Australia: Property & Leasing Disputes - Edition 2

In this edition

Property & Leasing Disputes provides a bimonthly analysis and commentary on a handful of selected issues which may be of interest to those whose professional lives involve dealing with property, leasing, property development or conveyancing. The focus is upon matters that have found their way into the upper reaches of the court system, and some guidance is offered on dealing with similar issues as they may arise.

This edition looks at:

  • The limited scope to challenge a final and binding expert determination;
  • Assessing damages in a falling market when a purchaser fails to complete a contract for the sale and purchase of land;
  • Obtaining easements across public space to enable construction; and
  • Whether a long term lease at a nominal rent can be repudiated.

Challenging expert determinations

Leases and other forms of property contracts often contain expert determination clauses, allowing certain disputes to be referred to an expert. Examples include disputed rent reviews, adjustments to sale prices or measuring losses.

The rationale behind such clauses is simple. The parties, appreciating the cost, time and inconvenience of litigation, contractually agree that an expert is to be appointed to finally determine certain disputes within a short period of time and with limited formality. Normally the parties specify that the expert will 'act as an expert not an arbitrator' - meaning that the expert will not need to make a judicial-style determination and hear evidence etc - and that the expert's decision will be 'final, conclusive and binding'.

Disputes about disputes

Not only can parties fall into dispute about contractual matters that they agree must be referred to an expert, but once a report is delivered, they may then dispute the determination itself, and try and challenge its binding nature. This is particularly so if one party regards the determination to be infected with an obvious error that goes against their interests.

Courts generally will not allow review of expert determinations said to be 'final, conclusive and binding'. Perhaps counterintuitively, this often includes cases where the expert has made a mistake. The Supreme Court of New South Wales recently considered the law in this area in some detail (Australian Vintage Limited v Belvino Investments No 2 Pty Ltd [2015] NSWSC 168).

AVL leased a vineyard from Belvino. Frost severely damaged the vines, affecting production. The parties were then required to try and agree upon the impact of the frost on the tenant's production. If production, or 'production capacity', was adversely affected to a particular point, the tenant could terminate the lease.

"Courts generally will not allow review of expert determinations said to be 'final, conclusive and binding'. Perhaps counterintuitively, this often includes cases where the expert has made a mistake."

No agreement was reached and the matter was referred to an expert, who was charged with determining the extent of the lost production, and whose decision was to be "final and binding".

Courts will not normally intervene to overturn expert reports

Ultimately, the expert found that the reduction in production caused by the frost did not reach the threshold allowing termination. The tenant considered that the expert had misconstrued the relevant clause of the lease and asked the court to set aside the determination. The court refused to do so. The precise reasons why, in AVL's case, are particular to that contract and not relevant. What is relevant is what the court said about the principles applicable to reviewing final and binding expert determinations:

  • The overarching question is 'did the expert provide a report, or make a determination, in accordance with the terms of the contract?'
  • If the answer to this question is 'yes', it does not matter that the determination considered irrelevant material, or failed to consider relevant material, or involved a misinterpretation of parts of the contract, or was probably wrong, or was unreasonable, or involved an error of judgment, or involved a negligent application of an applicable principle, or involved a negligent understanding of the applicable law, or the expert was asked to determine a legal question but was not a lawyer.
  • This makes the wording of the contract quite critical in determining whether the expert did what was required. For instance, there may be a significant difference between asking an expert to "value the land" and asking an expert to "value the land in accordance with the criteria specified in schedule A", where schedule A sets out a precise set of matters that must be considered.
  • In the first example, so long as any valuation of the land is provided - no matter how incompetent - the parties have got what they asked for and they have agreed to be bound by the outcome. They must live with it.
  • In the second example, there will only be scope to overturn the determination if the expert did not apply all of the criteria in schedule A, since in this case the expert will not have done what the contract required. However, so long as the expert follows schedule A - even if the final report is a plainly poor report or contains a mistake (for instance by treating as comparable rents that which on no reasonable view are comparable), the parties are still bound. In other words, while providing more criteria may steer the expert toward what the parties ideally want, it is not failsafe.
  • If the expert is required to construe a clause of a contract for the purposes of the determination (eg, how a mathematical formula in the contract is to be applied to work out a price adjustment), the expert's construction will be binding, even if not the best possible construction, or even a mistaken construction.
  • Finally, if a report is properly susceptible to review because the expert did not deliver what the contract required, then the court will normally refer the matter back to the same expert for further reporting.

Comment

The binding nature of a 'conclusive, final and binding' expert report is often very desirable. It serves a useful commercial purpose in achieving finality. Looked at the other way, if a clause is not said to be final (which occurs), the dispute then has the potential to become full blown litigation if one party is not content with the expert's opinion, running against the reason why parties generally agree upon expert determination clauses in the first place.

However, there is always going to be a risk that the parties will have to live with a poor determination (but in a sense that is life - there can also be poor judicial decisions etc). This result is nonetheless undesirable and some upfront measures can be put in place to limit the possibility of its occurrence:

  • An expert needs to be told what to do with clarity and with some parameters steering the expert in the required direction.
  • Care needs to be taken not to include too much detail. This may only open the way for a disgruntled party to assert that the expert did not take a particular issue into consideration. Balance is the key.
  • The quality and appropriateness of the expert is plainly important. In respect of quality, a contract should provide a process to ensure that an expert with sufficient qualification is selected. Often this is done by reference to membership of a professional body and satisfying experience criteria, such as time in practice and demonstrated expertise in dealing with similar issues.
  • In respect of an expert's appropriateness, some care needs to be taken in making sure that the expert is not being asked to give an opinion on a matter not within their expertise. As stated above, this will not be a ground for review. In some situations, it may be that more than one expert is needed, or that the expert may have a discretion to request that specific matters be referred to another expert.

Sale of land - damages when a purchase fails to complete

Following breach of contract, the injured party typically asserts a right to damages to provide compensation for the loss suffered by the breach. However, measuring the damage suffered is not always straightforward.

Filmlock owned land in Jindabyne, NSW capable of subdivision into 100 lots and entered into a contract to sell the land to Nissi Investments for $7.2 million. Completion was scheduled for May 2008, but didn't take place through the fault of the purchaser. A notice to complete was issued, requiring completion in May 2008, which failed to occur. The vendor terminated on the basis of the purchaser's breach and took steps to resell the land.

Calculating damages

Given events, including the 'GFC', Filmlock was only able to find a purchaser in June 2009 - 13 months later - and only then for a purchase price of $3.1 million. Filmlock sued Nissi and its guarantors for damages which were calculated to be $3.7 million, being:

  • the original contract price ($7.2 million); less
  • the retained deposit; less
  • the 2009 sale price ($3.1 million), which the trial judge regarded as fair value of the land at June 2009 (ie the date of resale).

The above approach to damages follows clause 9.3 of the standard contract for the sale and purchase of land (in both the 2005 and 2014 versions, with similar provisions in standard contracts in Victoria and Queensland).

Clause 9.3 applies after a vendor has terminated for a purchaser's default. If the vendor resells the land within 12 months of termination, the vendor can sue the purchaser for damages which are to be measured as the "deficiency on resale", being the difference between the original purchase price and the resell purchase price, less any retained deposit.

The correct approach to damages when a resale occurs more than 12 months later

A guarantor of Nissi Investments appealed the decision contesting the calculation of damages (Ng v Filmlock [2014] NSWCA 389). He argued that the approach under clause 9.3 was irrelevant because the resale did not take place within the 12 months, but occurred 13 months after termination. This meant that the court was required to measure the damages according to the 'general rule' following termination being:

  • the original contract price; less
  • any retained deposit; less
  • the value of the land as at the date of termination for breach by the purchaser (ie in May 2008 not June 2009).

Given that the land value had fallen considerably by June 2009, the purchaser was hoping that the value at the date of termination (May 2008) would have been higher, thereby lessening the amount of damages payable.

The court agreed with the guarantor on the approach to damages, but due to deficiencies in evidence concerning the land value in May 2008, it could not assess the damage suffered and a further hearing will now be required (which just goes to show how slowly the legal system can proceed – the default was in 2008 and the matter will not be concluded until mid 2015 at the earliest).

The correct approach and some comment

Relevantly, the court made the following points that are useful to reflect upon when considering damages that may be payable following termination for breach:

  • Clause 9.3 of the contract for the sale and purchase of land is a contractual exception to the usual position that damages are measured as the difference between the sale price and the value of the land at the date of breach.
  • Accordingly, if a vendor cannot rely on clause 9.3, the usual measure of damages applies (ie original price less the market value at the date of breach). However, applying the standard approach to damages is not always simple. For instance, it may not be easy to identify the market value at the date of breach, and in some cases the best gauge of that value may well be the price the land is ultimately sold for if the vendor is diligent in selling. That is, the general rule does have some flexibility in particular - or unusual – circumstances, such as if a market at the relevant date cannot be established.

Clause 9.3 provides an uncomplicated way of measuring damages. In a stable or slightly rising market, its application won't cause undue hardship. The resale price will often be the same or more than the original sale price, meaning that there is no additional damage suffered by the purchaser, particularly where a deposit has also been forfeited. However, in a falling market, clause 9.3 offers a vendor a real benefit if it can achieve a sale within 12 months, and this should be borne in mind.

Obtaining an easement across a public park to enable CBD building works

It is not unusual for a landowner wanting to develop their land to require access, by way of an easement, across neighbouring land. In some cases, including where the easement will need to give a right of way across public land, a court may be prepared to order a temporary easement out of 'reasonable necessity' even where the landowner does not agree to the easement on their land.

In NSW these are known as 'section 88K easements' due to the relevant section of the Conveyancing Act.

In this case, to assist with the substantial refurbishment of a CBD office tower, its owner sought an easement to enable construction vehicles to temporarily pass across a neighbouring public reserve. This required the court to consider the circumstances in which an 'easement of necessity' might be granted over public space.

The office tower, which had not been refurbished for 20 years, was in a precinct with high levels of pedestrian and vehicle traffic. The proposed refurbishment was also time critical since, if the works were not commenced quickly, they would be delayed for considerable time by the planned construction of a light rail station near the building.

Negotiations and a court application

The owner negotiated with the council and entered into a 'voluntary planning agreement' to upgrade the public reserve following the refurbishment. However, while the local council supported the granting of an easement, the relevant legislation did not empower it to make the grant, so it could not agree to grant an easement.

The fact that a council is unable to grant an easement does not prevent a court from doing so, and the building's owner then approached the court, asking it to order the easement (Perpetual Trustee Company Limited v The Council of the City of Sydney [2015] NSWSC 454). It argued that a temporary easement over the park for construction vehicles was "reasonably necessary for the effective use or development of the land".

When is an easement reasonably necessary?

In considering whether an easement is 'reasonably necessary', the court will focus upon:

  • The reasonable uses that can be made of the land (ie the land on which the office tower stood);
  • If the landowner has a specific proposed use of the land (here the refurbishment), whether the easement is reasonably necessary for that use;
  • Whether the proposed use is itself reasonable compared to other available uses that would not require an easement. In other words, unless the proposed use is reasonable when compared to other uses, a court will be hesitant to order an easement and thereby burden someone else's land; and
  • The impact of an easement upon the owner of the burdened land (here the Council) and upon third parties, including the public in a case where the easement would impact upon a public park.

The court found that the refurbishment was a reasonable use of the land, and that the upgrade would provide better amenity to tenants and visitors. The court was also satisfied that the easement was reasonably necessary for the refurbishment, given that the alternative would require construction vehicle access from other points, which would cause traffic congestion, hold up public transport, disrupt pedestrians and have safety risks.

In respect of third party considerations, the court considered that the refurbishment works were consistent with the building's zoning, that the refurbishment would increase amenity in the building, and that the park would be upgraded under the voluntary planning agreement. The temporary use of part of the park did not affect this finding.

Comment

As a practical rule, it is always best to try and negotiate an easement with neighbouring landowners. If a court application for an easement needs to be made, such an application may take several weeks or even months. The possibility of this delay, which may itself delay construction, should be considered when creating timelines for a project, or when calculating completion dates in off-the-plan sales contracts.

Leasing - Can a tenant repudiate a long term lease for nominal consideration?

A recent Victorian decision illustrated that while it is nowadays common to consider leases as another type of contract, so that principles such as repudiation and termination for breach apply easily, this will not always be the case, particularly for long term leases with nominal rent.

De Facto subdivision

Mr Stephan owned a large piece of land in Victoria which couldn't be subdivided. He wanted to sell a small portion of the land to the Brahams and keep the rest for himself. To achieve this, a de facto subdivision was created as follows:

  • The Brahams purchased the entire parcel of land from Mr Stephan
  • Mr Stephan leased back the portion that he wanted to keep, known as the 'northern portion'. The lease ran for 99 years and only $1 was payable as rent
  • The purchase price paid by the Brahams was the market value for the portion of the land that they would use, and the contract documents said that the intention of the agreement was for the Brahams to only acquire their portion of the land
  • Mr Stephan was given an option, exercisable at any time during the lease term, to purchase the northern portion for $10. The idea was that if a subdivision became possible, Mr Stephan could acquire the leased land for a nominal sum.

What brought this matter before the Victorian Supreme Court (Braham v Stephan [2015] VSC 87) began with a clause in the lease prohibiting Mr Stephan from using the northern portion of the land for any "illegal matter or thing". As it happened, Mr Stephan's son built a shed on the northern portion without the necessary approval. The local council issued a demolition order to the Brahams as land owners, and via a series of unfortunate but not malicious events, the shed remained on the northern portion in defiance of the council's notification.

Ultimately the local council commenced a criminal proceeding against the Brahams (as landowners) concerning the shed. The Brahams pleaded guilty, had to pay costs, and the Magistrate's Court ordered that the shed be demolished. None of these happenings were conveyed to Mr Stephan and his shed remained on the northern portion.

Breach notice and repudiation

The Brahams then issued a breach notice under the relevant leasing legislation stating that the lease would be terminated if the illegal shed was not demolished within 14 days. The shed was not demolished within the 14 days (it was a short time later) and the Brahams purported to terminate the lease by notice. If effective, the consequence would be that the Brahams obtained possession of the northern portion of the land and Mr Stephan would lose his interest in the land.

The Brahams sought court declarations that Mr Stephan had repudiated his lease and that their termination was effective. The court refused to make the declarations for the following reasons:

  • While it is orthodox to regard a commercial lease as subject to normal contractual principles, such as the ability for a landlord to accept a tenant's repudiation and terminate, these principles have a limited application in respect of a long term lease for nominal consideration. In these cases, a court will treat the lease as primarily an estate in land, and except in a case of very clear abandonment of possession, conduct amounting to a repudiation of the lease will be rare.
  • Another way of considering this is that the parties to the lease could not be said to have intended the doctrine of repudiation to apply. This is evident on the basis that: the only consideration is nominal; the lease was to run for such a long period that the landlord commercially stands to gain nothing from the lease; and in the circumstances the tenant is effectively the landowner of the leased portion of land.
  • The terms of the contracts made it clear that the parties treated Mr Stephan as having full legal ownership of the northern portion, and the only reason he had to lease it was due to the legal inability to subdivide.
  • Even though termination may not have been possible, any loss suffered as a result of the breach was still able to be claimed. Here, the Brahams suffered the costs of the local council's prosecution, which Mr Stephan had to pay.

Comment

This case is a useful reminder that leases are not only contracts but also interests in land, and depending on their terms and the parties' intentions, some contractual remedies may not be available in particular circumstances. In commercial contexts, there can be long term leases of land at relatively nominal consideration where the tenant is required to make significant improvements to the land. The above principles may have some application in disputes concerning those leases.

This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.

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