Will a purchaser’s caveat stand without an undertaking as to damages?

Real estate purchasers register a caveat upon the title to the property they are purchasing if the deposit paid is to be released. They register a caveat to protect their interest as purchaser under the Contract for Sale, to prevent the vendor dealing with the property.

But will the caveat stand, if the vendor wants it removed, if the purchaser does not proffer an undertaking as to damages?

The answer is found in 2-6 First Ave Pty Ltd v Aquamore Credit Equity Pty Ltd [2018] NSWSC 980 (27 June 2018), a decision of Justice Darke in the Supreme Court of New South Wales.

The Facts

2 - 6 First Ave Blacktown Pty Ltd (First Ave) entered into a contract to purchase a property at 2-6 First Avenue, Blacktown from Aquamore Credit Equity Pty Ltd (Aquamore) on 5 March 2018. The price was $10 million, and the deposit paid was $650,000. It was a development site, sold with Development Approval for 160 home units + retail/commercial.

The Contract contained a Special Condition which provided that part of the deposit was to be released “to pay the Architect’s fees and disbursements for the Development Approval”; and that upon payment, the vendor would provide to the purchaser “all documents pertaining to, and supporting, the relevant Development Approval in DWG format”. The completion date was to be four months after the date the documents were provided.

According to Aquamore, the documents were all provided by 26 March 2018. It pressed for the four month completion period to commence, but the purchaser resisted, claiming that documents were missing.

By 31 May, 2018, Aquamore had had enough. It took the view that First Ave had repudiated the contract because of its failure to confirm that the completion period had commenced. It therefore terminated the contract and served a lapsing notice to remove the caveat.

Since 1986, when the lapsing notice procedure was introduced, all that a registered owner needs to do is to serve a lapsing notice upon the caveator and wait 21 days. If the caveator does not apply to the Court to extend the caveat within that period of 21 days, the Registrar General will remove the caveat from the title administratively (s 74J Real Property Act 1900).

The Legal Issues

First Ave applied to extend the operation of the caveat within the 21 day period, by way of a Summons under s 74K(1) of the Real Property Act 1900; s 74K(2) sets out the requirements:

the Supreme Court may, if satisfied that the caveator's claim has or may have substance, make an order extending the operation of the caveat concerned for such period as is specified in the order or until the further order of that Court, or may make such other orders as it thinks fit, but, if that Court is not so satisfied, it shall dismiss the application.

Justice Darke applied the principles applicable to applications for interlocutory injunctions, namely:

Was there a serious question to be tried?
Did the balance of convenience favour the continued operation of the caveat?
Were there any discretionary matters?

A serious question to be tried

In the circumstances that the completion date had not arrived, and more significantly, that different interpretations of the contract were being advanced, Justice Darke stated that:

Although “The plaintiff’s case … is in my view not a strong one … it does ... raise a serious question to be tried as to the validity of the defendant’s termination of the contract”.

Therefore he was satisfied that the claim had substance.

The balance of convenience

First Ave did not proffer an undertaking as to damages, and made no offer of any security by itself or anyone standing behind it.

In Justice Darke’s opinion, this factor was significant and led to the conclusion that the application to extend the operation of the caveat should be dismissed on the balance of convenience.

Other factors were considered which did not change this conclusion:

Aquamore was a mortgagee selling in the exercise of its power of sale. The mortgage debt on the property exceeded the value, and the debt was escalating rapidly with default interest. The loss of opportunity to sell the property at this time, instead of waiting until after the hearing at the end of the year, made the inability “to proffer a meaningful undertaking as to damages” significant.
First Ave argued that the payment of a deposit, of which 5% remained after the payment to the architect of $150,000. was sufficient security. Justice Darke did not agree: “The deposit, which is paid as an earnest of the bargain, cannot simply be regarded as a form of security for an undertaking as to damages” because “the losses against which a forfeited deposit might be put are not co-extensive with the losses for which compensation may be recovered pursuant to an undertaking as to damages.”
The argument of wrongful termination of contract was not strong.

Discretionary matters

On discretion, Justice Darke considered that “the risk of injustice to the defendant if the caveat is extended exceeds the risk of injustice to the plaintiff if the caveat is not extended” because:

No claim was made for specific performance of the contract (which is usually sought in an application to extend a caveat).
No weight was to be given to the fact that Aquamore did not adduce evidence of its ability to compensate First Ave because there was no reason given to doubt its wherewithal (being a moneylender). In any event, it was not the one making the application.
The continued existence of the caveat inhibited Aquamore’s ability “to freely deal with the property”.
This was not a case “where it would be appropriate to dispense with the usual requirement that an undertaking as to damages be proffered”.

Analysis

First Ave failed in its application to extend the caveat because it was not in a position to proffer (and did not proffer) an undertaking as to damages that had substance.

Why did it not do so? These are possible explanations:

First Ave was a new company which was registered specifically to buy this property. This is done to quarantine financial risk. It can be assumed the people behind First Ave made a commercial decision not to expose their funds or assets to a claim for damages should First Ave be found to have repudiated the contract.
It is likely that First Ave was having difficulty in obtaining a loan approval. This can be inferred from First Ave’s refusal to agree that the completion period had commenced, and might explain why specific performance was not sought.
The Special Condition for DA documentation was loosely drafted. The documentation to be provided was not specified, it was left in general terms “all documents pertaining to”. Therefore there was considerable uncertainty as to First Ave’s prospects of success.