Muller v Zielonkowsky[2006] QSC 265

SUPREME COURT OF QUEENSLAND

[1] MULLINS J:  The applicant and the respondent are the registered owners as joint tenants of Lot 36 on RP114265 in the County of Stanley Parish of Redland (“the property”), having been registered since 2 October 1995.  The parties had been in a relationship since in or about 1993 and separated in September 1998.  When this proceeding was originally commenced, the applicant applied for a property adjustment order under Part 19 of the Property Law Act 1974 (“PLA”).  This was not appropriate as the relationship between the applicant and the respondent had ended before the commencement of Part 19 of the PLA.  An amended originating application was filed in which the applicant substituted a claim for relief under s 38 of the PLA and sought the determination of the parties’ respective interests in the property pursuant to s 42 of the PLA. 

History of the dealings in relation to the property

[2] The parties completed their purchase of the property on 26 September 1995.  The purchase price was $103,000.  The parties borrowed $98,000 plus an additional amount to meet borrowing expenses from the Advance Bank Australia Limited (“the bank”).  To obtain the deposit for the house and to contribute to the purchase the applicant had sold a car and ski boat which netted $4,500 and the parties borrowed about $3,000 from the respondent’s parents.  The parties were both employed fulltime.  At that stage the applicant was earning approximately $750 per week and the respondent was earning “a few hundred dollars per week”.

[3] The parties had a joint account linked to their loan into which they each made payments from which the loan repayments were debited.  The applicant has prepared a schedule of deposits made by the parties to their joint account.  It shows that between 28 September 1995 and 15 April 1998 the applicant deposited $7,551.15 and the respondent deposited $7,310.80.  The parties used the funds in their joint account to pay for the rates and insurance for the property and food and household expenses.  They also repaid the amount borrowed from the respondent’s parents.  They otherwise kept their finances separate. 

[4] From about April 1998 the respondent reduced her contribution towards the mortgage repayments to $50 per week and from this time the applicant was paying all rates and insurances. 

[5] According to the applicant, the respondent left the property in September 1998, returned a week later to take some of her belongings, they argued and the respondent left with her furnishings and personal items.  In September 1998 the balance outstanding under the loan was about $90,000. 

[6] In December 1998 the applicant met a woman who was to become his wife and consulted solicitors about resolving the interests of the parties in the property.  On 2 December 1998 there was a further drawdown on the loan secured over the property for the sum of $3,000.  That was used to purchase decking and materials for renovations to the property.   

[7] The applicant received a letter from solicitors acting for the respondent dated 18 February 1999 in which it was proposed by way of finalising the parties’ financial relationship that the respondent would transfer her interest in the property, subject to the mortgage, to the applicant for the sum of $15,000.  The applicant made a counter offer of $4,000.  The respondent’s solicitors then advised that they were no longer acting for the respondent and gave the applicant’s solicitors an address for her at Woodridge.  By letter dated 22 March 1999 the applicant’s solicitors requested the respondent to respond to the offer of $4,000 made by the applicant.  The applicant’s solicitors sent a further letter to the respondent dated 24 May 1999 increasing the applicant’s offer to $6,000.

[8] In April 1999 the applicant’s new partner moved into the property to live with him.  They were married in November 1999.  Whilst living together in the property they carried out further renovations to the property.  They spent about $2,000 on carpets and floor coverings.         

[9] In a letter dated 1 June 1999, another firm of solicitors advised the applicant’s solicitors that they now acted for the respondent and were seeking instructions in respect of the letter from the applicant’s solicitors dated 24 May 1999.  The applicant’s solicitors attempted to communicate with the respondent’s solicitors between June and August 1999, but received no response.  A letter dated 16 September 1999 was forwarded by the applicant’s solicitors to the respondent’s last known address in Woodridge enclosing a copy of their letter dated 24 May 1999 and seeking a response.

[10] By early 2000 the renovations to the property had been completed and the applicant and his wife moved out of the property.  The applicant was inadvertently given an address for the respondent at Crestmead by the bank in 2000.  The applicant drove past the property and verified that the respondent was living there. The matter of negotiating an agreement with the respondent was not advanced further by the applicant’s solicitors at that time.

[11] No further action was taken by the applicant to locate the respondent until February 2004 when he consulted his current solicitors after he received information that the respondent may have resided at an address at Forest Lake. The applicant’s solicitors sent a letter to the respondent at that address.  When no response was received, the applicant’s solicitors instructed their commercial agent to attend that address.  The commercial agent’s report dated 24 August 2004 records that the commercial agent was informed by the current tenant at the address and neighbours that the respondent had not been at the address for about two years.  The commercial agent’s searches of electoral rolls, white pages and a credit reporting agency did not locate the respondent.   

[12] The property has been rented from at least March 2001.  The applicant has used the rents to pay the mortgage repayments, rates, insurance and other expenses incurred in maintaining the property.  A number of items have required replacement.  The applicant has paid for a new cook-top, swimming pool filter, pool fence, right-hand boundary fence, bathtub and curtains and a full electrical rewire. 

[13] For the purpose of this application the applicant has prepared comprehensive schedules for each financial year from 1 July 1989 until March 2006 in which each payment under the mortgage, receipt of rent and expense paid in respect of the property has been itemised.  These schedules are supported by copies of the source documents, such as bank statements, cheque butts, receipts and invoices. 

[14] The total amount of rent received by the applicant until March 2006 has been about $50,000.  Between separation and March 2006, the applicant has made payments under the mortgage of approximately $92,000, and in that time the principal under the mortgage has been reduced by about $14,000.  The applicant has also paid during the same period about $27,000 for rates, maintenance and other expenses for the property.

[15] Because of the applicant’s inability to locate or contact the respondent, the applicant has been prevented from dealing with his interest in the property, other than by renting the property.  It is noted in the written submissions of Ms Kellie of Counsel on behalf of the applicant (exhibit 1) that the applicant has had the taxation benefits that accrue from negative gearing, as a result of renting the property.

Service of the application

[16] The applicant’s originating application was filed on 7 December 2005.  The applicant obtained an order from Fryberg J on 22 December 2005 permitting the amended originating application and the supporting affidavits of the applicant to be effected by way of substituted service by inserting a notice in the public notices section of “The Australian” newspaper on each of two occasions separated by one week.  The form of notice was set out in the order.  That notice was published on 14 and 21 February 2006.  The notice informed the respondent that copies of the application and affidavit could be obtained by contacting Mr Mole of the applicant’s solicitors.  Mr Mole did not receive any inquiries in response to the notice. 

[17] The notice of the application described the order that was being sought by the applicant as a declaration as to the extent of the interests of the applicant and the respondent in the property and for statutory partition of the property in accordance with the court’s declaration as to each co-owner’s respective interest and sale to the applicant of the respondent’s interest in the property.    

[18] The property is a residential urban allotment containing an area of 607m².  Partition of interests (requiring the physical division of the relevant property to reflect the parties’ respective interests) which can be ordered under s 38 of the PLA is not what the applicant is truly seeking.  The applicant is seeking the appointment of statutory trustees for sale which can also be ordered pursuant to s 38 of the PLA.  The fact that the notice did not identify correctly the exact nature of the relief that the applicant was seeking under s 38 of the PLA does not require re-service, as the respondent was given sufficient notice of the applicant’s intention to seek relief that would quantify and deal with her interest in the property.

[19] When the application came on for hearing on 21 March 2006, the respondent was called, but there was no appearance by her or on her behalf.

[20] During the hearing of the application, I was concerned that the searches that had been undertaken unsuccessfully to locate the respondent were done no later than August 2004.  I therefore required current searches to be undertaken in an endeavour to locate the respondent.  During April 2006 a commercial agent retained by the applicant’s solicitors was unsuccessful in locating the respondent after searching national electoral rolls, national electronic white pages, credit files and the internet and undertaking other database searches accessible by commercial agents.  The applicant’s solicitors undertook searches of marriage and death records in each of the States and Territories which were also unsuccessful in locating any record relating to the respondent.  The further affidavits dealing with these searches were provided in June 2006.     

[21] The applicant in his affidavit filed on 7 December 2005 set out his knowledge of the respondent’s family and stated “I have attempted to locate Adele through old friends and contacts without success.”  I was also concerned during the hearing of the application that the applicant had not expanded upon what inquiries he had made through these old friends and contacts in his endeavour to locate the respondent and had not disclosed whether he had made any attempts to locate the respondent through her brother and sister.  The applicant has sworn a further affidavit on 6 September 2006 in which he sets out the inquiries about the respondent he made of named friends during 2004 and 2005.  The applicant has also deposed to the fact that throughout the period of his relationship with the respondent he did not have any direct contact with the respondent’s brother, never knew the whereabouts of the respondent’s brother and has been unsuccessful in a White Pages search throughout Australia under the name Zielonkowsky in locating an entry for the respondent’s brother.  The applicant has deposed to visiting the address which he had for the respondent’s sister and finding that the block of units where she had been living had been demolished and the site redeveloped.  The applicant’s White Pages search for the respondent’s sister was also unsuccessful.

[22] On the basis of all the searches that have now been undertaken in relation to locating the respondent, I am satisfied that the respondent has been unable to be located and that it is appropriate to proceed to determine this application in her absence.

Whether appropriate to exercise jurisdiction under s 38 PLA

[23] The legal interest of the respondent in the property is as the registered owner of the property with the applicant as joint tenants.  The usual purpose of an application under s 38 of the PLA for appointment of statutory trustees for sale is to enable the subject property to be vested in the trustees for sale who then proceed to sell that property and divide the net proceeds between the owners in the proportions which reflect their beneficial entitlements.  Property which is owned by persons beneficially as joint tenants can expect the net proceeds to be divided equally amongst each of the owners.

[24] Where the relationship between de facto partners has broken down (and Part 19 of the PLA has no application, as in this case), it is usual for the partner who claims a greater beneficial interest in the jointly owned property than reflected by the legal ownership to bring a proceeding that establishes the quantum of that beneficial interest, in reliance on such authorities as Muschinski v Dodds (1986) 160 CLR 583 (“Muschinski”) or Baumgartner v Baumgartner (1987) 164 CLR 137 (“Baumgartner”).  

[25] Under s 42 of the PLA the court is given additional jurisdiction in an application under s 38 of the PLA to determine any question of fact arising in the proceeding or give directions as to how such questions should be determined and direct that such inquiries be made and such accounts be taken as may in the circumstances be necessary for the purpose of ascertaining and adjusting the rights of the parties.

[26] It is that jurisdiction on which the applicant relies to seek a declaration of the extent of the parties’ interests in the property, on the basis that their beneficial entitlements differ from their registered interests as joint tenants. 

[27] The respondent had the opportunity in 1999 to pursue the negotiations which she had commenced with the applicant to dispose of her interest in the property to the applicant as part of a property settlement between them.  I am satisfied that the steps taken by the applicant in 1999 conveyed to the respondent his intention of endeavouring to resolve these matters with her.  The respondent has not only failed to pursue the resolution of her interest in the property and allowed the applicant to use the property and meet the debts incurred in respect of the property, but is now not able to be located.  It is unusual to embark on an exercise to determine the quantification of the parties’ beneficial entitlements to property without the benefit of evidence or submissions from a party whose entitlements are the subject of the exercise.  To decline to do so in this matter, however, would prejudice the applicant.

Valuation of the property

[28] The applicant obtained an appraisal from a real estate agent in February 1999 that estimated the selling price of the property to be between $95,000 and $100,000.  The applicant obtained an appraisal from a second real estate agent who inspected the property in February 1999 and who estimated that the property would sell in the vicinity of $100,000.

[29] For the purpose of this application the applicant obtained a valuation from certified practising valuer Mr DS Yearley who valued the property at $270,000, as at 17 March 2006.  Mr Yearley’s researches into comparable sales also supported an estimate of the value of the property in early 1999 as around $100,000. 

How should parties’ respective interests be determined?

[30] Theoretically, the respondent has remained an owner of the property since she and the applicant separated.  Practically, however, the applicant has been the owner of the property since separation and the failure of the parties to negotiate a property settlement upon separation. The applicant has used the property in the meantime to provide accommodation for himself and his new partner and then to generate income which has been used to meet, but has been considerably less than, the expenses incurred in respect of the property between separation and the present time. 

[31] Mason and Deane JJ in Muschinski imposed a constructive trust to prevent unconscionable reliance on the legal title by one co-owner of property after the failure of the defacto relationship between the co-owners and their joint venture in respect of the development of the property.  The application of the relevant equitable principle was described at 620:

“Those circumstances can be more precisely defined by saying that the principle operates in a case where the substratum of a joint relationship or endeavour is removed without attributable blame and where the benefit of money or other property contributed by one party on the basis and for the purposes of the relationship or endeavour would otherwise be enjoyed by the other party in circumstances in which it was not specifically intended or specially provided that that other party should so enjoy it.  The content of the principle is that, in such a case, equity will not permit that other party to assert or retain the benefit of the relevant property to the extent that it would be unconscionable for him so to do.” (Footnotes omitted)

[32] In Muschinski the parties had purchased a property as tenants in common in equal shares.  Mrs Muschinski had paid the purchase price on the basis that Mr Dodds would purchase a kit home for the property and pay for the renovations of an old cottage on the property to be used as an arts and crafts business operated by Mrs Muschinski.  The local authority refused the permission to erect the kit home.  The parties separated and the joint project was abandoned.  Mrs Muschinski had contributed approximately ten-elevenths to the costs of the project and Mr Dodds had contributed the remaining one-eleventh.  The operation of the relevant equitable principle was held to preclude Mr Dodds from asserting or retaining against Mrs Muschinski his one-half ownership of the property to the extent that it would be unconscionable for him to do so.

[33] Muschinski was applied in Baumgartner which has been described as a “pooling of resources” case.  Although the relevant property was registered in the name of Mr Baumgartner, the acquisition of that property was facilitated by the pooling of earnings of both partners for the purposes of their joint relationship.  The beneficial interests of the parties in the relevant property were declared in the proportions 55% to the man and 45% to the woman as that reflected their contributions to the pooled funds.  As the man had contributed to the purchase of the relevant property the net sale proceeds from the unit which he had owned prior to the relationship, he was entitled to receive from the proceeds of the sale of the property acquired during the relationship repayment of that contribution, before the balance was divided in accordance with the parties’ beneficial interests. 

[34] In this matter with the benefit of the knowledge of what has transpired, the separation of the parties is the appropriate stage at which to determine their interests in the property.  Their relationship had failed by that stage and their subsequent conduct has resulted in the property being treated as that of the applicant.  The respondent effectively abdicated her interest in the property, leaving the applicant to manage the property, as if it were his own, but without the power to deal with the property absolutely.  Apart from preserving the capital value of the respondent’s interest in the property at or soon after the date of separation, it would be artificial to attempt to adjust the transactions that have occurred since separation.  Because separation is the critical event in this matter for determining the parties’ interests, issues such as occupation rent are not relevant.  It would be unconscionable for the respondent now to claim any greater interest in the property than that reflected by her interest at separation, subject to capital growth.  In particular, it would be unconscionable for the respondent to claim anything approaching a one-half interest in the property.  In accordance with Muschinski, it is therefore appropriate to impose a constructive trust to reflect the beneficial entitlement of the parties determined around the time of separation.

[35] The net equity of the parties in the property at the time of separation was the difference between the value of the property of $100,000 and the amount owed to the bank of about $90,000.  That was largely achieved by close to equal contributions of the parties to the purchase of the property and repayment of the mortgage.  If the property settlement between the parties had been finalised at that stage, it was likely that the applicant would have paid out the respondent for the quantum of her interest.  Without taking into account the mortgage to the bank, I therefore find that the respondent’s interest in the property at the time of separation was equivalent to 5% of the value of the property. 

[36] In order to reflect what has transpired since the separation of the parties and their failed negotiations for a property settlement, but at the same time ensuring that the capital value of the respondent’s interest in the property at separation has been preserved, the applicant should continue to be responsible for the debt secured under the mortgage to the bank and the rates, insurances and other outgoings payable in respect of the property.  That will justify treating the applicant’s interest in the property as 95% and the respondent’s interest as 5%.  The costs of the trustees in carrying out their duties as trustees will be payable from the proceeds of the sale of the property and therefore will be borne by both parties rateably:  s 37A of the PLA.     

Appointment of statutory trustees for sale

[37] At the hearing of the application, the applicant sought to have his solicitors appointed as the statutory trustees for sale.  I indicated that it was inappropriate to have two solicitors from the firm which was acting for the applicant as the trustees for sale where the respondent was not able to be located and was therefore not represented.  The applicant subsequently obtained consent to act as trustees for sale from accountants Paul Crispian Kendall and Daniel John Hillier, who are both of KDH Business Group and hold current practising certificates issued by the Institute of Chartered Accountants, Australia. 

[38] The effect of appointing statutory trustees for sale of property is that the subject property vests in the trustees:  s 38(3A) of the PLA.  That means that any sale of the property is effected by the trustees.  It is for the trustees to decide the appropriate price at which to sell the property and the manner in which the property should be sold and to attend to the transfer of the property and the distribution of the net proceeds of sale. 

[39] The applicant’s interest in purchasing the property was notified at the hearing of the application.  There is no reason not to make an order under s 40(1) of the PLA permitting the applicant to purchase the property from the trustees.

Orders

[40] The applicant sought an order in the amended originating application that the respondent pay the applicant’s costs of the application on a standard basis.  As the need to make the application has arisen as a result of the applicant’s inability to locate the respondent, that does not seem to be an unreasonable order.

[41] I therefore will make the following orders:

1.Subject to order 2, it is declared that Raymond Norman Muller and Adele Zielonkowsky are the beneficial owners of Lot 36 on RP114265 in the County of Stanley Parish of Redland (“the property”) in the respective interests of nineteen-twentieths and one-twentieth.

It is ordered that:

2.The applicant indemnify the respondent in respect of any moneys due under registered mortgage number 700883860 and all rates, insurances and other outgoings payable in respect of the property.

3.Paul Crispian Kendall and Daniel John Hillier (“the trustees”) be appointed trustees of the property pursuant to s 38 of the Property Law Act 1974 to hold the property on the statutory trust for sale (which is altered to the extent necessary to give effect to order 2) and that the property vest in the trustees. 

4.The applicant be permitted to purchase the property from the trustees without the need for the trustees to sell the property by auction or to require the applicant to pay a deposit on account of such purchase. 

5.Liberty to either party or the trustees to apply on 2 days’ notice in writing to any interested person.

6.The respondent pay the applicant’s costs of the application to be assessed.