Tanzone Pty Ltd v Westpac Banking Corporation

[1999] NSWSC 478

Reported Decision: [2000] 9 BPR 17,287
[1999] ATPR 46-195
[1999] Aust Contract R 90-103
(1999) NSW ConvR 55-908

New South Wales

Supreme Court

CITATION:	Tanzone v Westpac [1999] NSWSC 478 revised - 11/06/99
CURRENT JURISDICTION:	Equity
FILE NUMBER(S):	5075/98
HEARING DATE(S):	19, 20, 21 and 22 April 1999
JUDGMENT DATE:	26 May 1999
PARTIES :	Tanzone Pty. Limited (Plaintiff and First Cross Defendant) Westpac Banking Corporation (Defendant and Cross Claimant) Perpetual Trustee Company Limited (Second Cross Defendant) Archie Raymond (Third Cross Defendant) Mary Ann Raymond (Fourth Cross Defendant)
JUDGMENT OF:	Windeyer J at 1

COUNSEL :	Mr. T.F. Bathurst QC with him Mr. D. Hammerschlag (Plaintiff and First Cross Defendant) Mr. R.B.S. MacFarlan QC with Mr. J.P.A. Durack (Defendant and Cross Claimant) Mr. J.M. Hennessey (Second Cross Defendant) - submitting appearance Third and Fourth Cross Defendants - submitting appearance
SOLICITORS:	Freehill Hollingdale & Page (Plaintiff and First Cross Defendant) Allen Allen & Hemsley (Defendant and Cross Claimant) Heidtman & Co (Second Cross Defendant) Barker Gosling (Third and Fourth Cross Defendants)
CATCHWORDS:	EQUITY - RECTIFICATION - COMMON MISTAKE - rectification of terms of lease relating to rent review calculations - rectification where third party has acquired the interest of original lessor - equity of rectification is a "mere equity" binding a purchaser at least of Old System land taking with notice of equity - ; UNILATERAL MISTAKE - plaintiff not an original party to lease - no unconscionable conduct by plaintiff; REAL PROPERTY - TORRENS TITLE LAND - INDEFEASIBILITY OF TITLE - knowledge of an unregistered interest not in itself fraud - right to rectification a mere equity - whether protection of Real Property Act 1900 applies to mere equities in same way as it applies to equitable interests - ; RIGHTS IN PERSONAM - indefeasibility does not bring an end to personal claims - whether knowledge of mistake justifies rectification; TRADE PRACTICES ACT PART IVA - unconscionable conduct - taking advantage of known mistake - whether unconscionable; LIMITATION OF ACTIONS - TRADE PRACTICES ACT S87(1) - no limitation period
ACTS CITED:	Conveyancing Act 1919 s117 Real Property Act 1900 Trade Practices Act 1974 (Cth) Transfer of Land Act 1958 (Vic)
CASES CITED:	Australian Broadcasting Commission v Australian Performing Rights Association (1973) 129 CLR 99 Bahr v Nicolay (No 2) (1988) 164 CLR 604 Breskvar v Wall (1971) 126 CLR 376 Bromley v Ryan (1956) 99 CLR 362 Calmao Pty. Ltd. v Stradbroke Waters Co-Owners Co-Operative Society Limited (1989) 21 FCR 28 Cave v Cave (1880) 15 Ch D 639 Commonwealth v Verwayen (1990) 170 CLR 394 Downie v Lockwood [1965] VR 257 Equity and Law Life Assurance Society Limited v Coltness Group Limited (1983) 267 EG 949 Fitzgerald v Masters (1956) 95 CLR 420 at 426 Frazer v Walker [1967] 1 AC 569 Garofono v Reliance Finance Company Pty. Limited [1992] NSW Conv R 59/659 Grgic v ANZ Banking Group Limited (1994) 33 NSWLR 202 at 220. Johnston v Arnabaldi (1990) 2 Qld R 138 Johnstone v Commerce Consolidated Pty. Ltd. [1976] VR 463 Lisciendro v The Official Trustee (1966) 139 ALR 689 Mercantile Mutual Life Insurance Co. Limited v Gosper (1991) 25 NSWLR 32 Mills v Stokman (1967) 116 CLR 61 Munro v Stuart 1924 [41] SR(NSW) 203 NSW Medical Defence Union v Transport Industries Insurance Company Ltd (1986) 6 NSWLR 740 Oertel v Hordern (1902) 2 SR(NSW) (Eq) 37 Ong v Luong [1991] ANZ Conv R 596 Phillips v Phillips (1861) 4 DeG F & J 208 Secured Income Real Estate (Australia) Ltd v Martins Investments Pty. Ltd. (1979) 144 CLR 596 Smith v Jones [1954] 2 All ER 823 Taylor v Johnson (1983) 151 CLR 422 Terceiro v First Mitmac Pty. Ltd (1997) 8 BPR 15,733 Tutt v Doyle (1992) 42 NSWLR 10 Watson v Phipps (1985) 60 ALJR 1 Westminster Bank Ltd v Lee [1956] 1 Ch 7 at 19
DECISION:	Claim for rent upheld. Cross-claim for rectification and other relief dismissed

- 1 -

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

WINDEYER J

WEDNESDAY 26 MAY 1999

5075/98 TANZONE PTY. LIMITED v WESTPAC BANKING CORPORATION

JUDGMENT

General Issue

1 The main question to be decided in this action is whether Westpac Banking Corporation (Westpac) as lessee of premises 140-144 Main Street Lithgow (the premises) is liable to pay rent to Tanzone Pty. Ltd (Tanzone) the owner of the premises upon terms of the lease as claimed by Tanzone in the statement of claim or whether it, Westpac, is entitled to relief by way of rectification of the lease or under s87(1) of the Trade Practices Act on the ground that Tanzone has engaged in unconscionable conduct with s51AA of that Act.

There are other issues but those are the main claims.

Facts

2   The premises were owned by Westpac but sold and leased back pursuant to the provisions of a contract which arose on exercise of an option granted by Westpac to Mainzeal Overseas Pty. Limited (Mainzeal) dated 30 July 1984. The option deed had annexed to it a draft contract which was deemed to come into existence upon exercise, the terms of which obliged the parties to enter into an agreement for lease in accordance with a draft annexed to the draft contract. Triden Contracting Pty. Ltd. (Triden), a subsidiary of Mainzeal, contracted as a party to the lease to erect a bank building on the land for occupation by Westpac as lessee.

3   The form of agreement of lease contained a means of calculating the annual rent on a measured area base, provided for review dates on the second anniversary of the commencement date and each two years thereafter and provided by clause 2.02 as follows:

2.02 The yearly rent payable set out in Clause 2.01 hereof shall be increased on and from each Review Date to an amount equal to the greater of:-
(i) The amount of the rent payable immediately preceding the Review Date multiplied by 1.1664 (equivalent to 8% compounded annually), and
(ii) the amount of the rent payable immediately prior to the Review Date multiplied by X over Y where X is the Consumer Price Index Weighted Average Sydney All Groups Number for the quarter last preceding the Review Date and Y is the Consumer Price Index Weighted Average Sydney All Groups Number for the last quarter preceding the Date of Commencement of the term of this Lease.

4   The rights of Mainzeal as grantee were assigned to Mr. & Mrs. Raymond (the Raymonds)the third and fourth cross defendants in this action. They exercised the option by notice dated 21 August 1984. Settlement of the sale took place on 31 August 1984 the required agreement for lease being executed and exchanged that day.

5   The building work proceeded in accordance with the agreement for lease and practical completion was reached on 15 March 1985, which date accordingly became the commencement date of the lease. The lease was executed upon the agreed terms. It is dated 10 July 1985 and is registered number W006367. It is for a term of twenty years commencing on 15 March 1985, terminating on 14 March 2005. The initial rent was calculated in accordance with the agreement at $69 404.25 so that clause 2.01 and 2.02 of the lease are as follows:

2.01. YEARLY RENT
The Lessee covenants with the Lessor that the Lessee will during the whole of the term hereof pay to the lessor without demand from the Lessor free of exchange and without any deduction whatsoever the Yearly Rental of $69,404.25 until the first Review Date and thereafter as determined in accordance with Clause 2.02 of this Article.
2.02 The yearly rent payable set out in Clause 2.01 hereof shall be increased on and from each Review Date to an amount equal to the greater of:-
(i) The amount of the rent payable immediately preceding the Review Date multiplied by 1.1664 (equivalent to 8% compounded annually), and
(ii) the amount of the rent payable immediately prior to the Review Date multiplied by X over Y where X is the Consumer Price Index Weighted Average Sydney All Groups Number for the quarter last preceding the Review Date and Y is the Consumer Price Index Weighted Average Sydney All Groups Number for the last quarter preceding the Date of Commencement of the term of this Lease.

6   On 4 November 1993 Tanzone purchased the premises from the Raymonds at auction for $1 770 000. The contract provided that the property was sold subject to the lease, a copy of which was attached. The purchase was settled on 16 December 1993 by transfer registered I945409. The rent being paid under the lease at the date of the contract was $131,501 per annum. Clause 30.1 of the contract dated 4 November 1993 was as follows:

30.1 The property is sold subject to the lease existing as at the date of this contract and referred to in Schedule 1 (the 'Lease") the benefit of which shall be given to the purchaser on completion. The purchaser acknowledges having inspected the Lease (a copy of which is attached) and confirms that it has satisfied itself in respect of the Lease. The purchaser cannot make any objection, requisition or claim for compensation or rescind or terminate or refuse to complete this contract as a result of the terms of the Lease or in respect of anything lawfully done under the Lease.

7   Tanzone mortgaged the property to Perpetual Trustee Company Limited by Mortgage I945410 to secure a sum of $1 066 600 presumably applied towards the purchase moneys. It seems that the mortgagee thought that the CPI renewal was on a ratchet basis as did its valuer, Jones Lang Wootton, which company considered the purchase price was at the uppermost level. That firm's valuation proceeded on the basis that without the Westpac lease but with a normal rent with normal increases the property was worth about $800 000, that above market rents based on 8% annual increases, increased the value by $760 000 which is added to $800 000 and rounded up the figure to $1.6 million.

8   On 14 March 1995 Tanzone wrote to Westpac stating that rent as from 15 March 1995 being the next review date would be $221 557.69 per annum at which stage Westpac became acutely aware of the formula in clause 2.02. Westpac replied that this calculation was not an accurate reflection of the agreement as to rent as Tanzone knew or should have known. There was no real response to this statement, although Tanzone did ask what was meant by "intended review mechanism". It obviously knew because Mr. Madson of Tanzone had told Mr. Raymond there was a mistake in the lease and Tanzone would get more rent. About the same time Westpac entered a caveat against the title to the leased land. As that document claimed a leasehold interest under the lease dated 10 July 1985, which was the lease registered on the title, and only prevents registration of dealings affecting that interest, it is difficult to see its purpose although it seems to be thought it prevented registration of a variation of mortgage. On 26 February 1997 Tanzone sent to Westpac notice of increase of rent from 15 March 1997 to $402 059.67 per annum which was challenged in the same way, this time by Messrs. Allen Allen and Hemsley acting for Westpac, the challenge being by letter of 5 April 1997.

9   Rent has been paid by Westpac in accordance with its calculations and accepted by Tanzone without prejudice to its rights under the lease. On 21 December 1998 this action was commenced, seeking withdrawal of the caveat and declarations as to entitlement to rent as claimed in the review notices, damages and interest.

Facts specific to the review clause

10   The original discussions which brought about the sale, building and lease back agreement were conducted by Mr. Mair, Southern Premises Manager of Westpac and Mr. Allan Hunt of Triden. The proposal as finally put forward was that "rent reviews be every two years, adjustments to CPI or 8% whichever is the higher. These reviews to be established on a compound basis."

This was accepted by Mr. Mair. Mr. Hunt said he would have read the option deed. He said the intention of Triden and Mainzeal was that rent "be increased every two years by 8% compound annually or in line with the increase with the CPI during the two year period whichever was higher". Mr. Mair said that was his understanding as to what was contained in the lease. To make things clearer I will refer to such a provision as a " CPI ratchet provision" or "ratchet clause". Mr. Hearne, solicitor of Messrs. Cowley Hearne, acted for Mainzeal. He deposed that the draft option agreement, which included the draft agreement for lease, was intended to incorporate arrangements between Mainzeal and Westpac arrived at through Messrs. Hunt & Mair and that he understood the CPI comparison was "between that immediately prior to the review date and that at the prior review". Upon the option being exercised he drafted or had drafted the agreement for lease which of course conformed with the draft option. Mr. Holtsbaum of the then Messrs. Perkins Stevenson and Linton, acted for Westpac on the option. He wrote to Westpac on 25 June 1984 a letter containing the following: "The rent is to be reviewed on the second anniversary of the commencement date and thereafter biennially. The new rent is to be the greater of the rent multiplied by 1.1664 (equivalent to 8% compounded annually) and the current rent increased by the Consumer Price Index." He also said that had he been asked to advise Westpac prior to the auction of what it should do on the basis that it had brought to its attention the result of the wording in the lease, he would have advised Westpac to seek agreement to a variation, and if that did not succeed then to seek rectification, and if that failed to advise purchasers at the auction of the claim and possibly to consider purchase itself.

11   Mr. Linton solicitor, then a partner in Perkins, Stevenson and Linton, acted for Westpac on the dealings after the option was exercised, but so far as the lease was concerned only checked to ensure that it accorded with the agreement.

12   Mr. J.S. Davis of Messrs. Henry Davis York, acted for Mr. and Mrs Raymond. He reviewed the draft lease attached to the option. His understanding was that clause 2.02 related to a ratchet clause, in other words increases due to the CPI increase during the two year review period. The Raymonds thought the provision was a ratchet provision. Their statements admitted into evidence made that clear, although they appeared reluctant witnesses which was probably not surprising. Mr. Davis also acted for the Raymonds on their sale to Tanzone. Messrs. Gillis Delaney Brown acted for Tanzone and after auction sought information as to the current rent and how it was calculated in accordance with clause 2.02 of the lease. It seems that in response to this inquiry, or for some other reason, Gillis Delaney Brown were furnished with correspondence which showed that increases had been calculated on the ratchet formula or the 8% compound whichever was greater.

13   By 1993 Westpac had become concerned about the cost of operating its Lithgow branch, mainly because of its rental cost. There was internal correspondence in Westpac as to the possible purchase of the building or attempts to negotiate a decrease in rent. The concern was about the 8% per annum compounding increases and not about the literal meaning of the CPI clause. It was noted the property was being marketed with emphasis on the favourable provisions for increase in rent. Mr. Leyden, the leasing manager, was brought into the picture. It is clear from a memorandum of his of 8 October 1993, that he thought that the ratchet formula applied. He said in that memorandum:

Clause 2.02 of the lease provides for a biennial review with a prescribed increase being the greater of the applicable CPI or alternatively 8% compounded annually. Obviously the latter formula increase, which is causing concern to the branch and to Paul Lahiff applies in current times."

The view of Mr. Nass, who was the asset manager in the property and premises group of Westpac, was the same. He gave some consideration to the matter when making a recommendation to Mr. Robert Gough, the chief manager of the property and premises group about Mr. Leyden's suggestion that purchase of the site should be considered. At this time a Mr. J.C. Adamson, the senior leasing coordinator of New South Wales for Westpac, who reported to Mr. Leyden who reported to Mr. Nass. Also reporting to Mr. Nass were Miss Caceda and Mr Elder. I am satisfied that it was never thought by any of them that clause 2.02 operated other than as a ratchet provision. Westpac decided against purchase.

Reviews from 1987 to 1993

14   The review for 1987 created no problems. It was calculated on the CPI increase but of course the base figure was the original base figure. That increase was greater than an increase of 8% per annum compound and was calculated as follows: $69 400.25 x 160.10/134.7 = $82 491.65.

15   The review for 1989 was again calculated on the CPI ratchet basis. The original checking of figures against those put forward by the agents for the lessor was carried out at Westpac by Ms Loughran a clerk in the property and premises department of Westpac and checked by Mr. Elder. Ms Loughran thought that she checked the lease provisions from the document or from a lease summary, but the summary in evidence could not have been the one used. While the accepted figure was calculated on the ratchet basis Ms Loughran did carry out a calculation based on the literal wording of clause 2.02 and was not able to give any real explanation for this, although she did say that she considered the calculations agreed with Raine & Horne, the lessor's agents, were in accordance with the lease provisions. She reported to Mr. Elder, who was supposed to check her calculations, although that does not seem to have been done with any great accuracy. While he was not a perfect witness, I am satisfied that he considered the rent reviews were to be on a basis of the greater of 8% compounded annually and the CPI on the ratchet basis. Even if that were incorrect I am satisfied no one whose knowledge would be that of Westpac knew of the lack of a ratchet clause in 1989.

16   The 1991 and 1993 reviews were calculated on the 8% compounded basis.

Action before auction - strange happenings

17   The property was advertised for auction to take place on 4 November 1993. The advertisements were a little misleading, but a major selling point was the lease to Westpac with "rental growth assured through annual increases of 8% or CPI whichever is greater."
18   A Sydney barrister, whom it is not necessary to name as he is neither a party nor a witness, was a customer of what was called in evidence the Westpac Private Bank. It was not suggested this was a separate entity but rather a part of the bank dealing with customers of some net worth. The barrister wrote on 21 October 1993 to Mr Bush, one of the executive managers at the private bank, seeking approval for a loan to a company which would be acquired and the shares in which would be owned in equal numbers by his family interests and those of a solicitor partner in Messrs Freehill Hollingdale and Page. He sent a copy of the lease to Mr. Bush pointing out that the rent review provisions were favourable to the tenant (a mistake for landlord). He pointed out that on each review the rent would increase by not less than 62% and included various tables showing that an 80% advance on a purchase price of $1.2 million would be repaid by March 2000 out of rent after tax and an advance on a purchase price of $1.4 million would be repaid by March 2001. There was further correspondence supporting this calculation.

19   Mr. Bush and his assistant Mr. Ryan, investigated the proposal. Mr. Ryan checked the rent claim with someone in the property department. The solicitor also checked with that department. Nobody at Westpac threw up their hands, in fact the opposite happened, Mr. Bush recommending that approval be given to the funding outside the general guidelines because the loan repayments could easily be met out of rent and the loan would be repaid over a short period. In recommending it for approval Mr. Bush said that part of the security should be a charge taken over the rent. Approval to the loan was given by Mr. Mayo, manager, NSW Commercial Credit Centre of Westpac, he stating that the factors which influenced the decision to proceed outside the normal guidelines were first, the quality of the tenant and second, the amortisation offered which would reduce the loan security ratio in a reasonable time.

20   This approved loan did not proceed presumably because the customers were outbid. Nevertheless the evidence is relied upon on the issues of knowledge, acquiescence and the question of construction.

Effect of the clause

21   Some remarkable figures are set out in evidence on the result of the strict construction of clause 2.02 even for the ten year period from 15 March 1995. Suffice it to say that taking forward estimates into account the estimated difference in rent over the ten year period between that which would be paid on the strict wording of clause 2.02 and that which would be paid otherwise, which for the most part has been calculated on the 8%, is a figure of over $9.5 million. Even more remarkable figures are shown for the total period of the lease from 1985 bringing about an estimated difference of $24 million.

Admissions

22   No affidavit or oral evidence was given by witnesses for the plaintiff. There were, however, some admissions made in verified answers to interrogatories. These were:

A. That Tanzone had knowledge of the rent clause prior to the auction.

B. That prior to settlement it knew how the rent was being paid and calculated, the approximate rental which would have been payable had the rent been determined in accordance with clause 2.02 and the difference between that paid and that which would have been payable on that basis.

C. That Tanzone believed prior to auction that the rent review clause entitled the lessor to increase the rent each review date on the basis that the fraction was calculated with the denominator remaining at the original figure.

Pleadings

23   In its defence to the plaintiff's claim for declarations as to entitlement Westpac raised issues on the construction of the lease and claims of estoppel by convention and by representation.

24   The construction issue is raised by paragraph 5 of the amended defence, Westpac saying in paragraph 5(c)

(c) … it was a term of the Lease inter alia that the yearly rent payable would be increased on and from each Review Date to an amount equal to the greater of:
(i) the amount of the rent payable immediately preceding the Review Date multiplied by 1.1664 (equivalent to 8% compounded annually); and
(ii) the amount of the rent payable immediately prior to the Review Date multiplied by X over Y where X is the Consumer Price Index Weighted Average Sydney All Groups Number for the quarter last preceding the Review Date and Y is the Consumer Price Index Weighted Average Sydney All Groups Number for the last quarter preceding the Date of Commencement of the term of this Lease in the case of the first Review Date and thereafter Y is the Consumer Price Index Weighted Average Sydney All Groups Number for the quarter preceding the last Review Date.

25   The defence based on conventional estoppel is founded on the claim that prior to the purchase by Tanzone, rent reviews were conducted on the basis that the ratchet approach was correct, that Tanzone knew of this, that both Tanzone and Westpac assumed that it would continue and that up to 14 March 1995, Tanzone adopted that course of dealing.

26   The defence based on estoppel by representation is claimed to arise through silence in Tanzone deliberately refraining from alerting Mr. Raymond or Westpac to the situation, while aware of their assumption as to the lease terms, the sale being conducted on those terms, and Tanzone acting so as to avoid any action being taken prior to auction or settlement to rectify the lease.

27 By its further amended cross-claim Westpac seeks first rectification, second an order under s87(1) of the Trade Practices Act 1974 (Cth) (the TPA) by reason of Tanzone having engaged in unconscionable conduct in breach of s51AA of the TPA, and third rescission for unilateral mistake.

28   So far as rectification is concerned, Tanzone having taken the reversion by assignment, Westpac claims it is entitled to rectification nevertheless by reason of much the same facts which are alleged to give rise to the estoppel defences, namely the knowledge in Tanzone of the mistaken belief of Westpac and the Raymonds as to the terms of the executed lease, the refraining by Tanzone from taking any steps which would result in the original parties to the lease becoming aware of their mistaken belief, and the knowledge that the property was being sold on the basis that the lease terms were as believed.

29 For much the same reasons it is claimed that Tanzone's claim to enforce the lease is unconscionable conduct in trade or commerce in contravention of s51AA of the TPA. Lastly, the claim for rescission of the lease is based on the same allegations. It is fair to say I cannot see how this claim could be made out as it would be impossible to restore the parties to the original position as in 1985. Nevertheless, so far as s87(1) of the Trade Practices Act is concerned an order could be made that the lease be declared void or perhaps rectified as from 16 December 1993.

30 In defence to the cross-claim, Tanzone says (a) that it has an indefeasible title to the property and the rights under the lease, this being acquired by registration; (b) that there can be no rectification because third party rights have intervened or been acquired after the lease was entered into, namely by Tanzone as purchaser and by Perpetual Trustee Company Limited as mortgagee; (c) that the lease has been affirmed by Westpac Banking Corporation, it having become aware of the true position in March 1995; (d) that the claim based on the TPA is barred by time and (e) that so far as relief other than rectification is claimed it is barred by laches, acquiescence and delay because prior to the auction Westpac was aware of all the circumstances relating to the rent review provisions, but took no steps to raise the problem or remedy it.

Construction of Lease

31   There is no ambiguity in clause 2.02 of the lease. Its words are perfectly clear. The question is whether these words lead to an absurd result looking at the situation in 1985. If they do then they should be construed so as to avoid the absurdity by supplying, omitting or correcting words. Watson v Phipps (1985) 60 ALJR 1; Fitzgerald v Masters (1956) 95 CLR 420 at 426 However, if the result of giving words a literal meaning is seen to be unreasonable that unreasonableness cannot be remedied through construing the words contrary to their true meaning. Australian Broadcasting Commission v Australian Performing Rights Association (1973) 129 CLR 99 at 199 and 214.

32   It is of course much easier to construe a document not in accordance with its words, if a mistake is so obvious that it can be rectified by including or deleting a word obviously left out or inserted such as "not". Secured Income Real Estate (Australia) Ltd v Martins Investments Pty. Ltd. (1979) 144 CLR 596; or by reading "inconsistent" as "consistent". Fitzgerald v Masters. It is not so easy to do so when the construction put forward requires the clause under discussion to be read as if the words "in the case of the first Review Date and thereafter Y as the Consumer Price Index Weighted Average Sydney All Groups Number for the quarter preceding the last Review Date" were added to it.

33   There is an obvious difference between supplying words without which the document is ineffective, such as in Lisciendro v The Official Trustee (1966) 139 ALR 689; or an intended right not created; Watson v Phipps, and the supplying of words to a document quite effective on its face.

34   While extraordinary results were shown on the evidence to arise on the assumption of particular inflation rates, that is not sufficient to carry the day. The review clause is workable, it is effective, and it is not contrary to any other provision of the lease. Perhaps the strongest evidence that it is not absurd is in the reaction of those in Westpac Private Bank when they were asked to approve an advance against the property supported by security the value of which depended upon the words being given their ordinary meaning. It seems to me that is the end of the absurdity claim.

Estoppel

35   The defence of estoppel by convention might possibly have been available if the Raymonds had in 1995 attempted to enforce the lease on its strict terms. However the fact Tanzone was aware of the prior course of dealing does not mean it assumed it would continue; in fact the evidence makes it quite clear its assumption was that it would not. The defence based on conventional estoppel fails.

36   The defence based upon estoppel by representation relied upon representation by silence. There is no evidence of any relationship or contact between Tanzone or Westpac prior to the action so it is impossible to see how Westpac could have relied upon Tanzone accepting its assumed position. Silence after purchase was immaterial as there was no review until 1995. This defence fails.

Claims under cross-claim

Claim for Rectification

37   I consider a claim for rectification would have succeeded as against the Raymonds. They are in fact cross-defendants to the cross-claim having been joined at the last moment and having filed a submitting appearance. It is, I think, clearly established that the wording of clause 2.02 does not reflect the intention of the parties. So far as Westpac was concerned its intention was formed at the time the option was entered into. It is perfectly clear on the evidence of Mr. Hunt and the evidence of Mr. Mair, that the intention was for a CPI ratchet provision as sought in the cross-claim for rectification. Nevertheless that does not determine the position, because the contract to enter into the lease, which included 2.02, was made upon exercise of the option by the Raymonds. They exercised that option on the understanding that the CPI alternative had a ratchet effect. The reviews for 1989, 1991 and 1993 were conducted on that basis. Had it been intended that the original CPI figure continued as the denominator in the fraction, the 1991 and 1993 reviews would not have been conducted on the 8% compound per annum basis. The intentions of both parties were the same, this is borne out by their evidence and by their conduct. There is no requirement for an expression of accord; NSW Medical Defence Union v Transport Industries Insurance Company Ltd (1986) 6 NSWLR 740. A case for rectification between original lessor and lessee is made out. That however is not what Westpac seeks because they seek to bind Tanzone, being a third party which has acquired the interest of the Raymonds.

Rectification against Tanzone

38   The fact that third party rights would be effected by an order for rectification is in most circumstances good reason for not ordering rectification, but it was not contended by counsel for Tanzone that there were not circumstances in which it was appropriate for an order for rectification to be made, which would bind third parties or bind persons not parties to the original agreement. Perpetual Trustee Company Limited has filed a submitting appearance. Its solicitor stated at a directions hearing it did not object to rectification.

39 The benefits of the lessee's covenants run with the land on sale of the reversion Conveyancing Act 1919 s117. That does not make the assignee of the reversion a contracting party with the original lessee. Nevertheless it was accepted, correctly, that although an equity of rectification of a lease is a "mere equity" it is available or would bind a purchaser taking with notice of the equity, perhaps because it is attached to an equitable interest in land; Smith v Jones [1954] 1 All ER 823 Downie v Lockwood [1965] VR 257; Equity and Law Life Assurance Society Limited v Coltness Group Limited (1983) 267 EG 949; Meagher Gummow & Lehane Equity Doctrines and Remedies 3rd Ed. 429. This is a somewhat difficult area to which I will need to return. The question is whether Tanzone took with notice of the right of rectification. In other words did it purchase with notice of a common mistake on the part of the Raymonds and Westpac, giving rise at least to a right in Westpac to seek rectification in the terms sought or to the same effect. I consider there is no doubt whatsoever that it took with such notice prior to completion, and I also consider that it took with such notice prior to purchase at auction. It was aware of the clause; a conversation between Mr. Madson and the Raymonds after the auction, of which detailed notes were taken, was extraordinary for what was not in it; Tanzone must have known prior to auction that the rent being paid was not calculated on the rights under clause 2.02 on its wording. The absence of any evidence from any officer of Tanzone enables one more readily to conclude that Tanzone was well aware of the mistake from the start, particularly as those persons interested in Tanzone were Mr. Madson, a very experienced property investor, Mr. Hall and Mr. & Mrs. Sperling, all three being solicitors. The non-admission of paragraph 9 of the cross-claim, while there was some attempt to explain that, reinforces my conclusion as does the failure to deny the accusations of Westpac in the first response to the March 1995 demand. I therefore conclude that on the principles of general law, leaving aside the question of indefeasibility, Tanzone having taken with knowledge of the common mistake and thus with notice of the right of rectification, an order for rectification of the lease could be made which would effect its interests under that lease as assignee of the reversion. That does not necessarily mean relief would be granted but it could be.

The effect of indefeasibility

40 In some ways this is the most difficult and the most interesting question to be determined in this action. Tanzone is registered proprietor of the property. Pursuant to s42(1) of the Real Property Act 1900 (RPA) and in the absence of fraud, it holds the land subject to such other estates and interests as are recorded in the folio of the register, but free from all other estates and interests not so recorded, except certain interests which are not relevant here. In addition as a person dealing with and taking a transfer from the registered proprietors, namely the Raymonds, of their interest in the property, Tanzone was not affected by any notice of any unregistered interest, except in the case of fraud, and knowledge of an unregistered interest is not in itself fraud. RPA s43.

41   First I shall deal with fraud. There was no conduct directed at the Raymonds, there was no fraud in obtaining registration of the transfer and even if subsequent conduct can amount to fraud, which is at least doubtful, there was no conduct to which this could apply.

42 Mr. Bathurst QC relied on s42 and s43 of the RPA to overcome any problems which might arise through a finding of notice. Mr. Macfarlan QC, senior counsel for Westpac argued that as Tanzone was aware of the mistake giving rise to a right of rectification in Westpac then had the lease been rectified an order would still have been made as between the Raymonds and Tanzone for specific performance of the contract of sale after rectification of the lease and therefore there was an obligation on the part of Tanzone to recognise the pre-existing interest of Westpac. That is probably right at least prior to registration, although the prior claim to rectification is a mere equity competing with an equitable interest. To some extent this argument was put on the basis that when a purchaser took under a contract subject to a lease, and that lease was noted on the register, then the purchase took subject to the equity of rectification of the lease, relying on Downie v Lockwood as authority of this proposition. It is important to understand, however, as was explained by McLelland CJ in Eq in Ong v Luong [1991] ANZ Conv R 596, that the decision in Downie was based on s42(2)(e) of the Transfer of Land Act 1958 (Vic) which excluded from the doctrine of indefeasibility "the interest of a tenant in possession of the land"; which was there held to include a claim for rectification on the basis that specific performance would have been ordered subject to that right. At page 599 in Ong, McLelland CJ said:

There is however no equivalent of s42(2)(e) of the Victorian Act in the New South Wales Real Property Act, and so the chain of reasoning in Downie can have no application in New South Wales. The only interest of the plaintiffs to which, as a matter of equity, the defendants could be held to be subject, was the interest specified in the contract of purchase, which was defined by reference to the instrument of lease and annexed thereto, on the true construction of which, as I have held, the leased property comprised only the lock up shop number 38.

43   The plaintiffs on the other hand relied on Downie and Ong to claim that the equity of rectification was an interest within the meaning of s43 of the RPA and that irrespective of notice Tanzone took free of that interest. At page 599 in Ong the then Chief Judge said:

Section 42 protects the defendants from any equity, such as an equity to rectification, arising between the plaintiffs and the predecessors in title of the defendants, and even if they were held to have had notice of any such equity prior to becoming a registered proprietor of the subject land (and this has not in my opinion been established) they are, by the express terms of s42(1) except in the case of fraud, not to be 'affected by notice direct or constructive of any unregistered interest, any rule of law or equity to the contrary not withstanding, and their knowledge that any such unregistered interest is in existence shall not of itself be imputed as fraud.

That was a case in which it was found that there was no knowledge of that interest and in fact it was found that there was no right of rectification in any event, even had it not been for the provisions of the RPA so that what was said was not strictly necessary for the decision. Nevertheless on general principles so far as Torrens land is concerned, one could have no argument with it although it will need further consideration.

44   This discussion led naturally to a detailed consideration of Bahr v Nicolay (No 2) (1988) 164 CLR 604. That case is authority for the proposition when applied to the facts of the present case that if, upon the true construction of clause 30(1) of the contract, there was an agreement to take the property subject to the lease on the terms attached to the contract and the right to rectification attaching that lease, then the lease as rectified would be the interest of the lessee, and if after obtaining registration that right of rectification were repudiated then either that conduct of repudiation would amount to fraud (see Mason CJ and Dawson J) or the act of repudiation would be so unconscionable that it would be declared the registered proprietor held the property upon trust to give effect to the lease as rectified (Wilson & Toohey JJ). In the present case, however, it could not be said, as it was in Bahr v Nicolay, that there was any such agreement. In fact as the intention was the opposite, no such term could possibly be implied. While a great deal of attention was given to those parts of the judgment dealing with notice of an unregistered interest and fraud, I do not consider that they apply here. None of the judgments goes so far as to say that an agreement to take subject to a lease implies an agreement to take subject to a right of rectification, the right to which and need for which is unknown to the transferor and the lessee from the transferor. It follows that I would not have held that the plaintiff in acquiring with notice of the mistake, was guilty of fraud in failing to recognise the right to rectification or that it was so unconscionable not to do so as to require the imposition of a trust. To do so would be to act contrary to the wording of the Act and cases such as Oetel v Hordern [1905] AC 176, Monro v Stewart 1924 [41] SR(NSW) 203; and Mills v Stokman (1967) 116 CLR 61.

45 A right of rectification is a "mere equity" as opposed to an equitable estate. It is therefore an interesting question as to whether the protection given to a registered proprietor by s42(1) and s43 of the RPA bears on this case at all. On general principle it would seem to be illogical and inimical to the whole theory of Torrens if there were protection against interests in land of which there was notice but no protection against lesser mere equities of which there was notice.

46   There are several ways of looking at this matter. It must be accepted that a right of rectification is a mere equity, all the books on equity say so. One can take the robust view as McLelland CJ in Equity did in Ong, saying that s42, except in the case of fraud and the specific exceptions, protects the registered proprietor against any equity; or one can accept the reasoning of Bryson J in Double Bay Newspapers Pty. Ltd. v A.W. Holdings Pty. Ltd. (1997) 42 NSWLR 409 that mere equities do not impinge on registered titles, at least where there is no notice, because they do not compete in priority claims with equitable interests, the equitable doctrine as to first in time going to competition among competing equitable interests.

47   Thus to put it in the words of Upjohn J in Westminster Bank Ltd v Lee [1956] 1 Ch 7 at 19 (following Cave v Cave (1880) 15 Ch D 637 and Phillips v Phillips (1861) 4 DeG F & J 208 and quoted by Bryson J in Double Bay Newspapers:

The defence of purchaser for value without notice may be available by the owner of an equitable estate against the holder of a prior equity.

This is because Phillips v Phillips and Cave v Cave , which Upjohn J followed, both held that in a competition between a purchaser without notice of an equitable estate and the holder of a prior equity of rectification the later in time could prevail over the former. All of this law depends upon a consideration of the effect of notice, it being clear that notice prior to purchase must defeat a claim for priority of the later equitable interest, just as it would defeat a claim involving common law title of a purchaser for value of the equitable estate, who gets in the legal estate.

48   As the effect of the Torrens System was to put a purchaser with notice who obtains registration of the transfer without fraud, in the same position as a bona fide purchaser of the legal estate without notice, or a bona fide purchaser of an equitable estate who gets in the legal estate after notice, then in my view the only sensible conclusion to be drawn is that unless there is some right in personam Tanzone takes free of the equity of rectification. In other words Tanzone holds free from some equity, not notified on the register, which can only exist through attachment to an interest in land.

Claim in personam

49   Indefeasibility does not bring to an end personal claims at law or in equity: Frazer v Walker [1967] 1 AC 561; Breskver v Wall (1971) 176 CLR 384; Bahr v Nicolay No. 2, and many other cases. For instance if the actions of Tanzone had given rise to some personal claim in the Raymonds, the fact that Tanzone had been registered as proprietor could not defeat that claim. Thus had Tanzone contracted with the Raymonds that it would recognise the right of Westpac to rectification, there is no reason to suppose such obligation would not be enforced in equity. While Bahr v Nicolay recognised the right of repurchase as a competing equitable interest, that was not stated to be determinative because there was no need to express any position on this. But as I have said the Raymonds had no idea of the mistake and it was not in their interest to require it to be acknowledged if they did know of it as that might have brought about an obligation to refund part of the purchase price. Thus the right of Westpac cannot flow through such right in the Raymonds, and any right must depend upon its having a direct claim in personam against Tanzone.

50   It is obvious that the Raymonds gained by Tanzone's knowledge, because on the evidence it seems clear they got more for the property than they would have got had the lease been rectified. But this is not a case of their standing by taking advantage of a mistake by Tanzone of which they were aware. They were not aware of the mistake so that it could not be said that there was "sharp practice" or dishonest practice as against the Raymonds entitling them to rectification on the ground of unilateral mistake as was obtained in cases such as Johnston v Arnabaldi (1990) 2 Qld R 138; or Johnstone v Commerce Consolidated Pty. Ltd. [1976] VR 463, which were referred to by Mr. Macfarlan.

51 There is a considerable body of case law and a lot of discussion devoted to the question of rights in personam and their inroads on indefeasibility. Many of the cases are discussed in articles by S. Robinson and D. Skapinker in 67 ALJ 355 and 68 ALJ 587 respectively. It is purposeless for a trial judge to attempt yet another explanation but one can hardly forbear to say that unfortunate facts seem sometimes to have given rise to unfortunate decisions, but that there now appears to have been movement back from the somewhat extreme decision in Mercantile Mutual Life Insurance Co. Limited v Gosper (1991) 25 NSWLR 32 which was referred to in argument, and it is clear there is no basis for a claim unless the facts give rise to a known legal or equitable cause of action: See Garofono v Reliance Finance Company Pty. Limited [1992] NSW Conv R 55/640 and Grgic v ANZ Banking Group Limited (1994) 33 NSWLR 202 at 220. Indeed if the view of Professor Butt Land Law 3rd Ed. 753 is correct that the only basis for the decision in Gosper, was the finding that there was no authority from Mrs. Gosper to the mortgagee to use the certificate of title for the purpose of obtaining registration of the variation of mortgage so that improper act gave rise to the cause of action, then while one must follow it, if it remains binding, that result is I should point out with respect very surprising. That is because first hard to see how an equity could have been raised had a forged authority been obtained; it is hard to see how an equity could have been raised; second for many years variations were registered on the mortgage which the mortgagee was entitled to hold, not on the certificate of title or the folio identifier and it could not be said the mortgagee had no implied authority to register a variation on the mortgage so that there could be no reason for thinking that a new practice of registration on the certificate of title should alter that situation; and third, as judges are supposed to be aware of conveyancing practices (see Waltons Stores (Interstate) Ltd v Maher(1988) 164 CLR 387 at 435 it is reasonable for one who has acted on hundreds of variations to say that never in his experience in acting for a mortgagor has he been asked for or required to produce an authority for the use of the certificate of title to register the variation, nor when acting for a mortgagee, has he ever asked for any such authority which is obviously registered. The only purpose in saying this is to point out that movement back seems to be based on the desirability of greater certainty not attainable if rights pursued are not within any known cause of action.

52 In the instant case there is of course a known action for rectification. Is it available? The purpose and effect of the abolition of the effect of notice brought about through s43 of the Real Property Act cannot be defeated by some cause of action which relies on notice for its existence. Thus it is accepted that rectification can be ordered against a successor in title to a lessor, who took with knowledge of the mistake if Old System land is involved. But that cannot in itself be sufficient where Torrens Titles are at issue. Thus what Bahr v Nicolay establishes, is that while notice itself cannot lead to a right in personam, notice together with an agreement to be bound by the interest can amount to unconscionable conduct justifying relief. When this is applied to the facts in the present case, I do not consider a case for relief by way of rectification is made out. There was no express or implied agreement to recognise the claim for rectification and there was no suggestion to the Raymonds or to Westpac that such right existed. The Raymonds had no idea of the mistake, while Westpac proceeded with knowledge of the facts but no apparent understanding of or regard to the mistake. Tanzone did not take advantage of the Raymonds because while Tanzone knew the property was worth more with the lease as it stood than with what was intended the Raymonds could not have taken advantage of this. And to refuse to be bound by an unregistered lease could conceivable cause loss similar to the apparent loss to Westpac here. Many purchasers make use of knowledge which will result in disadvantage to persons other than vendors. If this position seems hard, then the Torrens System requires that at times to make it effective. In any event it must be borne in mind that had the customers of Westpac Private Bank purchased the property, Westpac could have made no complaint about the lease terms, it having agreed to lend on the rights those terms gave to the lessor. In other words any possible claim for rectification arose through good luck and not good management

Rectification for unilateral mistake

53   This was pleaded as a separate claim under paragraph 12A of the cross-claim. Insofar as I have not already covered it there are two reasons why I consider such a claim must fail. The first is that Tanzone was not a party to the original lease, so that it could not be said that it engaged in unconscionable conduct in letting the mistake occur with knowledge of it; the second is that the Raymonds were not responsible for the mistake. The ground of the claim would have to be that the conduct of Tanzone in failing to bring to the attention of Westpac its mistake and its right to rectification amounted to unconscionable conduct, giving rise to a right to rectification. None of the cases referred to me would extend the principle upon which rectification is granted for unilateral mistake so far. These include Taylor v Johnson (1983) 151 CLR 422; Tutt v Doyle (1992) 42 NSWLR 10; and Tercerioro v Milne {1997] BCR 5733.

Unconscionable conduct s51AA of the Trade Practices Act 1974 (Cth)

54 Section 51AA is as follows:

(1) A corporation must not, in trade or commerce, engage in conduct that is unconscionable within the meaning of the unwritten law, from time to time, of the States and Territories.

(2) This section does not apply to conduct that is prohibited by section 51AB or 51AC.

55   It was not argued that if there were conduct to which the section otherwise applied it was not in trade or commerce. In essence what is claimed is that Tanzone, in taking title with notice of the mistake, engaged in unconscionable conduct by taking advantage of the mistake. It is very difficult to conceive how a major financial institution can be in a position of special disadvantage of the sort generally required to bring entitlement to relief for unconscionable conduct. When ignorance is referred to in Bromley v Ryan (1956) 99 CLR 362 at 415 it is as part of the general incapacity of a party to a transaction. In this case ignorance arose, if it arose at all, through an extraordinary blindness to revealed facts. And usually unconscionable conduct requires the party under the disability to have been in direct relationship with the oppressor so that there is some inequality of position or power between them. Thus unconscionable conduct often involves the insistence upon legal rights "to take the benefit of another's vulnerability in a way that is unreasonable and oppressive to an extent that offends ordinary minimum standards of fair dealing". Commonwealth v Verwayen (1990) 170 CLR 394 at 441; or in circumstances such a those which arose in Bahr v Nicolay refusing to acknowledge a right having been found to have been agreed to be bound by that right. The facts of the case do not bring it within either of these principles. In addition, s51AA cannot in my view be used as a means to defeat indefeasible title by an attack from flank. That is because s51AA must be directed to conduct which would, under State law, give rise to a right to relief. In some respects it may do little more than extend the range of remedies available under State law. Thus this claims fails.

Rescission

56   An order for rescission was sought in the cross-claim on the ground of unilateral mistake. It was never explained to me how such a right could arise. The mistake in the lease was not a unilateral mistake which could give rise to relief under the principle in Taylor v Johnson. It is not possible to restore the parties to the lease, namely Raymond and Westpac, to the position they were in at the commencement of the lease. It was not suggested it was possible. The claim must fail.

Trade Practices Act - Limitation defence - and claim relief should be refused as matter of discretion

57 Although in view of my decision it is not necessary to deal with the special defences raised it may be desirable if I do so shortly. The plaintiff has sought an injunction under s80 and additional relief under s87(1). The limitation periods of two and three years provided in s87(1CA) apply only to applications for orders under s87(1A). It has been argued that this is a mistake which occurred as a result of legislative amendments. Whether or not that is so it seems to me that the wording is perfectly clear and thus I must differ from the conclusion of Pincus J in Calmao Pty. Ltd. v Stradbroke Waters Co-Owners Co-Operative Society Limited (1989) 21 FCR 28. I have little doubt that what was intended was to carry forward the three year limitation period which applies to s82 claims to s87 claims, other than those for unconscionable conduct under Part IVA and to have a two year limitation period for those latter claims. It is quite unsatisfactory not to have a fixed period for a s87(1) claim, but that is the position as it now exists. A discretion to grant or refuse relief makes for undesirable uncertainty. However the defence based on the statutory limitation fails.

58 Westpac has been aware of the claim of Tanzone since at the latest, April 1995. The cross-claim was filed on 18 February 1999, and relevant sought relief under s87(1A); the further amended cross-claim seeking the relief under s87(1) coupled with an injunction was filed on 19 April 1999. While it is clear that Westpac contended that the true construction of the lease, or in the alternative the intended meaning was not that incorporated in the actual words of clause 2.02, there is no evidence that any suggestion of conduct in breach of Part IVA was raised prior to the cross-claim being filed at which time the claim as then made under s87(1A) would have been barred. While the amendment got over the statutory time bar there remains a discretion under s87(1). I am of the view that in the circumstances which arise here it would not be proper to allow the claim to be brought. The party seeking relief of the nature sought here ought to act promptly and not to stand by waiting to see whether a claim made will be enforced by litigation. In this case the position in my view is that the court would not grant an injunction unless some order under s87(2) were made. The plaintiff is seeking a declaration as to its rights, but the real subject of litigation is the claims in the cross-claim. The relief that Westpac really seeks is an order under s87(2)(b) that the lease take effect from 16 December 1993 as if it were rectified as sought. It could not readily be rescinded from that date in view of the payments made. While I accept that there is no unconscionable conduct until an intention to act in the manner complained of is notified, I do not accept that, if there is a limitation period, time does not begin to run until legal proceedings are commenced and on one argument, completed. Had there been a limitation period then in my view time would have commenced to run in April 1995. If it had been necessary to determine the matter I would, in exercise of discretion, have refused relief under s87(1) of the TPA.

59 There is also raised as a separate matter the defence the claim that relief under the TPA should be refused as a matter of discretion because:

on or from 22 May 1989 and at the latest in October 1993 and prior to the auction that Westpac was aware of all the circumstances of and concerning what it now alleges to be an error in the lease and did not raise it .

It is clear from some pencilled notes on Exhibit F that Ms Loughran must have given some consideration to the literal meaning of the review clause as one of the calculations she did in calculating the 1989 review figures used the original CPI figure as the denominator, but it has not been established that anyone else was aware of this or that she thought that was a correct calculation or understood its import. I am however satisfied that Westpac was aware of all the facts prior to the auction. They had been presented with startling clarity to the private bank at a senior level. There is no evidence that the private bank was any more a separate entity that any major branch. Knowledge of Mr. Bush and Mr. Mair was knowledge in the bank. Westpac had knowledge of all the facts which would have enabled it to understand it had a right of rectification provided of course that it could establish a common intention of the Raymonds. With that knowledge it allowed the auction to proceed. It could not be said that in doing so it affirmed the lease as executed, although had its client purchased it must have failed in an action for rectification. Tanzone did not know of Westpac's knowledge, or rely on it. As it is not necessary to decide what effect Westpac's knowledge but lack of understanding should have on this discretionary decision I do not do so.

Laches and acquiescence, lack of clean hands and affirmation

60   It was not argued by Mr. Bathurst that laches and acquiescence was a defence to the claim for rectification. It was not raised in reply to estoppel defences.

61 It is pleaded as a defence to the claim for equitable relief. Thus it must be restricted to rescission because the claim under s51AA of the TPA is for statutory relief not equitable relief. As it is clear that claim for rescission must fail it is not necessary to consider this further.

62   No argument was addressed to a defence of lack of clean hands, so I do not deal with it. Affirmation was raised on the basis that since March 1995, Westpac has remained in occupation, taken the benefits as tenant and lodged a caveat to protect its interest. It has since March asserted the words did not convey the true intention. There was no affirmation of the lease on its terms.

Conclusion

63   The plaintiff is entitled to succeed on its claim for rent and removal of the caveat. The cross-claim should be dismissed. In coming to this conclusion in this difficult case I am aware that the result may seem unfair even if to some extent self inflicted. However, purchasers of land often know of a hidden value of which alters who will be affected do not know. The court is not a court of morals. The conclusion is reached without expression of a view as to the conduct involved, except so far as it bears on the claims in the cross claim. The parties can calculate the interest and I will give judgment. Westpac must pay the costs of the proceedings, those of the submitting cross-defendants on that basis.

Last Modified: 06/11/1999