Posts Tagged Robert Hay Barrister
New edition of ‘Mortgagee’s Power of Sale’ published
Posted by ROBERT HAY QC COMMERCIAL LAW BARRISTER in Dr Clyde Croft AM SC, mortgagee's power of sale, Mortgages, Robert Hay, Robert Hay QC, Sale of land on October 16, 2019
The latest edition of The Mortgagee’s Power of Sale has been published by LexisNexis. Now in its fourth edition this book started life in 1980. The book is primarily written for practitioners and the text is arranged, as far as possible, in the same chronological order as the steps a mortgagee may take in selling mortgaged property under the power of sale. The authors are Justice Croft (now the Honourable Dr Clyde Croft AM SC) and Robert Hay QC. Professor the Honourable Marilyn Warren AC QC has kindly written the foreword. Dr Croft was the sole author of the first edition.
“Retail premises leases” cannot jump out of the Retail Leases Act 2003
Posted by ROBERT HAY QC COMMERCIAL LAW BARRISTER in Commercial Law, Commercial Leases, Disputes, Greens List, Lease, Leasing, Meaning of Retail Premises, Property Law, Retail Lease Act 2003, retail tenancy dispute, Robert Hay, Robert Hay QC, VCAT on October 1, 2019
The Supreme Court of Victoria has ruled that a lease that is a “retail premises lease” (within the meaning of s.11 of the Retail Leases Act 2003) when it is entered into cannot cease to be such a lease during its term.
In Richmond Football Club v Verraty  VSC 597. Croft J upheld an appeal by a tenant from a VCAT decision which held that a lease that was a “retail premises lease” when entered into could cease to be such a lease during the lease term. VCAT held that the Act ceased to apply when “occupancy costs” exceeded $1,000,000 exclusive of GST.
Section 4(2) of the Act sets out circumstances in which premises are excluded from the definition of “retail premises” in s.4(1). The exceptions include, among other things, where “occupancy costs” (i.e. estimated outgoings plus the rent) exceed $1,000,000 exclusive of GST, where the tenant is a publicly listed company or a subsidiary of such a company, and where the Minister makes a declaration that the premises are premises to which s.4(2)(f) applies with the consequence that the premises are not “retail premises”.
The effect of Croft J’s decision appears to be that all of the circumstances listed in s.4(2) of the Act are relevant only when the lease is entered into – they are not relevant after that time. Unless one of the exclusions in s.4(2) applies when the lease is entered into, the lease will be a retail premise lease for the term of the lease.
The judgment is less clear concerning the terms of a lease resulting from the exercise of an option. It appears that even if an exclusion in s.4(2) applies (i.e. so that the premises are not “retail premises”) when a renewed lease commences (i.e. following the exercise of an option), the renewed lease will nevertheless contain the provisions implied into the lease by the Act (i.e. provisions such as ss. 37, 52 – 57) and the provisions of the lease made void by the Act (i.e. provisions such as those referred to in s.35(3) (ratchet clauses) and 50 (land tax) will remain void. The only way to avoid the renewed lease containing the terms implied by the Act, or to revive provisions made void by the Act, is to include appropriately worded provisions in the lease that are to apply if the Act ceases to apply.
I will write further about this case.
“Jumping out” the Retail Leases Act – a clarification
Posted by ROBERT HAY QC COMMERCIAL LAW BARRISTER in Breach of Contract, Commercial Leases, Contract Law, Greens List, Landords, Lease, Leasing, Property Law, Retail Lease Act 2003, retail tenancy dispute, Robert Hay, Robert Hay QC, Tenants on August 1, 2019
Today I posted an article about Verraty Pty Ltd v Richmond Football Club  VCAT 1073.
I have had queries about paragraph (i) where I said:
“where the commencing rent under a new lease does not exceed $1,000,000 for the first 12 months, before the lease is entered into the landlord should make an estimate of outgoings for the first 12 months of the lease and keep a record of the making of the estimate;”
The point I was intending to make is that where a new lease is being entered into and the rent is less than $1,000,000 (but when added to outgoings “occupancy costs” exceed $1,000,000), a failure to make an estimate under s.4(3) could result in the lease (assuming it concerns “retail premises” (s.4(1)) being a “retail premises lease”. The reason is that “occupancy costs” constitute rent and an estimate of outgoings made by the landlord (s.4(3)); in the absence of an estimate of outgoings the “occupancy costs” will be restricted to the amount of the rent. There is no need to give the estimate to the tenant.
A new lease will be a “retail premises lease” where “occupancy costs” do not exceed $1,000,000 in which case it is necessary to give a written estimate under s.46.
Retail premises leases can “jump out” of the Retail Leases Act
Posted by ROBERT HAY QC COMMERCIAL LAW BARRISTER in Greens List, Landords, Lease, Leasing, Retail Lease Act 2003, retail tenancy dispute, Robert Hay, Robert Hay QC on August 1, 2019
Can a “retail premises lease” (within the meaning of s.11 of the Retail Leases Act 2003) cease to be a “retail premises lease” during its term? That long-standing question has finally been resolved.
In Verraty Pty Ltd v Richmond Football Club Ltd  VCAT 1073 the Tribunal held that a lease could cease to a “retail premises lease” during the lease term. The lease was for a term of 20 years commencing 7 May 1998. A variation made in 2004 effected a surrender and regrant with the consequence that a “retail premises lease” was entered into at that time. In April 2017 the tenant exercised an option to renew the Lease from 7 May 2018 for a term of 10 years. The landlord claimed that the lease had ceased to be a “retail premises lease” from 7 May 2016 because “occupancy costs” were $1,000,000 or more and that the renewed lease was not a “retail premises lease”.
The issues were:
(a) whether the lease ceased to be a “retail premises lease” for the period 7 May 2016 to 6 May 2017 and was therefore not governed by the Act;
(b) if yes to (a), did the lease remain outside the ambit of the Act for the period 7 May 2017 to 6 May 2018; and
(c) if yes to (b), was the renewed lease resulting from the exercise of the option a “retail premises lease”?
VCAT answered “yes” to each of the three questions.
Section 11 says, among other things, that the Act applies to a “retail premises lease”. Section 11(2) says that “….this Act only applies to a lease of premises if the premises are retail premises…at the time the lease is entered into….” (emphasis added)
While the Act does not contain a definition of “retail premises lease” the expression “retail premises” is defined in s.4(1). Where “occupancy costs” are $1,000,000 or more per annum premises are excluded from the definition of “retail premises” (s.4(2)(a)) and regulation 6 of the Retail Leases Regulations 2013). “Occupancy costs” are defined in s.4(3) to mean:
- the rent payable under the lease (s.4(3)(a)); and
- the outgoings, as estimated by the landlord, to which the tenant is liable to contribute under the lease (s.4(3)(b))
There is a note under s.4(3) that says s.46 requires the landlord to give the tenant a written estimate of the outgoings to which the tenant is liable to contribute.
The landlord alleged that the lease had ceased to be a “retail premises lease” on 7 May 2016 because the “occupancy costs” for the next 12 months were $1,000,000 or more.
The landlord gave the tenant an estimate of outgoings dated 12 May 2016 (Estimate) pursuant to s.46(2) of the Act for the landlord’s 12 month accounting period commencing on 7 May 2016. Section 46(3) requires an estimate to be given before a retail premises lease is entered into and in respect of each of the landlord’s accounting periods during the term of the lease, at least one month before the start of that period. Section 46(4) says that a tenant is not liable to contribute to any outgoings of which an estimate is required to be given to the tenant until the tenant is given that estimate. The Estimate was not given at least one month before the start of the landlord’s accounting period commencing 7 May 2016. The Estimate and the rent exceeded $1,000,000 for those 12 months.
On 3 May 2017 the landlord estimated the outgoings to which the tenant was liable to contribute for the 12 month accounting period commencing 7 May 2017. No written estimate was given to the tenant. The estimated outgoings and rent exceeded $1,000,000 for those 12 months.
The landlord contended that whether or not the lease was a “retail premises lease” was governed solely by s.4(3) and that s.46 was irrelevant – all the landlord had to do was make an estimate of outgoings – a written estimate did not have to be given to the tenant. Consequently, it did not matter that the Estimate was not given within the time prescribed by s.46(3). The landlord also contended that because the lease ceased to be a “retail premises lease” on 7 May 2016 it was not required to given a written estimate under s.46 for the year commencing 7 May 2017 – all it had to was make an estimate of the outgoings under s.4(3).
The tenant contended, among other things, that a “retail premises lease” could not cease to be a “retail premises lease” during its term but that if a lease could cease to be a “retail premises lease” all the provisions made void by the Act were not revived – the lease continued without those provisions. The lease contained a “ratchet clause” that prevented the rent from decreasing – such clauses in a “retail premises lease” are void (s.35(3)).
The Tribunal held that:
- a lease could cease to be a “retail premises lease” during its term – s.11(2) prescribed the time at which a lease had to be a “retail premises lease” for the Act to apply but said nothing about a lease ceasing to be a “retail premises lease”;
- the landlord had to give an estimate under s.46(1) for the year commencing 7 May 2016 and, because the Estimate was give late, any outgoings referable to the period 7 May 2016 to 12 May 2016 had to be excluded from the estimate of outgoings;
- even with outgoings for the period 7 May 2016 to 12 May 2016 excluded, “occupancy costs” exceeded $1,000,000 for the 12 months commencing 7 May 2016 with the consequence that the Act did not apply for those 12 months;
- because the Act did not apply it was not necessary for the landlord to give an estimate of outgoings under s.46 for the accounting period commencing 7 May 2017 – all that the landlord had to do was to make an estimate of outgoings as required by s.4(3);
- the landlord made an estimate of outgoings on 3 May 2017 and, because “occupancy costs” exceeded $1,000,000 for the 12 months commencing 7 May 2017, the Act did not apply for those 12 months;
- the renewed lease was not a “retail premises lease”; and
- clauses in a lease that were void while the lease was a “retail premises lease” (such as the “ratchet clause”) were not void once the Act ceased to apply.
The Tribunal also held that the note at the foot of s.4(3) referring to s.46 was no more than a reminder that if the lease were a retail premises lease the landlord had to comply with s.46.
The tenant is likely to seek leave to appeal.
The following propositions emerge from the case:
(i) where the commencing rent under a new lease does not exceed $1,000,000 for the first 12 months, before the lease is entered into the landlord should make an estimate of outgoings (under s.4(3)) for the first 12 months of the lease and keep a record of the making of the estimate;
(ii) where the estimate of outgoings plus the rent for the first 12 months exceeds $1,000,000 the lease will not be a “retail premises lease” and a written estimate of outgoings under s.46 need not be given to the tenant;
(iii) where the estimate of outgoings (made under s.4(3)) plus the rent for the first 12 months does not exceed $1,000,000 it is necessary to give a written estimate of outgoings pursuant to s.46 to the tenant;
(iv) a “retail premises lease” can cease to be such a lease during its term;
(v) a lease can cease to be a “retail premises lease” during its term because “occupancy costs” exceed $1,000,000 provided an estimate of outgoings has been given under s.46;
(vi) where a lease ceases to be a “retail premises lease” during its term the landlord should make an estimate of outgoings (under s.4(3) for each remaining 12 month accounting during the term but need not give a written estimate of outgoings (under s.46) to the tenant where “occupancy costs” exceed $1,000,000.
With respect to (vi), while the Tribunal did not determine whether a lease that has ceased to be a “retail premises lease” during its term can revert to being a “retail premises lease” during the term, it is likely that a lease can revert to being a “retail premises lease” during the term.
High Court affirms traditional test for enforcing oral contracts based on acts of part performance
Posted by ROBERT HAY QC COMMERCIAL LAW BARRISTER in Commercial Leases, Contract Law, Part performance, Property Law, Purchaser, Robert Hay QC, Sale of land on November 19, 2018
The High Court has resisted an invitation to expand the grounds on which a party can enforce an oral contract for the sale of the land on the ground of part performance.
Legislation in each State and Territory requires that contracts for the sale of land meet certain formal requirements if they are to be enforceable. The legislation is the modern iteration of s 4 of the Statute of Frauds 1677. In Victoria, s 126(1) of the Instruments Act 1958 says:
“An action must not be brought to charge a person upon a special promise to answer for the debt, default or miscarriage of another person or upon a contract for the sale or other disposition of an interest in land unless the agreement on which the action is brought, or a memorandum or note of the agreement, is in writing signed by the person to be charged or by a person lawfully authorised in writing by that person to sign such an agreement, memorandum or note.
The Statute of Frauds can be avoided where the party seeking to enforce the contract has undertaken acts of part performance. Australian courts have ordered specific performance of oral contracts for the sale of land of land where there have been acts of part performance that are, in words of the Earle of Selbourne LC, “unequivocally, and in their own nature, referrable to some such agreement as that alleged”.
In Leon Pipikos v Trayans  HCA 39, which considered the South Australian equivalent of s 126, the appellant submitted that test referred to above was unduly demanding of a party seeking specific performance of an oral contract for the sale of land and urged the adoption of a more relaxed approach. The appellant argued that a court should ask whether a contracting party has knowingly been induced or allowed by the counterparty to alter his or her position on the faith of the contract. The court unanimously rejected the appellant’s arguments.
The court held that the reference to “some such agreement” in the above quote suggested that the requirement was not concerned with the particular contract in question, but with dealings between the parties which in their nature established that the parties were in the midst of an uncompleted contract for the sale or other disposition of an interest in land. The equity to have the transaction completed arises where the acts that are proved are consistent only with partial performance of a transaction of the same nature as that which the plaintiff seeks to have completed by specific performance.
The acts of part performance should be sufficient to indicate a change in the respective positions of the parties in relation to the land that is the subject of the oral contract. The mere payment of money is unlikely to amount to part performance because such payment could also be consistent with a loan, whereas a defendant putting a plaintiff into possession of land is likely to be a sufficient act of part performance.
Acts of part performance must be acts by the party seeking to enforce the contract; it is not necessary for a plaintiff to prove detrimental reliance on its part to establish an equity to relief.
Once there are sufficient acts of part performance, regard may be had to the terms of the oral contract in order to ascertain the appropriate orders by way of specific performance.
In summary, it is necessary first to determine whether the acts performed establish the equity and then to refer to the terms of the oral agreement in order to ascertain the terms in which the equity is to be enforced.
In Maddison v Alderson (1883) 8 App Cas 467 the Earle of Selbourne LC said at 479 that “the acts relied upon as part performance must be unequivocally, and in their own nature, referrable to some such agreement as that alleged”.
Error in earlier post
Posted by ROBERT HAY QC COMMERCIAL LAW BARRISTER in Breach of Contract, Contract Law, Disputes, Estate agents, Property Law, Sale of land on June 26, 2018
In the post of earlier today I referred to the Justice Legislation Miscellaneous Amendment Bill 1990; the reference should have been to the Justice Legislation Miscellaneous Amendment Bill 2018.
Estate agents’ commission fiasco to be fixed
Posted by ROBERT HAY QC COMMERCIAL LAW BARRISTER in Breach of Contract, Contract Law, Estate agents, Greens List, Property Law, Robert Hay QC on June 26, 2018
The Victorian government has revealed its “fix” for the problems that emerged from the Victorian Court of Appeal’s decision in Advisory Services Pty Ltd v Augustin  VSCA 95. That decision was the subject of an earlier blog. The consequence of the decision was that estate agents faced claims by vendors for recovery of commissions that had been paid despite the agent’s engagement or appointment containing rebate statements in a form approved by the Director of Consumer Affairs Victoria. The decision also prevented agents who had not been paid from seeking to recover commissions.
The “fix” is contained in the Justice Legislation Miscellaneous Amendment Bill 2018 which has been introduced into the Victorian Legislative Assembly. The Bill provides for amendments to the Estate Agents Act 1980 which will protect agents who have used a rebate statement in a form approved by the Director but, by reason of the decision in Advisory Services, does not contain the statement referred to s.49A(4)(a) of the Act or the statement referred to in s.49A(4)(c) of the Act. However, the protection will apply only where the rebate statement is contained in an engagement or appointment entered into before the date after the day on which the Justice Legislation Miscellaneous Amendment Act 2018 receives the Royal Assent.
The amendments to the Estate Agents Act will not assist the unfortunate estate agent in Advisory Services.
Estate agents and their advisors should ensure that the correct rebate statements are being used.
VCAT loses jurisdiction to hear a dispute where a party is not resident in Victoria
Posted by ROBERT HAY QC COMMERCIAL LAW BARRISTER in Court Juridiction, Disputes, Robert Hay, VCAT jurisdiction on April 23, 2018
Following last week’s High Court decision in Burns v Corbett  HCA 15 the Victorian Victorian Civil and Administrative Tribunal has lost its jurisdiction to hear and determine a dispute where one of the parties is resident of a State other than Victoria.
This will pose significant problems for VCAT particularly concerning its exclusive jurisdiction to hear and determine a “retail tenancy dispute” under the Retail Leases Act 2003 (2003 Act). Proceedings in the Tribunal where a party is not resident in Victoria will be affected by the decision. Because VCAT never had jurisdiction to hear and determine a matter where a party was not resident in Victoria, Burns is also likely to have consequences for proceedings that have been heard and determined where one party was not a resident of Victoria.
Where a party is not resident in Victoria, disputes under the 2003 Act will have to be heard and determined in a Victorian court, the Federal Court or an interstate court. Where a “retail tenancy dispute” is heard in a court, a significant issue will be whether the cost regime in the 2003 Act applies or whether the awarding of costs will be governed by court rules. Except in limited circumstances, s.92 of the 2003 Act requires each party to bear its own costs.
In Burns the High Court held that provisions of the Civil and Administrative Tribunal Act 2013 (NSW) were invalid to the extent that they purported to confer jurisdiction upon the Civil and Administrative Tribunal of New South Wales (NCAT) concerning matters between residents of different States.
Chapter III of the Australian Constitution includes ss75 to 77. Section 75(iv) provides that the High Court has original jurisdiction in all matters between residents of different States. Section 76 enables the Commonwealth Parliament to confer additional original jurisdiction on the High Court. Except for the High Court, s.77 permits Parliament to defines the jurisdiction of any federal court including defining the extent to which the jurisdiction of any federal court is exclusive of the jurisdiction of a State court, and gives State courts federal jurisdiction. Section 39 of the Judiciary Act 1903 invests State courts with federal jurisdiction subject to certain conditions and restrictions.
In Burns, Mr Burns complained to the Anti-Discrimination Board of New South Wales about statements made by Ms Corbett and Mr Gaynor which he alleged vilified homosexuals contrary to the Anti-Discrimination Act 1977 (NSW)). Mr Burns was a resident of New South Wales, Ms Corbett was a resident of Victoria and Mr Gaynor was a resident of Queensland.
The complaint against Ms Corbett was referred to the Administrative Decisions Tribunal of New South Wales (predecessor to NCAT) which found that Ms Corbett had breached the Act and ordered her to make an apology. Ms Corbett refused to apologise and Mr Burns commenced a proceeding in the Supreme Court charging Ms Corbett with contempt. Ms Corbett contended that neither the ADT nor NCAT had jurisdiction because she was a resident of Victoria. The complaint against Mr Gaynor was dismissed by NCAT. However, Mr Gaynor obtained leave to appeal to the Court of Appeal in respect of an interlocutory costs order on the basis that NCAT had no jurisdiction to determine matters concerning residents of a State other than New South Wales.
The New South Wales Court of Appeal determined the jurisdiction disputes. The Court had to decide whether NCAT could hear and determine a dispute arising under the Act between a resident of New South Wales and a resident of another State. It was common ground that in determining Mr Burns’ complaints, NCAT was exercising the judicial power of the State despite it not being a “court of a State” within the meaning of Chapter III. The Court held that NCAT had no jurisdiction to hear and determine the complaints against Ms Corbett or Mr Gaynor.
The High Court unanimously dismissed the appeals with a majority deciding that Chapter III permitted adjudicative authority concerning the matters in ss 75 and 76 to be exercised only by a State court. Chapter III would be undermined were a State Parliament able to confer adjudicative authority concerning any of the matters referred to in ss 75 and 76 on a State tribunal that was not a State court.
Parties to current litigation in VCAT need to consider whether the proceeding can continue in the Tribunal.
See s.89(4) of the Retail Leases Act2003.
Real estate agents face claims for recovery of commissions
Posted by ROBERT HAY QC COMMERCIAL LAW BARRISTER in Breach of Contract, Contract Law, Estate agents, Property Law, Robert Hay on April 23, 2018
Vendors of properties who have paid commissions to real estate agents are gearing up to recover the commissions on the ground that they were paid by mistake following the Court of Appeal’s decision in Advisory Services Pty Ltd v Augustin  VSCA 95. Agents are in turn likely to take action against the party that drafted the standard form real estate agent’s authority which was found not to comply with the Estate Agents Act 1980.
Advisory concerned an appeal from the County Court where the trial judge decided that a real estate agent’s authority from its client (the vendor of land) did not contain the precise wording of s.49A(4)(c) of the Act with the consequence that the authority was unenforceable pursuant to s.50.
Section 50(1) provides, among other things, that an estate agent is not entitled to sue for or recover or retain any commission or money in respect of any outgoings unless the agent has complied with s.49A(1) with respect to the engagement or appointment.
Section 49A(1) says:
(a) An estate agent must not obtain, or seek to obtain, any payment from a person in respect of work done by, or on behalf of, the agent or in respect of any outgoings incurred by the agent unless:the agent holds a written engagement or appointment that is signed by the person (or the person’s representative); and
(c) the engagement or appointment contains –
(i) details of the commission and outgoings that have been agreed; and
(iii) a rebate statement that complies with subsection (4).
Section 49A(4) says:
A rebate statement complies with this subsection if it is in a form approved by the Director and it contains-
(a) a statement of whether or not the agent will be, or is likely to be, entitled to any rebate in respect of –
(i) any outgoings;
(c) a statement that the agent is not entitled to retain any rebate and must not charge the client an amount for any expenses that is more than the cost of those expenses.
Section 48A(1) says that an estate agent is not entitled to retain any amount the agent receives from another person as a rebate in respect of –
(a) any outgoings; or
(b) any prepayments made by the client in respect of any intended expenditure by the agent on the client’s behalf; or
(c) any payments made by the client to another person in respect of the work.
Section 48B(1) says:
An estate agent must not seek to obtain from the client an amount for any outgoings or proposed outgoings (the expenses) that is more than the amount paid, or payable, by the agent for those expenses.
The agent’s authority provided for the agent to be paid a commission but did not require the client to pay outgoings. However, the authority did not contain a statement in the exact words set out in in s.49A(4)(c). The language used in the authority was based on one of the two forms approved by the Director of Consumer Affairs Victoria and available for download by real estate agents. One of the forms contained the words used in s.49A(4)(c) and the other did not. In accordance with the latter form, the authority stated:
Item 6: Rebate Statement – No Rebate will be received
“The Agent will not, or is not likely to be, entitled to any rebate. A rebate includes any discount, commission or other benefit, and includes non-monetary benefit, and includes non-monetary benefits.”
(*If entitled to a rebate, complete and attach the rebate statement approved by the Director of Consumer Affairs Victoria, at the time of signing this Authority. The statement can be downloaded at www.consumer.vic.gov.au)
Item 8 of the authority provided, under the heading “Agent’s role”, that the “Agent will advertise, market and endeavour to sell” the property.
In the Particulars of Appointment that formed the front page of the authority, there appeared a section headed “Marketing Expenses” which included spaces for “Advertising”, “Other Expenses” and “Total” which were filled in with a dashe that the parties agreed meant that there were no Marketing Expenses payable by the client.
The trial judge held that whether or not an agent was entitled to a rebate, s.49A(c) applied but that substantial compliance with the section would suffice. However, the judge held that the authority did not comply with s.49(4)(c) because it did not convey the information that the estate agent was not entitled to retain any rebate and must not charge the vendor an amount for any expenses that is more than the cost of those expenses. The judge also rejected an argument that a rebate statement would comply with s.49A(4) if it was in a form approved by the Director. The Authority did not make it clear that no rebate could arise.
The Court of Appeal held that ss48A and 48B were explicit prohibitions on certain conduct by estate agents and viewed in that light, the requirement in s.49A(1)(c) that the statement be contained in the engagement or appointment could be seen as ensuring that the client was advised as to the existence of the prohibitions. The Court said that the relevant question was whether the Act required notice to the client in circumstances where the prohibitions could not, by virtue of the arrangement between the estate agent and the client, be breached in any event? The Court answered this question “yes”. The Court said that that it was apparent that Parliament intended the client be aware of the prohibitions in the context of being able to negotiate the terms of commission and payments in respect of outgoings. The Court held that the correct construction of s.49A(4)(c) was that the statement it describes must be contained in the rebate statement required by s.49A(1) irrespective of whether the agent would be, or likely to be, entitled to any rebate or charge any amount by way of expenses.
When does a deposit become a penalty?
Posted by ROBERT HAY QC COMMERCIAL LAW BARRISTER in Breach of Contract, Contract Law, Penalties, Property Law, Purchaser, Robert Hay, Robert Hay QC, Sale of land, Vendor on November 16, 2017
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. 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…”.
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.
In Simcevski v Dixon (No 2)  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, 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.
 See: Workers Trust and Merchant Bank Ltd v Dojap Investments Ltd  AC 573; Kazacos v Shuangling International Development Pty Ltd (2016) 18 BPR 36,353.
 Workers Trust, 578-9.
 See, among others: Luu v Sovereign Developments Pty Ltd (2006) 12 BPR 23,629; Iannello v Sharpe (2007) 69 NSWLR 452.
  VSCA 161.