if it failed to serve the notice of dispute.

The issue of whether time periods in rent review clauses are of the essence was revisited recently in Sentinel Asset Management Pty Ltd v Primo Moratis  [2014] QSC 200. The tenant failed to serve a notice disputing the rent specified by the landlord within the time prescribed by the lease with the consequence that iff time was of the essence the rent would increase by 22%. The critical clause provided that:

“Unless the Tenant gives the Landlord a notice stating that the Tenant’s assessment of the current annual market rent of the Premises at the relevant Market Review Date within 30 days after the Landlord gives the its notice, the Rent on and from the relevant Market Review Date is the current annual market rent in the Landlord’s notice.”

The lease also said that if “the Tenant gives a notice…. on time” (underlining added) the parties must attempt to agree the rent in writing failing which a valuer could be be appointed to determine the market rent.

The court found that time was of the essence with the consequence that the rent specified by the landlord applied.

The court also rejected an argument that the rent specified by the landlord had to be “reasonable”. The rent specified by the landlord in its notice was higher than the rent contained in an expert valuation obtained by the landlord.

The lesson is that it is critical for tenants to respond within the time prescribed by the lease.

 

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“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 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, among other things, to contribute to the tenant’s fit-out and grant a rent abatement. The lease did not require the tenant to undertake a fit-out. 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:

  • the lease and the incentive deed had to be construed as if they were one document;
  • the obligation to repay only arise if there a termination;
  • 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;
  • the repayment obligation should not be viewed as a restitutionary payment;
  • in addition to contractual damages for breach of the lease, the landlord was entitled, by the repayment clauses, to recover substantial additional payments;
  • 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.

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