New South Wales Supreme Court CITATION : Evolution Living Property Management Pty Ltd v CSP Australia Pty Ltd [2010] NSWSC 65 HEARING DATE(S) : 12/02/10 JUDGMENT DATE : 12 February 2010 JURISDICTION : Equity Division JUDGMENT OF : Barrett J DECISION : Separate question answered. CATCHWORDS : CONTRACTS - general contractual principles - illegal and void contracts - call option for purchase of residential property made void by statute - call option and put option created by same deed - period within which prospective vendor may put commences after period within which prospective purchaser may call - whether statutory provision making call option void affects put option - whether contract severable Conveyancing Act 1919, ss 66ZE, 66ZG LEGISLATION CITED : Conveyancing (Sale of Land) Amendment Act 1990 Uniform Civil Procedure Rules 2005, rule 28.2 CATEGORY : Separate question Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Pty Ltd (No 2) (1975) 133 CLR 331 CASES CITED : Kelly v Kosuga 358 US 516 (1959) Vam Ltd v McDonald Industries Ltd [1970] 3 NSWR 3 PARTIES : Evolution Living Property Management Pty Limited - Plaintiff CSP Australia Pty Ltd - Defendant FILE NUMBER(S) : SC 2009/00289812 COUNSEL : Mr M E Gildea, Solicitor - Plaintiff Mr R W Tregenza - Defendant SOLICITORS : Klimt & Associates - Defendant IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION BARRETT J FRIDAY 12 FEBRUARY 2010 2009/00289812 EVOLUTION LIVING PROPERTY MANAGEMENT PTY LIMITED v CSP AUSTRALIA PTY LTD JUDGMENT 1 These proceedings concern 46 deeds each of which is entitled "option deed" and is made between the defendant (therein called "Vendor") and the plaintiff ("Purchaser"). It will be convenient to refer to the parties as the Vendor and the Purchaser accordingly. 2 Mr Brett Collins is also a party to each deed but only for the purpose of guaranteeing due and punctual performance by the Purchaser. 3 Some of the deeds were made on 1 September 2008 and bear that date. The others were made on 2 September 2008 and bear that date. 4 The Purchaser seeks a declaration that each of the deeds is void and an order that the Vendor pay to it $312,500, by way of return of moneys paid by the Purchaser to the Vendor under or in connection with the deeds. 5 Now before me for determination is a question ordered pursuant to rule 28.2 of the Uniform Civil Procedure Rules 2005 to be determined separately from any other question and before trial. At the start of the hearing of the separate question this morning, Mr Gildea, solicitor, announced his appearance for the plaintiff and sought an adjournment, which I refused. Mr Gildea did not have instructions to make submissions on the separate question. I therefore heard submissions from counsel for the defendant only. 6 The separate question is: "Whether, on the proper construction of the Option Deeds as defined in paragraph 3 of the Amended Statement of Claim filed 11 August 2009 the call option purported to be granted pursuant to clause 2.1 of each of the Option Deeds, and in consequence the put option purported to be granted pursuant to clause 3.1 of each of the Option Deeds, are void, unenforceable and/or of no legal effect, by reason of section 66ZG of the Conveyancing Act 1919 (NSW)." 7 Each of the 46 deeds is in the same form, except for the description of the property to which it relates. Each contains these recitals: "A. The Vendor has agreed to grant and the Purchaser has agreed to accept a Call Option to purchase the Property on the terms and conditions contained in this Deed. B. The Purchaser has agreed to grant and the Vendor has agreed to accept a Put Option to require the Purchaser to purchase the property on the terms and conditions contained in this Deed." 8 The "Property" is, in each case, a particular lot in a strata subdivision at Narooma. 9 Clauses 2 and 3 of each deed are as follows: "2. GRANT OF CALL OPTION 2.1 Call Option In consideration of payment of the Call Option Fee by the Purchaser to the Vendor (receipt of which is acknowledged), the Vendor grants a Call Option to the Purchaser to purchase the Property. 2.2 Exercise of Call Option The Purchaser may, at any time during the Call Option Period, exercise the Call Option by: (a) delivering the Call Option Notice to the vendor; and (b) the Call Option Fee will be taken to be the deposit under the Contract. 3. GRANT OF PUT OPTION 3.1 Put Option In consideration of payment of the Put Option Fee by the Vendor to the Purchaser (receipt of which is acknowledged), the Purchaser grants a Put Option to the Vendor to require the Purchaser to purchase the Property. 3.2 Exercise of Put Option The Vendor may, at any time during the Put Option Period, exercise the Put Option by delivering the Put Option Notice to the Purchaser." 10 The definitions of "Call Option" and "Put Option" are: " Call Option means the option to purchase the Property granted in clause 2.1." " Put Option means the option to purchase the Property granted in clause 3.1." 11 There is an element of circularity in each of clause 2.1 and clause 3.1. Clause 2.1 says that the Vendor grants to the Purchaser the option to purchase the Property granted in clause 2.1; and clause 3.1 says that the Purchaser grants to the Vendor the option to purchase the property granted in clause 3.1 to require the Purchaser to purchase the Property. The sense is nevertheless sufficiently clear. Under clause 2, the Purchaser has an option to purchase, while under clause 3, the Vendor has an option to require the Purchaser to purchase; and in each case the sense of the clause is confirmed by clause 5 which, referring to an annexed form of contract for sale and purchase defined as the "Contract", says: "5.1 Formation of contract As soon as either the Put or Call Option has been exercised, a contract for the sale and purchase of the Property in the form of the Contract will immediately be taken to be operative and effective." 12 Each deed, as I have said, is dated either 1 or 2 September 2008. This has particular relevance because of the definition of "Call Option Period": " Call Option Period means the period commencing after the date of this Deed and ending at 12:00 noon on 28 November 2008." 13 "Put Option Period" is defined as follows: " Put Option Period means the period commencing at 12:01pm on 28 November 2008 and ending at 5 pm on 1 December 2008." 14 The separate question concerns the effect of s 66ZG of the Conveyancing Act 1919. That section is in these terms: "(1) An option granted for the purchase of residential property is void: (a) unless it is granted by way of exchange of counterparts, one of which is signed by the purchaser and the other signed by the vendor, or (b) if it is exercisable within 42 days after it is granted or, if a different period is prescribed, within that period. (1A) Subsection (1) (a) does not render an option void if it was granted, without an exchange of counterparts, before the commencement of the amendment made to this section by the Conveyancing Amendment Act 1997 and it was signed in duplicate by both parties. (2) If an option is void under this section, section 66ZE applies as if an effective notice of rescission of the option had been served under this Division, except that: (a) the purchaser is not liable to the forfeiture provided for under that section, and (b) that section has effect as if it provided that the whole of the consideration paid in relation to the option and the whole of any deposit paid in relation to the purchase of the property are payable to the purchaser." 15 Having regard to s 66ZG(2), it is pertinent to quote s 66ZE: "(1) On service of an effective notice of rescission in accordance with section 66ZD in relation to an option to purchase residential property, the option is to be taken to be rescinded ab initio, but subject to the rights and obligations conferred by this section. (2) The purchaser forfeits 0.25 per cent of the purchase price of the property to the vendor. (3) The amount forfeited may be recovered from any consideration paid in relation to the option or from any deposit paid in relation to the purchase of the property. (4) If the consideration or deposit is insufficient, the balance of any amount forfeited may be recovered from the purchaser as a debt in any court of competent jurisdiction. (5) The balance of the consideration or deposit remaining after deduction of any amount forfeited is payable to the purchaser. (6) Subject to subsection (7), neither the vendor nor the purchaser is liable to pay any other sum for damages, costs or expenses. (7) Either party is entitled to make a claim for: (a) such compensation, adjustment or accounting as is just and equitable between the vendor and purchaser where the purchaser has received the benefit of possession of the property, or (b) the payment of damages, costs or expenses arising out of a breach of any term, condition or warranty contained or implied in the option, but not so as to affect rights and obligations arising under this Division. (8) The vendor may agree to waive any rights regarding forfeiture under this section. (9) Stamp duty ceases to be payable on an option rescinded under this Division, and the provisions of the Stamp Duties Act 1920 relating to the refund of any stamp duty paid on a rescinded agreement for the sale of property apply in relation to any stamp duty already paid on the rescinded option. (10) In this section, "deposit" includes any amount paid by the purchaser in relation to the proposed contract attached to the option or on account of the purchase price of residential property." 16 There is, on the pleadings, an issue whether the strata lot the subject of each of the deeds is "residential property" within the statutory definition applying for the purposes of s66ZG. The Purchaser, as plaintiff, alleges in the statement of claim that the subject matter of each deed is "residential property", but the Vendor, in its defence, does not admit this. However, Mr Tregenza of counsel, who appeared for the Vendor upon the hearing of the separate question, conceded in court this morning that each lot is "residential property". I proceed on that basis. 17 That being so, there can be no doubt that the Call Option created by clause 2 of each deed is affected by s 66ZG. The Call Option is, clearly enough, what s 66ZG(1) calls "an option granted for the purchase of" the particular residential property to which the deed relates. On the footing that, as a matter of construction, the period "commencing after the date of this deed" commenced immediately upon the expiration of the day of the date that the deed bears (that date being either 1 or 2 September 2008), the option became exercisable at the commencement of the next succeeding day (that is, 2 or 3 September 2008) and remained exercisable until 12 noon on 28 November 2008. The period within which the option was capable of being exercised was therefore a period of 87 or 86 full days (plus part of 28 November 2008), and that period included the 42 days after the option was granted. 18 Having regard to the defendant's concession, each Call Option is thus of the description in s 66ZG(1)(b). Section s 66ZG(1) therefore makes it "void", with the consequences stated in s 66ZG(2). 19 That brings to the fore the second aspect of the separate question – in essence, whether, as a consequence of the operation of the statutory provisions on the Call Option, the Put Option is also "void". I am of the opinion that, essentially for reasons advanced by Mr Tregenza in his submissions on behalf of the Vendor, that question must be answered in the negative. 20 It is clear that s 66ZG(1) does not, of its own force, affect the Put Option which is not, on any view, an "option granted for the purchase of" the relevant strata lot. The question is really whether, although both were created by the same deed, the Put Option stands apart from the Call Option in such a way as to be insulated from the statutory avoidance affecting it or whether, in truth, it is caught up by that statutory avoidance. 21 Before attention is given to legal principles about "severance", it is appropriate to say something about the purpose behind s 66ZG(1)(b). The provision was introduced by the Conveyancing (Sale of Land) Amendment Act 1990. The Minister for Natural Resources said in his second reading speech in the Legislative Assembly on 21 November 1989 (Hansard, page 12923): "The existing ban on short-term options has been retained and extended to cover options exercisable within 42 days of the grant. This extension is necessary to allow grantees and their solicitors sufficient time to obtain the necessary searches and certificates to test the vendor warranties contained in the option." 22 The legislative preoccupation was therefore with the possibility that grantees of options to purchase – that is, potential purchasers - would not have time to complete necessary investigations before having to decide whether or not to exercise the option, with the result that they might come under pressure to exercise the option (rather than lose the property) before having been able to obtain the assurance and protection that the investigations provide. This may properly be borne in mind as the question of severability is approached. 23 Courts have, in different cases, taken different approaches to the question whether part of a contract can be separated form the remainder and discarded, leaving that remainder intact. Mr Tregenza handed up and relied on paras 877 to 879 of "Halsbury's Laws of England", fourth edition reissue, Volume 9(1), in which the matter is discussed. 24 Some of the approaches taken by courts were referred to by the Privy Council in Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Pty Ltd (No 2) (1975) 133 CLR 331 at 342: "As Kitto J remarked in Brooks v Burns Philp Trustee Co. Ltd . (1969) 121 CLR 432 at p 438, 'questions of severability are often difficult'. The answer depends on the intention of the parties as disclosed by the agreement into which they have entered; but generally, of course, they have not foreseen that one or more of the provisions in their agreement will be unenforceable. Various tests have been formulated which might not in every case lead to the same result -- e.g. is that which is unenforceable 'part of the main purport and substance' of the clause in which it appears? (per Lord Moulton in Mason's Case : sub nom Mason v Provident Clothing and Supply Co Ltd [1913] AC 724 at p 745); does the deletion "alter entirely the scope and intention of the agreement?" (per Lord Sterndale MR in Attwood v Lamont [1920] 3 KB 571 at p 580); does the deletion of the covenant in question "leave the rest of the deed a reasonable arrangement between the parties" (per Denning LJ in Bennett v Bennett [1952] 1 KB 249 at p 261); does what is left constitute an "intelligible economic transaction in itself ... even though it furnished the occasion for" the unenforceable restraint? ( Kelly v Kosuga (1959) 358 US 516 at p 521)." 25 The question in that case concerned the severability of a provision that was void because it imposed an unreasonable restraint on trade. Here, by contrast, the court must judge the impact of a statutory regime that makes a particular kind of contract "void" (but not, it must be noted, illegal) and goes on to prescribe for the parties rights and obligations not only different from those created by the "void" contract but also apparently different from those that would exist if the contract were a nullity. Examination of the precise scope and operation of that statutory regime is therefore necessary. 26 Section 66ZG(1) makes "void", in the sense explained in s 66ZG(2), "an option granted for the purchase of" relevant property. The provision thus operates upon (and only upon) contractual provisions under which a prospective purchaser can compel a prospective vendor to sell, with the compulsion arising, by force of those provisions, from the unilateral choice of the prospective purchaser in the form of exercise of the contractual right to bring into existence a contact under which both are bound to a transaction of sale and purchase. 27 The consequence of the option's being void is that neither party can look to the option itself as a source of rights or obligations. The rights and obligations that the option, as a contract, would otherwise have created and allowed to be enforced are eliminated by the statute; and there arise in their place the statutory rights created by s 66ZG(2), as understood in the light of s 66ZE. 28 Section 66ZG does not attempt to encroach upon any contractual rights and obligations of the parties beyond those that constitute the "option granted for the purchase of" the particular property. It follows that, if any contractual rights and obligations remain visible after those making up the option to purchase are excluded from view and those remaining rights and obligations constitute an "intelligible economic transaction" (to use words in Kelly v Kosuga 358 US 516 (1959) quoted by the Privy Council), that transaction is not affected by the statute. 29 I return to the parties' agreement as evidenced by each deed. The effect of clause 2 and associated provisions was that the Purchaser had a right to compel the Vendor to become party to a contract for sale and purchase with the Purchaser but that right was exercisable by the Purchaser only during the period beginning on the day immediately after the date of the deed and ending at 12 noon on 28 November 2008, at which point the right ceased to exist. Under clause 3, the Vendor had a right to compel the Purchaser to become party to a contract for sale and purchase with the Vendor but that right could not be exercised before 12.01 pm on 28 November 2008 (and remained available thereafter until 5pm on 1 December 2008). 30 The structure of the deed makes it plain that the clause 3 right of the Vendor could not be exercised if the clause 2 right of the Purchaser had been exercised at or before 12 noon on 28 November 2008 (or at some earlier time within the clause 2 period). The availability of the clause 3 right for exercise by the Vendor thus arose only if no contract for sale had come into existence beforehand through exercise by the Purchaser of the clause 2 right. 31 In the events that happened, the Purchaser did not exercise the clause 2 right. Because of s 66ZG(1), there was, in any event, no clause 2 right capable of being exercised in the eye of the law. 32 Absence of a contract for sale and purchase created by exercise of the clause 2 right during the period ending at 12 noon on 28 November 2008 was, according to the parties' bargain, a circumstance that caused the clause 3 right to be exercisable by the Vendor between 12.01 pm on 28 November 2008 and 5pm on 1 December 2008. The reason for that absence is not a material consideration. To that extent, the operation of the statute was of the same quality as a simple decision of the Purchaser not to exercise the clause 2 right, whatever the reason for that decision may have been. The fact of non-exercise by the Purchaser put the clause 3 right at the disposal of the Vendor. 33 For these reasons, the conclusion must be that the impact of s 66ZG was not such as to make void or otherwise render unavailable to the Vendor the right created by clause 3 to cause the Purchaser to become party to a contract for sale and purchase. Nor, I might add, would the exercise of that right by the Purchaser itself between 12.01pm on 28 November 2008 and 5pm on 1 December 2008 have entailed pressure upon the Purchaser of the kind that Parliament sought to forestall by enacting s 66ZG. 34 It is important to note that this is not a case of statutory illegality. Section 66ZG does not prohibit the creation of the particular type of option or visit penal consequences upon someone who grants or takes such an option. It merely changes what would otherwise have been the parties' contractual rights and obligations. There is accordingly no need to consider the question of the reach of a statutory prohibition or to entertain the possibility that, as a matter of public policy (and to adopt words used by Street J in Vam Ltd v McDonald Industries Ltd [1970] 3 NSWR 3), "the illegality involved in the [contravening aspect] . . . will taint the whole transaction". 35 Finally and by way of confirmation of what I have found to be the position in any event, I note clause 23 of each deed to which Mr Tregenza drew my attention. That clause is in these terms: "If any part of this Deed is invalid or unenforceable, this Deed does not include it. The remainder of this deed continues in full force." 36 The parties have thus anticipated eventualities of the kind in fact produced by s 66ZG in relation to clause 2 and have prescribed the consequence that, on my analysis, emerges in the absence of that adoption. 37 The separate question is answered as follows: "The call option granted pursuant to clause 2.1 of each of the Option Deeds is rendered void by s 66ZG(1) of the Conveyancing Act 1919, with the consequence that s 66ZG(2) applies to and in relation to that call option; but the said s 66ZG(1) does not make void or unenforceable or deprive of legal effect the put option granted pursuant to clause 3.1 of the Option Deed." ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. 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