187 Settlement Road v Kennards Storage Management  VSC 771, Gorton J., (14 December 2022)
Note: In this case Gorton J. dismissed a claim for compensation under s. 118 for alleged lodgment of a caveat “without reasonable cause”. His Honour conducted an intricate analysis of the law. In particular:
- His Honour pointed out that the commonly judicially approved test for “without reasonable cause”, ie whether the caveator did not have an honest belief based on reasonable grounds that it had a caveatable interest: sat comfortably with the text of s. 118 where there was some factual uncertainty but where the legal consequences were otherwise straightforward; but did not easily apply where a caveator had an honest belief as to a set of facts the legal consequences of which arguably did, but might not, give rise to a caveatable interest. In the latter case it was preferable simply to ask: was the caveat lodged “without reasonable cause”?
- His Honour dealt with the situation whether, even if a caveat was lodged without reasonable cause, it was just to order compensation if there was no causal connection between the caveat and any loss, or if by the time the caveat became a source of loss there was a proper basis for its lodgment.
- His Honour also dealt with the consequences, for the purposes of s. 118, of the prohibition on any dealings with the property and the claim of a freehold estate.
- His Honour considered complex issues of contractual interpretation and in what circumstances a right of first refusal, ie a conditional right to purchase under the contract, gave rise to a caveatable interest.
The facts were –
- 187 Settlement Road Pty Ltd (187SR) was registered proprietor of land in Thomastown (the property). GDM Self Storage Group Pty Ltd (GDM) owned the self-storage business conducted there. Leslie Smith controlled both companies. Kennards Storage Management Pty Ltd (KSM) was associated with Sam Kennard.
- On 1 September 2015 187SR and KSM executed an agreement with a term of 5 years commencing that day, renewable at the option of either party. Under the agreement: the “Centre” was defined to be the self-storage centre at the property and the “Business” was defined to be the operation of the Centre; 187SR agreed to develop and then maintain the Centre and KSM agreed to provide management services there and 187SR agreed to pay fees including a “performance incentive fee” if the property were sold. Clause 16, headed “First and Last Right of Refusal”, provided that during and for 2 years after the end of that agreement the Owner (ie 187SR) must not, without first making the same offer to KSM (Offer), inter alia, sell Centre or the property (cl. 16(a)). Under cl. 16(b) the Offer to sell was required to be in writing accompanied by a contract of sale specifying the purchase price, deposit, settlement date and any other material terms and KSM had 14 days to accept it. Clause 16(c) provided that: “The Owner must not … sell … the Centre except at a … price not less than and on terms and conditions not more favourable to KSM than as specified in any Offer made pursuant to sub-clauses (a) and (b) above, provided that before offering to grant on such lesser terms to another party, those terms must be first offered to KSM, so KSM has the last … right to purchase all or any part of the Property or the Centre”.
- Following construction the Centre commenced operation shortly thereafter in August 2019. KSM operated the Business. However, due to complications attributable to 187SR being a trustee company, Smith and Kennard then deemed it preferable for GDM (not 187SR) to own the Business (as occurred at certain premises in Cheltenham). More particularly:
- After KSM raised the potential problem of the trusteeship the chief financial officer of KSM emailed Smith on 27 November 2019 saying: “I see the new Mgmt agreement [that is, the agreement for the premises in Cheltenham] was signed with GDM Self Storage – could we adjust the Thomastown agreement to this ABN and then we should be sorted?”
- On 2 December 2019 Smith responded: “We are OK for the TT [Thomastown] management agreement to be under GDM Self Storage as well”.
- On 12 December 2019 a financial controller at KSM emailed Smith attaching a document (“the 2019 agreement”) and saying:
“As discussed … please find attached new management agreement for Thomastown …. This is between KSM and GDM Self Storage and this agreement supersedes the old SSAMA dated 1st September 2015 with 187 Settlement Road. Please sign and return, thanks.”
- Smith then signed and returned the 2019 agreement. This was in the same terms as the 2015 agreement (even being dated and applying from 1 September 2015) with an additional clause providing that it superseded “Self Storage Asset Management Agreement dated 1st September 2015 between Kennards Storage Management Pty Ltd … and 187SR Pty Ltd …”. This document also provided for “performance incentive fee” if the property were sold payable by GDM, calculated by reference to the EBITDA of the business.
- In late September 2020, in response to Smith’s invitation, Kennard expressed interest in purchasing the property and the Cheltenham property. Smith provided valuations, the valuation for the property being $19 m.
- On 28 October Kennard emailed an offer to purchase the property for $16.2 m. The email included: “This offer is made separately to the terms of the Management Agreement and does not forfeit any rights and obligations outlined by Clause 16 of the agreement”.
- On 4 November 187SR obtained a signed “offer to purchase” the property for $18.5 m. from a third party. On 5 November Smith informed Kennard of this and of his belief that the deal would be done with the third party at $19 m. and asked Kennard to consider his position. On 6 November Kennard emailed: “I guess we should revert to the mechanism in the Management Agreement”.
- On 6 November Smith signed and returned the offer to purchase to the third party, altering the price to $19 m., but stating that it was subject to his obligations to Kennard or KSM.
- On 9 November Smith informed Kennard that he had received an offer at $19 m., that he had instructed solicitors to prepare contracts, and asked Kennard to advise his position. Kennard replied, saying: “Thanks Les. Send it to us when its ready.”
- On 10 November Kennard advised Smith that his company would not buy the Cheltenham property.
- On 13 November Kennard instructed his solicitors to caveat over the property, leaving it to them to prepare the caveat documentation. The solicitors lodged a caveat by KSM prohibiting registration of any dealings with the property and claiming a “Freehold Estate”.
- On 8 December Smith emailed Kennard that the third party had now also offered to purchase the Cheltenham property, also advising the gross offer for both properties, and stating “It is extremely important to the company to deal with both assets ….”, and “please advise what you would like to do in regards both properties”.
- On 10 December Kennard sought the sale contract for both properties and stated
“We should follow the process agreed and in accordance with the Right of Refusal outlined in the management agreement. …”
- Smith did not provide to any contract to Kennard but on 23 December 187SR and GDM respectively agreed to sell the property and Business to the third party.
- On 24 December Smith asked Kennard to remove the caveat. KSM alleged that it was a willing buyer for the property at $19m. and sought a written offer from 187SR in accordance with the 2015 agreement. Dispute then arose about whether 187SR was required to make this offer, or whether any offer would require KSM to purchase both properties. Then contracts were provided by 187SR and GDM, KSM raised whether it was being offered terms identical to those offered to the third party, KSM purported to accept the offers, argument erupted over whether acceptance was too late, and on 10 February KSM removed the caveat. The sale to third party was completed on 19 February 2021.
- 187SR sued KSM claiming compensation under the Transfer of Land Act s. 118. It contended that the caveat was lodged without reasonable cause and delayed the completion of the sale to the third party giving rise to additional amounts it had to pay to its financier.
The Transfer of Land Act s. 118 provided:
Any person lodging with the Registrar without reasonable cause any caveat under this Act shall be liable to make to any person who sustains damage thereby such compensation as a court deems just and orders.
KSM contended that because the “first and last right of refusal” granted by 187SR in the 2015 agreement was expressed to apply for 2 years after its end, it remained operative in 2020, because the 2015 agreement was only superseded by the 2019 agreement in December 2019, thereby giving it a caveatable interest.
His Honour accepted Kennard’s evidence that he believed that KSM had a right of first refusal and that it had not been complied with.
GDM paid to KSM, under sufferance, the performance incentive fee claimed by KSM. This did not account for rent payable by GDM to 187SR, but if this rent was to be taken into account in determining the EBITDA, then no performance incentive fee was payable. GDM sued KSM for return of the performance incentive fee. The proceedings were heard together.
Gorton J. dismissed the application under s. 118 and ordered the return of the performance incentive fee, holding –
- Smith was acting on behalf of both 187SR and GDM when he participated in the exchanges preceding the 2019 agreement. Conceptually, these communications, together with the signing of the 2019 agreement and the subsequent management of the Business by KSM, revealed that an agreement was reached that included Smith on behalf of 187SR agreeing that the 2015 agreement would be wholly discharged and replaced by the 2019 agreement. This conclusion was compelled by: the change in the entity that was to own the business; the communications preceding the 2019 agreement; the text of the 2019 agreement, in particular the expression that it “supersedes” the 2015 agreement and the backdating of the 2019 agreement to 1 September 2015 and expressing that it was to commence from that date. , , 
- Accordingly from the time of execution of the 2019 agreement the parties were discharged from all obligations under the 2015 agreement, including any obligations imposed on 187SR by the 2015 agreement expressed to survive its termination. -
- Accordingly, although as at December 2020 GDM was obliged to give KSM a “first and last right of refusal” if it wished to sell the business, 187SR was not so obliged as regards sale of the property, whereby KSM did not have a caveatable interest. , 
- The test whether the caveat was lodged “without reasonable cause” within the meaning of s. 118 was often re-expressed as whether the caveator did not have an honest belief, based on reasonable grounds, that it had a caveatable interest. The re-expressed test sat comfortably with the text of s. 118 where, although there was some factual uncertainty, the legal consequences were otherwise straightforward. However, it sat less comfortably where there was, as here, a complex legal dispute as to whether a first and last right of refusal, that the parties believed existed, was legally sufficient to give rise to a caveatable interest: it did not easily apply where a caveator had an honest belief as to a set of facts the legal consequences of which arguably did, but might not, give rise to a caveatable interest. If the caveator believed that he or she probably had a caveatable interest, but recognised that the position was uncertain, was that an honest belief in a caveatable interest? In these circumstances, it was preferable to return to the text of the statute: was the caveat lodged “without reasonable cause”? The fact that a caveat might be lodged with reasonable cause yet to protect an uncertain interest was apparent from previous authority. , , 
- Both parties believed that there was a contractual right of first refusal exercisable against 187SR, and through Smith 187SR incorrectly believed that it had complied with its obligations. , , -, 
- If, however, contrary to his Honour’s view but nonetheless believed to be so by the parties, 187SR had still contractually been bound to make KSM an offer of first refusal, this right would not per se give rise to an equitable interest because it did not, of itself, give the holder the right to call for a conveyance. No interest would arise if the owner was still absolutely free to sell or not. 
- However, if a right of first refusal was expressed in positive terms that applied when a contingency was satisfied, then equity would ordinarily intervene once the contingency was satisfied. 187SR’s argument that cl. 16 of the 2015 agreement did not impose a positive obligation on it, on the satisfaction of a contingency, to make an offer to KSM, but merely prevented it from selling to anyone else unless it first made an offer to KSM, had force but the position was not without difficulty. It was, at least, well arguable that if 187SR were to make an offer to sell the property, then it was positively obliged to make an offer on those terms also to KSM. It was at least arguable that by signing the 6 November 2020 offer and manifesting a clear intention to sell the property on those terms, or by signing the 23 December 2020 agreements, both in circumstances where 187SR had informed the third party that KSM had a right of first refusal, 187SR fell under an enforceable contractual obligation to make an offer in those terms to KSM. On balance, if the 2015 agreement had applied, a court probably would have ordered 187SR to offer to sell the properties to KSM on the terms contained in the 23 December 2020 intertwined agreements. However, the matter was not straightforward. , , , -
- For the reasons set out above, by the time the caveat was lodged, having regard to the complexity of the legal argument as to whether cl. 16 would give rise to a caveatable interest, his Honour was not satisfied that KSM lodged the caveat without reasonable cause. It had reasonable cause. , , 
- Not detracting from this conclusion was that the caveat precluded all dealings with the property and claimed a freehold interest. If KSM was entitled to lodge a caveat, it was entitled to lodge one that precluded any dealings. As to claiming a “freehold estate”, the right that KSM was asserting was the equitable right to obtain the freehold on a sale, and although perhaps it would have been more precise to claim a conditional right to purchase under the contract, this imprecision was insufficient to establish lack of reasonable cause. 
- Although it may be correct, as the caveat was lodged by KSM’s solicitors, to consider that KSM’s solicitors’ mind that was the mind of KSM for the purpose of determining reasonable grounds, even so, and even on the basis that the person preparing and lodging the document had legal training, the caveat was not lodged without reasonable cause. 
- Further, even if the interest asserted or wording used in the caveat rendered the caveat not lodged with reasonable cause, it would not be “just” to award 187SR any compensation unless it could be shown that this assertion or use caused any loss that would not have been caused anyway if the “right” interest were asserted or wording was used. This was not proved. , 
- The caveat was also not lodged prematurely. But in any event, by the time that the caveat interfered with 187SR’s intentions and, as 187SR alleged caused it loss, 187SR had signed the offers. In reality, it was probably the maintenance of a caveat at a time when someone tried to register an instrument that caused loss, rather than the “lodging” of the caveat. In any event, it would not be “just” for the purposes of s. 118 to order that a party pay compensation because a caveat was lodged prematurely if, by the time the caveat became a source of loss, there was a proper basis for its lodgement. , 
- Accordingly, 187SR’s claim for compensation under s. 118 failed. But, if this was incorrect, the process of determining compensation involved two steps: first to ascertain a date by which, but for the caveat, the sale of the business would have been completed; second to ascertain what loss KSM suffered, if any, by reason of the delay between that date and 19 February 2021 being the date of completion of the sale. If there had been no caveat settlement would have taken place by 22 January 2021 and the loss from delay would have been $274,658 being the increased amount that 187SR had to pay to its financier. -, , , 
- GDM was entitled to return of the “performance incentive fee” because it was not payable under the terms of the 2019 agreement. 
Philip H. Barton
Owen Dixon Chambers West
Wednesday, March 22, 2023