5 Ridge Pty Limited v Tryname Pty Limited

The plaintiff was the purchaser pursuant to a contract for sale of land dated 17 December 2015. The defendant was the vendor. On 2 March 2016 the defendant terminated the contract. On 4 April 2016 the plaintiff terminated the contract. The underlying dispute between the parties related to the exercise of an option by one of the tenants in the property which was the subject of the contract for sale.

The sequence of events appears to have commenced on 23 November 2015. On that date Mr Demlakian, the principal of the defendant, wrote to the agent Mr Lowry. He informed Mr Lowry that:

Mr Demlakian's email to the agent was sent at 4:04pm. At 5:17pm, later that afternoon, the agent sent an email to Mr Miron and his wife, the principals of the plaintiff. He told them that:

He added:

The Tenancy Schedule stipulated that the retail lease to Rusty's Cafe would expire on 18 May 2020. It revealed that Rusty's Cafe was the most significant tenant apart from a company associated with Mr Demlakian and that the rate per square metre payable by it was substantially more than all other tenants. The base rent for the Rusty's Cafe lease was $69,390 per annum. The rate per square metre was $1,003. This was more than 30 percent greater than the rent payable by the other retail tenant and three times the rate paid by all other tenants. Rusty’s Café was a valuable tenant.

As a result of those communications, Mr Miron sent an email on 24 November thanking the agent for the update and emphasising that ‘our offer and commitment to the property acquisition was on the basis of a specific yield’. He then proposed a price adjustment to reflect the new transaction.

Mr Miron explained in evidence why the exercise of the option for Rusty's Cafe was critical. He gave the following evidence:

The premium to which Mr Miron referred was the high rental which had been secured from Rusty's Cafe. On 30 November an agreement was signed between the parties. The document was described as a ‘confirmation of sale’ and sometimes as a ‘Heads of Agreement’. It was prepared by the agent. It stated that:

Mr Miron and Mr Demlakian signed the document and Mr Demlakian initialled every page including alongside the statement that the Tenancy Schedule was to form the basis of the negotiated deal. Mr Demlakian also signed the copy of the Tenancy Schedule which was attached to the confirmation of sale document.

Between 9 and 16 December the solicitors for the parties engaged in the usual conveyancing and drafting negotiations to bring into existence a legal document which reflected the parties' intentions. On 9 December Mr Nasr, the solicitor for the plaintiff wrote to the solicitor for the defendant and stated:

The defendant's solicitor, Mr Kotowicz responded on 10 December. He said:

This was not good enough, understandably, for the plaintiff's solicitor. On 15 December at 3.52pm he replied:

At 4:08pm Mr Lowry, the agent, sent an email to Mr Miron. He was obviously aware of the insistence by the plaintiff's solicitor on confirmation of the exercise of the option. His email stated:

He then added:

At 5:10 pm the defendant's solicitor replied to Mr Nasr stating that he had been instructed to respond to Mr Nasr's request for written confirmation of the exercise of the option. He said:

The enclosed amendment to cl 2.1 was in the form that found its way into the contract when it was signed. It had the effect that cl 2.1 of the contract now read as follows:

This appears to have resolved matters. It was, however, confirmed in a further communication at 6.15pm from the agent to Mr Demlakian, copied to Mr Kotowicz, the defendant's solicitor. The agent said:

The ‘latest agreement outlined below’ was that set out in the email from Mr Lowry to Mr Miron at 4.08 pm, which appeared lower down the page. I set it out in paragraph [12] above. It is the email which stated, among other things, that:

The next day, 16 December, Mr Nasr responded formally to Mr Kotowicz's email sent on 15 December at 5:10 pm. He appeared to be seeking further satisfaction for the benefit of the plaintiff. He suggested a qualification to the proposed amendment to cl 2.1 which does not appear to have affected its substance and emphasised several times in the one paragraph the need for evidence of the options for the leases having been exercised.

He then also recommended the insertion of an entirely new special condition which he described as ‘vendors warranties relating to the leases’. I will return to this clause, which became cl 11.3 in the signed contract. The substance of it was that in respect of each of the leases referred to in the Tenancy Schedule annexed to the contract the vendor warranted that at the date of the contract ‘each of the leases is subsisting’.

Later on 16 December, Mr Kotowicz responded. In essence he would not agree to any further change to the amended cl 2.1 and stuck to the draft which he had already provided to the plaintiff's solicitor. The main issue of difference seemed to relate to the accounting of interest which accrued on the deposit pending its release, if and when the options for lease were exercised.

As to Mr Nasr's request for an additional warranty relating to the leases referred to in the Tenancy Schedule, Mr Kotowicz attached an amended cl 11 which incorporated Mr Nasr's proposal. Mr Nasr had not suggested that his proposed warranty clause be included as part of cl 11 but Mr Kotowicz took it upon himself to add it as cl 11.3. This has a complication to which I will return. It seems likely that Mr Nasr intended that the warranty clause would be freestanding. The effect of Mr Kotowicz's inclusion of the warranty clause as cl 11.3 meant that it was caught by an exclusion in cl 11.2.1.

There was a side issue which I need not dwell upon relating to a request by the purchaser's solicitor for the deletion of cl 11.2.2 which prevented the purchaser making any claim or requisition or rescinding or terminating or delaying completion if any tenant vacated any part of the property on or before completion. The defendant's solicitor would not agree to delete that clause.

On 17 December, as I have mentioned, the contract was signed. The defendant's subsequent position was stark and appears to have been inconsistent with the tenor and substance of the negotiations immediately prior to the contract.

On 8 February 2016 Mr Demlakian wrote to the agent with a copy to Mr Kotowicz to inform them that the tenant for Rusty's Cafe had decided not to exercise its option. He stated:

Then he added, confusingly:

And he reiterated:

Later that day the plaintiff's solicitor wrote to the defendant's solicitor about the consequence of the non-exercise of the option by the tenant of suite 2. He said:

He added that the resolution had been ‘that the vendor agreed to provide the warranties in special condition 11.3 which specifically referred to the tenancy schedule annexed to the contract’.

He then requested instructions as to how the vendor intended to remedy the breach of warranty. And he noted that he had suggested to the plaintiff that there should be an adjustment of the purchase price to reflect the non-exercise of the option.

On 10 February Mr Kotowicz responded in a letter which I regard as disingenuous, if not worse. He said, ‘The tenancy schedule was intended at best to be an aide memoire to facilitate reference to such Leases’. He then said that the description of the Rusty’s Café lease in the Tenancy Schedule was clearly a mistake. He also insisted that special condition 11.2 was inserted to allow for the possibility that before settlement one or more of the lessees did not exercise an option and vacate the premises leased.

In the light of the sequence of events which I have explained I regard that position as unmeritorious. Once again, confusingly, Mr Kotowicz referred to the fact that ‘The deposit was not to be released until the option was so exercised’.

On 11 February the plaintiff's solicitor replied stating, among other things:

That letter also contained the following summary of the sequence of events:

The negotiations between the solicitors for the parties continued. On 12 February 2016 Mr Kotowicz made the bold statement that:

But as I have pointed out, that was the very language of the emails sent on 15 December 2015, namely that ‘Ken will agree to making the contract subject to the two retail tenants exercising their options’. (emphasis added)

On 15 February the defendant served a notice to complete, requiring completion on 2 March 2016. On 18 February the plaintiff's solicitor disputed the validity of the notice. On 22 February the plaintiff's solicitor invited the defendant to accept and proceed with settlement on the basis that the contractual mechanism for determining compensation to a purchaser be activated.

On the same day the defendant's solicitor declined that proposal. On 26 February the plaintiff's solicitor calculated its loss at $169,309.17 which he communicated to the defendant's solicitor. On 29 February the defendant's solicitor denied any liability and refused to speculate as to the claim for damages by the purchaser. On 2 March the defendant purported to terminate the contract.

Prior to receipt of the notice the plaintiff's solicitor wrote to the defendant's solicitor on 2 March stating that:

There were attempted communications between Mr Miron and Mr Demlakian on 2 March but Mr Demlakian was busy playing tennis and unable to respond. On 16 March the plaintiff's solicitor wrote to the defendant's solicitor stating, among other things, that the notice to complete and purported termination of the contract were invalid and that by issuing the notice of termination the defendant had itself repudiated the contract. On 4 April the plaintiff terminated the contract.

The disputes between the parties related to questions of construction of the contract, rectification and the application of s 55(2A) of the Conveyancing Act 1919 (NSW). That section provides that in any proceedings for the return of the deposit ‘the Court may, if it thinks fit, order the repayment of any deposit with or without interest thereon’. It applies notwithstanding the validity of the defendant's termination.

This is not one of those cases where evidence of the resale of the property by the vendor or the price which it achieved in doing so was relevant. There was no evidence about those matters. The issue is not whether the defendant has obtained a windfall. The issue is one of misrepresentation. There is no doubt about the primary importance to the plaintiff of the exercise of the option for the relevant lease.

Mr Miron was a careful and impressive witness. I entirely accept his evidence on this issue, both as to misrepresentation and particularly as to reliance. The defendant also accepted the importance of the exercise of option, at least until the dispute arose. The confirmation of sale document prepared by the agent, and signed by Mr Demlakian on behalf of the defendant, stated that the ‘attached Tenancy Schedule dated 30 November 2015 is to form the basis of the negotiated deal’.

The pleaded ground for the application of s 55(2A) is misrepresentation. It was fully addressed in the evidence and submissions. I am satisfied as a matter of fact that there was misrepresentation and that Mr Miron relied on and was induced to enter into the contract for sale by reason of it. The gist of the misrepresentation waGs that the contract was ‘subject to the two retail tenants exercising their options’. Mr Miron's belief and his reliance were reasonable and understandable in the circumstances. This is not a case like Nassif & Ors v Caminer [2009] NSWCA 45 where the most that the Court could say was that the misrepresentation claim was ‘reasonably arguable’: [69].

Whether or not the plaintiff is entitled to succeed on its contentions as to the proper construction of cl 2.1 or cl 11.2 or cl 11.3 or whether there was any defect in the service of the notice to complete, I have concluded that the plaintiff should succeed on its claim pursuant to s 55(2A).

Misrepresentation by a vendor has often been held to be relevant to the exercise of the statutory discretion pursuant to s 55(2A). Two recent examples include Statewide Developments Pty Ltd v Higgins [2011] NSWCA 35 and Havyn Pty Ltd v Webster [2005] NSWCA 182. Each of those cases involved misrepresentation by a vendor and the subsequent exercise of its contractual rights. In Statewide the primary judge was Barrett J. He held that:

He then concluded:

See Higgins v Statewide Developments Pty Ltd [2010] NSWSC 183.

In the Court of Appeal, Sackville AJA applied the same principles. He said:

At the conclusion of his judgment Sackville AJA said:

In Hayvn, Santow J also addressed the question of misrepresentation by a vendor. He said:

Finally, Santow J concluded:

A third relatively recent decision is Nassif v Caminer to which I have made passing reference. In that case there was an illuminating difference in the reasoning of Macfarlan JA and Sackville AJA. Macfarlan JA first emphasised that a deposit is an earnest of performance and that the Court ‘should not take an approach to ordering the return of deposits under s 55(2A) which weakens the proper function of the deposit in providing a sanction so that the purchasers treat the making and completing of contracts with due seriousness’.

He then continued, however at [67]:

He explained those factors in the following paragraphs:

Sackville AJA was concerned about the quality of the evidence of the misrepresentation, but did not differ as to the applicable principle. He said:

The criticisms made by Sackville AJA in that case do not apply in this case. As I have said, the issue of misrepresentation was pleaded and fully addressed. I am satisfied that both misrepresentation and reliance have been proved. I should add that I am conscious of the warning by the High Court of Australia in Romanos v Pentagold Investment Pty Ltd (2003) 217 CLR 367 – a case not directly concerned with the application of s 55(2A). The Court said at 375:

Nonetheless, the statutory discretion available to a court pursuant to s 55(2A), although not unlimited, is broad. Respected Judges of this division have often stated that a liberal approach should be adopted to its application. In Lucas and Tait (Investments) Pty Ltd v Victoria Securities Ltd [1973] 2 NSWLR 268, Street CJ in Eq expressed his agreement with the ‘liberal approach to the jurisdiction conferred by the section’ at [272] and expressly declined to state ‘where the boundaries of the discretion are to be drawn’ at [273]. He was mirroring the approach taken by Jacobs J in Horne v Zebra Motor Inn Pty Ltd (unreported 12 September 1963).

And the same approach was applied by Mahoney JA in Nelson v McDonald (unreported 27 November 1972), who said:

I have reached the view that the exercise of my discretion in this case in favour of the plaintiff on the ground of the defendant’s misrepresentation in the particular circumstances is in accordance with principle and consistent with precedent. I should add that this is not one of those cases where the plaintiff did not in fact rely on the misrepresentation but was content to place his trust in the terms of the contract, whatever meaning those terms might be found to have. Such circumstances sometimes occur. But in this case Mr Miron did not abdicate his reliance in favour of his solicitor's drafting skill. He maintained a clear belief before and after the contract was signed that the defendant had agreed that the contract was ‘subject to the two retail tenants exercising their options’.

In essence, Mr Miron understood and believed that absent the exercise of the relevant retail options, the deposit would not only not be released to the defendant, but that the contract would not be required to be completed. He held that belief on reasonable grounds because of what was conveyed by Mr Demlakian and his agent Mr Lowry. It was, as Mr Miron understood, it the ‘basis of the contract’.

I will address the contractual construction issues briefly. The contextual evidence which I have set out at length provides assistance in identifying the genesis, object and purpose of the amendment to cl 2.1. It also assists in identifying the mischief that the amendment was designed to redress. The principles of construction are well known but they are sometimes difficult to apply in a given case. In Electricity Generation Corporation v Woodside Energy Limited [2014] HCA 7 French CJ, Hayne, Crennan and Kiefel JJ explained the principle as follows at [35]:

On the defendant's construction of cl 2.1, its object was only to benefit the defendant. On that approach 2.1 merely provided for the early release of the deposit and the accrual of interest in favour of the defendant. But the context made clear that the object was not that. Rather it was the protection of the plaintiff in the light of its stated concern about the status of the Rusty’s Café lease. The defendant's construction not only ignores that object and purpose but renders the language of cl 2.1 meaningless and devoid of effect.

On the defendant’s approach the vendor will always get the deposit. The plaintiff's approach applies the language used by the parties in accordance with its terms. As the option for the relevant lease was not obtained, it follows in accordance with cl 2.1 that the defendant was not entitled to the deposit. The parties could not have sensibly intended that contrary to the language of cl 2.1 the defendant should have the deposit if the lease option was not obtained.

Nor could they have sensibly intended that completion should nonetheless occur, but that the defendant should not receive the deposit. The plaintiff's construction is the natural construction and makes cl 2.1 workable. The defendant's construction gives rise to serious difficulties of application and further uncertainty. I well understand the concern of counsel for the plaintiff to emphasise that prior negotiations should not be used to the extent that they are merely reflective of the actual intentions and expectations of the parties; that they do no more than reveal the terms of the contract which the parties intended or hoped to make; and that they are superseded by and merged in the contract itself: Codelfa Construction Pty Limited v State Rail Authority of New South Wales [1982] 149 CLR 337 at 352.

That is an important consideration, which I am the first to acknowledge. But this is not such a case and the warning in Schwartz v Hadid [2013] NSWCA 89 at [38] does not have any relevant application in this case. In fact, the contextual evidence during the period prior to 17 December does not reveal the terms of the contract which the parties intended or hoped to make. It reveals their object and purpose and it explains the genesis of the amendment to cl 2.1.

Clause 11.2 was not amended. It has always provided that the purchaser cannot make a claim or requisition or rescind or terminate or delay completion ‘as a result of any matter or thing referred to or arising from the special condition 11’. There was no negotiation over any suggested change to that provision. The complication that has arisen is that the vendor warranties clause proposed by Mr Nasr was incorporated in cl 11 and numbered 11.3. That was Mr Kotowicz's work. It was agreed to by Mr Nasr. Its natural consequence is that the prohibition on the purchaser making a claim "as a result of any matter or thing referred to or arising from this special condition 11" also applies to the warranty in cl 11.3.

The relevant warranty is that ‘in respect of each of the leases referred to in the Tenancy Schedule annexed to this contract...each of the leases is subsisting’. There was no real issue of construction. It is not possible in the light of the clear language of cl 11.2 and 11.3 to reach a result that avoids the effect of the prohibition on the making of a claim.

The question which really arises is whether cl 11.3 should be rectified simply by renumbering it, so that it becomes a freestanding clause. The remedy of rectification requires proof of an identical actual intention by the parties which is inconsistent with the effect which the executed instrument has, in some clearly identifiable way. The true intention of the parties must be sufficiently precise and specific to displace the hypothesis arising from the execution of the document that it expressed their true intention: Commissioner of Stamp Duties NSW v Carlenka Pty Limited (1995) 41 NSWLR 329.

At the factual level the question is whether, when Mr Kotowicz responded to Mr Nasr's request for the incorporation of the vendor warranties clause that he proposed, and did so by simply incorporating it into cl 11 – to which Mr Nasr agreed – was that a mistake? Did each of the parties, through their solicitors, actually intend that the vendor warranties clause should be freestanding and operate independently of the prohibition against making certain claims in cl 11.2.1?

I am afraid to say that the subjective intentions of the parties, in particular the intentions of Mr Demlakian and Mr Miron, not to mention the intentions of Mr Nasr and Mr Kotowicz, were not fully canvassed on this issue in the evidence. Indeed, they were hardly explored. Their precise intentions as to what they intended would be the effect of the vendor warranties clause, was not something about which I can be safely satisfied. The rectification claim appeared to occupy a secondary position in the presentation of the case. I therefore do not feel able to order the rectification which the plaintiff seeks.

There is one final issue which, in the circumstances, does not matter. However, I should express some brief reasons. The plaintiff contended that the notice to complete was invalid because it was served less than 14 days prior to the nominated date for settlement and therefore failed to meet the requirements of a valid notice prescribed by cl 3.1 of the special conditions of the contract.

The practical reason why the notice was not served until less than 14 days prior to the nominated date, is that it was sent initially by facsimile to the wrong fax number and by post to the wrong address. This was entirely the fault of Mr Kotowicz, the defendant's solicitor. The result was that it was not actually received until two days later, namely on 17 February 2016. By that date there were fewer than 14 days before the nominated date for completion.

Clause 9.2 of the special conditions provides that when a facsimile is sent to the facsimile number of a party's solicitor on the contract, it is deemed to be served on that party. However, cl 9.2 does not state when a facsimile sent to the facsimile number on the contract is deemed to be received. On its own, it does not assist in determining when the 14 day period commenced to run.

Clause 9.4 does prescribe when a document sent by facsimile is deemed to be received. It states that the document is received ‘on the business day on which it is received’.

Clause 9.1 also prescribes when a document sent by facsimile is deemed to be received. It is subject to the preamble to cl 9 which makes clear that it is to be read in addition to standard cl 20.6.5. Clause 9.1 only applies in respect of a facsimile that is served for the purposes of standard cl 20.6.5. The standard cl 20.6.5 provides that a facsimile is not deemed to be served if it is not received and that in the result a facsimile that is not received, is not ‘served if sent’ for the purposes of cl 9. The result is that cl 9.1 has no effect in relation to such a facsimile. For those reasons the plaintiff is entitled to succeed in its contention that the notice to complete was invalid.

The plaintiff seeks indemnity costs on the basis of an offer of compromise dated 27 June 2016. The plaintiff succeeded on all issues, other than cl 11.3. It is true that the express reliance on s 55(2A) of the Conveyancing Act and the apparent reliance on cl 2.1 were only included in the amended statement of claim which was filed in Court on 28 March 2017. However, the plaintiff also succeeded on the issue of the validity of the notice to complete and would have been entitled to succeed in the proceedings even if the amendments were not made to the statement of claim.

It is an important principle of policy that losing parties should face the consequence of having to pay the costs of the successful party. That policy encourages compromise and discourages unmerited defences and claims. An aspect of that policy is that the Courts encourage parties and their solicitors to think seriously about proceeding after an offer of compromise has been made.

In this case the offer of compromise was made nine months ago. If it had been accepted, the defendant would be in a significantly better position than it is now and the Court would not have been troubled with the conduct of this hearing. And time would have been available for other litigants to have their disputes determined and resolved.

The defendant has failed. It has failed on all but one issue. It could have accepted the offer of compromise in June or July last year. It does not matter that two of the issues on which the plaintiff succeeded were introduced late in the proceedings. I therefore order the defendant to pay the plaintiff's costs on an indemnity basis from 28 June 2016.