Here's a round-up of some useful lessons for the real estate industry around frustration of commercial leases and contracts, setting aside valuations, and effective cause of sale. Siobhan Luck, a lawyer in our Litigation team, highlights some recent cases.
The New South Wales Supreme Court recently looked at frustration in the context of a commercial lease and a contract of sale for a hospitality venue.
Frustration occurs when a contract or other agreement is incapable of being performed through no fault of either party.
In Gazcorp v Woolworths, the parties entered a lease contingent upon construction of a new building. The owner obtained development approval to allow for construction, and later applied to vary it.
Ultimately, the variation application was rejected, and the development approval lapsed.
The court said as there was no development approval on foot at the time of the trial, there were no lawful means by which the tenant could trade from the premises. This meant the lease had been frustrated and come to an end.
Another case, Dyco Hotels v Laundy Hotels, concerned a contract for the purchase of Quarrymans Hotel in Pyrmont as a going concern. Between the date of contract and settlement, the vendor was required to carry on the business in the "usual and ordinary course".
Prior to settlement, the government issued public health orders restricting the Hotel to takeaway sales and delivery, which led to a decline in the value of the business by $1 million. The buyer attempted to escape the contract by arguing it had been frustrated.
The court found there was no frustration of the contract as the main purpose of the contract was a sale and transfer of assets for an agreed price. The obligations to carry on the business were ancillary to this purpose. Further, the contract did not contain any warranties about the future income of the business.
In Harmon International Holdings v Pashon Electrical, a commercial agreement provided for a named valuer to undertake a valuation of two properties. The parties were required to accept the valuation unless there was a 'manifest error'. That term was not defined in the agreement. One of the parties to the agreement was unhappy with the valuations, particularly because the valuer had used comparable properties which were inferior in size, zoning, and gross lettable area to the subject property.
The New South Wales Supreme Court said 'manifest error' means an 'error that is apparent to the understanding of the reader'. It did not find the scale of the error needed to be significant; rather, that it could extend to clear and obvious errors of any category which a reader could identify from the face of the valuation report themselves.
Ultimately, the court said the valuer's use of the comparable properties in question defied 'any rational or logical explanation' and resulted in a manifest error.
In Century 21 Plateau Lifestyle Real Estate v Hall, the court had to determine whether a mere introduction by an agent of a purchaser, without involvement in negotiating the ultimate transaction, was the 'effective cause of the sale'.
The vendor had signed listing authorities with two different agencies. The first agent introduced a buyer to the property and assisted the buyer to make an offer which was rejected. The agent went overseas without leaving anyone else from the agency in charge of the negotiations.
A second agent from another agency subsequently secured a contract between the vendor and the same purchaser at a higher price.
The court said the first agent was not entitled to commission as the mere introduction of a purchaser to a property was insufficient to be the 'effective cause' of the sale. This was particularly the case where the sale was extinguished or exhausted after the introduction, but later revived by the actions of another agent.