Kennedy v Vercoe [1960] HCA 64; (1960) 105 CLR 521 (26 August 1960)

HIGH COURT OF AUSTRALIA

KENNEDY v. VERCOE [1960] HCA 64; (1960) 105 CLR 521

Vendor and Purchaser

High Court of Australia
Dixon C.J.(1), Kitto(1) and Windeyer(1) JJ.

CATCHWORDS

Vendor and Purchaser - Sale of business - Contract - Purchaser to be accepted as tenant by landlord of business premises - Time for performance of term - Specific performance at suit of vendor - Availability of remedy.

HEARING

Sydney, 1960, May 23, 24; August 26. 26:8:1960
APPEAL from the Supreme Court of New South Wales.

DECISION

August 26.
THE COURT delivered the following written judgment:-
This is an appeal from a decree of Myers J. in a suit for specific dismissed and upon the counter-claim a declaration was made that the agreement which the plaintiff had sought to enforce had been rescinded. It was ordered that two sums, one of 200 pounds and the other of 800 pounds, paid by the defendant to the plaintiff be repaid by the plaintiff to the defendant. The plaintiff appeals to this Court from the decree both as to the claim and the counterclaim. (at p523)

2. The agreement, which was dated 19th March 1958, was for the sale and purchase of a laundry and dry-cleaning business carried on by the plaintiff appellant in Bondi. The business was in fact carried on in a lock-up shop of which the plaintiff was lessee under a lease for a term expiring on 31st October 1960 and thereafter for a weekly tenancy. There was a provision against assigning or subletting without leave to which a prohibition was added against taking a fine; see Conveyancing Act 1919-1954, s. 133B. The rent appears to be a low one but in the agreement of sale and purchase the leasehold term is not included among the parcels sold. There is moreover a clause expressly agreeing and declaring that no part of the consideration, which was 3,300 pounds, should be treated as a premium in the hands of the vendor (the plaintiff) for the purpose of s. 83A of the Income Tax and Social Services Contribution Assessment Act 1936-1952. It is not necessary to discuss the operation of s. 83A. It is enough to say that it is apparent that the omission of the lease from the parcels of the sale and the insertion of the clause relating to this section have a common purpose, namely, to prevent any part of the purchase money falling within the description of a premium on the assignment of a lease and so forming part of the assessable income of the vendor. To meet the difficulty in securing for the purchaser a continuation of the site for the business, a clause in the contract of sale (cl. 9) provided that the contract is subject to the purchaser being accepted as tenant of the premises in which the subject business is carried on by the landlord thereof. This clause would, so far as its terms go, be satisfied by the landlords of the shop accepting the defendant as a tenant, whatever might be the tenure and whatever the rent demanded. But when the circumstances in which it was to operate are known and it is seen that the plaintiff was already lessee for a term it is clear enough that the parties supposed that the residue of the lease would be taken over. What the plaintiff agreed to sell and the defendant to buy was described in the contract as the laundry and dry-cleaning business of the plaintiff together with the fixtures, fittings, plant and equipment contained therein and the goodwill attached thereto. The business was identified as carried on by the plaintiff in the premises situated at 182 Bondi Road, Bondi, that is to say, the leased premises. Of the purchase price 1,990 pounds was attributed to goodwill and 1,310 pounds to the fixtures fittings plant and equipment, which was referred to in a schedule. No doubt the fixtures were removable tenant's fixtures but the description of some of them shows that removal would not naturally be contemplated between parties selling and purchasing the business as a going concern. The contract contains clauses, too, requiring the plaintiff as vendor to pay charges for gas, electric light, rent and telephone in respect of the premises up to the date of completion, and to leave the existing telephone service on the premises and to execute forms of transfer of the service to the defendant as purchaser. It is therefore evident that the transaction was conceived as one in which the purchaser would take over the business in the premises as a going concern and accordingly as requiring the recognition by the landlords of the purchaser as tenant. The purchase money was to be paid by a deposit of 200 pounds and the balance of 3,100 pounds in full in cash on completion. Unfortunately the actual day of the date of completion was left blank: the clause as to completion reads - "subject to the above" (the clauses of the contract) "completion hereof shall take place on the day of March 1958". The deposit of 200 pounds was paid and shortly after the signing of the contract it was arranged that the business should be taken over on 24th March 1958 and that the defendant should pay a further sum of 800 pounds on account of the purchase money. That was done and the defendant entered into occupation of the shop and control of the business. Soon afterwards the plaintiff went into hospital where he remained for some weeks, a circumstance which may possibly account for some of the difficulties that arose. On 15th April 1958 the plaintiff's solicitor wrote to the defendant's solicitor demanding that a settlement of the transaction be made by 21st April 1958 and threatening that otherwise he would institute a suit for specific performance. To this the defendant's solicitor replied on 30th April in a more lengthy letter setting up that the contract had been induced by fraudulent misrepresentations. He gave notice that his client thereby rescinded the contract and he demanded the immediate return of the sum of 1,000 pounds paid on account of the purchase money together with an amount for stamp duty costs. The letter contained an offer to operate the business until 23rd May 1958 in order to enable the plaintiff to take it over again. It concluded with the following passage: "We might add that our client does not consider himself bound by the agreement in any event by reason of the provisions of clause 9 thereof. This clause makes the agreement subject to the acceptance by the landlord of our client as a tenant of the subject premises. Our client has been informed that he will not be accepted as tenant without the payment by him of a premium and such requirement constitutes a non-fulfilment of the condition stated in clause 9." (at p525)

3. On 22nd May 1958 the plaintiff's solicitor protested that the defendant had no right to rescind, and stated that his client would sue for specific performance of the agreement and would take possession of the shop only so that it could be handed over again in the event of the success of the suit. As to the paragraph set out above, the letter said that the landlord had accepted the defendant as tenant and requested a payment of 100 pounds; that it was a reasonable request to which the defendant was contractually bound to accede; that in any event the plaintiff had always been prepared, if necessary, to pay that sum. On 23rd May 1958 the plaintiff commenced this suit. The defendant abandoned the shop, locked it up and handed the keys to the plaintiff's solicitors who received them under protest. The plaintiff continued to pay the rent to the landlords. In the suit the defendant pleaded that certain representations which had been made were fraudulent. The truth or falsity of the representations formed the chief issue at the hearing of the suit before Myers J. That learned judge found that they were true and accepted the plaintiff as an honest witness. His Honour said that he was quite unable to accept the evidence of the defendant. The result was that the whole case came to depend upon the effect of cl. 9 and the failure of the landlords to accept the defendant as a tenant unless upon the payment of a premium of 100 pounds. Myers J. held that in order to succeed in the suit the plaintiff must show that the defendant had been accepted as a tenant of the premises by the owners and that the plaintiff had not shown that he had been so accepted. On the counterclaim his Honour held that the defendant was entitled to recover the two sums he had paid to the plaintiff, viz. the sum of 200 pounds and the sum of 800 pounds; he was so entitled because he had repudiated the contract on the non-performance of a condition. (at p525)

4. The question upon this appeal is whether upon the facts the operation of cl. 9 enabled the defendant to treat himself as discharged from the performance of the contract and to recover the two sums he had paid thereunder. (at p525)

5. In considering the correctness of this view the first step is to ascertain exactly what was done in point of fact. In this there is some difficulty owing to the paucity of the evidence which was led on this point amidst the more intense conflict concerning the alleged falsity of the misrepresentations. In the statement of claim it was alleged that in March the defendant had been accepted as tenant of the premises by the landlords but this allegation was denied by the defence. The denial was followed by an affirmative statement that the defendant had been informed by the landlords that he would only be accepted as a tenant of the premises on condition that he paid a premium to the landlords; this allegation the plaintiff's replication did not admit. At the trial one Daniel Currie, an estate agent, was called for the plaintiff on a subpoena duces and produced the lease. Referring to this gentleman in his evidence the plaintiff said that he had taken the defendant to him as the prospective buyer who would take the business over and Currie had said that he would look into the defendant's standing and let the plaintiff know. Three or four days later the plaintiff met Currie who waved his hand and said it was all right, he would fix it. A week or so after the defendant had gone into possession of the business he spoke over the telephone to the plaintiff's wife, the plaintiff being in hospital. He said that he did not want to go on with the business because Currie wanted 100 pounds for the lease. The defendant's own story was that it was not until after he had closed the business that he was told by Currie that a premium of 100 pounds must be paid. On the other hand the plaintiff said in the course of his cross-examination that he had found out that Currie demanded 100 pounds premium from the defendant and made payment subject to his acceptance as a tenant, a statement that appears to mean that his acceptance as a tenant was conditional on the payment of a premium of 100 pounds. (at p526)

6. As the contract was expressed its evident intention was that the purchaser should be accepted as a tenant and take over the business on or before the date of completion and thereupon the balance of purchase money remaining after payment of the deposit should be paid and the transaction so completed. But the subsequent deviation from this course in which the parties concurred, slight as it may have appeared to them at the time, has now assumed an importance. For by agreeing that only another 800 pounds should be paid down and the remaining 2,300 pounds should remain outstanding, and that the business should be taken over at once notwithstanding that the purchase money had not been paid, the parties brought about a very different position. No doubt it was the obligation of the vendor, the plaintiff, to obtain the acceptance of the defendant as a tenant, although an implied obligation lay on the purchaser, the defendant, to do on his part whatever might reasonably be required of him to enable the vendor to obtain the landlords' consent. But it became no longer necessary to procure the landlords' consent befor ecompletion by putting the purchaser, the defendant, in possession of the business and in occupation of the premises. The actual landlords are executors and trustees administering an estate but Currie seems to have been treated by the parties as speaking for them. In fact there is no evidence of his authority; no objection on that score however was taken. The issue whether the landlords accepted the defendant as a tenant, be it an acceptance by the landlords personally or on their behalf by Currie, certainly remained an issue upon which the burden of proof lay upon the plaintiff. That burden was not discharged by making it to appear that the landlords would accept the defendant as a tenant conditionally on payment of 100 pounds. The result of s. 133B (1) (a) of the Conveyancing Act upon the operation of the lease is probably that the attachment of such a condition to a consent to assignment could be ignored and the consent treated as unreasonably withheld: an assignment thus being open without consent: cf. Halsbury's Laws of England, 3rd ed. vol. 23, par. 1338. But the contract between the parties studiously avoids stipulating for an assignment of the lease and substitutes the acceptance by the landlords of the defendant as a tenant, and, even if the purpose of doing so is to secure the vendor, the plaintiff, from being held liable to tax upon a premium, yet the purchaser is entitled to have the contract performed in the manner expressed in the bargain. If the plaintiff had paid the amount of 100 pounds demanded by or on behalf of the landlords and the acceptance had been thus obtained, it would have been enough. But that was not done and there was no acceptance of the defendant in fact. There was therefore no performance of cl. 9 by the date of the commencement of the suit. But the defendant had been in occupation of the shop since 24th March 1958 and was in control of the business and he had not been disturbed by the landlords. He had given no notice fixing a definitive time by which the landlords' acceptance of him as a tenant must be obtained and on the contrary, on 30th April he had purported to rescind the contract for fraud, a ground held on the facts to be untenable. It seems clear enough that unless the period between 24th March and 30th April 1958 in which an unconditional acceptance of the landlords had not been obtained be held so unreasonable in its length as to involve a complete failure of performance in an essential provision of the contract, it could not provide an alternative justification for the renunciation or purported rescission of the contract by the defendant. In the circumstances it is clear that the delay in obtaining unconditional acceptance by the landlords of the defendant could not have such an effect. It follows that had the vendor, the plaintiff, accepted the renunciation and sued at law for damages, he would have succeeded. But he did not do so; on the contrary he chose to sue in equity for specific performance and thereby kept the contract open for fulfilment, including cl. 9. While the defendant insisted that the contract was at an end and that he would not perform it, as he did right up to the hearing and of course afterwards, the plaintiff could not reasonably be expected to proceed in obtaining the acceptance of the defendant as a tenant. If cl. 9 began as a preliminary condition it had ceased to be so when the parties proceeded to put the defendant in possession of the business and in occupation of the shop before completion of the contract. In the circumstances that have been narrated it became simply one of the clauses to be put in execution by a decree of specific performance, if such a decree be made. (at p528)

7. What answer has the defendant to the plaintiff's prima facie right to such a decree? The defendant's plea of misrepresentation failed. Clause 9 ceased to be a preliminary condition of the contract and there was never any final or definitive default in its fulfilment. Time has now passed and it is true that the expiration of the lease is not so far away. Yet the landlords may not refuse their acceptance of the defendant and the defendant is bound to do nothing to induce them to refuse. The conclusion appears to be that no reason in law exists why a decree should not now be made for specific performance, though it must contain special provisions as to cl. 9. There is a question whether there be jurisdiction to grant specific performance of the sale of a business independently of the property in the site. On appeal to this Court neither party raised the question whether it fell within the equitable jurisdiction to entertain this suit, regarding it as a suit specifically to enforce a contract for the sale of a business containing no provision for the assignment of an estate or interest in the premises where the business was carried on. But apparently it was raised by the defendant in the Supreme Court and the question was put from the Bench during the argument of the appeal. (at p528)

8. In Darbey v. Whitaker [1857] EngR 762; (1857) 4 Drew 134 (62 ER 52) Kindersley V.C. said: "No doubt you cannot have a specific performance of a contract to purchase a goodwill alone, unconnected with business premises, by reason of the uncertainty of the subject-matter. But when a goodwill is entirely or mainly annexed to the premises, and the contract is for the sale of the premises and goodwill, there is not the slightest ground for doubt that such a contract is a fit matter for a decree in a suit for specific performance" (1857) 4 Drew, at p 139 (62 ER, at p 54) . (at p529)

9. It is plain that the objection is the uncertainty of the subject matter of the contract, the impossibility of supervision or the difficulty of specifying the acts to be done: cf. per Grant M. R. in Bozon v. Farlow (1816) 1 Mer 459, at p 472 (35 ER 742, at p 747) , and per Jessel M.R. in May v. Thomson (1882) 20 Ch D 705, at p 715 . The latter was the case of a medical practice and during the argument the Master of the Rolls said: "I cannot see my way to making a decree for the specific performance of an agreement to purchase a medical practice. What can the Court order the seller to do?" (1882) 20 Ch D 705, at p 715 . It is almost needless to say that there would be no difficulty in the present case if the contract had provided for the assignment of the lease. It is because cl. 9 does not do this, although it treats the question as one of obtaining a tenancy for the purchaser, that the transaction wears the appearance of a sale of a business as something existing apart from its site or the transfer of property therein. The reason why a suit for specific performance of a sale of goodwill independently of site is not enforceable specifically is that such a goodwill cannot be local and its transfer must depend on something different from the transfer of a fixed site with a business as a going concern. The reason is not that the sale and transfer of an interest in land is within the remedy of specific performance and the inclusion of the goodwill of the business is simply disregarded. In principle the present case is not very different from the sale of a business and site. It is an essential part of the contract that the purchaser must be given or obtain a tenancy of the site of the business, the goodwill of which is treated as local and not as something depending not on site but on connexion or some other personal element like that of a medical or solicitor's practice. In other words it is the business as a going concern in the shop that is the subject of the contract. On the whole therefore there is no sufficient reason for regarding the contract as outside the remedy of specific performance. The decree however must take account of cl. 9. (at p529)

10. There should be a declaration that the contract should be carried into execution and an order that to that end the defendant do whatever may be reasonably required of him on the part of the plaintiff to enable the plaintiff to procure his acceptance by the landlords as a tenant of the premises. There should be an order that upon the defendant being so accepted as tenant he do specifically perform the contract and do pay to the plaintiff the sum of 2,300 pounds. There should be a further order that if within a reasonable time from the making of the decree the landlords fail to accept the defendant as a tenant of the premises either party be at liberty to apply to the Supreme Court for such order as may appear just. The decree should contain a declaration that, in the event of its appearing that the landlords will not accept the defendant as a tenant of the premises and that they will not do so for reasons which are not brought about by any act or default of the defendant under the contract including the terms, express and implied, in cl. 9 thereof, the contract is not further specifically enforceable and the Supreme Court may give such relief to the parties as may appear just. (at p530)

11. It is perhaps proper to say in conclusion that s. 9 of the Equity Act 1901-1957 has not been overlooked and that should the parties concur in preferring a decree thereunder such a decree may be substituted. (at p530)

12. This appeal should be allowed. (at p530)

ORDER

Appeal allowed with costs. Decree or order of the Supreme Court discharged. In lieu thereof pronounce a decree or order as follows:

Declare that the contract in the pleadings mentioned should be carried into execution and specifically performed. Declare that to that end the defendant was and is bound to do whatever may be reasonably required of him on the part of the plaintiff to enable the plaintiff to procure the acceptance of the defendant by the landlords of the premises mentioned in the said contract as a tenant thereof.

Order that upon the defendant's being so accepted as tenant he do specifically perform the said contract and do pay to the plaintiff the sum of 2300 pounds. Further order that if within a reasonable time from the making of this order the landlords fail to accept the defendant as tenant of the said premises then in that case either party shall be at liberty to apply to the Supreme Court for such order as may appear just.

Declare that in the event of its appearing upon such application that the said landlords will not accept the defendant as a tenant of the said premises and that they will not do so for reasons which are not brought about by any act or default of the defendant under the contract including the terms express or implied in cl. 9 thereof the contract is not further specifically enforceable and the Supreme Court may give such relief to the parties consistently with this order as may appear just.

Dismiss counter-claim with costs.

Order that the defendant pay the costs of the suit to the date of this order.