Harris v Prigg[2008] QDC 236

DISTRICT COURT OF QUEENSLAND

Introduction

1. [1]
   On 23.3.07, Mr. Prigg (the defendant) sold his unit in the Whitsunday Vista Resort at Airlie Beach to Mr. Harris and Mr. Maher (the plaintiffs) for $415,000. The property sold is described in the contract as Lot 18 on SP121164…title reference 50277604. A deposit of $40,000 was paid and it is common ground that the contract was to be settled on 26.4.07. On that day the plaintiffs solicitor purported to terminate the contact pursuant to Clause 7.5 of the standard terms and conditions of the contract on the ground that “there (was) an encroachment by structures from  the Lot onto an adjoining property which is material”, and demanded return of the deposit. The defendants solicitors had (prior to receipt of this letter) on 26.4.07 notified the plaintiffs solicitors that their client was ready, willing and able to complete at 4:00 p.m. that day at a bank in Maroochydore. On 29 January 2008, (after these proceedings had been commenced), the defendants solicitors accepted what they describe as the “wrongful repudiation of the contract”, and elected to accept the termination and forfeit the deposit. The plaintiff now claims the return of the deposit, and the defendant in turn counterclaims for the deposit monies which have been paid into court.

The Dispute

2. [2]
   The dispute focuses on Clause 7.5 of the contract which is in these terms:

“7.5 Survey and Mistake

1. (1)
   The buyer may survey the Lot.
2. (2)
   If there is:

   1. an error in the boundaries or an area of the Lot;
   2. an encroachment by the structures onto or from the Lot; or
   3. a mistake or omission in describing the Lot or the Seller’s title to it;

which is

4. immaterial; or
5. material, but the Buyer elects to complete this contract;
6. the Buyer’s only remedy against the Seller is for compensation, but only if claimed by the Buyer in writing on or before settlement.

3. (3)
   The Buyer may not delay settlement or withhold any part of the Balance Purchase Price because of any compensation claim under clause 7.5(2).
4. (4)
   If there is a material error, encroachment or mistake, the Buyer may terminate this contract before settlement.”

3. [3]
   Messrs Harris and Maher argue that an encroachment of a pool built on the common property of the Whitsunday Vista Resort onto an adjoining lot is:

“an encroachment by (a structure)

… from the Lot…

which is

(e) material;….”,

which entitles them, pursuant to 7.5(4) of the Contract, to terminate the contract prior to settlement.

4. [4]
   Mr. Prigg argues that any encroachment onto the adjoining property of the pool built on the common property is not “an encroachment…from the Lot”, because as a matter of law the term “the Lot” in Clause 7.5 does not include the common property. He also argued that the encroachment was not “material” in that the evidence adduced by Messrs Harris and Maher was not enough to establish this on the balance of probabilities.

5. [5]
   Before coming to the issues in dispute I should first deal with the relevant factual background and what I shall term a “side issue” which I raised with Mr. Nevison early in the hearing.

The factual scenario

6. [6]
   There is really no factual dispute, nor are there any credibility issues to be resolved.

7. [7]
   The uncontested evidence establishes that on 13 April 2007, Oric Legal, on behalf of the plaintiff purchasers, requested Prime Legal Services to “arrange an Inspection of Body Corporate Records Search” (sic). Prime Legal Services provided the information to Oric Legal on or about the 23.4.07.

8. [8]
   Included in the search (Exhibit 8) was reference to an encroachment of the pool area in the Whitsunday Vista Resort onto the adjoining property which I will refer to as Blue Horizons. The search contains a number of emails and a survey which appears to have been notified to the Body Corporate in mid-late March 2007.

9. [9]
   The survey contained in the search of the Body Corporate is similar to Exhibit 2 which is a detailed survey dated 30.5.07, which shows an encroachment from the Whitsunday Vista Resort pool area (part of the common property) into the Blue Horizons property of an area of 93m². Although the survey in the records does not include the area and the more detailed measurements in Exhibit 2, it is nevertheless obvious that there was an encroachment.

10. [10]
    On the 26^th April 2007 Oric Legal (on behalf of  the plaintiffs) wrote to Ferguson & Cannon (sic) Solicitors for the defendant (relevantly) in these terms:

“We advise that as a result of a physical inspection of body corporate records the buyer has become aware that an encroachment from the subject property to the neighbouring property exists and clause 7.5 of the Standard Terms and Conditions of the contract applies. This letter is a Notice of Compensation under that clause.             

On the material available to the buyers it is not clear if the encroachment is material or immaterial. The buyers elect to proceed to settlement and claim compensation              from the seller”

11. [11]
    It is common ground that the letter was faxed at 11:58am on the 26^th April.

12. [12]
    The letter went on to propose a basis for compensation.

13. [13]
    Ferguson Cannon responded on the same day (time not stated but prior to 3:54 p.m.)(relevantly):

“I note your client is of the opinion there is an encroachment and that your client elects to complete this Contract.

I refer to clause 7.5(3) which provides your client “may not delay settlement or withhold any part of the balance purchase price because of any compensation clause under clause 7.5(2).”

Your client has elected to complete the contract.

I advise our client is ready, willing and able to effect completion today. I advise the date, time and place of settlement is today at 4.00pm at the National Australia Bank, 17 Carnaby Street, Maroochydore.”

14. [14]
    At 3:54 p.m. Oric Legal responded (relevantly) in these terms:

“The buyers have become aware that there is an encroachment by structures from the Lot onto an adjoining property which is material.

Pursuant to clause 7.5 of the Standard Terms and Conditions of the Contract the buyers hereby terminate the contract and demand repayment of the deposit monies”

15. [15]
    I will deal with the side issue first.

16. [16]
    It appeared to me that upon a proper construction of clause 7.5(2)(e) it was open to Mr. Prigg to argue that once Messrs Harris and Maher elected to complete the contract as a result of the letter faxed at 11:58a.m., the only remedy was for compensation, and they could not delay the settlement as a consequence of 7.5(3). Mr. Nevison has not pleaded his clients case thus, and expressly confirmed that Messrs Harris and Maher could act under Clause 7.5(4).

Discussion of the Issues

17. [17]
    1. Was there a material encroachment.

1. (a)
   It is not expressly admitted that there was an encroachment from the common property onto the adjoining Lot. That there was at the time the contract was made, is clear from Exhibit 2. Part of the pool and surrounds supported on the boundary with Blue Vistas property by a 14.325 metre long brick wall encroaches by an area of 93m² onto the adjoining property.
2. (b)
   Was it “material”? Obviously this term is not defined in the contract so it should be given its ordinary and common meaning. Relevantly, the word is defined in The Macquarie Dictionary as “of substantial import or much consequence”. It is clearly a question of fact to be determined in the context of the particular case.

Both Counsel referred by analogy to the analysis of Mullins J in Shadbolt v Wise [2002] QSC 348 in which her Honour was considering an application for relief under s. 182(1) of the Property Law Act 1974. The applicants had constructed a pool and enclosure on a Lot which encroached onto the respondents land involving an area of approximately 108m². Her Honour was able to say that the structure was elaborate as a result of a series of photographs tendered.

For the purposes of such an application, “encroachment“ meant “encroachment by a building” and “building” was defined as “a substantial building of a permanent character.”

By looking at the elaborate nature of the structure, its siting to take advantage of views and other factors, her Honour was able to proceed on the basis that the pool and enclosure constituted an encroachment. Indeed that was not an issue joined between the parties to that dispute. Her Honour’s judgment was the subject of an unsuccessful appeal: Shadbolt & Anor v Wise & Anor [2003] QCA 241 which does not bear on the issue before me.

18. [18]
    More directly, I was referred to Coghill v Le Borgue [1983] 2 Qd R 552 a decision of Derrington J. The contract there was a standard REIQ Contract for the sale and purchase of freehold land which included a clause 7 in similar but not the same terms to Clause 7.5. The standard clause there did not refer to an encroachment from the subject land onto adjoining land but his Honour construed the clause to include such an encroachment.

19. [19]
    The claim was for summary judgment for specific performance; the defendants refusing to settle on the basis that there were substantial encroachments both upon and off the subject land as a result of a dividing fence comprising in part a wall, which was not on the boundary line but transacted it at an acute angle so that about two-thirds of that part of the line was on the subject land and about one-third of it on that of the next door neighbour. His Honour described it as a “give-and-take fence line.”

20. [20]
    His Honour, in granting specific performance, held that the relevant encroachments “are so slight and trivial that they do not attain the measure of a material or substantial nature required by paragraph 7 of the contract.”

21. [21]
    The facts here are indeed few. I have referred to the survey. There are no photographs and given the amount of money involved in the claim this is perhaps understandable.

22. [22]
    The plaintiffs called Christine Eccles who is and was the manager of Body Corporate Services, which in turn manages the Body Corporate of the Whitsunday Vista. The Body Corporate has resolved to purchase the land the subject of the encroachment which will result in a cost to the owner of Lot 18 of $5,906.22.

23. [23]
    Mr. Nevison argues that as this is in fact 1.4% of the purchase price, it should be regarded as “slight and trivial” and not material. On the evidence the relevant facts are:

1. (1)
   the area of the encroachment when compared to the whole area of the Blue Horizons land (Exhibit 2)
2. (2)
   the fact that the structure (inferentially) does not encroach in such a way as to adversely affect any existing structures on the adjoining land (Exhibit 2) which is further confirmed by the apparent agreement to sell the land the subject of the encroachment to the Whitsundays Vista Body Corporate.
3. (3)
   The cost to the owner of Lot 18.

24. [24]
    Clause 7.5(2)(d) and (e) draws a distinction between an immaterial encroachment and a material encroachment both of which are amenable to a compensation claim.
25. [25]
    On the evidence, I am not satisfied on the balance of probabilities that the encroachment was “material” in the sense in which that term is used in Clause 7.5 of the Contract.

26. [26]
    2. Was there “an encroachment…from the Lot”?

“Lot” is not defined in the contract. It is common ground that the functional definition is that contained in the Land Title Act 1994, namely;

“…a separate, distinct parcel of land created on –

…….

(b) the recording of particulars of an instrument;…”

27. [27]
    Ms. Anderson submits that a transfer of Mr. Priggs interest in Lot 18 includes as a matter of law, his interest in the common property by virtue of s. 35 of the Body Corporate and Community Management Act 1997 (the Act):

“35 Ownership of common property

1. (1)
   Common property for a community titles scheme is owned by the owners of the lots included in the scheme, as tenants in common, in shares proportionate to the interest schedule lot entitlements of their respective lots.
2. (2)
   Subsection (1) applies even though, under the Land Title Act, the registrar creates an indefeasible title for the common property for a community titles scheme.
3. (3)
   An owner's interest in a lot is inseparable from the owner's interest in the common property.

Examples--

1 A dealing affecting the lot affects, without express mention, the interest in the common property.

2 An owner can not separately deal with or dispose of the owner's interest in the common property

……………….”

28. [28]
    Mr. Nevison submits to the contrary having regard to the overall purpose of the Act. He submits that “the Lot” referred to in Clause 7.5 does not include the common property but only the “separate, distinct parcel of land…created on the recording of (the instrument)” a copy of which is contained in Exhibit 5, the real property description of Lot 18.

29. [29]
    Neither counsel was able to find any case on point although both refer to some authorities by analogy.

30. [30]
    To fully comprehend Mr. Nevisons argument it is necessary to consider various provisions in the Act which he calls in aid of his submission.

31. [31]
    A “community titles scheme” is defined in s. 10 of the Act (relevantly) as:

“10 Meaning of community titles scheme

1. (1)
   A community titles scheme is--

1. (a)
   a single community management statement recorded by the registrar identifying land (the scheme land); and
2. (b)
   the scheme land.

1. (2)
   Land may be identified as scheme land only if it consists of--

1. (a)
   2 or more lots; and
2. (b)
   other land (the common property for the community titles scheme) that is not included in a lot mentioned in paragraph (a).

1. (3)
   Land can not be common property for more than 1 community titles scheme.
2. (4)
   For each community titles scheme, there must be--

1. (a)
   at least 2 lots; and
2. (b)
   common property; and
3. (c)
   a single body corporate; and
4. (d)
   a single community management statement.

1. (5)
   A community titles scheme is a basic scheme if all the lots mentioned in subsection (2)(a) are lots under the Land Title Act.
2. (6)
   However, under this Act, a lot may be, for its inclusion in a community titles scheme other than a basic scheme, another community titles scheme.”

32. [32]
    In relation to sub-section 2(b), Exhibit 7 contains the registration details of the common property and, as required by the Act, does not include any of the land contained in Lot 18. The registered proprietor of the common property is the Body Corporate.

33. [33]
    In relation to sub-section 1(a), Exhibit 6 is a copy of the request to register the first Community Management Statement.

34. [34]
    S. 30 provides that when a community title scheme is established, a body corporate is created, and is the body corporate for the scheme, and s. 31 provides that the owners of all the lots in the scheme are to be members of the body corporate.

35. [35]
    I have referred earlier to s. 35 upon which the plaintiffs primarily rely in support of their case.

36. [36]
    S. 36 deals with the rights of the body corporate to sue and be sued for rights and liabilities related to the common property as if the body corporate were the owner.

37. [37]
    Chapter 5 of the Act deals with sale of lots.
38. [38]
    S. 206 imposes an obligation on the seller of a lot to give a proposed buyer a disclosure statement which must disclose the matters set out in s. 206(2). S 206(2)(6) requires the seller to provide to the buyer an information sheet and warning statement as required under named sections of the Property Agents and Motor Dealers Act 2000.

39. [39]
    It is common ground that Mr. Prigg complied with these provisions.

40. [40]
    Relevantly, he discloses no latent or patent defects or contingent or expected liabilities of the Body Corporate in his s 206(2) disclosure.

41. [41]
    It is not suggested that he knew about the encroachment at the time of the execution of the contract or by the time of the completion date on the 26^th April. On the basis of Mr. Eccles’ evidence it appears that the first notice of it to Mr. Prigg was in an agenda forwarded to Lot owners prior to a general meeting on 31.5.07 which he did not attend. Minutes of the meeting in which the issue was raised were sent to him in June. It is not suggested that Mr. Prigg ought reasonably to have known of the encroachment prior to sometime in May 2007. It was not submitted (for example) that he must have known of the buyers concerns as a result of the letters on 26 April and should have reasonably checked with the body corporate himself that day. As required by s. 207, the disclosure statement was included in the contract. S. 209(1) entitles a buyer to cancel a contract prior to settlement if:

1. “(b)
   at least 1 of the following applies--

1. (i)
   the disclosure statement is inaccurate, and the buyer would be materially prejudiced if compelled to complete the contract, given the disclosure statement's inaccuracy, but only to the extent that the disclosure statement was inaccurate when the contract was entered into;
2. (ii)
   despite reasonable efforts by the buyer, the buyer has not been able to verify the information contained in the disclosure statement; and …”

42. [42]
    S. 223 sets out a number of warranties that are implied in a contract for the sale of a lot. Relevantly, s. 223(2) provides:

1. “(2)
   The seller warrants that, as at the date of the contract--

1. (a)
   to the seller's knowledge, there are no latent or patent defects in the common property or body corporate assets, other than the following--

1. (i)
   defects arising through fair wear and tear;
2. (ii)
   defects disclosed in the contract; and

1. (b)
   the body corporate records do not disclose any defects to which the warranty in paragraph (a) applies; and
2. (c)
   to the seller's knowledge, there are no actual, contingent or expected liabilities of the body corporate that are not part of the body corporate's normal operating expenses, other than liabilities disclosed in the contract; and
3. (d)
   the body corporate records do not disclose any liabilities of the body corporate to which the warranty in paragraph (c) applies.

1. (3)
   The seller warrants that, as at the completion of the contract, to the seller's knowledge, there are no circumstances (other than circumstances disclosed in the contract) in relation to the affairs of the body corporate likely to materially prejudice the buyer.

Examples for subsection (3)--

1 An administrator has been appointed under the order of an adjudicator under the dispute resolution provisions.

2 The body corporate has failed to comply with the provisions of this Act to the extent that its affairs are in disarray, records are incomplete and there is no reasonable prospect of the buyer finding out whether the warranty mentioned in subsection 2(b) has been breached.

1. (4)
   For subsection (2), a seller is taken to have knowledge of a matter if the seller has actual knowledge of the matter or ought reasonably to have knowledge of the matter.”

43. [43]
    S. 224 provides rights to a buyer for breach of any of these implied warranties.

44. [44]
    S. 224 provides:

“224 Cancellation for breach of warranty

1. (1)
   The buyer may, by written notice given to the seller, cancel the contract if there would be a breach of a warranty established under this part were the contract to be completed at the time it is in fact cancelled.
2. (2)
   A notice under subsection (1) must be given--

1. (a)
   if the lot is a proposed lot--not later than 3 days before the buyer is otherwise required to complete the contract; or
2. (b)
   if paragraph (a) does not apply--within 14 days after the later of the following happen—

1. (i)
   the buyer's copy of the contract is received by the buyer or a person acting for the buyer;
2. (ii)
   another period agreed between the buyer and the seller ends.

1. (3)
   If the buyer cancels the contract, the seller must repay to the buyer any amount paid to the seller (including the seller's agent) towards the purchase of the lot the subject of the contract.”

45. [45]
    There was no evidence as to the date referred to in s. 224(2)(b)(i) apart from the date of the contract itself. What is clear is that Oric Legal did not commission a Body Corporate Search until April 13^th, and by the time the search was received on 23.4.07 (See EX HMM2 to Ms. Mumford’s affidavit sworn 23.10.08 and filed by leave at the hearing), the date for giving notice under s. 224 had probably passed.

46. [46]
    When looked at as a whole the Act provides a statutory scheme to protect buyers of lots which apply in addition to, and not in derogation of, any contractual rights a buyer may have.

47. [47]
    I was initially troubled by the concept that a Lot owners transfer of his interest in the Lot did not include his or her interest in the common property. Indeed Ms. Anderson’s submission is that a proper construction of s 35(3) of the Act permits no other interpretation.

48. [48]
    Mr. Nevison’s response is that it is clear as a matter of law that the defendant, as the registered owner of Lot 18 had no legal title to the Common Property and no individual control of it. He argues that s. 35(3) has to be read conjuctively so that the Lot owner’s interest (and not title) in the Lot is inseparable from the lot owner’s interest (not title) in the Common Property. In other words, to maintain the integrity of a community titles scheme, it is fundamental that common property held by owners of the Lots included in the scheme from time to time should not be separated. He argues that s 35(1)-(3) creates an interest in the common property as a tenant in common with other Lot owners and cannot (having regard to the overall purposes of the Act) merge a Lot owners interest in the common property (created by s. 35) into the owner’s legal title to a Lot.

49. [49]
    The contract itself conventionally follows the scheme of the Act; incorporating the sellers disclosure obligations required by the Act, and makes a distinction in terms between the Body Corporate and the “property” sold which is the Lot. “Property” is defined in the contract as:

“(1) The Lot

(2) the improvements; and

(3) the included Chattels”,

and makes no reference to the sellers interest in the common property as    set out in s. 35.

50. [50]
    As I have noted, neither Counsel has been able to refer me to any case on point, however both have referred to the recent decision of the Court of Appeal in Menitti & Ors v Winn & Anor [2008] QCA 66. The case concerned the proper construction of s. 206 of the Act relating to disclosure statements, and is clearly distinguishable from the case here.

51. [51]
    The purposive approach to construction of s. 206 (and by analogy s. 35 in this case) was adopted by Muir JA (with whom Keane and Fraser JJA agreed while adding additional reasons) in paragraphs [24]-[27] of his Honour’s reasons and informs the approach that I should take here.

52. [52]
    Keane JA (at[6]) wrote:

“The body corporate is a legal person with its own obligations, separate and distinct from those of individual lot owners.”

53. [53]
    Construction of s. 35 in isolation favours the construction contended for by the plaintiffs, however adopting the correct approach supports the argument advanced by Mr. Nevison. The contract itself recognises the distinction between the interests of the Body Corporate and the individual Lot owner’s obligation to comply with the Act in relation to disclosure of matters relevant to the Body Corporate and the Common Property; and the obligations of the Lot owner in relation to his legal interest and title in the individual Lot.

54. [54]
    If the plaintiffs solicitors had undertaken the body corporate search at an earlier date, it may have been possible to give a notice cancelling the contract pursuant to s. 224(2)(b) of the Act.

55. [55]
    On the proper construction of clause 7.5 of the contract, I hold that it did not permit the plaintiffs to terminate on the grounds of material encroachment onto adjoining property from the common property.

56. [56]
    The plaintiffs claim is dismissed and I give judgment for the defendant on his counterclaim. I will hear the parties on costs and the appropriate minutes of order to follow as a result of my reasons.