Ahmed Mahdi Pty Ltd v Cinque Enterprise Pty Ltd
[2023] VSC 445
•2 August 2023
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMON LAW DIVISION
PROPERTY LIST
S ECI 2023 02286
| AHMED MAHDI PTY LTD (ACN 134 266 229) | Plaintiff |
| v | |
| CINQUE ENTERPRISE PTY LTD (ACN 654 408 063) (AS TRUSTEE FOR THE CINQUE ENTERPRISE TRUST) | Defendant |
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JUDGE: | McDonald J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 21 July 2023 |
DATE OF JUDGMENT: | 2 August 2023 |
CASE MAY BE CITED AS: | Ahmed Mahdi Pty Ltd v Cinque Enterprise Pty Ltd |
MEDIUM NEUTRAL CITATION: | [2023] VSC 445 |
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REAL PROPERTY – Plaintiff vendor and defendant purchaser entered contract of sale of land and dwelling – Defendant issued notice of default and rescission following damage to dwelling by fire – Defendant claims that the plaintiff has failed to meet their obligation under contract of sale to deliver property at settlement in same condition it was in on the day of sale – Plaintiff sought a declaration that the defendant is not entitled to terminate contract of sale based on notice of default and rescission – Special condition provides that purchaser may not terminate contract as a consequence of condition of the property – General conditions that vendor carries risk of loss or damage to property until settlement and must deliver property at settlement in same condition it was on the day of sale not essential terms – Breach of general conditions does not give rise to right to rescind – Property Law Act 1958, s 49.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | F C Brimfield | JP Legal |
| For the Defendant | E Twomey | John Yianoulatos Lawyer |
HIS HONOUR:
This proceeding concerns an application pursuant to s 49 of the Property Law Act 1958. The plaintiff seeks a declaration that the defendant is not entitled to rescind a contract of sale entered into between the parties on 16 June 2022 for the sale of a property at 344 Whitehorse Road, Balwyn (‘Property’). The defendant purported to rescind the contract by a Notice of Default and Rescission dated 19 May 2023 (‘Notice of Rescission’). The defendant claims that the plaintiff vendor has failed to meet their obligations under the contract of sale owing to the destruction of the dwelling on the Property by a fire on 10 October 2022.
Background
The plaintiff became the registered proprietor of the Property on 30 December 2020.[1] At the time of purchase, there was a vacant medical clinic situated on the Property (‘dwelling’). The plaintiff had intended to renovate the dwelling for use in its own medical services business.[2]
[1]Exhibit JP-1 to the Affidavit of John Pastro dated 24 May 2023, 30.
[2]Affidavit of John Pastro dated 24 May 2023, [8].
On 16 June 2022, the plaintiff entered into a contract of sale for the Property, with settlement to occur 14 months from the date of contract. The purchase price pursuant to the contract was $2,650,000, with a $34,000 deposit payable within seven days of signing. A further $1,200,000 was payable by way of deposit within 60 days of signing. Special condition 5 of the contract allowed the purchaser to take out a mortgage over the Property to the value of 70% of the purchase price.[3] The defendant has taken out a mortgage of $1,855,000 over the property and has, to date, paid the plaintiff $1,234,000 by way of deposit.
[3]Exhibit JP-1 to the Affidavit of John Pastro dated 24 May 2023, 9.
It is common ground that at the time of sale, the dwelling on the property was derelict and vacant. It is also common ground that the defendant intended to purchase the property and develop it into 13 townhouses.[4]
[4]Joint Statement of Agreed Facts dated 13 July 2023, [8]-[9].
On 10 October 2022, the dwelling was damaged in a fire. Following the fire, the plaintiff sought to make a claim on its building insurance policy. The plaintiff’s insurer engaged Mr Ian Cross to prepare an expert report detailing the damage to the dwelling and the cause of the fire. The report was delivered on 21 October 2022. Mr Cross’ report concluded that the cause of the fire was deliberate ignition. The fire caused significant internal damage to the dwelling, including extensive structural collapse of the roof.[5]
[5]Exhibit JP-1 to the Affidavit of John Pastro dated 24 May 2023, 75.
On 26 October 2022, the defendant’s solicitor emailed the plaintiff’s solicitor, stating:
It has been brought to my client’s attention that the premises at 344 Whitehorse Road, Balwyn has been the subject of a fire which has severely damaged the building.[6]
[6]Ibid 97.
Following further correspondence on 28 November 2022, the plaintiff’s solicitor wrote to the defendant’s solicitor informing them that the insurer had denied the plaintiff’s claim. The plaintiff received written confirmation of the same from its insurer on 2 December 2022.
On 23 March 2023, the defendant’s solicitor wrote to the plaintiff’s solicitor enclosing a report from a surveyor estimating the costs of replacing the dwelling to be $861,000, exclusive of GST. The defendant’s solicitor made a demand for compensation by way of a reduction in the contract price.
Following further correspondence between the parties, the defendant issued the Notice of Rescission. The Notice of Rescission specifies the following particulars of default:
By virtue of the fire which destroyed the building at the property address, the vendor is in breach of the following general conditions of the Contract of Sale of Real Estate signed and dated 16 June 2022.
• GC 31.1 - The vendor carries the risk of loss or damage to the property until settlement.
• GC 31.2- The vendor must deliver the property to the purchaser at settlement in the same condition it was on the day of sale, except for fair wear and tear.
• GC 32 - A party who breaches this contract must pay to the other party on demand:
(a) compensation for any reasonably foreseeable loss to the other party resulting from the breach;
(b) and any interest due under this contract as a result of the breach.[7]
[7]Ibid 127.
The Notice of Rescission gave the plaintiff 14 days to rectify the defaults before the contract was rescinded pursuant to general condition 35 of the contract of sale. On 31 May 2023 the plaintiff commenced the present proceeding seeking a declaration that the defendant is not entitled to rescind the contract.
Does special condition 8(iv) limit the defendant’s right to rescind the contract?
Special condition 8 of the contract of sale states:
8. Limitations of rights
Despite anything else in this contract and to the maximum extent permitted by law and equity, the purchaser may not make any objection, claim compensation, bring any action, suit or proceeding, seek any order, delay completion or end this contract as a consequence of:
i. a matter which was capable of discovery by or on behalf of the purchaser or was or should have been within the knowledge of the purchaser as a result of the purchaser’s investigations and enquiries;
ii. any failure to comply with a law applicable to the property or a requirement of any Authority;
iii. any improvements not being erected within the boundaries of the land;
iv. the condition of the property.
v. the existence of, right to use or failure of any services.[8]
[8]Ibid 12.
The plaintiff submits that the Notice of Rescission is an attempt by the defendant to end the contract as a consequence of the condition of the property.[9] The plaintiff relies on special condition 8(iv) as a basis for resisting rescission of the contract.
[9]Plaintiff’s Submissions dated 21 June 2023 [18].
The defendant contends that special condition 8(iv) does not apply to the circumstances of the present case. The defendant’s primary submission is that the reference to the ‘condition of the property’ should be read down to exclude circumstances where there has been substantial damage amounting to destruction of the dwelling. The defendant submits that ‘clauses concerned with the condition of the Property have no application in the circumstances of this matter’.[10]
[10]Defendant’s Submissions dated 12 July 2023 [14].
The defendant invited the court to make a finding that the dwelling had been destroyed. I do not accept that submission. The fire investigation report prepared on behalf of the insurer states that ‘there was extensive structural collapse of the roof’ and that ‘[m]ost of the structure in the habitable areas was intact with little to no fire damage to the contents’.[11] The report contains photographs which show the brickwork on the side walls of the dwelling to be intact.[12]
[11]Exhibit JP-1 to the Affidavit of John Pastro dated 24 May 2023, 74.
[12]Ibid 78–87.
Even if the building had been destroyed, I do not accept that the destruction of the dwelling is not a matter going to the condition of the property. The defendant submits that ‘it is not sensible or consistent with the natural use of language to refer to what remains of the building as “a dwelling in poor condition”’.[13] In its ordinary meaning, ‘condition’ refers to a ‘particular mode of being of a person or thing; situation with respect to circumstances; existing state or case’.[14] The word ‘condition’ in special condition 8(iv) refers to the existing state of the Property. Even if the damage to the dwelling by the fire on 10 October 2022 amounts to destruction of the dwelling this was an event affecting the then-existing state of the Property and thereby altered the condition of the Property.
[13]Ibid.
[14]Macquarie Dictionary (7th ed, 2017) ‘condition’ (def 1).
Accepting the defendant’s construction of special condition 8(iv) would lead to an absurd result. A finding of a breach of general condition 31.2 requires a finding that the vendor has failed to deliver the property ‘in the same condition it was in on the day of sale’. If the destruction of the dwelling did not affect the condition of the Property, the defendant would have no grounds to assert a breach of general condition 31.2 of the contract.
Further, the defendant submits that special condition 8 should be construed so as to:
prevent the Defendant from rescinding the contract, seeking compensation, or bringing a claim on the basis of the condition of the property as it was at the time of sale. The Defendant submits that this interpretation is consistent with the remainder of the subparagraphs to Special Condition 8, which each deal with matters which the Defendant could reasonably have investigated and satisfied itself of prior to entering into the Contract.[15]
[15]Defendant’s Submissions dated 12 July 2023, [27].
I reject this submission. If the parties sought to have the phrase ‘condition of the property’ read as ‘condition of the property as it was at the time of sale’, the words ‘at the time of sale’ could easily have been inserted into special condition 8(iv). General condition 31.2 utilises language of a similar effect in its reference to ‘the same condition it was in on the day of sale’. Similarly, special condition 10(ii) refers to the Property’s ‘present condition and state of repair’.[16]
[16]Exhibit JP-1 to the Affidavit of John Pastro dated 24 May 2023, 13.
I reject the defendant’s contention that each of the subparagraphs to special condition 8 deal with matters that could have been the subject of investigation prior to entry into the contract. If that were the case, special condition 8(i) would render the balance of the subparagraphs otiose. That subparagraph provides that no claim may be brought as a consequence of:
a matter which was capable of discovery by or on behalf of the purchaser or was or should have been within the knowledge of the purchaser as a result of the purchaser's investigations and enquiries.[17]
On the defendant’s construction, subparagraphs (ii)-(v) only pertain to matters existing at the time of sale. To adopt this construction would, in light of subparagraph (i), mean that subparagraphs (ii)-(v) would have no work to do.
[17]Ibid 12.
Does special condition 8(iv) reverse the contractual allocation of risk?
The primary issue in dispute is whether special condition 8(iv) limits the defendant’s right to rescind the contract in the present circumstances. The question is whether, assuming that the defendant otherwise has a right of rescission as a result of the plaintiff’s breaches of general conditions 31.1 and 31.2, special condition 8(iv) precludes the defendant from rescinding the contract as a consequence of the condition of the property.
The defendant submits that special condition 8 should not be construed so as to reverse the contractual allocation of risk. In aid of this submission, the defendant points to general condition 31.1, which states:
The vendor carries the risk of loss or damage to the property before settlement.[18]
[18]Ibid 24.
The defendant submits that in order to reverse the effect of general condition 31.1, unambiguous words are necessary. The defendant submits that special condition 8(iv) does not unambiguously reverse the effect of general condition 31.1. I reject this submission.
In the event of inconsistency between special condition 8(iv) and general condition 31.1, the former prevails. Special condition 8(iv) is prefaced by the phrase ‘despite anything else in this contract and to the maximum extent permitted by law and equity’.
Similarly, the signing page of the contract stipulates:
The terms of this contract are contained in the –
· particulars of sale; and
· special conditions, if any; and
· general conditions (which are in standard form: see general condition 6.1)
in that order of priority.[19]
[19]Ibid 5 (emphasis added).
Further special condition 14 stipulates that:
14. Precedence
In case of any ambiguity or any inconsistency between these further special conditions and any other conditions contained in this Contract then these Further Special Conditions shall take precedence and prevail. In all other respects the Contract of Sale particulars, Further Special Conditions, Special Conditions and General Conditions in that order shall remain enforceable.[20]
This clause is directly concerned with the precedence of further special conditions over special conditions and general conditions. However, it also supports a finding that the special conditions prevail over the general conditions to the extent of any inconsistency.
[20]Ibid 11 (emphasis added).
Together, these contractual provisions evince an objective intention of the parties to reverse the contractual allocation of risk. The insertion of a special condition which specifically limits the rights of the parties to claim under the contract, makes clear that the parties sought to affect the operation of the standard form general conditions. Assuming that the defendant has a right to rescind as a result of the plaintiff’s breaches of general conditions 31.1 and 31.2, special condition 8(iv) precludes the defendant from rescinding the contract as a consequence of the condition of the property.
In addition the defendant submits that the plaintiff’s construction of special condition 8(iv) is inconsistent with section 2.1 of the vendor statement annexed to the contract, which reads:
INSURANCE
2.1 Damage and Destruction
This section 2.1 only applies if this vendor statement is in respect of a contract which does NOT provide for the land to remain at the risk of the vendor until the purchaser becomes entitled to possession or receipt of rents and profits.
Not applicable.[21]
[21]Ibid 27.
The vendor statement, while annexed to the contract, is not wholly incorporated into the contract. Where the contract incorporates aspects of the vendor statement it does so in express terms. The following warranties contained in the vendor statement are expressly incorporated into the contract: the warranty as to encumbrances on the property,[22] and any warranties contrary to those set out in general condition 6.3 and 6.4.[23] Section 2.1 of the vendor statement is not expressly incorporated into the contract.
[22]Ibid 14, General Condition 5.1(a).
[23]Ibid 15, General Condition 6.5.
Though section 2.1 of the vendor statement is not a contractual warranty which is incorporated into the contract, it is prima facie a representation that the vendor bears the risk of damage and destruction until the purchaser settles on the property. The truth of that representation is in apparent conflict with the construction of the contract as contended for by the plaintiff in this case. However, any such inconsistency does not warrant a finding that special condition 8(iv) does not prevail over general conditions 31.1 and 31.2.
Do general conditions 31.1 and 31.2 provide the defendant with a right to rescind the contract?
In light of the above finding as to the proper construction of special condition 8(iv), it is not necessary to deal with the question of whether the plaintiff’s breaches of general conditions 31.1 and 31.2 constitutes a repudiation of the contract which provides the defendant with a right to rescind the contract. However, for the sake of completeness I shall address this issue.
The primary issue for determination is whether general conditions 31.1 and 31.2 are essential terms of the contract. In Tramways Advertising Pty Ltd v Luna Park,[24] Jordan CJ stated:
The question whether a term in a contract is a condition or a warranty, ie, an essential or a non-essential promise, depends upon the intention of the parties as appearing in or from the contract. The test of essentiality is whether it appears from the general nature of the contract considered as a whole, or from some particular term or terms, that the promise is of such importance to the promisee that he would not have entered into the contract unless he had been assured of a strict or a substantial performance of the promise, as the case may be, and that this ought to have been apparent to the promisor. If the innocent party would not have entered into the contract unless assured of a strict and literal performance of the promise, he may in general treat himself as discharged upon any breach of the promise, however slight. If he contracted in reliance upon a substantial performance of the promise, any substantial breach will ordinarily justify a discharge. In some cases it is expressly provided that a particular promise is essential to the contract, eg, by a stipulation that it is the basis or of the essence of the contract; but in the absence of express provision the question is one of construction for the Court, when once the terms of contract have been ascertained.[25]
[24](1938) 38 SR (NSW) 632.
[25]Ibid 641-2.
In Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd,[26] Gleeson CJ, Gummow, Heydon and Crennan JJ stated:
It is the common intention of the parties, expressed in the language of their contract, understood in the context of the relationship established by that contract and (in a case such as the present) the commercial purpose it served, that determines whether a term is “essential”, so that any breach will justify termination.[27]
…
The focus of attention should be the contract, and the nature and seriousness of the breaches. There being, at this stage, no concern with waiver, estoppel, variation or forbearance, the intention that is relevant is the common intention of the parties, at the time of the contract, as to the importance of the relevant terms and as to the consequences of failure to comply with those terms. This is a question of construction of the contract to be decided in the light of its commercial purpose and the business relationship it established.[28]
[26](2007) 233 CLR 115.
[27]Ibid 138 [48].
[28]Ibid 145-6 [68].
The question is whether the plaintiff’s undertakings - to carry the risk of loss or damage to the property until settlement, and to deliver the property to the purchaser in the same condition as on the day of sale - are essential terms, the breach of which would provide the defendant with a right to rescind the contract.[29]
[29]Cf Associated Newspapers Ltd v Bancks (1951) 83 CLR 322, 336.
Special condition 8(iv) limits the defendant’s right to rescind the contract as a consequence of the condition of the property. The common intention of the parties as expressed in the language of special condition 8(iv) is to reverse the contractual allocation of risk in respect of the condition of the property. This militates against general conditions 31.1 and 31.2 being essential terms of the contract. Further, it is common ground that at the time of sale the dwelling was derelict and vacant and the defendant’s intention was to develop the property into 13 townhouses.[30] The commercial purpose of the contract envisaged the eventual demolition of the dwelling. On a proper construction of the language and commercial purpose of the contract, general conditions 31.1 and 31.2 are not essential terms. The plaintiff’s breaches do not provide the defendant with a right to rescind.
[30]Joint Statement of Agreed Facts dated 13 July 2023, [8]-[9]
Conclusion
Special condition 8(iv) restricts the capacity of the defendant to end the contract as a consequence of the condition of the Property. The Notice of Rescission is an attempt by the purchaser to end the contract as a consequence of the condition of the Property. General conditions 31.1 and 31.2 are not essential terms and the plaintiff’s breaches thereof do not provide the defendant with a right to rescind. I will grant the declaration sought by the plaintiff that the defendant is not entitled to terminate the contract of sale dated 16 June 2022 based on the defendant’s Notice of Default and Rescission dated 19 May 2023.
I will provide the parties with an opportunity to make submissions as to the costs of the proceeding.
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