New South Wales Supreme Court CITATION : Sirtes v Pryer [2005] NSWSC 1082 HEARING DATE(S) : 26, 27, 29, 30 September 2005 JUDGMENT DATE : 25 October 2005 JURISDICTION : Supreme Court Equity Division JUDGMENT OF : Burchett AJ at 1 DECISION : See para 26 CATCHWORDS : Equity upon loss of substratum of arrangement under principle of Muschinski v Dodds - quantum of equitable charge - whether based on amount of expenditure upon improvement of property of chargee or upon amount of the increase in value of the property - whether there is a general principle applicable to both promissory estoppel cases and Muschinski v Dodds cases - effect of failure of marriage upon transfer of interest in her home by a mother-in-law to her daughter-in-law - order for transfer back to mother-in-law subject to equitable charge in favour of her son and daughter-in-law measured by the increase in the value of the property by virtue of building works carried out by the son and daughter-in-law. LEGISLATION CITED : Property (Relationships) Act 1984 (NSW) Baumgartner v Baumgartner (1987) 164 CLR 137 at 148 Burgess v King [2005] NSWSC 231 at [16] Crabb v Arun District Council {1976} Ch 179 at 198 Forgeard v Shanahan (1994) 35 NSWLR 206 at 223 Giumelli v Giumelli (1999) 196 CLR 101 at 122-125 Henderson v Miles (No 2) [2005] NSWSC 867 Hogan v Baseden (1997) 8 BPR 15,723 at 15,726 CASES CITED : Houghton v Immer (No 155) Pty Ltd (1997) 44 NSWLR 46 at 56 Knox v Knox (Young J, unrep 16/12/1994) Muschinski v Dodds (1985) 160 CLR 583 at 620 Nichols v Nichols (1986) 4 BPR 9240 at 9244 Pascoe v Turner [1979] 1 WLR at 438 The Commonwealth v Verwayen (1990) 170 CLR 394 Waltons Stores (Interstate) Limited v Maher (1988) 164 CLR 387 at 404 PARTIES : Paula Sirtes v Kim Jacqueline Pryer and Gregory Andrew Sirtes; Kim Jacqueline Pryer v Paula Sirtes FILE NUMBER(S) : SC 1394/05 Mr J Simpkins SC & Mr D Meltz ( Plaintiff/Cross Defendant) COUNSEL : Mr M Evans & Mr C Bolger (First Defendant/Cross Claimant) Submitting appearance of Second Defendant filed in Court Broun Abrahams Burreket (Pltf/Cross Deft) SOLICITORS : Swaab Attorneys (Deft/Cross Claimant) LOWER COURT JURISDICTION : - 15 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION BURCHETT AJ Tuesday, 25 October 2005 1394/05 SIRTES V PRYER JUDGMENT 1 This matter had its genesis in a family arrangement which was aborted because a marriage on which it depended failed. The plaintiff, Paula Sirtes, who was born in Hungary 77 years ago and spent the last part of World War II in Ravensbruck, Dachau, and ultimately Spandau, migrated to Australia with her late husband, on 14 January 1950. In Australia, a daughter was born to them in 1964 and a son, Gregory Andrew Sirtes, in 1966. Paula Sirtes and her husband purchased in 1969 a family home at 60-62 Balfour Road, Rose Bay (or, more properly, Bellevue Hill) where they lived until his death in 1990, upon which she became the sole owner and has continued to live there, apart from brief absences. The house had two separate entrances, corresponding to the two street numbers, the main residence, containing three bedrooms, being number 60 Balfour Road, while the other, number 62, was a one bedroom "granny flat" at the rear. 2 At about the time of the death of the husband of Paula Sirtes, Gregory Sirtes returned from studies in London (he is now a barrister) and took up residence at 60 Balfour Road, living from about late 1994 in the flat 62 Balfour Road. It was there that the first defendant, Kim Jacqueline Pryer, began to live with Gregory Sirtes about a year later and continued to do so after their marriage on 3 March 1996. They have one child, Jonah Toby Pryer Sirtes, born 19 August 2001. 3 The evidence makes it clear that, during the substantial period, for most of which they lived in close proximity, until October 2003, Paula Sirtes and her daughter-in-law formed a quite close family bond. At all times relevant to the questions that arise in this case, Paula Sirtes believed that the marriage between her son and her daughter-in-law was strong. She is a woman of very substantial means, with investments in a number of other properties apart from her dwelling, and she had made a will in which the home at 60-62 Balfour Road was left to her son as part of his share of her estate. 4 At some stage, Gregory Sirtes and Kim Pryer were considering the purchase of a family home of their own, but by about the year 2000, Paula Sirtes made it clear to her son that, as she intended to bequeath 60-62 Balfour Road to him upon her death, she would be agreeable to his demolishing 62 Balfour Road and part of 60 Balfour Road in order to construct a new house on the back portion of the property. The implementation of this plan would involve the parties living elsewhere for some time and it would also require the raising of substantial finance by Gregory Sirtes or Gregory Sirtes and Kim Pryer. Kim Pryer was the joint owner with her sister, Nicole, of an apartment in Dover Road, Rose Bay which their grandmother had provided for them. Nicole Pryer was bought out and the apartment was renovated; then early in 2003 Gregory Sirtes and Kim Pryer took up residence there so that the building works could be carried out at 60-62 Balfour Road. About March 2003, for the same reason, Paula Sirtes went to live in a unit at 15 William Street, Double Bay where she remained until she was able to move back into her home in about December 2003. 5 During a period of a number of months commencing in about April 2003, Kim Pryer pressed Paula Sirtes to provide her with some security by giving her a share of the property at 60-62 Balfour Road. She said that she would be letting Gregory Sirtes borrow against her apartment for the building work at Balfour Road, and if anything happened to her husband she might be thrown out in the street. She claimed it was causing her distress and affecting her health (a matter of considerable concern since she was still under treatment as a result of a thyroid cancer). Paula Sirtes pointed out that she had not only made a will in favour of Gregory Sirtes with a gift over to Kim Pryer should he not survive her by 30 days; she had also entered into a deed of covenant to protect the beneficiaries against the possibility of a subsequent revocation of the will. However, Kim Pryer continued to press for a transfer of part of the property on a number of occasions, and her mother, Carol Pryer, with whom as well Paula Sirtes was very friendly, seconded these requests, also urging that money for the building of 62 Balfour Road would be borrowed "against Dover Road". At a conference with Paula Sirtes' solicitor, Kevin Emanuel, as he confirmed, Kim Pryer said: "I have been speaking to Paula about her giving me a share of the Balfour Road property. You see, I have an apartment and we are going to borrow against it for the cost of building. The apartment is mine, but I have no share in Balfour Road. I want security for using my apartment to advance against funds." Mr Emanuel made it clear that, if Paula Sirtes wished to do so, she could transfer an interest as tenant in common to her daughter-in-law, but stamp duty would be involved. He suggested the share for Kim could be 25%. From then on, both Kim Pryer and Carol Pryer continued to request Paula Sirtes to transfer a share of the Balfour Road property to Kim Pryer to provide her with security in the place of her interest in her Dover Road apartment which would be mortgaged. Finally, about early October 2003, Paula Sirtes instructed Mr Emanuel to draw up the transfer. I am satisfied, whatever may have been said in June, that the ultimate instruction to carry the transfer into effect was only given by Paula Sirtes after the series of requests to which I have referred and in early October. That is confirmed by the evidence of Mr Emanuel. 6 It was on or about 8 October 2003 that both Paula Sirtes and Kim Pryer attended upon Mr Emanuel to execute the transfer. He suggested to Kim Pryer that she should get independent legal advice because he was acting for Paula Sirtes, but Kim Pryer declined to do so. Mr Emanuel then said: "O.K. then. The basis upon which Mrs Sirtes is transferring a share of the Balfour Road property to you is that your apartment is being used for the purpose of raising finance for the construction of a house for you and Greg?" to which Kim Pryer replied: "Yes", and Mrs Sirtes replied: "On that basis, yes." The transfer was then executed by each of them. It transferred a 25% interest as tenant in common in the property to Kim Pryer. At that time, counsel for Kim Pryer conceded in argument, Paula Sirtes "had no knowledge "anything was going wrong in the marriage of her son and his wife. 7 In fact, about four weeks later, Kim Pryer asked Gregory Sirtes to move out of the Dover Road apartment, and they separated, without the apartment ever being utilised as security for the raising of any of the funds utilised in the building works at 60-62 Balfour Road. Kim Pryer and Gregory Sirtes are presently embroiled in proceedings in the Family Court. When, in mid November 2003, Kim Pryer informed Paula Sirtes that the marriage was "over," she said as to the building of the house: "It's got nothing to do with me any more. I don't care about the building." But upon Paula Sirtes pointing out that, if she did not intend to borrow against the Dover Road apartment for the building, she should transfer back the interest in the Balfour Road property, Kim Pryer responded: "No. I won't transfer it back to you." After waiting some time in the hope that her son and Kim Pryer might be able to reach some agreement about the matter, so as to avoid litigation, Paula Sirtes instituted these proceedings. 8 The case is put on a number of bases, but the primary basis is that the transfer was made as part of a family arrangement which was dependent upon Kim Pryer making her apartment available as security to raise funds for the building of the matrimonial home of herself and Gregory Sirtes at 60 Balfour Road at the back of and hard by Paula Sirtes' own house at 62 Balfour Road, the substratum of the whole arrangement being the understanding that the marriage would continue to be subsisting and Gregory Sirtes and Kim Pryer would live in the home that was planned. The transfer was not simply a gift, and would not have been made if Kim Pryer had disclosed there was a prospect that the marriage would not continue, or that she would not be contributing to the construction through a mortgage of her apartment at Dover Road. In these circumstances, the plaintiff relied on the law as it is stated in Muschinski v Dodds (1985) 160 CLR 583 at 620; Baumgartner v Baumgartner (1987) 164 CLR 137 at 148; and Nichols v Nichols (1986) 4 BPR 9240 at 9244, a decision of Needham J. 9 In the event, as funds were not available upon the security of the apartment at Dover Road, Paula Sirtes herself arranged for a property at 58 Dolphin Street, Coogee, belonging to a company the shares in which she owned, to be utilised as security for a borrowing required in respect of the funding of the building works at 60-62 Balfour Road. 10 In the plaintiff's amended points of claim, by paragraph 6, it is pleaded: "In the premises, the Defendant [ie. the first defendant, Kim Jacqueline Pryer] holds the one-quarter share on constructive trust for the Plaintiff subject to the existence of an equitable charge or lien in favour of the Defendant and Greg Sirtes in such amount as may be agreed or determined by the Court." 11 The proceedings were defended, and a cross-claim was filed in which Kim Pryer sought a declaration "that as and from 8 October 2003 the cross-claimant is entitled to one quarter of the legal and beneficial interest, unencumbered, of the property … located at 60-62 Balfour Road, Rose Bay in the State of New South Wales" and orders to secure a sale upon the statutory trust for sale and that she be paid one quarter of the net proceeds of sale. However, after the hearing had proceeded some distance, with cross-examination of the plaintiff and of Gregory Sirtes, on the morning of the third day, counsel for Kim Pryer made the following statement: "I am instructed to advise the Court that the first defendant does not now maintain her claim to uphold the transfer but instead accepts an equitable charge or lien in the terms referred to in the pleading of the plaintiff's amended points of claim." Counsel's concession did not end the hearing because the parties were unable to agree on the amount of the charge to be imposed as pleaded in paragraph 6 of the amended points of claim. Determination of that question by the Court required me to hear the conflicting views of valuers called by the parties and legal argument as to the basis on which the amount of the charge should be fixed. For Kim Pryer, it was argued that the charge should be measured by the expenditure on the building works; but for Paula Sirtes, it was contended that the amount spent greatly exceeded the increase in the value of the property which resulted, and that equitable principle required the charge to be limited, in such a case, to the increase in the value of the property. 12 Before turning to the valuation evidence, it is convenient to dispose of the question whether the measure of the equitable charge or lien, the imposition of which is conceded, is the expenditure on the building works or the increase in the value of the property. Although the authorities reveal a general principle, what equity requires in a particular situation, or, as it is frequently put, what will, in the view of equity, assuage the conscience of the party subjected to an equitable charge or lien, may depend upon the basis on which that charge or lien is imposed. It seems to me the basis here is not estoppel, such as was found by Deane and Dawson JJ in The Commonwealth v Verwayen (1990) 170 CLR 394 which is analysed in Giumelli v Giumelli (1999) 196 CLR 101 at 122-125, a case that turned, in the view of all the judges of the High Court, upon estoppel. What is important for present purposes is the statement of Gleeson CJ, McHugh, Gummow and Callinan JJ in the latter case (at 125), that it was "necessary…. to avoid relief which went beyond what was required for conscientious conduct by [the parties upon whose property a charge was imposed by the Court]". This may be compared with the expression chosen by Brennan J in Verwayen (at 429) "the minimum equity needed to avoid the relevant detriment" which had earlier been adopted by Scarman LJ in Crabb v Arun District Council {1976} Ch 179 at 198; by Cumming-Bruce LJ delivering the judgment of the Court of Appeal (Orr, Lawton and Cumming–Bruce L. JJ) in Pascoe v Turner [1979] 1 WLR 431 at 438; and by Mason CJ and Wilson J in Waltons Stores (Interstate) Limited v Maher (1988) 164 CLR 387 at 404. All these were cases of proprietary estoppel where, if a charge were to be imposed on the relevant property in consequence of expenditure or work done, the minimum equity would require it to be measured, as the majority held in Giumelli v Giumelli (at 126), by "the improvement to the value of the land…brought about" by the expenditure or work. 13 But, as I have said, this is not a case of estoppel. Paula Sirtes did not encourage the expenditure in question by representations, whether express or implied, from which she later withdrew. On the contrary, the expenditure was incurred, and permitted by Paula Sirtes, on the basis that the substratum of the whole arrangement, the marriage of Kim Pryer and Gregory Sirtes, would continue. It is because both the transfer, in respect of which it is now conceded Paula Sirtes is entitled to relief in equity, and the expenditure had this substratum that equity requires the return of the 25% interest transferred to be subject to the imposition of the charge. The question then is whether the measure of the charge should be any different when it is traceable to the principle for which Muschinski v Dodds and Baumgartner v Baumgartner are cited than it would be if founded upon an estoppel. The authorities treat the general rule as being the same. Knox v Knox (Young J, unreported, 16 December 1994) was a case which was not resolved on the basis of proprietary estoppel but on the principle of the two High Court cases I have mentioned. Young J said: "Equity in the current situation, where it finds that it would be unconscionable for a person to take the whole beneficial ownership without recognising a contribution of some other party, only makes the minimal order that is necessary to relieve the conscience of the legal owner… Ordinarily when there is an incontrovertible benefit provided by the person who seeks restitution against the owner of the property, the benefit is the lesser of the increase in value or the cost of providing the benefit." His Honour's approach was adopted by Beazley JA (with whom Mason P and Stein JA agreed) in Hogan v Baseden (1997) 8 BPR 15,723 at 15,726 when she described the former of the two passages I have quoted from the judgment of Young J as stating "a well established principle" and, after citing Muschinski v Dodds, Baumgartner v Baumgartner and other authorities, continued: "The principle which emerges from these cases is that the court's approach to relief is flexible, concordantly with the principle that the court will give the minimum equity necessary to relieve the conscience of the legal owner. " 14 In the analogous situation where a co-owner has expended money on the common property which is subsequently sold, it has been held that there must be made "an allowance in respect of the amount by which the value of the property has been increased, not exceeding the amount expended": Forgeard v Shanahan (1994) 35 NSWLR 206 at 223 , per Meagher JA; Houghton v Immer (No 155) Pty Ltd (1997) 44 NSWLR 46 at 56, per Handley JA; Burgess v King [2005] NSWSC 231 at [16 ]. (The last case illustrates the generality of the principle, for there it was applied in the context of an application under the Property (Relationships) Act 1984 (NSW).) 15 The question of the correct approach to the assessment of the amount of a charge based on the principle of Muschinski v Dodds (which was referred to as "the windfall equity") was the subject of extended consideration in Henderson v Miles (No2) [2005] NSWSC 867, a decision of Young CJ in Eq. His Honour stressed that "the remedy in each case is prescribed as 'the minimum equity' to assuage the defendant's conscience" (paras. 20, 62, 106), and he rejected (at para 46) "the proposition that it is an ordinary consequence in this sort of case that the plaintiff receive compensation for the value of what she has lost as opposed to the lesser of either what she has lost or what the defendant has gained by the arrangement coming to a premature end." His Honour concluded (at para 110) that the "unconscionably retained windfall," which, on the particular facts, he adjusted slightly, was $39,000, assessing that amount (at paras. 98-100) on the following basis: "What then was the windfall that would be unconscionably retained by the defendants when the relationship failed if no order were made? One way of assessing the windfall would be to say that they now have a property which is $39,000 more valuable than had the plaintiff not built her house. My earlier reasons said that this was the correct way of looking at the situation." His Honour confirmed his earlier view of the matter. 16 In the present case, I take the same view. Therefore it is necessary to turn to the valuation evidence. 17 Both valuers (Mr Field who gave evidence for Paula Sirtes, and Mr O'Connor who gave evidence for Kim Pryer) were agreed that the increase in the value of Mrs Sirtes' property as a result of the building works was much less than the amount of the expenditure. Without apportioning the contributions made by Gregory Sirtes and Kim Pryer or determining their rights inter se in respect of those contributions, the total they expended was agreed to have been $1,881,786 – 19. Nothing like as much was added to the value of the property. Indeed, a charge of that magnitude imposed on the 25% share of the property in question would more than swallow up the whole of the share, so that the fruits of the plaintiff's success in the action would be Dead Sea fruits. Kim Pryer's cross-claim, it should be appreciated, did not seek an equitable charge or lien over the plaintiff's retained 75% share of the property. 18 Mr Field considered the current value of 60-62 Balfour Road on the hypothetical basis that it remained in the condition it was in prior to the building works. He put that value at $2.85 million. I did not understand this assessment to be controversial. What was disputed was the valuation Mr Field then put upon the property in its present state, following the expenditure upon the building works which have been carried out. His valuation on this basis is $3.625 million. Accordingly, the plaintiff Paula Sirtes contends the amount of the equitable charge or lien that should be imposed on the interest to be received back by her is $775,000, being the difference between $3.625 million and $2.85 million. Mr O'Connor, on the other hand, without disputing the $2.85 million valuation asserts that the current actual value of the property is $4 million, which would bring the increase due to the building works to a figure of $1.15 million. 19 The property is in a desirable location, close to the harbour and shops, and surrounded by houses and flat buildings of various ages. At the front is Number 60, a two bedroom house built about 1920 with a single garage. Both valuers assumed a purchaser would intend to demolish Number 60. Immediately behind it is Number 62, a two-storey "contemporary" style architect designed house of glass, steel and concrete, providing three bedrooms, open plan lounge and dining room, kitchen, two bathrooms, powder room and laundry. Fixtures and fittings are comprehensive and of high quality, and there is a landscaped garden with a small in-ground pool. The living area is about 300 square metres. Three drawbacks which would adversely affect the value were noted by Mr Field in his first report: (1) Number 62 has no off street parking; (2) It has only three bedrooms; (3) Whilst the extensive use of glass has maximised the sunlight, it has also reduced the level of privacy. In his oral evidence, Mr Field emphasized that demolition of Number 60, while exposing the glass, would not enable an additional bedroom and garage to be built without a real problem of compatibility of design and materials being confronted, any solution of which, as well as of the impact on privacy, would be likely to be difficult and costly. 20 In his original valuation done as at 25 April 2005, Mr Field analysed fifteen recent sales in the area of Bellevue Hill and Rose Bay, concluding the most relevant comparable sale was a sale of 56 Balfour Road Bellevue Hill in April 2005 at $3.625 million. This was a well presented property with six bedrooms plus study, kitchen, lounge, dining, family room, three bathrooms, powder room, laundry, terrace and double garage. Mr Field considered 56 Balfour Road was superior to the subject property, the fair market value of which he assessed at that time as being $3.4 million. 21 On 24 August 2005, following an exchange of contracts (not settlement) in respect of 48 Balfour Road at a price of $4.65 million, Mr Field reviewed his earlier valuation and updated it to $3.625 million. He expressed the opinion that the subject property is inferior to 48 Balfour Road and would remain so even if Number 60 were demolished and expensive additions made to Number 62. He pointed out that 48 Balfour Road is a modern double brick house with four bedrooms, kitchen, lounge, dining, family room, study, four bathrooms plus powder room, laundry, two terraces, double garage (with internal access), pool and landscaped garden. It is indeed vastly superior, being both larger and more appealing than the subject property, looks far better from the street and is a finished project. 22 In disputing Mr O'Connor's valuation of $4 million, Mr Field, both in writing and in oral evidence, asserted there was no comparable sale in this area of a three bedroom house for $4 million. Mr O'Connor did not take up the challenge of providing any. According to Mr Field the market in this area places a value on four bedrooms and more. Under cross-examination, Mr O'Connor, while disputing the importance of four or more bedrooms, conceded he had looked for, and failed to find, a comparable sale of a three bedroom house at in excess of $3 million. 23 Mr O'Connor, like Mr Field, is a qualified valuer. Unlike Mr Field, who lives and works at Rose Bay, Mr O'Connor has his office at Parramatta, although he practises widely in the Sydney area. His initial report was dated 18 May 2005. He analysed five sales, including 56 Balfour Road and also 33 Latimer Road. The Latimer Road property sold for $4 million. Mr O'Connor referred to it as "a newly refurbished 1920's single storey brick and terracotta tile residence of approximately 330 square metres" with four bedrooms, three bathrooms, lounge/dining room, rumpus room and "solar heated in-ground pool". He considered it was comparable in location to the subject property, but the land was a "larger superior allotment." "Overall," he concluded, it was a "superior allotment and refurbished 1920's dwelling, although lacks potential of subject property." In his oral evidence, he said it was "the most directly comparable" of the five properties he considered. In addition to the features described, and unlike the subject property, it had a detached double carport. Directly asked whether it was "a superior property … to the subject property", Mr O'Connor conceded it was, although he added some qualifications including that it was "very difficult to compare with a new contemporary residence." 24 In a supplementary affidavit sworn 12 August 2005, Mr O'Connor asserted that 48 Balfour Road was "a comparable property to Balfour Road on the basis that it is of comparable location and land area, although it has a smaller frontage." "It has," he continued, "a double garage with internal access, walk-in pantry, rear family room, 4 bedrooms with large dressing room to master bedroom and 2 ensuite bathrooms" (there are actually four bathrooms in all). In a further supplementary affidavit sworn 22 September 2005, Mr O'Connor gave additional details of a number of sales he had considered, acknowledging that 48 Balfour Road was "superior to the subject property in terms of accommodation", with the qualification that it was on a smaller lot with a smaller frontage and had "a relatively bland street appeal and a narrow double garage for a property in this price bracket." Mr Field totally rejected this muted comment. He said he had inspected 48 Balfour Road and "believed this property to be superior in terms of aesthetic appeal, quality of construction, marketability, it has a larger home, it has a better home, it has a finished home … a far superior property." 25 Generally, Mr O'Connor's approach drew heavily upon his view that 62 Balfour Road would have superior qualities once Number 60 has been demolished and a large garage and additional bedroom or bedrooms have been added to Number 62. He assumed the additional building work could be done at a much lower cost per square metre than the cost of the existing building. And he was not much perturbed by the problems of design, privacy and the effect on the market of an incomplete project, to which Mr Field drew attention. In my opinion, Mr Field's assessment of the situation was more practical and his reasoning was more persuasive. A satisfactory addition to Number 62, as it stands, would have to be compatible with the nature of what is there, and inevitable problems would arise, the solution to which would be unlikely to be cheap. 26 I have come to the conclusion that I should accept Mr Field's valuation. It follows that the appropriate equitable charge is one in the sum of $775,000. The only formal order I make at this stage is that the plaintiff bring in, on a date to be fixed, short minutes of orders appropriate to be made in the light of these reasons. ********** 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.