Disclaimer of a lease by a landlord update: Re Willmott Forests [2012] VSCA 202.

I wrote a post on disclaimer of a lease by a landlord in 'Disclaimer of a lease by a landlord: Willmott Forests Ltd [2012] VSC 29'. That matter was a decision by Davies J in which Her Honour held that a landlord could not disclaim a lease, under s568 Corporations Act, for the following reasons (at [11]):

a disclaimer of the lease by the liquidator of the landlord would only terminate the rights, interests, liabilities and property of the landlord but it would not bring the lease to an end for all purposes. Specifically, it would not bring the tenant’s proprietary interest in the land to an end. The tenant’s proprietary rights in the land will continue to subsist, even though the effect of disclaimer is that the landlord’s interests and liabilities under the lease have been terminated. Thus the effect of disclaimer is different where the lease is disclaimed by the liquidator of the landlord.

That decision was appealed, and the Court of Appeal (Warren CJ, Redlich JA and Sifris AJA) upheld the appeal in Re Willmott Forests [2012] VSCA 202. I haven't linked the AustLII decision to this page as the decision is not available yet. However the decision is available on the ABL website section devoted to the Willmott Forests liquidation litigation (http://www.abl.com.au/willmott/willmott.htm).

Warren CJ and Sifris AJA summarised the critical question as follows (at [1]): 'The critical question in this appeal is whether a leasehold interest in land is extinguished by the disclaimer of the lease agreement by the liquidator of the lessor, pursuant to s 568(1) of the Corporations Act 2001 (Cth) ('the Act').'

The Court of Appeal considered that if the interest of a lessee under a disclaimed contract terminated, then the leasehold estate must also go.

Warren CJ and Sifris AJA construed s568D(1) Corporations Act widely and considered that it included the obligation to provide possession and quiet enjoyment (at [37]):

37. The context of the word 'liability' in s 568D(l) suggests that it should be given the widest possible meaning and include the obligation to provide possession and quiet enjoyment. The section is specifically designed to enable a liquidator 'to cease performing obligations ... [and] to achieve a release of the company in liquidation from its obligations'. If WFL is to be relieved of its obligation to provide quiet enjoyment, clearly and in context a liability, the interest of the lessee so far as tenure is concerned is directly related to and underpins such liability. The tenure must go. It is necessary to affect the Growers rights (tenure) in order to release WFL from its liability (possession and quiet enjoyment). The cases where rights have been preserved usually involve claims against third parties unrelated to any liability of the company in liquidation.

Warren CJ and Sifris AJA relied on the decision of Deane J in Progressive Mailing House Proprietary Limited v Tabali Proprietary Limited (1985) 157 CLR 17 (at [42] of Willmott):

[T]he leasehold estate cannot be divorced from its origins and basis in the law of contract (c.f. per Aitkin L.J. in Matthew v Curling): the lease should be seen as 'resting on covenant' (or contractual promise) and it is 'the contract ... and not the state ... which is the determining factor': see per Isaacs J., Frith v O'Halloran quoting from Hallen v Spaeth.
...
[O]nce it is accepted that the principles of the law of contract  governing termination for fundamental breach are, as a matter of theory, applicable to leases generally, there is no difficulty in applying them in the present case in much the same fashion as an ordinary executory contract: '[i]f the contract is avoided or dissolved ... the estate falls with it': per Lord Wright, Cricklewood Property and Investment Trust Ltd v Leighton's Investment Trust Ltd.

Warren CJ and Sifris AJA held that because the leasehold interest is governed by the law of contract, the consequences of disclaimer of a contract of lease were no different to those for termination of a lease by way of acceptance of a repudiation (at [47]):

47. Although the event bringing about the termination of the contract of lease (and as a consequence, any leasehold interest) was a repudiation accepted by the non-defaulting party, it is the consequences of such termination, (namely termination of the leasehold interest) however brought about, that are relevant. There is no reason in principle or policy that should treat the consequences of disclaiming a contract of lease in a different way. In both cases, the lease agreement is at an end and what follows is a matter of law, namely termination of the leasehold interest that does not depend in any way on the reason for such termination. 

Warren CJ and Sifris AJA held that the leasehold interest could not survive the termination of the very document that created it and regulated the tenure of the Grower, and held that the policy of the Corporations Act, particularly the disclaimer provisions, supported the appellant's position (at [58]):

58. Accordingly, in our opinion, the grounds of appeal are made out. For the reasons given, any leasehold interest cannot survive the termination of the very contract that created it and regulated the tenure of the Grower. It is this tenure which creates, and is the basis of, the obligation or liability on the part of WFL to provide quiet enjoyment. Section 586D(1) allows the liquidator to terminate this obligation or liability despite its intrusion into the property rights of an innocent party. The evident policy is to permit the loss of these rights in order to enable the company in liquidation to be free of obligations so that it can be wound up without delay for the benefit of its creditors. To compensate, the rights of the affected parties are transmuted into various statutory rights and claims.

Redlich JA also held that s568D ought to be construed widely (at [82]):

82. Save where the terms of the lease provide otherwise, the landlord will ordinarily be obliged to meet various expenses arising from ownership of the freehold to ensure the tenant's undisturbed possession of the land. But 'liability' in the context of s 568D is not to be confined to a financial obligation or immediate financial detriment. There is nothing in s 568D or Div 7 A to suggest that the term liability is not so wide as to include 'a legal obligation or duty.' The term 'liability' has a broad meaning which covers executory obligations in relation to the quiet possession, use and enjoyment of the land into the future. To release the appellants from these obligations it is necessary that the respondents' estates or interests in the leased lands be extinguished at the same time as the contracts. 

Amendment vs removal of caveats: Ren v Shi [2012] VSC 271

I was recently involved in the matter of Ren v Shi [2012] VSC 271 which was a hearing before Justice McMillan in the Supreme Court of Victoria. The plaintiff was seeking to remove a caveat from a property, and the defendant alleged that the caveat ought to remain on the title as, although defective, it was said to be capable of amendment.

The defect in the caveat was largely in the section 'estate or interest claimed'. The caveat claimed an 'estate in fee simple' (i.e. stating that the caveator was the owner of the land), whereas it appeared that the interest that the caveator had could only be, at its highest, an equitable charge (at [34] to [37]). Also, the document (written in Chinese) said to give rise to the interest was translated as follows (at [33]):

The plaintiff’s translation reads “[Mr] Xiao agrees to use his family assets to guarantee the repayment of the debt owed to [Mr]Shi”. In contrast, the defendant’s translation reads “[Mr] Xiao agrees to use his family assets as security for the repayment of the debt owed to [Mr] Shi”.

Power to amend a defective caveat

s90(3) of the Transfer of Land Act 1958 (Vic) (the TLA) provides:

(3) Any person who is adversely affected by any such caveat may bring proceedings in a court against the caveator for the removal of the caveat and the court may make such order as the court thinks fit. [emphasis mine]

s90(3) TLA has been construed widely, giving the Court a discretion not only to remove a caveat, but also to amend the caveat to cure certain defects on the face of the caveat. There had been ongoing debate about whether or not the power to amend a caveat extends to amending the 'estate or interest claimed'.

In Ren v Shi, the McMillan J noted the factors that a Court must consider when faced with a defective caveat and an application to amend, including (at [21]):

(a) Whether the amendment is to the estate or interest claimed and not just the grounds of claim.

(b) The circumstances in which the error was made, including whether the caveator was represented by lawyers at the time.

(c) “The Court should not readily act in a way which might encourage the belief that the caveats can be imprecisely formulated and then ’fixed up later’.”

(d) The overall merits of the claim.

These factors developed from the decision of Macaulay J in Percy & Michele Pty Ltd v Gangemi [2010] VSC 530 (Gangemi) and were fleshed out by Dixon J in Martorella v Innovision Developments Pty Ltd [2011] VSC 282 (Martorella). Much earlier, in Midwarren Estates Pty Ltd v Retek & Stivic [1975] VR 575, Menhennit J held that the 'estate or interest claimed' could not be amended. However, Macaulay J in Gangemi and Dixon J in Martorella held that the 'estate or interest claimed' section in a caveat could be amended, but in considering the four factors set out above, special circumstances had to exist for such an amendment to be allowed (see Martorella at [65]).

The reasons for the limitation are discussed by Dixon J in Martorella in detail between [51] and [66]. A succinct summary is set out by Dixon J in Martorella at [55]:

A person proposing to deal with the land is entitled to assume that the claim expressed is the only one made, for the express mention of one ground is to the exclusion of the other. If a caveator enjoyed more, or different, rights in land than claimed in the caveat, it is proper and appropriate to lodge another, or a different, caveat notifying such interests.

For instance, it would be unfair for a registered proprietor to issue proceedings against a caveator, knowing that the caveator doesn't have the particular interest claimed, only to have the Court cure the defective caveat to the benefit of the caveator and to the detriment of the registered proprietor.

Removal of a caveat

McMillan J went on to discuss the considerations for the exercise of the Court's discretion to order the removal of a caveat. The basis for the removal of a caveat is the same as for an interlocutory injunction, as noted by Warren CJ in Piroshenko v Grojsman (2010) 27 VR 489 (Piroshenko) at [7] (also in Ren v Shi at [30]):

Caveats under the Torrens system are treated by the courts as analogous to applications for interlocutory injunctive relief. In so far as their registration is an administrative act, it is when application is made for their removal that the onus falls on the caveator to satisfy the two-stage test used by the court when deciding whether to exercise its discretion to grant injunctive relief. ... This two-stage approach requires the caveator to establish that there is a serious question to be tried that they have the estate or interest which they claim in the land in question, and having done so, to establish that the balance of convenience favours the maintenance of the caveat on the Register of Titles until trial.

Australian Broadcasting Corporation v O’Neill [2006] 227 CLR 57 clarified the proper test for a Court exercising its discretion to grant an interlocutory injunction. As a result, the trial division of the Supreme Court of Victoria recently reformulated the test for the removal of caveats, particularly with respect to the first arm of the test, being whether there is a 'serious question to be tried'. The test is as follows (Piroshenko v Grojsman [2010] VSC 240 at [18] and Ren v Shi at [31]):

1. there is a probability on the evidence before the court that he or she will be found to have the asserted equitable rights or interest; and

2. that probability is sufficient to justify the practical effect which the caveat has on the ability of the registered proprietor to deal with the property in question in accordance with their normal proprietary rights.

If there is a 'serious question to be tried', then the Court goes on to consider the 'balance of convenience'. The 'balance of convenience' test has had a similar re-expression as a result of the Court of Appeal in Bradto Pty Ltd v State of Victoria [2006] VSCA 89 rejigging the 'balance of convenience' test for interlocutory injunctions. This has been expressed as 'the court should take whichever course appears to carry the lower risk of injustice if it should turn out to have been ‘wrong’ (see Bradto at [35] and Ren v Shi at [38]).

Ultimately, McMillan J held that the caveat ought not be amended ([25]), and even if it was amended, the Court would order its removal as there was no serious question to be tried (at [37]), nor would the balance of convenience favour the retention of the caveat (at [38]).

Ren v Shi is a good summary of the factors which influence the exercise of the Court's discretion under s90(3) TLA. It also discusses the circumstances in which a Court will award compensation for a caveat lodged without reasonable cause under s118 TLA, and when an award of indemnity costs ought to be made against a caveator, but these topics are beyond the scope of this post.

Civil Procedure Amendment Bill 2012 - costs disclosure and expert evidence

The Civil Procedure Amendment Bill 2012 was recently introduced into the Victorian Parliament by Attorney-General Robert Clark and is currently being considered by the lower house. The Civil Procedure Amendment Bill 2012 is an amendment to the Civil Procedure Act 2010.

The explanatory memorandum of the Civil Procedure Amendment Bill 2012 notes that it is being introduced to give additional powers and discretions for the Courts in relation to costs disclosure and expert evidence:

The Civil Procedure Amendment Bill 2012 amends the Civil Procedure Act 2010 to introduce specific powers and discretions for the courts in relation to costs and expert evidence, to amend and create greater flexibility in the overarching obligations and proper basis certification requirements and to make other technical amendments.

The Bill aims to reduce costs and delays for persons involved in civil litigation in Victoria, and improve the effectiveness of the civil justice system. The Bill builds on the foundation established by the Civil Procedure Act 2010 in seeking to give judges and magistrates a clear legislative mandate to proactively manage cases in a manner that will promote the just, efficient, timely and cost-effective resolution of the real issues in dispute in a civil proceeding.

Part 2 of the Civil Procedure Amendment Bill 2012 gives the Court power to require costs disclosure to a lawyer's own client, and expands the type of costs orders which are able to be made:

Disclosure of litigation costs by a lawyer to his or her client is critical for informed decision-making. The Bill gives the courts a discretionary power to order that a lawyer make costs disclosure to the lawyer's own client. The order may be made at any stage of the proceeding. This will allow the courts, in appropriate cases, to increase the parties' access to information in relation to actual and estimated costs and disbursements incurred prior to trial, thereby encouraging more informed decision-making and the settlement of appropriate cases. 

The Bill also clarifies and strengthens the courts' discretionary power to make other costs orders aside from the usual order that the losing party pay the winning party's costs. The Bill provides that the court may make any costs order that it considers appropriate to further the overarching purpose. Specific powers include ordering costs as a lump sum figure instead of taxed costs, ordering a party to pay a proportion of costs or fixing or capping recoverable costs in advance. Such orders avoid or narrow the scope of a taxation of costs. The objective is to increase the use of other costs orders in appropriate cases, thereby reducing the complexity, time and cost associated with taxation. Orders may be made in relation to any aspect of a proceeding, including, but not limited to, any interlocutory proceeding.

Part 3 of the Civil Procedure Amendment Bill 2012 gives the Court greater power to manage expert evidence, including requiring parties to seek directions if the party intends to adduce expert evidence at trial, ordering conferences and joint reports and limiting expert evidence in Court:

Expert evidence plays a critical role in civil litigation and is often essential to the just determination of an issue in dispute between the parties. However, expert evidence can also be a significant source of expense, complexity and delay in civil litigation. For example, the disproportionate use of expert witnesses has the potential to increase costs and delays for parties and reduce the effectiveness of the civil justice system as a whole. The inherent complexity and volume of expert evidence can also limit its usefulness to decision-makers.

The main objective of the expert evidence provisions is to reduce the costs and delays associated with expert evidence by providing clear legislative guidance and encouragement for the courts to actively manage and control expert evidence. The provisions also aim to improve the quality and integrity of expert evidence and enhance its usefulness to judges and magistrates.

Some of the expert evidence provisions consolidate existing powers of the courts, for example in the rules of court and practice directions. Although the existing powers of the court may be sufficient for the court to give directions and impose reasonable limits on any party in respect of expert evidence, clear statutory provisions will have greater impact in encouraging the courts to actively manage and control expert evidence. This will also resolve any argument about the limits of existing rule-making powers and will overcome any constraints on the exercise of powers that exist at common law.

Finally, the Civil Procedure Amendment Bill 2012 amends the certification requirements, including extending certification to any 'substantive document' that a party relies on (with some qualification).

The expert provisions appear to be detailed and, if the Civil Procedure Amendment Bill 2012 is passed and given Royal Assent, practitioners will need to quickly get up to speed with the detail in the bill. The proposed commencement date is 1 May 2012 or on proclamation.

Learned observations on Investec Bank (Australia) Limited v Mann & Anor [2012] VSC 81

On 6 June 2012 I attended the Commercial Court seminar on Investec Bank (Australia) Limited v Mann & Anor [2012] VSC 81 (Investec No. 2).

The decision in Investec No. 2 appears to be quite drastic. That is, the Supreme Court of Victoria dismissed an application for the solicitor to file a notice of solicitor ceasing to act, and required the solicitor to continue to act and be on the Court record in circumstances where the client did not have the available funding or instructions. However Michael McGarvie, the Legal Services Commissioner, noted that Investec had to be put into context which is otherwise not apparent from the judgment.

The context was a preceding decision of Pagone J in Investec Bank  (Australia) Limited v Mann & Anor [2012] VSC 58 (Investec No. 1) in which the defendants' and their solicitor's conduct was brought into question. In Investec No. 1 the defendants made application for leave to file and serve an expert report out of time and by 2 March 2012 (11 days before trial). There was evidence that the defendant's solicitor sent correspondence to the plaintiff suggesting that an expert had already been engaged and that the expert required further time for the preparation of a report. The plaintiff gave evidence that the expert, once contacted by the plaintiff, said that he hadn't been retained at all. Pagone J agreed with the plaintiff, dismissed the application and invited submissions on whether it was appropriate to order costs against the defendant's lawyer (see [13] and [14]). Obviously this sort of background would colour the application for leave in Investec No 2.

Justice Davies, who introduced and summarised Investec No. 2, noted that the procedure used in Investec No. 2 could be a tactic for a party to obtain an adjournment of the trial. The difficulty that I see with a Judge dealing with this sort of application is how to infer that this tactic is being used, when the evidence will never really go to this. Perhaps the notable lack of evidence on certain issues could be used to infer such an intention on the party who was represented by the solicitor seeking leave (e.g., such as the notable lack of evidence on certain matters in Investec No. 2 at [9]).

Solicitor not permitted to cease to act - Investec Bank (Australia) Limited v Mann & Anor [2012] VSC 81

I am attending a Commercial Court seminar tomorrow (6 June 2012) at Monash University Law Chambers on the matter of Investec Bank (Australia) Limited v Mann & Anor [2012] VSC 81. I thought I'd give a brief summary by way of background to bring both myself and my audience up to speed.

Investec was an application before Pagone J for leave to file and serve a notice of solicitor ceasing to act. The trial was listed for 13 March 2012 and it was set down on 9 December 2011. The defendants' solicitor applied for leave to file and serve their notice on 2 March 2012, 11 days before the trial.

The evidence of the defendant's solicitor in support of the application was to the effect that a request for funds was made on 2 March 2012 and the defendants said that they could not provide the funding.

Pagone J held that there were 'special circumstances which render it expedient to retain the solicitor on record', particularly the lateness of the request for funding and the inconvenience to the parties and the Court (at [8]):

8 This is a case where in my view there are “special circumstances which render it expedient to retain the solicitor on the record.” The application was made almost three months after the date was fixed for trial and only eleven days before the trial was due to commence. Madgwicks left their requirement that its clients put them in funds for the trial until 2 March 2012. No explanation was given for the delay (or timing) in imposing or insisting upon funds or for the delay (or timing) in making the application for leave. It is incumbent on solicitors making such applications for leave to satisfy the Court that it is proper and appropriate that leave should be granted. Applications of this kind are likely to be unopposed and that circumstance, coupled with the practitioner’s duty to the Court and to uphold the law, makes it incumbent upon them to be full and frank with the Court asked to grant leave. The removal, or absence, of legal practitioners close to trial is sometimes used as a reason for an adjournment of the hearing with inconvenience to the Court, the other parties and to other litigants. Practitioners ought to guard against the possibility of the Court finding itself with unrepresented litigants close to the hearing date. No evidence was given by Madgwicks of having taken any steps to avoid the inexpedient consequences to the Court, to the plaintiff and to the plaintiff’s solicitors which would arise if the leave Madgwicks seeks were to be granted. Nor, for that matter, have Madgwicks given evidence of any steps to prevent the situation of the defendants finding themselves close to the hearing date without legal representation or having to conduct the trial unrepresented after many months of all concerned knowing of the trial date. The inconvenience to the Court and the additional inconvenience and costs to the plaintiff and its solicitors, that would be occasioned by granting leave at so late a stage, could not be compensated by costs orders and outweigh any burden to Madgwicks of not granting them leave. The requirement in r 20.03(3) of seeking leave is imposed upon legal practitioners for the proper administration of justice. It enables the Court’s work to be performed efficiently and with the confidence of the assistance of practitioners it provides a protection to former clients and serves to protect the position of adversaries.

Pagone J held that the effect of this meant that the solicitors would not necessarily have to conduct the trial for the defendants, but would be required to offer such assistance as the court may require (at [9]):

9 The role Madgwicks may hereafter be required to perform upon my refusal to grant leave is another matter. Their continued role should, as far as possible, be limited to the purpose of the rule requiring leave as explained in Plenty v Gladwin as concerned with the record of the Court and with service of documents. They may be required to continue to receive documents from the plaintiff’s solicitors. It may require Madgwicks to continue to convey to the defendants any documents served for them at Madgwicks. Their status as officers of the Court may conceivably also require them to offer such assistance as the Court may require during the conduct of the trial. Madgwicks may not be required to conduct the trial on behalf of their former clients without funding but may need to give such other assistance as may be required by the Court to lessen or eliminate the adverse impact upon the Court’s record or upon the orderly service of documents upon the defendants as the Court may direct. It is conceivable that greater duties may also arise but they should not be considered in the abstract and without hearing submissions from Madgwicks and others affected.

The decision in Investec has serious implications for litigation legal practitioners as it would appear to require a legal practice to continue working for a client in circumstances where there is no funding available or likely to be available.  With that in mind, I am looking forward to the commentary on Investec from the Bench, Senior Counsel and the Victorian Legal Services Commissioner at the seminar tomorrow night.