Gorgas v Soon Ok Hwang

[2010] NSWSC 1121

CITATION:	Gorgas v Soon Ok Hwang [2010] NSWSC 1121 This decision has been amended. Please see the end of the judgment for a list of the amendments.
HEARING DATE(S):	15 June 2010
JUDGMENT DATE :	1 October 2010
JURISDICTION:	Equity Division
JUDGMENT OF:	Palmer J
DECISION:	Vendor’s termination of contract is invalid.
CATCHWORDS:	CONTRACTS – contract for sale of land – whether contract had been validly terminated for non-compliance with Notice to Complete – whether Notice to Complete was valid – whether Notice to Complete ought to have included an adjusted purchase price pursuant to s 66M Conveyancing Act – whether risk under contract for sale passed to purchaser already in possession pursuant to a lease agreement before the contract was entered into.
LEGISLATION CITED:	Conveyancing Act 1919 (NSW) – Pt 4 Div 7, s 66K, s 66M Conveyancing (Passing of Risk) Amendment Act 1986 (NSW) Supreme Court Act 1970 (NSW) – s 100
CATEGORY:	Principal judgment
CASES CITED:	DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423 Fitzgerald v Masters (1956) 95 CLR 420 Hughes v Schofield [1975] 1 NSWLR 8 Stephenson v State Bank of New South Wales Ltd (1996) 39 NSWLR 101
PARTIES:	George Gorgas (Plaintiff/Cross Defendant) Soon Ok Hwang (Defendant/Cross Claimant)
FILE NUMBER(S):	SC 2009/290465
COUNSEL:	In person (Plaintiff/Cross Defendant) A.L. Hill (Defendant/Cross Claimant)
SOLICITORS:	In person (Plaintiff/Cross Defendant) Taylor & Scott (Defendant/Cross Claimant)

2009/290465 Gorgas v Soon Ok Hwang

JUDGMENT

1 October, 2010

Introduction

1 This is a vendor and purchaser suit, the principal question being whether the vendor validly terminated the contract for sale for the purchaser’s breach and, if so, what damages are recoverable.

2 The Plaintiff, Mr Gorgas, entered into a contract dated 30 November 2007 to purchase from the Defendant, Ms Hwang, a strata title home unit at Croydon for a price of $550,000.

3 At the time of the contract, Mr Gorgas was already in occupation of the unit as a tenant. He had entered into a residential tenancy agreement with Ms Hwang which expired on 2 October 2007, but he remained in occupation under holding over clause because he had offered to purchase the unit.

4 The contract for sale provided for a deposit of $12,500 instead of the usual 10% of the purchase price but it contained a covenant that if Mr Gorgas defaulted in his obligations under the contract the balance of the 10% deposit would be immediately recoverable as a debt. The contract stipulated 11 February 2008 as the date for completion but it did not make time of the essence.

5 Mr Gorgas continued to pay rent under the residential tenancy agreement until February 2008.

6 On 29 January 2008, Mr Gorgas’ solicitors wrote to Ms Hwang’s solicitors requesting an extension of time for completion from 11 February to 17 March 2008. After some correspondence, the parties apparently agreed on an extended settlement date of 31 March 2008, upon terms that Mr Gorgas paid interest on the balance of the purchase price in accordance with special condition 32.1 of the contract, from 11 February to 17 March, the payment to be made by 7 March.

7 Special condition 32.1 provides:

“If completion of this contract takes place after the completion date, it is an essential condition of this contract that the purchaser pay to the vendor on completion, in addition to the other moneys payable under this contract the amount obtained by applying a simple interest formula of ten percent (10%) per annum to the balance of the purchase price and calculated on a daily basis from and including the date upon which this contract is completed. No interest will be payable in respect of any period during which the vendor is in default under this contract.”

8 It is not clear whether the payment due on 7 March was made. On 11 March, the floor of the unit was damaged by water from a burst pipe in the Common Property. Mr Gorgas did not complete the purchase on 17 March or on 31 March. He remained in occupation of the unit, without paying rent, claiming that it was the obligation of Ms Hwang to repair the water damage and that his obligations under the residential tenancy agreement and under the contract for sale were in suspense until the repairs had been carried out to his satisfaction.

9 On 17 April 2008, the Owners Corporation of the home unit building confirmed that it would undertake the repairs to the floor of the unit at the expense of its insurer.

10 Mr Gorgas not having resumed payments of rent, Ms Hwang terminated the tenancy agreement and required vacant possession. Mr Gorgas did not comply and Ms Hwang applied to the Consumer Traders and Tenancy Tribunal for orders either that Mr Gorgas give possession or else pay outstanding rent.

11 On 8 May 2008, the Tribunal made the following orders by consent:

– Mr Gorgas was to pay Ms Hwang the rent outstanding from 19 February to 8 May 2008, namely $5,600, by instalments of $2,000 per week;

– default in the payment of any instalment would make the whole of the balance immediately payable;

– Mr Gorgas was to pay rent as from 8 May 2008 of $980 per fortnight, the first payment to be due on 19 May.

12 Mr Gorgas ceased payment of rent on 10 June 2008 but remained in occupation of the unit. He asserted that it would cost $37,500 to repair the damage to the unit floor. The Strata Corporation’s insurer had assessed the cost of repair at $9,740. Mr Gorgas refused to accept this amount as adequate to carry out repairs and refused to complete the contract until either repairs had been carried out to his satisfaction or a reduction of $37,500 was made from the purchase price under the contract. Mr Gorgas’ solicitors asserted that he was entitled to this deduction pursuant to s 66M Conveyancing Act 1919 (NSW) – an assertion to which I will return shortly.

13 On 22 July 2009, Ms Hwang’s solicitors wrote to Mr Gorgas’ solicitors noting that the cost of repairs to the unit claimed by Mr Gorgas substantially exceeded the cost assessed by the Strata Corporation’s insurers and offering settlement of the contract on the basis that $37,500 of the purchase price would be held in escrow pending independent valuation of any persisting damage to the unit floor after repairs by the Strata Corporation’s insurer had been completed. This offer was not accepted.

14 On 29 July 2009, Ms Hwang’s solicitors served a notice to complete appointing 14 August 2009 as the date for settlement. Mr Gorgas did not complete the contract by the appointed date and on 24 August 2009 Ms Hwang’s solicitors gave a notice terminating the contract.

15 On 3 September 2009, Mr Gorgas commenced these proceedings by Summons, seeking a declaration that Ms Hwang was not ready, willing and able to perform the contract when the Notice to Complete was served so that her purported termination of the contract was invalid. Mr Gorgas sought an order for specific performance.

16 The basis of the allegation that Ms Hwang was not ready, willing and able to perform the contract was an assertion that, by virtue of s 66M Conveyancing Act, the purchase price was to be reduced on completion by $37,500, being the cost of repairs to the unit floor, but Ms Hwang was not willing to perform the contract in accordance with her obligations by accepting a purchase price reduced by this amount.

17 By a Cross Claim filed on 17 November 2009 Ms Hwang claimed:

– a declaration that the contract had been validly terminated on 24 August 2009 and the deposit of $12,500 forfeited;

– an order for the payment of the balance of 10% of the purchase price, i.e. $42,500, in accordance with the contract;

– interest on the balance of the purchase price, $537,500, from 11 February 2008 to the date of termination, 24 August 2008, in accordance with special condition 32.1 of the contract, i.e. an amount of $82,336;

– outstanding rent under the residential tenancy agreement from 10 June 2008 to 16 December 2008 in an amount of $41,990 and rent thereafter at $88.60 per day;

– an order for possession;

– interest under s 100 Supreme Court Act 1970 (NSW)

18 Mr Gorgas moved out of the unit on about 11 January 2010. On 8 February 2010, Ms Hwang entered into a residential tenancy agreement with an unrelated party.

19 When the proceedings came on for trial, Mr Gorgas appeared in person. He said that he had “run out of money” and could not afford legal representation. He did not wish to contest the proceedings in any active way. He did not wish to purchase the unit. He said:

“I forfeited the deposit, I am happy to do that. I just want to walk away. There is really not much I can do at this point. I'm stuck. I am happy to walk away.”

20 Mr Gorgas, therefore, effectively abandoned all claims in his Summons. Accordingly, only the issues raised by the Cross Claim must be determined. Despite the fact that Mr Gorgas did not actively oppose the Cross Claim and offered no evidence and made no submissions, the Court must nevertheless determine whether, on the evidence tendered, the relief sought in the Cross Claim should be granted.

Did risk of loss pass to Mr Gorgas

21 The only basis upon which termination pursuant to non-compliance with the Notice to Complete could be invalid is that Ms Hwang was, in serving the notice, insisting on performance of the contract by payment of the full contract price when, by virtue of s 66M(1) Conveyancing Act, she was required to abate the price to reflect the water damage to the unit: see Baker v Jessup (1998) 9 BPR 16,653.

22 Section 66M provides:

“(1) Where land is damaged after the making of a contract for the sale of the land and before the risk in respect of the damage passes to the purchaser, the purchase price shall be reduced on completion of the sale by such amount as is just and equitable in the circumstances.”

23 As to when the risk in respect of damage passes to the purchaser, s 66K provides:

“(1) The risk in respect of damage to land shall not pass to the purchaser under a contract for the sale of the land until:


(a) the completion of the sale, or

(b) the time stipulated by the parties to the contract, being a time after the purchaser enters into, or is entitled to enter into, possession of the land,


whichever first occurs.

(2) The reference in subsection (1) to possession of land includes a reference to:


(a) the occupation of the land (whether pursuant to a licence or otherwise) pending completion of the sale of the land, and

(b) the receipt of income from the land.”

24 Mr A. Hill of Counsel, who appears for Ms Hwang, submits that s 66M has no operation in this case because the risk of damage to the property had passed to Mr Gorgas before the damage occurred on 11 March. Mr Hill points out that Mr Gorgas had been in occupation of the property even before the contract for sale was exchanged. He relies on s 66K(1)(b) and says that, by clauses 18.1 and 18.4 of the contract, possession was both given and taken and the passing of risk occurred upon exchange of contracts in November 2007.

25 Clauses 18.1 and 18.4 provide:

“18 Possession before completion

18.1 This clause applies only if the vendor gives the purchaser possession of the property before completion.
…
18.4 The risk as to damage to the property passes to the purchaser immediately after the purchaser enters into possession.”

26 *Clause 18.4 certainly provides a time for the passing of risk, as required by s 66K(1)(b). However, the difficulty with Mr Hill’s submission is that by clause 18.1, clause 18.4 applies only if the vendor “gives” the purchaser possession and the risk passes under clause 18.4, not upon such giving, but when the purchaser subsequently “enters” into possession. In other words, for the risk to pass under clauses 18.1 and 18.4, one must be able to point to two events occurring upon or after exchange of the contract: a “giving” of possession and an “entry into” possession.

27 How do clauses 18.1 and 18.4 operate, if at all, if the purchaser was in possession pursuant to a lease or tenancy agreement before the contract was entered into, and if nothing changed in that regard either at the time of exchange of the contract for sale or at any time before completion of the contract?

28 Mr Hill says that, at the time of exchange of the contract, Mr Gorgas was only a tenant at will. Accordingly, he says, Ms Hwang could have given Mr Gorgas notice to quit immediately, required Mr Gorgas actually to give possession and thereafter let him back into possession. Instead, Ms Hwang simply allowed Mr Gorgas to remain in occupation. Allowing a tenant at will to continue in occupation is, Mr Hill says, both a “giving” of possession and an “entry” into possession for the purposes of clause 18.

29 Mr Hill’s researches and my own have not found any case directly in point as to what is a “giving of possession” and an “entry into possession” for the purposes of clauses 18.1 and 18.4. I approach the question, therefore, as a matter of construction of the words of the contract, bearing in mind the context and purpose of the clause.

30 Clause 18 was inserted into the standard form of contract for sale of land in response to the amendments to the common law which had been introduced in April 1986 by Part 4 Div 7 of the Conveyancing Act. Division 7, which is entitled “Passing of Risk between Vendor and Purchaser” was inserted in the Act by the Conveyancing (Passing of Risk) Amendment Act 1986 (NSW) in compliance with a recommendation in a Report of the New South Wales Law Reform Commission published in March 1984 (LRC 40). Before the amendment to Division 7, under the common law the risk of loss from damage to a property passed to a purchaser upon exchange of the contract for sale. It was seen that not all purchasers were aware of this circumstance and many did not insure the property prior to completion.

31 Section 66K reversed the common law position: it provided that risk in respect of damage to the land subject to a contract for sale does not pass to the purchaser until completion of the contract or until an earlier time stipulated by the parties to the contract. Clause 18.4 of the standard form of contract for sale of land then stipulated that risk would pass upon the giving and taking of possession: see generally Stephenson v State Bank of New South Wales Ltd (1996) 39 NSWLR 101.

32 A tenant of land who is in possession has a limited estate or interest. That estate or interest is insurable, of course, for a variety of purposes but the nature of the limited estate or interest insured is very different from the nature of the estate of the owner of the fee simple. A contract for sale of the fee simple raises, as between the parties, the risk that the value of the fee simple interest will diminish if the property suffers damage before completion of the contract. Accordingly, where a tenant in possession enters into a contract to purchase the property, that contract creates a risk of loss from damage to an estate or interest in the land which the tenant did not have before entering into the contract. Before the enactment of s 66K that risk would have been borne by the tenant/purchaser as from the date of the contract. By virtue of s 66K(1)(b) and clauses 18.1 and 18.4 that risk passes to the tenant/purchaser only if there is a giving and taking of possession. It seems to me, in that circumstance, that for the tenant/purchaser to remain in possession pursuant to the terms of the tenancy or lease after exchange of contracts is not enough, in itself, to show that something has been done pursuant to the contract for sale which transfers risk, in accordance with clauses 18.1 and 18.4. What must be done to transfer risk under those clauses must be sufficient to show that the parties to the contract for sale, in their characters as vendor and purchaser, not landlord and tenant, have unambiguously agreed, for the purposes of the contract for sale, that the incidence of risk of loss to the value of the estate in fee simple has altered from that provided by s 66K.

33 In the present case, Mr Gorgas ceased paying rent as from 19 February and Ms Hwang gave him a notice to quit. However, he never gave possession in accordance with that notice. The consent orders made by the Tribunal on 8 May 2008 merely provided for the payment of outstanding rent due under the residential tenancy agreement by instalments and made provision for further rent, again presumably under the residential tenancy agreement, at a certain rate in the future. Nothing done between the parties after exchange of the contract for sale evidences an unambiguous agreement that the incidence of risk under s 66K is to be altered or that possession is to be given or taken for the purposes of clauses 18.1 and 18.4.

34 I conclude, therefore, that the risk of loss to the fee simple in the property never passed to Mr Gorgas after exchange of contracts so that s 66M remained applicable at all times.

Was the Notice to Complete valid

35 At the time that Ms Hwang’s solicitors issued the Notice to Complete, the damage to the floor of the unit had not been rectified and the parties were in dispute as to how much the rectification work would cost. It was clear that, even on the lowest estimate, the work would cost in excess of $9,000.

36 The Notice to Complete simply required Mr Gorgas to “pay the balance of the purchase money” on completion, i.e. the difference between the purchase price in the contract and the deposit, after adjustments. On its face, the Notice to Complete required performance of the contract without the reduction in purchase price required by s 66M(1). Accordingly, the Notice is invalid unless it can be said that the offer made by Ms Hwang’s solicitors in their letter of 22 July 2009 to Mr Gorgas’ solicitors made it “just and reasonable in the circumstances” that there be no reduction in the purchase price payable upon completion: Baker v Jessup at [19].

37 The 22 July letter relevantly states:

“On our instructions there is simply no justification for the adjustment of $37,500.00 which the purchaser seeks. As you are aware the vendor and managing agent recently inspected the property. Your client opposed the previously agreed taking of photographs of the area of alleged damage so that no material relating to the alleged damage is available to us. The insurer has always been prepared to fund what their loss adjustor assessed as being required to restore the floor, such works being valued at $9,740.00 but your client has rejected this. If you have any material to support your client’s claim for greater damage please forward same urgently.

We are instructed in the meantime to propose a remedy which will achieve early settlement. Our client would agree to the sum of $37,500.00 being held in escrow pending independent valuation of any alleged persisting damage, such money to be held in an account with both solicitors as signatories.

Please let us have your response by close of business on 24 July 2009 failing which we will proceed to issue a fresh Notice to Complete.”

38 What is proposed by the letter seems to be that the full purchase price is to be paid by Mr Gorgas on completion but of that amount $37,500 is to be held in escrow pending ascertainment of the cost of the rectification work. The letter does not say what is to happen next.

39 The letter does not propose that the money will be expended on the actual cost of repairs and that whatever is left afterwards will be paid to Ms Hwang so that ultimately, after completion and after the repair work is carried out, Ms Hwang receives the purchase price less the actual cost of repairs. Even if that had been expressly proposed, it is arguable that the proposal would not have satisfied the requirement of s 66M(1) that the purchase price “shall be reduced on completion”.

40 What the letter actually proposes is simply that $37,000 will be held in escrow pending independent valuation of any alleged persisting damage. What is to happen if the valuation is agreed and what is to happen if it is not agreed are left in the air. Mr Gorgas cannot be criticised for not accepting the proposal in those terms.

41 Non-acceptance of the proposal in the letter of 22 July left the parties in dispute as to whether Mr Gorgas was entitled to any reduction in the purchase price – Ms Hwang’s solicitors had earlier denied any such entitlement – and it left them in dispute as to the amount by which the purchase price should be reduced on completion, if Mr Gorgas was entitled to any such reduction.

42 In those circumstances, Ms Hwang had two courses open to her. As did the vendor in Stephenson v State Bank of New South Wales, she could have commenced proceedings for:

– a declaration that s 66M(1) did not apply because of s 66K(1)(b) and clauses 18.1 and 18.4 of the contract so that no reduction in the purchase price was required;

– alternatively, a declaration as to what reduction was just and equitable;

– a declaration that she was entitled to serve a Notice to Complete allowing the reduction so determined.

43 Alternatively, Ms Hwang could have expressly made a reduction in the purchase price and, trusting that the reduction was fair and reasonable in the circumstances, she could have then served a Notice to Complete stipulating the reduced purchase price payable on completion.

44 However, as Ms Hwang adopted neither course but served a Notice to Complete requiring payment of the full purchase price on completion, her termination of the contract in reliance upon that Notice is invalid.

The inconclusive consequences

45 The contract for sale has not been validly terminated by either party for the other party’s breach. However, it is clear from all of the evidence that neither party wishes to proceed with the contract. Ms Hwang purportedly terminated it more than a year ago and she has entered into a residential tenancy agreement with a third party which is inconsistent with the requirement of the contract with Mr Gorgas to give vacant possession on completion. Mr Gorgas, although he initially sued for specific performance, stated at the trial that he is happy to forfeit the deposit already paid and wishes to “walk away” from the contract.

46 In these circumstances, it is highly arguable that the contract has been expressly and unequivocally abandoned: see e.g. DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423, at 434; cf Hughes v Schofield [1975] 1 NSWLR 8, at 13-14 and Fitzgerald v Masters (1956) 95 CLR 420, where the question was whether abandonment was implied rather than, as appears to be the case here, express.

47 Neither party made any submissions at the trial as to whether the contract had been abandoned. Apparently, neither party has given consideration to that question and, in particular, as to what are the consequences of abandonment in regard to forfeiture of the deposit paid on exchange.

48 If I am correct in holding that Ms Hwang did not validly terminate the contract for Mr Gorgas’ non-compliance with the Notice to Complete then, as matters presently stand, she cannot claim damages under any of the headings in clause 9 of the contract because all such claims can only be made when the vendor terminates for the purchaser’s breach. Moreover, I cannot see how any amount equivalent to the interest claimed under special condition 32.1 can be recoverable by Ms Hwang as common law damages where the contract has been abandoned.

49 There is also considerable difficulty as to whether Ms Hwang can recover in these proceedings the difference between the amount of $12,500 paid on exchange of contracts and the full 10% deposit. Special condition 37 of the contract provides:

“The purchaser acknowledges that the vendor is normally entitled to require payment of a deposit equal to 10% of the price on the date of this contract. The purchaser also acknowledges that the vendor has accepted such reduced deposit of the price as a deposit on the condition that, if the purchaser defaults in the observance or performance of any of the purchaser’s obligations under this contract, the purchaser must pay to the vendor an additional amount equal to the remaining deposit of the price immediately upon demand by the vendor. If the purchaser fails to pay the additional amount on demand by the vendor, the vendor may recover the additional amount from the purchaser as a debt.”

50 It is not clear from the evidence whether Mr Gorgas has ever been in breach of his obligation under the contract, triggering a right on the part of Ms Hwang to claim payment under special condition 37. This is so because the contract provided for completion by 11 February 2008 but, prior to that time, the parties had agreed upon an extension of time to 31 March, in consideration of a payment of additional interest by Mr Gorgas.

51 As I have noted at [8], it is not clear whether payment in consideration of the extension of time was ever made. If it was made, then the completion date was extended to 31 March or, as has also been suggested in the correspondence, to 17 March. It does not matter whether there was extension of time for completion to 17 March or 31 March because on 11 March damage to the unit occurred entitling Mr Gorgas to a reduction in the purchase price under s 66M(1).

52 When the extended date for completion – whatever that date was – passed without completion Mr Gorgas was, very arguably, not in breach because by virtue of s 66M he was entitled to a reduction in the purchase price but Ms Hwang had not then agreed to any such reduction.

53 None of these issues has been canvassed by the parties at the trial. I do not think that it would be right to dispose of the case without giving the parties the opportunity to address them.

54 I will therefore publish these reasons and give directions as to the further conduct of the proceedings.

Recovery of rent

55 The Cross Claim also seeks an order for the payment of outstanding rent. There is no evidence to suggest that Mr Gorgas in fact paid rent from 10 June 2008 to the time he vacated the property. When the matter is brought back for directions I will enter judgment against Mr Gorgas for outstanding rent calculated up to the date on which Ms Hwang obtained vacant possession.

– oOo –

25/11/2010 - Incorrect rent figure: figure should be $980, not $580. - Paragraph(s) paragraph 11, third dash point.