Octra Nominees Pty Ltd v Chipper [2007] FCAFC 92 (20 July 2007)

FEDERAL COURT OF AUSTRALIA

Octra Nominees Pty Ltd v Chipper [2007] FCAFC 92

CONTRACT – lessee granted right of first refusal – sale of property to third party after lessee refused offer on same terms – subsequent variation of contract for sale – whether second offer of property must be made to lessee on varied terms – construction of right of first refusal – sale of land occurs upon entry into contract for sale, not upon conveyance –right of first refusal not revived by variation of contract for sale – otherwise commercial uncertainty may ensue – lessor’s entry into contract for sale not in breach of lease

WORDS AND PHRASES – "sale"

Federal Proceedings (Costs) Act 1981 (Cth)
Guardianship and Administration Act 1990 (WA)
Property Law Act 1974 (Qld)

Chipper v Octra Nominees Pty Ltd [2006] FCA 1633, reversed
Beneficial Finance Corporation Ltd v Multiplex Constructions Pty Limited (1995) 36 NSWLR 510, considered
Chan v Dainford Limited [1985] HCA 15; (1985) 155 CLR 533, distinguished
Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22, cited
Mackay v Wilson (1947) 47 SR (NSW) 315, considered
Milner v Staffordshire Congregational Union (Incorporated) (1956) 1 Ch. 275, considered
Nationwide Produce (Holdings) Pty Ltd (in liquidation) v Linknarf Limited (in liquidation) [2005] FCAFC 129, cited
Walker Corporation Pty Ltd v W R Pateman Pty Ltd (1990) 20 NSWLR 624, considered
White Property Developments Ltd v Richmond Growth Pty Limited [1998] FCA 26, considered
Woodroffe v Box [1954] HCA 22; (1954) 92 CLR 245, applied

RED VALLEY PTY LTD (ACN 009 384 605) v CHRISTOPHER JOHN CHIPPER AND MELODY JANE CHIPPER, OCTRA NOMINEES PTY LTD (ACN 008 960 094) AND PETER CAMPBELL SMYTH (BY HIS ADMINISTRATORS DAVID ANDREW SMYTH AND ROBERT LANSELL AVERY)
WAD 369 OF 2006

OCTRA NOMINEES PTY LTD (ACN 008 960 094) AND PETER CAMPBELL SMYTH (BY HIS ADMINISTRATORS DAVID ANDREW SMYTH AND ROBERT LANSELL AVERY) v CHRISTOPHER JOHN CHIPPER AND MELODY JANE CHIPPER AND RED VALLEY PTY LTD (ACN 009 384 605)
WAD 375 OF 2006

TAMBERLIN, GYLES AND GILMOUR JJ
20 JULY 2007
PERTH

BETWEEN:	RED VALLEY PTY LTD (ACN 009 384 605) Appellant/Cross Respondent
AND:	CHRISTOPHER JOHN CHIPPER AND MELODY JANE CHIPPER First Respondents/Cross Appellants OCTRA NOMINEES PTY LTD (ACN 008 960 094) Second Respondent PETER CAMPBELL SMYTH (BY HIS ADMINISTRATORS DAVID ANDREW SMYTH AND ROBERT LANSELL AVERY) Third Respondent

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

BETWEEN:	OCTRA NOMINEES PTY LTD (ACN 008 960 094) First Appellant/First Cross Respondent PETER CAMPBELL SMYTH (BY HIS ADMINISTRATORS DAVID ANDREW SMYTH AND ROBERT LANSELL AVERY) Second Appellant/Second Cross Respondent
AND:	CHRISTOPHER JOHN CHIPPER AND MELODY JANE CHIPPER First Respondents/Cross Appellants RED VALLEY PTY LTD (ACN 009 384 605) Second Respondent

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

BETWEEN:	RED VALLEY PTY LTD (ACN 009 384 605) Appellant/Cross Respondent
AND:	CHRISTOPHER JOHN CHIPPER AND MELODY JANE CHIPPER First Respondents/Cross Appellants OCTRA NOMINEES PTY LTD (ACN 008 960 094) Second Respondent PETER CAMPBELL SMYTH (BY HIS ADMINISTRATORS DAVID ANDREW SMYTH AND ROBERT LANSELL AVERY) Third Respondent
IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY		WAD 375 OF 2006

BETWEEN:	OCTRA NOMINEES PTY LTD (ACN 008 960 094) First Appellant/First Cross Respondent PETER CAMPBELL SMYTH (BY HIS ADMINISTRATORS DAVID ANDREW SMYTH AND ROBERT LANSELL AVERY) Second Appellant/Second Cross Respondent
AND:	CHRISTOPHER JOHN CHIPPER AND MELODY JANE CHIPPER First Respondents/Cross Appellants RED VALLEY PTY LTD (ACN 009 384 605) Second Respondent

1 Before the Court are two appeals from the reasons for judgment given by a judge of the Court in a proceeding which ultimately sought restraint of a sale and an order of specific performance, but which primarily concerned the construction of a right of first refusal to purchase in a lease of property. A number of additional issues were raised by the parties and decided by the primary judge, but need only arise on appeal if we uphold the primary judge on the question of construction.

2 In order for the first respondents, Mr Christopher Chipper and Mrs Melody Chipper ("the Chippers"), to succeed in the proceeding below and in these appeals, it was necessary for them to succeed on a number of issues, all of which the judgment below decided in their favour. These issues include a claim that the first appellant in one of the appeals, Octra Nominees Pty Ltd ("Octra"), held the benefit of its right of first refusal under the lease on trust for the Chippers. Then it was necessary to determine the meaning and effect of the provision giving them a right of first refusal over the property. His Honour found that, on the true construction of the provision, there had been a failure by the grantor to comply with the requirements for the right of first refusal and that, as a consequence, the Chippers acquired an interest in the land which entitled them to an injunction to restrain the sale of the property to a third party, Red Valley Pty Ltd ("Red Valley"), and also to obtain specific performance. His Honour also found that there was no delay or laches defence to the claim for specific performance and made orders granting specific performance in favour of the Chippers.

3 In the proceeding below, the Chippers sought relief against the owner of the land, Mr Peter Smyth, Octra, Red Valley and a collection of fourth respondents. The fourth respondents to that application did not participate in the hearing below, had no orders made in relation to them and were not party to these appeals. Orders were made by his Honour, after hearing submissions as to their form, on 13 December 2006. On 19 December 2006, Red Valley filed a Notice of Appeal (WAD 369/2006), which was followed by a separate Notice of Appeal filed by Octra and Mr Smyth on 28 December 2006 (WAD 275/2006). On each appeal different orders are sought. Both appeals were heard together.

4 The construction issue which must first be resolved is whether a variation to a binding contract made between Mr Smyth and Red Valley after refusal by the Chippers to purchase the property on the unvaried terms enlivened an obligation for Mr Smyth to make a further offer of the property to the Chippers on the varied terms. It is important in the present case to note that there is no contention that the variation of the contract was done in bad faith or on the basis of some misrepresentation in order to side-step or reduce the substance of the Chippers’ right of first refusal.

5 While there is no significant dispute between the parties as to the facts and circumstances which give rise to the construction issue, given the complexity of the factual context we set out the background and findings of fact made by his Honour in terms similar to those employed in the judgment below.

6 Mr Smyth is the registered proprietor of Glen Oban Farm, located in York, Western Australia. The farm comprises approximately 1,200 acres, and is contained in five separate certificates of title. From about 1996, the farm was leased to a family which has no connection with this proceeding, but in early 2002 their lease was coming to an end, and they decided not to renew. The Chippers were farmers in the area. By agreement with Mr Smyth and his wife, and with the then lessees of the farm, the Chippers operated the farm for about the last year of that lease.

7 In about March 2002, Mr Chipper had a number of conversations with Mr Smyth, in which he said that he and his wife were interested in taking a lease of the farm. During one of these conversations, Mr Smyth told Mr Chipper that he would lease the farm for a rent of $25,200 per annum. There was some discussion about the rent, but Mr Smyth was not prepared to negotiate, and the parties eventually agreed on that rent. The conversation ended with Mr Smyth saying that he would ask a farm management consultant based in York, Mr Ken Sevenson, to prepare a lease document.

8 On 29 April 2002, Mr Sevenson met with Mrs Smyth. Mrs Smyth said that a lease of the farm had been agreed with the Chippers. She said that her husband was having health issues, and they wanted the lease to be ‘secure’. Mr Sevenson contacted Mr Chipper, and made an arrangement to inspect the farm. The inspection took place on 1 May 2002, on which day Mr Sevenson spoke to the Smyths about the lease, including the proposed term of the lease, an extension to the lease, and a proposed right of first refusal. On 6 May 2002, Mr Sevenson had a further conversation with Mr Chipper, in which he obtained both the Chippers’ details for insertion into the lease agreement. As a result of these conversations, Mr Sevenson drafted a lease agreement between Mr Smyth and the Chippers. The agreement was in standard form, and contained a provision for the lessee to have a right of first refusal to buy the freehold. Mr Sevenson did not keep a copy of that draft lease.

9 A little later in May 2002, Mr Sevenson spoke to Mrs Smyth, who told him that there may be a GST issue with the lease, and suggested that he contact the Smyths’ accountant, Mr Hall. On 24 May 2002, Mr Sevenson spoke with Mr Hall, and during that conversation Mr Hall said that, rather than having a lease between Mr Smyth and the Chippers, the lease should be structured so that there was a lease between Mr Smyth and Octra, and then a sub-lease between Octra and the Chippers. Octra was and is a private company owned by the Smyths, and the trustee of the Peter Smyth Family Trust. Mr Hall said that the rent payable under the lease between Mr Smyth and Octra would be nominal, and that the rent payable under the sub-lease between Octra and the Chippers would be a commercial rent. Mr Hall said that this would be tax efficient. As a result of that discussion, Mr Sevenson prepared two documents, a lease and a sub-lease, as instructed by Mr Hall.

10 On 5 June 2002, Mr Smyth and Octra executed a lease of the farm at a rent of $100 per annum. The common seal of Octra was affixed to the lease in the presence of the Smyths. On the same day, Octra executed a sub-lease of the farm to the Chippers at a rent of $25,200 per annum. Again, the affixation of the seal was witnessed by the Smyths. On 24 June 2002, the sub-lease was executed by the Chippers.

11 By the lease, Mr Smyth leased the farm to Octra for a period of 4 years commencing on 1 May 2002, and granted to Octra an option of a further 4-year term commencing on 1 May 2006. Clause 6(d)(ii) of the lease provided as follows:

By the sub-lease, Octra leased the farm to the Chippers for a period of 4 years commencing on 1 May 2002, and granted to the Chippers an option of a further 4-year term commencing on 1 May 2006. Clause 6(d)(ii) of the sub-lease provided as follows:

12 The Chippers occupied the farm, and little which is presently relevant occurred for more than 2 years. The one event in that period which is relevant was that, as a result of Mr Smyth’s infirmity, his affairs were placed under the joint administration of his son David Smyth and one Robert Avery by order dated 6 May 2003 under the Guardianship and Administration Act 1990 (WA). From that time forward, and for the purposes of all subsequent relevant events, it was David Smyth who effectively represented, and made decisions for, his father, although Mr Avery’s participation was necessary for any act of Mr Smyth to have legal effect. Notwithstanding his infirmity, it appeared that Mr Smyth remained conscious of the events which later became relevant in this proceeding, and that David Smyth made important decisions on his behalf only after discussion with him.

13 In late 2004, Mr Smyth decided to put the farm up for sale. Once he learnt of his father’s intentions in this regard, David Smyth effectively took over responsibility for the arrangement of the sale. On 17 November 2004, he and Mr Avery appointed agents for the sale, Elders Real Estate of York. The sale was handled by their Branch Manager, Brian Woolcock. Thereafter, the Smyths dealt with the Chippers as though the latter had a right of first refusal to buy the freehold. They dealt with the Chippers in exactly the same way as would have been appropriate if the farm were leased directly to the Chippers, without the interposition of Octra.

14 On 8 November 2004, David Smyth informed Mr Chipper of the intended sale of the farm. On 23 December 2004, David Smyth confirmed that in writing, and told Mr Chipper that the price being sought by the vendor was $1,450,000, or about $1,200 per acre. The Chippers regarded that price as excessive. In February 2005, they signed an open offer to purchase the farm for the price of $1,100,000. This was rejected by David Smyth, who countered with a price of $1,445,000. The Chippers increased their offer to $1,200,000, but David Smyth would not move from the price he last nominated. In all of the discussions, the Chippers left David Smyth (and Mr Woolcock) in no doubt that they considered the asking price of $1,445,000 excessive.

15 Nothing material happened in relation to the proposed sale of the farm between about February and about August 2005. During that time, the farm continued to be listed with Elders. It was in August that Red Valley came into the picture. Red Valley was (and is) a company controlled by Warren Anderson, and of which he and his wife were directors. Mr Anderson had been a farmer and a property developer for many years, although, since the early 1990’s, not actively involved in the latter. Red Valley was used by Mr Anderson to own properties in which he was interested. Mr Anderson gave evidence that, in about early 2005, a farming property near York owned by Red Valley was given to his sister. However, he was concerned that the property might be too small to support her, her husband and their three sons. Mr Anderson was looking for a further property which his sister could use as pasture, and possibly for one of her sons to use as his own farm. He asked Colin King, a friend and an estate agent with L J Hooker of York, to look out for properties close to the one which Red Valley had given to his sister. In August, Mr King told Mr Anderson that he had located a reasonably priced property which was ‘just what you’re after’. Mr Anderson was interested, and asked Mr King to arrange an inspection. Mr King contacted Mr Woolcock, and an inspection was arranged.

16 Mr Woolcock gave evidence before the primary judge that, during the inspection, he told Mr Anderson that the farm was under lease, and that there was a further 4-year option, and that the lessee had a right of first refusal. He said that Mr Anderson said that he would have preferred to have had access to the property as at 30 April 2006, but that such access was not vital. Mr Anderson said that, at or about the time of the inspection, Mr King said to him:

Mr Anderson was given a copy of the lease and sub-lease, but did not read them at that stage.

17 In anticipation of an offer to buy the farm being made by Red Valley, on 27 August 2005 David Smyth told Mr Chipper that he expected such an offer to be made, and asked him to indicate if he was interested in purchasing the farm.

18 On 29 August 2005 Red Valley offered to buy the farm for a price of $1,400,000, and subject to various conditions set out in the offer. On 2 September 2005, David Smyth countered with an offer to sell for $1,445,000, together with certain adjustments to the conditions proposed. Red Valley agreed to pay the higher price, but rejected one of the adjustments to the conditions. On 16 September 2005, David Smyth accepted the most recent amendments proposed by Red Valley and signed the contract. Mr Avery signed on 19 September 2006.

19 As a result of those signatures, on 19 September 2005 there came into existence a binding contract for the sale of the farm to Red Valley. Apart from the agreed price of $1,445,000, some of the conditions in the contract are material to the present case. The contract provided for a deposit of $140,000, of which $10,000 was payable immediately and the balance, $130,000, was payable within 60 days. Settlement was to be 12 months from acceptance (i.e.: 19 September 2006). In addition to the conditions printed on the standard form, the contract contained the following conditions:

The farm was on five separate certificates of title. There was, apparently, a proposal to create a sixth, but, at the time of trial, this had not been completed and the farm remains on five titles. As to condition 11, by the time of the execution of the contract, Mr Anderson had received a copy of the lease and sub-lease. At the time he executed the contract, he had not had an opportunity to consider the lease and sub-lease, and Mr King suggested to him that it become a condition of the offer to buy the farm that Red Valley be satisfied with the terms and conditions of the existing lease. Mr Anderson agreed with the suggestion, Mr King drafted condition 15, and that was accepted by David Smyth. As to conditions 12, 13 and 14, they are presently relevant only for the fact that they existed as annexures (or the like) to the written contract. Why they are relevant will appear shortly.

20 In the period immediately following the execution of the contract, Mr Anderson used Mr King to speak to the Chippers on the question whether they would be prepared to be bought out of the sub-lease, including the optional term. Mr King told him that the Chippers had named the price of $50,000 a year, down to the end of the optional term, to be bought out. Mr Anderson was not prepared to pay such a sum.

21 Towards the end of September 2005, Mr Anderson read the lease and sub-lease for the first time. He noted the clauses giving the Chippers a right of first refusal, and was unsure whether that affected the contract which Red Valley had signed. He told Mr King to make sure that Mr Smyth offered the farm to the Chippers, adding ‘I don’t want this to become bogged down in another court fight’. Mr King said that he would speak to Mr Woolcock about the matter. The first instalment of the deposit under the contract, $10,000, which was due upon execution, had not been paid.

22 The Chippers were informed of the proposed sale of the farm to Red Valley, but they did not then take any step to buy the farm under their right of first refusal. Mr Woolcock provided the Chippers with a blank pro-forma confirmation by which they were invited to indicate that they wished, or did not wish, to exercise their right of first refusal to purchase the farm at the cash price of $1,445,000. By this stage, the only details of the Red Valley contract which had been provided to the Chippers consisted of the first page of that contract (which included the price and the deposit terms, but not the special conditions). On 28 September 2005, Mrs Chipper’s brother, Mr Stevenson (a legal practioner), wrote to Mr Woolcock advising him that there had not been proper compliance with the lessor’s obligation to give the Chippers an opportunity to exercise their right of first refusal. He asked Mr Woolcock to provide the Chippers with ‘proper documentation for their consideration’. This was apparently not promptly forthcoming, at least to the Chippers’ satisfaction.

23 The 28-day period within which, under condition 15 of the contract, Red Valley had the opportunity to withdraw if it was not satisfied with the terms and conditions of the existing lease expired on 17 October 2005. As this date approached, Mr Anderson still had not resolved his concerns about the lease and so he asked Mr King to obtain an extension of time for the operation of condition 15. Mr King spoke to Mr Woolcock about the matter, and on 17 October 2005 Mr Woolcock prepared a written form of variation to the contract which would have done two things: first, extend the period referred to in condition 15 to 15 December 2005, and secondly, provide for the deposit to be paid in full within 7 days of that condition being satisfied (i.e.: by 22 December 2005 at the latest).

24 Two days later, on 19 October 2005, David Smyth telephoned Mr Chipper. He asked why the Chippers had not signed the form indicating that they did not wish to buy the farm at the price of $1,445,000. He said that their failure to do so was delaying the sale. Mr Chipper said that he had still not been shown the whole contract, which he required before exercising his right of first refusal one way or the other. On 20 October 2005, Mr Woolcock visited the Chippers’ farm, and spoke to Mrs Chipper. He gave her a memorandum addressed to the Chippers and signed by Mr Smyth, in the following terms:

The memorandum concluded with a prepared statement, to be signed by the Chippers, to the effect that they did not wish to exercise their right of first refusal to buy the farm for the cash price of $1,445,000. They did not sign that statement.

25 It seems that, by the end of October 2005, the Chippers had been provided with a copy of the Red Valley contract, but not with the annexures or the addendum referred to in conditions 12, 13 and 14. On their behalf, on 7 November 2005, Mr Stevenson wrote to Mr Woolcock protesting about those omissions. Mr Woolcock immediately brought the complete contract, including the annexures and the addendum, to the Chippers’ attention. Having perused these documents, the Chippers decided that they did not wish to purchase the farm for the consideration and on the conditions specified in the Red Valley contract. On 16 November 2005, Mrs Chipper delivered a notice, signed by both herself and her husband, to Mr Woolcock in the following terms:

Mr Woolcock notified Mr King of this communication, who then notified Mr Anderson.

26 The variation to the contract between Mr Smyth and Red Valley which had been prepared by Mr Woolcock at Mr King’s request on 17 October 2005 was executed by both parties in the days following the delivery of the above Chippers’ notice. It was executed by Mr Anderson on behalf of Red Valley on 17 November 2005, and by David Smyth and Mr Avery on behalf of Mr Smyth on 22 November 2005. It bore the date 17 October 2005.

27 In a finding of fact, his Honour concluded that Mr Smyth did not inform the Chippers of Red Valley’s request for an extension of time allowed under condition 15 of the contract. At about mid-November 2005, there was an extension of the time for the payment of the deposit under the contract, and there was no suggestion before the primary judge that the Chippers were told about that at any time before they signed off on their right of first refusal.

28 In December 2005, Mr Anderson travelled overseas. While in Moscow, he received a phone call from Mr King, who told him that the time on the condition in the contract of sale was about to expire, and asked him what he was going to do about it. This was a reference to the fact that the time for Red Valley to express its satisfaction (or otherwise) under condition 15 had been extended to 15 December 2005. Mr Anderson asked Mr King whether the Chippers were going to accept ‘a sensible offer on their lease’, by which he referred to earlier proposals for Red Valley to buy the Chippers out from the remaining term of the lease, including the extended term. Mr King said that he had heard nothing from the Chippers, adding: ‘if you buy it I can on-sale the blocks for a profit. And you never know, Chipper might still come to the party.’ Mr Anderson said, ‘put it in motion’, and left it up to Mr King.

29 Mr Woolcock was also concerned that 15 December 2005 was approaching. Apparently after contact with and at the request of Mr King, he drafted a further variation to the contract on 12 December 2005 to the effect that a first instalment of the deposit of $90,000 would be paid within 7 days, and the balance of $50,000 would be paid on 31 March 2006. At the same time as he prepared that draft variation, Mr Woolcock also prepared a draft waiver of condition 15, to be signed on behalf of Red Valley. However, Mr King was unable to have Mr Anderson execute this variation and the waiver in December 2005. Although Mr Anderson returned from overseas shortly before Christmas, Mr King was still unable to contact him. Eventually, Mr King advised Mr Woolcock to contact Mr Anderson directly. On 30 December 2005 Mr Woolcock prepared a 3-page facsimile which was addressed to Mr Anderson. The cover sheet contained the following memorandum:

The second page of the facsimile was the draft variation which Mr Woolcock had prepared on 12 December 2005, and the third page was the draft waiver. The facsimile was sent to Mr Anderson at about the end of December 2005. However, Mr Woolcock had no greater success than Mr King in prompting Mr Anderson to execute the variation and waiver. As it appeared to Mr Woolcock, Mr Anderson was simply unavailable.

30 As mentioned above, in December 2005 Mr Anderson still held on to the prospect that the Chippers might agree to be bought out of the remaining term of their lease. That he was, in his words, ‘still attempting to sort out the lease’, was a reason why he requested that there be a split in the deposit. He said that he was not going to commit himself for anything until ‘any arrangements had been made about the lease’. From this point, his evidence in cross-examination before the primary judge was as follows:

His Honour did not accept Mr Anderson’s evidence that the reason he did nothing about the variation and waiver proposed in December 2005 was simply that he did not apply himself. His Honour found that, from about the first half of December until at least the beginning of February, Mr Anderson’s failure to respond to Mr Woolcock was no accident. Mr Anderson’s original idea of buying the farm as an additional resource for his sister was being frustrated by the Chippers’ refusal to consider being bought out of the lease on Mr Anderson’s terms. From the outset, Mr King had proposed, as a fall-back position, the sale of individual lots to third parties. Unless Mr Anderson could achieve either his preferred position, or Mr King’s fall-back position, the purchase of the farm would have been pointless. His Honour considered that Mr Anderson’s conscious objective at around this time was to avoid committing Red Valley to the purchase until one of those positions had been achieved.

31 His Honour rejected any suggestion that Red Valley’s failure to pay the deposit, and its failure to come to terms with the variation and waiver which had been drafted by Mr Woolcock, was due to absent-mindedness, preoccupation or even incompetence. He found that these failures were the result of decisions consciously taken by Mr Anderson on Red Valley’s behalf.

32 In early February 2006, certain events occurred which, it seems, renewed Red Valley’s interest in executing the variation and waiver prepared by Mr Woolcock in December 2005. At the time, Mr Woolcock knew nothing of these developments. On 4 February 2006 Mr King received a written offer for so much of the farm as was contained on Lots 97 and 99. The receipt of these offers caused Mr Anderson to decide that he would proceed with the purchase of the farm. In cross-examination before the primary judge, Mr Anderson gave the following evidence:

33 Mr King contacted Mr Woolcock with a view to arranging for the execution of the variation and waiver. The variation was executed by Mr Anderson on 22 February 2006, by David Smyth on 28 February 2006, and by Mr Avery on 1 March 2006. It contained the following term:

On 22 February 2006 Mr Anderson, on behalf of Red Valley, signed a form of waiver in the following terms:

On 1 March 2006, Mr Anderson notified Mr Woolcock in writing that he was satisfied with his inquiries regarding the lease as shown in clause 15 of the contract, thereby waiving that condition. Red Valley paid the first deposit instalment on 9 March 2006.

34 The above events involving Red Valley and the non-performance of its contract with Mr Smyth were originally unknown to the Chippers. In January 2006, Mr Chipper happened upon Mr Woolcock in the street in York, and asked him if the contract with Red Valley had been finalised. Mr Woolcock said that the deposit was ‘in the mail’ and that Mr Anderson’s trip to Russia was holding things up. Mr Chipper said that people were driving over the farm, and that he assumed that they were considering a purchase from Red Valley. He told Mr Woolcock that had to stop, but Mr Woolcock said that it was not his problem. Also in January 2006, or possibly in early February, and possibly also as a result of the conversation with Mr Woolcock, Mr Chipper spoke to David Smyth about the purchase of the farm by Red Valley. This was in the course of a conversation otherwise concerned with the negotiation of the rent for the 4-year extension of the sub-lease. David Smyth told Mr Chipper that he was still waiting on Red Valley ‘to finish on concluding the deal’. According to Mrs Chipper’s evidence before the primary judge, ‘in or about February 2006’ she asked Mr Woolcock whether Red Valley had paid the deposit under the contract, and Mr Woolcock said that the deposit had not been paid because Mr Anderson was overseas. According to Mrs Chipper, she told Mr Woolcock that she considered that, if the deposit had not been paid, ‘there had to be a different contract’. Mr Woolcock disagreed with that, and said that the Red Valley contract had been ‘finalised’.

35 At about this time, the Chippers were reconsidering their original refusal to pay $1,445,000 for the freehold of the farm. According to Mr Chipper, having found out that Red Valley had not paid the deposit under the contract, he ‘presumed the contract was void’. He discussed the position with his wife, and they decided to make an offer to purchase the farm for the sum of $1,445,000, and otherwise on the same terms as contained in the Red Valley contract (as then known to them). Mr Chipper gave evidence that he called David Smyth on his mobile phone, and left a message for him to call back. Mr Chipper said that a couple of days later, David Smyth telephoned him, at which time he asked whether Red Valley had paid the deposit, and was told that it had not. He said that he and his wife could purchase the farm for the price being offered by Red Valley, and that David Smyth responded that he did not care who bought the farm – he just wanted it sold.

36 David Smyth, for his part, gave evidence before the primary judge that it was not until 12 March 2006 that Mr Chipper first told him that his circumstances had changed and that he could then afford to purchase the farm. According to his evidence, Mr Chipper referred to the new increased rent which they would be paying under the extended sub-lease, and said they might as well buy the farm if it was still available. David Smyth replied that he would need to check with Elders to see if the deposit had in fact been paid. He said that, on 13 March 2006, he rang Mr Woolcock, and was told that Red Valley had paid the first instalment of the deposit, $90,000, by the due date. He said that he then rang the Chippers, and spoke to Mrs Chipper, telling her that the farm had been sold and that ‘it was the original contract to Red Valley ... it was the same price ... and the same people’. According to David Smyth, Mrs Chipper said that she and her husband were aware of the variation to the Red Valley contract and of the fact that the deposit had not been paid.

37 In the meantime, Mr King was continuing his efforts to sell the lots constituting the farm to third parties. As noted above, he received offers for two of those lots in the first week of February 2006. On 17 March and 21 March 2006, he also received written offers for Lot 203 and Lot 202 respectively. The four offers were all accepted by Red Valley on 21 March 2006. Each contract thus coming into existence was subject to settlement with Mr Smyth. In each case there was an acknowledgement by the purchaser that settlement would be without vacant possession because of ‘a long term lease’ and that the purchaser had previously received a copy of each of the lease and the sub-lease.

38 In late March 2006, Mrs Chipper asked Mr Woolcock for a copy of the then current contract of sale between Mr Smyth and Red Valley. She did not receive the contract, and again asked Mr Woolcock for a copy of it in early April 2006. She visited Mr Woolcock in his office in York on 10 April 2006, and was provided with a copy of the contract, together with a copy of the variation (but not of the waiver) executed on 1 March 2006.

39 The Chippers consulted Mr Stevenson about these developments. On 16 April 2006, he spoke to David Smyth. He said that he had been informed about the variation to the contract and, according to David Smyth, ‘wanted to sort it out’. David Smyth said that he told Stevenson that he had been more than happy to sell the farm to the Chippers, but they had declined to purchase it. He said that Mr Stevenson replied that he had told the Chippers to pay the full amount for the farm, but that they had not wanted to do so.

40 Over the ensuing five weeks or thereabouts, the Chippers took legal advice. On 5 May 2006, they lodged a caveat over the farm to protect what was said to be an ‘option to purchase and/or right of first refusal pursuant to lease agreement dated May 1 2002’. On 26 May 2006, the Chippers’ solicitors wrote to Octra, with a copy to Mr Smyth, referring to the variation to the contract with Red Valley which had recently come to their clients’ attention. They asserted that, in relation to the deposit, the contract had been renegotiated and was now ‘substantially more favourable to the purchaser’. They said that the Chippers wished to exercise the ‘right of pre-emption over the freehold of the property’ on the terms of the contract, as varied. They sought an acknowledgement of the Chippers’ right to purchase the freehold on the terms of the contract as varied, and asked that Red Valley be informed thereof. The solicitors added that they were preparing a form of contract for the purchase of the property, which would shortly be sent, together with the Chippers’ cheque for the deposit of $140,000. A similar letter was sent to Red Valley.

41 On 30 May 2006, the Chippers’ solicitors again wrote to Octra, enclosing a copy of a form of contract for the sale of land executed by the Chippers as purchasers, together with a trust account cheque in the sum of $140,000. The form of contract purported to be on the same terms and conditions as the contract made between Mr Smyth and Red Valley in September 2005 as amended on 1 March 2006, save that the deposit of $140,000 was payable forthwith. The form of contract also contained a waiver of condition 15 in the original contract.

42 On 13 July 2006 the Chippers commenced this proceeding against Octra, Mr Smyth and Red Valley to restrain the sale to Red Valley amongst other relief.

43 On 10 August 2006, the Chippers’ bank, National Australia Bank Ltd, advised them in writing that they had unconditional approval for a $1.3 million finance package for the funding of the purchase of the farm, subject to their execution of the bank’s standard security and loan documentation.

44 His Honour held that the right of first refusal conferred on Octra was held on trust for the benefit of the Chippers. They were entitled to the benefit of Mr Smyth’s promise under cl 6(d)(ii) of the lease to grant a right of first refusal to Octra.

45 His Honour also held that, on the true construction of the clause, Mr Smyth had a contractual obligation to give the Chippers the opportunity to exercise a right of first refusal on the terms of the contract as varied, and that the failure to do so breached both the negative and positive requirements of the obligation. As a consequence, his Honour found that the Chippers were entitled to an injunction to restrain the breach by Mr Smyth by agreeing to convey the freehold of the farm to Red Valley. In addition, his Honour held that the Chippers had a right to specific performance (that is, to exercise the right of first refusal) and that such right had not been lost as a consequence of delay or laches. His Honour did not consider that Red Valley’s interest arising under its contract to purchase the land prevented the Chippers from seeking a remedy. In conclusion, his Honour granted specific performance and ordered the respondents to the application to pay the Chippers’ costs.

46 All the other questions raised on appeal turn on the question of construction of the right of first refusal conferred under the lease. On the construction question, his Honour concluded that notwithstanding that a binding contract of sale is made with a third party after the holder of the right of first refusal expressly declined to purchase on the same terms as the contract, if it is later varied before settlement on terms more favourable to a purchaser, the negotiation of the varied contract with the third party ought to be regarded as a new offer for sale enlivening the otherwise dormant or exhausted right of first refusal. Whether the terms of the new contract as varied are more favourable is a question of fact. His Honour decided that the terms of the agreed variation with Red Valley were more favourable in a significant respect. His Honour concluded that the vendor’s obligation to give the lessee an opportunity to be the first to refuse is not necessarily brought to an end by execution of a binding contract for sale between the vendor and the third party purchaser, but that it continues to operate in respect of a binding contract which has been varied.

47 On the basis of this construction, his Honour concluded that the agreement for sale to Red Valley as made on 2 September 2005 was in breach of the clause conferring the right of first refusal in the lease.

48 Having reached this conclusion on the construction question, his Honour proceeded to consider the effect of the breach and the Chippers’ entitlement to equitable relief. It is not necessary for us to consider these and other matters on appeal in view of our conclusion that his Honour erred in his analysis and construction of the clause and its application in the present circumstances and context.

49 Counsel for the Chippers submitted that notwithstanding a binding contract had been entered into between Red Valley and Mr Smyth after the Chippers had refused to purchase the property on the same terms, any subsequent variation prior to settlement on terms more favourable to Red Valley (except in circumstances of de minimis) triggered a further obligation for Mr Smyth to again offer the property for purchase by the Chippers on terms comprising those of the variation. The reference to ‘sale’ in cl 6(d)(ii) is said to be referable to the time of completion on the basis that there is no sale until completion, in which respect counsel for the Chippers referred to the decision in Chan v Dainford Limited [1985] HCA 15; (1985) 155 CLR 533 at 537-538. As a consequence, it is submitted that if, for example, the day before settlement of a duly signed and binding contract of sale a seller agrees to vary the terms of the contract by granting the purchaser a substantial extension of time for settlement or by delaying the date for payment of the deposit, there arises an obligation on the part of the lessor to make a fresh offer on the varied terms to the grantee of the right, without which there is a breach of the negative and positive obligations contained in the clause.

50 According to common understanding in the context of and in relation to the sale of land, the expression ‘sale of land’ is commonly taken as referring to the making of a binding contract for sale of land. By way of illustration, in Milner v Staffordshire Congregational Union (Incorporated) (1956) 1 Ch. 275, the Court considered the meaning of the word ‘sale’ and the expression ‘making a sale’. Danckwerts J there concluded at 281-282 that a sale is made when the owner of a property enters into a contract of sale for the sale of the property to a purchaser, and not when the conveyance eventually takes place. This meaning is appropriate in this case rather than the meaning referred to in Chan v Dainford. Here, the expression ‘to purchase the land’ in cl 6(d)(ii) is, in our opinion, to the same effect. In the present case, there is nothing in the terms of the right of first refusal which supports any different meaning or which refers to ‘conveyance’, ‘transfer’ or ‘completion’. The emphasis in the clause is on the right to refuse to purchase the land which is subsequently ‘offered for sale’ by the lessor. The so-called right of first refusal is enlivened during the period in which the property is offered for sale. Where the lessee refuses to purchase and the land is sold upon acceptance of the offer by a third party, then the right of first refusal is of no continuing force.

51 The reasoning in Chan v Dainford is therefore to be distinguished from the present case because it is clear that the observations of the Court in that case were made in relation to the specific definition of ‘instalment contract’ in the Property Law Act 1974 (Qld). That definition defines an instalment contract as an executory contract for the sale of land in terms whereby the purchaser is bound to make a payment (other than a deposit) without becoming entitled to receive a conveyance in exchange. The case related to a claim for specific performance of an executory agreement for the purchase of home units off the plan in circumstances where the contracts were made before the building was constructed and where there were no lots in existence at the time the contracts were made. The lots only came into existence on subdivision, and when this occurred the lot became ‘land’ for the purposes of the Act. None of those circumstances parallel those in the present case.

52 The content of an agreement giving the right of first refusal was summarised by Street J in Mackay v Wilson (1947) 47 SR (NSW) 315 at 325 in a statement which has been followed in numerous later cases, including by a Full Court of this Court in Nationwide Produce (Holdings) Pty Ltd (in liquidation) v Linknarf Limited (in liquidation) [2005] FCAFC 129 at [58]:

53 Young J in Beneficial Finance Corporation Ltd v Multiplex Constructions Pty Limited (1995) 36 NSWLR 510 at 524 accepted the description of a right of pre-emption as being different from an option in so far as the grantor of an option has parted with his freedom of alienation and is obliged to sell to the grantee at the request of the latter. In the present case, once the binding contract for sale was entered into between Mr Smyth and Red Valley, the grantor had parted with his freedom of alienation and was obliged to sell to the purchaser. There was no equitable interest remaining in the lessor which could be claimed by the Chippers.

54 In some cases, the nature of the pre-emptive right conferred by a clause in a contract is expressly spelt out. This was so in Walker Corporation Pty Ltd v W R Pateman Pty Ltd (1990) 20 NSWLR 624, where the pre-emptive right was framed in these terms:

In this clause, the pre-emptive right is clearly spelt out as being a condition precedent for entry into a contract for sale. There can be no suggestion that the clause is referable to completion as opposed to contract for sale. In our view, the same construction should be given to the clause in the present case. The consequence of this is that an offer in the same terms and conditions must be given to the grantee before the grantor enters into a binding contract for sale. This construction in our view makes sound commercial sense and makes it clear that it is the entry into the binding contract for sale which exhausts the right of first refusal and not the ‘completion’, ‘transfer’ or ‘conveyance’ of the property in question. We consider that, according to the language used in the clause, the obligation on the vendor has been discharged and that there has been no breach of the clause.

55 Also in support of the proposition that any subsequent variation prior to settlement on terms more favourable to the purchaser reactivates the right of first refusal, counsel for the Chippers referred to the observations of Madgwick J in White Property Developments Ltd v Richmond Growth Pty Limited [1998] FCA 26 ("White Property"). In that case his Honour (after referring to the High Court’s decision in Woodroffe v Box [1954] HCA 22; (1954) 92 CLR 245) said at 28:

The reasoning of Madgwick J in White Property does not assist the Chippers. Although the above passage clarifies that the expression ‘unless and until’ indicates that it is only once the offer has been made and refused that the grantor can enter a contract for sale, its reasoning proceeds on the premise that the initial offer had also not been accepted by a third party after refusal by the grantee and had been re-offered on lesser terms by the grantor. In the present case, there was a signed binding contract which had come into force between Red Valley and Mr Smyth after the Chippers had refused an offer on the same terms. That contract has never been rescinded or terminated. It is true that that contract was later varied, but only after Red Valley had accepted the offer of Mr Smyth and the vendor, on the execution of the contract, had put it outside its power to unilaterally vary that contract. The variation in this case was not significant and was not capable of giving rise to a right of rescission or termination, nor does it constitute a new offer to sell. The effect of the variation was to vary the date for payment of the deposit and the size of the instalments in which it was to be paid. The total amount of the deposit remained unchanged at $140,000. The payment of each instalment was deferred for several months, but the deposit was nevertheless to be paid before the date at which settlement was originally planned. The total amount to be paid for the property remained at $1,445,000. The balance at settlement was still payable on 19 September 2006. Any pre-emptive right which was exhausted before the contract was made is not revived as long as the contract, as varied, remained on foot. The Chippers’ right of first refusal was and remains exhausted because the contract was not in fact terminated. The reasoning of his Honour in White Property, and the reference he makes to Woodroffe v Box, is consistent with the termination of the right of first refusal upon and as a consequence of entry into a binding contract by Mr Smyth with Red Valley on terms refused by the Chippers. Madgwick J premised his remarks on the assumption that an offer rejected by White Property had not been accepted by anyone else. Where there is no binding contract, his Honour concluded that a further offer had to be made. However, in the present case, we do not need to consider that position because there was and continues to be a binding contract in existence which has not been terminated or rescinded. This is not the occasion to consider the correctness of all of the reasoning in White Property.

56 The part of Woodroffe v Box to which Madgwick J referred is found in the joint judgment of Fullagar and Kitto JJ at 257:

The words ‘unless and until’ support the conclusion that the opportunity to exercise the right of first refusal is an event or condition precedent to selling the property. Once this has occurred, the vendor has the right to sell the property on those terms to a prospective purchaser. Where the property is sold after that requirement has been satisfied, then both in terms of the language and as a matter of practical operation the right vested in the grantee is exhausted. The right is of first refusal, not of first and last refusal. Thus, in the absence of any suggestion of bad faith, prior arrangement, fraud, mistake or misrepresentation, the contract may later be varied between the grantor and the third party purchaser, and this will not revive the right so that a new offer must be made on the varied terms to the grantee. The right is exhausted when an offer to sell is rejected and the offer or a less advantageous offer is accepted by a third party. In this case it is evident that the Chippers, as is evidenced from their written confirmation on 16 November 2005, never had any intention to accept an offer in the terms stipulated by Mr Smyth on 2 September 2005. If the submission advanced by the Chippers is accepted then substantial commercial uncertainty will ensue in situations where, in the time between the signing of the contract of sale and final settlement, a variation is agreed upon by the parties to the contract of sale, even though the contract of sale is not terminated or rescinded. Considerable caution needs to be exercised when it is sought to convert an in personam contractual promise into what amounts to a new form of property right enforceable against third parties (cf, in another context, Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22 at [118]- [120]).

57 Counsel for the Chippers also referred to the wording of cl 6(d)(ii) and points out that it is loosely drafted. On a literal reading, for example, it might be suggested that the clause assumes that it will only apply where the property is advertised because the only ‘notice of intention to sell’ which must be given is one month’s notice prior to advertising. In circumstances where the property is not advertised, it might be argued that the clause would not apply. This might occur where, for instance, a prospective buyer approaches the lessor with an unsolicited offer to purchase and the lessor proposes to accept such an offer without prior advertisement. A second unsatisfactory aspect of the drafting pointed to by counsel is that the right of first refusal assumes an offer for sale by the lessor to a third party purchaser. This would again not be satisfied, on a literal interpretation of the clause, in circumstances where a third party approaches the lessor with an offer to buy and the lessor accepts. In our view, while supporting the conclusion that the clause has been poorly drafted and should not be read too literally, these suggested inadequacies do not provide any material support for the primary proposition advanced by counsel for the Chippers on the issue of construction. Where a lessor wishes to accept an offer by a third party it can be said that the lessor wishes or is prepared to sell on the terms of the offer to buy, and therefore the clause is activated. It can be said that a lessor who proposes to accept an offer by a third party, without advertising, is in substance offering the property for sale to the purchaser on the terms and conditions specified by the prospective purchaser. In that case, an unsolicited offer by a third party comes within the clause on any practical commercial reading of the clause. If a lessor forms an intention to accept a specific unsolicited offer from a third party, the lessor is offering to accept and thereby sell the property and therefore the clause applies. In any event, on its proper construction the final sentence of the clause can be read independently of those sentences and will operate regardless of whether the lessor intends to advertise or to accept an offer from a third party.

58 Accordingly, for the above reasons we are of the view that his Honour erred in his construction of the right of first refusal in the present case, and in his conclusion that the variation to the agreement gave rise to a further requirement to again offer the property to the Chippers. Since all other submissions for the Chippers are dependent on the answer to this primary question of construction being favourable to the Chippers, it is not necessary to deal with them.

59 The order of the Court in each matter is that the appeal is allowed, the cross appeal is dismissed, the orders below are set aside and the first respondents/cross appellants are to pay the costs of the appellants and cross-respondents.

60 In appeal WAD 369 of 2006 the appellant sought a declaration and an order that caveat number J730409 be removed. That accords with relief sought below and appears to follow but there was no discussion of it during the appeal. We shall grant that relief but reserve liberty to the first respondents to move to discharge the relief within seven days of this date.

61 Any application under the Federal Proceedings (Costs) Act 1981 (Cth) by the first respondents in respect of the costs incurred by the first respondents in relation to the appeals can be made to the chambers of Tamberlin J within seven days.

I certify that the preceding sixty-one (61) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Tamberlin, Gyles and Gilmour.

Counsel for the Appellant in WAD 369 of 2006 / Second Respondent in WAD 375 of 2006:	Mr J. Giles

Solicitor for the Appellant in WAD 369 of 2006 / Second Respondent in WAD 375 of 2006:	Kott Gunning Lawyers

Counsel for the Second and Third Respondents in WAD 369 of 2006 / Appellants in WAD 375 of 2006:	Mr C. Zelestis QC and Mr J. Thomson

Solicitor for the Second and Third Respondents in WAD 369 of 2006 / Appellants in WAD 375 of 2006:	Michael, Whyte & Co.

Counsel for the First Respondents in WAD 369 of 2006 / WAD 375 of 2006:	Mr N. Hutley SC and Mr D. Stone

Solicitor for the First Respondents in WAD 369 of 2006 / WAD 375 of 2006:	Williams & Hughes

Date of Hearing:	23 May 2007

Date of Judgment:	20 July 2007

IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY	WAD 369 OF 2006

JUDGES:	TAMBERLIN, GYLES AND GILMOUR JJ
DATE OF ORDER:	20 JULY 2007
WHERE MADE:	PERTH

JUDGES:	TAMBERLIN, GYLES AND GILMOUR JJ
DATE:	20 JULY 2007
PLACE:	PERTH

Federal Court of Australia - Full Court Decisions

Octra Nominees Pty Ltd v Chipper [2007] FCAFC 92 (20 July 2007)