Ruthol Pty Ltd v Mills

Case [2003] NSWCA 56

NEW SOUTH WALES COURT OF APPEAL

CITATION:     RUTHOL PTY LTD v MILLS & ORS [2003]  NSWCA 56

FILE NUMBER(S):
40387/02

HEARING DATE(S):    3 February 2003

JUDGMENT DATE:      26/03/2003

PARTIES:
Ruthol Pty Limited - Appellant
Brian Mills - First Respondent
Elaine Mills - Second Respondent
Tricon (Aust) Pty Ltd - Third Respondent

JUDGMENT OF:        Meagher JA Sheller JA Cripps AJA   

LOWER COURT JURISDICTION:       Supreme Court - Equity Division

LOWER COURT FILE NUMBER(S):     2101/99, 4858/01

LOWER COURT JUDICIAL OFFICER:   Palmer J

COUNSEL:
B W Walker SC/R P L Lancaster - Appellant
N A Cotman SC/G B Colyer - First and Second Respondents
M W Young - Third Respondent

SOLICITORS:
David Landa Stewart Lawyers - Appellant
McCabe Terrill Lawyers - First and Second Respondents
Grahame Jackson & Associates - Third Respondent

CATCHWORDS:
Equity - Priority - Equitable interests - Maxim that no party may take advantage of its own wrong - Third party - Purchaser of equitable interest for value without notice
Leases and tenancies - Options - Options to renew - Options to purchase - Whether option to renew had been exercised
Contract - Options - Options to purchase property - Exercise of option - Conditions - Misrepresentation - Priority between holder of option and third party acquiring equitable interest bona fide for value and without notice

LEGISLATION CITED:
Fair Trading Act 1987

DECISION:
1  Appeal allowed
2  Judgments and orders of Palmer J of 19 April 2002 set aside except as to costs
3  The appellant to pay the costs of first and second respondents of the appeal
4  The second and third respondents to pay the third respondent's costs of the appeal but to be indemnified in respect of the amount of those costs by the appellant
5  In both matters No 2101/99 and No 4858/01, order that the parties bring in short minutes of order in accordance with these reasons for judgment.

JUDGMENT:

IN THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL

CA 40387/02
SC 2101/99;  4858/01

MEAGHER JA
SHELLER JA
CRIPPS AJA

RUTHOL PTY LTD v MILLS & ORS

Ruthol leased a property to Alphega for a term of five years with an option to renew.  Alphega had difficulty keeping up with rent increases and it seemed unlikely that it would exercise the option.  Ruthol granted Mr and Mrs Mills an option to purchase the property for $490,000.  This option was conditional on Alphega not exercising its option.

In discussions with Alphega it was signalled that Alphega were also interested in purchasing the property and a figure of $610,000 was mentioned.  Ruthol then entered into a series of discussions with Alphega aimed at convincing Alphega to exercise the option to renew, despite Alphega's reluctance to do so because of certain conditions contained in the lease.

Alphega purported to exercise the option but the renewed lease was never executed.  Nevertheless, Ruthol's solicitors wrote to Mr and Mrs Mills's solicitors telling them that Alphega had exercised its right to renew under the lease.  Mr and Mrs Mills did…

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AGLC
Ruthol Pty Ltd v Mills [2003] NSWCA 56
Case
[2003] NSWCA 56
Decision Date

CaseChat Overview and Summary

Ruthol Pty Ltd appealed against a decision of Palmer J concerning competing equitable interests in a property. The dispute involved Mr and Mrs Mills, who held an option to purchase the property, and Tricon, which subsequently acquired an equitable interest in the property through its own option. The core of the appeal concerned the priority of these equitable interests and whether Ruthol had acted wrongfully in relation to the Millses' option.

The legal issues before the court were whether the Millses had validly exercised their option to purchase the property, and if not, whether Ruthol's conduct in relation to the Millses' option created a mere equity that was subordinate to Tricon's later equitable interest. The court also had to consider the principle that a party cannot take advantage of its own wrong, and how this applied when a third party, such as Tricon, acquired an interest for value without notice of the prior equitable right.

The Court of Appeal found that Palmer J had erred in his assessment of the evidence. It was held that the Millses' option had expired due to their failure to exercise it in accordance with its terms. Furthermore, the court determined that any wrongful conduct by Ruthol in relation to the Millses' option did not create a mere equity that would prevail over Tricon's subsequent equitable interest, which was acquired for value and without notice. The principle that a subsequent equitable interest for value without notice prevails over a prior mere equity was applied.

The appeal was allowed, and the judgments and orders of Palmer J were set aside, except for costs. The court ordered that Ruthol pay the costs of the first and second respondents on appeal, and that the second and third respondents be indemnified by Ruthol for their costs of the appeal in relation to the third respondent.

Orders

Orders of the court

1 Appeal allowed

2 Judgments and orders of Palmer J of 19 April 2002 set aside except as to costs

3 The appellant to pay the costs of first and second respondents of the appeal

4 The second and third respondents to pay the third respondent's costs of the appeal but to be indemnified in respect of the amount of those costs by the appellant

5 In both matters No 2101/99 and No 4858/01, order that the parties bring in short minutes of order in accordance with these reasons for judgment.

Background

Background to the litigation

Ruthol appealed in both the proceedings begun by Mr and Mrs Mills and the proceedings begun by Tricon. The notice of appeal sought an order that Palmer J’s judgment be set aside but did not stipulate any alternative declarations or orders. Factual background According to Mrs Blakeman’s evidence by the early part of 1997, Alphega had been experiencing difficulties in paying the rent for the property. She claimed that the annual rent increases led to a situation where Alphega was continually in arrears. In early March 1997, Dr Graeme Harris, who had been a director of Alphega until disqualified by reason of his bankruptcy, and was a guarantor together with Mr Steve Gracie of Alphega’s due performance of the terms and conditions of the lease, Mrs Blakeman’s husband Kerry and Mrs Blakeman met with Mr Manoy. At that meeting Dr Harris said words to the effect:“There is no way that we will 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.” Dr Harris and Mrs Blakeman raised the possibility of Alphega buying the property from Ruthol. $610,000 was discussed on terms of a small deposit with a postponed settlement date. Mr Manoy said words to the effect:“We will talk about selling you the property. But you have to execute the option and sign the lease first.” Mrs Blakeman deposed that she again met with Mr Manoy on or about 18 March 1997 to discuss the possibility of Alphega taking a further five year lease of the premises. Also present at the meeting were Alphega’s then solicitor, Richard Legg (Mr Legg), and Mr Blakeman. Mrs Blakeman’s recollection was that at the time of the meeting Alphega owed approximately $12,000 to $15,000 in outstanding rent for the premises. Ruthol asserted the figure was even higher. At the meeting, according to Mrs Blakeman, discussion took place in the following terms:“At some stage during the meeting I recall saying words or words to the effect of:‘Alphega cannot afford to exercise the option if it means having to pay the arrears of rent and having the same level of annual rent increases as the original lease. As we have previously told you, there is no way that Graeme will guarantee a lease unless this is fixed. Mr Gracie is also out as a guarantor.’Colin Manoy said words to the effect:‘It is very important for us that you sign a document which can be used as an option for renewal.’I then said words to the following effect:‘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.’ ” Mrs Blakeman deposed that, after she had made this statement, Mr Manoy made a telephone call to someone. Mrs Blakeman understood it to be his solicitor, Mr Singer. She heard Mr Manoy say words to the following effect:‘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.”

Evidence

Evidence Before The Court

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Decision

Reasons for decision

Tricon contended that Ruthol’s submission should be accepted. If there had been any wrongful conduct on the part of Ruthol in relation to the Millses’ option to purchase, Tricon took its equitable interest in the property, pursuant to the Tricon option, for value and without notice at a time when the Mills had no prior equitable interest in the property because their option had expired. All that Mr and Mrs Mills had then and still had was a right in personam against Ruthol by way of an estoppel. That right was a mere equity. 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 prevailed. Accordingly, Mr and Mrs Mills must be left to their remedy in damages against Ruthol.Palmer J’s reasons for judgment Palmer J addressed the question of what was said and done at the meeting between Mr Manoy and Alphega’s representatives on 18 March 1997. His Honour said that at the outset he accepted the evidence of Mrs Blakeman in preference to that of Mr Manoy for reasons which he gave as follows:“83First, 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.84It 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.85In 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.86Mrs 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: ... 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.87Second, 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.88Accordingly, 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.89Third, 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. [para 22 of this judgment]90Mrs 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 [referred to below in this judgment]. 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.91Fourth, 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.92Fifth, 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: …;-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: …;-he was not frank when questioned about the facsimile: …;-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: …;-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: ...”

Ratio Decidendi

Legal Principle Established

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