Wu v Statewide Developments Pty Ltd

[2010] NSWSC 1016

CITATION:	Wu & Anor v Statewide Developments Pty Ltd [2010] NSWSC 1016
HEARING DATE(S):	30 August to 2 September 2010
JUDGMENT DATE :	10 September 2010
JURISDICTION:	Equity Division
JUDGMENT OF:	Palmer J
DECISION:	Declaration that Plaintiffs validly rescinded contract and consequential orders.
CATCHWORDS:	CONVEYANCING – CONTRACT FOR SALE – RESCISSION – ELECTION – WAIVER – before completion of contract, vendor creates restrictive covenant on title giving effect to an Environmental Management Plan, to ensure that soil contamination is properly managed – whether covenant detrimentally affects property to a substantial extent – whether purchasers entitled to rescind in accordance with contractual term – whether, after valid rescission, purchasers could elect to affirm contract. - DAMAGES – vendor holds property for three years after rescission of contract – whether vendor can recover as damages mortgage payments and holding charges incurred.
LEGISLATION CITED:	Conveyancing Act 1919 (NSW) – s 55(2A), s 88B
CATEGORY:	Principal judgment
CASES CITED:	- Agricultural & Rural Finance Pty Ltd v Gardiner (2008) 238 CLR 570 - Commonwealth v Verwayen (1990) 170 CLR 394 - Hadley v Baxendale (1854) 9 Exch 341, 156 ER 145 - Havyn Pty Ltd v Webster [2005] NSWCA 182 - Higgins v Statewide Developments Pty Ltd [2010] NSWSC 183 - Nassif v Caminer [2009] NSWCA 45 - Romanos v Pentagold Investments Pty Ltd (2003) 217 CLR 367
PARTIES:	Da Hui Wu (First Plaintiff/1st Cross Defendant) Jing Jing Li (Second Plaintiff/2nd Cross Defendant) Statewide Developments Pty Ltd (Defendant/Cross Claimant)
FILE NUMBER(S):	SC 2007/254837
COUNSEL:	S.P. Brennan (Plaintiffs/Cross Defendants) J. Stoljar SC, Ms J. Taylor (Defendant/Cross Claimant)
SOLICITORS:	Gregory J. Goold (Plaintiffs/Cross Defendants) Mallesons Stephen Jaques (Defendant/Cross Claimant)

07/254837 Wu & Anor v Statewide Developments Pty Ltd

JUDGMENT

10 September, 2010

Introduction

1 On 6 July 2006, the Plaintiffs entered into a contract to purchase from the Defendant a three bedroom unit in Building G of a large development in the course of construction at Rhodes. The contract price was $880,000 and the Plaintiffs paid a deposit of $88,000 on exchange.

2 In these proceedings the Plaintiffs seek primarily a declaration that they have validly rescinded the contract and they claim consequential orders. In the alternative, they seek an order under s 55(2A) Conveyancing Act 1919 (NSW), for the return of the deposit.

3 The Defendant seeks a declaration that it, not the Plaintiffs, has validly rescinded the contract for the Plaintiffs’ breach. It says that the deposit of $88,000 is forfeited to it. In addition, the Defendant seeks damages. It has been unable to sell the home unit in the period of more than three years since, on both parties’ assertions, the contract was rescinded. The Defendant seeks damages for the holding costs of the unit, amounting to $264,555.61.

4 There is virtually no dispute as to the underlying facts. Most are apparent from contemporaneous documents. There are no issues which depend upon findings as to the credit of witnesses.

Facts

5 The subject unit, Unit 304G, is located in Building G on the site, which is called “Sol Rio”. The whole of the land on which the project is constructed was formerly used for industrial purposes and was contaminated by industrial pollutants. The Development Consent granted for the Defendant’s development required remediation of the land to make it suitable for residential use.

6 A Site Auditor, Dr Ian Swane, of Environmental Resources Management (ERM) was retained to monitor the remediation being carried out by the Defendant in order to certify that each step had been carried out properly. The whole project is divided into two stages, Stage 1 and Stage 2. There has been no problem with remediation work carried out on Stage 1. The problem has arisen with the remediation work carried out on Stage 2.

7 Clause 22.19 of the Contract for Sale disclosed that the Environmental Protection Authority had declared land forming part of overall development site to be “unhealthy building land”. Paragraph (d) of that clause stated:

“the vendor has commissioned environmental consultants to carry out remediation works on the Development Site, and prepare a validation report. It is anticipated that the program of remediation will take approximately 2 years to complete once commenced; …”

8 The report commissioned by the Defendant referred to in Clause 22.19(d) of the contract was delivered in the form of an Environmental Management Plan (EMP) by Dr Swane on 20 November 2006. The EMP stated:

“While ERM consider the remedial works were extensive, addressed all identified areas of concern, and ERM witnessed all final excavations in the Stage 2 area and had no knowledge of remaining contamination, the Site Auditor (Dr Ian Swane) considers there is a possibility of contamination remaining under the concrete building slab and/or pavements in the Stage 2 area due to the fact that ERM was not present onsite during all works. The Site Auditor considers data gaps to exist in the documentation associated with the remediation and validation of the Stage 2 area as a result. … Consequently, the Site Auditor requested an Environmental Management Plan (EMP) outlining procedures for managing the Stage 2 area of the Site in a way that will minimise exposure of site users to potentially contaminated soils that may be present beneath the concrete building slab.

The main chemicals of concern as identified in the investigation that could be present in soils include dioxins, hexachlorobenzene (HCB), organochlorine pesticides (OCP), other chlorinated hydrocarbons and polycyclic aromatic hydrocarbons (PAHs). As shown in the various validation reports (Section 1.4), however, samples taken across the site show these chemicals to be within levels of acceptable risk for the scenario of high-rise residential development with soils being beneath concrete slabs.

The majority of the Site is to be used for high-rise residential land-use with minimal access to soil, which is to be owned under many strata titles controlled by a single Body Corporate. A strip along the southern boundary of the Site is to be handed over to the Department of Planning and Canada Bay Council as a public cycleway and the northern part of the Stage 2 area is to be handed over to Canada Bay Council to allow the extension of Gauthorpe Street. This EMP has been prepared so that future users of the Site are aware that there may be potentially contaminated soils and that appropriate action can be implemented if and when exposure to these soils occurs. The EMP shall be appended to the Section 149 certificate relevant to the Lots and Deposited Plans that comprise the site. Consequently, any future works required on any lots covered by this EMP shall have conditions imposed by Canada Bay Council requiring that this EMP be implemented.

The concrete slab referred to is the slab which forms the basement floor of Building G.

9 In November 2006, the Defendant applied to the Land & Environment Court for orders modifying the terms of the Development Consent, as they then were, to incorporate the EMP so that construction on Stage 2 would then be in accordance with the Development Consent. One of the Plaintiffs, Mr Wu, and some other purchasers of units in the Stage 2 area were given leave by the Land & Environment Court to appear as intervenors in the proceedings. Their principal concern was as to the amount which should be provided by the Defendant to pay for the costs of inspection of the concrete slab, in accordance with the EMP, and also to pay for any costs of repair and maintenance of the slab.

10 On 24 January the Land & Environment Court approved modifications to the Development Consent. One of the modifications was to insert new conditions, including the following:

“Statewide Developments Pty Limited is responsible to:

(a) prior to issue of the Occupation Certificate, deposit with Gadens Lawyers an amount of $50,000.00, being the estimated cost of complying with the Environmental Management Plan prepared by ERM and dated November 2006 for the life of the development. On registration of the strata plan for SP77916, the amount is to be paid to the owners corporation for SP77916 to be held on trust for the owners corporations of SP77916 and SP77949 and the owners of Building F and to be disbursed for the purposes only of this condition; and

(b) amend the by-laws for SP77916 to provide that this amount is to be disbursed only by the owner’s corporation for the purpose outlined in (a) above; and

(c) ensure that a restriction as to user burdening each of the common property for SP77916, SP77949, SP77457 and lots created by the subdivision of Lot 11 in DP1097776, in the form of the draft instrument marked ‘A’ attached is registered over those parts of lots 1, 5, 10, 11, 13 and 15 DP1097776 shown in the plan marked ‘B’ attached. The instrument and plan may be varied as to form if required and only to the extent necessary to satisfy the registration requirements of LPI (NSW).”

11 In accordance with the Land & Environment Court’s orders, the EMP was registered in the Deed Register of the Land and Property Information Service on 31 January 2007. On 13 February 2007 DP 1108728 was registered. By the registration of the Deposited Plan and pursuant to s 88B Conveyancing Act the Common Property and the lots in the strata plan for Building G were burdened with the following restrictive covenant (the Covenant):

“1 Terms of restriction on use numbered 1 in the Plan

1.1 the Owner of the Lot Burdened must not:


(a) carry out any works on (or allow any disturbance of) that part of the Lot Burdened shown on the Plan other than in accordance with the Environmental Management Plan prepared by ERM dated November 2006 (ref No.0033877EMPV05) registered in book 4508 no.663 in the General Register of Deeds or modification of it pursuant to the Environmental Planning & Assessment Act 1979 (NSW) (‘Environmental Management plan’); and

(b) if the structures erected on that part of the Lot Burdened shown on the Plan are damaged or destroyed such that the soil below the structures is exposed or made accessible, the Owner of the Lot Burdened must not use or occupy (or allow use or occupation) of that part of the Lot Burdened until the structures are repaired or replaced in the manner required under the Environmental Management Plan; and

(c) impede access to that part of the Lot Burdened shown on the plan by Owners of the Lot Benefited for the purposes of carrying out an inspection of the relevant part of the Lot Burdened as required by the Environmental Management Plan.

Name of the person empowered to release, vary or modify the Restriction on Use numbered 1 in the Plan:
The Minister administering the Environmental Planning & Assessment Act 1979 (NSW).”

12 Clause 23 of the contract provided:

“ 23.3 Detrimental affect

If:

(a) any easement, restriction on use or positive covenant is created;

(b) any lease, agreement or arrangement is entered into or made;

(c) any right or privilege is granted; or

(d) any land is dedicated,

which detrimentally affects the property to a substantial extent prior to completion, the purchaser may rescind by written notice to the vendor within seven days after the earlier of:

(e) the day that the vendor notifies the purchaser of the creation of the easement, restriction on use or positive covenant, the entry into or making of the lease, agreement or arrangement, the grant of the right or privilege or the dedication of the land which gave the purchaser the right to rescind ; and

(f) the day that the vendor serves the Vendor’s Notice, if the document is lodged for registration with the Strata Plan.”

13 On 7 March 2007, the Defendant’s solicitors wrote to the Plaintiffs’ solicitors requiring settlement of the contract on 21 March 2007. The letter commenced:

“We notify you pursuant to the Contract for Sale that the strata plan for the property has been registered at the Land and Property Information Service.”

There was no reference in that letter to the creation of the Covenant, as required under Clause 23.3(e) of the contract but such express reference was not necessary because the letter clearly was a “Vendor’s Notice” as defined in Clause 65.1 and Clause 31.1 of the contract and therefore fell within Clause 23.3(f). The seven day limitation period for rescission under Clause 23.3 was, therefore, set running by service of the 7 March letter.

14 On 13 March 2007, the Plaintiffs’ solicitors sent to the Defendant’s solicitors a facsimile letter, the relevant part of which is:

“Our clients hereby rescind the Contract by reason of the following grounds:

a. Pursuant to Clause 23.3 of the Contract on the basis that a restriction of use or positive covenant has been created (pursuant to the order of the Land and Environment Court (NSW) made on 24 January 2007 in proceedings 11628 of 2003) which detrimentally affects the property to a substantial extent.”

15 The facsimile letter was received by the Defendant’s solicitors on 14 March 2007. There is no dispute that the letter was received within the time limit provided by Clause 23.3 of the contract, and that the letter was effective to rescind the contract if the Covenant in fact “detrimentally affects the property to a substantial extent”. Whether the Covenant has that character is one of the principal issues in this case.

16 By another facsimile sent on 13 March 2007 to the Defendant’s solicitors, the Plaintiffs’ solicitors requested the return of the deposit paid under the contract.

17 The settlement date for the contract, 31 March 2007, passed without response by the Defendant’s solicitors to the Plaintiffs’ notice of rescission.

18 On 3 April 2007, the Defendant’s solicitors wrote to the Plaintiffs’ solicitors rejecting the Plaintiffs’ contention that the contract had been rescinded.

19 On 12 April 2007, the Defendant’s solicitors served a Notice to Complete fixing the time for settlement of the contract on 27 April 2007 at 3pm.

20 It was about this time that the Plaintiffs’ solicitors advised the Plaintiffs that they could no longer act in the matter by reason of potential conflicts. On 16 April 2007, the First Plaintiff, Mr Wu, who was then without a solicitor, sent an e-mail to the Defendant’s agent in the following terms:

“Hi, Al
What’s update now with vendor finance? Please advise.”

Mr Wu says that this e-mail referred to finance he had been hoping to procure from the Defendant for the purchase of the unit.

21 On 24 April 2007, Mr Wu sent an e-mail to the Defendant’s agent in the following terms:

“Hi, Al
What’s happening, please advise, due to the final completion date due on 27/04/2007, could you please extinction [sic – probably “seek extension”] for 2-3 weeks more enable me to re-approve the finance again”

22 Mr Wu says that, because the Plaintiffs did not then have a solicitor, he was seeking an extension of time for completion in order to explore the options open to the Plaintiffs – whether they would proceed with the purchase, if they could obtain finance, or rely on their rescission of the contract regardless of whether finance was available. The Plaintiffs did not, however, make known to the Defendant or its agent the reasons for seeking the extension of time.

23 One of the major issues in the case is whether Mr Wu’s e-mail of 24 April 2007 constituted a waiver or election by the Plaintiffs, so that they remained bound by the contract and by the Notice to Complete sent on 12 April 2007.

24 On 26 April 2007, the Defendant’s agent advised Mr Wu by e-mail that the Defendant had granted an extension of time of two weeks for compliance with the Notice to Complete. The Defendant, in its Amended Defence, relied upon Mr Wu’s request for an extension of time and the Defendant’s grant of that request as founding an estoppel preventing the Plaintiffs from relying upon their purported rescission of the contract on 13 March. However, in his closing submissions, Mr Stoljar SC who appears for the Defendant with Ms Taylor of Counsel, expressly abandoned estoppel as a ground of defence.

25 The Plaintiffs did not comply with the Notice to Complete and on 28 June 2007 the Defendant’s solicitors served a notice purporting to terminate the contract for breach by the Plaintiffs.

26 Between 28 June 2007 and 2 August 2010, a short time before the trial commenced, the unit remained unsold. The Defendant says that it used its best endeavours to sell the unit in order to mitigate its loss under the contract, but there was simply no market for three bedroom units at the time. It says that it can only sell the unit if it divides it into two units – a two bedroom unit and a one bedroom unit. It has now exchanged Contracts for Sale “off the plan” of the proposed two bedroom unit; the proposed one bedroom unit has not yet been sold.

27 By its Cross Claim, the Defendant claims:

– forfeiture of the deposit of $88,000 and interest thereon accrued from 6 July 2007;

– in addition, damages for a capital loss represented by the difference between the contract price of $880,000 and the nett amount obtained, or likely to be obtained, on resale of the unit ($720,080) – $159,920;

– in the alternative, damages for a capital loss represented by the difference between the contract price of $880,000 and the market value of the unit as at the date of judgment ($750,000) – $130,000;

– in addition, damages in an amount equal to the interest paid by the Defendant to its financiers on the outstanding balance of the contract price from the date of settlement under the Notice to Complete until the date of judgment –$236,836.60

– in addition, holding costs of the unit, such as council and water rates, land tax, body corporate strata fees and so on to the date of judgment – $27,725.01;

– less nett rent received from the unit – $72,531.

The Defendant’s claim for damages in addition to forfeiture of the deposit is, therefore, at minimum $322,024.61 and at maximum $351,944.61.

28 The Plaintiffs do not dispute the calculation of these figures. They say, firstly, that they are not liable for damages at all because they have validly rescinded the contract. Secondly, they say that if they are liable at all, the damages claimed are too remote. Thirdly, they say that the Defendant has not made any reasonable endeavour to mitigate its loss.

The issues

29 The issues may be summarised thus:

– did the Covenant “detrimentally affect the property to a substantial extent” ;

– was the contract validly rescinded by the Plaintiffs on 13 March 2007;

– if yes, did the Plaintiffs waive their rescission or elect to affirm the contract by the e­-mail sent by Mr Wu on 24 April 2007;

– was the Defendant’s Notice to Complete valid and effective;

– did the Defendant validly terminate the contract on 28 June 2007 for the Plaintiffs’ failure to comply with the Notice to Complete;

– if yes:

is the Defendant entitled to any, and if so what, damages under the headings claimed;

should return of the deposit to the Plaintiffs be ordered under s 55(2A) Conveyancing Act .

Effect of the Covenant

30 Mr S. Brennan of Counsel, who appears for the Plaintiffs, contends that whether the Covenant detrimentally affects the property to a substantial extent is to be ascertained by reference to the subjective views of the Plaintiffs as well as to objective evidence to the effect which the Covenant would have on prospective purchasers generally. Mr Stoljar SC submits that only objective evidence is relevant. He says, correctly, that the question is “what is the effect of the Covenant on the property”, not “what is its effect on the Plaintiffs”.

31 However, in my view, the evidence of the Plaintiffs’ subjective views, while far from determinative, may be weighed with all of the other evidence as to probable market reaction in determining the effect of the Covenant on the property.

32 The First Plaintiff, Mr Wu, says that prior to entering into the contract he was aware that the Rhodes Peninsula had a history of industrial use. The contract had made it clear to him that the Defendant had the responsibility to remediate the soil on the project site. He says, and I accept, that at the time he entered into the contract he had no reason to think that the project, when completed, would have any restrictions on use or ongoing requirements concerned with residual contamination of the site.

33 Mr Wu says that, after he learned of the Covenant, he became worried about the safety of the property and the effect of the Covenant on the value of the unit which he was buying. He says:

“I do not have any training in chemistry or biology. I am unaware of the details of the contaminants underneath the building and I do not know with certainty that it would be safe to live in the building. Especially I worry it might be bad for my children or my wife if pregnant. Because the building needs to be inspected every year I know something must be serious. I worry that new scientific discoveries will be made about the safety of industrial waste and that the building could be affected by the need to do further remediation work or further stigmatised by peoples opinions about the safety of certain chemicals.

I do not feel good about living in the building and would like to live somewhere else.”

This evidence was not weakened in cross examination.

34 The Second Plaintiff, Ms Li, is Mr Wu’s partner and they have two young children. Ms Li says:

“I am aware that there is a concern over contamination and that the building needs yearly inspections for contamination. This makes me concerned that the health of people living there may be put at risk, particularly the health of my children.

I do not have training in chemistry or biology and do not understand the problems, but I feel anxious about taking any risks. I would not feel good living in the building and would prefer to live somewhere else. I also do not think that a contaminated building would be a good investment and I worry about the effect of this case on the financial future of our family. If we were forced to buy the unit, I would always be worried that we would be unable to sell it at a reasonable price if we wanted to.”

Again, this evidence was not weakened in cross examination.

35 The Defendant lays heavy emphasis on the fact that, in Dr Swane’s opinion, the risk to health and safety posed by residual contamination in Stage 2 is “extremely remote”. The Defendant says that, having regard to the remoteness of risk of danger, the market would not be deterred in the least by the presence of the Covenant on the title.

36 I am unable to accept this approach. It is true that if one delves into Dr Swane’s report and if one reads the judgment of the Land & Environment Court determining to amend the Development Consent, one would arrive at the conclusion that the risk to health and safety from residual contamination in Stage 2 is remote. However, I do not think that it can be assumed that every prospective purchaser and his or her solicitor who discovers the Covenant on the title to the Plaintiffs’ unit before entering into a contract to purchase it will research the background to the Covenant by finding and reading, not only the EMP, but also Dr Swane’s audit report and the Land & Environment Court’s decision. What will appear simply on a reading of the terms of the Covenant itself is that the property is affected by an EMP which is obviously to do with soil contamination and that the site on which Building G is erected must be inspected regularly by the authorities to assess the risk of contamination (whatever that risk might be).

37 In short, I think that the effect of the Covenant on the property is to be assessed on the basis that the hypothetical reasonable prospective purchaser, properly advised by his or her solicitor, will probably not investigate the degree of risk to health and the degree of risk of financial burden involved in the purchase beyond considering the terms of the Covenant itself and of the EMP.

38 A reader of the EMP would not conclude that the risks of contamination are “extremely remote”, even though this may be the view of Dr Swane stated elsewhere. The reader of the EMP would find only that “there is a possibility of contamination”, the degree of possibility not being made apparent: see para [8].

Expert evidence

39 I turn now to the expert evidence as to the effect of the Covenant on the market for the property. The two valuers who were called put forward polarically opposed views. Mr Wotton, who was called by the Plaintiffs, was of the view that the Defendant had been unable to sell Unit 304G, and other units in Building G similarly affected by the Covenant, for three years for a number of reasons, including the adverse impact of the Covenant. Mr Paris, who was called by the Defendant, was of the view that there had been very few sales of units in Building G since March 2007 because there had simply been no market `for three bedroom units.

40 I prefer the evidence of Mr Wotton on this issue for the following reasons.

41 Mr Wotton regarded Unit 304G, in terms of its location, views and standard of construction, as quite desirable and marketable. However, he said:

“68. The notation on the Folio Identifier to the Common Property to the Strata Plan is an undesirable factor that in my view will cause considerable adverse impact on the desirability of these apartments. Any reasonable purchaser viewing the notation on title and then examining the Restriction as noted within the Section 88B instrument of the Deposited Plan would be concerned about the references in the Restriction to an Environmental Plan prepared by ERM, together with the liability to undertake works to the building structure should damage occur to permit soil below the structures become exposed or made accessible.

69. The Planning Certificate includes a notation in Item 10 that is undesirable and in my view would be a deterrent to potential purchasers. The indication is that this property has some form of contamination which needs to be monitored.

70. There has been considerable development of residential apartment buildings in the Rhodes area and extensive supply of new apartments has been available to the market.

71. Purchasers of new apartments in the Rhodes area have had a considerable supply of apartments from which to choose a dwelling suited to their needs.

72. This large volume of supply has given purchasers the ability to be selective as to the apartment which they most desire.

73. A purchaser of an apartment in the Rhodes area in March 2007 would have a wide choice of dwellings from which to select a suitable dwelling.

74. There were a number of opportunities available in the area for apartments in buildings which did not have similar contamination clauses within the Folio Identifier to the Common Property or on the Planning Certificate.

75. The fact that contamination may exist in the site and this contamination is noted in a document and which also has an Environmental Management Plan would be sufficient to deter most if not all purchasers from proceedings with a purchase in this locality.”

42 Mr Wotton supported his view by reference to sales of other units in the area which he regarded as comparable in terms of location and size, but which were not affected by a covenant such as the Covenant in this case: for example at paragraph 76 of his report he referred to sales of units in a building at Walker Street, Rhodes, many of which had living areas very close to that of Unit 304G, i.e. 100m².

43 Mr Wotton noted that there had been very few sales of units in Building G. At the time that he had prepared his report, in July 2009, there had only been six sales of units in Building G – which has twenty-five units – since the Defendant began selling off the plan in 2003. Only three of those sales had been made since registration of the Covenant on the title to the common property in February 2007. The percentage of sales in Buildings B, C and D, which are not affected by any covenant relating to an EMP, ranged between 75% and 86%, whereas the percentage of sales of units in Building G was 25%.

44 Mr Wotton frankly acknowledged that no clear picture of market reaction to the Covenant could be drawn from sales patterns for units either in the Defendant’s project or in nearby projects. He acknowledged that there had been other factors at work in the marketplace contributing to the poor overall sales in Building G – particularly stagnation in the market between 2003 and 2006. However, he remained of the view that the presence of the Covenant on the title to the units in Building G had a significant effect on their marketability.

45 I bear very much in mind that Mr Wotton was shown to have made a mistake in one aspect of his evidence which he used to support his conclusion. He had drawn attention to the fact that the percentage of sales of units in Building A was lower than the percentage of sales of units in Buildings B, C and D but still higher than the percentage of sales of units in Building G. Mr Wotton said that that was because the titles to units in Building A were burdened by a covenant in terms similar to, but not the same as, the terms of the Covenant affecting Building G. He thought that the covenant affecting Building A was not as onerous as the Covenant affecting Building G. In fact, the Covenant bound both Buildings A and G in the same terms.

46 Mr Wotton acknowledged his error but adhered to the view that the presence of the Covenant on the title to units in Building G had adversely affected their value and marketability. He drew attention to the fact that Building A was in Stage 1 of the development, in which remediation work had been completed without problems, whereas Building G was in Stage 2, where the problems giving rise to the EMP had been encountered. Building A, however, shared the car parking basement with Building G, necessitating the presence of the Covenant on the titles in Building A.

47 I do not think that a clear and convincing conclusion as to the effect of the Covenant can be reached, one way or the other, by examining and drawing inferences from what are said to be comparable sales of other units in the Defendant’s project and in the Rhodes Peninsula generally. There are too many variables to which each expert can point as invalidating the conclusions of the other. There are too many possible interpretations which one can place on such information as is available. In the end, I think that Mr Wotton’s conclusions are supported by common sense and ordinary experience. Bearing in mind the evidence that there was a large number of units available on the market in the Rhodes Peninsula at all relevant times, one asks whether a significant proportion of purchasers would choose a unit which had no contamination issue noted on the title rather than a unit with a covenant such as the present Covenant, carrying with it the possibility of health and safety risks, the possibility of financial burdens for rectification work, and the possibility of market resistance on a resale. Regardless of the degree of such risks ever eventuating, it accords with common sense and experience that a significant proportion of the market would, if there were a choice, simply avoid a purchase which involved any of these risks at all.

48 I think that there is some support for this conclusion in the fact that, when the Defendant made application to the Land & Environment Court for a modification of the Development Consent so as to incorporate the EMP, a number of purchasers of units affected, including Mr Wu, made a successful application for leave to intervene. The intervenors argued that, rather than the Defendant contributing $20,000 to a fund to provide for the further investigation of contaminants in Stage 2, the Defendant should contribute $270,000 and, rather than a fund of $30,000 for the cost of any rectification work which might become necessary, the Defendant should contribute $100,000. The Council, which was the Respondent in the application, had suggested that the latter figure should be $70,000.

49 The fact that a number of purchasers other than Mr Wu were prepared to go to the trouble and expense of intervening in the Land & Environment Court proceedings shows that Mr Wu’s reaction to the Covenant is not isolated and idiosyncratic.

50 Secondly, the Plaintiffs tendered the Defendant’s Answers to Interrogatories, which showed that:

– contracts for the sale of 62 units in the affected Buildings in the Sol Rio development had been exchanged prior to registration of the Covenant in February 2007;

– the purchasers under thirteen of those contracts (including the Plaintiffs) – i.e. almost 21% – had subsequently commenced proceedings against the Defendant seeking orders for the termination of their contracts and citing as a ground for termination the registration of the Covenant;

– the purchasers of two such units had subsequently abandoned the Covenant as a ground for termination.

51 I acknowledge that the purchasers of these units probably had a variety of different reasons for seeking to terminate their contracts with the Defendant. However, I regard this evidence as giving some support to the overall impression I have gained that Mr Wotton’s opinion is correct.

52 I turn now to the evidence of the Defendant’s valuer, Mr Paris.

53 Mr Paris approached the question on a straightforward ‘black or white basis’ – was the lack of sales in Building G since February 2007 due to the effect of the Covenant or was it due to the softening of the market and the consequential lack of demand for three bedroom units: see Mr Paris’ July 2009 report p.14. In my opinion, the analysis of reasons for the lack of such sales is not as uncomplicated as that – there could have been more than one reason, there could have been a combination of reasons, as Mr Wotton expressly recognised.

54 The substance of Mr Paris’ conclusion that the reason for lack of sales in Building G was lack of demand for three bedroom units is incorporated in the following passage from his July 2009 report:

“I am aware from previous valuation work and experience that the Rhodes Peninsula has been recognised over many years as a contaminated site. I observed that in the course of my inspection of the subject unit that remediation work is continuing to be carried out at the date of this report. The potential for possible remaining contamination affecting residential properties would be well known to the majority of prospective purchasers of units in the “Sol Rio” development. Such purchasers would be less likely to be deterred upon discovery of the potential for remaining contamination in relation to the subject properties through any of the EMP, the restriction on use or the s 149 Certificate. All buyers or their solicitors would be alerted to potential contamination through the Section 149 Certificate and the fact that there is an EMP in place.

In my opinion it is doubtful whether the revelation of the restriction on use on title or the EMP would have any effect on prospective purchaser’s decision to buy.

The restriction on use does not appear to have materially affected the price paid in any sales of units within Buildings “A”, “E” or “G”. I have been advised that there has been no attempt regarding any prospective purchasers of properties in the Development attempting to negotiate a lower purchaser price because of the EMP, or the restriction on use. If prospective purchasers were concerned about the EMP or restriction on use, I would expect in the ordinary course at least some of them to attempt to negotiate a reduced purchase price expressly based on the existence of the EMP and/or the restriction on use.”

I do not find this reasoning persuasive.

55 First, Mr Paris conceded in cross examination that he had undertaken no research or investigation which could support his factual conclusion that “the potential for possible remaining contamination affecting residential properties would be well known to the majority of prospective purchasers of units in the Sol Rio development. Such purchasers would be less likely to be deterred upon discovery of the potential for remaining contamination … etc”.

56 There is no evidence to suggest that the market for units in the Sol Rio development generally, or in Building G in particular, is confined to Sydneysiders who might be assumed to have some knowledge of the industrial history of the Rhodes Peninsula and problems of residual contamination – an assumption which is, in itself, a large one. Indeed, to the contrary, the evidence suggests that the majority of purchasers in Building G have been of Asian origin: it is just as open on the evidence to suppose that a substantial part of the market for the development is of overseas origin and that that part of the market has little, if any, knowledge and acceptance of contamination issues in the Rhodes Peninsula.

57 Second, Mr Paris appears to found his conclusion that the Covenant has no effect on market value on the statement that “it does not appear to have materially affected the price” of units sold in Buildings A, E and G. However, price is only one factor – Mr Paris does not consider the low percentage of actual sales in Building G. He does not consider the possibility that prospective purchasers concerned about the effect of the Covenant may well simply decide to purchase elsewhere rather than attempt to negotiate a lower price for units in Buildings A, E or G.

58 In short, I conclude that Mr Paris has over-simplified his analysis. For the reasons I have already given, I prefer the view of Mr Wotton.

59 There was no serious challenge to Mr Wotton’s view that, without the Covenant on the title, the market value of Unit 304G as at March 2007 would be between $825,000 and $875,000 whereas, with the Covenant on the title, the market value would be discounted by between 20% and 30%, i.e. the market value would be between $595,000 and $680,000. I accept that evidence.

60 I am, therefore, satisfied that the creation of the Covenant on the title to Unit 304G detrimentally affected the property to a substantial extent, entitling the Plaintiffs to rescind the contract pursuant to Clause 23.3.

61 As I have earlier noted, there is no dispute that, if the Plaintiffs had a right to rescind under Clause 23.3, the letter sent by the Plaintiffs’ solicitors to the Defendant’s solicitors on 13 March 2007 was effective to exercise that right.

Waiver and election

62 The next issue is: did the Plaintiffs’ e­­-­mail to the Defendant’s agent on 24 April 2007 requesting an extension of time to comply with the Defendant’s Notice to Complete operate as a waiver of the Plaintiffs’ rights or as an election to affirm the contract.

63 The content of, and the distinctions between, the principles of waiver, election and common law estoppel are difficult and uncertain areas of the law, much discussed in judgments: see Agricultural & Rural Finance Pty Ltd v Gardiner (2008) 238 CLR 570, at [50] ff. A judgment at first instance is not the occasion for another essay on the topic. I shall state the principles as I understand them, as briefly as I may, and will explain how I apply the principles to the issues in this case.

64 “Waiver” in the present case is not used in the sense of estoppel: Mr Stoljar expressly abandoned estoppel as a defence in his final submissions because he conceded that he could say nothing about detrimental reliance.

65 “Waiver” cannot be used in this case in the sense of “abandonment and dissolution of the contract”: Gardiner at [52]. The contract for sale between the parties had already been terminated by the time that the Plaintiffs sent the e-mail of 24 April. Likewise, “waiver” could not be used in the sense of abandonment or renunciation of a right (Gardiner at [49]): the Plaintiffs had no right to terminate a contract which was, in fact, already terminated. The legal consequences of termination inevitably followed by operation of law.

66 “Waiver” can mean that a party to a contract does not insist upon a term of the contract which is for that party’s sole benefit: Gardiner at [52]. There could be no waiver in that sense in the present case because the entire contract had already been brought to an end.

67 In truth, therefore, the Defendant’s reliance upon “waiver” is in the sense of “waiver by election” (Gardiner, at [56]):

“In this court an intentional act, done with knowledge, whereby a person abandons a right by acting in a manner inconsistent with that right has been described as the ‘waiver’ of that right. But as later demonstrated, many such cases are applications of the doctrine of election between inconsistent rights. The same may be said of election between inconsistent remedies such as damages and an account of profits.”

68 This is not a case of equitable election because the Plaintiffs do not choose to take the benefit of the contract while rejecting a burdensome condition of the contract: see Gardiner at [57]. If there is an election at all in this case, it is an election at common law (Gardiner, at [58]):

“The doctrine of election is long established at common law. As Jordan CJ pointed out in O’Connor , ‘[s]ince the days of the Year Books it has been recognised that you cannot have the egg and the halfpenny too’ . If, then, something happens which gives rise to the existence of two alternative rights, and one of those rights is satisfied, the other is no longer available. A breach of contract by one party always gives the other party a right to recover damages for the breach. If serious, the breach will give the innocent party the right to treat the contract as at an end. But the innocent party need not accept the repudiatory breach and avoid the contract; the innocent party may choose to insist upon further performance. And as Craine shows, the exercise, despite knowledge of a breach entitling one party to be discharged from its future performance, of rights available only if the contract subsists, will constitute an election to maintain the contract on foot.”

69 It is of the essence of the doctrine of election that there be in existence mutually inconsistent rights available to the electing party so that exercise of one of those rights automatically precludes exercise of the other. The classic example is a contracting party’s choice between the right to rescind the contract for the other party’s serious breach and the right to insist on performance of the contract, claiming damages for the breach. It is important to recognise that, outside the special realm of the conduct of litigation where special considerations may apply – see the discussion of Commonwealth v Verwayen (1990) 170 CLR 394, in Gardiner at [62] – election, as distinct from estoppel, applies to a choice between legal rights, not to a choice merely between possible courses of action.

70 What legal rights relating to the contract for sale did the Plaintiffs have as at 24 April 2007? They had no right either to rescind or to insist on performance of the contract for sale: the contract was already dead for all purposes and the Plaintiffs had no right to revive it unilaterally. The only rights which the Plaintiffs had in relation to the contract flowed from its termination, i.e. they had a right to receive their deposit back. As at 24 April, the only way that the contract for sale could have been ‘brought back to life’ so that the Defendant could later rescind it for non-compliance with a Notice to Complete was if the Plaintiffs had represented that the contract was still alive and the Defendant had detrimentally relied upon that representation, so that the Plaintiffs were then estopped from asserting that they had validly rescinded on 13 March 2007. However, as I have said, the Defendant has eschewed a case of estoppel based on detrimental reliance.

71 Accordingly, I am of the view that the Plaintiffs’ 24 April e-mail was not an election between two mutually inconsistent legal rights relating to the contract for sale. It was nothing more than the Plaintiffs taking a certain course of action to try to keep their options open.

72 The Defendant’s case on election therefore fails. I hold that the Plaintiffs are entitled to a declaration that they validly rescinded the contract for sale on 13 March 2007.

Damages

73 In case I am wrong in my conclusions thus far, I should state briefly my views as to the Defendant’s claim for damages.

74 In Higgins v Statewide Developments Pty Ltd [2010] NSWSC 183, the present Defendant made precisely the same claim for damages against a defaulting purchaser of a unit in the Sol Rio development as it makes against the Plaintiffs in this case. As in this case, the defendant in Higgins did not seek to recover the difference between the contract price and the market price for the unit as at the date of the purchaser’s breach. Rather, the defendant sought to recover what it said it had outlaid in respect of the unit – mortgage interest and outgoings – for a long period after termination while it attempted to re-sell the unit.

75 Barrett J, in an admirable judgment (if I may say so with respect), rejected the claim for damages after a careful review of the authorities. The principle which his Honour drew from the cases is that when a vendor elects to terminate a contract for sale for the plaintiff’s breach, thereby deciding to retain the property and to attempt to re-sell it, the vendor has made a commercial decision. The consequences of that decision – for example, if the property takes a long time to sell and the vendor has to pay interest on borrowing and other outgoings – are not caused by the purchaser’s breach of contract but are inherent in the very decision of the vendor not to affirm the contract but to take its chances by attempting to re-sell the property in the market, whatever the market conditions may happen to be or may become during the attempt to re-sell.

76 Further, his Honour was of the view that the fact that the purchaser knows in a general way that the vendor has mortgaged the property is not sufficient to bring the case within the second limb of the rule in Hadley v Baxendale (1854) 9 Exch 341, 156 ER 145 so that the vendor may recover mortgage interest as damage reasonably in the contemplation of the parties: see Higgins [103]-[118].

77 It would be otiose for me to elaborate further on the reasoning of Barrett J in Higgins in rejecting the Defendant’s claim for mortgage interest in the present case. I gratefully adopt that reasoning.

78 In this case, as in Higgins, the Defendant incurred outgoings for Council and water rates, land tax and so on, in holding Unit 304G since March 2007. As in Higgins, those outgoings (totalling $27,725) have been entirely offset by rent of $77,531 received by the Defendant for Unit 304G. The Defendant has, therefore, suffered no damage under this heading.

Section 55(2A)

79 Again, I should briefly state my conclusions as to return of the deposit if I had otherwise upheld the Defendant’s contentions.

80 The considerations which the Court should take into account in the exercise of its statutory jurisdiction under s 55(2A) are discussed in Romanos v Pentagold Investments Pty Ltd (2003) 217 CLR 367, at [27]; Havyn Pty Ltd v Webster [2005] NSWCA 182, at [173]; and Nassif v Caminer [2009] NSWCA 45, all of which are reviewed by Barrett J in Higgins. There, his Honour said, at [134]-[135]

“A second factor also points towards an order under s 55(2A) in favour of the plaintiff in this particular case. Had damages been awarded to the defendant, the deposit would have been brought to account as part of the damages. Thus, if damages had been assessed at $100,000, the forfeited deposit of $76,100 would have been applied towards those damages and the further outlay required of the plaintiff would have been the difference of $23,900. If, on the other hand, damages had been assessed at $50,000, the deposit would have been applied to satisfy those damages in full and the plaintiff, as purchaser, would have had no right to recover the balance of $26,100. The clear contractual provision declaring that the vendor can keep the deposit would have stood in the way of any such recovery; yet the plaintiff would have been in the same position as if $50,000 of the $76,100 had not been forfeited at all and the defendant, having proved loss of only $50,000, would enjoy $76,100.

After a purchaser’s default, the deposit represents a form of security for that purchaser’s liability in damages (having been, before default, a form of security for the purchaser’s obligation to perform the contract). Where the deposit exceeds the damages to which the vendor is entitled by reason of the purchaser’s breach, the vendor’s legal right (conferred by the contract) to keep the excess may not sit happily with the fact that the vendor’s loss has been fully compensated and the vendor thereby made whole without resort to that excess. In the present case where assessment of damages has produced a zero entitlement for the vendor, the vendor’s legal right to keep the whole deposit and the purchaser’s consequent inability at law to recover any part of it likewise may not sit happily with the justice and equity of the case. Although the fact that a vendor has resold at a profit may not, of itself, be sufficient to warrant an order under s 55(2A) in favour of the defaulting purchaser, it is still a significant consideration: see, for example, Nelson v Bellamy [2000] NSWSC 182; (2000) 10 BPR 19,011. A case such as the present in which the vendor has proved no loss or damage stands in the same light.”

81 As in Higgins, the Defendant could not have proved loss for which it was entitled to damages. It did not seek to prove as loss the difference between the contract price and the value of the unit as at the date of termination of the contract. If it were to retain the deposit, it would not only have $88,000 and the interest which that sum has earned for more than three years, it would also have the rental profits of the unit (some $44,800) and, of course, the benefit of the unit itself. As Barrett J said, allowing the Defendant to retain all these benefits does not “sit happily with the justice and equity of the case”.

82 Had the Defendant otherwise succeeded, I would have ordered return of the deposit under s 55(2A).

Orders

83 There will be declarations in accordance with paragraphs 1 and 3 of the Summons and consequential orders.

84 The parties will need to formulate Short Minutes of Order to accommodate some aspects of the interest which has accrued on the deposit. I will stand the proceedings over for a short time to enable the Plaintiffs to bring in Short Minutes of Order. I will then hear argument as to costs.

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