Six Bruce Pty Ltd v Milatos
[2017] VSC 784
•19 December 2017
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
PRACTICE COURT
COMMON LAW DIVISION
PROPERTY LIST
S CI 2017 04909
| SIX BRUCE PTY LTD (ACN 604 847 770) | Plaintiff |
| v | |
| ANDREW MILATOS | First Defendant |
| and | |
| NATIONAL COMMERCIAL FINANCE PTY LTD (ACN 620 255 905) | Second Defendant |
| and | |
| REGISTRAR OF TITLES | Third Defendant |
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JUDGE: | Keogh J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 13, 14 December 2017 |
DATE OF JUDGMENT: | 19 December 2017 |
CASE MAY BE CITED AS: | Six Bruce Pty Ltd v Milatos & Ors |
MEDIUM NEUTRAL CITATION: | [2017] VSC 784 |
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REAL PROPERTY – Caveats – Application for removal of caveat – Transfer of Land Act 1958
s 90(3) – Plaintiff seeking refinance of property – Contract of sale between Plaintiff and first Defendant terminated – Whether first Defendant has purchaser’s lien for repayment of deposit – Whether prima facie case of sufficient probability to justify maintenance of caveat – Balance of convenience.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr De Kock | Judicate Lawyers |
| For the First Defendant | P G Cawthorn QC with C E Shaw | Legal AU Pty Ltd |
| For the Second Defendant | K Khera (solicitor) | ERA Legal |
HIS HONOUR:
Six Bruce Pty Ltd (Six Bruce) is the registered proprietor of the property at 1–8, 6 Bruce Street, Toorak, (the property). Pursuant to a contract of sale of real estate, Six Bruce contracted to sell the property to Andrew Milatos, who paid the required deposit. The contract did not proceed. Mr Milatos served a notice to rescind on the basis of alleged non-disclosure in the vendor’s statement attached to the contract, however the circumstances of termination of the contract are controversial. Because the deposit paid by Mr Milatos has not been returned to him, he lodged a caveat against the property asserting a purchaser’s lien, and commenced proceedings in this court against Six Bruce seeking payment of the deposit. Six Bruce has defaulted on payments of principal and interest in relation to a first mortgage secured against the property, and has made arrangements to refinance with an alternative financier. Six Bruce commenced this proceeding seeking an order pursuant to s 90(3) of the Transfer of Land Act removing the caveat to allow the refinance to occur.
The issues on the application for removal of the caveat were:
(a) Whether there is a probability Mr Milatos will be found to have an equitable right or interest in the property which is sufficient to justify the practical effect of the caveat on the ability of Six Bruce to refinance. Six Bruce submits the case against it is weak because:
(i) there was no non-disclosure in the vendor statement attached to the contract justifying Mr Milatos’ rescission notice;
(ii) Six Bruce validly terminated the contract before Mr Milatos’ rescission notice could take effect; and
(iii) the caveat was defective because it did not name the nominated substitute purchaser under the contract who must have a joint interest with Mr Milatos in the equitable right in respect of the deposit.
(b) Whether the balance of convenience favoured the caveat being maintained.
The application to remove the caveat was supported by three affidavits of Scott Crow, the sole director and secretary of Six Bruce, the first dated 4 December and the remaining two 12 December. Mr Milatos relied on two affidavits of John Melis, solicitor, dated 5 and 6 December.
At the time it commenced this proceeding, Six Bruce also sought an order for removal of a caveat naming the second defendant as caveator. The matter first came on before me in the Practice Court on 6 December. Six Bruce sought to adjourn the hearing for one week. The parties agreed to that adjournment on terms. Before the matter came back on for hearing on 13 December, an agreement was reached between Six Bruce and the second defendant, and those parties sought orders by consent, which were made.
On 14 December 2017 I made orders granting the application to remove the caveat subject to conditions. At the same time I indicated written reasons would follow.
What happened
Six Bruce was registered on 19 March 2015. Mr Crow is the sole director, secretary and shareholder. The company has paid up capital of $100. There is no evidence Six Bruce owns any assets other than the property.
Six Bruce was registered as proprietor of the property on 19 February 2016. Details of the purchase were not provided. However, Mr Crow said purchase of the property by Six Bruce was funded by a 12-month facility provided by La Trobe Financial Asset Management Pty Ltd (La Trobe) secured by registered first mortgage.
A writ and statement of claim subsequently issued by La Trobe against Six Bruce in this court alleging non-payment of principal and interest on the loan facility discloses:
(a) the principal amount advanced by La Trobe to Six Bruce was $4,095,000;
(b) a default notice was served on Six Bruce by La Trobe on 3 May 2016 alleging default in payment due pursuant to the loan; and
(c) default interest was accruing. By late 2017 interest was accruing daily at just over $1,600, at a rate of 14.39 per cent.
On 20 May 2016, Six Bruce obtained an order from the Victorian Civil and Administrative Tribunal (VCAT) permitting construction of a four-storey apartment building on the property. Six Bruce then sought expressions of interest for the sale of the property.
On 5 February 2017, Six Bruce contracted to sell the property to Mr Milatos for a purchase price of $7,800,000. The contract provided for a deposit of $390,000, which was paid by Mr Milatos on the same date.
Attached to the contract was a vendor statement purporting to be in accordance with s 32 of the Sale of Land Act 1962. The corrected permit for construction of apartments on the property was attached to the vendor statement. The corrected permit contained information in relation to drainage requirements in respect of the permitted construction, including a requirement that a drainage easement be created over the new drain. The vendor statement did not disclose an existing drainage easement affecting the property.
On 20 March 2017, pursuant to the contract, Mr Milatos nominated A M Land (Bruce) Pty Ltd (A M Land) as substitute purchaser of the property.
The contract was due to settle on 3 July 2017. On about that date, agreement was reached to extend the settlement to 4 August, on the basis Mr Milatos pay $390,000 by way of additional deposit.
Of the total deposit of $780,000, the selling agent holds $200,000 on trust, a further $95,400 was paid to the agent on account of fees, and the balance of $484,600 was released to Six Bruce. There was no evidence as to the basis for release of the deposit.
A statement from South East Water dated 31 July 2017, obtained by Mr Milatos’ then solicitors, disclosed an existing drainage easement affecting the property.
The contract did not settle on 4 August. On 8 August solicitors then acting for Six Bruce served on Mr Milatos a Notice of Default and Rescission for non-payment of the balance due under the contract. The notice stated that unless the default was remedied within 14 days the contract was rescinded.
On 14 August solicitors for Mr Milatos served on Six Bruce a Rescission Notice alleging default by failure to disclose existence of a current easement affecting the property. The notice stated that unless the default was remedied the contract will be rescinded.
Mr Crow states that in September 2017 Six Bruce entered a joint venture with Olibele Pty Ltd and Crowbuild Pty Ltd to develop the property by construction of luxury apartments. The undated executed joint venture ‘Land Development Deed’ is exhibited to Mr Crow’s first affidavit. There is no evidence of when and how the joint venture project will proceed. A market assessment for internal purposes issued on 1 September, prepared by valuer Mr Anthony Rohan, director of Charter Keck Cramer, appears to be a feasibility assessment of the proposed development of the property. Development costs are estimated in summary at over $9 million. Interest on funding related to construction is estimated at 5.75 per cent, and totals approximately $1.3 million. The total value of units post-construction is estimated at just under $25 million. Other costs associated with the development appear to reduce estimated profits to the developer to approximately $3.5 million. There is no evidence the joint venture partners have made any progress towards realising the proposed development, or when that task will commence.
On 3 October, Mr Milatos lodged a caveat on the property. The caveat names Mr Milatos as caveator, and records:
Grounds of claim
Purchaser’s lien to secure repayment of money paid under a contract of sale with the following parties and date.
Parties
The registered proprietor
Date
3 March 2017
Estate or interest claimed:
Interest as lienee
Prohibition:
Absolute
On 10 October 2017, Mr Milatos issued proceeding S CI 2017 04119 in this court against Six Bruce claiming payment of the deposit of $780,000 or alternatively a declaration that he is entitled to maintain the caveat until hearing and determination of the proceeding.
On 12 October, La Trobe issued a proceeding in this court against Six Bruce seeking repayment of just over $4,400,000 in respect of the loan secured by first mortgage against the property, interest accruing at a daily rate of $1,614.93, and costs.
Six Bruce filed a defence to the action by Mr Milatos on 27 November alleging:
(a) the contract was validly terminated by Six Bruce, and the deposit was forfeited;
(b) adequate notice was given by Six Bruce in the vendor statement of the drainage easement affecting the property;
(c) alternatively, if the easement was not disclosed, Six Bruce acted honestly and reasonably, and Mr Milatos is substantially in as good a position as if there had been compliance with s 32 of the Sale of Land Act, with the consequence that Six Bruce had a defence under s 32K of that Act;
(d) Mr Milatos is not entitled to maintain the caveat against the property.
In the defence, Six Bruce admitted Mr Milatos paid the total deposit of $780,000.
On the same day the defence was filed, Six Bruce first requested that Mr Milatos remove the caveat.
A title search of the property discloses the following registered encumbrances and caveats:
(a) first mortgage: La Trobe;
(b) second mortgage: Ivan John Brookfield (Brookfield) dated 5 December 2016;
(c) caveat: Domain Capital Pty Ltd (Domain) dated 21 July 2016;
(d) caveat: Brookfield dated 22 September 2016;
(e) caveat: Mr Milatos;
(f) caveat: National Commercial Finance Pty Ltd (NCF) dated 31 October 2017.
Mr Crow stated that the indebtedness secured against the property calculated as at 15 December 2017 is:
(a) La Trobe: $4,556,559
(b) Brookfield: $1,500,633
(c) Domain: $271,672
(d) NCF: $60,000
The above figures, which do not take account of the potential indebtedness to Mr Milatos, total $6,407,805.
Mr Crow said that on 20 November 2017 Six Bruce received a letter of offer from Jadig Management and Advisory Pty Ltd (Jadig) for mortgage finance in the amount of $5 million. Subsequently the Jadig offer was revised to $4.8 million. After pre-payment of three months’ interest, a procurement fee and legal and valuation costs, the balance available from Jadig will be $4,575,500, which is approximately $19,000 more than the figure necessary to discharge the La Trobe debt.
Mr Crow stated that after the proposed refinance with Jadig, the indebtedness secured against the property will be:
(a) Jadig: $4,800,000
(b) Brookfield: $1,000,000
(c) Domain: $271,672
(d) NCF: $60,000
These figures total $6,131,672. The refinance arrangement involves payment down of the debt owed to Mr Brookfield by $500,000. The source of funds to pay down the Brookfield secured debt has not been explained.
In a valuation dated 30 October 2017 Clive Silverstein valued the property at $7.8 million “as is”, reduced to $7.1 million in mortgagee sale circumstances. On that valuation equity in the property before the proposed refinance was between $700,000 and $1.4 million, and after refinance $1-1.7 million.
Six Bruce submits the position of Mr Milatos will be improved by the refinance because the debt secured against the property is reduced, and there is pre-payment of interest for three months.
Prima facie case
The parties proceeded on the basis that the test set out by Warren CJ in Piroshenko v Grojsman & Ors[1] applies.
[1][2010] VSC 240, [12]–[23].
Mr Milatos submits the contract was terminated through no fault of his own, and this entitles him to maintain a caveat against the property as lienee.
Six Bruce submitted, for four reasons, that Mr Milatos’ case for maintenance of the caveat is weak or unsustainable. First, it is alleged the VCAT planning permit attachments which formed part of the vendor statement to the contract gave notice of the easement. In my view it is strongly arguable this is not correct. The planning permit documents refer to future drainage requirements and a future easement. The current easement is not mentioned. Arguably, the requirement to describe the easement contained in s 32C of the Sale of Land Act has not been satisfied. Relevant documents in relation to the existing easement were not attached to the vendor statement.
Secondly, Six Bruce submitted it has a defence to Mr Milatos’ claim under s 32K(4) of the Sale of Land Act. To succeed Six Bruce must prove that it acted honestly and reasonably, and that Mr Milatos is substantially in as good a position as if notice of the easement had been given. Mr Milatos submits that lay and expert evidence will likely be called by both parties going to the elements of the defence. The prospects of success of the defence are entirely uncertain at this stage. Thirdly, Six Bruce submitted the contract was validly terminated by it pursuant to the notice dated 8 August, and as a consequence the deposit was forfeited. In response Mr Milatos submitted Six Bruce was in breach of the contract, and was not entitled to terminate; that he was entitled to rescind the contract without notice for non-compliance with the requirements of s 32 of the Sale of Land Act, and that it was arguable the notice served by Mr Milatos on 14 August had the effect of immediately terminating the contract. Mr Milatos noted that whilst a defence in these terms had been pleaded by Six Bruce, there had been no application to strike out his claim for return of the deposit. I agree the circumstances leading to and the effect of the rescission notices served by each party are controversial. These are not matters to be determined on this application. There is a probability that Mr Milatos will establish a defect in the vendor statement attached to the contract which entitled him to rescind. Mr Milatos served a rescission notice in respect of that alleged breach. I am satisfied he has established a prima facie case for return of the deposit, and that he has asserted equitable rights or interest in respect of the property which justify a caveat.
Fourthly, Six Bruce submitted the caveat was defective because the nominee A M land must have a joint interest with Mr Milatos in any equitable right to the deposit, and the caveat did not name A M land.[2] Six Bruce conceded this argument could not apply in respect of the first tranche of the deposit which was paid before nomination of A M land. The effect of this concession was that the caveat is not defective but would, if the argument of Six Bruce was accepted, be limited to the first $390,000 of deposit. It was submitted the reduced value of the interest protected by the caveat was therefore relevant to the balance of convenience.
[2]Union Finance Pty Ltd v Ratelic Pty Ltd (No 2) [2007] SASC 11, [16], (Lann J).
For the following reasons I disagree. First, Six Bruce expressly conceded in the defence filed in the recovery proceeding that the whole of the deposit of $780,000 was paid by Mr Milatos. Secondly there is no evidence the second tranche of the deposit was paid by or on behalf of A M land. Thirdly the effect of the nomination clause was to empower Mr Milatos to require Six Bruce to complete the contract by transfer of the property to the name of A M land. After nomination A M land did not acquire rights as purchaser against Six Bruce. The rights and obligations as purchaser remained with Mr Milatos.[3]
[3]Tonelli v Komirra Pty Ltd [1972] VR 737 at 739; Commissioner of State Revenue v Politis [2004] VSC 126, [11], Nettle J; 428 Lt Bourke St Pty Ltd v Lonsdale St Cafe Pty Ltd & Ors [2009] VSC 133, [24]-[25], Judd J.
Balance of convenience
In Bradto Pty Ltd v State of Victoria[4] in relation to the question of the balance of convenience the court stated:[5]
…the court should take whichever course appears to carry the lower risk of injustice if it should turn out to have been ‘wrong’, in the sense of granting an injunction to a party who fails to establish his right at the trial, or in failing to grant an injunction to a party who succeeds at trial.
[4][2006] 15 VR 601.
[5][2006] 15 VR 601, [35].
Mr Milatos submitted the following factors favouring maintenance of his caveat on the property:
(a) The value of the rights asserted by Mr Milatos are significant. Mr Milatos has a claim for return of $780,000 of which only $200,000 remains held in trust by the selling agent.
(b) Six Bruce has paid up capital of $100. There is no evidence it owns assets other than property.
(c) There is history of serious default by Six Bruce on the La Trobe land dating from 3 May 2016, and no evidence of the ability of Six Bruce to service loans of over $6 million secured against the property. The average interest on the secured debt is approximately 15 percent, or more if penalty rates apply, leading to an annual interest burden of over $900,000.
(d) There are a number of unknowns, among them the source of the $500,000 to pay down the Brookfield debt, when and how the joint venture will be able to develop the property, financial arrangements between the joint venture partners, and whether the conditions attached to the Jadig refinance proposal can be met.
In my view the above factors are outweighed by circumstances which justify removal of the caveat. Most of the deposit was released, presumably as part of the contractual dealing between the parties. Mr Milatos has only recently commenced the proceeding for return of the deposit. A trial of that proceeding to determine whether Mr Milatos is entitled to return of the deposit, and thus has a caveatable interest in the property is some way off.
Six Bruce is registered proprietor of the property, and is seeking to refinance in an arrangement that would reduce debt secured against the property, give breathing space by prepayment of interest and maintain the prospect of developing the property with the joint venture partners. If the refinance did not proceed it was likely La Trobe would take possession as mortgagee and sell to recover the amount outstanding to it, resulting in loss of the opportunity to develop the property and reduction in the price likely to be obtained on sale.
Six Bruce and Mr Crow have provided an undertaking to the court not to deal with the property until final determination of Mr Milatos’ proceeding. Further, Six Bruce has agreed to provide Mr Milatos security by way of a charge against the property for the amount of any judgment in his favour in the proceeding, allowing Mr Milatos to lodge a further caveat against the property once the refinance has occurred. I agree that in those circumstances Mr Milatos’ position is probably improved by the refinance. The debt secured against the property has been reduced, and interest pre-paid for three months. Mr Milatos’ potential entitlement is secured by a new caveat supported by the undertaking. Engagement of the joint venture partner gives some hope of progress with development of the property. In my view the balance of convenience weighs in favour of removal of the caveat.
I have made orders in accordance with these reasons, in a form agreed by the parties. I will hear the parties as to the question of costs.
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