Mills v Ruthol Pty Ltd

[2002] NSWSC 294

CITATION:	[1] Mills v Ruthol [2] Tricon v Ruthol [2002] NSWSC 294
CURRENT JURISDICTION:	Equity
FILE NUMBER(S):	SC [1] 2101/99; [2] 4858/01
HEARING DATE(S):	19 to 21 March, 2002
JUDGMENT DATE:	15 April 2002
PARTIES :	[1] Brian Mills (First Plaintiff) [1] Elaine Mills (Second Plaintiff) [1] Ruthol Pty Ltd (Defendant) [2] Tricon (Aust) Pty Ltd (Plaintiff) [2] Ruthol Pty Ltd (First Defendant) [2] Brian Mills (Second Defendant) [2] Elaine Mills (Third Defendant)
JUDGMENT OF:	Palmer J

COUNSEL :	[1] N.A. Cotman SC with G. Colyer (Plaintiffs) [1] L.J. Aitkin (Defendant) [2] Marcus W. Young (Plaintiff) [2] L.J. Aitkin (First Defendant) [2] N.A. Cotman SC with G. Colyer (Second & Third Defendants)
SOLICITORS:	[1] McCabe Terrill (Plaintiffs) [1] David Landa Stewart (Defendant) [2] Grahame Jackson & Assoc (Plaintiff) [2] David Landa Stewart (First Defendant) [2] McCabe Terrill (Second & Third Defendants)
CATCHWORDS:	REAL PROPERTY - OPTION - EXERCISE - Option to purchase land not exercised within option period because grantor deceived grantees into believing option terminated - grantees later discover deception and exercise the option almost two years out of time - whether option validly exercised. Held: the principle that a person cannot take advantage of his or her own wrongdoing operates to eliminate from the option agreement the condition as to time for exercise - the option was validly exercised. - EQUITY - PRIORITIES - EQUITABLE INTEREST - MERE EQUITY - Defendant grants two options to purchase same land - grantees of first option deceived by Defendant into not exercising option within stipulated time - grantee of second option takes option without notice of first option - both options confer equitable interests in the land - whether equitable interest of first option holders expires at end of option period - whether first option holders' right to exercise option outside option period is a "mere equity" - whether the principle that a "mere equity" cannot compete with an equitable interest taken for value without notice applies. Held: Equitable interest of first option holders did not come to an end upon expiry of option - the first option holders did not require the assistance of equity to perfect their title to their equitable interest in the land - the first option holders at all times had a prior equitable interest which prevailed against the equitable interest of the second option holder. MERE EQUITY - Nature discussed - the rule in Phillips v Phillips is a rule of policy: where the holder of a prior equitable interest needs the assistance of the equity court to perfect his or her title to that interest, that interest will be defeated if, before the title is perfected, a third party takes an equitable interest for value without notice.
CASES CITED:	- Bragg v Alam [1981] 1 NSWLR 668; (1982) NSW ConvR 55-082 - Brown v Heffer (1967) 116 CLR 344 - Burns Philp Trustee Co Ltd v Viney [1981] 2 NSLWR 216 - Butler v Fairclough (1917) 23 CLR 78 - Central Trust and Safe Deposit Co v Snider [1916] 1 AC 266 - Cooper v Phibbs (1867) LR 2HL 149 - DKLR Holding Co (No 2) Pty Ltd v Commissioner of Stamp Duties [1980] 1 NSWLR 510 - Double Bay Newspapers Pty Ltd v A W Holdings Pty Ltd (1996) 42 NSWLR 409 - Eaglesfield v Marquis of Londonderry (1876) 4 Ch D 693 - Glenn v Federal Commissioner of Land Tax (1915) 20 CLR 490 - Lapin v Abigail (1930) 44 CLR 166 - Latec Investments Ltd v Hotel Terrigal Pty Ltd (In liq) (1965) 113 CLR 265 - Laybutt v Amoco Australia Pty Ltd (1974) 132 CLR 57 - MacKenzie v Royal Bank of Canada [1934] AC 468 - Mackay v Wilson (1947) 47 SR(NSW) 315 - National Provincial Bank Ltd v Ainsworth [1965] AC 1175 - Phillips v Phillips (1861) 4 De GF & J 208; (1861) 45 ER 1164 - Reynell v Sprye (1852) 1 De GM&G 660; (1852) 42 ER 710 - Unatin 7 Up Co v Solomon 39 Atl 2nd 835 - Broom's Legal Maxims 10th Ed, pp.191ff - Coke's Commentary upon Littleton - Corbin on Contracts - Meagher Gummow & Lehane "Equity Doctrines and Remedies" (1992) 3rd Ed, para.428. - Megarry & Wade "The Law of Real Property" (2000) 6th Ed, para.5-013. - Snell's Equity (2000) 30th Ed, para 2-05; (1955) 71 LQR 480 - Spencer Bower, Turner & Handley "Actionable Misrepresentation" (2000) 4th Ed., paras 38 and 39
DECISION:	Plaintiffs in first proceedings entitled to specific performance or damages for breach of contract, at their election; Plaintiff in second proceedings entitled to specific performance or damages for breach of contract, according to the election of the Plaintiffs in the first proceedings.

Introduction

1    “An option,” said Sir Frederick Jordan, “is nearly always a ticklish thing” : Mackay v Wilson (1947) 47 SR(NSW) 315, at 318. If ever a case demonstrated the truth of that aphorism, this is such a case. 2 The Plaintiffs in proceedings 2101/99 (“the Mills”) claim specific performance of a contract for sale of the land of the Defendant (“Ruthol”) which they say came into existence upon their exercise of an option to purchase (“the Mills’ Option”). The Plaintiff in proceedings 4858/01 (“Tricon”) claims specific performance of a contract for sale of the same land which it says came into existence upon its exercise of an option to purchase which was granted by Ruthol subsequent to the Mills’ option (“the Tricon Option”). 3 Ruthol and Tricon say that the purported exercise of the Mills’ Option was outside the stipulated option period and therefore was of no effect. The Mills say that they were tricked into not exercising their option within the option period by a misrepresentation on the part of Ruthol so that Ruthol is estopped from asserting that the option period had expired by the time that the Mills discovered the deception and exercised the option. Tricon says that even if that were so, the “mere equity” that the Mills have against Ruthol to enforce their option against Ruthol cannot prevail against the equitable interest in the land which was created by the granting of the Tricon Option, even though the Tricon Option was taken later in time than the Mills’ Option, because Tricon took its option and therefore its equitable interest in the land for value and without notice of the Mills’ mere equity against Ruthol. 4 Ruthol, of course, denies any wrongdoing. It says that it is entitled to sell the land to Tricon under a contract of sale which, it says, came into existence when Tricon exercised its option.


Ruthol has a problem

5    The Mills’ Option is dated 25 February 1997. In consideration of a fee of $5,000, the Mills were granted an option to purchase Ruthol’s property at 258 Condamine Street, Manly Vale (“the Property”) for $490,000. The option was exercisable between 7 April 1997 and 30 June 1997. Mr Mills, who is a veterinarian, was keen to acquire the Property for use as his surgery. 6    The Property was subject to a lease to Alphega Management Services Pty Ltd (“Alphega”), which carried on a medical practice on the Property. The lease expired on 30 June 1997, but contained an option to renew for a further term of five years upon the same terms as the original lease. Clause 11(a) of the Mills’ Option therefore provided that it was subject to the “non-exercise by [Alphega] under the Lease, of the right to renew contained in the Lease by 7 April 1997” . 7    Alphega was having difficulty in paying the rent under its lease. The rent was already above current market rent and the lease contained an annual rent review clause which ‘ratcheted’ the rent upwards by a minimum of 6% per annum. Nevertheless, Alphega wanted to remain in the premises although it did not want the renewed lease to contain the ‘ratchet’ rent review clause which the original lease provided. 8    It seems that by early March 1997 Ruthol had begun to repent of its decision to grant the Mills’ Option. Mr Colin Manoy, a Director of Ruthol and a businessman very experienced in commercial leasing, sought advice from Ruthol’s solicitor, Mr David Singer of Messrs David Landa, Stewart & Co (“DLS”). Mr Singer is also a director of Ruthol. The advice was sought in the knowledge that the rental under the Alphega lease was higher than current market rental and that Alphega would probably not want to renew the lease if it contained the same rent provisions as in the original lease. This is what Mr Singer had told the Mills’ solicitor in a letter dated 29 January 1997. 9    By letter dated 13 March 1997 to Mr Manoy, Mr David Singer summarised the effect of the option to renew in the Alphega lease (Clause 4.01). That clause provides, in brief, that if Alphega gives written notice of its desire to take a renewed lease within the specified period, Ruthol must lease the premises for a further term of five years “at the yearly rentals to be determined in accordance with the First Schedule hereto and otherwise on the same terms and conditions as are herein contained …” . Mr Singer drew attention to the First Schedule of the lease, which governed rent reviews, and noted that “the rental determination cannot under any circumstances yield a rent which is lower than the rent being paid by the lessee in the immediately preceding 12 month period” . 10    The letter went on to make it clear to Mr Manoy that the only way that Ruthol could avoid the Mills’ Option being exercised was if Alphega exercised its option to renew the lease on the same terms as in the original lease; if terms other than those in the original lease were negotiated, the Mills’ Option would not lapse and the Mills could sue Ruthol for damages.


The 13 March meeting

11    On 13 March 1997 a meeting took place between representatives of Alphega and Mr Manoy, representing Ruthol. The purpose of the meeting was to discuss the renewal of the Alphega lease. Present at the meeting representing Alphega were Mrs Nicole Blakeman, a director, Mr Kerry Blakeman, who had no apparent role within Alphega, and Dr Harris, a former director who had been disqualified from holding office by reason of bankruptcy. Mrs Blakeman was the office manager of Alphega and had been appointed a director to fill the vacancy created by Dr Harris’ disqualification. Essentially, she took directions from Dr Harris. 12    At the meeting, Mr Manoy said that he had someone who wished to purchase the Property. He was referring to the Mills’ Option, but he did not identify the Mills or disclose the purchase price under the Option. Dr Harris and Mrs Blakeman also expressed interest in Alphega purchasing the Property and a figure of $610,000 was put forward. Mr Manoy said that Alphega’s purchase of the Property was not really open for discussion unless Alphega exercised its option to renew its lease. He noted that there was already a substantial amount owing for arrears of rent and outgoings. 13    At this point in the discussion, according to Mr Manoy, Dr Harris became very agitated and shouted at him, saying that the rent was too high, Alphega would not pay it, and the rent was unreasonable. According to Mrs Blakeman, while Dr Harris did not shout, he stated very strongly there was no way that Alphega would be entering into a new lease “unless you get rid of the automatic annual rent increases and we will need to review the rent levels” . Mrs Blakeman says that she too was very concerned at the high level of the existing rent, that she was conscious that Alphega had been unable to pay the existing rent on time, and that she thought that Alphega could not afford to enter into a new lease with Ruthol if it contained the same automatic rent increase provisions as in the original lease. 14    I accept that at this meeting Dr Harris and Mrs Blakeman were adamant that the rent under the existing lease was too high and that Alphega would not renew the lease if it contained the same rent review clause as in the original lease. 15    During the course of the discussion, Dr Harris and Mrs Blakeman also said that they wanted the new lease to provide for rent to be payable fortnightly instead of monthly in advance, as in the original lease. Mr Manoy said that if there were to be a new lease he wanted Dr Harris and Mr Steve Gracie, who had been the guarantors under the original lease, to be guarantors under the renewed lease. Both Mrs Blakeman and Mr Manoy say that Dr Harris was adamant that there was “no way” that he would give a guarantee. It was also said that Mr Gracie had no further involvement with Alphega so that he would not be giving a guarantee either. 16    The meeting concluded with no agreement about what was to be done. 17    A diary note made by Mr Singer on 17 March 1997 records a discussion with Mr Manoy, from which it appears that Mr Manoy had another conversation with a representative of Alphega. The note reveals that Mr Manoy told Mr Singer, amongst other things, that Alphega wanted the rent under the new lease to be paid fortnightly, not monthly. Mr Singer told Mr Manoy that the new lease had to be documented in exactly the same form as the original lease and had to provide for rent increases after the first year. This advice was in conformity with what Mr Singer had earlier told Mr Manoy about the effect on the Mills’ Option of a renewal of the Alphega lease which was not in the same terms as the original lease.


Mr Manoy’s objective

18    A further meeting between Mr Manoy and Alphega representatives had been arranged for 18 March 1997. Shortly before attending the meeting on that day, Mr Manoy had a conference, either at a meeting or by telephone link-up, with Mr Singer and Mr Adrian Abbott, an accountant. Mr Singer took the following diary note of the conference: Ex.P1, pp.42-43. 19    The diary note records a discussion in which Mr Manoy expressed Ruthol’s desire to get out of the Mills’ Option because there was a possibility of selling the Property for a higher price. The discussion recognised that the only way in which Ruthol could get out of the option was if Alphega exercised its option to renew on the same terms and conditions as in the original lease. However, it was further recognised that Alphega did not want to do that. Various solutions to the problem were canvassed but, in the end, it was agreed that Mr Manoy would try to get Alphega simply to exercise its option to renew, so that Ruthol could tell the Mills that their option had lapsed. After that, Ruthol could continue to negotiate with Alphega. Mr Manoy agreed that this was the content of the discussion recorded in the diary note: T 18.55-19.55. 20    With the benefit of the advice which he had received from Mr Singer and Mr Abbott, Mr Manoy went to the 18 March meeting with Alphega’s representatives. It is clear that he went with the objective of obtaining from Alphega a notice of exercise of the option so that he could use that notice to inform the Mills that their option was at an end: the notice of exercise would not necessarily reflect the fact that both Alphega and Ruthol had agreed that the renewed lease would be on the same terms and conditions as the original lease – that was a matter which could be negotiated later. 21    Mr Manoy endeavoured to suggest that he was relatively indifferent as to whether or not he achieved that objective. I do not accept that evidence. Mr Singer’s diary note of the 18 March conference reveals that one-and-a-half hours of intense discussion were devoted to considering ways and means whereby Ruthol could get out of the Mills’ Option without exposing itself to litigation. The reason for this manoeuvring is also revealed by the diary note: “We want $610,000 in 18 months time” .


The 18 March meeting

22    The meeting on 18 March took place in the office of Alphega’s solicitor, Mr Richard Legge. Present were Mr and Mrs Blakeman, Mr Manoy and Mr Legge. There is a critical dispute about what was said at the meeting. No note of the discussion was taken by anyone present. Only Mrs Blakeman and Mr Manoy have given evidence. No explanation has been proffered as to why Mr Blakeman and Mr Legge have not been called by the Mills, and Ruthol and Tricon have made no Jones v. Dunkel submission as to their absence. I am left to resolve the conflict between Mrs Blakeman and Mr Manoy first by recourse to the inherent probabilities as deduced from the undisputed surrounding circumstances and from relevant documentation and, second, according to my perception of the credit of Mrs Blakeman and Mr Manoy. 23    According to Mrs Blakeman, she said at some stage during the meeting that Alphega could not afford to exercise the option to renew the lease if it meant having to pay the arrears of rent and having the same level of rent increases as in the original lease. She repeated that Dr Harris and Mr Gracie would not give guarantees. She says that Mr Manoy responded: “It is very important for us that you sign a document which can be used as an option for renewal” . She repeated: “Alphega will not exercise the option to renew if it means having to pay the arrears of rent and being subject to the same rent reviews” . 24    Mrs Blakeman says that at some stage after she had re-stated Alphega’s position Mr Manoy made a telephone call to someone whom she understood to be his solicitor. Mr Manoy says that he did, in fact, telephone Mr Singer. She heard Mr Manoy say: “What can I write and how can I write it? How can I do this so that they are seen to be exercising an option that we can get them to sign?” She then saw Mr Manoy writing something which was apparently dictated to him. 25    According to Mrs Blakeman, at the conclusion of this telephone call, Mr Manoy said:
“If you sign a document in the form we need which states that you are renewing the option, we will make sure that you do not have the automatic rent increases and will also address the outgoings. All the arrears will be waived and we will be able to continue negotiating terms for the purchase of the property. But we cannot put these things into your notice of exercise of option as this will cause us legal problems.”
Mr Manoy then handed to her the document which he had been writing during the telephone call. It is in the following terms:

“We confirm that the Rent for the first year is to be the same Rent as is currently payable for current year of our lease and then as provided in the lease.

We are prepared to wave [sic] any arrear [sic] of Rent and Out Going [sic] owing as at this date provide [sic]

1. You exercise the option to renew your lease at a Rent not less than $69,436.20 for the first year.

2. You do not fault [sic] in payment of any further Rent and Out Goings as from this date. If you do then the above arrear will become immediately due and payable.”
26    According to Mrs Blakeman, another document was then prepared on the letterhead of Alphega Medical Practice, which happened to be a company different from Alphega. The content of this document was as required by Mr Manoy. The document is addressed to Ruthol, dated 18 March 1997, and states as follows:
“Dear Sir,
Re: Lease of 258 Condamine Street, Manly Vale
We hereby confirm that we, by this letter, exercise the option to renew the lease of the above property in accordance with our discussions today and previously. We hand this letter to Mr Manoy today.”
27    Mr Manoy asked Mrs Blakeman to sign the document addressed to Ruthol. Mrs Blakeman says that she said: “I want to be clear on this. I am signing this on the basis of our agreement that there will be no more automatic increases in rent” . Mr Manoy, she says, responded: “That’s understood” . Mrs Blakeman then signed the notice exercising the option to renew the lease, and the other document recording the agreement as to rent for the first year of the new lease and arrears in rent and outgoings. 28    Mrs Blakeman says that she signed the notice exercising the option on the understanding that there had been an agreement between Alphega and Ruthol which contained not only the terms in the document prepared by Mr Manoy at Mr Singer’s dictation, but also the following terms. First, the automatic 6% annual rent increases provided by the original lease would not apply to the renewed lease. Second, the personal guarantees of Dr Harris and Mr Gracie would not be required. Third, rent would be paid fortnightly in advance instead of monthly in advance. 29    Mr Manoy says that he did not agree that there would be no 6% annual rent increases during the term of the renewed lease. He says that he agreed only that the rent for the first year of the new term would remain at the current rent, but thereafter the 6% annual increases would apply. He says that he did not agree to the proposition that Dr Harris and Mr Gracie would not be guarantors of the renewed lease. He does agree, however, that Mrs Blakeman requested that the new lease provided that rent be paid fortnightly in advance rather than monthly in advance, and that he assented.

The representation to the Mills

30    On 21 March 1997 DLS sent to Mr Manoy for approval a copy of the new lease to be entered into by Alphega. The rent for the first year was $69,436.20, as stipulated in the document signed at the 18 March meeting. However, the lease still contained provisions for the 6% annual rent increases, personal guarantees to be given by Dr Harris and Mr Gracie, and for rent to be paid monthly in advance. The covering letter noted Mr Manoy’s instructions to Mr Singer “to cancel the Option with Mills notwithstanding that the lease has not been signed by the tenant” . 31    By another letter of 21 March 1997 Mr Singer sent to Mr Manoy a copy of the letter which he had sent to the Mills’ solicitors of the same date. That letter said:

“We have been informed by our client that the lessee of the above premises has exercised its right to renew under the lease.

Accordingly, we regret to inform you that pursuant to Clause 11 of the Option granted to your client the Option is of no effect, and the rights between our respective clients relating to the Option are at an end.”
32    Mr Mills was unhappy with this turn of events and asked his solicitor to request proof that the option to renew the Alphega lease had been exercised. His solicitors made that request and on 17 April 1997 Mr Singer, by way of compliance, sent a copy of the handwritten document exercising the option to renew which had been signed by Mrs Blakeman at the meeting of 18 March. He did not send a copy of the other document which had been signed by her and Mr Manoy on that day, nor did he give any information as to what was the current position between Ruthol and Alphega. 33    Upon receipt of the copy notice from Alphega apparently exercising unconditionally the option to renew the lease, Mr Mills concluded that there was nothing further he could do. He let the period during which the Mills Option could be exercised expire on 30 June 1997 without attempting to exercise the Option. He says that had he not been informed that Alphega had exercised its option to renew the lease, he would definitely have exercised the Mills’ Option within the option period. That evidence was not challenged and I accept it without reservation.


Continuing negotiations for Alphega’s lease

34    On 8 May 1997, Alphega’s solicitors wrote to DLS saying that it was not clear to them whether the option to renew Alphega’s lease had been properly exercised. They said that the draft new lease prepared by DLS did not reflect the agreement between the parties reached at the 18 March meeting. They drew attention to the rent for the first year of the new term being stipulated as a sum net of outgoings, whereas Alphega believed it should be gross. They said that guarantees had been included whereas it had been stated that Dr Harris and Mr Gracie were not prepared to guarantee any new lease because the rent for the first year of the new term was considerably higher than the market rent. The letter requested further discussion about the purchase of the Property by Alphega and asked for a “fresh lease document in the appropriate form” . 35    Mrs Blakeman says that she participated with Dr Harris in giving instructions to Alphega’s solicitors that the draft lease which had been sent by DLS did not conform to the terms which she says were agreed with Mr Manoy on 18 March. I observe that Alphega’s solicitors do not complain that the 6% annual rent increases have not been deleted from the new draft lease and that payment of rent monthly in advance has not been altered to fortnightly in advance, although they do complain about the retention of Dr Harris and Mr Gracie as guarantors. This is a circumstance which I must take into account in assessing whether Mrs Blakeman’s evidence of what was discussed and agreed at the 18 March meeting is accurate. 36    Despite this letter from Alphega’s solicitors, Mr Manoy clearly did not regard the dispute as to the terms of the new lease as a matter requiring urgent attention. Although on 12 May Mr Singer requested instructions for a response to Alphega’s solicitors’ letter of 8 May, no instructions were forthcoming. On 28 July 1997, Alphega’s solicitors telephoned Mr Singer noting that there had been no answer to their letter and requesting a meeting to discuss the issues. Again, no response from Ruthol was forthcoming. 37    It appears that it was not until early October 1997 that Mr Manoy gave his attention to the Alphega lease. Alphega had, in the meantime, remained in occupation of the Property after expiry of the term of the original lease on 30 June 1997, paying the rent fixed for the final year of the original term. 38    On 3 October 1997, Mr Manoy sent a facsimile to Mr Singer advising that he had had a meeting that day with Dr Harris and Mr and Mrs Blakeman. He said that the points that needed discussing were: whether the rent for the first year of the new term was net of outgoings or gross, the possible sale of the Property to Alphega, and “Option – same lease or new lease” .


Mr Manoy’s solution to a problem

39    Mr Singer’s diary note of 10 October 1997 records a discussion with Mr Manoy concerning the possible purchase of the Property by Alphega. The note contains this statement:
“DS [i.e. Mr Singer] to check whether we have to have a fresh lease executed because terms vary from old lease. Rent is definitely fixed until December ’98 so this a reason that there should be a new lease.”
40    The reference in this note to rent being “fixed until December ’98” is to a discussion between Mr Manoy and Alphega earlier in October in which the suggestion was made, as a compromise, that there be no rent review at the end of the first year of the new lease, namely 30 June 1998, but that the rent for the first year remain fixed for another six months before the next review. This term, if incorporated into the renewed lease, would of course be a variation from the terms of the original lease – hence Mr Singer’s comment, at the conclusion of the note, “that there should be a new lease” . 41    On 12 November 1997 Mr Manoy sent a facsimile to Alphega commenting in numbered paragraphs on various points for discussion and containing this paragraph:
“2. $69,420 Net [ie the first year’s rent under the new lease] + Increases must go in the lease but you pay $69,420 N [ie net] to 31/12/98. Bal. of all o/s amounts will be adjusted on settlement.”
42    Mr Manoy was asked about this paragraph in cross examination: T40.10-41.5. His attempt to explain it as meaning that there was to be an express variation in the lease so that the first rent review would take place, not on 1 July 1998 but on 1 January 1999, is unconvincing and I do not accept it, for the following reasons. First, his explanation is contrary to the natural meaning of the words which he used: “Increases must go in the lease but [i.e. notwithstanding what is in the lease] you pay …” . Second, his explanation flies in the face of the advice which Mr Singer had given him on 10 October that to vary the rent review provisions in the original lease would require a fresh lease, not a renewal – a situation which Mr Manoy was obviously anxious to avoid. Third, it was clear from the way in which Mr Manoy gave this evidence that he found it very awkward to explain away what seemed clear from his facsimile. At first, he sought to avoid answering the question “What did you mean by the expression ‘$69,420 net plus increases must go in the Lease” . In the answers which followed, he appeared to me to prevaricate, saying at first that he knew what he meant but finally saying that he did not know what were the “outstanding amounts” referred to at the end of the paragraph. 43    I regret to say that I have reached the conclusion that Mr Manoy was not telling the truth when he denied that his facsimile was intended to suggest that “the lease will say one thing but what will happen in reality will be something different”. I conclude that what he was proposing to Alphega was that the new lease contain the same provisions for rent review as the original lease, but that there be a “side agreement” varying the rent for the first half of the second year – a side agreement which would not be discoverable by anyone, such as Mr Mills, searching the new registered lease.


Mr Manoy’s attitude to being caught out

44    On 13 November 1997 Mr Manoy had a conversation with Mr Milch of DLS, who had taken over conduct of the matter from Mr Singer. Mr Milch made a diary note of this conversation. The note concludes with a careful record by Mr Milch of the advice which he gave Mr Manoy. It was in these terms:
“ Advised
If previous grantee finds out that lease not pursuant to option or granted option to purchase – he would commence proceedings for breach of contract. You rescinded on basis that tenant exercised option to lease.
He not worried, he’s a dead duck, do it all the time.”
45    Mr Manoy was asked about this conversation with Mr Milch and as to what he meant by his concluding statement. He answered that he did not recall the conversation. Mr Milch agreed that the concluding words of his diary note probably record a statement by Mr Manoy in response to Mr Milch’s advice, to this effect: “I’m not worried; Mills is a dead duck; I do it all the time” . That is the meaning which I ascribe to Mr Manoy’s words. 46    In my opinion, one may legitimately draw the inference from these words, in the context in which they were said, that Mr Milch told Mr Manoy that what was being done between Ruthol and Alphega was not a renewal of the Alphega lease pursuant to the option to renew but was, rather, a fresh lease with different terms; if Mr Mills found out what had happened he would commence proceedings for breach of the Mills’ Option Deed. I infer from Mr Manoy’s response, as recorded by Mr Milch, that Mr Manoy’s attitude to this advice was: “I’m not worried about the possibility of being caught out by Mr Mills; I’ve succeeded in manoeuvring him out of his option rights; I do this sort of manoeuvre all the time” – the latter remark being a reference to his extensive experience in negotiating commercial leases in the course of conducting his business. It may well be that Mr Manoy felt confident that he had little to fear from Mr Mills because he believed that the new lease would contain no variation of the annual rent increase provision as the proposed variation that there be no rent review until 1 January 1998 would be contained in an undisclosed “side agreement” with Alphega.


The dispute materialises

47    The remaining factual history of the matter may be briefly recounted as it is not in dispute. 48    On 17 November 1997 Mr Milch wrote to Alphega’s solicitor advising, inter alia, that it was an essential term of the lease that the guarantors be Dr Harris and Mr and Mrs Blakeman. On 11 February 1998, Alphega wrote to Ruthol complaining that “we are very disturbed with the way things have progressed over the term of the lease . Also [this letter] is to confirm that Alphega Management is on a month to month lease and is trying to obtain suitable alternative premises” . On 18 February 1998, Mr Manoy replied to this letter disputing, amongst other things, that Alphega was in occupation pursuant to a monthly tenancy. He asserted that the option to renew the lease had been exercised on 18 March 1997. 49    On 6 May 1998 Ruthol entered into a lease of the premises with Tricon for a term of five years commencing on 1 July 1998. The Tricon lease contained an option to purchase exercisable during the first three years of the term. The purchase price was $615,000 if the option were exercised during the first year of the term, $625,000 if it were exercised during the second year, and $640,000 if it were exercised during the third year. 50    On 14 May 1998, Ruthol served on Alphega a notice to quit the premises, asserting that Alphega was “holding over on a month to month tenancy” and was required to vacate the premises on or before 30 June 1998. Alphega vacated the premises on 30 June. 51    On 2 July 1998, Mr Milch made a statutory declaration which was then attached to the Tricon lease. The declaration stated that Mr Milch acted for Ruthol and that “Alphega Management Services Pty Ltd the Lessee of the property under Lease Registered No E542841 has not exercised the option of renewal and vacated the property on 30 June 1998” . 52    There is no dispute that at the time Tricon entered into its lease of the Property and went into occupation it had no knowledge of the Mills’ Option and of the facts and circumstances giving rise to the Mills’ claim in these proceedings. Since going into occupation Tricon has spent a little over $250,000 in improving, extending and fitting out the Property in order to make it suitable for the carrying on of its business. 53    In August 1998 Mr Mills happened to notice that the Property had been vacated. He rang Mr Manoy and asked what had happened with Alphega. Mr Manoy replied: “Alphega renewed their lease under the Option Agreement. However, they then defaulted and we asked them to vacate.” This evidence has not been contradicted by Mr Manoy. His statement to Mr Mills was inconsistent with Ruthol’s notice to quit and with Mr Milch’s statutory declaration of 2 July 1998. 54    Mr Mills’ suspicions were aroused and he endeavoured to contact Alphega to make further enquiries. He was finally able to speak to Mrs Blakeman on 29 January 1999. His solicitor then conducted a Land Titles Office search of the Property and discovered the Tricon lease and the attached statutory declaration of Mr Milch. 55    On 3 March 1999, the Mills’ solicitor wrote to DLS alleging that Ruthol had misrepresented that Alphega had exercised its option to renew the Alphega lease. The letter enclosed a notice exercising the Mills’ Option. On the same day the Mills lodged a caveat against the title to the Property claiming an equitable interest arising under the Mills’ Option and under a contract for sale said to have come into existence as a result of the Mills’ exercise of their option. 56    On 5 March 1999 DLS responded rejecting the Mills’ claims. On 19 May 1999 the Mills commenced their proceedings against Ruthol. 57    Tricon first became aware of the Mills’ claim to a prior equitable interest in the Property in July 1999. 58    On 23 March, 10 April, 26 April and 17 May 2001, Tricon gave to DLS a notice of exercise of the option to purchase the Property which was contained in the Tricon lease. Each of those notices was rejected by Ruthol as an invalid exercise of the option. On 30 May 2001 Tricon forwarded a fifth notice of exercise of the option. After some argumentative correspondence, DLS advised by letter dated 5 June 2001 that Ruthol was prepared to enter into a contract for sale. Contracts were exchanged on 7 June 2001, but the Mills’ caveat prevented completion. 59    Tricon commenced proceedings on 3 October 2001, joining Ruthol and the Mills as defendants. Tricon seeks specific performance of its contract for sale with Ruthol and an order for the removal of the Mills’ caveat.


The Mills’ contentions

60    The Mills contentions may be summarised as follows. 61    Alphega did not in fact exercise its option to renew the Alphega lease on 18 March 1997 because it did not agree to take a new lease upon the same terms and conditions as in the original lease. What happened on 18 March 1997 was either that Alphega and Ruthol agreed to enter into a lease upon different terms, or else that there was no concluded agreement between the parties at all. 62    Ruthol deliberately misrepresented to the Mills that the Alphega option to renew had been exercised. The Mills relied upon that representation and refrained from exercising their option during the option period as they would have done but for the misrepresentation. 63    Ruthol is estopped from relying upon its own deliberate misrepresentation in order to assert that the Mills’ Option could not be exercised except within the option period. 64    The Mills’ Option has been validly exercised by the Mills’ notice of exercise dated 3 March 1999. 65    The Mills’ Option itself created an equitable interest in the Property. The contract for sale which came into existence on 3 March 1999 by reason of exercise of that option itself created an equitable interest in the Property, but that interest is derived from the equitable interest created by the Mills’ Option. 66    The Tricon lease, being registered on the title, created a subsequent legal estate and was taken by Tricon for value and without notice of the Mills’ prior equitable interest in the Property. The Mills’ equitable interest is, therefore, subject to Tricon’s leasehold estate. 67    The Tricon option to purchase created an equitable interest in the Property but it is subsequent in time to the Mills’ equitable interest and the Mills’ equitable interest takes priority. 68    The Mills are, therefore, entitled to specific performance of their contract for sale with Ruthol but their title will be subject to the leasehold estate of Tricon.


Ruthol’s contentions

69    Ruthol contentions may be summarised as follows. 70    Alphega agreed at the meeting of 18 March 1997 to take a renewed lease of the Property on the same terms and conditions as in the original lease, so that the option to renew was validly exercised in accordance with the terms of the lease. The representation by Ruthol to the Mills was therefore true. 71    Alternatively, even if there was no agreement between Alphega and Ruthol on 18 March 1997 that Alphega would take a further lease upon the same terms and conditions as in the original lease, nevertheless as a matter of construction of the Alphega option to renew and of the Mills’ Option, Ruthol correctly stated the position in its representation to the Mills that Alphega “has exercised its right to renew under the lease” and that “pursuant to Clause 11 of the [Mills] option … the Option is of no effect” . This is so because Alphega had, by its letter of 18 March, expressed a “desire to renew” within the meaning of the option to renew clause and this was all that was necessary to bring the Mills’ Option to an end. 72    Alternatively, if Alphega did not agree on 18 March 1997 to renew the lease upon the same terms and conditions as in the original lease, then the representation by Ruthol to the Mills that Alphega “has exercised its right to renew under the lease” was a representation as to law. Accordingly, it is to be taken as a statement of opinion and is not actionable either at law, in equity or under the Fair Trading Act (1987) NSW. 73    Alternatively, the time for exercise of the Mills’ Option has passed and the Court cannot indirectly order relief against forfeiture of an expired option. 74    Alternatively, the Court will not order specific performance of a contract for sale with the Mills because the rights of Tricon have intervened.


Tricon’s contentions

75    Tricon’s contentions may be summarised as follows. 76    The submissions of Ruthol should be accepted. 77    Alternatively, if there has been wrongful conduct on the part of Ruthol in relation to the Mills’ Option, Tricon took its equitable interest in the Property pursuant to the Tricon Option for value and without notice of the Mills’ Option and of such wrongful conduct. 78    At the time that Tricon took its equitable interest in the Property, the Mills had no prior equitable interest in the Property because their option had expired. All that the Mills had then, and still have, is a right in personam against Ruthol by way of an estoppel. That right is a “mere equity”. 79    In a competition between a prior “mere equity” and a subsequent equitable interest in property taken for value and without notice of the prior “mere equity”, the subsequent equitable interest prevails. 80    The Mills must therefore be left to their remedy in damages against Ruthol.

Whether Alphega exercised its option to renew on the same terms and conditions

81    The first question is: what was said and done at the meeting between Mr Manoy and Alphega’s representatives on 18 March 1997? 82    I may state at the outset that I accept the evidence of Mrs Blakeman recounted in paragraphs 23 to 28 in preference to that of Mr Manoy, for the following reasons. 83    First, it is common ground that the rent under the Alphega lease was significantly above current market rent and that, for some time, Alphega had had difficulty in paying it. As at 18 March 1997 arrears of rent were in the order of $30,000. It is also common ground that at the meeting of 13 March Dr Harris expressed in the strongest terms his view that the rent was too high and that Alphega would not pay it. Mr Manoy concedes that at the 18 March meeting Mrs Blakeman repeated that the rent was too high. 84    It is inherently improbable that at the 18 March meeting Mrs Blakeman would agree to enter into a new lease with the same annual rent increase provisions as in the original lease when Alphega was already in serious difficulty in meeting its existing rent commitments. The conditional waiver of arrears of rent proffered by Mr Manoy if Alphega punctually paid the ever-increasing rent under the renewed lease would have been of little attraction to Alphega because its difficulty in paying the escalating rental under the renewed lease would probably generate a default, which would entitle Ruthol to claim the rent in arrears as well. 85    In my view, it is inherently improbable that Mrs Blakeman agreed at the 18 March meeting that the exercise of Alphega’s option to renew would commit it to annual rent increases in accordance with the terms of the original lease. It is highly improbable that she would have done so without Dr Harris’ prior approval. It is to be remembered that Dr Harris was not at the 18 March meeting. There is no evidence that Mr Manoy’s proposal as to waiver of arrears of rent had been put to Alphega prior to 18 March. 86    Mrs Blakeman, though strongly challenged in cross examination, remained unshaken in her evidence that she signed the letter exercising the Alphega option to renew only upon the assurance of Mr Manoy that there would be no annual rent increase provisions in the renewed lease. I bear in mind that the letter of 8 May 1997 written by Alphega’s solicitors to DLS made no express reference to this assurance: see paragraph 35. I do not think that this omission outweighs the inherent probabilities to which I have referred: the letter did protest that the draft lease was not in accordance with the agreement which had been reached between the parties and made it clear that further discussion was necessary. 87    Second, it is common ground that at the meeting of 13 March Dr Harris objected vehemently to giving a guarantee for the renewed lease and that Mr Manoy was told that Mr Gracie would not be giving a guarantee because he had nothing further to do with Alphega. Mrs Blakeman says that she repeated this assertion at the 18 March meeting. Mr Manoy agrees that nothing said by Mrs Blakeman at the 18 March meeting indicated that Dr Harris had changed his mind about giving a guarantee. He admits that Mrs Blakeman said that Mr Gracie would not be a guarantor but he says that he did not agree. 88    Accordingly, as Mr Manoy’s own evidence stands, it is clear that at the 18 March meeting Mrs Blakeman continued to maintain the position that Dr Harris and Mr Gracie would not guarantee the renewed lease, Mr Manoy continued to maintain the position that they were required to give guarantees, and no resolution of the impasse was achieved. 89    Third, Mrs Blakeman says that when she told Mr Manoy that Dr Harris and Mr Gracie would not give guarantees he responded: “It is very important for us that you sign a document which can be used as an option for renewal” . She says that when Mr Manoy telephoned Mr Singer during the meeting, Mr Manoy said: “What can I write and how can I write it? How can I do this so that they are seen to be exercising an option that we can get them to sign?” Further, she says that Mr Manoy made the statement which I have set out in paragraph 27. 90    Mrs Blakeman’s evidence is strikingly probable in view of the advice which had been given to Mr Manoy by Mr Singer at the discussion with Mr Abbott earlier on 18 March. It is strikingly in conformity with Mr Manoy’s objective in going to the 18 March meeting with Alphega, as discussed between himself, Mr Singer and Mr Abbott and revealed in Mr Singer’s diary note: see paras 18-21. It is inconceivable that Mrs Blakeman could have manufactured this evidence when Mr Manoy’s purpose in going to the 18 March meeting was not disclosed. I cannot accept Mr Manoy’s contradiction of this evidence. 91    Fourth, Mr Manoy concedes that at the 18 March meeting he agreed that the renewed lease would provide for rent to be paid fortnightly, rather than monthly, in advance: T26.10-.22 (20.03.02). Yet the draft renewed lease sent by Mr Singer to Alphega on 8 May 1997 did not contain this variation although Mr Singer knew of it: see paragraph 19. I infer that it did not, because both Mr Manoy and Mr Singer knew that such a variation would show that there had not been an exercise of Alphega’s option to renew in accordance with the terms of the Alphega lease. I infer that Mr Manoy was prepared to agree to a variation as to the time for rental payments in order to procure Alphega to sign the notice of exercise while intending not to carry out his agreement to incorporate the variation into the renewed lease. This attitude of Mr Manoy strongly reflects on his credibility as to the other variations to the renewed lease to which Mrs Blakeman says he agreed. 92    Fifth, while the credit of Mrs Blakeman remained unshaken, I am of the view that Mr Manoy’s credit has been severely damaged, for the following reasons:


– he attempted to suggest, falsely, that he was relatively indifferent to whether Ruthol would avoid the Mills’ Option: see paras 21-23;

– his proposal to Alphega in his facsimile of 12 November 1997 to the effect that the renewed lease would contain the same rent review provisions as the original lease, but that there would be a side agreement to the contrary, was, I have concluded, a deliberate attempt to conceal the truth from the Mills if they should search the registered renewed lease: see paras 41-46;

– he was not frank when questioned about the facsimile: see paras 44-46;

– in the face of advice from Mr Milch that Mr Mills would sue if he found out that the new Alphega lease was not granted pursuant to the option to renew in the Alphega lease, Mr Manoy displayed an almost contemptuous unconcern. His attitude seemed to be that breach of legal obligations was of no great consequence;

– he was prepared to assert to Alphega, when it suited him, that Alphega had exercised its option to renew and was bound to take the renewed lease and to assert, when it suited him, that Alphega was holding-over on a monthly tenancy: see paras 50-53;

– he told Mr Mills in August 1998 that Alphega had renewed its lease but had defaulted when he had, in May 1998, required Alphega to vacate under a monthly tenancy: see para 53.

93    For these reasons, I conclude that the evidence of Mrs Blakeman as to what transpired at the 18 March meeting should be preferred to the evidence of Mr Manoy. I bear in mind Mr Manoy’s evidence that he would not have agreed to remove the annual rent review provisions from the renewed lease because that would be highly uncommercial. I accept that such an agreement on Mr Manoy’s part would indeed have been uncommercial – if he had ever intended to honour it. I am satisfied that, just as Mr Manoy agreed to a variation of the provisions as to time for payment of rent without intending to incorporate that variation in the renewed lease, Mr Manoy agreed to vary the rent review provisions without intending to honour that agreement. 94    I find that at the 18 March meeting:


– Mrs Blakeman, on behalf of Alphega, signed a notice exercising the Alphega option to renew induced by an express agreement with Mr Manoy, on behalf of Ruthol, that the renewed lease would not contain the annual rent review provisions in the original lease, and would contain an amendment varying the time for payment of rent from monthly in advance to fortnightly in advance;

– Mrs Blakeman maintained that Dr Harris and Mr Gracie would not guarantee the renewed lease, Mr Manoy would not agree and there was no resolution of this disagreement;

– Mr Manoy induced Mrs Blakeman to sign the notice exercising the Alphega option to renew in unconditional terms by agreeing to amend the terms of the renewed lease as to annual rent reviews and as to time for payment of rent although he did not intend that Ruthol should honour that agreement.

95    Accordingly, I find that as at 18 March 1997:


– Alphega did not agree to take a renewed lease upon the same terms and conditions as in the original lease;

– Mr Manoy knew that fact. He knew that the terms in the original lease as to annual rent reviews and as to time for payment of rent had been varied by agreement and that there had been no agreement at all as to whether the guarantors of the original lease would guarantee the renewed lease;

– Mr Manoy knew that the renewal option in the Alphega lease required that, if the option were to be validly exercised, Alphega would have to take the renewed lease upon the same terms and conditions as in the original lease;

– by reason of the advice he had received from Mr Singer, Mr Manoy knew that the notice of exercise signed by Mrs Blakeman and handed to him at the meeting of 18 March was not an exercise of the option to renew in accordance with the requirements of the Alphega lease.


Was the Mills’ Option validly terminated?

96    Mr Aitkin, who appears for Ruthol, submits that even if I were to make the findings which I have made as to what transpired at the 18 March meeting, nevertheless the Mills’ Option was validly terminated. This, he says, flows from the true construction of the option to renew clause contained in the Alphega lease (Clause 4.01) and of Clause 11 in the Mills’ Option. 97    Clause 4.01 of the Alphega lease is in the following terms:
“ OPTION : If the Lessee shall desire to take a renewed Lease of the Demised Premises for a further term of five (5) years from the expiration of the term of this Lease and shall give to the Lessor not less than three (3) months and not more than six (6) months previous notice in writing thereof and shall in the meantime duly and punctually pay the rent reserved by this Lease and all other moneys payable pursuant to this Lease at the times and in the manner herein appointed for payment thereof and shall not at the date of the notice nor at the expiration of the term hereof be in breach of any of the covenants conditions provisos and agreements by and on the part of the Lessee expressed or implied in this Lease except to the extent to which any breach non-observance or non-performance may have been waived or excused by the Lessor in writing the Lessor shall at the cost and expense of the Lessee lease to the Lessee (and the Lessee shall take as tenant) the Demised Premises for a further term of five (5) years at the yearly rentals to be determined in accordance with the First Schedule hereto and otherwise on the same terms and conditions as are herein contained subject to clause 4.02 hereinafter appearing.”
98    Clause 11 of the Mills’ Option is as follows:

“ LEASE

Despite anything in this Deed, the parties acknowledge that:

(a) ( non-exercise of option to renew ) the Option shall be subject to and conditional upon the non-exercise, by the lessee under the Lease, of the right to renew contained in the Lease (‘Right to Renew’) by 7 April 1997; …”
99    Mr Aitkin says that Alphega does not really have an option to renew under Clause 4.01. All Alphega can do is give Ruthol written notice of its “desire to take a renewed Lease” . Even if that notice is given within the prescribed time, there is no obligation on the part of Ruthol to grant a renewed lease until the complete expiry of the term of the lease, i.e. midnight on 30 June 1997, because up until that time Alphega may commit a breach of the lease which Ruthol might choose not to waive, so that Alphega would not be entitled to a further lease. 100    According to Mr Aitkin, when Mrs Blakeman signed and delivered to Mr Manoy on 18 March 1997 the letter set out at para 26, all that happened was that Alphega gave “written notice of its desire” , for the purpose of Clause 4.01: no option was exercised, Ruthol was not obliged to grant a renewed lease on the same terms as the original lease or on any terms, and Alphega was not obliged to take a renewed lease – it could simply change its mind at any time up to midnight on 30 June 1997. 101    However, says Mr Aitkin, the giving by Alphega of its “notice of desire” was an exercise “by the lessee under the lease of the right to renew contained in the Lease” for the purpose of terminating the Mills’ Option under Clause 11(a). 102    I am unable to accept these submissions. In my opinion, the true construction of Clause 4.01 is that if the lessee gives the written “notice of desire” within the prescribed time and at the time of giving such notice it has not committed any breach of the lease which has not been waived by the lessor, then the lessee thereupon becomes entitled to the grant of a further lease. The lessee has validly exercised its option to renew. However, that right of renewal is subject to defeasance if, between the date of exercise of its option and the expiration of the original term of the lease, the lessee commits a breach of the lease which the lessor does not waive. 103    Clause 11 of the Mills’ Option is for the protection of Ruthol in that it avoids Ruthol becoming subject to two inconsistent obligations, namely, the obligation to sell the Property to the Mills with vacant possession if the Mills exercise their option, and the obligation to grant a renewed lease to Alphega if it exercises its option under the lease. If there is no obligation to grant a new lease to Alphega arising by virtue of something done by it prior to 7 April 1997, then the Mills’ Option is to remain on foot. 104    This is evident from the use of the words in Clause 11(a) “non-exercise of the right to renew” . These words connote that by virtue of something done by the lessee, it will have a right to renew the lease which is enforceable against Ruthol. If Alphega had, on 18 March 1997, given an unconditional notice to Ruthol that it desired to renew the lease upon the same terms and conditions as in the original lease, and if Ruthol had waived all of Alphega’s breaches of the lease then subsisting, there would have been an exercise by Alphega of its right to renew the lease within the meaning of Clause 11(a) of the Mills’ Option. That is so because Alphega, at that point in time, would have had a contingent right to enforce the option against Ruthol. Alphega’s right was contingent in that it could be lost if Alphega thereafter committed a breach of the lease which was not waived by Ruthol. But if Alphega had a right to renew which was still subsisting by 7 April 1997, the Mills’ Option would be terminated pursuant to Clause 11(a) even though at some time after 7 April 1997 Alphega’s right to renew might be lost. 105    For the reasons I have given, Alphega did not give to Ruthol on 18 March, or at any time prior to 7 April 1997, notice of its desire to take a renewal of the lease upon the same terms and conditions as in the original lease. Accordingly, the Mills’ Option was not terminated under Clause 11(a) either on 18 March 1997 or at any time prior to expiry of the Mills’ Option period, i.e. 30 June 1997.

Whether a misrepresentation of fact or law

106    Ruthol submits that the statement made by Ruthol to the Mills in the DLS letter of 21 March 1997 that Alphega “has exercised its right to renew under the Lease” is a statement of opinion as to law and is therefore not actionable. I am unable to accept this submission. 107    Not every representation which involves a matter of law is regarded as a representation of law for the purpose of the rule that such a representation is not actionable. As Sir George Jessel MR pointed out in Eaglesfield v Marquis of Londonderry (1876) 4 Ch D 693, at 703, there can hardly be a statement as to the identity or status of a person or as to the nature and quality of property which does not involve “all sorts of law” . Moreover, there is a distinction between a representation as to the general law – that is, a representation as to a question of pure legal principle – and a representation as to the private rights of parties which depend partly on facts and partly on legal questions. The true rule is that a representation as to private rights, involving or founded upon matters of fact not equally well known to both representor and representee, will invariably be regarded as a representation of fact which is actionable, whether at law or in equity as the nature of the case requires: see e.g. Reynell v Sprye (1852) 1 De GM&G 660 ; (1852) 42 ER 710; Cooper v Phibbs (1867) LR 2HL 149; MacKenzie v Royal Bank of Canada [1934] AC 468, at 476; see also Spencer Bower, Turner & Handley Actionable Misrepresentation (2000) 4th Ed., paras 38 and 39, where the law is stated with admirable conciseness and clarity. 108    In the present case, the representation to the Mills that Alphega “has exercised its right to renew under the Lease” was a representation as to private rights, namely, the rights and obligations of Ruthol and Alphega under the Alphega lease consequent upon some act of Alphega. It was a representation which was founded upon and inextricably interwoven with matters of fact known to Ruthol but not to the Mills. The matters of fact were: whether or not Alphega had given the requisite notice under Clause 4.01 of the lease within the prescribed time; whether or not Alphega, by the notice or otherwise, expressed a desire to take a renewed lease “upon the same terms and conditions” as in the original lease; whether or not Alphega had committed any breaches of the lease which were outstanding as at the time the notice was given, and whether or not Ruthol had waived such breaches; whether or not Ruthol had agreed to grant a renewed lease “upon the same terms and conditions” as in the original lease. 109    Ruthol’s representation to the Mills is, therefore, to be regarded as one of fact. It was a deliberate misrepresentation of fact, for the reasons which I have given in paragraphs 83 to 95. The misrepresentation is therefore actionable by the Mills.

Whether the Mills’ Option was validly exercised

110    Mr Aitkin submits that even if Ruthol induced the Mills not to exercise their Option by deliberate misrepresentation, nevertheless it was too late for the Mills to exercise their Option on 3 March 1999 because the option period had expired on 30 June 1997. 111    Mr Cotman SC, who appears with Mr Colyer for the Mills, submits that Ruthol is estopped from asserting that the option was not exercised within the prescribed time because the Mills were induced not to exercise it timeously by the deliberate misrepresentation of Ruthol itself. For this proposition, he relies upon Bragg v Alam [1981] 1 NSWLR 668. In Bragg , the plaintiffs granted to the defendant an option to purchase the plaintiffs’ land, the option being exercisable by the giving of written notice to either one of the plaintiffs personally within a stipulated time. The grantors deliberately evaded service on them of a notice exercising the option so that the defendant was unable, despite all reasonable efforts on his part, to give the notice within the stipulated option period. When the notice of exercise was eventually served on the plaintiffs, the defendant lodged a caveat against the title to their land claiming an equitable interest by virtue of a contract for sale coming into existence upon his exercise of the option. The plaintiffs sought the removal of the caveat, contending that the option could not be exercised after the option period had expired. 112    Rath J held that the option had been validly exercised. His Honour relied chiefly on the principle of law, applicable equally in courts of law and in courts of equity, that no one shall be permitted to take advantage of his or her own wrongdoing: see Broom’s Legal Maxims 10th Ed, p.191. The plaintiffs’ wrongdoing had been to breach their implied contractual obligation to make themselves available for the giving of a notice exercising the option, so that the defendant might have the benefit of the contract into which the parties had entered: at 673-674. 113    It is worthy of note that his Honour did not consider that the defendant’s entitlement to exercise the option out of time depended upon the doctrines of tender, waiver or estoppel: at 673E-F. His Honour was content to hold that the defendant succeeded because of the substantive principle of law, applicable in every jurisdiction, which deprives a person from taking advantage of his or her own wrong. Alternatively, his Honour considered that the Defendant could rely upon the principle that a grantor cannot derogate from his or her own grant: at 674B. 114    Bragg went to the Court of Appeal, but the appeal was dismissed: (1982) NSW ConvR 55-082. Hutley JA, with whom the other members of the Court agreed, quoted with approval at 56,489 the following passage from Corbin on Contracts , sec.767:

“One who unjustly prevents the performance or the happening of a condition of his own promissory duty thereby eliminates it as such a condition. He will not be permitted to take advantage of his own wrong, and to escape from liability for not rendering his promised performance by preventing the happening of the condition on which it was promised.”

His Honour noted that that principle had been applied to the non-exercise of an option within the stipulated time because delivery of the notice to the grantor on the due date was made impossible by the grantor’s religious beliefs: Unatin 7 Up Co v Solomon 39 Atl 2nd 835.

115    In my opinion, the reasoning in Bragg is entirely applicable to the present case. By its misrepresentation to the Mills that Alphega had exercised its option to renew the lease and that, as a consequence, the Mills’ Option was terminated, Ruthol deprived the Mills of the opportunity of exercising their option within the option period, as they would doubtless have done otherwise. I have concluded that the misrepresentation by Ruthol was deliberate so that it is clearly a wrongful act for the purpose of the substantive principle of law referred to in Broom and in Corbin , as applied by the Court in Bragg . 116    The consequence is that the law regards the wrongful conduct of Ruthol as having eliminated as a condition in the Mills’ Option the requirement that the option be exercised by 30 June 1997. The Mills’ Option was validly exercised on 3 March 1999, within a reasonable time after the Mills discovered with sufficient certainty the deception that had been practised upon them.

The competition between the Mills and Tricon

117    There is no dispute that the grant of the Mills’ Option and the grant of the Tricon Option gave each grantee an equitable interest in the Property: see Laybutt v Amoco Australia Pty Ltd (1974) 132 CLR 57, at 75 per Gibbs J, and the cases there cited. 118 Mr Young, who appears for Tricon, submits that the equitable interest in the Property which the Mills had by virtue of their option came to an end on 30 June 1999 when the option period expired without the option having been exercised. The Tricon Option was granted on 6 May 1998 when the Tricon lease was executed. It follows, says Mr Young, that at the time that Tricon’s equitable interest in the Property came into existence, the Mills had no prior equitable interest. The Mills’ exercise of the option on 3 March 1999 might be valid as against Ruthol, but that is only because the Court will now decree that, as against the Mills, Ruthol cannot rely upon its own wrongdoing to deny valid exercise of the option. The right of the Mills to have the exercise of their option validated against Ruthol by a judgment of the Court is, says Mr Young, a “mere equity” which cannot prevail against an equitable interest in the Property which Tricon acquired for value without notice. 119 There is no doubt that, as a general rule, a “mere equity” does not enter into competition with an equitable interest in property which is taken for value and without notice, even if the equitable interest was acquired later in time. This general rule was already well established by the time Lord Westbury LC enunciated it in the leading case of Phillips v Phillips (1861) 4 De GF & J 208, at 218; (1861) 45 ER 1164, and it has been frequently re-stated and applied in recent times: see e.g. Latec Investments Ltd v Hotel Terrigal Pty Ltd (In liq) (1965) 113 CLR 265, at 277, and the helpful discussion of that case by Bryson J in Double Bay Newspapers Pty Ltd v A W Holdings Pty Ltd (1996) 42 NSWLR 409, at 423ff. 120 While the general rule is familiar, its application to particular cases is not always easy, the most frequently encountered difficulty being to identify just what is a “mere equity”. That difficulty comes into sharp focus in the present case. What is the right or interest of the Mills which is in competition with the equitable interest in the Property held by Tricon? Is it a merely personal right against Ruthol which prevents Ruthol from denying that the Mills’ Option was exercised within time? If so, is that right a common law right or an equitable right which could properly be called a “mere equity”? If the right is a common law right, does the rule enunciated in Phillips v Phillips still apply?

“Mere equity” or equitable interest

121    As has been often observed, the Courts have not laid down a clear dividing line between an equitable interest in property and what is described as “a mere equity”. The difficulties of categorisation were recognised well before the decision in Phillips v Phillips and have not been resolved despite much erudite judicial and academic discussion since then: see e.g. Double Bay Newspapers at 423E; Megarry & Wade “The Law of Real Property” (2000) 6th Ed, para.5-013; Snell’s Equity (2000) 30th Ed, para 2-05; (1955) 71 LQR 480; Meagher Gummow & Lehane Equity Doctrines and Remedies (1992) 3rd Ed, paras.427ff. 122    Equitable, or proprietary, interests and “mere equities” alike depend for their very existence upon the fundamental concept that equity acts in personam and that the rights which it recognises and enforces are not rights in rem but rights in personam. So, for example, the beneficiary of a bare trust of land is said to have an equitable interest in the land because an equity court, acting upon the conscience of the trustee, will compel the trustee to deal with the land in a certain way for the benefit of the cestui que trust. Likewise, the purchaser of land under an uncompleted contract for sale is said to have an equitable interest in the property, but only because it is tacitly assumed that a court of equity will grant specific performance of the contract. In examples such as these, the equitable interest is commensurate with the availability and extent of the corresponding right in personam: see e.g. Glenn v Federal Commissioner of Land Tax (1915) 20 CLR 490, at 503-504 per Isaacs J; Central Trust and Safe Deposit Co v Snider [1916] 1 AC 266, at 272; Brown v Heffer (1967) 116 CLR 344, at 349; DKLR Holding Co (No 2) Pty Ltd v Commissioner of Stamp Duties [1980] 1 NSWLR 510, at 518ff. 123 It follows that if the equity court would not enforce the right in personam – where, for example, it has been lost by acquiescence, laches, delay or some other circumstance affording a defence – then the equitable interest might either never have existed in the first place or might have ceased to exist: see Central Trust and Safe Deposit Co at 272. 124 A right enforceable in personam in equity confers an equitable, or proprietary, interest only when there is a nexus of sufficient propinquity between the right and the specific property to which the right relates. What is a nexus of sufficient propinquity is the conundrum. It has been recognised that “there is some circuity involved in finding the starting point for the existence of … an equitable interest, the problem being to isolate as the initiating factor the proprietary interest or the right to enforce the interest … This problem is almost a jurisprudential mystery” : per Kearney J in Burns Philp Trustee Co Ltd v Viney [1981] 2 NSLWR 216, at 223. 125    Many definitions of an equitable interest have been attempted and found wanting. For example, in National Provincial Bank Ltd v Ainsworth [1965] AC 1175, at 1248, Lord Wilberforce identified such an interest as being one which was “definable, identifiable by third parties, capable in its nature of assumption by third parties and [having] some degree of permanence or stability” . That definition has been much criticised: see Meagher Gummow & Lehane Equity Doctrines and Remedies (1992) 3rd Ed, para.428. There is probably no point in attempting any universal definition. As Kearney J said in Burns Philp Trustee Co Ltd v Viney , at 223-224:
“… there is an obvious difficulty in endeavouring both to analyse and to formulate any general principle in this area of the law. The administration of equity has always paid regard to the infinite variety of interests and has refrained from formulating or adhering to fixed universal and exhaustive criteria with which to deal with such varying situations. The approach traditionally adopted by equity has been to retain flexibility so as to accommodate the multitudinous instances in which fundamental equitable rules fall to be applied.”
126    Like an “equitable interest”, a “mere equity” is a slippery creature. It can be cornered and illuminated by example but not captured and confined by definition. For present purposes, the most illuminating example is found in the Latec Investments case. There, a mortgagee fraudulently exercised a power of sale, so that as against the mortgagee and the collusive purchaser the mortgagor had a right in equity to set aside the conveyance. However, the rights of a third party had intervened in the meantime so that the competition was between the mortgagor, claiming an equitable interest in the land which was prior to that of the third party, and the third party who claimed a subsequent equitable interest acquired for value without notice of what it said was the mortgagor’s “mere equity”. 127    There was disagreement between Kitto and Taylor JJ as to whether the mortgagor had a prior equitable interest in the property. Kitto J was of the view, on the authority of Phillips v Phillips , that the mortgagor had to make good its right in equity to have the fraudulent conveyance set aside before the mortgagor could be said to have an equitable interest in the land, namely, its equity of redemption. As between the mortgagor and the third party, the competition was, according to his Honour, between a “preliminary equity” – that is, a claim to set aside the conveyance for fraud – and an admitted subsequent equitable interest. His Honour was of the opinion that Phillips v Phillips compelled the conclusion that the “preliminary equity” was a “mere equity” which could not compete with the subsequent equitable interest acquired for value without notice: at 277-279. 128 On the other hand, Taylor J was of the view that the mortgagor had never been deprived of its equitable interest in the property by the voidable fraudulent conveyance. On the authority of cases decided both before and after Phillips v Phillips , his Honour concluded that the owner of an equitable interest in property who is induced by fraud to transfer it continues to retain that equitable interest: it does not cease upon the transfer and then come into existence again when the transfer is set aside: at 281-284. 129 However, Taylor J concluded that the true principle enunciated in Phillips v Phillips was simply that where the person entitled to a prior equitable interest requires the assistance of a court of equity to remove an impediment to his or her title as a preliminary to asserting it, the court will not interfere if a third person has acquired an equitable interest in the property for value without notice before the prior equitable interest holder comes to the court for assistance: at 286. 130 The approach of Menzies J was to attempt to reconcile the two apparently conflicting streams of authority relied upon by Kitto and Taylor JJ. His Honour would recognise that an equitable right could be a “mere equity” in the sense adopted by Kitto J for the purpose of a priority contest with an equitable interest and yet could be an “equitable interest” for the purpose of transmission by devise or assignment: at 290-291. In the result, therefore, Menzies J agreed with the position taken by Kitto J. 131    Latec Investments has been judicially considered on very many occasions and I will not contribute yet another exegesis. My own view, which reflects the approach taken by Menzies J, is that Phillips v Phillips can be explained as a policy decision rather than a decision resting on distinctions in the qualities of various equitable rights. The policy is simply this: where the holder of a prior equitable interest needs the assistance of the equity court to perfect his or her title to it, that equitable interest will be defeated if, before the title is perfected, a third party takes an equitable interest for value without notice. 132    Perfecting the title to an equitable interest does not mean resolving a dispute as to its existence in the first place, as where, for example, parties disagree as to whether a document has created an equitable charge and a declaration is sought from the equity court. Perfecting the title means seeking an equitable remedy without which a previously existing equitable interest would be lost.

The nature of the Mills’ interest

133    As I have observed, the Mills acquired an undoubted equitable interest in the Property upon the grant of their Option. Did that equitable interest cease upon expiry of the option period, only to be revived when the Court, by the grant of some equitable remedy, declares that they validly exercised the option on 3 March 1999, so that their equitable interest is retrospectively reinstated? 134    In my opinion, the Mills did not require the assistance of the equity court in order to exercise their Option validly, so that the competition between them and Tricon is not one between a “mere equity” and an equitable interest. The Mills validly exercised their option, even though the option period had expired, because of the principle of the common law which deprives a wrongdoer of the advantage of his or her wrongdoing. 135    That principle is not an invention of equity; it is a long established principle of the common law. It was explained by that arch-enemy of the Lord Chancellor’s Court, Sir Edward Coke, in his Commentary upon Littleton , 148b, under the maxim “nullus commodum capere potest de injuria sua propria” . The maxim has been applied again and again in the common law courts: see the cases cited in Broom’s Legal Maxims 10th Ed, pp.191ff. Equity applies the principle not because it is an equitable principle but because, in this respect, equity follows the law. 136    In the present case, if the Mills had not placed a caveat on the title to the Property and the Property had been transferred to Tricon, the Mills could have successfully claimed damages for breach of contract in a court of common law. The court of common law, applying the maxim, would have held that the condition as to the time of exercise of the option had been “eliminated”, to use the words of Corbin (see para.114), that the option had been validly exercised so that a contract for sale had come into existence, that that contract had been breached by Ruthol, and that the Mills were entitled to damages. If a court of common law would recognise that the contractual right to exercise the Mills’ Option continued to exist until 3 March 1999, so also would a court of equity. The court of equity would, in addition, have recognised that because the contractual right to exercise the option continued to subsist until 3 March 1999 so also did the Mills’ equitable interest in the Property which had been conferred by the grant of the option. 137    From the time of grant of the Mills’ Option up to the date of judgment, the Mills have never required the assistance of equity to perfect their title to an equitable interest in the Property. They have held their equitable interest without interruption from 25 February 1997. For that reason, the competition between the Mills and Tricon is a competition between equitable interests so that, if the merits are equal, the interest which is prior in time will prevail.

Who has the better equity?

138    The principles upon which a prior equitable interest may be postponed to a subsequent equitable interest are clear. There must be some act or neglect of the prior equitable owner such as to make it inequitable as between that owner and the subsequent equitable owner that the initial priority should be retained. The subsequent equitable owner bears the burden of proving the act or neglect of the prior owner and of proving that it contributed in some way to the subsequent owner acquiring his or her interest without notice of the prior equitable interest: Lapin v Abigail (1930) 44 CLR 166, at 204, per Dixon J; Butler v Fairclough (1917) 23 CLR 78. 139 In the present case Tricon, quite properly, does not submit that any conduct on the part of the Mills contributed to the acquisition by it of its equitable interest in the Property without notice. The Mills did not exercise their Option nor did they register a caveat before 3 March 1999 because they had been deceived by Ruthol into believing that the Option had been terminated on 18 March 1997. Mr Mills discovered the deception by chance and thereafter acted to protect his rights with all appropriate expedition. 140 It follows that as between the Mills and Tricon the merits are equal. Both have been deceived by Ruthol. The result is that the prior equitable interest of the Mills prevails over the subsequent equitable interest of Tricon. 141 If they so elect, the Mills are entitled to an order for specific performance of the contract for sale which came into existence upon the exercise of their Option on 3 March 1999. As the Mills freely concede, their entitlement to a conveyance of the fee simple of the Property is subject to the leasehold interest acquired by Tricon which, being held under a registered lease, is a legal estate acquired for value without notice of the Mills’ equitable interest.

Conclusion

142    The Mills have sought an order for specific performance of the option or damages against Ruthol for breach of contract, in the alternative. They have apparently not yet made an election between the remedies. 143    The Mills are entitled, if they so wish, to an order for specific performance of the contract for sale of the Property which came into existence upon the exercise of their option on 3 March 1999. The Mills are entitled to be registered as the owners of the Property upon completion of that contract, subject to the leasehold interest of Tricon. 144    If the Mills so elect, they will have damages against Ruthol for breach of contract. 145    Depending upon the remedy for which the Mills elect, Tricon will have either an order against Ruthol for damages for breach of contract or an order for specific performance. 146    The values of the Property at the relevant times for the purpose of calculating damages have been agreed by all parties so that that calculation should be uncontroversial. 147    I will stand these proceedings over for a short time to enable the parties to bring in Short Minutes of Order reflecting these reasons. I will then hear any argument as to costs.
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Last Modified: 04/15/2002