LAW 1511 Property Law - Privity of Contract
Case Study
In 2014, MPP purchased a parcel of land in South Yarra with the intention of developing 295 apartments. MPP obtained a planning permit and completed the building in October 2016. To date 45 apartments have been sold. Of the remaining lots, Lots A, B, C, D and E are to be rented out as residential apartments. Leases have been signed. Jane rented Lot C. She moved into the apartment on 30 February 2018. Jane noticed that the shower head in the bathroom was not working properly, and noted this on the condition report. The shower head began to leak quite badly one month after Jane moved in and she contacted the letting agent, Rogers Rentals, on 26 May 2018 but has not heard back from them regarding how to repair the leak and who should pay. On 5 July 2018 Jane had to urgently fly to London. Her mother was suddenly taken ill and she expected to be away for two months. Jane asked her friend Sim to move in to the apartment. Sim agreed to live in the apartment whilst Jane was away. As Sim was in between homes, Sim agreed to pay rent to Jane whilst Jane was away, and Sim explained that she could only 'housesit' for 5 weeks. Jane was delighted with this arrangement as her lease with MPP set the rent at $400 per week, and Sim's rent would help Jane pay the monthly rent. Jane forgot to tell MPP that Sim had moved in whilst Jane was overseas. A week after Jane left, the gas cooker ceased to operate and Sim had to cook dinner on the BBQ located on the balcony. On a very rainy day in early August, Sim decided to shift the BBQ indoors. Whilst cooking her steak, and whilst Sim was on her mobile, a small coal from the BBQ inadvertently dropped on to the carpet and burnt a large hole in it. Sim contacted Rogers Rentals and asked them to repair the carpet, and to not tell Jane what had happened. Rogers Rentals inspected the property the next day and saw not only the burn mark on the carpet in the lounge, but also smaller burn marks on the carpet in the bedroom. Both Sim and Jane enjoy a good cigar, and often smoked these on Saturday nights. Rogers sends Jane a bill for $1,000 to replace the carpet in the lounge and the bedroom, as well as a copy of Condition 25 in the lease (The apartment is a smoke free zone). Jane opens up her mail in October 2018 and is annoyed to see this bill. She and refuses to pay Rogers Rental because Jane was overseas when the alleged damage occurred. Jane tells Rogers that Sim will pay the bill.
Question
1: Should MPP pursue Jane or Sim for the $IK?
Prior to completion of the development, MPP decided to sell Lot 34 off the plan. They approach their solicitors and a contract of sale was drawn up. Sam Sales Pty Ltd was appointed the real estate agency to market the property. Sam Smith sells real estate as a hobby, as he is now retired. Sam commences a sales campaign. Kohn is interested in purchasing a modern apartment and Sam tells him that MPP have on their books ‘a city style pad’ in South Yarra. Kohn was very impressed by the sales pitch put to him by Sam. Kohn, is too busy to inspect the property, and relied on the advertising and sales information provided by MPP and to a lesser extent, the pitch put by Sam. Kohn decided to do his own conveyancing, having obtained a do it yourself kit from the post office. The deal breaker for Kohn to close was the advertising brochure which promised "a beach-like 50M pool on the roof", and as Kohn enjoyed swimming, he knew the place was just right. MPP was never able to secure planning permission for a 50M pool, and placed in all of their advertising material a "subject to planning approval" clause regarding the pool. An arrangement was in fact struck with Council for 3 x rooftop spas, but the advertising material prepared by Sam continued to show pictures of a large rooftop pool. After the development was built, and settlement had gone though, Kohn as the new apartment owner demanded an explanation from Sam as to why there were spas, not a 50M pool, on the roof. Sam told Kohn that MPP had hoped for a large pool to be built, but as this was purely a "sales puff", Kohn had to accept that there was no pool. Kohn is angry and says he would not have purchased the apartment, but for the representations made to him that the 50M pool was going to be on the roof.
2 : (a) Can Kohn return the apartment to MPP?
(b) Consider what assurances were actually made to Kohn, by whom, and whether they were 'mere puffs'
Answer
1 : Issue:
Privity of contract and privity of estate. Whether parties not in privity of contract or estate could sue each other?
Rule:
In property law, sub-tenancy arises when the tenant transfers his/her part of the leasehold interests to a third party. The original lease becomes the head-lease, and the arising lease between the tenant and a third party becomes a sublease. The original landlord remains as the head-landlord, and the original tenant remains as the head-tenant, but the third party becomes a sub-tenant. When a sublease arises, the new relationships remain as follows.
- The head-tenant and the main landlord remain both in the privity of estate and privity of contract. What this means is that both can sue each other over matters of the estate and those of the contract. The case of Tweddle v Atkinson was the earliest case for this authority where it was held that only party to a contract can sue each other.
- The head-tenant and the sub-tenant remain both in privity of contract and in the privity of estate. Again, both can sue each other over matters of the contract and that of the estate.
- The head-landlord and the sub-tenant have neither privity of estate or nor the privity of contract. Here, none of the parties can sue each other over the matters of the contract and that of the estate.
The rules regarding the privity of contracts and privity of estates were su
mmarized in the ruling by Joyce J the main lessor cannot commence an action against a subtenant for a breach of the positive lease agreement between the sub-tenant and the head-tenant. The main lessor can only seek to raise an action against the head-tenant who can then be liable for the breach of their lease agreement. An exception to this rule is only when the agreement between the head-tenant and the sub-tenant concern land and this should be expressly stated in the head-landlord and head-tenant agreement.
Application
On analysis, Jane and MPP are the ones who contracted for the lease. Therefore, these are the head landlord and the head tenant. Both parties are in the privity of the contract and the privity of the estate. People in the privity of a contract can sue each other over the contract as found in Tweddle v Atkinson. People in privity of an estate can also sue each other over matters of the estate. On the other hand, MPP as the head landlord cannot sue Sam. Sam is a subtenant and he is not in the privity of contract nor is he in the privity of the estate. Applying the rules stated in Hua Chiao Commercial Bank Ltd v Chiaphua Industries, the main landlord cannot sue a subtenant. This same rule applies even in cases where the head tenant and the subtenant states that they allow the head tenant to have entered into the house for the purpose of making repairs. For instance, in Amsprop Trading Ltd v Harris Distribution Ltd, the court dropped the claim by the head landlord (Amsprop) seeking to paid repairs by the subtenant. Similarly, MPP claim against Sam would fail.
Conclusion
MPP can only sue Jane as they are both in the privity of contract and privity of estate. A claim against Sam would fail as they are neither in the privity of contract nor in the privity of estate.
2: (i) Issue
Rescissions of a contract where conveyance has already happened. Can a misrepresentation be a ground for rescission when conveyancing has been completed? When does a misrepresentation become material to the sale of land?
Rule
In contracts relating to conveyancing, equity will only allow rescissions on completed conveyance where there is a fraudulent misrepresentation. This proposition was first provided in the case of Wilde v Gibson. The purchaser sought to rescind the conveyance after the vendor concealed the defects in the title but the court dismissed the claim since there was an innocent misrepresentation; the vendor was not aware of the defects. The authority places an obligation to the purchaser to prevent innocent mistakes by conducting a search before conveyancing. Despite this rule applying in equity, the Australian court emphasized on the same rationale in Taylor v. Johnson, and in the ruling of Walker v. Boyle. Also, where there is a substantial deficiency on the subject matter, the court will allow the purchaser to resile the contract as stated by the court in Rudd v. Lascelles. Again, in Leighton Properties Pty Ltd v. Hurley, the court allowed the purchaser to rescind the contract since the building unit varied significantly from the represented plan.
The law of tort requires a proof of negligent misrepresentation of the seller or its agent. Both the vendor and his agent must be in breach of a duty to care. In Roots v. Oentory Pty Ltd, the court affirmed that real estate agents owe a duty of care to the purchaser’s in respect to the information they provide. Under the provisions of the Trade Practices Act, the s.52(1) provisions of this section prevent any corporation from engaging in misleading or deceptive conduct. the Under s 53(a) as false representation is any untrue statement about goods or services, quality, grade, standard, style or model.
Application
On application, it the first step is to identify a false representation in by Sam to Kohn, and the representation must be fraud or intentional (not innocent). While looking at Wilde v Gibson, the reason why the rescission failed was because the vendor was not aware of the defects. However, in the situation of Sam and Kohn, Sam was aware of that there was no swimming pool, but he chose to include it in the advertisement. This certifies to be a fraudulent representation which would allow Kohn to rescind the contract.
An application of the tort of negligence will have the same effect, the case of Roots v. Oentory Pty Ltd demonstrated that a duty of care exists on the party of the agents. In MacCormick v Nowland, the agent was found in breach for describing the property as constructed with bricks, and as being located next to parkland when was constructed with of concrete and not close to parkland. Also, in the case of Benlist Pty Ltd v Olivetti Australia Pty Ltd, the agent was found to be in breach of the duty of care for wrong information in the advertisement. And in Ackers v Austcorp International Ltd, the court refused a defense that the purchaser should have carried out sufficient search. In this regard, Sam owed a duty of care to ensure that the advertisement carried true information.
On application of the provisions of the Trade Practices Act, Sam was a corporation that was not supposed to engage in any misleading conducts. Where the provisions are violated, the court may allow rescission. In Zhang –v– VP302 SPV & Ors, the court allowed rescission on the fact that the claimant relied on the defendants’ misrepresentation.
Conclusion
Kohn would be allowed to rescind the contract base on the application of the principles of equity, common law, and the Australian Trade Practices Act, 1974 (Cth).
(ii) Issue
Difference between a representation, and a sale’s puff.
Rule
The general rule is that a “puff” or a mere boost or exaggerated statements in pre-contractual statements and should not be taken seriously, and do not have any legal consequences. These statements have no sense to a reasonable person; hence they have no legal repercussions. For instance, a car may be stated to be ‘comfortable.’ However, sometimes there seems to be a thin line between a puff and a representation as found in Carlill v Carbolic Smoke Ball Company.
Unlike a puff, a representation is a serious statement that is intended to be taken by the other party seriously. A representation may also turn into a contractual term, and where that representation turns out to be false, it has an action of misrepresentation. Innocent misrepresentation does not cancel the contract, but the innocent party is allowed to sue for damages. A determination whether the representation was a term or mere representation requires examination of four factors. The parole evidence rule provides that pre-contractual statements not included in the written contract are not applicable. One authority for this rule is Gordon v Macgregor where the court refused to admit statements in the negotiation. The second rule regards the importance put on the statement and whether it causes reliance from the other party, such state constitutes a term. In Bannerman v White, a statement asserting that there was no Sulphur in hops was ruled to be a term. Where the person making the statement is an expert making it to someone with no expertise, such would be construed as a term. For instance, a statement made by the car dealer was taken to be a term when made to the claimant who had no expertise in cars. Lastly, if there is a short time difference between when the statement was given and when the contract was completed, the statement would be a term. In Routledge v Mckay, the duration was longer thus allowing the claimant to exercise free will other than reliance on the inducement.
Application
A determination of the statement given by Sam that the house had a swimming pool would require the application of the rules mentioned above. Like explained in Carlill v Carbolic Smokeball Co, the line between a puff and representation is very fine. Therefore, since Kohn states that he relied on the statement to enter into the contract, this would require a test whether the statement was a term or a representation. On application of the parole evidence, the statement would not be admitted as found in Gordon v Macgregor. However, a test on the importance and reliance of the statement would confirm that the statement was a term. Since Kohn points out that this swimming pool was the main reason for entering into the contract, the statement would not be a puff. The same rationale was held in Carlill v Carbolic Smokeball Co where a statement that induced the other party was construed to be a term. Again, a test on the expertise of the party’s states that where one party is an expert in the field while the other one is not, that statement would be taken a term. In this case, Sam is an expert as an agent in real estate while Kohn is not. Therefore, the statement would be taken as a term. Even though Kohn took a DIY kit, DIY cannot be regarded as reasonable knowledge. Again, the ruling in Ackers v Austcorp International Ltd refuted a defense that the other party should have conducted an examination.
Conclusion
The statement was a term since there was reliance, and varying knowledge of the parties.
(iii) Issue
What are the remedies available for fraudulent misrepresentation?
Rule
There are two possible remedies that the court may award for a claim of misrepresentation. These are damages, and equitable remedy of rescission. Damages are mainly the financial payments meant to compensate the innocent party as a restoration to the place the party would have been had there be no misrepresentation. However, these damages are different from those of breach of a contract. Damages from in fraudulent misrepresentation are awarded from the tort of deceit. Also, their assessment of these damages is the loss that accrued directly from entering into that contract regardless of foreseeability during misrepresentation or not. For instance, Smith New Court Securities v Scrimgeour Vickers, the court awarded all losses that resulted directly from the fraudulent misrepresentation.
As noted, damages apply only where monetary reward would be sufficient to restore the claimant to a position he would have been had the misrepresentation not happened. Where damages are impossible, an award of rescission allows orders both parties to return all the benefits they had received. For instance, Coastal Estates Pty. Ltd. v. Melevende, the appellant was ordered to return all the money including the deposits and the monthly installments since he had fraudulently induced the claimant into the sale of the land contract. Also, where the misrepresentation caused substantial variance, the court will award rescission.
Application
On analysis, even though Kohn is awarded damages, there is no damages cable of providing him with a swimming pool. Besides, the permission to make the 50M pool was denied or MPP was never able to secure it. Therefore, monetary damages would not be adequate for the restoration of Kohn.
An analysis of rescission seems to favor the case of Kohn since the misrepresentation causes substantial variance. In the case of Rudd v Lascelles, a substantial variance was set to be a suitable ground for rescission. Again, the recent case of Zhang –v– VP302 SPV & Ors will provide favorable support for acquiring rescission.
Conclusion
Rescission would be the best possible remedy that would be available for Kohn against both Sam and MPP.
Bibliography
Hepburn, Samantha, Australian Principles of Property Law (Routledge, 2013)
Ackers v Austcorp International Ltd [2009] FCA 432
Amsprop Trading Ltd v Harris Distribution Ltd (1997) 1 WLR 1025
Bannerman v White (1861) 10 CBNS 844
Benlist Pty ltd v Olivetti Australia Pty ltd [1990] ATPR 41-043
Carlill v Carbolic Smokeball Co (1892) 1892 EWCA Civ
Dick Bentley Productions v Harold Smith Motors (1965) 1 WLR 623
Gordon v Macgregor (1909) 8 CLR 316
Hua Chiao Commercial Bank Ltd v Chiaphua Industries [1987] AC 99
Leighton Properties Pty Ltd v Hurley & Anor [1984] FC 042; [1984] 2 Qd R 534
MacCormick v Nowland [1988] ATPR 40-852
Roots v Oentory Pty Ltd (I9831) 2 Qd R 745
Routledge v Mckay (1954) 1 WLR 615
Rudd v Lascelles (1900) 1 Ch 815
Smith New Court Securities v Scrimgeour Vickers [1996] UKHL 3
South of England Dairies, Ltd v Baker 2
Taylor v Johnson [1983] 151 CLR 422
Tweddle v Atkinson [1861] 1 B & S 393; 121 ER 762;
Walker v Boyle (I982) 1 WLR 495
Wilde v Gibson (1848) 1 HLC 605
Zhang –v– VP302 SPV & Ors [2009] NSWSC 73
Trade Practices Act 1974 (Cwth)
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