Whitehead v Whitehead [2002] NSWSC 486

New South Wales Supreme Court

CITATION : Whitehead v Whitehead [2002] NSWSC 486 CURRENT JURISDICTION: Equity FILE NUMBER(S) : SC 4975/00 HEARING DATE(S) : 28 May 2002 JUDGMENT DATE : 31 May 2002

Alfred Ritchie Whitehead (A) PARTIES : Thomas Arnold Whitehead (R1) Cassie Marie Whitehead (R2) JUDGMENT OF : Austin J

COUNSEL : Mr M S White (A) G A Sirtes (R) SOLICITORS : Kell Moore Solicitors (A) Belbridge Hague (R) CATCHWORDS : REAL PROPERTY - co-ownership - partition - statutory trusts for sale or partition - orders for adjustment of entitlements to proceeds of sale - whether one co-owner's claim for damages for breach of contract by the other co-owner should be made deductible from proceeds of sale LEGISLATION CITED : Conveyancing Act 1919 (NSW) s 66G Bray v Bray (1926) 38 CLR 542 Brickwood v Young (1905) 2 CLR 387 CASES CITED : Forgeard v Shanahan (1994) 35 NSWLR 206 General Steel Industries Inc v Commissioner for Railways (1964) 112 CLR 125 Parker v Gerard (1754) Amb 236b Re Fettell (1952) 52 SR (NSW) 221 DECISION : Appeal from Master allowed; order for summary dismissal of part of cross-claim seeking deduction of damages from proceeds of sale

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

AUSTIN J

FRIDAY 31 MAY 2002

4975/00 ALFRED RITCHIE WHITEHEAD v THOMAS ARNOLD WHITEHEAD & ANOR JUDGMENT 1 HIS HONOUR: This is an appeal by the plaintiff, as appellant, from the judgment of Master McLaughlin delivered on 5 April 2002 in respect of the plaintiff's notice of motion filed on 20 February 2002. 2 The plaintiff and the defendants are the registered proprietors of a grazing property called "Welby's" at Welaregang in New South Wales. They hold the land as tenants in common, the plaintiff having a 16/43rd share, and the defendants (who are husband and wife) having a 12/43rd and a 15/43rd share respectively. 3 On 12 September 1985 the plaintiff, on the one hand, and the defendants, on the other, entered into an occupancy agreement in relation to the property, under which they agreed that they would respectively occupy designated portions of the land. By clause 3 of that agreement, each party promised to maintain the land occupied by them in a good and husbandlike manner according to accepted farming practices in the area, and in particular to destroy vermin and noxious weeds, maintain fencing and maintain the stockyards. 4 The occupancy agreement was terminable on three months notice ending at 30 June in any year. On 9 March 2000 the plaintiff terminated the agreement as from 30 June 2000. The parties then explored various options for resolving the problem of how the property was to be used and dealt with, but they were unable to reach any agreement. 5 In December 2000 the plaintiff commenced the present proceeding, seeking orders for the appointment of trustees for sale under s 66G of the Conveyancing Act 1919 (NSW). On 10 August 2001 Registrar Berecry made orders by consent for the appointment of trustees for sale and the sale of the property by public auction. Order 5 of the consent orders was as follows: "5. The proceeds of sale of the Land to be retained by the trustees in an interest bearing account pending the resolution of these proceedings and further order of the Court." 6 The defendants were to file and serve their cross-claim in August 2001. Their solicitor prepared a draft cross-claim in the form of a pleading and submitted it to the plaintiff's solicitor, but it was eventually decided that, the proceeding having been instituted by summons, it was inappropriate for the cross-claim to be fully pleaded. The cross-claim in abbreviated form was filed on 30 November 2001. I mention this history because reference to the draft cross-claim, in the form sent to the plaintiff's solicitors on 30 August 2001, gives an indication of the nature of the defendants' claim. 7 The draft cross-claim makes claims of two kinds. First, it asserts that during the time the property was occupied under the occupation agreement, the plaintiff failed to maintain fencing and stock yards and to control noxious weeds, and did not take any adequate measures to prevent soil and gully erosion, in breach of clause 3, and in consequence the value of the land was diminished and the defendants suffered and would continue to suffer loss and damages. Secondly, it asserts that between 1985 and 1999 the defendants made "contributions to the land by way of improvements". The alleged improvements and their cost are particularised. They include such things as a new dam, access roads, fencing, "pasture improvements" and "clearing tussocks/access roads". The total cost is about $20,000. The draft asserts that the defendants are entitled to "contribution" from the plaintiff from the proceeds of sale of the land in proportion to their respective interests in the land. 8 The relief claimed in the draft and also in the cross-claim as filed and served in December 2001 is the same. It consists of: 1. An order for damages against the Cross-Defendant. 2. An order that an account be taken of all moneys disbursed by the Cross-Claimants in respect of the Land in relation to improvements made thereon. 3. An order that the Trustees appointed by the Court to sell the Land deduct from the net proceeds of sale and pay the Cross-Claimants: (i) any damages awarded pursuant to order 1 hereof (ii) all contributions made by the Cross-Claimants and pay the balance to the Cross-Claimants and Cross-Defendant in relation to their respective interests in the Land. 4. Costs. 9 Since the cross-claim as filed is not a pleaded cross-claim, and there is no evidence of supply of particulars, I cannot infer that the claim to damages is made for breach of clause 3 in the manner pleaded in the draft cross-claim, and on no other basis. However, the defendants made it expressly clear in their written submissions on the appeal that the claim to damages is a claim to common law damages for breach of the occupation agreement. 10 On 20 February 2002 the plaintiff filed an application by notice of motion seeking summary dismissal of the cross-claim and in the alternative, that the cross-claim be transferred to the District Court. The Master decided that insofar as the cross-claim sought damages, it should not be dismissed, but that the cross-claim for "contributions" was misconceived. He ordered that prayer 3 (ii) in the cross-claim be dismissed, although he granted leave to the defendants to file an amended cross-claim to claim, on a proper basis, an allowance for the value of the improvements they claim to have made to the land. He rejected the plaintiff's claim to transfer the cross-claim to the District Court, on the ground that the cross-claim sought equitable relief by way of an accounting and an allowance from the proceeds of the sale, and that the claim for damages was closely related to those equitable claims. No appeal has been brought in respect of the Master's decision on any of those matters. 11 Paragraph 3 of the plaintiff's notice of motion sought an order in the following terms: "3. Order 5 of the orders of the Court dated [10 August 2001] be vacated, and the Trustees for Sale appointed by the Court on 10 August 2001 be permitted to distribute the proceeds of sale received by them upon settlement of the sale of the land." 12 The plaintiff sought this relief because he was the successful purchaser of the land when it was offered for sale by the trustees in November 2001. The purchase price was $870,000 and settlement took place in February 2002. Although the plaintiff is entitled to a 16/43rd share of the net proceeds of sale after deduction of the costs of sale and any proper claim for deduction by the defendants, he paid the full purchase price, and borrowed at interest in order to do so. The net purchase money is being held in trust and the plaintiff has not received any part of it. He wishes to obtain the whole or some portion of his share, but order 5 of the orders made on 10 August 2001 has prevented him from doing so. At the time when the Master considered the matter, the effect of order 5 was that neither party would be entitled to any of the purchase money until the cross-claim was finally determined. 13 The Master decided that it was unnecessary to prevent the trustees from affecting any distribution out of the proceeds of sale until the resolution of the entirety of the proceedings. It would be enough, in his view, that a sufficient fund be retained in trust to meet the maximum amount which could possibly be awarded to the defendants upon the cross-claim, together with costs. He therefore varied order 5 by deleting the words "the resolution of these proceedings and". The effect of the order, as varied, was to permit a party to make application to the Court for payment out of a specified amount from the fund held by the trustees. There is no appeal against the Master's decision on this point. 14 The plaintiff contended before the Master that order 5 should be vacated rather than merely varied, and that the Trustees be permitted to distribute the proceeds of sale. The Master was bound to reject that application, because of his finding that the defendants could assert, by properly amended cross-claim, an allowance for improvements out of the proceeds of sale. The principle applied by the Master was stated by Meagher JA in Forgeard v Shanahan (1994) 35 NSWLR 206, 223, as follows: "If a co-owner in occupation effects improvements on the co-owned property he may claim an allowance for any improvements in value effected by him. Such an allowance may be claimed in an action for partition. The allowance is not a reimbursement of the amount expended but an allowance in respect of the amount by which the value of the property has been increased, not exceeding the amount expended, the "value" to be ascertained at the commencement of the action." 15 It will be seen that the equitable right to an allowance for improvements is measured by the increase in the value of the property (up to the amount expended), and is therefore not a right to compensation for expenditure as such. The Master summarily dismissed the claim to deduct from the net proceeds of sale the "contributions" made by the defendants because that claim did not fall within the principle enunciated by Meagher JA. But the Master's decision to allow an amendment to the cross-claim meant that a properly articulated claim for an allowance for improvements could be asserted against the net proceeds of sale. 16 That conclusion may not be a substantial obstacle to the plaintiff. Once particulars are given of the amended cross-claim, it may emerge that the maximum increase in value that the defendants can make out is to a relatively small amount. As Meagher JA explained, the claim to an allowance for improvements is limited to the amount expended on improvements, and according to the draft cross-claim of 30 August 2001 that amount was approximately $20,000. I cannot assume that at the final hearing, the defendants' claim for improvements will be limited to the amount set out in the draft cross-claim, for it is only a draft, but nevertheless the draft gives some indication of the scope and quantum of the claim one can expect the defendants to make. In light of the Master's amendment to order 5 and the opinions expressed in his reasons for judgment, it would be open to the plaintiff to have the vast bulk of the purchase price released, upon application to the Court, if it emerges that the defendants claim is of the order of the claim set out in the draft. 17 However, there is an obstacle standing in the plaintiff's way. The Master allowed paragraph 3 (i) of the cross-claim to stand. In that paragraph the defendants seek an order that their damages be paid from the net proceeds of sale prior to distribution. The plaintiff's appeal is against that part of the Master's decision in which he held that the defendants had an arguable case that they were entitled to deduct their damages (if established) from the proceeds of sale. The Master dealt with the matter in paragraphs 53-58 of his reasons for judgment. 18 In reaching his conclusion on this point, the Master applied the well-recognised principles applicable to a claim for summary dismissal, referring to General Steel Industries Inc v Commissioner for Railways (1964) 112 CLR 125. He said (at paragraph 17) that it was not necessary for the Court to be persuaded that the defendants would succeed upon the cross-claim, but only that the cross-claim was not doomed to failure. He held (at paragraph 57) that he was "not persuaded that the assertion by the defendants that [their damages] should properly be deducted from the share of the plaintiff of the proceeds of sale, is a hopeless one ", and (at paragraph 58) that the contention was "arguable". It has not been contended on appeal that the Master applied the wrong principle in assessing the claim for summary dismissal of paragraph 3 (i) of the cross-claim. I accept the Master's approach. 19 The Master reached his conclusion after considering the observations of Kirby P (dissenting) in Forgeard v Shanahan at 217. In that case Rolfe J at first instance had decided, in connection with orders for sale under s 66G of the Conveyancing Act, that Ms Shanahan was entitled to an adjustment in respect expenditure which increased the value of the property jointly owned by her and Mr Forgeard, so long as the increase in value exceeded the expenditure. He decided that Ms Shanahan's expenditure by way of partial repayment of a mortgage over the property, and for payment of water and council rates, should lead to adjustments, but that her payment of insurance premiums, the cost of pest control, the cost of repair of guttering and rotten weatherboards, the erection of the new side fence, provision of pool chemicals and certain legal expenses, should not be taken into account. Kirby P. disagreed with this approach. He said: "Some at least of the expenses which Ms Shanahan incurred, related to the ordinary costs which would normally fall upon co-owners for the regular maintenance and upkeep of the jointly-owned property. Without such expenditures, the property would, or might, be diminished or significantly reduced in value…. Some of the sums claimed by Ms Shanahan are disputable. They may be personal claims which Ms Shanahan could enforce against Mr Forgeard. It is important to remember always the jurisdiction which Rolfe J was exercising, viz, that conferred by s 66G of the Conveyancing Act. Only sums expended directly relevant to the property jointly owned would form the proper basis of an order attaching conditions to the sale of the property. However, in my view, the premiums on the houseowners' insurance, the cost of pest treatment, repair and replacement of essential items in the property, a erection of anew side fence, will be proper expenses recoverable by Ms Shanahan from Mr Forgeard. She would be entitled to bring those expenses into account in the adjustment necessary to the making of proper order under s 66G." 20 The Master regarded as arguable that a personal claim by the defendants against the plaintiff for damages for breach of the occupation agreement is a claim directly relevant to the property owned by them in co-ownership, and according to the reasoning of Kirby P, the defendants would be entitled to bring the loss and damage they had suffered through breach of that agreement into account in the process of adjustment of the proceeds of sale. 21 I respectfully disagree with the Master's conclusion on this point. First, Kirby P's observations were made in a dissenting judgment. They are inconsistent with the reasoning of Meagher JA, who held that Ms Shanahan was entitled to equitable contribution to the extent that she had discharged jointly owed debts for mortgage repayments, water and council rates, but that her expenditure for such matters as insurance premiums and pest control were at most payments towards the maintenance of the property and could not be classified as payments for improvements or payments of debts jointly owing (at 225). The third member of the Court of Appeal, Mahoney JA, saw no reason to interfere with the application of the law which Meagher JA had suggested (at 220). 22 In my opinion it is plain beyond argument that a claim by one co-owner against another for damages for breach of contract is not to be taken into account by way of adjustment of entitlements to the proceeds of sale of property ordered to be sold under s 66G. This is so, even where the contract relates directly to the use of the land and one co-owner has caused loss to another by using the land in breach of the contract. 23 The approach now taken by courts to adjustments out of the proceeds of sale of property ordered to be sold under s 66G was formed historically through the approach taken by courts of equity in partition suits. The connection arises because the Partition Acts (consolidated in New South Wales in the Partition Act 1900) authorised the Court in a suit for partition to order sale instead of division, and that statutory jurisdiction was the precursor to s 66G. Forgeard v Shanahan establishes that the principles applied in partition suits remain applicable when a question of adjustment arises in proceedings for orders under s 66G: 35 NSWLR at 224 per Meagher JA, and at 220 per Mahoney JA. 24 The jurisdiction to decree partition, in proceedings instituted by one co-owner against another by bill, was exercised by courts of equity from early times, and was a mature head of jurisdiction by the 18th century: see Parker v Gerard (1754) Amb 236b; 27 ER 157b. In appropriate cases the court would make provision for rights and equities arising from the circumstances, and would direct inquiries in relation to rents and profits received by, or repairs and improvements carried out by, one of the co-owners. Where an occupying co-owner claimed an allowance for expenditure, the court could charge him with an occupation rent: see Brickwood v Young (1905) 2 CLR 387, and as to the effect of the Petition Acts, Bray v Bray (1926) 38 CLR 542. 25 Some of the principles upon which courts of equity would proceed in making adjustments in partition cases are summarised Meagher JA's judgment in Forgeard v Shanahan. Meagher JA had no occasion to address the circumstances, if any, in which a court of equity might have made an adjustment in a partition suit where conduct by an occupying co-owner reduced rather than enhanced the value of the occupied property. Counsel has not referred me to any case where such an adjustment was made, but in principle it would be odd if the court made an adjustment for improvement of the property but not for reduction in its value. Therefore it might be arguable, not because of anything said by Kirby P in Forgeard v Shanahan, but by reference to the principles upon which adjustments were allowed in partition cases, that an adjustment should be made where one co-owner has caused damage to another co-owner by reducing the value of the co-owned land. 26 It is not necessary for me to decide whether an adjustment for diminution in value would be available in a partition suit or by order in proceedings under s 66G. All of the adjustments made in partition suits, and therefore in s 66G proceedings, are limited by the principles enunciated by McLelland J in Re Fettell (1952) 52 SR (NSW) 221. After giving an account of the jurisdiction to make adjustments in a partition suit, his Honour said (at 225): "But in all cases where relief was granted in addition to partition, it was directly concerned with the position of the parties as co-owners."