Sentinel Property Group Pty Ltd v ABH Hotel Pty Ltd

This case concerned the purported termination of a call option given in respect of land. Performance of the option was subject to the condition that the two mortgagees of the land give consent for the sale. Consent was not obtained from either mortgagee and the grantor of the option sought to terminate the option. The grantee contended that this breached its implied obligation to take reasonable steps to obtain the consent of the mortgagees. On appeal and at first instance, no breach of the implied obligation was found, and the termination was considered valid. The Court noted that the burden of proof is on the party resisting termination of the contract to show that reasonable steps were not taken unless the contract makes the right to terminate conditional on the taking of reasonable steps.

Morrison and Bond and Boddice JJA

13 February 2024

On 7 October 2020, the respondent, as grantor, and the appellant, as grantee, entered into a Heads of Agreement (“HOA”) by which the respondent granted a call option to purchase land for $41,500,000. [2]. The HOA contemplated a due diligence period which was to expire on 13 November 2020. [30]. It also stated that the “call option agreement is subject to the [grantor] obtaining the consent of its mortgagee to this transaction within the Due Diligence Period”. [31]. It then provided that the grantor could terminate the agreement if the grantor was “unable to obtain the consent of its mortgagee”. [31].

The grantor had two mortgagees. The first in priority was the Commonwealth Bank of Australia (“CBA”). [17]. The CBA mortgage secured amounts owing from time to time by the grantor, as well as by various other entities in the grantor’s corporate group (notably, other securities were also available to CBA in respect of these debts). [20]. The precise amount owing to CBA by all of these entities was somewhere between $36 million and $37 million. [147]. The second priority mortgagee was Oncore (1982) Pty Ltd (“Oncore”). [10]. Around $4.5 million was owing to Oncore, and there was some contention (not presently relevant) about a further loan of $1.5 million. [182]–[186].

From the time the HOA was signed until around 6 November 2020, the parties were in negotiations as to the final form of various agreements related to the call option. [34]–[52]. On 10 November 2020, the grantor sought Oncore’s consent to the transaction contemplated under the HOA. [53]. In doing so, the grantor noted that there would be insufficient funds from the sale to pay transaction costs as well as both CBA and Oncore. [53]. As such, there would be a shortfall. [53]. Oncore refused to give consent to the transaction. [57]. On 12 November 2020, the grantor sought consent from CBA. [59]. It did so on terms that would allow Oncore to be paid out in first priority, such that CBA would be left with a shortfall. [59]. CBA also refused to give consent to the transaction. [61]. The following day, the grantor sought to terminate the HOA on the basis that the consent of the mortgagees was not obtained.

At first instance, the Court found that the HOA had been validly terminated. The grantee appealed on various grounds including that the trial judge had misconstrued the HOA and misplaced the burden of proof. [117]. Justice Bond gave the leading judgment, with Morrison and Boddice JJA agreeing.

Before turning to the substantive issues, his Honour considered the proper approach to appellate review. [122]–[127]. His Honour highlighted that the question of whether a party acted reasonably based on facts found by the primary judge requires an evaluative judgment, but one to which there could only be one right answer. [124]. Evaluative judgments of that kind attract the Warren v Coombes standard of review, rather than the deferential House v The King standard. [124].

As to the substantive issues on the appeal, his Honour began by construing the HOA. His Honour found that the obligation of the parties to continue to perform the HOA was made subject to the grantor obtaining the consent of the mortgagees. [130]. If that event did not occur within the Due Diligence Period, the grantor would have a right to terminate. [130]. However, as the primary judge found, each party was subject to an implied obligation “to take such steps as were objectively required and reasonable in the circumstances to achieve the end specified by the HOA”. [131]. The grantor would be precluded from exercising the right to rescind if it had not performed its implied obligation, and that failure caused the non-fulfilment of the condition (being the failure to obtain the consent of the mortgagees). [133]. The burden of proof fell on the grantee to establish a breach of the implied obligation. [133].

Notably, the position is different in cases where the right to terminate is made conditional on the taking of reasonable steps to ensure fulfilment of the condition. [132]. In that case, as the taking of reasonable steps is a condition on the right to rescind, the burden would fall on the party seeking to terminate to establish that they took reasonable steps. In addition, the right to terminate would be lost if reasonable steps were not taken, even if the taking of reasonable steps would not have prevented the non-fulfilment of the contractual condition. [132].

The Court was not satisfied that the grantor failed to take reasonable steps. Given that the indebtedness of the grantor exceeded the sale price, at least one of the mortgagees would have needed to give up security. [147]–[155]. The responses of the mortgagees made clear that they were unwilling to do so. As such, the Court upheld the findings of the primary judge that the HOA had been validly terminated.

L Inglis