Spring 2009

The Property Law Update is produced to keep you up to date with the developments in the law relating to property. If you would like to know more about any of the topics covered in this update, please contact us. This update is produced by our Property and Private Services Group.

This issue:

• Lease Assignments in Liquidation Situations
  Landlords faced with rent arrears when their tenant goes into liquidation can take heart.  A recent case provides some hope of recovering arrears from liquidators wanting to assign a lease.  more
• Legitimate Warning v Illegitimate Threat
  This case highlights the need for parties to a contract to be very sure of the difference between what may appear to be a threat, and what could in fact be just a warning.  more
• Body Corporate Consent to Fix Leaky Units
  Clear Body Corporate rules are critical in ensuring that unit owners do not go beyond their power, but do have the means to protect their property.  more
• Rental Return:  Who Got It Wrong and Who Pays?
  In this case the Court apportions responsibility for misrepresentation of a rental return between the vendor, the agent and the purchaser.  more

Lease Assignments in Liquidation Situations

Hardley, Hardley & Hardley v Fatupaito & McCloy

The commercial property market has been adversely affected in the recent economic climate.  It is not uncommon to see tenants struggling with their obligations under commercial leases.  If a tenant is put into liquation, can the landlord, as a pre-condition to consenting to any assignment, require a liquidator to pay the outstanding rent arrears?

In this case, Hardley ("Landlords") applied to the High Court to confirm their right to require the liquidators of the tenants ("Liquidators") to pay arrears of rental before they consented to an assignment of the lease. 

The Liquidators raised the following arguments with respect to the Landlord's rights and obligations under the lease and the Property Law Act 2007 ("PLA'07"):

• That the Landlord's condition requiring the liquidators to pay the rent arrears contravened section 227(1)(a)(i) of the PLA'07;
• That the imposition of the condition meant that the Landlord's were unreasonably withholding their consent to the proposed assignment.

The High Court's finding regarding the above issues can be summarised as follows:

Did the Landlords breach Section 227(1)(a)(i) of the PLA'07?

• Section 227(1)(a)(i) of the PLA'07 provides that consent is unreasonably withheld if "as a condition of, or in relation to, giving consent, the lessor requires the payment of additional rent or by way of premium or fine or other consideration; …"
• The Court held that nothing in this provision suggested that it was intended to curtail a landlord's ability to enforce rights under the lease that exist independently of any request for consent to a proposed assignment.
• The provision only applies to any amount that the lessor may require the lessee to pay that is in the nature of additional rent, premium or fine.
• The Court found that the Landlords were seeking payment of outstanding rent and outgoings which they are already entitled to under the lease, and to demand payment of this did not constitute additional rent, premium or fine.
• The Court further noted that the requirement to pay the arrears is a contractual obligation that arose prior to, and exists entirely independent of, the request for the consent to the proposed assignment.

Were the Landlords unreasonably withholding consent to the assignment?

• The solicitors for the Liquidators argued that the Landlords were using their power to withhold consent for a collateral purpose that is unconnected with the lease.
• The Court held that the requirement to pay rental is a fundamental obligation under any lease and if a tenant is in breach of this obligation, then a landlord cannot be criticised for withholding its consent to a proposed assignment until the rent arrears are paid.

The Liquidators' argument on both of the above issues failed.  However, landlords should seek legal advice regarding their rights and obligations under the lease and the PLA'07 if their tenant is put in liquidation.  Lease disputes can become complex, and landlords need to be careful in dealing with liquidators and tenants in default. With timely legal advice, landlords can minimise their loss. Likewise, tenants in default should seek legal advice on their legal position both under the lease and at law.

For more information please contact: Deborah Miller, Ian McCombe or Howard Johnston (Partners, Commercial Property)

Legitimate Warning v Illegitimate Threat

McIntyre v Nemesis DBK Limited – Court of Appeal [2009]

This case illustrates the difference between an illegitimate threat to do something not contemplated by a contract, and a legitimate warning that a party may exercise a contractual right.

Mrs M, who owned a section of land valued at $245,000 which was subsequently transferred to her family trust, entered into a joint venture with Mr H to subdivide the land and sell the sections. The essential terms of the joint venture were:

• Mrs M would transfer a half share of her land to Mr H for $100,000, taking into account the value of the house retained by Mrs M;
• Mr H would manage the subdivision process;
• Mrs M and Mr H would share the costs of the subdivision equally;
• Mr H would be remunerated by receiving one section as his own in addition to an equal share of the profit made from the sold sections;
• Mr H had a buyout option of Mrs M's interest in the land if the subdivision was not completed within five years.

The subdivision process took 11 years to complete. Due to the extended delay and the extra work and stress Mr H considered this had placed on him, he requested a variation to the joint venture to increase the remuneration he was entitled to receive for his management of the subdivision The trustees agreed to provide Mr H the right to choose a section from the subdivision which had title at that time rather than from the last stage of the subdivision.

Mr H sought further improvements to his remuneration and sent a letter to the trustees raising the possibility of his exit from the joint venture. He wrote a separate letter purporting to give formal notice of his resignation as manager but he did not in fact withdraw. A meeting was held between Mr H and the trustees where a second variation to the joint venture was agreed, the agreement being recorded on a hand written note signed by Mr S, the independent trustee who was also a solicitor, and by Mr B, who was Mr H's solicitor. Mr H would receive a further two sections and payment for part of his management services would be 'worked out on a goodwill basis'.

Upon Mr H’s sudden death, a successful claim for payment in accordance with the second variation was brought by the executors of his estate against the trustees. The trustees appealed to the High Court arguing that the claim should be set aside due to the economic duress which Mr H had placed on the trustees causing them to agree to the second variation. The key requirements of economic duress are:

• an exertion of illegitimate pressure on a victim; and
• the imposition of that pressure must compel the victim to enter into the contract.

The Court noted the distinction between threats and warnings, the former being illegitimate and the latter being legitimate. The trustees argued that Mr H was threatening to stop work on the subdivision as he was contractually bound to do. However, the joint venture contained a provision which noted the parties could agree to revoke Mr H's appointment as manager and that the revocation would not affect his right to a section from the subdivision. This showed that it was contemplated by the parties that Mr H would not always be the project manager and that his letters amounted to a warning of a potential consequence, rather than a threat to take an action which he was not legally entitled to take.

In reaching a decision in favour of Mr H the Court noted the following main points:

• the prolonged life span of the development;
• the trustees signed a note recording the second variation and there was no record of any protest at that time, in fact the allegation of duress was not raised until after Mr H's death;
• the characteristics of the alleged victim are relevant and one of the trustees was an experienced property solicitor;
• the decision of the trustees to agree was motivated primarily by the interests of the beneficiaries – it was in their best interests to appease Mr H so that the subdivision would be completed – and it was the best outcome available to the trustees;
• the trustees did not take steps to mitigate their potential loss ie finding another manager or purchaser of either the trustee's or Mr H's interest in the joint venture;
• the trustees took steps which affirmed the variations.

This case highlights that one party may consider the other party's actions are outside the agreement reached, based on a moral position, while in fact, taking into account the commercial context of the transaction, those actions are lawful.  While care may be taken not to issue an unlawful threat, the Court will not interfere with legitimate use of a contractual term. Accordingly, parties to any contract need to ensure that it is drafted so that the rights of the parties are evenly balanced.

For more information please contact: Deborah Miller, Ian McCombe or Howard Johnston (Partners, Commercial Property)

Body Corporate Consent To Fix Leaky Units

Fraser, Lewis; Dustin v Body Corporate S63621, Ingram & Ors, High Court, 2009

The Unit Titles Act 1972 ("Act") is a complex piece of legislation affecting the rights and obligations of unit owners and Bodies Corporate. Body Corporate rules should be interpreted accurately, considering both the intention of parliament when drafting the Act, and the application of case law which may be relevant to a particular scenario.

This case demonstrates the importance of interpretation of the Body Corporate rules in the context of the Act.  Body Corporate rule 1(f) provides that "a proprietor shall make no additions or structural alterations to the unit without the consent of the body corporate".  The main issue before the Court was to decide if the Body Corporate's approval was required before any remedial or reinstatement work could be undertaken, to remedy the problems caused to the unit by water ingress.

In this case the Body Corporate refused consent for a new dwelling to be constructed given the new dwelling was going to be outside the existing building footprint and was likely to affect the view of other unit owners. 

The Court concluded that a fundamental reconstruction of a unit was a major structural work and the Body Corporate had the right to refuse consent, if the economic or aesthetic interests of the owners were affected. 

Section 48 of the Act provides that where a building or other improvement comprised in any unit is damaged or destroyed then by application by a unit owner or the Body Corporate, the court can by order settle a scheme for reinstatement of the buildings or other improvements.  In this case the applicant sought the court's order under section 48 of the Act, however the court delayed its decision on this issue until later.

For more information please contact: Deborah Miller, Ian McCombe or Howard Johnston (Partners, Commercial Property)

Rental Return:  Who Got It Wrong and Who Pays?

Hinton v Smith & Ors

In this case the plaintiffs ("Mr & Mrs Hinton") sought various relief from the Court for losses they incurred as purchasers of two investment units. The basis of the relief sought was a pre-contractual representation by the vendors' agents about the expected annual return from the units.  The agents advised Mr & Mrs Hinton that the annual return for one of the units was 9.12% per annum and 8.48% for the other unit.  The actual net return was closer to 2% per annum.  It was not established that the vendors knew of this representation, or the agents knew that it was a misrepresentation, instead, the vendors had not provided enough information to the agents and the agents had not appreciated the significance of conveying an unqualified representation to a purchaser.  Although, Mr & Mrs Hinton had requested additional information, they had signed the agreement without receiving more detailed information, relying on the agents' representation.

The Court held that the agents' representation was a material misrepresentation. Mr & Mrs Hinton sought the following relief from the Court:

1. Cancellation of the agreement.  The Court held that Mr & Mrs Hinton were entitled to cancel the agreement and the Court granted orders accordingly.
2. The Hintons alleged that the agents' representation was misleading and deceptive and sought an order under section 43 of the Fair Trading Act.  However this order was not granted by the Court.
3. The Court held that the agents breached their duty of care not to make negligent misstatements.
4. The Court held: (a) that Mr & Mrs Hinton had failed to take reasonable care as they failed to make sufficient enquiries about the nature and scope of other costs applicable to the units. Therefore the damages available to them were reduced; (b) that the agents breached an implied term of the agency agreement, and were liable to the vendors; and (c) that the vendors were not liable to indemnify the agents as it was beyond the reasonable contemplation of the vendors that the vendors' incomplete information would be transformed into a representation in the terms made by the agent.

The allocation of responsibility was found to be: (a) Vendors: 35%; (b) Agents: 50%; and (c) Purchasers: 15%. This case shows the power of the Courts to completely unwind a transaction in case of a misrepresentation made by a vendor as well as vendor's agents.  This case also establishes that an agent does have a responsibility to use reasonable skills to check the facts being submitted to a purchaser, and where facts are apparently incomplete, the agent should seek full information from the vendor.  A vendor should provide relevant information to the agents to ensure that there is no misrepresentation rather than providing only material which is misleading due to what is omitted.

For more information please contact: Deborah Miller, Ian McCombe or Howard Johnston (Partners, Commercial Property)

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Last updated: 27 October 2009

The contents of this publication are general in nature and are not intended to serve as a substitute for legal advice on a specific matter. In the absence of such advice no responsibility is accepted by Brookfields for reliance on any of the information provided in this publication.