When does a deposit become a penalty?

Deposits hold a special place in contracts for the sale of land and do not fall within the general rules about penalties. Where a purchaser defaults the deposit (customarily 10 per cent) can be forfeited even though the amount of the deposit bears no reference to the anticipated loss to the vendor flowing from the breach of contract[1]. The vendor can forfeit the deposit as a minimum sum even if it makes a profit on the resale. On the purchaser’s breach, a vendor is also not limited to recovering the amount of the deposit; but may recover any deficiency on resale (after taking into account the forfeited deposit).

The special treatment afforded to deposits “derives from the ancient custom of providing an earnest for the performance of a contract in the form of giving either some physical token of earnest (such as a ring) or earnest money…”[2].

Where the principles governing deposits and the law governing penalties interact is where the contract provides, for example, for a deposit of less than 10 per cent to be paid and, in the event of a default, for the whole of the 10 per cent deposit to be paid. In such cases the requirement to pay the additional amount on default has been held to be a penalty[3].

In Simcevski v Dixon (No 2) [2017] VSC 531 Riordan J considered a contract for the sale of land that provided for the payment of a deposit equivalent to 5 per cent of the purchase price. Upon default by the purchaser, the vendor sought payment of a further 5 per cent of the purchase price relying on clause 28.4 of the contract which provided that:

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

(a) the deposit up to 10% of the price is forfeited as the vendor’s absolute property, whether the deposit has been paid or not; and”

While His Honour accepted that the anomalous position of deposits in the law of penalties protected them in most circumstances, he held that the obligation in cl 28.4 to pay further sum of 5% of the price was void as a penalty because:

• the obligation to pay a further sum of 5% of the purchase price did not purport to be by way of a deposit because the words in cl 28.4, being ‘the deposit up to’, had been deleted; and
• the further sum of 5% was only payable ‘[i]f the contract ends by a default notice given by the vendor’.

His Honour said:

“In my opinion, the circumstances of this case lead to the position, described by the Court of Appeal, in Melbourne Linh Son Buddhist Society Inc v Gippsreal Ltd[4], as:

[t]he irresistible inference that arises from [the] evidence and the inherent circumstances of the … transaction is that the [payment is to be made] in order to punish the [breaching party] for the inconvenience its conduct caused to the [innocent party] … rather than to protect any legitimate commercial interest of the [innocent party] arising from a breach … by the [breaching party].

His Honour also held that cl 28.4 was not a penalty simply because it was not a liquidated damages clause (ie a clause that refers to a sum fixed by the contract as a genuine pre-estimate of damage in the event of breach), but rather because it imposed an obligation to pay without any limit on the vendor’s right to claim damages to the extent that they exceed that payment.

Drafters of contracts must make it clear what is and what is not a deposit and provide for that sum to be paid without any reference to a breach. The case contains an extensive discussion of all the relevant caselaw.

[1] See: Workers Trust and Merchant Bank Ltd v Dojap Investments Ltd [1993] AC 573; Kazacos v Shuangling International Development Pty Ltd (2016) 18 BPR 36,353.

[2] Workers Trust, 578-9.

[3] See, among others: Luu v Sovereign Developments Pty Ltd (2006) 12 BPR 23,629; Iannello v Sharpe (2007) 69 NSWLR 452.

[4] [2017] VSCA 161.

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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.

“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.

NSW Court departs from general rule on drawing down of bank guarantees

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Courts have traditionally treated an interlocutory application to restrain the calling upon or use of money secured by a bank guarantee or other performance bond as being in a special category.

The authorities were summarised in Cerasola TLS AG v Thiess Pty Ltd & John Hollandd [2011] QSC 115 as follows:

On the basis of those authorities, it is sufficient for present purposes to note that the general rule is that a court will not enjoin the issuer of a performance guarantee from performing its unconditional obligation to make payment. A number of exceptions to that general rule have been identified. They are identified in Clough Engineering at [77] as:

(1)       An injunction will issue to prevent a party in whose favour the performance guarantee has been given from acting fraudulently.

(2)       An injunction will issue to prevent a party in whose favour the performance guarantee has been given from acting unconscionably in contravention of the Trade Practice Act 1974 (Cth).

(3)       While the Court will not restrain the issuer of a performance guarantee from acting on an unqualified promise to pay if the party in whose favour the guarantee has been given has made a contractual promise not to call upon the bond, breach of that contractual promise may be enjoined on normal principles relating to the enforcement by injunction of negative stipulations in contracts.

See: also Otter Group Pty Ltd v Wylaars [2013] VSC 98 at [16] where the summary was referred to with approval.

This general rule is the product of appellate authorities. See: Wood Hall Ltd v Pipeline Authority (1979) 141 CLR 443, Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd [1983] 3 VR 812; Bachmann Pty Ltd v BHP Power New Zealand Ltd (1999] 1 VR 420 and Clough Engineering Ltd v Oil and Natural Gas Corporation Ltd & Ors (2000) 249 ALR 458.

The rationale for the general rule is that by providing for security to be given, the parties implicitly agree that the party giving the security deposit shall be out of pocket pending resolution of the underlying dispute.

In Clough, the Full Federal Court said at [83] that “clear words will be required to support a construction which inhibits a beneficiary from calling on a performance guarantee where a breach is alleged in good faith, that is, non-fraudulently.”

The Supreme Court of New South Wales in Universal Publishers Pty Ltd v Australian Executor Trustees [2013] NSWSC 2012 appears to have departed from the general rule in circumstances where there were no clear words preventing the landlord calling on the bank guarantee and there was no issue that the landlord was acting in good faith. The lease did not contain any negative stipulations on the landlord’s right to call on the guarantee. The tenant disputed that there was any breach. The landlord submitted that the authorities referred to above made it clear that the existence of a dispute as to whether there was an actual breach was not an answer to an invocation of the guarantee. See: para [21].

In Universal the tenant obtained an ex parte injunction restraining the landlord from drawing on the bank guarantee. The proceeding then concerned whether the injunction should be discharged.

Clause 19.1 of the lease required the tenant to provide an “unconditional” bank guarantee to “secure the Lessee’s obligations under this Lease”.

Clause 19.4 provided that:

19.4. In the event that the lessee:

19.4.1.1 defaults in the payment of Rent or in the performance or compliance of any other obligations under this Lease; or

19.4.1.2 breaches any other obligation, term, condition or covenant under this Lease,

the Lessor is hereby authorised to demand that the guaranteeing bank pay to the Lessor such amount that (in the reasonable opinion of the Lessor) may be due to the Lessor as a result of such default, breach or non-observance by the Lessee or termination of the Lease pursuant to it.

The Court determined that there had to be an actual breach before the landlord could form an opinion as to the amount that might be due. See: para [25]. As to whether there was an actual breach did not depend on a judicial determination but on whether the tenant could establish that there was a serious question to be tried about whether there was a breach. See: paras [27] and [71].

The Court held that clause 19.1 did not provide for an allocation of the risk as to who should be out of pocket while a dispute as to the lessee’s asserted breach was determined. See: para [60].

The lesson from Universal is that the parties to a lease should ensure that the provisions concerning the drawing down of the guarantee specifically define the circumstances when the landlord can draw down on the guarantee. In particular, solicitors acting for landlords should, rather than relying on the general rule referred to above, ensure that the lease refers to the landlord’s entitlement to draw down on a guarantee where the landlord believes in good faith that the tenant has breached the lease.

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

Franchisor’s internet trading breaches restraint clause

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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 Ezy 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

VCAT is a “court” and therefore arbitration clause effective

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In  Subway Systems Australia Pty Ltd v Ireland [2013] VSC 550 Croft J held that a requirement in a franchise agreement that disputes be referred to arbitration did not prevent VCAT hearing and determining the dispute.

The matter came before Croft J as an application for leave after a VCAT member declined to find that the Tribunal was bound by  s.8 of the Commercial Arbitration Act 2011 (Vic)) (CAA) to refer the dispute to arbitration.

In broad terms s.8 of the CAA requires a court before which an action is brought in a matter which is the subject of an arbitration agreement to refer the matter to arbitration if one of the parties makes that request. Croft J held that VCAT was not a “court” for the purpose of s.8(1) and therefore VCAT was not bound to refer the dispute to arbitration.

In Subway Systems Australia Pty Ltd v Ireland [2014] VSCA 142 the Court of Appeal allowed an appeal from Justice Croft’s decision. Maxwell P and Beach JA held that VCAT was a “court” for the purposes of s.8 of the CAA. Kyrou AJA dissented. This means that the dispute must now be referred to arbitration. The Court of Appeal’s decision can be found here:

Subway Systems v Ireland_merged_17114[1]

 

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Parties can agree to higher standard than that imposed by s.52 of Retail Leases Act

 

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Section 52 of the Retail Leases Act 2003 implies into a “retail premises” lease an obligation on landlords to maintain “in a condition consistent with the condition of the premises when the retail premises lease was entered into” things such as the “structure of, and fixtures in” the premises, “plant and equipment at retail premises” and “the appliances, fittings and fixtures provided under the lease by the landlord relating to the gas, electricity, water drainage or other services”.

When is the lease entered into if an option is exercised? Is it the date when the lease commenced or when the new lease arising by reason of the option being exercised commences?

In Ross-Hunt Pty Ltd v Cianjan Pty Ltd[1] the Tribunal held that that the relevant date was the date that the new term commenced following the exercise of an option and not the commencing date of the first term of the lease.

A further question then arose about whether a provision in a lease that imposes a higher standard on a landlord than that imposed by s.52 is void under s.94 on the ground that it is contrary to or inconsistent with s.52.

In Savers INC (ARB 075 452 185) v Herosy Nominees[2][the Tribunal held that if parties wished to contract for more than was provided for under s.52 they were free to do so; in that case the leases (and earlier leases to which the landlords and tenant were parties) contained terms that obliged the landlords to undertake repairs to the premises and imposed obligations that were more onerous than those imposed by s.52.

In the recent decision of Di & Li Australia Pty Ltd v Jin Dun Pty Ltd[3] Senior Member Riegler rejected an argument that lease provisions which imposed more onerous obligations on the landlord than those imposed by s.52 were void. The Senior Member said:

“[20] In my view, s 52 does not prohibit the parties from agreeing to extend the Landlord’s obligations to repair or maintain its installations. The situation might be different if s 52 was expressed as a provision limiting a landlord’s obligation to maintain plant and equipment to a condition consistent with its condition when the lease was entered into. However, the provision does not expressly limit a landlord’s obligations but rather, imposes what I consider to be a minimum obligation on a landlord.

[21] There is nothing inconsistent or contrary to s 52 for the parties to increase that obligation and in the present case, it made eminent sense for the Landlord to continue to have that obligation upon renewal, given that it held the reversionary interest in the plant and equipment.

Further, it is not the case that s 52 is devoid of any limitation. In particular, sub-section (3) sets out various circumstances which limit its operation.

Those circumstances do not include limiting the comparator to the commencement of the Lease.

In my opinion, it was open for Parliament to have limited the operation of s 52(2) of the Act to the current term by stating words to the effect that a lease is not to include a term which requires the landlord to maintain plant and equipment, other than in a condition commensurate with the condition of the plant and equipment at the commencement of the lease.

However, the section is not expressed in such prohibitory terms, nor is it expressed to indicate any intention on the part of the legislature to ‘cover the field’ in respect of a landlord’s repair liability.”

 

[1] [2009] VCAT 829.

[2]2011] VCAT 1160

[3] [2014] VCAT 349

 

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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

 

 

Proprietary estoppel – estopped party does not have to disprove reliance

 

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The High Court has rejected the notion that the onus of proof in relation to detrimental reliance can shift to the party said to be estopped. In Sidhu v Van Dyke [2014] HCA 19 0the Court had to consider the sufficiency of proof of detrimental reliance required to given rise to an equitable estoppel (proprietary estoppel).

The appellant and his wife owned land as joint tenants.

The trial judge found that the appellant had promised to give the respondent part of the land owned by him and his wife once that land was subdivided.

The appellant and the respondent formed a relationship which resulted in the respondent’s husband leaving her.

The respondent did not seek a property settlement from her husband because of the promises made by the appellant.

The trial judge accepted that respondent had worked on the land and gave up opportunities for employment and that these activities might  be sufficient to amount to detrimental reliance for the purpose of an equitable estoppel; however, Her Honour concluded that the respondent may well have done all or most of those things in any event.

This conclusion was based on answers given by the respondent in the course of cross-examination. The trial judge also held that it was not reasonable for the respondent to rely on a promise of a transfer of land when  performance depended on the land being subdivided and the consent of the appellant’s wife.

The Court of Appeal upheld the respondent’s contention that the trial judge erred in holding that it was unreasonable to rely on the promises.

The Court of Appeal also held that the onus of proof in relation to detrimental reliance shifted to the party said to be estopped (ie the male appellant) where inducement by the promise could be inferred from the conduct of the claimant (ie the respondent).

The Court of Appeal held that an award of equitable compensation measured by reference to the value of the respondent’s disappointed expectation was the appropriate form of relief, being the value of the land at the date of judgment.

The High Court rejected the notion that the onus of proof in relation to detrimental reliance shifted: reliance was a fact that had to be found and not imputed on the basis of evidence that fell short of proof of the fact; the respondent at all times bore the legal burden of proving that she had been induced to rely upon the appellant’s promises.

The Court said that the real question was the appropriate inference to be drawn from the whole of the evidence. The Court also held that the evidence established reliance.

As to the relief, the High Court said that “this category of equitable estoppel serves to vindicate the expectations of the represented against a party who seek unconscionably to resile from an expectation he or she has created”. See: French CJ, Keifel, Bell and Keane JJ at [77].

Had  the respondent been induced to make a relatively small, readily quantifiable monetary outlay on the faith of the appellant’s assurances, then it might not be unconscionable for the appellant to resile from his promises to the respondent on condition that he reimburse her for the outlay.

However,  the  Court decided that this case was one to which the observations of Nettle JA in Donis v Donis (2007 19 VR 577, at 588-589 were apposite:

“[H]ere, the detriment suffered is of a kind and extent that involves life-changing decisions with irreversible consequences of a profoundly personal nature…beyond the measure of money and such that the equity raised by the promisor’s conduct can only be accounted for by the substantial fulfillment of the assumption upon which the respondent’s actions were based.”

 

 

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Section 243 of Australian Consumer Law gives tenants a powerful weapon

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Landlords need to be very careful about what they say when negotiating leases because s.243  of the Australian Consumer Law provides a wronged tenant with a powerful weapon.

That section permits the court to make an order declaring the whole or any part of a contract void or to vary a contract.

The most famous case concerning the sections’s predecessor (s.87 of the Trade Practices Act 1974)  was Kizbeau Pty Ltd v WG & B Pty Ltd (1995) 184 CLR 281 where the High Court varied a lease.

The Supreme Court of Queensland recently used s.243 of the ACL to set aside a lease and a guarantee. In that case the tenant and guarantors of the tenant’s obligations alleged that they were induced to enter into a 30 year lease by representations that if the tenant  paid rent at a rate of $180,000 per annum for three years and had not purchased the freehold after three years the landlord would cancel the lease and enter into a new lease at a rental of about $120,000 per annum.

The court found that the representation had been made and relied upon and that the tenant and the guarantor had suffered detriment as a result of the conduct of the defendants. The Court declared the lease and the guarantee void ab initio under s 243. The case is Morgo’s Leisure Pty Ltd and others v Morgan v Toula Holdings Pty Ltd and others [2013] QSC 325.

Postcript: the decision referred to above was reversed by the Court of Appeal in Toula Holdings Pty Ltd v Morgo’s v Dante (NQ) Pty Ltd [2014] QCA 201. Thanks to George Tsogas for alerting me to the result of the appeal.

 

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