New South Wales Supreme Court CITATION : Ferella & Anor v Otvosi & Anor [2004] NSWSC 230 HEARING DATE(S) : 18/03/04 JUDGMENT DATE : 31 March 2004 JUDGMENT OF : Gzell J DECISION : Appeal from Master dismissed. CATCHWORDS : CONVEYANCING - Relationship of Vendor and Purchaser - Restrictive Covenants - Whether a common building scheme existed - Elements to be established - Whether reduction in mutuality of burden and benefit brought scheme to an end - Whether onus of proof lies on party asserting non-enforceability of the restrictive covenant LEGISLATION CITED : Supreme Court Rules 1970 Real Property Act 1900 Kerridge v Foley (1964) 82 WN (Pt 1) (NSW) 293 Re Louis and the Conveyancing Act [1971] 1 NSWLR 164 Re Mack and the Conveyancing Act [1975] 2 NSWLR 623 Elliston v Reacher [1908] 2 Ch 374 Reid v Bickerstaff [1909] 2 Ch 305 Sutton v Shoppee (1963) SR (NSW) 853 CASES CITED : Application of Fox (1981) 2 BPR 97111 Re Naish and the Conveyancing Act (1960) 77 WN (NSW) 892 Application of Amory Pty Ltd (1984) NSW ConvR 55-180 Hume v Monro (No 2) (1943) 67 CLR 461 Re Redmond and the Conveyancing Act (1965) 82 WN (Pt 1) (NSW) 427 Lawrence v South County Freeholds Ltd [1939] 1 Ch 656 Brunner v Greenslade [1971] 1 Ch 993 Bradbrook and Neave, Easements and Restrictive Covenants in Australia, 2nd ed, Butterworths, Australia Angelo Ferella - First Plaintiff/Appellant PARTIES : Gustavo Ferella Second Plaintiff/Appellant Ervin Lloyd Otvosi - First Defendant/Respondent Keiko Otvosi - Second Defendant/Respondent FILE NUMBER(S) : SC 2583/03 COUNSEL : Mr T G R Parker - For the Plaintiff/Appellant Mr J Ayling SC - For the Defendant/Respondent SOLICITORS : Sachs Gerace Lawyers Landerer & Company Solicitors & Attorneys LOWER COURT Supreme Court (Master) JURISDICTION : LOWER COURT 2583/03 FILE NUMBER(S) : LOWER COURT Master McLaughlin JUDICIAL OFFICER : IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION GZELL J WEDNESDAY 31 MARCH 2004 2583/03 ANGELO FERELLA & ANOR v ERVIN OTVOSI & ANOR JUDGMENT 1 Master McLaughlin had before him for decision separately from other questions under the Supreme Court Rules 1970, Pt 31 r 2, a claim for a declaration that the plaintiffs' land was not affected by a covenant contained in the original transfer of the land by Anthony Hordern to a predecessor in title or, in the alternative, a declaration that the covenant was not enforceable against the plaintiffs' land. The Master refused relief. The plaintiffs appealed to the Court. 2 The plaintiffs' land was lot 2 in a plan of subdivision containing four lots. It was first transferred in 1955. The memorandum of transfer contained a covenant by the transferee for himself, his executors, administrators and assigns as registered proprietors for the time being of the land with the transferor, his executors, administrators and assigns: "That not more than one main building shall be erected upon the said land and that such building shall not be more than two storeys in height." 3 It was provided that the covenant might not be released, varied or modified except with the consents of the then registered proprietors of lots 1, 3 and 4. The lands to which the benefit of the covenant was appurtenant were lots 1, 3 and 4 and lot 2 was the land that was subject to the burden of the covenant. 4 The memorandum of transfer also contained a covenant by the transferor for himself, his executors, administrators and assigns as the registered proprietors for the time being of lot 1 with the transferee his executors, administrators and assigns as registered proprietors for the time being of lot 2 that no more than one main building should be erected upon lot 1 and such building should not be more than two storeys in height. Lot 1 was burdened by the covenant and Lot 2 was the land to which the benefit of the covenant was appurtenant. 5 The defendants were the registered proprietors of lot 4 in the subdivision. It was first assigned in 1955 prior to the transfer of lot 2. The memorandum of transfer contained a similar covenant by the transferee with the transferor. The land to which the benefit of the covenant was appurtenant was the rest of the land in the plan of subdivision. There was a like provision that the covenant would not be released, varied or modified except with the consents of the then registered proprietors of all four lots in the plan. 6 Lot 3 was the first portion of the subdivision to be assigned on 5 October 1954. The memorandum of transfer contained a similar covenant by the transferee for himself, his heirs, executors, administrator and assigns or other registered proprietors for the time being of the land with the transferor, his executors and administrators. It was provided that the covenant might be released, varied or modified by the registered proprietors for the time being of lots 1, 2 and 4. The lands to which the covenant was appurtenant were lots 1, 2 and 4 and lot 3 was burdened by it. 7 By a memorandum of transfer executed after the transfer of lot 3 and before the transfer of lot 4, Anthony Hordern transferred lot 1 to his wife for nominal consideration. As has already been pointed out, by the transfer of lot 2 Anthony Hordern for himself, his executors, administrators and assigns as the registered proprietors for the time being of lot 1, burdened lot 1 by a like covenant, its benefit been appurtenant to lot 2. 8 By the time lot 2 was assigned, Anthony Hordern retained no interest in the subdivision. He had previously assigned each of the other lots. At common law the benefit of a restrictive covenant could only be made appurtenant to land owned by the covenantee (Kerridge v Foley (1964) 82 WN (Pt 1) (NSW) 293). 9 The equitable doctrine of the common building scheme overcomes this problem. Each lot within such a scheme takes both the benefit and the burden of the restrictive covenant. Where such a scheme exists, earlier purchasers may take the benefit of subsequent restrictions, the vendor thus annexing the benefit of restrictive covenants to previously transferred land (Re Louis and the Conveyancing Act [1971] 1 NSWLR 164 at 179, Re Mack and the Conveyancing Act [1975] 2 NSWLR 623 at 630). 10 It was held by a majority in Re Louis that the equitable principle of a common building scheme applied to land under the Real Property Act 1900. The land within the subdivision was registered under that Act. 11 Mr Parker, who appeared for the appellants, put the formal submission that Re Louis was wrongly decided in this respect. I am bound by Re Louis and proceed upon the basis that the equitable principle applies to land registered under the Real Property Act 1900. 12 The first issue on the appeal was whether there was, with respect to all or some of the lots in the subdivision, a common building scheme which rendered the restrictive covenant enforceable in equity. 13 The requirements of a common building scheme were stated in Elliston v Reacher [1908] 2 Ch 374 at 384: "… it must be proved (1) that both the plaintiffs and defendants derived title under a common vendor; (2) that previously to selling the lands to which the plaintiffs and defendants are respectively entitled the vendor laid out his estate, or a defined portion thereof (including the lands purchased by the plaintiffs and defendants respectively), for sale in lots subject to restrictions intended to be imposed on all the lots, and which, though varying in detail as to particular lots, are consistent and consistent only with some general scheme of development; (3) that these restrictions were intended by the common vendor to be and were for the benefit of all the lots intended to be sold, whether or not they were also intended to be and were for the benefit of other land retained by the vendor; and (4) that both the plaintiffs and the defendants, or their predecessors in title, purchased their lots from the common vendor upon the footing that the restrictions subject to which the purchases were made were to enure for the benefit of the other lots included in the general scheme whether or not they were also to enure for the benefit of other lands retained by the vendors." 14 Mutuality is the element that underlies the common building scheme. The intention is that each lot takes both the benefit and the burden of the restrictions. Commonality lies in the obligation between purchasers inter se and between purchasers and their vendor to obey a local law by observing whatever restrictions the scheme has imposed on their respective lots or on the estate generally (Reid v Bickerstaff [1909] 2 Ch 305 at 319). 15 The Master concluded that each of the elements was satisfied in respect of each of the lots. Alternatively, the Master was satisfied that each of the requirements existed with respect to lots 2, 3 and 4. The Master viewed the transfer of lot 1 as an apparently irregular element, all the other transactions following a similar pattern. With respect to the other lots he concluded that the intention of the vendor must have been that their obligations were mutual and reciprocal. With respect to lot 1, the intention was that it be burdened only by a restriction enforceable by the owner of lot 2 although in respect of those owners the obligations were, again, mutual and reciprocal. 16 The appellants contended that lot 1 stood outside any common building scheme. It was contended that there was insufficient mutuality with respect to that lot. Lots 3 and 4 were burdened in favour of each of the other lots but lot 1 was only burdened in favour of lot 2. 17 The respondents pointed out that it is unnecessary that there be exactly similar levels of reciprocity in terms of the distribution of benefit and burden throughout a common building scheme. As is pointed out in Bradbrook and Neave, Easements and Restrictive Covenants in Australia, 2nd ed, Butterworths, Australia, 2000 at par 13.98, a scheme of mixed residential and commercial development must, of necessity, give rise to differing restrictions. In Reid at 319, Cozens-Hardy MR observed that the obligations imposed within the area need not be identical in a passage cited with approval by Sugerman J in Sutton v Shoppee (1963) SR (NSW) 853 at 862. In Application of Fox (1981) 2 BPR 97111 at 9317, Wootton J observed that the point of a common building scheme lies not in the "one to one" relationship between particular blocks of land and their effect on each other, but in the impact of the various restrictions on an area as a whole creating a local law which may impinge differently on different parts of the area but, overall, works to give a particular character and amenity to the area. 18 The area the subject of the subdivision slopes down to the harbour foreshore at Double Bay. Lot 1 has a large frontage to the water. Lot 2 which adjoins it has a small water frontage. Lots 3 and 4 abut lot 2 and are on a ridge well above lot 1. That topography may explain why lot 1 was only burdened to the benefit of lot 2. It was important to the amenity of the area that the registered proprietor of the contiguous lot could enforce the height restrict with respect to a building on lot 1. It was not so important for the registered proprietors of lots 3 and 4. Residential buildings on them would be established high up on the ridge. 19 Whatever the reason, the restriction placed upon lot 1 was common to the restrictions placed upon each other lot in the subdivision and, not withstanding the limitation of benefit of the covenant on lot 1 there was, in my view, sufficient similarity to constitute it as part of the local law of the area. In my view, the Master was not in error in concluding that lot 1 should not be excluded from any common building scheme. 20 It was submitted that the Master erred in concluding that the fourth element in Elliston was present in the instant circumstances. It was not enough that Anthony Hordern may have intended that reciprocal obligations and benefits would apply on the transfers of lots 1, 2 and 4. If there was a common building scheme it crystallised upon the transfer of lot 3, it being the first, and there was nothing to indicate that the transferee purchased on the understanding that a reciprocal pattern of obligations would apply to later purchasers. 21 The Master found that when Anthony Hordern sold lot 3 on 5 October 1954, he intended that the remaining lots would be sold subject to equivalent restrictions. The appellants did not accept that finding but said whether it was open or not, there was no basis for the further element that lot 3 was purchased on the footing that reciprocal restrictions and benefits would be imposed upon the transferees of the other lots. 22 Title to the lots originated in Anthony Hordern. He laid out his estate for sale in lots subject to restrictions the Master found were intended to be imposed on all the lots consistent only with a general scheme of development. The Master was entitled to find that the first and second elements in Elliston were established. 23 In my view the Master was not in error in concluding that Anthony Hordern sold with the necessary intention required under the third element in Elliston, whether the scheme covered all the lots or only lots 2, 3 and 4. These events occurred almost 50 years ago. There was no direct evidence of intention before the Master. It was a question of inference to be drawn from all the circumstances. Anthony Hordern subdivided the entirety of the land. Each of the lots was the subject of a restriction in identical or almost identical terms. Remaining lots were sold within eight months of the sale of lot 3. The restrictions were not unusual for a residential subdivision with water views and could be expected to increase the value of each of the lots. 24 As to the fourth element in Elliston, there is, again, no direct evidence that the transferee of lot 3 acquired his interest on the footing that Anthony Hordern had subjected the remaining lots to like restrictions. 25 The transferee was clearly aware of the restrictions on lot 3. He signed the covenant in the memorandum of transfer. In Re Naish and the Conveyancing Act (1960) 77 WN (NSW) 892, Myers J refused to infer that a common building scheme existed where the only material before the Court was that the lands were held in one ownership, were transferred over a period of not less than 16 years and not more 54 years and all lots except five, which were transferred by three transfers, were subjected to similar restrictions by covenants between the vendors and the respective purchasers. 26 On the other hand, in Application of Amory Pty Ltd (1984) NSW ConvR 55-180 where some lots were sold without restriction, Kearney J concluded that each of the elements in Elliston existed and a common building scheme was constituted. His Honour was prepared to infer the existence of the fourth element on the meagre facts before him. 27 In this case, the same solicitor acted for Anthony Hordern throughout. The vendor's execution of all transfers was witnessed by a Mr Minter. Mr Minter also accepted the transfer of lot 3 on behalf of the transferee. The transferee of lot 3 was an architect by profession. 28 The short space of time in which the transfers were effected and the lack of the existence of any lots not burdened by the common restriction distinguishes the instant circumstances from Naish. It also supports the inference that the lots were marketed at about the same time and it was likely that Anthony Hordern's intention to bind all lots by the common restriction became known to the transferee of Lot 3. It is not beyond the realm of legitimate inference that Mr Minter informed the purchasers of lots of that intention. Nor is it speculation alone to conclude that an architect who paid five thousand two hundred and fifty pounds for lot 3 would have ascertained the vendor's intentions with respect to the burdening of the other lots with a like restrictive covenant. 29 It was said in Elliston at 385 that once the first three elements are established, the fourth may readily be inferred provided the purchasers had notice of the facts involved in the first three elements. In my view the Master was not in error concluding it more likely than not that the transferee of lot 3 took the transfer on the footing that reciprocal restrictions and benefits would be imposed by Anthony Hordern on the remaining lots of the subdivision. 30 It was held by the majority in Sutton at 863 and 870-871 that where a declaration of unenforceability of a restrictive covenant in a common building scheme is sought, the onus lies on the applicant to establish the non-existence of the scheme. The majority relied upon a passage from Latham CJ in Hume v Monro (No 2) (1943) 67 CLR 461 at 474 that a plaintiff seeking a declaration denying any possible foundation for an alleged claim of right must exhaust the possibilities and show that the claim cannot possibly be supported. It is not for the defendant in such a proceeding to make a claim and to justify it. 31 The decision in Sutton was followed in Re Redmond and the Conveyancing Act (1965) 82 WN (Pt 1) (NSW) 427 at 434 and in Re Mack at 626. 32 It was submitted that the decision in Sutton was limited to the circumstance that it had been concluded that the second and third elements in Elliston had been satisfied and in the absence of such satisfaction the statements could have no effect. 33 The answer to this proposition is twofold. First, the Master was satisfied that the second and third requirements of Elliston had been established and I have already said that there was no error in that conclusion. Secondly, neither the observation of Latham CJ in Hume nor those of Sugerman and Else-Mitchell JJ in Sutton are limited to such findings. As Else-Mitchell J went on to say at 871, the concept lies at the root of the whole of the law of property and property rights, the security of which depends very largely upon the presumptive effect of possession and upon the necessity for adverse rights and titles to be supported by proper proof. 34 Like the Master, I prefer to rest my reasons upon inferences properly to be drawn from the evidence rather than to conclude that the appellants failed to overcome their onus of proof. Had I taken the course of basing my judgment on who bore the onus of proof, I would have followed the majority in Sutton. 35 I am told that there is a cross claim in which the respondents assert an enforceable restriction the onus of proof of which will lie upon the respondents. It was submitted that if I based my judgment solely upon the onus of proof issue, I should defer dismissing the appeal until the cross claim is determined. It is unnecessary for me to take this course. 36 In my judgment, therefore, the Master was entitled to conclude that there was, with respect to the subdivision, a common building scheme. 37 There have been a number of variations and extinguishments of the restrictive covenants. Lot 4 is no longer burdened by the covenant in favour of any of the other lots. The covenant with respect to lot 3 was varied to a height restriction in metres. It remains burdened in this respect only to lot 1. Lot 1 is still burdened to lot 2 in its original form. Lot 2 remains burdened to lot 1 in its original form, remains burdened by the original height restriction in favour of lot 4 and the burden in favour of lot 3 has been varied to a height restriction in metres. 38 It was submitted that equity looks not only to the position on first sale but also to the equity sought to be enforced before the Court. It was submitted that there was an insufficient mutuality between the lots to justify the continuance of a common building scheme. Reference was made to Sutton at 873 where Else-Mitchell J had said: "Where in consequence of one of these events any lot or any purchaser is freed from or not bound by the scheme, it or he is likewise to be denied the benefit of the scheme and any right to enforce it as against the other lots or owners who remain bound; this is simply an illustration of the mutuality which a building scheme entails and of the rules relating to the exercise of equitable remedies." This is not, however, a case of a party freed from the restrictive covenants of the scheme. The appellants are still bound by the covenant. Else-Mitchell J went on to say: "In each instance, however, there would seem to me to be no question that although the comprehensiveness of the scheme may have been prejudiced, it nevertheless remains valid and enforceable as between the other owners; their mutual rights and obligations are not affected and will continue to be enforceable inter se ." 39 The argument that the Court looks to the equity sought to be established at trial as well as the situation on first sale of a subdivisional lot was developed by the reference to other circumstances in which equity has regard to intervening circumstances. 40 In Re Louis at 179, Jacobs JA made reference to the loss of an equitable right upon the intervention of a purchaser for value without notice. In Elliston at 394-395 it was held that the superimposition of further covenants disentitled the plaintiffs from departing from them to enforce original restrictive covenants. To like effect is Lawrence v South County Freeholds Ltd [1939] 1 Ch 656 at 677-678, an obiter dictum cited with approval in Brunner v Greenslade [1971] 1 Ch 993 at 1002-1003. 41 By analogy it was submitted that, the respondents as the registered proprietors of lot 4 being no longer burdened by the restrictive covenant, it would be unfair to hold the appellants as registered proprietors of lot 2 to the burden of the restrictive covenant and, it was submitted, equity would not do so. 42 The Master pointed out that there was no authority for the proposition that a common building scheme comes to an end when there remains but a limited mutuality of obligation and benefit. He pointed out that over time there will be adjustments in the relationships between registered proprietors to meet current needs. But that was not to say that in doing so the registered proprietors forfeited the benefit of those elements of the scheme which they did not adjust and wished to retain. 43 No doubt lot 4 was attractive to the respondents because it benefited from the restrictive covenant annexed to lot 2. There is no reason why the respondents should be denied the benefit of the restrictive covenant because they are no longer burdened to other lot owners. The Master pointed out, correctly in my view, that although reduced in scope the common building scheme still had work to do and had not come to an end. 44 The appellants and the respondents entered into a deed whereby the appellants consented to the respondents being released from the restrictive covenant and the respondents agreed to consent to the appellants' covenant being varied by the deletion of all provisions other than the requirement of but one two-storeyed residential building on the land. 45 The Master took the view that the deed constituted an approbation whereas the claim to declarations of non-enforceability constituted a reprobation. It was unnecessary for the Master to go so far and I do not do so. The respondents were unable to specify any equitable principle contravened by the present proceedings in view of the existence of the deed. 46 In the result I would dismiss the appeal. I will hear the parties on costs. I direct the parties to bring in short minutes of orders reflecting these reasons. ********** Last Modified: 04/01/2004 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.