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Petelin v Deger Investments Pty Ltd [1976] HCA 4; (1976) 133 CLR 538 (19 February 1976)

CATCHWORDS

HEARING

DECISION

2. The manner of exercise of the option was specified. The third clause of the agreement was in the following terms:

"3. Immediately upon the exercise of this option the Grantor
and the Grantee or its nominee will execute a contract on
the terms referred to above and containing the conditions of
sale as approved by the Real Estate Institute of New South
Wales and the Law Society of New South Wales together
with such conditions (if any) as appear in the Third Schedule
hereto."

3. Liverpool Properties Pty. Ltd. duly nominated the respondent as its nominee and the respondent duly exercised the option. (at p541)

4. The form of contract approved by the Real Estate Institute and the Law Society of New South Wales in current use at the time of the grant of the option to purchase contained the following condition:

"16. Should it be established prior to completion that at
the date of this Agreement the property was affected by any
town and country planning Scheme or interim development
prepared or prescribed under the provisions of the State
Planning Authority Act or Pt XIIA of the Local Government
Act 1919 as amended otherwise than as stated in the fourth
schedule hereto or was affected by any Residential District
Proclamation under s. 309 of the Local Government Act
1919, or by any existing proposals for re-alignment widening
or siting of a road by any competent authority otherwise than
as disclosed in the said fourth schedule, either party shall be
entitled to rescind this Agreement by notice in writing to the
other". (at p541)

5. The fourth schedule to this form of contract was as follows:

"The property is affected as shown in the copy certificate
under s. 342AS of the Local Government Act 1919 annexed
hereto".

6. The third schedule to the option agreement merely provided that if the option were exercised, settlement should take place within ninety days. (at p541)

7. No copy of the Real Estate Institute form of contract was annexed to the option agreement: nor did the parties at any time expressly agree to delete the provision of the fourth schedule to that form: nor was any certificate under s. 342AS of the Local Government Act, 1919 (as amended) annexed to the option agreement. Further, it did not appear that any such certificate had been issued at the time of the signature of the option agreement. Consequently, neither party had any such certificate in hand at that time. (at p541)

8. In fact, at that time, the land was subject to zoning. It was shown as Part Zone 3 (a) Business General and Part Reservation Roads 2 (c) Local Road Proposed under the City of Liverpool Planning Scheme. (at p541)

9. On 2nd March 1972, the appellant gave notice of rescission of the contract pursuant to cl. 16 of the Real Estate Institute form of contract. The notice was based apparently upon the existence of these zoning provisions. (at p542)

10. On 24th May, the respondent commenced proceedings for specific performance of the agreement constituted by the exercised option to purchase. The appellant defended the suit upon the ground, amongst others, that the contract had been duly rescinded. (at p542)

11. The Supreme Court in its Equity Division (Holland J.) decreed specific performance following the decision of the Court of Appeal Division in Cullen v. Petelin (1973) 2 NSWLR 485 . In that case, it was decided that the decisions in Wolczyk v. Barr (1970) 92 WN (NSW) 518 and Jonray (Properties) Pty. Ltd. v. Taranto (1970) 92 WN (NSW) 929; 21 LGRA 399. were distinguishable from the circumstances of that case and that, in order to give business efficacy to the contract between the parties, there must be implied therein an intention on the part of the parties that when the formal contract was entered into "the matter proposed to be inserted in the fourth schedule" would be inserted. Accordingly, the contract between the parties was taken to include "the material objectively in existence at the date of the exercise of the option and of the entering into the necessary written agreement of sale as contemplated by the option document". It was said: "This is material that can be obtained from the appropriate authorities." (at p542)

12. From the decree for specific performance the appellant appeals to this Court. It is now necessary to decide a point which this Court found it unnecessary to decide in Petelin v. Cullen [1975] HCA 24; (1975) 132 CLR 355 . (at p542)

13. In my opinion, the first matter to be decided is the relationship of the terms of the Real Estate Institute form of contract to the terms of the option. The respondent in argument initially took the stand that cl. 3 of the option agreement called upon the appellant, when the option had been exercised, to enter into a new contract containing terms which had not formed part of the option. But later, counsel for the respondent seemed to accept the position that cl. 3 did no more than require the execution of a document to record in a formal fashion the agreement which resulted from the exercised option. That, in my opinion, is the correct analysis of the operation of cl. 3. It introduces into the option agreement as part of the terms of the option the terms of the Real Estate Institute form of contract. There was no question of the formation of a new and different contract. With the execution of a document in the Real Estate Institute form, the agreement resulting from the exercise of the option would contain, amongst other terms derived from the form, clause 16 and the fourth schedule to the form. The suit was initiated on such a basis for no form of contract was executed. (at p543)

14. The contract between the parties was therefore one for the sale of an unencumbered freehold in possession, planning restrictions being regarded, in my opinion, as within the description "free of all mortgages charges and other encumbrances easements restrictions and convenants". The exception from this generality of the proposed roadway intended for the land by the Liverpool City Council as mentioned in the second schedule to the option agreement is indicative to my mind of the extensive sense in which the word "restriction" was used in the description of the estate to be conveyed. But a right of rescission was given to each party if it should be established prior to completion that the land was affected by, amongst other things, planning restrictions otherwise than as stated in the fourth schedule to the Real Estate Institute form. (at p543)

15. The difficulty in the case is due to the fact that nothing was stated in that schedule. The schedule provides for the annexation of a certificate under s. 342AS of the Local Government Act. But the disclosure of existing planning restrictions was not confined to the method of attaching such a certificate. The parties were at liberty, so far as the form was concerned, to notify their current knowledge of any planning restrictions by any agreed statement they chose to insert in the fourth schedule. The evident purpose of cl. 16 and the fourth schedule is to provide against the possibility of their common knowledge of planning restrictions at the date of the grant of the option being mistaken or inexact. Clearly, the relevant knowledge was that which both had on the matter and the relevant time was, in my opinion, the time of the giving of the option, whose terms would govern their contractual relations when it was exercised. (at p543)

16. The very purpose of cl. 16 and its use of the fourth schedule contemplates that even if a current certificate under s. 342AS were in hand at the time of the formation of the contract, or the parties otherwise had then a mutual understanding of what I may call the planning situation, the certificate or that understanding as contained in the agreement might be inaccurate or insufficient fully to disclose the then planning restrictions. When the terms of the form are introduced into those of an option to purchase, so that the expression "the date of this agreement" refers, as I think it does, to the date of the exercise of the option, a question arises as to whether the clause would cover any changes in planning restrictions which supervened on the granting of the option and become effective before its exercise. It is unnecessary to resolve that question now; but at least the clause refers to the agreed understanding of the parties as to the planning situation at the date of the exercise of the option. It is the annexing of the certificate under s. 342AS which expresses the parties' agreement, not the existence or contents of such a certificate not so consensually annexed to form part of the contract. (at p544)

17. It follows from these considerations, in my opinion, that the difficulty which arises in this case from the absence of any statement in or relating to the fourth schedule cannot be solved by the insertion by the Court of the terms of a certificate obtained now from the appropriate office as at the date of the grant of the option or as at the date of its exercise. The contents of the fourth schedule must, in my opinion, be the result of the agreement of the parties. It must be their agreed statement of their common knowledge or understanding of the planning restrictions operative at the relevant time, which in my opinion was at least the date of the grant of the option. (at p544)

18. It seems to me that a failure to make an agreed statement of that common knowledge or understanding does not vitiate their agreement for a mutual right of rescission should planning restrictions stand in the way of the performance of the promise to convey a fee simple unencumbered in the sense in which I have read the contractual description of the estate to be conveyed. The effect of the absence of a relevant statement in the fourth schedule is, in my opinion, to leave the right of rescission unqualified. If in fact planning restrictions at the date of the exercise of the option are shown to exist, the right of rescission will have arisen. No common knowledge or understanding of such existence would be shown as qualifying that right. Consequently, in my opinion, the appellant validly exercised a right of rescission, it being established that there were relevant planning restrictions: the decree for specific performance ought not to have been made. (at p544)

19. Two observations should be made. First, I do not see that such a conclusion creates any real difficulty in the use of the Real Estate Institute form referentially to incorporate its terms in an option to purchase. The parties are able to obtain the relevant certificate as at the date of the grant of the option or to state for themselves their common understanding of the planning situation as at that date. If operative at the date of the option, they will, unless meantime repealed, be operative at the date of the exercise of the option. The question whether further restrictions supervening on the grant of the option and before its exercise would give rise to a right of rescission need not presently be decided. Of course, repeal of restrictions operative at the date of the option will not warrant rescission. (at p545)

20. Secondly, I am unable to find any relevance in the resolution of this case of the concept of business efficacy. Here, the parties have made an agreement which, as I have analysed it, is quite capable in its terms of being carried out. They did not qualify their agreed mutual right of rescission by reference to their agreed common understanding at the time of the grant of the option of the planning position in which the subject land then stood, or such understanding of what that position would be at the date of the exercise of the option. They did so evidently because they had no such common knowledge or understanding. There is no room for any implication, in my opinion, in order to render what they had agreed efficacious. On the contrary, to insert into their agreement a term upon which they had not agreed, so far from lending efficacy, is to depart in a radical respect from what they had agreed. (at p545)

21. In my opinion, the decision in Wolczyk v. Barr (1970) 92 WN (NSW) 518 was well decided and this case, in relation to the lack of any statement in the fourth schedule to the Real Estate Institute form, is indistinguishable. (at p545)

22. It will be observed that I have treated the expression in cl.16, "the property was affected by any town or country planning scheme", as referring to any effect of such a scheme as restricts the availability or use of the land. Accordingly, I have spoken of planning restrictions. I do not accept a submission made on behalf of the respondent that an exception of land from the operation of a planning scheme would fall within the purview of the contractual expression. (at p545)

23. In my opinion, the appeal should be allowed and the suit for specific performance dismissed. (at p545)

McTIERNAN J. I agree in the reasons for judgment of the Chief Justice. (at p545)

MASON J. This matter comes before us by way of an appeal from the decision of Holland J. sitting in the Equity Division of the New South Wales Supreme Court. (at p546)

2. By an agreement made on 6th April 1971 the appellant in consideration of the sum of $100 paid by a third party, Liverpool Properties Pty. Ltd., granted an option in favour of that third party to purchase certain real property at Liverpool, New South Wales. The time limit for the exercise of this option was 6th June 1971. The period of the option was subsequently extended for a further six months from 6th June 1971. On 3rd December 1971 the third party nominated the respondent as its nominee in respect of the option and on the same day the respondent notified the appellant that it exercised the option by serving upon him a document entitled "Exercise of Option". (at p546)

3. The appellant, it seems, refused to recognize the exercise of the option and took no steps to transfer the land to the respondent. Accordingly, the respondent commenced a suit, claiming, inter alia, specific performance of the agreement. (at p546)

4. We are told that in the Supreme Court, Holland J. felt that he was bound by the decision of the New South Wales Court of Appeal in Cullen v. Petelin (1973) 2 NSWLR 485 , and accordingly granted the relief sought by the respondent. Cullen v. Petelin was the subject of appeal to this Court recently where the decision of the Court of Appeal on the non est factum issue was reversed (see Petelin v. Cullen [1975] HCA 24; (1975) 132 CLR 355 ). However, as will appear shortly, the issue which now arises differs from that previously decided. (at p546)

5. The present dispute resolves principally around cl. 3 of the option agreement which provides as follows:

"3. Immediately upon the exercise of this option the
Grantor and the Grantee or its nominee will execute a contract
on the terms referred to above and containing the conditions
of sale as approved by the Real Estate Institute of
New South Wales and the Law Society of New South Wales
together with such conditions (if any) as appear in the Third
Schedule hereto." (at p546)

6. The crucial provision, in this case, of the "conditions of sale as approved by the Real Estate Institute of New South Wales and the Law Society of New South Wales" is that contained in cl. 16 of the Law Society and Real Estate Institute's standard form contract of sale which provides as follows:

"16. Should it be established prior to completion that at
the date of this Agreement the property was affected by any
town and country planning scheme or interim development
prepared or prescribed under the provisions of the State
Planning Authority Act or Pt XIIA of the Local Government
Act 1919 as amended otherwise than as stated in the fourth
schedule hereto or was affected by any Residential District
Proclamation under s. 309 of the Local Government Act
1919, or by any existing proposals for re-alignment widening
or siting of a road by any competent authority otherwise
than as disclosed in the said Fourth Schedule, either party
shall be entitled to rescind this Agreement by notice in
writing to the other." (at p547)

7. The fourth schedule referred to in cl. 16 contains the printed words: "The property is affected as shown in the copy certificate under s. 342AS of the Local Government Act 1919 annexed hereto." However, in the margin beside these words is the advisory phrase, "Delete if not applicable". (at p547)

8. No copy of the standard form contract was annexed to the option agreement; nor was there a s. 342AS certificate attached. The crux of the appellant's submission is that whatever interpretation of cl. 3 of the option agreement be adopted none the less the only contract for sale of the land that he could be required to execute is one with a blank fourth schedule because no s. 342AS certificate was annexed to the agreement and so cl. 16 must be regarded as expressing a condition of sale (in the words of cl. 3 of the option) that there were no planning or zoning restrictions governing the subject property (see Wolczyk v. Barr (1970) 92 WN (NSW) 518 ; Sargent v. A.S.L. Developments Ltd. [1974] HCA 40; (1974) 131 CLR 634 ). It follows, according to this submission, that since indisputably the land was subject to a planning scheme then there was an automatic breach of the condition and thus cl. 16 of the conditions of sale gave the appellant, notwithstanding that he is the vendor, a right to rescind the agreement. (at p547)

9. The decision of this Court in Sargent v. A.S.L. Developments Ltd. establishes that the omission of a s. 342AS certificate or of particulars in lieu of a certificate from the fourth schedule in the standard form of contract does not make the contract void for uncertainty. The absence of information of the kind contemplated by the standard form of contract is tantamount to a statement that the land is not relevantly affected by town planning restrictions or proposals. The issue here is whether a similar approach is to be taken when the standard form of contract is incorporated in an option agreement so as to set out the terms of the contract which will arise on the exercise of the option and when the fourth schedule contains neither a s. 342AS certificate nor particulars in lieu of a certificate. (at p547)

10. In Sargent v. A.S.L. Developments Ltd. (1974) 131 CLR, at pp 639-640 , Stephen J. said that the function of cl. 16 is "to set out in the contract the planning status of the land so that the contracting parties may agree upon its sale and purchase on the footing of the status thus revealed; there is to be an agreed, disclosed statement of any affecting of the land by planning provisions, anything not so stated giving rise to a right of rescission. Fundamental to this concept is that the parties should have before them, when executing the contract, an agreed statement of planning status, which of course may indicate the total absence of all planning". (at p548)

11. Although an option agreement antedates the making of a binding contract created by an exercise of the option, the observations of Stephen J. in Sargent's Case in my view apply with equal force to cl. 16 when it has been incorporated as part of the standard form in the terms of an option agreement for the purpose of setting out the provisions of the contract which will come into existence in the event that the option is exercised. (at p548)

12. The only distinction between the two cases lies in the circumstance that here the statement of planning status is made on the making of the option agreement, whereas it is made on the making of the contract when a binding contract is entered into not preceded by an option agreement. This distinction is in my view of little moment. It is natural that the parties should wish to protect themselves against the unforeseen consequences of disconformity between actual and understood planning status - this is achieved by recording, or by making provision for representing, in the option agreement, the planning status of the land as the parties then agree it to be. (at p548)

13. The respondent's argument imputes to the parties an intention that the certificate or particulars for which the fourth schedule makes provision should be inserted on or after the exercise of the option. This argument proceeds upon the footing that the option agreement requires the execution of a formal contract after the option has been exercised and that this formal contract will contain material not necessarily known to or agreed upon by the parties, as for example a s. 342AS certificate as may be issued by the responsible authority on application made to it. A contrary view, and one which to my mind accords more closely with the usual character of an option agreement, is that such an agreement sets out all the terms and material on which there will come into existence, upon exercise of the option, the contract thereby constituted without the necessity for the parties executing a subsequent formal or substituted contract. (at p548)

14. The respondent's argument also attributes to cl. 16 in the context of an option agreement a function which is, to say the least of it, curious. It would enable the party to rescind the contract constituted by the exercise of the option, not for disconformity between the actual planning status at the date of the agreement and the planning status of the land as agreed and recorded by the parties, but for disconformity between the actual planning status of the land at that date and the planning status of the land as the council declares it to be, a status which may have been unknown to the parties at the time they entered into the option agreement. (at p549)

15. The respondent sought to draw some comfort from that part of cl. 16 which makes it clear that it is disconformity at the date of a contract which grounds the right of rescission. I do not perceive any lack of harmony between this provision and the notion that what is critical is a disconformity existing at the date of the contract between the actual planning status of the land and the planning status as it has been expressed at an earlier time, that is at the date of the grant of the option. (at p549)

16. Finally it was said that the form of the fourth schedule provided some support for the respondent because it contemplated that a certificate would be annexed. Assuming, as appears to be the case, that it is contemplated that the usual means of providing the information to be inserted in the fourth schedule will be by means of annexing a certificate, it does not follow that the certificate must coincide in date with the making of the contract. It may antedate the contract; all that is required is that it fulfils the function of disclosing the planning status of the land as the parties agree it to be. (at p549)

17. For these reasons I would allow the appeal and dismiss the suit for specific performance on the ground that it would be futile to grant relief to the appellant when the respondent has a right to rescind the contract which he intends to exercise. (at p549)

ORDER

Appeal allowed with costs.

Order of the Supreme Court of New South Wales set aside and in lieu thereof order that the suit be dismissed with costs.