McGee O'Callaghan Gill Pty Ltd v Deacons Graham & James
[2001] VSCA 105
•24 July 2001
SUPREME COURT OF VICTORIA
COURT OF APPEAL
No.4919 of 1998
| McGEE O’CALLAGHAN GILL PTY. LTD. (ACN 005 641 725) | Appellant (Third Party) |
| v. | |
| DEACONS GRAHAM & JAMES | First Respondent (First Fourth Party) |
| and | |
| ROBERT WARWICK ANDERSON & ORS. | Second to Thirtieth Respondents (Second to Thirtieth Fourth Parties) |
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JUDGES: | PHILLIPS, CALLAWAY and BUCHANAN JJ.A. | |
WHERE HELD: | MELBOURNE | |
DATE OF HEARING: | 18 JUNE 2001 | |
DATE OF JUDGMENT: | 24 JULY 2001 | |
MEDIUM NEUTRAL CITATION: | [2001] VSCA 105 | |
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Solicitors – Terms of retainer and duty of care – Advice as to purchase of land – Unusual terms of lease – No requirement to advise as to the steps to be taken to exercise landlord’s options to renew lease.
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| APPEARANCES: | Counsel | Solicitors |
| For the Appellant | Mr. P.G. Cawthorn | Connery & Partners |
| For the First Respondent | Mr. G.J. McEwen | Minter Ellison |
| For the Second to Thirtieth Respondents | Mr. P.J. Riordan | Blake Dawson Waldron |
PHILLIPS, J.A.:
I agree with Buchanan, J.A. that this appeal should be dismissed and for the reasons he has given. In my opinion there was no basis for the agent’s seeking to have the solicitors contribute to the liability afflicting the agent for its own breach of duty. I share the trial judge’s view that this case was "but a forlorn attempt by the managing agents of a city building to transfer part of their management responsibilities on to the solicitors for the client", being the client of both the agent and the solicitors. As Buchanan, J.A. explains, the solicitors were not shown to have failed in their duty to the client, whether that duty be cast in contract or in tort. That is all that we need to decide and on that basis the appeal must be dismissed.
CALLAWAY, J.A.:
I have had the advantage of reading in draft the reasons for judgment prepared by Buchanan, J.A. Subject to one qualification, I agree in them and in his Honour’s conclusion that the appeal should be dismissed.
There may well be circumstances in which solicitors engaged to advise with respect to the purchase of a building are under an obligation to draw the attention of the prospective purchaser to unusual features of the documentation even if they do not bear upon the value of the building. To adapt the language of the former law of occupiers’ liability, there may be a duty to warn of unusual dangers and concealed traps. An example given in the course of the argument was a provision in a lease requiring notices to be given in a foreign language. That would not impact on the value of the building, but there might well be circumstances in which solicitors advising a prospective purchaser would be obliged to mention it. I do not stay to consider whether that obligation would be an implied term of their retainer or a duty
in tort of the kind described in Waimond Pty Ltd v. Byrne[1]. In the circumstances described by Buchanan, J.A. there was nothing in the present case that enlivened such an obligation.[2] I think that is so even if, as to which I express no opinion, it was reasonably foreseeable that the owner’s agent would fail to exercise the option during the window of opportunity presented by the lease.
BUCHANAN, J.A.:
[1](1989) 18 N.S.W.L.R. 642 at 652.
[2]Counsel for the appellant disclaimed any suggestion that the case would have been different if the period for exercise of the option had not expired prior to the expiration of the current term of the lease.
By a lease dated 1 July 1992 the partners of a firm of solicitors (“the tenant”) entered into possession of the fourth and fifth floors of the building situated at 575 Bourke Street Melbourne (“the building”). The term of the lease was six years commencing on 30 March 1992. No rent was payable during the first five years of the term. The rent payable in the sixth year of the term was $670,850, which was substantially in excess of market rent. The lease contained seven options, each of two years. The first three options were expressed to be exercisable by the lessor or the lessee. The rent during any renewed term was to be the initial annual rent subject to being reviewed at the option of the lessor to become the current market rent. Clause 17.7 of the lease provided:
“17.7 Lessor’s Options
Notwithstanding that the Lessee may not have exercised an option which is exercisable by the Lessor or the Lessee and notwithstanding any provision to the contrary in this Lease, the Lessor shall be entitled to exercise those options for further terms which are options of the ‘Lessor or Lessee’ as set out Item 12 of the Appendix by giving the Lessee written notice at any
time, but only if the notice is effective not more than 12 months nor less than three months prior to the expiration of the then current term, that the Lessor exercises its option in respect of the relevant further term and the Lessor shall then at the expense in all things (including legal costs and stamp duty) of the Lessee grant a new Lease to the Lessee in the same manner and subject to the same provisions as set out in Clause 17 in respect of new leases.”
The current term of the lease expired on 30 March 1998, so that the first option was required to be “effective” in the period from 30 March 1997 to 30 December 1997.
In 1996 the building was put on the market. Ms Chew Gek Khim, one of the controllers of a group of companies in Singapore, was interested in purchasing the building. In December 1996 Ms Chew engaged Deacons Graham & James (“Deacons Sydney”) a firm of solicitors in Sydney. In her evidence Ms Chew said she asked Mr Davidson of Deacons Sydney to assist her with negotiations for the purchase. In turn Mr Davidson requested Mr Hando of the Melbourne firm Deacons Graham & James (“Deacons Melbourne”) to obtain copies of the tender documents and comment upon them. In December 1996 Mr Hando obtained and read copies of the leases. On 11 December 1996 he sent a facsimile to Mr Davidson commenting on the leases. He said of the lease to the tenant, inter alia:
“According to my calculations the current rent is fixed at the rate of $320 per square metre or thereabouts. This is well in excess of current market rental so that there will be no market reviews for some time and the Lessor will need to ensure that it exercises its put options for further terms.”
The facsimile also stated that “The tenancy particulars in the Investment Report are an accurate reflection of the provisions of the Leases. I therefore refer your client to the tenancy particulars in the Investment Report.” The Investment Report prepared for the vendor noted that the rent free period expired on 29 March 1997 and that put and call options were exercisable by the lessor or lessee to extend the term of the lease. A copy of the facsimile was sent to Ms Chew, who also received the Investment Report. Ms Chew gave evidence that she read and understood the advice contained in the facsimile.
On 31 January 1997 a company associated with the purchaser entered into a contract to purchase the building. Upon settlement of the contract on 4 March 1997 the title to the building was transferred to Selected City Property Ltd (“the owner”) pursuant to a nomination clause in the contract of sale. The owner was incorporated in the British Virgin Islands for the purpose of holding the title to the building. It appears to have been incorporated after the making of the contract pursuant to tax advice given by Deacons Sydney. No point was taken that its late arrival on the scene affected the liability of the solicitors to the owner.
On 6 January 1997 McGee O’Callaghan Gill Pty Ltd (“the agent”) proposed to Ms Chew that it act as the real estate agent to manage the building. The written proposal described the tasks the agent would undertake. Under the heading “Lease Administration” the proposal stated:
“Immediately upon appointment as managing agent, we will undertake a thorough analysis and interpretation of all existing leases within the property. The result of this analysis will be the creation of detailed lease summaries on all tenancies. The process of analysis will pay particular attention to diarising all important action dates … “
The proposal went on to state that if the agent was appointed to manage the building “Our immediate attention would be concentrated in … a thorough review of leases …” The agent was engaged by facsimile dated 11 February 1997 to act on behalf of the purchaser and “a company to be incorporated in the British Virgin Islands and to be called Selected City Property Ltd” with respect to the management of the property, including dealing with existing and prospective tenants.” A formal engagement was executed on 4 March 1997 by the agent and the owner. The agreement required the agent to, inter alia, “co-ordinate tenancies and in particular … review terms of options …”
On 11 February 1997 the solicitors acting for the vendors of the building sent a facsimile to Mr Hando informing him that there was doubt whether the tenant could pay the rent. Mr Hando sent a copy of the facsimile to Deacons Sydney and to the agent and commented:
“The Lease has only one year to run but the Landlord has the right to require options to be exercised so that effectively the Tenant is locked in for a further six years after expiration of its current Lease.”
In June 1997 a dispute arose with respect to the carpet in the part of the building occupied by the tenant, which apparently was worn out. The question was whether the owner or the tenant was obliged to pay the cost of replacing the carpet. Acting upon the owner’s instructions, the agent sought advice from Deacons Melbourne in relation to the dispute. By a facsimile dated 4 June 1997 to Mr Hando the agent said:
“[W]e request your advice as to the Lessor’s obligations and responsibilities on the question of carpet replacement.”
On 27 June 1997 Deacons Melbourne sent a facsimile to the owner in which they analysed the relevant provisions of the lease and expressed the opinion that the lease did not provide a clear answer to the question whose responsibility it was to replace the carpet. Accordingly the solicitors advised the owner that it would be reasonable to propose to the tenant that the owner would replace the carpet but would require the cost to be reimbursed by the tenant as part of its obligation under a clause in the lease requiring the tenant to contribute to operating costs.
The owner’s option to renew the lease upon the expiration of the initial term was not exercised during the period from 30 March 1997 to 30 December 1997. In a forlorn hope a notice was despatched on 6 March 1998. The tenant denied that the notice was effective and brought proceedings against the owner for a declaration that the owner had not exercised the option. The owner joined the agent as a third party and claimed damages for breach of retainer and in negligence consisting of the difference between the rent that would have been payable by the tenant had the lessor’s options been exercised and the rent recovered from a new lessee. In turn the agent joined Deacons Sydney and Deacons Melbourne as fourth parties, claiming contribution pursuant to the provisions of s.23B of the Wrongs Act 1958 on the basis that the fourth parties were liable to the owner in respect of the same damage for which the agent was liable. The agent contended that in failing to advise the owner to exercise the options the fourth parties breached the terms of their retainers by the owner or alternatively breached the duties of care they owed to the owner resulting from the fact that it was reasonably foreseeable that the owner would rely upon the fourth parties to properly advise it as to any matters necessary to ensure the commercial efficacy of the lease.
On 19 November 1999 the tenant and the owner settled the action between them. On the same day the agent settled the claim of the owner by agreeing to pay the sum of $1,200,000 to the owner. The agent’s claim for contribution from Deacons Sydney and Deacons Melbourne proceeded to trial before a judge of this Court. It was accepted by the parties that the agent was liable to the owner and that the settlement between the agent and the owner was a proper settlement.
The agent contended that the fourth parties were obliged to give advice as to clause 17.7 of the lease as a consequence of their retainer to advise as to the purchase of the building. It was also contended that Deacons Melbourne were obliged to give that advice as a consequence of their retainer to advise as to the carpet dispute.
According to the agent the first retainer obliged the solicitors to advise the owner as to any unusual clauses in the lease. In Sykes v. Midland Bank Executor and Trustee Co Ltd[3] Harman, L.J. said:
“When a solicitor is asked to advise on a leasehold title it is, in my judgment, his duty to call his client’s attention to clauses in an unusual form which may affect the interests of his client as he knows them.”[4]
[3][1971] 1 Q.B. 113.
[4]Ibid., at 124. See also Henderson v. Amadio (1995) 61 F.C.R. 1 at 141; Amadio v. Henderson (1998) 81 F.C.R. 149 at 215; County Personnel Ltd v. Pulver & Co [1987] 1 W.L.R. 916; Fox v. Everingham (1983) 50 A.L.R. 337 at 341.
The trial judge found that the provision in the lease relating to the put options was not, in the circumstances, an unusual term. He said:
“Unusual they may be in the very broadest sense of commercial tenancies, but not unusual in the context of leases which provided extensive rent free periods at the initial stages of the tenancy.”
Later, he said:
“The term of a put option was not in the given circumstances unusual at all, to the contrary, it was to be expected, because how else would a landlord ever recover the rent foregone during the rent free period if the tenant could simply terminate the tenancy and leave.”
Counsel for the appellant attacked the finding. He pointed out that Mr Hando assented to the proposition that “options … to compel the tenant to extend the tenancy were a fairly unusual … feature of the conveyancing scene in Melbourne”. He also pointed out that the agent’s employee who managed the building had never encountered a lessor’s option. There is some force in the criticism. The device of a put option was required because of the unusual circumstance that the rent free period occupied most of the initial term, and the preponderance of the evidence was that options to enable landlords to renew the terms of leases were unusual.
Assuming that the existence of the put option was relevant to the question of the value of the building because it enabled the landlord to fasten upon the tenant the obligation to pay rent at a rate higher than market rent, the question becomes the advice which the solicitors were obliged to give to the owner with respect to the option. The solicitors were not engaged to advise the owner on the steps that should be taken in the course of managing the leases. The solicitors were engaged to advise the owner with respect to the purchase. In my view their obligation was to draw the owner’s attention to those aspects of the leases which bore upon the value of the building. In the case of the lease to the tenant, those aspects were limited to the ability of the landlord to compel the tenant to pay a rent higher than market rent at the end of the initial term of the lease. The mechanical steps to be taken to enforce that obligation were not relevant to the decision to buy the building. Accordingly, I am of the opinion that, in advising the owner by the facsimile dated 11 December 1996 that rent at the rate of $320 per square metre was in excess of market rent and that the owner should ensure that it exercise its options for the further terms, the solicitors fulfilled their obligations under the retainer to advise as to the purchase.
Counsel for the appellant contended that the unusual aspects of the provision for further terms were that it took the form of options to be exercised by the landlord and that the options were to be exercised within a period of nine months. The owner was told of the options and the necessity to exercise them. Counsel for the appellants submitted that there was uncertainty as to the time for exercise of the options. Clause 17.7 provided that notice exercising each option could be given “at any time”, but went on to stipulate that it was to be “effective” within the specified period of nine months. Perhaps this was the product of drawing upon a precedent dealing with termination of a state of affairs or relationship. I think it was tolerably clear that the period during which the first option could be exercised was the period between 30 March 1997 and 30 December 1997. In any event, the agent’s failure to exercise the option was not caused by any ambiguity in the clause but was the result of the agent completely overlooking the need to exercise the option.
The question of the liability of the solicitors is not answered solely by analysing the terms of their retainers to see whether they carried out the tasks expressly assigned to them. It is also necessary to examine the facts and see whether more was required of them. In Hawkins v. Clayton[5] Deane J. said:
“The relationship of solicitor and client … is a relationship of proximity of a kind which may well give rise to a duty of care on the part of the solicitor which requires the taking of positive steps, beyond a specifically agreed professional task or function, to avoid a real and foreseeable risk of economic loss being sustained by the client. Whether the solicitor-client relationship does give rise to a duty of care requiring the taking of such positive steps will depend upon the nature of the particular professional task or function which is involved and the circumstances of the case.”[6]
If the solicitors ought to have foreseen that upon acquiring the building the owner or its agent in the course of managing the leases would not appreciate that the first option was to be exercised during the period from 30 March 1997 to 30 December 1997, it might be said that the solicitors should have expressly warned the owner of the time limits upon the exercise of the option, even though that was not required by the terms of their retainer. In my view, however, such want of ordinary prudence on the part of the owner or its agent was not reasonably foreseeable by the solicitors, especially as the purchase was completed some weeks before the period for the exercise of the option commenced and the period then ran for nine months.
[5](1988) 164 C.L.R. 539.
[6]Ibid., at 579. See Waimond Pty Ltd v. Byrne (1989) 18 N.S.W.L.R. 642.
In its statement of claim the agent pleaded that “Deacons Melbourne and/or Deacons Sydney knew or ought to have known or ought reasonably to have foreseen that the [owner] was relying on it or them to properly advise it as to any unusual clauses in the lease and as to any matters that were necessary for it to be advised of to ensure the commercial efficiency of the lease.” In fact there was no such reliance. During the trial Ms Chew was asked:
“But at no time were you relying upon [Mr Davidson] to advise you about the mechanics of exercising an option, or the dates during which any option might be exercised with respect to the building?”
Ms Chew answered: “That is correct.” In my opinion, having regard to the circumstances that their engagement was limited to advice as to the purchase, that the prospective purchaser was apparently a sophisticated investor and that there was a managing agent, it could not be concluded that the solicitors should have known or foreseen that Ms Chew was relying upon them to alert her to the need to take any particular steps with respect to the future management of the leases.
The appellant next contended that the retainer of Deacons Melbourne in June 1997 to advise as to the carpet dispute required the solicitors to recommend that the first option be exercised. Counsel for the appellant submitted that the advice of the solicitors that it be proposed that the tenant should reimburse the owner for the cost of new carpet as part of its contribution to operating costs assumed that the tenant would remain in possession, which required the exercise of the option, and thus, it was said, the solicitors should have advised the agent to exercise the option.
The trial judge held that the retainer of Deacons Melbourne in June 1997 was limited to advice as to whether the owner was obliged to replace the carpet. He said:
“It is a more than forlorn effort on McGee’s part to attempt to elevate the June retainer into a general one which required Deacons Melbourne to advise as to the option period.”
I agree. The parties conducted the appeal on the basis that the advice of the solicitors did assume that the lease would be renewed. In my opinion it does not follow from the fact that the solicitors assumed the continuation of the lease that they were obliged to give advice as to the steps to be taken by the owner or its agent to ensure that the lease did continue. It was no part of the solicitors' retainer in June 1997 to give any advice as to the options, and it did not become so merely because their advice concerned events which would occur only upon the renewal of the lease. In any event I doubt that the advice did assume that the lease would be renewed. If the provision in the lease requiring the tenant to pay increases in operating costs of the building applied to the cost of replacing the carpet, the whole cost was recoverable when it was incurred. The advice was given when the initial term of the lease had some nine months to run. I do not consider that the possibility that the cost might have been incurred upon or after the expiration of the initial term obliged the solicitors to advise the owner or the agent as to the steps to be taken to ensure the lease continued.
For the foregoing reasons I am of the opinion that the trial judge was correct in concluding that neither Deacons Melbourne nor Deacons Sydney breached the terms of its retainer by the owner and neither firm was in breach of a duty of care which it owed to the owner. It is not necessary to determine the questions of causation which were argued before us. I would dismiss the appeal.
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