Hai Tan v Bell & Ors and Optima Conveyancing Group No. DCCIV-96-1288 Judgment No. D3788
[1998] SADC 3998
•30 April 1998
HAI TAN v BELL & ORS and OPTIMA CONVEYANCING GROUP (THIRD PARTY)
Civil
Judge Herriman
In this action, the plaintiff lessor sued the third defendant lessee for unpaid rent and associated damages, arising out of the failure of that party to complete the term of its lease. The remaining defendants were proceeded against on the footing that each of them had separately guaranteed the performance of the subject lease; in the case of the fourth defendants, by the lessee, and in the case of the first and second defendants, by a predecessor lessee.
At the commencement of the trial, I was informed that:
the plaintiff had settled his claim against the first defendants, Graham Melville Bell and Heather Mary Bell (“the Bells”). Their settlement deed was tendered and became Exhibit D1;
the plaintiff had separately settled his claim against the second defendants and had filed an appropriate Notice of Discontinuance against them;
because of the respective financial positions of the third and fourth defendants, the plaintiff had elected not to proceed against them.
I was then invited by counsel for the plaintiff and the first defendants to enter a consent judgment for the plaintiff against the Bells in the sum of $44,000, inclusive of interest, plus costs to be taxed or agreed, and I did so.
The action did not end there, however, because the Bells had themselves brought third party proceedings against Optima Conveyancing Group, seeking to be indemnified against their liabilities to the plaintiff, and those proceedings had not been resolved. The trial therefore proceeded on that third party claim.
At the outset the third party, through its counsel (and then by Exhibit TP1), conceded that the terms of the Bells’ consent to judgment, in favour of the plaintiff, were reasonable, albeit that it reserved the right to dispute any potential liability it might have for the costs payable by the Bells to the plaintiff under that judgment. The third party further acknowledged it would take no point about the plaintiff’s concession, that he would not execute his judgment against the Bells, unless the Bells were successful in their claim against the third party.
THE CONTRACTUAL AND OTHER RELATIONSHIPS
It is necessary to set out in some detail the contractual and other relationships which gave rise to the litigation.
In about 1980, Northelm Pty Ltd (“Northelm”) became the registered proprietor of commercial premises in Ocean Street, Victor Harbor, from which traded the supermarket business I will refer to as “Tom the Cheap”.
Some time after then, Northelm leased those premises to an entity associated with the second defendants, (“the Kays”), and that entity then conducted the supermarket business. It would appear that the Kays personally guaranteed the performance of that party operating under the terms of its lease, which was apparently for a period expiring on 31 December 1997 (“the Kay lease”).
During the term of the Kay lease, the supermarket business was sold to Quickpoint Pty Ltd (“Quickpoint”), a company controlled by the first defendants, the Bells, and it would appear that settlement of that transaction occurred on 22 December 1987. Naturally, the transfer of occupancy to Quickpoint required the consent of Northelm and that consent was ultimately given, but in circumstances whereby:
it was agreed that the Kay lease would be determined and in its place there would be substituted a fresh lease from Northelm to Quickpoint for a 20-year period;
notwithstanding that the Kay lease had been determined, the Kays would become personal guarantors of the Quickpoint lease for the unexpired period of the Kay lease, namely, until 31 December 1997;
that the Bells would otherwise personally guarantee the performance, by Quickpoint, of its obligations under the lease.
These arrangements were put in place in document D2.
On about 5 December 1989, Quickpoint, in turn, sold the supermarket business to the third defendant. On this occasion, Northelm consented to an assignment of the Quickpoint lease to the third defendant, but upon the condition that its rights against the assignor, Quickpoint, remained on foot. As the Bells had guaranteed the performance by Quickpoint of the terms of its lease, their guarantees also remained on foot as, indeed, did those of the Kays. Finally, the fourth defendants, themselves, personally guaranteed the performance of their operating entity under the assigned lease.
On 4 June 1990, Northelm transferred the freehold premises to the plaintiff, who thereby acquired all Northelm’s rights under the Quickpoint/third defendant lease and, as well, under the supporting guarantees.
In the event, the third defendant operated the supermarket business until it ceased trading in about March 1996. It was then, or it later became, insolvent and it defaulted under the lease. Consequent upon that default, the plaintiff suffered damages by way of loss of rent, strata fees, re-letting costs and the like, for which he brought this action.
The third party, Optima Conveyancing Group (“Optima”), was at relevant times a registered business and its proprietors were licensed land brokers. Its predecessor in business, Robert Northcott & Associates, had acted for Quickpoint in its purchase of the supermarket business from the Kays, and Optima was later engaged by Quickpoint and the fourth defendants, to prepare the contract of sale between them and to arrange with Northelm for the transfer of the Quickpoint lease to the third defendant. One of the principals of Optima was Fred Northcott, a licensed land broker, and he, along with others in that business, had previously worked for Robert Northcott & Associates. More will be said later about this.
THE THIRD PARTY CLAIM
At trial, there was no dispute as to the true meaning and effect of the relevant documentation. There was no doubt that the original lease, D2, was for a 20-year term and that the obligations of Quickpoint (and hence the contingent liabilities of its guarantors) continued until its expiration, or until the same were otherwise released. Equally, there was no doubt that the transfer of lease (D3) did not affect any of those obligations or liabilities and, in fact, expressly provided by clause 7 and, impliedly, by the clause containing the landlord’s consent, that the transferor’s covenants continued.
The Bells had therefore settled with the plaintiff, but said that they were entitled to be indemnified by the third party on the grounds that, in providing professional land broking services to Quickpoint and to them, it had breached a duty it owed to them and each of them, and otherwise a term implied in their contract of engagement with it, to properly advise each of them that Quickpoint’s and their respective liabilities, under the lease and their guarantees, continued, notwithstanding the transfer of the lease to the third defendant. The Bells said that, had Quickpoint or they been advised of those matters, Quickpoint would never have proceeded to sell the business to the third defendant, nor part with possession of the leased premises.
By its defence to that claim, Optima admitted it had acted for the Bells and Quickpoint, and as well for the third and fourth defendants, in the subject transaction, but denied it had been under a duty to advise Quickpoint and/or the Bells in the manner alleged. It said that they were, in any event, aware of their obligations, or should have been, and further, that it did advise them of the fact that their respective liabilities would continue notwithstanding the assignment of the lease.
Optima further said that, if it was guilty of the alleged breach of duty, which it denied, then the Bells were guilty of contributory negligence, in failing to properly consider or act upon the documentation or otherwise have regard to the advice provided to them.
Finally, Optima pleaded that Northelm would not have consented to the transfer of the lease to the third defendant, had Quickpoint insisted upon the release of its lease obligations, or the Bells on the release of their personal guarantees.
THE LEGAL ISSUES
As to the claimed duty of care, Mr Muecke contended for a position analogous to that established in Dwyer v Long (1992) 58 SASR 102, namely, that the third party had no greater role in the matter than to put into effect a transaction, the terms of which had already been agreed upon, and that the Bells did not require to seek advice as to the nature and effect of the transfer of lease. Mr Keith, rightly I think, distinguished that authority from the present case, pointing to the fact that the third party had been, here, requested to undertake a number of tasks, including preparing the sale documentation itself, liaising with the lessor over consent to the lease transfer, discharging securities and so on; in other words, that it was generally instructed to attend to all matters associated with the transaction.
It is also noteworthy that the third party admitted that it undertook to act not merely for the vendor of the business, Quickpoint, but for the Bells, themselves, and that clearly implied an assumption of an obligation to advise the Bells in connection with the whole transaction.
There appeared to be no serious dispute as to the standard of care required of a licensed land broker and I find it was equivalent, in the particular circumstances of this transaction, to the standard of care expected of a competent solicitor practising in that field (cf Nagle v Power (1967) SASR 373 and in particular Chamberlain J at 382 and also McKessor v Mortimer 154 LSJS 288 at 308, per Olsson J). Inherent in that conclusion is a finding, which I make, that the work involved in transferring this lease was of a routine or usual kind and would not have imposed upon the third party any obligation to advise the Bells to seek legal advice, such as was suggested by Olsson J in the latter case.
That duty clearly arose both contractually and in tort.
In the particular circumstances of this case, I have no difficulty in finding that the duty of care, owed by Optima to Quickpoint, required it to ensure Quickpoint was aware, or otherwise to specifically advise it, of the lessor’s requirement that it remain bound under the lease, notwithstanding the transfer, (as set out in clause 7 of D3), and that the duty it owed to the Bells extended to the point of making that same fact known to them and advising them that, necessarily, their personal guarantees would continue whilst Quickpoint remained bound.
Of course, the third party says that Quickpoint and the Bells were aware of these matters, and that, in any event, it advised each of them of the lessor’s requirement and its consequence, but those matters go to causation and breach and I will deal with them later.
The other issue raised in the pleadings, and on which I was addressed, arose out of the acknowledged fact that the third party had acted for both vendor and purchaser of the business, and hence transferor and transferee of the lease. It was pleaded that that was a matter relevant to the nature of the duty owed to the Bells. There is no doubt that Optima did, indeed, act for both parties and that there was clear potential for conflict. Mr Fred Northcott said that it was not unusual for a land broker to act for both parties, at the relevant time, although he acknowledged that he was conscious, then, of emerging concerns within his profession about the practice. Of course, what the practice of the land broking profession was, at the relevant time, does not determine the standard of care (F v R (1983) 33 SASR 189), but the more important question in the context of this matter was whether there was in truth a conflict and, if so, whether it was relevant to the alleged duty or breach.
On the Bell’s case, there was such a conflict in that, in fulfilling its proper duty and advising the Bells of their ongoing obligations under the guarantees, Optima was making them aware of a circumstance which necessarily (on their account) meant that they would decide not to proceed with the sale. That advice would obviously impact upon the interests of the purchasers.
That potential conflict was, in my view, a clear one, but I do not consider that it extended the duty of care which I have already found rested upon the third party. In this particular circumstance, that duty was owed to the Bells whether or not Optima acted for both parties and it still begs the same question I have to resolve, ie whether Optima breached it.
There were four main factual disputes at trial:
what the Bells understood about the subject lease and their own guarantees of it;
what the Bells knew about the Kays’ guarantees of the subject lease;
what, if anything, the Bells were told by the third party about, or otherwise understood to be, the effect of the transfer of lease upon theirs and Quickpoint’s liabilities under the lease;
assuming, as their own case implies, that they did not appreciate the legal consequences, for Quickpoint and them, of the proposed transfer document, what the Bells would have done had they been properly informed of those consequences.
I shall discuss each of those issues in time, but before I do so, I will outline the events leading to the execution of the subject lease.
THE EVENTS LEADING TO THE SUBJECT LEASE
The defendant Graham Bell said in evidence that he was 48 years old and had attended Mount Gambier Technical School, completing Year 10 there. He had then worked in an insurance company and as an insurance broker. In 1980 he had, with his first wife, Vicky, purchased a delicatessen at Hackham and had run that delicatessen for three years, doubling its turnover in that time. He had worked in the business in excess of twelve hours per day, seven days per week. Midway through his venture, he and Vicky separated. He ultimately sold that business to a former customer and then took six months off work.
He subsequently entered into partnership with a husband-and-wife team (the Johnsons) in the purchase and operation of a supermarket business known as “Morphett Vale Serv-wel”. That, too, was a successful venture. He worked twelve hours a day, seven days a week in it and the partnership was able to increase weekly turnover from $5,000 to $20,000. In time, the partnership also negotiated and completed the purchase of the freehold of the business premises.
During this time, Graham Bell had renewed his acquaintanceship with a long-time friend, Heather (who happened to be a sister of Mr Johnson), and they married. Heather’s non-involvement in the business partnership then became a source of some friction and eventually the parties decided to go their separate ways. The Johnsons agreed to buy out Graham Bell’s interest in the partnership for about $260,000 but, as they did not then have ready access to that money, it was agreed that the freehold would be sold and that full payment out of Graham Bell’s interest would be deferred, pending receipt of the sale proceeds.
After departing from that business and over the next several months, Graham Bell considered other options and he then became aware that the Tom the Cheap supermarket at Victor Harbor was on offer. He became interested in it and Heather Bell was supportive. He discovered, however, that he could not obtain the required finance to purchase it and was told by his banker, Westpac, that until there was a contract on the sale of the freehold of Morphett Vale Serv-wel, no finance would be provided.
Eventually, a purchaser for Morphett Vale was found, and a contract signed, and that enabled the Bells, through Quickpoint, to purchase Tom the Cheap from the Kays for an agreed price of $185,000, plus stock at valuation of $111,000. The purchase was completed on about 22 December 1987. The Bells used bridging finance provided by Westpac to complete and some three or four months later, when they received the proceeds of the sale from Morphett Vale, they reverted to long-term funding arrangements.
Graham Bell said that, in his discussions with the land agent responsible for the sale of Tom the Cheap, it was suggested to him that he might use Robert Northcott & Associates, Land Brokers, to attend to necessary settlement arrangements on the contract and also to “organise” the lease (p.60). As has been noted, the premises were then owned by Northelm and, although Graham Bell was not aware of the terms of the Kays’ occupation, he assumed their operating entity was a lessee pursuant to some arrangement or other with Northelm. He did not know whether that arrangement had been reduced to writing.
The Bells obviously had some professional assistance at this time and arranged to establish Quickpoint to become the purchaser of the business.
Graham Bell said that prior to this transaction, he had always been advised on business arrangements by his father, who had told him that it was preferable to obtain a long-term business lease because that would then allow one a better opportunity to sell a business favourably. He said that one of his purposes in appointing Robert Northcott & Associates as broker was so that that firm would negotiate an appropriate lease with Northelm. On his evidence, the actual period of the lease - namely, 20 years - was nominated by Northelm, but he was quite happy with it as he considered it gave him something to sell.
The lease document was in fact drawn by Northelm’s solicitors, Wallmans, but it may be inferred from the evidence that it was then forwarded to Robert Northcott & Associates, which in turn gave it to Graham Bell to read.
GRAHAM BELL’S UNDERSTANDING OF THE ORIGINAL LEASE
Graham Bell’s evidence as to his understanding of the lease (D2) and the associated personal guarantee was inconsistent:
At page 62 of the transcript, he admitted that he had read the lease before signing it but said he did not understand its total import. He went on to say that he understood it to be a lease agreement allowing him to operate the business for 20 years, “which was a standard lease that was applicable to normal businesses which I - it was just a normal lease I thought”.
At page 63 of the transcript:
“Q...... Did you understand when you looked at this lease that it could be assigned or transferred to other persons.
A.I always knew that you could transfer a lease providing you had the landlord’s approval to do so.
Q. ... Were you aware that actually twenty years for this sort of operation was quite a long lease period.
A.I was well aware of that and that is why I was quite happy to have twenty years because I’d always have a term of lease to sell at some stage, whenever I decided to leave it.
Q...... That was your understanding from your father. Were you aware of a school of thought that was to the opposite, that a twenty year lease, binding yourself for twenty years, could be binding yourself for too long.
A.I didn’t know that.”
·....... He was then pressed (page 63) on his understanding of the guarantee:
“Q...... Did you understand that by the terms of this lease you and your wife were guaranteeing Quickpoint’s obligations under the lease.
A. I knew that we were - I’ll just say agreeing - no, what do you say, agreeing -
Q...... When you looked at this lease before you signed it, did you understand it to be or mean that you and your wife were guaranteeing the obligations of Quickpoint under the lease.
B. Yes, I knew that I was personally guaranteeing Quickpoint under this lease.
Q...... If Quickpoint failed to discharge its obligations the owner could look to you and your wife in your personal capacities.
C. I guaranteed Quickpoint because Quickpoint couldn’t speak for itself, so I was the spokesperson for the company and they couldn’t be held, so I personally felt that I was responsible should the business fail, and that should the parent company or whatever it is - Quickpoint - if they failed I knew then that I would then be personally guaranteeing any shortfall or whatever you’re getting at.
Q...... You knew if Quickpoint failed to meet any of its obligations under the lease you and your wife personally would be responsible to meet those.
D. Yes.
Q. That’s what you understood the guarantee obligations to be.
A...... That’s right.”
He was then shown the guarantee clause, clause 5 in Exhibit 2, and said he did not understand it and had not read it until after the proceedings were on foot. He said he was not aware that it was contained in the lease. He was pressed on that and I extract from page 66 of the transcript:
“Q...... Did you read clause 5.
E. I can’t honestly recall.
Q. You now understand what it means.
A...... I’ve been told what it means, yes.
Q.Do you understand now that it means that you and your successors would be bound to meet the obligations of Quickpoint if they failed to meet them themselves.
F. ... I did not know that.
Q.You now understand that to be the case.
G. ... Only because you learned people are telling me this.
Q.Do you now understand it to mean that if Quickpoint sold, assigned or transferred the lease, you would remain a guarantor.
H. ... No, I did not know that.
Q. May it have been that you didn’t read clause 5 at all.
A...... I may not have, but like I said, I read through the lease and understood it in my own terms, that’s the way I understood it.”
His attention was then drawn to his signature on the lease (D2) and to the specific reference above his signature to he and his wife as guarantors consenting to the lease and to its clause 5. He was asked whether, upon signing the lease, he checked on clause 5 and he said (p.66):
“A...... I think I would’ve, reading that, but my understanding is that I was only guaranteeing the business whilst I was operating it.
Q. It doesn’t say that though, does it.
A...... Not here, not in this paragraph here it doesn’t.”
He was asked whether he enquired of anyone as to his liability under the guarantee and he said that was why he appointed a broker “so that he could sort these out because I’d never been experienced in having leases before, and I went to a broker to advise me of all these sorts of things” (p.67.).
He freely acknowledged that he had been involved in leases with his two previous businesses but said his father had done everything and he had never read them. He was familiar with the fact that leases could be transferred, albeit that it required the landlord’s consent.
Then at page 68 of the transcript:
“Q...... You knew by virtue of when you signed that page that you were guaranteeing Quickpoint’s obligations under the lease, didn’t you.
I. I knew that I was guaranteeing Quickpoint, yes.
Q...... But you knew by signing that page that that had the effect of you and your wife giving personal guarantees of Quickpoint’s obligations.
A.I knew that, yes.”
The guarantee provision in the lease D2 (clause 5) is quite lengthy and need not be set out here, save to say that it identified “the Guarantor” as the party named in Item 8 of the lease Schedule.
It is then pertinent to point out that both page 23 and Item 8 of the Schedule of the lease, identified as the guarantors, pursuant to clause 5.01, not only the Bells but the Kays.
GRAHAM BELL’S UNDERSTANDING OF THE KAYS’ GUARANTEES
The terms of Item 7 of that same Schedule to D2 are also important and I set them out in full:
“Notwithstanding anything hereinbefore contained the provision of clause 5.01(d) hereof insofar as they apply ROBERT HENRY KAY and SANDRA JOY KAY shall be amended by the inclusion at the end thereof of the words ‘limited to the period from 1st day of January 1988 up to and including the 31st day of December 1997”
Graham Bell was cross-examined closely on his understanding of the involvement of the Kays in guaranteeing the lease.
At page 58 of the transcript:
“Q...... But they’d sold to you, yet you understood that they would have to be responsible if you defaulted on the lease, didn’t you.
A. No. I knew they were guaranteeing through that clause on s.8 or whatever it is but I had no idea that there was a clause in the contract that made me personally liable for the next 20 years.”
It was then suggested to him that he thereby knew that, if Quickpoint had defaulted, the Kays would be held responsible. He gave the curious answer: “I had never looked at it upon as such because I never believed such” (p.59). He then went on to say that he did not know the owner could then sue the Kays. He thought they were on the lease as “just guarantors” but he did not really know what they were guaranteeing.
He then said that he did not actually recall their names being on the lease when he signed it. That was a curious statement because of what he had previously said, because their names appeared on the document three times in that capacity, because there was provision for their signatures on the document immediately below his own signature and they had signed it, and because of the special reference to them in Item 7 (quoted above) which had been initialled by him and his wife.
He was pressed further on this matter and adhered to his position that he knew nothing about the Kays’ previous lease arrangements with the lessor, and at page 68:
“Q...... You saw that though. You saw and knew that the Kays were guaranteeing Quickpoint’s obligations under the lease.
A. I don’t believe that I knew that at the time when I was signing.
Q. There’s not much doubt about what that page says, is there.
A. ... In hindsight I can see, yes.”
And further at page 69 of the transcript:
“Q...... Item 8 down the bottom describes guarantors doesn’t it.
A. Yes.
Q...... And it refers to clause 5.01 of the lease.
A. Yes.
Q...... And describes you and your wife and Mr and Mrs Kay as guarantors.
A. That’s what it says, yes.
Q...... That when you signed this lease you understood that by putting them in that schedule as well as yourselves, that they were guaranteeing Quickpoint’s obligations.
A. I didn’t put them there.
Q...... But by their being there, they were in the same position as you and your wife so far as guaranteeing Quickpoint’s obligations.
A.I don’t believe so because - I don’t, I don’t just don’t believe that.”
He went on to say that he had no idea why the Kays were guaranteeing Quickpoint’s obligations up to 31 December 1997. He was asked at page 71:
“Q...... Didn’t you ask anyone as to say ‘What are the Kays in this document for?’.
A.I just thought they were there because it was a new - no, I’ve got no idea because it was a new lease wasn’t it.”
As with his evidence relating to his own guarantee, he began with a concession (that he knew the Kays’ guarantee was there), but he then appeared to retreat from that position altogether and ultimately denied knowledge or memory of the matter.
THE EVIDENCE OF HEATHER BELL ON THESE MATTERS
Insofar as it concerned the events surrounding the execution of the lease and its guarantees, I derived no assistance at all from the evidence of Mrs Bell. She identified her signature on D2, but otherwise could not remember the circumstances of signing it, did not think she had read the document before she signed it, did not think anybody had told her about it, did not remember the term of the lease, did not remember whether the Kays had been required to sign it and, perhaps most surprisingly, said she was not even aware that she and her husband had guaranteed Quickpoint at all (p.111.10-16). When questioned about Exhibits D3 and D5, she had no recollection of the circumstances of their execution. It became apparent during the course of her evidence that she did not actually fulfil her assigned role of company secretary and simply left all the paperwork to her husband, neither reading nor apparently discussing any of it with him. I will return to her evidence later for other purposes.
THE EXECUTION OF THE LEASE
I pause here to consider another issue, and it relates to the circumstances in which the original lease was prepared and signed. Clearly, it was prepared on behalf of Northelm by Wallmans Solicitors, but Mr Bell said that he appointed Robert Northcott & Associates to “organise it”. Mr Fred Northcott, formerly of that firm, was called and said that whilst it was he who was responsible for the land-broking work associated with Quickpoint’s purchase, he did not, himself, see the lease document. He acknowledged the possibility that another member of that firm might have attended to it, however, and that it was likely that Wallmans would have dealt with their firm as representing the purchaser.
In all circumstances, I am satisfied that that lease was presented to Quickpoint for execution by some person associated with Robert Northcott & Associates.
When Mr Bell was asked whether he had consulted anybody about the terms of the lease, he said that that was the reason that he appointed a broker, as he had not himself experienced leases before, his father having attended to all his requirements. That evidence implied some criticism of Robert Northcott & Associates, but I am unable to find, on the evidence, that it was justified. No real evidence was led, as to instructions and advice passing between the Bells and Robert Northcott & Associates, in conjunction with the negotiation and execution of the lease, nor is there any plea in this action as to the matter.
THE EVIDENCE RELATING TO THE EFFECT OF THE LEASE TRANSFER
I will discuss at a later stage, the financial positions of Quickpoint and the Bells prior to the business and lease transfer, but it was not disputed that in about July 1989, Graham Bell verbally agreed to sell the business to the fourth defendant, Steven Ford, or his nominee, for $180,000, plus stock. As their agreement was reached without the assistance of a business agent, they obviously required a contract document to be prepared and arrangements to be made for the transfer of the lease. By this time Mr Fred Northcott was now operating in Victor Harbor as a principal of the third party and, in the event, both Steven Ford and Graham Bell visited that office and provided him with instructions for the preparation of a contract for the sale of the business and for the transfer of the lease over the premises, subject, of course, to the landlord’s consent.
Mr Fred Northcott gave evidence that he did not personally attend to the preparation of the required documents and that this was performed by his Adelaide office, but he acknowledged that the third party prepared the contract document D5.
Exhibit D9 corroborates that Optima received instructions from Quickpoint and that it asked that Quickpoint notify the lessor of the sale of the business, as the latter’s consent to a transfer of the lease was required.
On that same date, Optima wrote to the landlord (D23), formally advising it of the proposed sale and the anticipated settlement date and, inter alia, saying:
“It is a term of the contract that the current lease be assigned to the purchaser. Would you please advise the writer if you have as yet consented to such assignment and who will be preparing same on your behalf.”
In the event, Northelm had Wallmans prepare the transfer of lease document and I am satisfied, on the evidence, that it can be inferred that that document was then forwarded to the third party, to arrange for its execution by Quickpoint and the third defendant. It was a panel form document and comprised two pages. Clause 7 of it read as follows:
“7...... Neither the consent hereinbefore given nor anything herein contained shall prejudice abridge limit or affect any of the rights, powers or remedies of the Registered Proprietor against the Transferor under and by virtue of the said Lease all of which said rights powers and remedies are expressly reserved and left enforceable in the event of a breach or default by the Transferee in the due observance or performance of the terms, conditions, provisos and covenants or any of them on the Lessee’s part in such Lease contained.”
At the foot of the second page there was provision for the endorsement of Northelm’s consent, and it is important to record its terms:
“NORTHELM PTY LTD formerly of 121 Greenhill Road Unley 5061 but now of 188 Greenhill Road Parkside 5063 the registered proprietor does hereby consent to this Transfer of the Lease but expressly without prejudice to the rights and remedies as contained in the Lease as against the Transferor.”
There was an issue, at trial, as to the circumstances in which the transfer of lease was executed and as to what (if any) exchanges took place between the first defendants and the third party over its contents and at execution.
Graham Bell said that he consulted Optima as a professional and paid it a fee to inform him of everything he had to do, but that, neither when he approached it with his original instructions, nor at any other time, was he told anything about negotiating any terms, with the lessor, over the lessor’s consent to the transfer of lease. He went on to say that he actually signed the transfer of lease after he was “out of the business” (p.50), but that seems to be inaccurate and it would appear that the document was actually completed on the very day of the settlement. He was unable to recall when and how he first saw or came into possession of that transfer. He remembered he had had phone calls from Optima from time to time during the transaction, and had gone there to pick up documents, but he was not sure whether the transfer was one of them. He said that no one read the document to him prior to the time he signed it. He said he had no knowledge that he would be held personally liable on the guarantee, or that he would be guaranteeing on any continuous basis, he had no idea that clause 7 was in the transfer document, and he would never have guaranteed the performance of any subsequent lessee, over whom he had no control. He said he would not have sold the business, if that had been an essential condition.
Under cross-examination, he said that he had no recollection at all of signing the transfer D3, nor of seeing Mr Fred Northcott. He said he could recall only one meeting with somebody from Optima, but acknowledged that there were obviously other meetings. He said that he had read D3 but was not sure he understood it, nor where it was that he did so. He said he normally read documents before signing them. He then said he did not remember reading it, but must have done because he signed it. He said he did not remember reading clause 7 of D3 and when its terms were put to him, he said he did not understand them. He was asked squarely whether Mr Northcott explained it to him and his answer was “Not that I can recall, no one has explained this document to me” (p.95). He was also asked whether Mr Northcott had given him the document and asked him to read through it. He answered “I can’t remember how I acquired the document”. He did not recall Mr Northcott asking him if he understood the document. He was asked whether he remembered Mr Northcott saying “Do you realise your liabilities continue if the purchaser defaults?” and his answer was “No, I’ve never had that sort of conversation” (p.95).
When it was put to him that he had guaranteed the obligations of Quickpoint for 20 years, his answer was “Well, that’s while I’m in there operating the business” (p.97). It was put to him that that was not what the document said and he said:
“A.... That’s what I thought it to be, if I take out a lease while I’m running a business then I will guarantee it while I’m running the business, then once you sell the business and the transfer, the lease, that was the end of it.”
Mrs Bell was of no assistance on this issue. She had no recollection of the circumstances in which she signed the document D3, but was confident that she had not read it before signing, nor, indeed, had she read any other documents before executing them. She had no memory of meeting Mr Fred Northcott but, after some pressing, admitted it was possible she had.
Mr Fred Northcott gave evidence. He acknowledged that, at the relevant time, he received instructions from the Bells and the Fords to effect a transfer of the business and the lease and that he took steps to do that. He was unable, however, to recall the circumstances of the particular transaction. He was questioned about the business contract (D5) and said that it was the firm’s and his normal practice to point out to clients, matters within documents which went to ensuring that people understood the import of the whole document. He was unable now to remember specifically which matters in Exhibit D5 were pointed out, but said that his and the firm’s normal practice was to ask the client to read the document through and, when that was done, to ask them if they had any questions and to deal with their questions. He said that it was never assumed that a lack of questions meant the client understood the document completely, and the practice was to “explain to them whatever relevant points were important enough to explain”.
The transfer of lease (D3) was then put to him and he acknowledged he had witnessed the signatures of the Fords on that document, but could not remember taking those signatures. He was then asked the following questions and gave the following answers (p.128):
“Q...... Do you remember now or have a memory of talking to either of the Fords or either of the Bells about what was contained in that document.
A.Yes, I certainly would have done that. Because the import of the transfer, in particular clause 7, was the one that was most important to be pointed out.
Q...... To whom.
A.To the Bells.
Q...... Why is that.
A.Well, they had to understand that in transferring the lease, they were still obliged under their original lease of the terms and conditions in that lease, and if there was a default by the incoming purchase occurred, that they were then liable.
Q...... Can you imagine any circumstances where you might not have explained that to anybody that you were acting for.
A.No, not really, because I made a point of talking to people who point these things out.”
Under cross-examination, it was put to him that the Bells had said they were not aware of their continuing obligations as guarantors after the transfer of the lease and his somewhat inelegant answer to that was (p.133) “That document would have had to have been spoken to them to point out that very point in that transfer of the lease”. He agreed that he had no specific recollection of such a conversation but said it was his normal practice.
Later in his cross-examination, it was put to him that in acting for the Fords and the Bells, he faced a conflict of interest. He agreed that in the circumstances of a transaction of this kind, such a conflict could arise, but he had not thought one had arisen in this particular case.
He also said that, where a lease provided that a lessee’s covenants would continue in the event of an assignment, it was normal practice for that to happen.
There was little other evidence that assisted in resolving the conflicting evidence of Graham Bell and Fred Northcott. Steven Ford was called but, like everybody else, had an imperfect memory of events in 1989, and the most he could say was that he recalled an occasion when the first and the fourth defendants were all present in Fred Northcott’s office, although he could not say whether documents were then signed. He did not recall Northcott discussing the question of guarantees of the lease at that time, but said that it was only he and his wife who were present when D3 was executed by them in Mr Northcott’s office. He acknowledged that he did sign a director’s guarantee in favour of the landlord, although that document was not tendered in evidence.
The first and obvious thing to say about the evidence of all parties, on this issue, is that it would be unreasonable to expect any of them to have a specific memory of events occurring in 1989. Mr Bell concluded he must have read D3, but denied that it had ever been read to him or explained to him, saying that if he had been told of its contents, he would not have proceeded with the sale. At the same time, he was unable to say how the document came into his possession and in what circumstances he signed it. Mrs Bell was unable to advance the position at all.
Similarly, Mr Northcott could not remember any specific occasion, but was a broker of twenty seven years’ experience and confidently said that it was his practice to ensure parties understood documents before they signed them and that he went through the process, described above, to provide for that. He said he could not imagine circumstances in which he would not have explained to an intending assignor the import of a provision in the nature of clause 7. In considering that statement, I must say that it is difficult to conceive of anything much else that need have been stressed to a transferor about such a transfer. He also said he would necessarily have made the Bells aware of the fact that their personal guarantees continued.
In balancing the above evidence, therefore, I have to bear in mind the lapse of time and I note that Mr Bell claims a specific recollection about certain aspects of the transaction, whereas Mr Northcott essentially relies on his usual practice. It would, of course, be more natural for Mr Bell to remember some aspects of a transaction in which he was intimately involved, as opposed to Mr Northcott’s memory of a matter which was no doubt part of his practice routine. At the same time, Mr Northcott’s claim that he would necessarily have drawn a provision, such as clause 7 of D3, to the transferor’s attention and also reminded the Bells of the fact that their guarantees continued, is indeed plausible.
Mr Northcott’s credibility did not come under challenge and he presented as an experienced, now retired, professional land broker, who was not prepared to make any extravagant claims as to his recollection.
The credibility of Mr Bell was challenged generally, however, on all the topics discussed above and on a final topic, with which I will now deal, before returning to the above question.
THE FINANCIAL POSITIONS OF THE BELLS AND QUICKPOINT PRIOR TO SALE AND THEIR RELEVANCE
There was a dispute as to the financial circumstances in which a decision was taken by Quickpoint and the Bells to dispose of the business to the third defendant.
According to the evidence of Graham Bell, the disposal of the business occurred in this way: Quickpoint had purchased Tom the Cheap in December 1989 and he found himself working five days a week between 8 a.m. and 5.30 p.m. and on Saturdays between 8 a.m. and 12 noon. These were considerably more generous hours than he had experienced in his two previous businesses, and he even said that he was not at the premises all the time because he had a full-time employee, Harry Rogerson, who was able to carry out many tasks. He said he had been there all the time, at first, but over a period he took off two days in each week to devote his attention to another business, of which I will speak shortly.
He said there were four or five full-time employees and some part-time people there and that his work involved ordering, stocking and dealing with representatives. He said he was not making any real profit out of the business and only taking wages. He did not think he was “making particularly good headway” (p.38). His finances were fine when he first borrowed, but towards the end of the period of their occupancy the interest rate had almost doubled: “Consequently, I knew that there was a problem there but I had put off some staff to try and rectify that, to try and bring it back into line. So I knew there was a problem there with keeping my head above water, if you like” (p.38).
Some seven months after purchasing, Mr Bell began to involve himself in another business. His friend, Larry, had run a business known as “Roadmaster”, which constructed caravans. The business had gone poorly and was being closed down, and Larry was going bankrupt. Mr Bell could not see why that should happen, so after some discussions with Larry, they went to see the receiver of the business and arranged to purchase it through another company which they set up and which was known as “Forbedre Pty Ltd”. Of course, they purchased only the plant and stock, and arranged finance to that end. Mr Bell said that he contributed some $15,000 to $20,000 to that business over a period of six months, and at first was only a silent partner, albeit that he would do things on a voluntary basis.
At some point in time, he concluded that Forbedre was “a better interest for me” (p.40) and, in particular, it did not involve commuting from the family home at Port Noarlunga to Victor Harbor. The caravan business traded under “Total Caravan Services”.
Within a few months of acquiring an interest in that business, and after discussing the matter with his wife, they decided to put Tom the Cheap on the market. It was first listed for sale with an agent on 14 September 1988, some 10 months after purchase. The asking price was $240,000, with estimated stock of $130,000. Bearing in mind their purchase price of $185,000 plus $111,000 stock and the trading record, it was perhaps not surprising that no buyers were attracted, and the agency lapsed in three months’ time. The business was then re-listed with another agent on 24 January 1989 for the same period at an asking price of $220,000 with a stock estimate of $150,000 (in effect, the same price). Again it did not sell. In evidence the plaintiff said he was not particularly concerned about that because “I only wanted to sell because I thought that I’d want to go and pursue my interests further in Roadmaster. I just thought, well, if I could sell the business down there, well, then I’d be free to go into Roadmaster on a full-time basis” (p.43). He went on to say that if he had not been able to sell Tom the Cheap, then he would have stayed there.
In March or April of 1989, Graham Bell was directly approached by the fourth defendant, Mr Ford and, over a period of some months, a sale was negotiated for the sum of $180,000 plus stock valued at $111,000-odd. At the last moment prior to settlement, that sale figure was reduced to $170,000. On Mr Bell’s own account, it was reduced because Mr Ford was having difficulty with the sale of his own house, which was the subject of a sale condition. Mr Ford himself gave quite a different account of that and said that he sought the reduction because he had not factored into his calculations the cost of stamp duty on the purchase. I will return to this price reduction at a later point.
Graham Bell was then cross-examined closely on the circumstances leading to that sale.
As to his financial arrangements generally, he acknowledged that Quickpoint had had to obtain an advance of $300,000 to purchase Tom the Cheap and that it had been obtained from Westpac, once there was a contract on the Morphett Vale property. Westpac had taken security over the first defendants’ property at Port Noarlunga, over the assets of Tom the Cheap and in the form of personal guarantees from him and his wife. Early in 1988, the State Bank approached Mr Bell, seeking to have the Quickpoint account transferred to it. This was close to the time when Mr Bell was seeking to advance moneys towards the Forbedre purchase. Westpac was not prepared to lend further moneys for that advance so he then transferred his accounts to the State Bank.
It is important, at this point, to note that the Morphett Vale property had been sold and settled in March/April of 1988 and Westpac had been repaid in part from Mr Bell’s share of that settlement. It should also be noted that Mr Bell had then arranged for Quickpoint to pay some $20,000 towards the Forbedre purchase, recording it as repayment of a director’s loan.
The situation thus emerged that by the time the State Bank financing was in place, Quickpoint’s indebtedness to it was in the sum of about $200,000 at an interest rate of 14%.
Mr Bell said that interest rates climbed steeply after that time, to somewhere near 23%, and he acknowledged that Tom the Cheap did not at any time make any trading profits. He said that interest repayments continued to be made over the period and rental payments were up to date (and this was confirmed by Northelm). Mrs Bell, in particular, was firm in the view that the family had continued to live normally.
All of these factors might serve to explain how, by the time the business was finally sold to the third defendant in December 1989, the State Bank loan had ballooned to approximately $360,000.
The result of all this was that when, ultimately, the settlement occurred, the entire net proceeds of about $260,000 were claimed by the State Bank, and there remained a residual debt to it of $100,000. That liability could only be satisfied by the sale of the Bells’ home. Of course, the bank had that security, so in due course their house was sold and the bank was paid out.
That capital situation was, of course, an evolving one, but it is abundantly clear that, from the very time Tom the Cheap was acquired, the capital liabilities of Quickpoint (and correspondingly of the Bells) increased markedly and there was insufficient income to alleviate that situation. It may well be that the Bells were keeping the landlord and the bank at bay, by making regular payments to them, and it may well be that they were still living an ordinary lifestyle, but it is equally clear that much of this was funded by borrowings.
Another aspect of the financial position concerned their business takings. I have already discussed the evidence Mr Bell gave in chief, but should quote the following passage from his cross-examination (p.84):
“Q...... By September 1988 you had already made a trading loss for the first reporting period since you had taken over, and the State Bank had lent you a considerable amount of money which you had to try and service by way of interest, isn’t that right.
A. I knew I had to service the loan, yes.
Q. And you were making trading losses, weren’t you.
A. Yes, I know I was making a loss.Q...... You would have known by September 1988 if that continued you would go broke.
A.But the statements didn’t come out until after that, I don’t know what time I got the statements.
Q. What statements you are you speaking of.
A. From the accountant.
Q. Saying, what, that you are in trouble.
A. Yes.Q...... You are not making anything and you cannot service your borrowings.
A.Well, I knew that, but what the actual figures were I didn’t know until I got the statements from the accountant.”
The accounts of Quickpoint for the six-plus months of trading in 1988 and for the 12 months ending in June 1989 were tendered and disclosed losses in the relevant periods of $3,569 and $6,234 respectively. Those were not large amounts in the scheme of things, but what they did reveal was a proportionate reduction in turnover in the second period and it was apparent that external borrowings, in particular the overdraft, had substantially increased. The position was thus worsening, notwithstanding that some employees had been put off.
Mr Bell was himself not attending at the premises on two days a week and was instead involved in the caravan business (which venture was ultimately destined to fail).
In this context, it was suggested to Mr Bell that he had begun attempting to sell Tom the Cheap in September 1988, because he was forced to do so for financial reasons. He denied that and reasserted that he wanted to sell the business in order to concentrate on the caravan business. He denied that the company’s position ever reached the point where it could not possibly service the State Bank loans and yet the figures provided on this spoke for themselves. It was suggested to him that he even reduced the Ford purchase price by $10,000 in order to achieve a sale, because he was obliged to then sell, but he denied that. He said he had reluctantly agreed to reduce it, because he had made up his mind to go, but denied he was forced. Very reluctantly, and after some questioning, he conceded that Ford informed him that if the reduction of $10,000 could not be made, the purchase would not go through. He said he did not know whether the bank had queried on how he was going to be able to meet his obligations and he no longer had access to their paperwork, because it had been routinely destroyed some years before.
In summary, by the time the Ford purchase was imminent, the bank liability had increased from $200,000 to $360,000, the likely yield from the business sale was $260,000 and it had not operated at a profit since acquisition. Mr Bell had by then become financially involved in another enterprise which interested him, he was prepared to sell the business at a nominal loss of $5,000 on its purchase price (and he ultimately reduced that by a further $10,000), and he was aware that the bank would call upon him to repay the remaining debt of $100,000, which inevitably meant the sale of their home. He had put off staff, but that had not brought the business into profit, he had attempted to sell the business over a six-month period, but had had no expressions of interest, and yet he said he could not remember whether the bank was pressing him over his commitments.
All this must be seen against the background that the business had been first put on the market only ten months after purchase, by which time it was already trading unprofitably.
Mrs Bell made a brave attempt to suggest that the decision to sell the business and for her husband to move into the caravan business was more a matter of his choosing a career path that interested him and she said that there were “not any money problems”. She said there was no need to sell and that after the sale she knew there would be “a little bit more” to be paid to the State Bank. She said two things, however, that made the real picture more obvious. She conceded that the sale of their family home was “traumatic” and, more revealingly, made the following statement in examination-in-chief (p.111):
“Q...... If you had been told that your liability as a guarantor of the lease would have continued, would that have changed your decision.
A. We wouldn’t have sold.
Q. What would you have done instead.
A...... Well, Graham would have worked it out somehow.”
.................. She was cross-examined in some detail about her reference to what it was that Graham was going to “work out”. She sought to avoid confronting the questions and ultimately could not account for that statement.
.................. Against the above background and the evidence generally, I found myself unable to accept the evidence of the Bells as to the reasons for the sale by Quickpoint of Tom the Cheap, and I find it was sold because of the heavy financial pressures which the company, and the Bells personally, were then facing.
FINDINGS AS TO CREDIT AND GENERALLY
.................. I have made due allowance for the time which has elapsed since the relevant events: it was a problem which afflicted all witnesses at trial. Nevertheless, on all the evidence, I found myself unable to rely on much of what Graham Bell said in evidence. He was unimpressive in the witness box, his evidence was internally inconsistent on a number of matters and, in particular, his evidence as to his apprehension of Quickpoint’s and their financial position, at the time the business was sold to the third defendant, was simply not believable.
.................. I am satisfied on the evidence that, at the time the lease (D2) was executed, he knew that he and his wife were guarantors of Quickpoint’s obligations under it, he was aware that the Kays, too, were continuing, until 1997, to guarantee Quickpoint’s performance and he knew why that was so. Those findings are significant because, in the face of the documentary evidence, they lead me to conclude that, as of the time when Quickpoint was negotiating the sale of the business to the third defendant, Graham Bell, as its negotiator, was aware of the Bells’ guarantees and of the fact that Northelm had previously insisted that the security offered by the earlier guarantors (the Kays) continue notwithstanding their sale of the business. In short, he was sensitive to the very issue which did arise, namely, that Northelm required Quickpoint’s covenants and the Bells’ guarantees to remain.
.................. I have not concluded from this, however, that, whether or not they were told, the Bells were aware, anyway, that the effect of the sale and transfer documentation produced for their signature, in particular the transfer, D3, was that the Quickpoint covenants and the Bells’ guarantees would continue after the transfer. The third party so contended, and were it necessary to do so, I would likely find that, on the basis of these matters and his credibility generally, Graham Bell was indeed so aware, but it would not follow that so was Heather Bell. It is, however, unnecessary for me to make a formal finding on this issue.
.................. Having regard to all the evidence and, in particular, my observations as to the credit of the Bells generally, I find that they have not satisfied me, on balance, that the third party did not comply with its duty by advising them that the effect of the transfer of the lease was to keep alive, for the balance of its term, Quickpoint’s covenants and their own guarantees. I have already discussed the evidence of Graham Bell in this respect. As to Heather Bell, as I have said, I derived very little assistance from her evidence at all. Her lack of recall of the circumstances of her execution and the contents of the various documents, and her claimed unawareness of their original guarantees made her evidence unhelpful and unreliable in almost all respects, including any potential it might have had to corroborate that of her husband. I found her evidence as to their financial circumstances at the time of sale to be prevaricating, implausible and unreliable.
.................. I therefore find that the Bells have not proved their case.
.................. This finding does not oblige me to make any further finding as to the Bells’ claim, in paragraph 15(d) of their statement of claim, that, had they been advised their guarantee obligations were to continue upon the transfer of lease, they would not through Quickpoint have proceeded with the sale of business and transfer of lease. For the reasons already discussed, however, had I been obliged to determine that issue, I would have found that the Bells had not satisfied me to the requisite degree on that topic. Even had they not sold it then, the financial position of the business was so irreversibly deteriorating, that failure of the business or a later sale within the lease period was a distinct possibility.
.................. It follows that the first defendants’ claim against the third party must be dismissed.
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