Fuentes v Bondi Beachside Pty Ltd

1. [1]

   HIS HONOUR: The plaintiff, Mr Jorge Fuentes, seeks an order for specific performance of a contract for the sale of land made between him and his wife, Regina Bueno Ros, as purchasers, and the defendant, Bondi Beachside Pty Ltd, as vendor. The contract was entered into on 8 September 2012. It was a contract for the sale and purchase of a unit in an apartment block to be constructed by the vendor in Campbell Parade, Bondi Beach. The contract price was $1,420,000 and a deposit of 10 per cent was paid on exchange. In the events which happened completion was due 14 days after the date the purchaser received written notification of registration of the draft strata plan and a copy of an occupation certificate in relation to the building. Clause 9 of the General Conditions provided:

2. [2]

   Special condition 63 provided:

3. [3]

   On 25 November 2015 the vendor’s solicitor advised the purchasers that the draft strata plan had been registered. The purchasers were asked to contact the vendor’s solicitor to make arrangements for completion to take place on Wednesday, 16 December 2015.

4. [4]

   On 14 December 2015 Mr Fuentes and Ms Ros entered into a contract to sell what was then identified as Lot 12 in Strata Plan 92043 to a Mr Blumenthal for $1,550,000. On 16 December 2015 their solicitor advised Gil Baron & Associates that their clients had exchanged contracts with a third party for the sale of the apartment and that that sale was scheduled to settle on 24 December, but the parties were aiming to settle earlier if possible. On the same day, the vendor’s solicitors wrote to the purchasers’ solicitor asserting that the purchasers were in breach of the contract and reserving the vendor’s rights, including a right to terminate the contract on the basis of the purchasers’ repudiation of it.

5. [5]

   On 21 December 2015 the vendor’s solicitor asserted that the purchasers were in default of the contract and the vendor would not accept any booking confirmation for the settlement of the sale.

6. [6]

   On 25 January 2016 the vendor’s solicitor served a purported notice of termination of the contract. The notice stated that the purchasers had breached clause 63 of the contract and the vendor gave notice that the contract was terminated and the deposit forfeited. It reserved its right to sue for breach of contract or to resell the property and claim and recover liquidated damages.

7. [7]

   The purchasers disputed the validity of the notice of termination. These proceedings were commenced on 22 February 2016. Mr Fuentes was the sole plaintiff. He sought an order for specific performance. By way of cross-claim the vendors sought damages for breach of contract.

8. [8]

   Ms Regina Ros who was a co-purchaser was not joined as a plaintiff in the proceedings. Her non-joinder was due to a breakdown of her marriage with Mr Fuentes that resulted in a settlement agreement having been reached between them under the terms of which she relinquished in favour of Mr Fuentes her rights to any proceeds from any future sale of the property. She resides in Mexico.

9. [9]

   On the face of it, the failure of both purchasers to sue as plaintiffs creates a substantial obstacle to the making of an order for specific performance. However, the vendor took no issue with respect to the non-joinder of Ms Ros. It expressly disclaimed any point about the sufficiency of parties.

10. [10]

    Three substantial issues arise. First, whether the contract of sub-sale made between the purchasers and their sub-purchaser, Mr Blumenthal, was a breach of clause 63 of the agreement between the vendor and the purchasers.

11. [11]

    If so, secondly, whether the purchasers had failed to comply with the contract in an essential respect, or repudiated the contract, so as to justify the vendor’s serving the notice of termination.

12. [12]

    Thirdly, if the purchasers breached clause 63, but the breach did not justify the vendor’s terminating the contract, whether there should be an inquiry as to the vendor’s claim for damages.

13. [13]

    For the reasons which follow I have concluded that:

First Issue: Breach of clause 63

1. [14]

   The plaintiff submitted that the sub-sale to Mr Blumenthal was not an assignment, novation or other disposition of the purchasers’ interest in the agreement or in the property within the meaning of clause 63.1 and therefore clause 63 did not apply. The purchasers’ interest in the property (if any) was their interest in the agreement for the purchase of the property. They did not assign that agreement, nor was there a novation of that agreement. They say there was no disposition of their interest in the agreement. The plaintiff relied upon the decision of the United Kingdom Supreme Court in Scott v Southern Pacific Mortgages Ltd [2014] UKSC 52; [2015] AC 385; [2015] 1 All ER 277 where the Court denied that a purchaser could confer a proprietary interest in land on a third party prior to acquiring the legal estate (per Lord Collins at [71] and Lady Hale at [95]). If correct, the corollary would appear to be that a purchaser under an uncompleted contract for the sale of land does not have in equity a proprietary interest in the property. It is the hallmark of a proprietary interest, as distinct from a personal interest, that it can be disposed of.

2. [15]

   The plaintiff also submitted that if the purchasers did have an equitable interest in the property that could be assigned or disposed of, the action of entering into a contract for the sub-sale of the land was not a disposition of that equitable interest. The contract for sub-sale imposed obligations on the purchasers. Any interest created in the sub-purchaser was an imposition on the purchasers’ equitable interest in the property, not a disposition of that interest.

3. [16]

   The vendor submitted that “disposed” in clause 63.1 had a wide meaning and encompassed “every conceivable mode by which property can pass” (Duke of Northumberland v Attorney General [1905] AC 406 at 410-411 per Lord Macnaghten). The vendor also submitted that it was clear from the balance of clause 63, in particular sub-clauses 63.3 and 63.4, that a sub-sale by the purchasers was the very kind of transaction intended to be caught by the words of clause 63.1.

Could the purchasers confer a proprietary interest on the sub-purchaser?

1. [17]

   Scott v Southern Pacific Mortgages Ltd concerned the interpretation of s 29 and Schedule 3 of the Land Registration Act 2002 (UK) which relevantly provided that registration of a registrable disposition of a registered estate that was made for valuable consideration had the effect of postponing any interest affecting the estate immediately before the disposition whose priority was not protected at the time of registration. An “overriding interest” whose priority was so protected included an interest belonging, at the time of the disposition, to a person in actual occupation subject to certain immaterial qualifications (at [39]).

2. [18]

   The case concerned the priority between a mortgagee and a prior owner. The prior owner, Mrs Scott, had been induced by fraud to sell her property to a purchaser who promised that she would be entitled to remain in her home at a discounted rent. She was told that if she stayed for 10 years she would receive a lump sum. She was told that she could stay as long as she liked and that if she were to die the tenancy would be automatically transferred into her son’s name and he would receive the lump sum at the end of the 10-year period (at [14] and [15]). These terms were not incorporated in the contract for sale, nor in the lease that was issued to Mrs Scott on completion of the sale. She was given only a two-year lease (at [21]).

3. [19]

   The purchaser used moneys borrowed on mortgage security to purchase the property. The mortgagee did not have notice of the true arrangements between the purchaser and vendor. Upon the purchaser’s default in paying moneys due under the mortgage the mortgagee sought to exercise its power of sale. The vendor claimed that her interest under her agreement with the purchaser was an overriding interest which had priority to that of the mortgagee.

4. [20]

   The issue of priority did not depend upon the general law. Presumably, at common law, the mortgagee would have had priority because it was a bona fide purchaser of the legal estate for value without notice or, if it did not acquire the legal estate, because the vendor’s prior equity would be postponed to the subsequent equitable interest of the mortgagee as the vendor had armed the purchaser with the means of deceiving the mortgagee by not incorporating the true terms of her agreement in the contract for sale or in the lease she took.

5. [21]

   The case concerned the effect of s 29 of the Land Registration Act 2002 (UK) and Schedule 3 to that Act. Those provisions so far as relevant were set out by Lord Collins at [39] and provided as follows:

6. [22]

   The question was whether Mrs Scott, who was in actual occupation of the property, had an overriding interest to which the mortgagee was subject, notwithstanding registration of the mortgage. In Abbey National Building Society v Cann [1991] 1 AC 56 the House of Lords had held that for a person to establish an overriding interest against a transferee or chargee, he or she had to be in actual occupation of the land at the date of completion of the transaction that effected the transfer or charge. Lord Collins summarised the holdings in Abbey National Building Society v Cann that were crucial to the appeal as follows:

7. [23]

   Mrs Scott sought to distinguish Abbey National Building Society v Cann on the ground that from the time of exchange of contracts, by virtue of the oral assurances given by the purchaser, she had an equity in the property beyond and in addition to her then registered freehold estate; and that this was an equitable proprietary interest and not a mere personal equity because from the exchange of contracts the purchaser had a proprietary right from which it could and did confer a proprietary interest on her. That interest arose before completion and she was at all relevant times in occupation (at [27]). Lord Collins observed:

8. [24]

   His Lordship then re-characterised the question as being “… whether a purchaser, prior to acquisition of the legal estate, can grant equitable rights of a proprietary character, as opposed to personal rights against the purchaser” (at [60]). His Lordship said that whilst it has frequently been said that a purchaser of land obtains rights akin to ownership that can be described as proprietary interests for some purposes, it did not follow that a purchaser has a proprietary interest for all purposes (at [65]). His Lordship said (at [63] and [64]):

9. [25]

   Although it is true that the High Court of Australia has said that the description of the vendor as trustee tends to conceal the essentially contractual relationship which governs the rights and duties of the parties, it has never before been doubted that a purchaser under a specifically enforceable contract has an equitable interest in the property commensurate with the right to equitable relief, albeit that the relationship between vendor and purchaser is not properly characterised as one of trustee and beneficiary prior to payment of the purchase price (e.g. Stern v McArthur (1988) 165 CLR 489 at 522-523; Kern Corporation Limited v Walter Reid Trading Pty Limited (1987) 163 CLR 164 at 191; Chang v Registrar of Titles (1976) 137 CLR 177 at 184-185; Chan v Cresdon Pty Ltd (1989) 168 CLR 242 at 252-253). The position is comprehensively summarised by Emmett JA in Golden Mile Property Investments Pty Ltd (in liq) v Cudgegong Australia Pty Ltd [2015] NSWCA 100; (2015) 89 NSWLR 237 at [98]-[105]).

10. [26]

    Lord Collins referred to English cases that had considered the complex priority rules under the UK Land Registration Act, namely Coventry Permanent Economic Building Society v Jones [1951] 1 All ER 901, Universal Permanent Building Society v Cook [1952] Ch 95, Woolwich Equitable Building Society v Marshall [1952] Ch 1, Church of England Building Society v Piskor [1954] Ch 553 and Abbey National Building Society v Cann [1991] 1 AC 56. His Lordship said:

11. [27]

    Baroness Hale said (at [95]):

12. [28]

    Baroness Hale then considered the English decisions on the priority issues under the UK Land Registration Act in which a purchaser who had contracted to buy residential premises had granted a tenancy to an occupant who moved in before the contract was completed. She observed (at [109]) that:

13. [29]

    Her Ladyship then said (at [111]):

14. [30]

    To an Australian lawyer this is puzzling. In principle one might think that if one were analysing the vendor’s (Mrs Scott’s) proprietary rights at the time of exchange and prior to completion that her interest was that of legal owner and her contract with the purchaser and her undocumented arrangements with the purchaser conferred an equitable interest on the purchaser that was an imposition on her legal title, albeit only to the extent of the true arrangement between them. One might think that the purchaser did not confer a proprietary interest on the vendor. Rather the vendor’s legal title was subject to the purchaser’s equitable interest arising from a specifically enforceable agreement for the purchase of land. That was not how the question was approached. One commentator has observed:

15. [31]

    Cuthbertson v Irving (1859) 4 H & N 742; 157 ER 1034 on which Lord Collins relied at [71] does not, with respect, support the proposition that where a proprietary right is claimed to be derived from the rights of a person who does not have the legal estate then the right needs to be fed by the acquisition of the legal estate before it can be asserted otherwise than personally. In Cuthbertson v Irving the original lessor (Biglands) had mortgaged the land and did not have the legal fee simple. He was in possession as mortgagor with an equity of redemption. He granted a lease to Irving and later assigned the reversion to Cuthbertson. Cuthbertson sued Irving for breach of the covenant to repair. Irving denied Cuthbertson’s title to sue. As Biglands did not have the legal fee simple, Cuthbertson did not have a statutory right to sue on the covenants made by Irving with Biglands. As between Biglands and Irving, Irving was estopped from denying his lessor’s title. (This was the first of the points made by Martin B quoted by Lord Collins at [71].) The issue in Cuthbertson v Irving was stated by Martin B (who gave the judgment of the Court of Exchequer Chamber) as being “… whether the assignee of a lessor in a lease by a deed, who has no estate in the land, has a reversion by estoppel against the lessee” (at 755). That question was answered in the affirmative (at 756-758). Martin B said (at 757-758):

16. [32]

    Prima facie this is contrary to the conclusion in Scott that a purchaser cannot confer an equitable proprietary interest prior to acquiring the legal estate. In Cuthbertson v Irving the mortgagee had the legal ownership, but the mortgagor was able to confer a proprietary interest on the assignee which the assignee could enforce against the lessee, notwithstanding he did not have the legal estate. It is possible that in referring to the “legal estate” (at [71]) Lord Collins was not necessarily referring to legal ownership. In Bell v General Accident Fire and Life Assurance Corpn Limited (1998) L & TR I, Hutchinson LJ (at 9-10) cited McGarry & Wade’s Law of Real Property, 5th ed that at common law all titles to real property are relative and there can be simultaneous legal estates. A person in possession who, as against the owner, is a trespasser, can nonetheless sue third parties for trespass and nuisance. He has a legal estate in possession.

17. [33]

    But Cuthbertson v Irving was not decided on the basis that the mortgagor, having only an equitable ownership interest, nonetheless had a legal estate in fee simple in possession which entitled him to grant a lease to Irving and assign the legal estate in possession to Cuthbertson. The case was decided on the contrary basis that Biglands did not have title to grant a lease, but Irving was estopped from denying the lack of title, and Cuthbertson, as Biglands’ assignee, was entitled to the benefit of the estoppel.

18. [34]

    Neither Cuthbertson v Irving, nor Bell v General Accident Fire & Life Assurance Corporation Limited held that it is only where a person having an equitable proprietary interest acquires the legal estate that an assignee from that person can assert a proprietary interest. In my respectful view, that is tantamount to denying the first person’s proprietary interest. It is a hallmark of a proprietary interest that it can be assigned or otherwise disposed of.

19. [35]

    In Shaw v Foster (1872) LR 5 HL 321 the House of Lords regarded it as axiomatic that a purchaser under an uncompleted contract for sale could assign his interest. The question was whether the notice received by the vendor was sufficient to put it on notice of the assignment (per Lord Chelmsford at 336-337, Lord Cairns at 338, Lord O’Hagan at 349, Lord Hatherley LC at 356-357).

20. [36]

    Professor Sparkes, commenting on the decision in Scott, has written:

21. [37]

    It is not the law in New South Wales that a purchaser under a specifically enforceable contract has no proprietary interest in the land prior to acquiring legal ownership. It is difficult to reconcile what was said in Scott with the established principle that a purchaser under an enforceable contract for sale has an insurable interest commensurate with the estate the vendor agreed to convey (Ziel Nominees Pty Ltd v VACC Insurance Co Ltd (1975) 180 CLR 173 at 175; Kern Corporation Ltd v Walter Reid Trading Pty Ltd at 180). It is difficult to reconcile the rules as to priorities between competing equitable interests, or between legal and equitable interests, with the apparent principle in Scott that a purchaser does not have rights other than personal rights and cannot confer a proprietary interest in land on a third party prior to acquiring the legal estate. It is also difficult to reconcile that principle with the equitable doctrine of conversion.

22. [38]

    In Scott Baroness Hale said (at [122]) that:

23. [39]

    In my view, Scott v Southern Pacific Mortgages Ltd should be treated only as authority on the complex provisions regarding overriding interests under the Land Registration Act 2002 (UK).

24. [40]

    In the present case, the purchasers’ equitable interest in the land is an interest in property. It is a corollary of the purchasers’ interest being an interest in property that it is capable of being disposed of or dealt with, such as by assignment or charge. Even though it would be necessary for the purchasers to give a direction for the transfer of the legal estate to the sub-purchaser in order for the sub-purchaser to be entitled to be registered as the proprietor of the land, it does not follow that the purchasers could not make an immediate disposition of their interest. Clause 4.3 of the standard conditions of sale provided that:

25. [41]

    This clause recognised that the purchasers could give a direction for the transfer of the land to another.

26. [42]

    I do not accept the plaintiff’s submission that the purchasers could not dispose of their interest in the agreement or the property before completion because they had not then acquired the legal estate.

27. [43]

    In any event, the parties contracted on the basis that the purchasers could dispose of their interest in the agreement or the property before completion and clause 63 has to be construed on the basis of that common assumption.

Did the purchasers dispose of their interest in the agreement or the property?

1. [44]

   The purchasers did not assign their interest under the agreement. Nor was there a novation of the contract. Nor did they “dispose” of their interest in the contract or in the property in the sense of getting rid of, that is alienating, their interest. Their sub-contract with the sub-purchaser created rights in the sub-purchaser that was imposed on the purchasers’ interest in the property, not subtracted from it (DKLR Holding Co (No. 2) Pty Ltd v Commissioner of Stamp Duties [1980] 1 NSWLR 510 at 518-520; Re Transphere Pty Ltd (1986) 5 NSWLR 309 at 311; GPT Re Limited v Lendlease Real Estate Investments Limited [2005] NSWSC 964; (2005) 12 BPR 23,217 at [62]). However, if “dispose” is read in the wider sense of “deal with” then by entering into the sub-contract the purchasers did dispose of their interest in the agreement and the property by creating an interest in the sub-purchaser that was enforceable against them and requiring them either to give a direction under clause 4.3 for the transfer to be made to the sub-purchasers (and hence dealing with their interest under the agreement) or, after taking a transfer from the vendor, giving a transfer to the sub-purchaser, and hence dealing with their interest in the property.

2. [45]

   Clause 63.3 contemplates that a sub-sale of the property is a matter that will fall within clause 63.1. Clause 63.3(a) provides that the vendor was not to withhold its consent to a request by the purchasers to assign, novate or otherwise dispose of its interest in the agreement or the property if, amongst other things, the purchasers obtained the approval of the vendor to the real estate agent which the purchasers proposed to use to sell the property. It is clear that a sale of the property by the purchasers, which could only be a sub-sale, falls within clause 63.3 and was assumed to be a transaction that would fall within clause 63.1 and 63.2. Such a sub-sale is not an assignment of the purchasers’ interest. The sub-purchaser cannot insist on the vendor’s transferring the property to him on tender of the balance of the purchase price due to the vendor. It is not an alienation of the purchasers’ interest. To complete the agreement for sub-sale the purchasers would be required to complete their agreement with the vendor. Nonetheless it was a disposition of their interest in the agreement or the property within the meaning of clause 63. Clause 63 provides its own dictionary by making it clear that a sub-sale amounts to such a disposition.

Second Issue: No breach of an essential term nor breach in an essential respect

1. [46]

   The purchasers were in breach of clause 63 by not obtaining the vendor’s consent to the sub-sale.

2. [47]

   Breach of special condition 63 only justified the vendor’s terminating the contract if the breach were a breach of the contract for sale in an essential respect (clause 9). There was no provision in the contract to the effect that clause 63 was an essential term.

3. [48]

   In Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd [2007] HCA 61; (2007) 233 CLR 115 the plurality (Gleeson CJ, Gummow, Heydon and Crennan JJ) endorsed the judgment of Diplock LJ in Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26 at 69-70 that of some contractual terms it can be said that whether a breach of the term would give rise to a right by the innocent party to terminate the contract for breach will depend upon whether the breach is of such seriousness as to deprive the innocent party of substantially the whole benefit it was intended he should obtain from the contract (at [49]-[52]). Kirby J, who concurred in the result, whilst rejecting the task of differentiating terms of a contract into classes of conditions, intermediate or innominate terms, and warranties, accepted that a right to terminate arises in respect of the breach of an essential term, the breach of a non-essential term causing substantial loss or benefit, or repudiation in the sense of renunciation of the contract (at [114]).

4. [49]

   Without descending into the debate on taxonomies, the critical question is whether the breach of special condition 63, which is not an essential term, substantially deprived the vendor of a substantial part of the benefit of the contract (Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd at 72; Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd at [52]-[55]).

5. [50]

   The purchasers’ breach of special condition 63 was not of that character. Had the vendor’s consent to the sub-sale been sought, the vendor would have been required to provide its consent, unless it did not approve of the real estate agent that the purchasers proposed to use to effect the sub-sale. The sub-sale was at a higher price than the purchase price specified in the agreement. If the vendor had not sold all of the development it could have had a legitimate interest in selling another unit in the development to the sub-purchaser, rather than being in competition with the purchasers for a sale of the unit. But the vendor would not have been entitled to refuse its consent to the sub-sale on that ground. (Nor did the vendor adduce evidence that it had not sold all of the units in the development.) The vendor’s interest in the contract was to receive the purchase price for the unit. The sub-sale did not affect that interest. The vendor was not substantially deprived of the benefit of the contract.

Repudiation

1. [51]

   Nor did the purchasers repudiate their contract with the vendor by entering into the sub-sale. The purchasers did not renunciate the contract. The purchasers remained ready and willing to perform their substantial obligation, namely to pay the purchase price for the unit. Their breach of special condition 63 was not a repudiation of the contract.

Requirements for completion

1. [52]

   Special condition 50.2 provided that the purchasers must ensure that a transferee of the property from the purchasers enter into a deed with the vendor in terms of clause 50 that incorporated such part of the contract for sale as was necessary that the vendor obtain the intended benefit of clause 50. Clause 50 specified the purchaser’s obligations in relation to the exercise of a vote at a meeting of the owners’ corporation. It provided that the purchaser must not make any claim because of “Designated Matters”. The “Designated Matters” included issues arising out of the management of the strata scheme. In the vendor’s solicitors letter of 25 November 2015 its solicitor stated that if the purchasers had sold the property in accordance with the contract, then the vendor required that the sub-purchaser enter into a deed of Designated Matters in accordance with the contract.

2. [53]

   The sub-contract included a term requiring the sub-purchaser to enter into the requisite deed of Designated Matters. There is no reason to apprehend that the purchasers cannot comply with clause 50.2.

3. [54]

   The purchasers’ breach of special condition 63 does not mean that the purchasers are not willing and able to complete the contract in accordance with its terms. That will no doubt include a direction that the vendor execute a transfer in favour of the sub-purchaser. The vendor is entitled to require that the sub-purchaser enter into a deed with the vendor in terms of clause 50.2. The plaintiff accepts that this is so.

Third Issue: Vendor’s claim for damages

1. [55]

   The vendor is entitled to nominal damages for the purchasers’ breach of special condition 63. It sought a further hearing for the quantification of damages. But no evidence was adduced that the vendor suffered any damage as a result of the breach of special condition 63. In those circumstances no such enquiry is warranted.

Declarations and orders

1. [56]

   For these reasons I make the following declaration and orders:

2. [57]

   Prima facie the defendant should pay the plaintiff’s costs of the proceedings, including the cross-claim, notwithstanding the award of nominal damages. I will hear the parties on costs.