Gippsreal Ltd v Registrar of Titles & Kurek Investments Pty Ltd
[2006] VSC 115
•4 April 2006
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
COMMON LAW DIVISION
PRACTICE COURT
No. 4980 of 2006
IN THE MATTER of an application pursuant to s. 90(2) of the Transfer of Land Act 1958
| GIPPSREAL LTD | Plaintiff |
| v | |
| REGISTRAR OF TITLES AND KUREK INVESTMENTS PTY LTD | Defendants |
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JUDGE: | Hollingworth J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 24, 30 March 2006 | |
DATE OF RULING: | 4 April 2006 | |
CASE MAY BE CITED AS: | Gippsreal v Kurek | |
MEDIUM NEUTRAL CITATION: | [2006] VSC 115 | |
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Real Property – caveats – whether caveatable interest - whether consideration for loan agreement was illusory – held that no caveatable interest.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr W Stark | Oakleys |
| For the First Defendant For the Second Defendant | No appearance Mr D Robertson | Mahons with Yuncken & Yuncken |
HER HONOUR:
Introduction
This case concerns the validity of caveats lodged by the plaintiff caveator against real property in which the second defendant (“the developer”) has an interest. The caveator asserts that it has a right to charge the property pursuant to a loan agreement with the developer. The developer says that the loan agreement is not enforceable, as the consideration for it is illusory.
The first defendant is the Registrar of Titles; she has not entered an appearance and has indicated that she will abide by the orders of the court.
On 1 September 2005, a finance broker acting on behalf of the developer submitted a short application for a loan from the caveator of approximately $2,325,000, being 75% of an assumed valuation of $3,100,000. On 6 September 2005, the caveator provided a formal letter of offer in the amount sought, subject to valuation and other conditions precedent. On 9 September 2005, the developer signed a letter of acknowledgement and acceptance. The letters of offer and acceptance, which will be considered in more detail shortly, are collectively referred to as “the loan documents”.
The letter of offer provided that the developer must be in a position to settle within 4 weeks of acceptance or, if the loan was to assist in the purchase of property, on the date advised to the caveator as the settlement date for the purchase. Prior to any settlement, the developer decided that it did not wish to proceed with the proposed loan. No money was ever advanced to the developer under the loan documents[1].
[1]Although the caveator’s written submissions refer in some places to money having been “advanced”, it is clear from the evidence and from oral submissions that did not in fact happen. The caveator made arrangements to ensure that it would be in a position to advance the money at settlement, however no money was in fact paid to or on account of the developer.
In the meantime, the caveator had taken certain steps, including preparing a mortgage and other documentation, requesting a valuation of the proposed mortgage property and arranging for funds to be available for the developer to draw down at settlement.
The caveats
The caveator lodged the following three caveats:
(a) On 20 September 2005 a caveat was lodged over some property in North Melbourne, the registered proprietor of which is in fact Epping Woods Pty Ltd and not the developer.[2]
(b) A few days later, on 23 September 2005, a caveat was lodged over some properties at Loch Sport, the sole registered proprietor of which is the developer.[3]
(c) On 28 November 2005, a caveat was lodged over property in Richmond, the joint proprietors of which are the developer and Geelic Pty Ltd.[4]
[2]Caveat AD890073F was lodged in respect of the following certificates of title: volume 4828 folio 458, volume 6154 folio 667 and volume 5056 folio 056.
[3]Caveat AD904053R was lodged in respect of certificates of title volume 10537 folios 752, 754 and 756.
[4]Caveat AE029598Q was lodged in respect of certificate of title volume 10784 folio 656.
On 27 October 2005, the caveator demanded the sum of $128,174.64, as moneys allegedly owing under the loan documents. This was said to be comprised as follows:
$7,136.80 Oakleys legal fees
$3,520.00 Valuation fee
$4,000.00 Professional costs
$62,484.38 Liquidated damages
$13,491.06 Interest
$500.00 Inspection fee
$92.40 Titles Office caveat fees
$40,950.00 Finance broker brokerage fee
less
$4,000.00 Application fee (already paid)
Over the following months, various letters passed between the respective solicitors for the developer and caveator, attempting to resolve, without success, the question of what, if any, moneys were owing under the loan documents. There was a substantial volume of solicitors’ correspondence generated during this period, much of which was exhibited to the affidavits before me. Most of it is not relevant to the consideration question and is therefore not addressed by me.
The developer applied to the Registrar of Titles pursuant to s. 89A of the Transfer of Land Act 1958 (“TLA”), for service of a statutory notice on the caveator in relation to the Richmond and Loch Sport properties. It did not apply in respect of the North Melbourne property, as it is not the registered proprietor. The applications were based on solicitors’ certificates dated 23 January 2006. The Registrar duly issued statutory notices, the effect of which was to require the caveator to apply to this court to substantiate its claims or else the caveats would lapse.
The issuing of the statutory notices resulted in a further exchange of heated solicitors’ correspondence. One of the effects of all this correspondence was that the amount claimed by the caveator kept increasing due to rising legal costs, as well as interest[5].
5. The caveator conducts the mortgage lending business of its solicitors, Oakleys. The lending manager of the caveator is a law clerk in the employ of Oakleys, which appears to be the practice of a sole practitioner in Leongatha.
On 2 February 2006, the caveator offered to accept the sum of $108,948.44 in full and final settlement of its claim. On 16 February 2006, the developer offered to pay into court, pending resolution of the dispute, the sum of $68,948.44; that was the $108,948.44 previously sought by the caveator, less the finance broker’s commission of $40,950, which the broker had clearly indicated he was not pursuing. That offer was rejected by the caveator on the basis that the amount offered was not sufficient.
By an originating motion and summons dated 6 March 2006, the caveator sought an order declaring that it had a caveatable interest in all three properties and declaring that the three caveats were all valid.
During early to mid March, the developer made several requests that the caveats be withdrawn on the basis that it would pay the disputed amount into court pending the determination of what, if any, amount was owing to the caveator, but sought details of the current amount claimed by the caveator. On 16 March 2006, the caveator responded that the amount due under the loan documents was now $223,707.82, calculated as follows:
$87,224.64 Due as at 27 October 2005 $9,223.18 Further interest and default costs $7,260.00 Further legal costs $122,000.00 An allowance “on account of the current and threatened proceedings”
On 17 March 2006, the developer issued a summons seeking an order under s. 90(3) of the TLA requiring the Registrar to remove the caveats, and a declaration that the caveator does not have and is not entitled to any charge on the Loch Sport and Richmond properties. In support of that application, the developer filed and served affidavit material which showed the prejudice it was suffering in terms of dealing with the properties, due to the lodgement of the caveats.
On 20 March 2006, at the request of the caveator, I adjourned both summonses to 24 March, to enable the caveator to prepare further affidavit material. Both summonses came on for hearing before me on 24 March 2006. Due to the demands of other litigants with urgent applications on a Friday afternoon in the Practice Court, I only heard argument in relation to the issue of whether or not there was a caveatable interest. I reserved my decision in relation to that matter and adjourned both summonses to a date to be fixed.
When my associate contacted counsel to inform them I proposed to hand judgment down on 30 March 2006, counsel for the caveator indicated that he wished to seek leave to re-open his argument and make further submissions. On 30 March, I granted leave to the caveator to make further submissions in relation to the construction of the loan documents and the consideration issue.
The loan documents
In the letter of offer, the caveator offered to make a first mortgage advance of $2,015,000 and a second mortgage advance of $310,000, to be secured by the personal guarantees of all directors and shareholders and a mortgage over the North Melbourne property. The actual amount to be advanced was up to a maximum loan to value ratio of 75% of the security property.
The interest rate on the first mortgage is 17.25%, reducing to 9.25% if payment is made on time. The interest rate for the second mortgage is 30.5%, reducing to 20.5% if payments are made on time. The interest rate is variable at the discretion of the caveator. Interest starts to be payable upon the earlier to occur of settlement and four weeks from acceptance of the offer. The caveator is not obliged to provide any statements or any accounting of interest or principal payments made by the developer.
These high interest rates are no doubt reflective of the fact that non-bank lending to a property developer such as the developer is higher risk finance than many other types of lending.
A sum equivalent to three months’ interest is due and payable at settlement. In the letter of offer this is described as a “performance bond”, which is to be deducted from the mortgage advance at settlement and applied by the caveator “at its absolute discretion”. The bond may be forfeited immediately, without notice, if the developer defaults under the terms of the mortgage and does not remedy the default within 7 days of its occurrence. If the default consists of the non-payment of interest, then in addition to the forfeiture of the performance bond, the caveator becomes entitled to interest at the higher rate and “default costs” of at least $425 per month. The performance bond is not refundable if the loan does not proceed.
The letter of acceptance says that if the developer chooses not to proceed with loan once it has accepted the offer, it agrees that the following “liquidated damages” will be payable to the caveator and that the “liquidated damages” are fair and reasonable:
$4,000.00 Professional costs
$62,484.38 Three months interest
plus Any other costs and disbursements actually incurred by the caveator
Although the caveator’s counsel seemed to be submitting that the performance bond and the liquidated damages are one and the same thing, the terms relating to them are not the same and it is not clear to me that that is so[6]. In any event, whether the liquidated damages clause in the letter of acceptance would be held to be a genuine pre-estimate of damages is not a matter that I need to decide.
[6]The only reference to “liquidated damages” in the letter of offer is under the heading “Repayment of principal”. That provides for the developer to pay liquidated damages of an additional three months interest at the higher rate if the developer does not repay the loan on the nominated date. This is not the same as the liquidated damages provision in the letter of acceptance.
The caveator relies upon the following provisions of the letter of offer:
“Charge
In accepting this offer of loan you agree to charge in favour of [the caveator] all your estate or interest in the security property (and in any and all other property including real estate property you may own) as from the date of the acceptance of this offer, with payment of the moneys due under this offer, the acceptance and acknowledgement and the proposed mortgage.
The mortgagor/guarantor and all directors of the mortgagor /guarantor additionally agree to be personally liable for all moneys due to [the caveator] hereunder and agree that [the caveator] may look to their estates in their entirety jointly and severally and that this offer and the acknowledgement and acceptance herein shall constitute a charge both fixed and floating over all assets of any bodies corporate listed as mortgagor or guarantor herein.
[The caveator] may at its discretion lodge a caveat against the title to any properties the above parties may own or have any form of interest in including the property offered as security or register a charge over any bodies corporate, to secure payment of any moneys outstanding under this offer or the mortgage.”
The letter of offer contains a large number of conditions precedent which the caveator may at its absolute discretion choose to forego at any time.
Reservation of rights
The loan documents are very one-sided, in terms of imposing obligations on the developer. Once again, that may be reflective of the high risk nature of non-bank development lending. I also accept that, as a general rule, courts should be slow to interfere with a bargain struck by commercial entities who are both well aware of the terms of the loan documents. Nevertheless, courts have long recognised that there can be dangers for lenders who attempt to reserve to themselves unfettered discretions in relation to important matters.
In this case, in my opinion the caveator has reserved its rights to such a degree that it has provided no valuable consideration for the bargain; or put in terms of the relevant authorities, the consideration is illusory. The letter of offer contains the following “reservations”, which are at the heart of this dispute:
“Reservation
This offer is not to be construed as an agreement binding [the caveator] to make an advance under the facility. Such agreement shall only come into existence on the making of the advance which may be delayed, or may not occur at all, unless all of [the caveator’s] requirements including any additional requirements to those set out herein are satisfied fully and promptly.
[The caveator] may, in the case of any error, correct any particulars of or relating to the proposed advance and, if any term of this proposal is breached for whatever reason, [the caveator] shall not be liable for any damage, loss, cost or expense suffered by [the developer] or by any third party as a result of such variation.
[The caveator] reserves the right to impose additional terms and conditions to the facility at any time (both before the advance and at any time during the term of the loan) should it become aware of other matters or issues which may affect the terms of the facility and which are at the time of issue of this offer unknown, unclear or unverified.
[The caveator] reserves the right to withdraw this offer at any time up to and including the date of settlement should [the developer] fail to comply with each condition (either set out herein or subsequently imposed by [the caveator] as a result of its enquiries) or any undisclosed information is determined from its enquiries and upon the withdrawal of this offer the mortgagor and any borrowers, covenantors and guarantors will be liable to make payment of all moneys due hereunder.
[The caveator] additionally and specifically reserves the right to withdraw this offer at any time up to and including the date of settlement for any other reason whatsoever without it being obliged to explain or justify the decision to withdraw the offer, however in the event that the offer is withdrawn without explanation then [the caveator] will not be entitled to demand payment of the liquidated damages set out herein, though the mortgagor will at all times remain liable for all costs and disbursements incurred by [the caveator].”
It is well-established law that an undertaking given in terms which place performance wholly within the discretion of the promisor is neither a binding contractual promise nor good consideration.
“Consideration would again be illusory where it was alleged to consist of a promise the terms of which left performance entirely to the discretion of the promisor. A person does not provide consideration by promising to do something ‘if I feel like it,’ or ‘unless I change my mind. Promises are not often made in this form; but the same principle may apply in analogous cases.’[7]
[7]Chitty on Contracts 29 ed at [3-025].
The developer relied in particular on the decisions of this court in British Empire Films Pty Ltd v Oxford Theatres Pty Ltd[8] and of the majority of the High Court in Placer Development Ltd v Commonwealth[9]. In British Empire Films, O’Bryan J considered a contract between a film distributor and a film exhibitor. The distributor was not obliged to supply films, but if it chose to do so, it would be subject to the provisions of the contract. The exhibitor, on the other hand, was obliged not to obtain films from a source other than the distributor. His Honour held that because the distributor was not obliged to supply any films the “supposed consideration which is entirely dependent on the will of [the distributor] whether it will ever become operative is illusory.”[10]
[8]British Empire Films Pty Ltd v Oxford Theatres Pty Ltd [1943] VLR 163 at 167 per O’Bryan J.
[9]Placer Development Ltd v Commonwealth (1969) 121 CLR 353 per Kitto J at 356 and Taylor and Owen JJ at 359-60
[10]At 167.
In Placer Development, Kitto J set out the line of authority upon which he relied in holding that the contractual provision under consideration was not enforceable:
“… but the general principle is established which Vaughan Williams LJ in Loftus v Roberts[11], expressed in words that were subsequently adopted by Lord Wrenbury, as Buckley J, in Broome v Speak[12]. It is that wherever words which by themselves constitute a promise are accompanied by words showing that the promisor is to have a discretion or option as to whether he will carry out that which purports to be the promise, the result is that there is no contract on which an action can be brought at all. The succinct statement of the principle in Leake on Contracts, 3rd ed., p3: ‘Promissory expressions reserving an option as to the performance do not create a contract’ was approved by the Lord Justice, as it was later by Lord Wright in Hillas and Co Ltd v Arcos[13].”
[11](1902) 18 TLR 532 at 534.
[12][1903] 1 Ch 586 at 599.
[13](1932) 147 LT 503 at 517.
The principles enunciated in British Empire Films and Placer Developments have been approved or applied in more recent authorities[14].
[14]For example International Malting Company Australia Pty Ltd v Pyle [2003] VSC 496 at [17] and [18] per Smith J; Thorby v Goldberg (1964) 112 CLR 597 at 605. See also MacRobertson Miller Airline Service v Commissioner of State Taxation (1975) 133 CLR 125 at 133.
The caveator sought support in the decision of Moynihan J in the Supreme Court of Queensland in Oasis Dalby Pty Ltd v Sovereign Capital Ltd[15]. However, in my opinion, the case does not assist the caveator, for the following reasons. In a letter of offer, which was duly accepted by the borrower, the lender reserved the right to vary or withdraw the loan offer at any time before settlement. The loan was to be secured by a mortgage over real property. The letter of offer provided that a formal loan agreement and mortgage would be prepared and executed, which duly occurred. The borrower subsequently said that it would not be proceeding with the transaction.
[15][2005] VSC 273.
The question which arose for determination was whether the mortgage (not the letter of offer or the loan agreement) could be enforced, because no money had actually been advanced by the lender and there was therefore no consideration for the mortgage. Moynihan J held that upon the acceptance of the letter of offer, the parties intended to be immediately bound to the performance of its terms, but acknowledged that full or more precise documentation, including the mortgage, was necessary to give it effect; that is to say, the case fell into the first category in Masters v Cameron[16]. The judge expressly noted that no issue had been raised as to the binding effect of the letter of offer; that is to say, the court was not required to consider whether the consideration for the letter of offer (or indeed the mortgage) was illusory in the sense discussed in British Empire Films and Placer Developments.
[16][1954] 91 CLR 353 at 360.
I turn to consider the caveator’s “promise” to advance money, in the light of those principles. Obviously, the lending of money is at the core of the transaction the subject of the loan documents. The first reservation expressly states that the offer is not to be construed as an agreement binding the caveator to make an advance, and that “such agreement shall only come into existence on the making of the advance which may be delayed, or may not occur at all”. It is hard to imagine a clearer statement of the fact that the caveator has made no binding promise to do anything. Coupled with additional reservations which entitle the caveator to withdraw the offer at any time up to and including settlement, including for any reason whatsoever “without being obliged to explain or justify the decision”, it is in my opinion clear beyond doubt that the consideration offered by the caveator is illusory.
The third reservation also purports to reserve to the caveator the right to unilaterally impose additional terms and conditions at any time, should it become aware of other matters which are unknown, unclear or unverified at the time of the offer. That matter was raised before me in the context of the argument about consideration. It may be that the third reservation also makes the loan documents objectionable on the more general ground of uncertainty[17], but as the issue was not argued before me on that basis, and given my finding as to consideration, I need not consider the uncertainty issue.
[17]Considered in cases such as Godecke v Kirwan (1973) 129 CLR 629; Kabwand Pty Ltd v National Australia Bank Ltd [1989] ATPR 40-950; Cross v National Australia Bank Ltd (Federal Court, unreported, 29 April 1994 per Drummond J); Hill v Canberra Centre Holdings Ltd (Supreme Court of the ACT, unreported, 23 December 1994 per Miles CJ).
The caveator raised an alternative argument. If the consideration was found to be illusory, then the caveator says that the loan documents were made enforceable by reason of the steps which the caveator had taken to be ready for settlement. Those steps include such matters as obtaining a valuation, conducting searches, corresponding about proposed contract variations and possible settlement dates and taking internal steps to have the loan moneys available for settlement. Although the caveator’s counsel consistently referred to these as acts of “part performance”, the use of that expression seems unhelpful and likely to mislead[18]. It seems to me that the more appropriate enquiry is to determine whether a binding contract has “sprung into existence” by reason of any subsequent conduct.
[18]The doctrine of part performance arose in equity to enable the court to enforce a contract which was required to be, but was not in fact, evidenced in writing.
This was an issue which arose in British Empire Films. It may be recalled that O’Bryan J held that the consideration was illusory because the film distributor was under no obligation to ever supply a film to the exhibitor. However, the distributor had in fact subsequently offered the exhibitor two films, which the exhibitor had accepted.
“If then the agreement of the 23rd October 1942 does not constitute a valid contract for want of consideration the acceptance by the [exhibitor] of the film ‘Professor Mamlock’ and a supporting feature offered by [the distributor] in that way in my opinion brought about a legal contractual relation between the two companies, the terms of which are to be found in the written documents relied upon. In other words, in this view the contract did not spring into existence on the execution of the document, but upon the acceptance of the first film supplied. For the contract so constituted by that offer and acceptance there is ample consideration…”[19]
[19]At 171.
I do not disagree with the analysis in that case of a fresh offer and acceptance, supported by consideration, and on the terms of the written agreement. But there is no equivalent fresh offer and acceptance in this case. The developer, unlike the film exhibitor, did not accept any offer constituted by the later conduct of the caveator. No additional evidence could change the simple fact that no moneys were in fact advanced to and accepted by the developer, and no matter what steps the caveator took to be in a position to settle, it was still free under the loan documents to decline to make any advance right up to the moment of settlement.
For these reasons, it follows that there is no binding contract between the parties and, accordingly, no caveatable interest in the Richmond and Loch Sport properties.
The effect of this decision is not to leave the caveator with no remedy against the developer. For example, the caveator may be able to recover on a quantum meruit basis in respect of work actually done by it. Or if the caveator has acted to its detriment in reliance on any misrepresentation by the developer, it may have a claim for damages. But neither of those two causes of action would give it any right to charge the developer’s property or to claim in excess of $200,000 as the price for withdrawing the caveats.
For these reasons, the plaintiff’s originating motion and summons must be dismissed.
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