St Hilliers (Developments) Pty Ltd & Anor v Radmanovich & Anor

it is the Purchaser's intention to develop by itself or its nominee the Development Site;

it has for some time been negotiating with other owners of properties comprised within the Development Site for the grant of options to purchase such properties broadly on similar principles as are reflected in this Deed;

as a result of the negotiations referred to in (b) above, the Purchaser has either concluded or has reached an advanced stage in respect of the grant of options to purchase several properties comprised in the Development Site; and

it is not the Purchaser's intention to assign this Deed but rather, as contemplated by the Deed, to obtain the Development Consent and proceed with the Development of the Property and other properties comprised in the Development Site over which it has or will obtain options to purchase." 12 Clause 11 provides: " ASSIGNMENT 11.1 Subject to Clause 3.1, the rights herein contained are conferred personally upon the Vendor and the Purchaser, except that either the Vendor or the Purchaser may assign its rights and obligations under the Deed, subject to the consent of the other party. In the event that one party gives the other party notice of its intention so to assign, that other party shall not unreasonably refuse such consent." The relevant terms of the Contract for Sale 13 The Option Deed provides that if the option is exercised the parties will enter into a Contract for Sale in terms annexed to the Deed. The relevant terms of that Contract for Sale are as follows. 14 The land the subject of the sale is Lot C in Deposited Plan 367229, excluding that part which is shown on a plan marked "B" attached to the Contract. The excluded land is to be retained by the Vendor and is to be subdivided into five lots as shown in Annexure "C" to the Contract. Upon one of the lots in Annexure "C" is the Vendor's home. 15 Special Condition 2.6 of the Contract obliges the Purchaser to do all things necessary to have the plan of subdivision in accordance with Annexure "C" registered such that the Vendor will have separate registered title to the five blocks to be retained. 16 Special Condition 7.2 provides as follows: "The Purchaser shall provide that each of the proposed 5 lots referred to in Special Condition 7.1 have access to a street not less than 14 metres wide (with road and path areas) by way of direct frontage to the lot as shown in the Plan of Subdivision, not being access by means of a right of way, a battle-axe corridor or a laneway, and provided that the total area allocated to developing the 5 lots in the Vendor's Reserved Land shall not be less than 3,540.24 square metres, neither party shall make any claim, requisition, or objection against the other or be entitled to rescind or terminate this Contract." 17 Special Condition 2.8.1 provides: "In the event that the subdivision referred to in Special Condition 2.6 has not been registered within 5 years of the date of the Contract, then within 1 month thereof the Purchaser shall, unless otherwise agreed in writing, pay to the vendor an amount being the sum of two components namely:–

an amount being 5 times the greater of either:

$450,000:00, or (ii) the value of a fully serviced lot on the basis of it being vacant, being between 600m2 and 700m2 in area, located on the higher side of Elimatta Road, Mona Vale between Hill Street and Rowan Street, having no easements or covenants affecting same or any adverse affectations, and having a residential type zoning allowing at least a single dwelling to be erected thereon, and

an amount being the value of all improvements on the Vendor's Reserved Land calculated on a for-new replacement value." 18 It is common ground between the parties that the roadway which is to give access to the five lots to be retained by the Vendor as shown on Annexure "C" is not on land which is owned either by the Vendor or by the Purchaser. It is, in fact, required to be constructed on land owned by Mr and Mrs Janus, who are adjoining owners. It seems that the Purchaser was negotiating for the purchase of the land owned by Mr and Mrs Janus at the same time as it was negotiating with the Vendor. The relevant facts 19 In 1999 and 2000 the Purchaser was negotiating with a number of landowners in Warriewood, including the Vendor, with the intention of accumulating sufficient parcels of land for a large development. The Purchaser's negotiations with the Vendor were protracted. One of the issues which the Vendor raised was whether the option which the Purchaser was seeking would be assignable. 20 In the 1980s Mr and Mrs Radmanovich had entered into a conditional contract to sell the Property to another developer. The developer had defaulted, litigation ensued and Mr and Mrs Radmanovich suffered significant losses. During his negotiations with the Purchaser, Mr Radmanovich recounted to its representative, Mr Nash, his experience with the previous developer and emphasised that he was willing to deal only with principals whom he himself had had the opportunity of assessing. He said words to the effect: "If we grant an option to purchase we will not allow it to be assigned or nominated to some third party whom we do not know" . 21 This concern was reiterated forcefully by Mr Radmanovich at a meeting between the parties and their representatives which took place on the day before the Deed of Option was executed. It is not necessary to enter into precisely what was said at the meeting. It is clear enough that the issue of assignability of the Option Deed was contentious and that in order to accommodate the Vendor's concerns the provisions of Clauses 3.1, 10 and 11.1 were drafted and inserted in the Deed. 22 On 22 November 2001 the Purchaser notified the Vendor's solicitor orally and in writing that it was "not able to commercially implement its original proposal and [had] elected to [assign] the Option in favour of the principal developer in the area [i.e. Jennings]" . The Vendor was requested to consent to the assignment and a form of consent was enclosed for signature and return. The Purchaser's letter suggested that "in the circumstances you may consider it prudent to have your clients meet with John Vagulans of [Jennings] who I understand has been previously introduced to them". 23 On 24 January 2002 the Purchaser wrote again to the Vendor's solicitor assuring the Vendor that the "financial strength and industry reputation of Jennings is indisputable" , and that Jennings had assumed all of the existing obligations and commitments contained in the Option Deed. The letter requested execution of the consent to the assignment by 29 January. 24 Apparently there was no response to that letter. On 31 January the Purchaser wrote again to the Vendor's solicitor suggesting a meeting at which "any relevant issues concerning the assignment might be canvassed" . From a letter dated 12 February sent by the Purchaser it appears clear enough that the Vendor had in fact already entered into discussions with Jennings and that Jennings had been seeking agreement from the Vendor to an amendment of the Option Deed as a precondition to the proposed assignment. What that amendment was is not revealed by the evidence but the Purchaser's letter of 12 February assured the Vendor that Jennings no longer sought any amendment to the Option Deed. The letter requested execution and return of the Vendor's consent to the assignment and foreshadowed litigation if that consent was withheld. 25 On 13 February Mr Radmanovich had another meeting with Mr Vagulans of Jennings. Mr Radmanovich says at that meeting Mr Vagulans told him: "Jennings won't be able to provide access to your reserved lands [i.e. the five lots to be retained] as envisaged in the option because Jennings haven't secured an option over [Mr and Mrs Janus'] land" . This evidence is uncontradicted. 26 On 15 February the Vendor's solicitor wrote to the Purchaser suggesting that the proposed assignment to Jennings was not permissible under Clause 11.1 of the Deed. The letter stated, however, that the Vendor had had a meeting with Jennings in which only scant details of Jennings' intentions were provided and that the Vendor believed more details were to follow. Finally, the Vendor raised an issue as to whether certain intellectual property rights claimed to be owned by the Vendor were to be assigned to Jennings. As this latter issue was not the subject of any submissions by the parties, I do not need to deal with it any further. 27 On 25 February the Purchaser wrote to the Vendor's solicitor asserting that, as a matter of construction, the proposed assignment was permitted under Clause 11.1 of the Deed, and that the Vendor was unreasonably withholding consent. The letter gave notice that urgent proceedings would be commenced in this Court if the Vendor's consent were not provided within two days. The Vendor's solicitor responded on 27 February advancing arguments in support of its construction of Clause 11.1. No further communication between the parties seems to have taken place before the proceedings were commenced by the Purchaser on 5 March. 28 The Purchaser's application for an expedited hearing came before the Court on 22 March. On 28 March the Purchaser's solicitor wrote to the Vendor's solicitor as follows: "When the expedition application was argued in Court on 22 March 2002/, your counsel indicated that your clients considered that the assignment was unreasonable as Jennings had indicated at a meeting between the parties that they would not agree to grant your clients the five lots comprising the Vendor's Reserved Land which are provided for in Clauses 2 and 7 of the Option. Attached is a copy of a letter which our client has received from AV Jennings dated 27 March 2002. In light of the assurances contained in this letter, once again, we call upon your clients to execute the consent to assignment and return it to us. If your clients have any other reason to put forward as to why they consider the assignee or the assignment unreasonable, please advise us by return mail. ..." The attached letter from Jennings is as follows: "We confirm our acknowledgement that, in the event that Mr & Mrs Radmanovich consent to the assignment to us of your rights under the option and we then exercise the option, we will be bound by the terms of the contract including special conditions 2 and 7 which require, amongst other things, the registration of a plan of subdivision creating five allotments to be retained by Mr and Mrs Radmanovich. While our initial view was the plan of subdivision creating the five lots as disclosed in the contract for sale of land would not be approved by Council, discussions were held between Mr John Vagulans, formerly of our company, and Mr Radmanovich where Mr Radmanovich stated that in his experience such types of subdivisions, being those that have a dwelling that straddles two lots, would be approved. I confirmed that Mr Vagulans advised me of this and we proceeded to enter into the deed of assignment. Again we confirm and acknowledge that if we enter into the contract in accordance with the option, then the terms of the contract will be binding on us." 29 No information was provided by Jennings as to how it proposed to comply with the obligation under Special Conditions 2.6 and 7.2 of the Contract for Sale to provide access to the five lots to be retained by the Vendor by a road to be constructed on the land of Mr and Mrs Janus. Evidence has been given by Mr Radmanovich, without objection, that after the commencement of the proceedings a representative of Jennings informed him that Jennings still had not acquired any rights over the land of Mr and Mrs Janus. The construction of the Option Deed 30 Mr Pullinger submits that, in the light of Clauses 3.1 and 10, no assignment by the Purchaser is permitted under Clause 11.1 unless that assignment is an assignment to a Nominee, as defined, in accordance with Clause 3.1. 31 I am unable to accept that submission. It denies any independent operation to Clause 11.1 and disregards the clear and express words of that clause permitting an assignment with consent. Clause 3.1 is confined to an assignment to a Nominee, as defined, in which case no consent by the Vendor is necessary. On the other hand, Clause 11.1 deals with an assignment which is outside the scope of Clause 3.1 and provides that consent is necessary but may be refused on reasonable grounds. The two categories of assignment are quite separate and distinct. That is why Clause 11.1 begins, inelegantly, with the words: "Subject to Clause 3.1" . What those introductory words really mean to convey is that the requirement for consent under Clause 1.1 does not apply to an assignment under Clause 3.1 32 In my opinion, Clause 11.1 conferred on the Purchaser a right to assign the benefit of the Option Deed and its obligations thereunder to Jennings, subject only to obtaining the consent of the Vendor. Whether consent unreasonably refused 33 Assignment clauses in leases are common and the Courts have often had to consider whether consent to the assignment of a lease has been unreasonably refused. Where a contract other than a lease may be assigned by one party with the consent of the other, what criteria determine whether or not such consent has been unreasonably refused? Surprising, neither Counsel, nor I in the limited time available for research, have been able to discover any authority which throws light directly upon the point. 34 I begin by noting the following considerations. First, although the Option Deed itself obliges the Purchaser to do no more than pay money and execute the Contract for Sale if the option is exercised, the consequence of exercising the option is that the Vendor would be required to enter into a contract for sale of land under which the Purchaser has extensive and onerous obligations to perform, possibly for a period of up to five years from the date of the Contract. As I have observed, under Special Condition 2.6, the Purchaser must procure a subdivision of the Property in accordance with Annexure "C"; it must provide Utility Services, as defined, to the Vendor's home "as and when appropriate in the course of the implementation of the development" : Clause 5.1; it must carry out the subdivision of the Vendor's retained five lots in a specified manner and in consultation with the Vendor: Clause 7; it must ensure that the Vendor's occupation of the home on the retained land is not unreasonably interfered with during the development: Clause 12. 35 Second, it is clear that if the option is exercised the Purchaser will be required not only to pay the Vendor a substantial purchase price ($2,357,035), but will also very probably have to finance a large and expensive development of which the Property forms only a part. If the Purchaser or its assignee is not financially able to undertake or to comply with all of these commitments, the Vendor may be confronted with a personal and financial disaster for a period of up to five years from the date of the Contract. 36 These considerations make it clear that consent to assignment of the Purchaser's rights under the Option Deed will very probably entail the Vendor in a relationship with the assignee which is an ongoing one, possibly for five years, and in which a great deal of co-operation and consultation will be required on both sides. 37 It was doubtless because the option entailed an ongoing relationship of this duration and character that the Vendor was insistent upon the insertion of Clauses 3.1 and 10 in the Option Deed. While those clauses do not prevent an assignment other than in accordance with Clause 3.1, as I have held, they nevertheless constitute a contractual acknowledgement by the Purchaser that the Vendor is reasonably entitled to pay close regard to the identity and character of a proposed assignee under Clause 11.1 and to the ability and willingness of the proposed assignee to perform the obligations which it will assume if it enters into the Contract for Sale. 38 I turn now to the general principles which, in my opinion, will guide the Court in determining whether consent to an assignment has been unreasonably refused in a case such as the present. The cases in which assignment clauses in leases have been considered are not, of course, on all fours but they provide some useful guidelines. The most frequently cited authority which discusses whether consent to the assignment of a lease is unreasonably refused is International Drilling Fluids Ltd v Louisville Investments (Uxbridge) Ltd [1986] 1 Ch 513. At p.519ff, Balcombe LJ set out seven propositions of law, the most germane of which, rather than repeat, I will adapt for the purposes of a case in which consent is sought to the assignment of a contract whereunder the assignee will have continuing obligations to perform. 39 First, the purpose in such a contract of a covenant against assignment without consent is to protect the non-assigning party from having to accept performance from a party with whom he or she did not choose to contract and whose mode of performance or capacity to perform may be unsatisfactory. 40 Second, the non-assigning party may not refuse consent to the assignment for a purpose which has nothing to do with the protection against unsatisfactory performance. So, for example, consent may not be refused simply in order to extract some premium from the proposed assignee, or in order to place the non-assigning party in a strong bargaining position to negotiate an amendment to the contract beneficial to it but to which it is not otherwise entitled. 41 Third, the onus of proving that consent has been refused unreasonably is on the proposing assignor. 42 Fourth, it is not necessary for the non-assigning party to prove that the concerns which have led to his or her refusal of consent to the assignment were justified in every respect; it is sufficient if such concerns might be held by a reasonable person in the circumstances. 43 Fifth, in deciding whether to consent the non-assigning party is entitled to have regard to his or her own interests under the contract to be assigned, consistently with the purpose of the covenant referred to in the first and second propositions. 44 Sixth, subject to the foregoing propositions, it is in each case a question of fact in all the circumstances whether the non-assigning party's consent is unreasonably refused. 45 To these propositions, extracted from International Drilling , I would add another. If the concern regarding assignment which the non-assigning party holds is reasonable in itself, in the sense referred to in the fourth proposition, refusal of consent may nevertheless be unreasonable if the concern is one capable of being remedied by the assignor or the assignee, but the non-assigning party either does not disclose that concern or does not permit an opportunity for that concern to be remedied. 46 In the light of those propositions, I turn to the facts of this case. Mr Radmanovich says that the concerns which led him to withhold consent to the assignment to Jennings were twofold. First, he was concerned, because of the statement made to him by Mr Vagulans on 13 February 2002, that Jennings would not be able to provide access to the five retained lots in accordance with the Contract for Sale because Jennings had not secured an option over the adjoining land. Second, he was concerned that he was being asked to enter into a contract for sale with a party with whom he had not negotiated, despite the resistance to being placed in such a position which he had stated prior to executing the Option Deed and despite the provisions of Clauses 3.1 and 10 of the Deed. 47 Mr Henry, who has argued the case most capably for the Purchaser, does not submit that Mr Radmanovich is not telling the truth in stating that he had these concerns. He says that the concerns, although actually held, do not afford reasonable grounds for the Vendor's refusal of consent, for a number of reasons. 48 First, he says, Mr Radmanovich knew at all material times that neither the Purchaser nor Jennings held any rights over the land of Mr and Mrs Janus. It was, therefore, unreasonable to refuse consent to an assignment to Jennings because Jennings was in exactly the same position as the Purchaser in its inability to procure a subdivision in accordance with the Contract for Sale. 49 I cannot accept this submission. The evidence does not reveal what exactly the position was as between Mr and Mrs Janus and the Purchaser at any time prior to the expiry of the option, nor does it reveal whether the Vendor knew anything about that position. On the other hand, Mr Radmanovich had been told that Jennings would not be able to procure a subdivision in accordance with the Contract. 50 The Purchaser had advised, by its letter of 22 November 2001, that it was not able to implement its original development proposal. Presumably, if it were not able to assign the option to Jennings, the Purchaser would simply have permitted the option to lapse and the Vendor would retain all of the Property without any further complication. However, if the Vendor consented to the assignment to Jennings, it was probable that the option would be exercised and that the Vendor would be immediately confronted with a major problem: Jennings would begin to develop the Property without being able to give the promised access to the Vendor's retained lots. By consenting to the assignment, when Jennings had told Mr Radmanovich that it would not be able to subdivide in accordance with the Contract, the Vendor would be placing itself in a position in which it could be seen to have compromised its contractual rights under Special Conditions 2.6 and 7. At the very least, the Vendor would probably be buying into a dispute with Jennings as to the extent of Jennings' obligations under the Contract. 51 In my view, there was a very real difference between the position of the Purchaser and the position of Jennings at the time of the proposed assignment as far as the effect on the Vendor under the option and the Contract for Sale was concerned. The Vendor was reasonably entitled to view the proposed assignment in that light. 52 Second, says Mr Henry, the Contract for Sale itself provided in Special Condition 2.8.1 for what was to happen if the Purchaser or Jennings could not carry out the subdivision as required by Special Conditions 2.6 and 7: compensation was to be paid to the Vendor. Accordingly, he submits, the Vendor was unreasonable in refusing consent to the assignment upon the ground of Jennings' inability to procure the subdivision when the consequence of failure to procure the subdivision was already provided for in the contract. 53 I am unable to accept this submission. Special Conditions 2.6 and 7 do not give the Purchaser, or Jennings, the right to elect whether to carry out the subdivision in accordance with Annexure "C" or to pay compensation instead: they impose a positive obligation to do all things necessary to procure the subdivision. That obligation requires the Purchaser or Jennings to use its best endeavours, in good faith, to procure the subdivision. It is only if those best endeavours fail after five years that compensation is payable to the Vendor under Special Condition 2.8.1. 54 Mr Radmanovich was informed by Mr Vagulans, even before the option had been exercised by Jennings and the Contract for Sale entered into, that Jennings would not be able to perform Special Conditions 2.6 and 7. In those circumstances, Mr Radmanovich would be justified in being concerned that there was a real risk that Jennings had already made up its mind that it was not going to endeavour to carry out the subdivision in accordance with Annexure "C" and that he might find himself in the position where he had lost control of his Property, including his home and the other four lots to be retained, and yet might have to wait five years from the date of the Contract before he could insist upon payment of compensation under Special Condition 2.8.1. 55 Third – and I think this is the point upon which Mr Henry places most emphasis – it was unreasonable, he says, for the Vendor to refuse consent on the basis of what Mr Vagulans had said on 13 February because Jennings, by its letter of 27 March 2002, had given an assurance that "if we enter into the contract [for sale] in accordance with the option, then the terms of this contract will be binding on us" . Mr Henry says that this assurance should have assuaged any concerns that the subdivision would not be carried out in accordance with Annexure "C" of the contract and Special Conditions 2.6 and 7. 56 I am unable to accept this submission. The first thing to note is that Jennings' "assurance" is in very broad, not to say equivocal, terms. It does not state that Jennings will carry out the subdivision in accordance with Annexure "C"; it simply states the obvious, namely, that Jennings will be bound by the terms of the Contract for Sale. Those terms include Special Condition 2.8.1. This assurance does nothing to remove a concern that Jennings might simply wait until five years elapses before proffering compensation under Special Condition 2.8.1. 57 The second thing to note is that neither in this letter nor otherwise has Jennings informed the Vendor as to how, precisely, Jennings proposes to overcome the difficulty in carrying out the subdivision to which Mr Vagulans adverted. Jennings simply says, in effect: "We will perform the contract." With respect, that statement does not do much to allay the feeling that Jennings is advisedly playing its cards close to its chest – a feeling not calculated to induce the Vendor to trust itself to a long-term and complex relationship with Jennings. 58 In my opinion, in refusing consent to the assignment on the ground that there was a concern that Jennings would not carry out the subdivision in accordance with the Contract for Sale, Mr Radmanovich was acting with a purpose for which the covenant against assignment without consent was given, namely, in order to prevent performance of the Contract for Sale by Jennings in a manner which he thought would or might be unsatisfactory. I am satisfied that Mr Radmanovich actually held that concern and that a reasonable person in his position could have held that concern. I am satisfied that prior to the expiry of the option both the Purchaser and Jennings were made aware of Mr Radmanovich's concern and had the opportunity to remedy it by providing information, with sufficient particularity, as to the manner whereby Jennings would carry out the subdivision in accordance with the Contract for Sale. Jennings' letter of 27 March 2002 gave no such information. 59 In the light of those findings, I conclude that the Purchaser has failed to prove that the Vendor's refusal to consent to the assignment to Jennings was unreasonable. 60 As the Vendor has succeeded on the first ground of its refusal it is, strictly speaking, unnecessary for me to consider its second ground. I do so only for the sake of completeness, in case the matter goes further. 61 In my view, Clauses 3.1 and 10 and the opening words of Clause 11.1 of the Option Deed acknowledge that because the relationship between the parties which will come into existence if the option is exercised is likely to be long, the likely quality of that relationship is a matter which the Vendor is entitled to take into account in deciding whether to consent to an assignment. The Vendor might legitimately and reasonably conclude that the attitudes or methods of doing business of a proposed assignee are such as are likely to cause friction, if not outright litigation, between the parties in the course of the relationship and that it would be contrary to its own interests under the option and the Contract for Sale to bring about that position by consenting to an assignment. 62 This is the kind of concern which, clearly, lay at the heart of Mr Radmanovich's attitude when confronted by the proposed assignment to Jennings – he had had an earlier painful experience with a developer in respect of the Property and he did not want to bring about a situation in which that experience could be repeated. 63 A distaste for assignment could not alone justify the Vendor's refusal to consent; there could be no reasonable refusal by the Vendor simply upon the ground of principle. But in this case there was more: for the reasons I have given, Mr Radmanovich, and a reasonable person in his position, had grounds for concern that Jennings would not use its best endeavours to carry out the subdivision in accordance with the Contract for Sale and that, in giving its assurance of 27 March 2002, it was playing its cards close to its chest, so that the Vendor's future relationship with it was likely to be difficult, if not litigious. For this reason as well, the Vendor's refusal of consent to the assignment was not unreasonable. Orders 64 For the reasons I have given, the Plaintiffs' claim fails. The Amended Summons will be dismissed with costs. The Exhibits may be returned. -o0o- LAST UPDATED: 12/06/2002