Keeping it in the family: property rights founded in “family honour”

The equity jurisdiction of the NSW Supreme Court has long sought to right the wrongs beyond the reach of the common law. The absence of a formal contract between parties does not naturally result in the absence of legal remedies available to victims of wrongdoing. Two common, but oft misunderstood principles that arise in the equity division are “estoppel” and “unconscionability”. In the May 2016 case of Doueihi v Construction Technologies Australia Pty Ltd (2016) NSWCA 105 the NSW Supreme Court of Appeal was faced with an interesting set of facts dealing with equitable proprietary estoppel and unconscionability.

Mr Hogan was the director and primary shareholder of the defendant, Construction Technologies Australia Pty Ltd (CTA). The first to fourth appellants Mr Doueihi, Mrs Scott, Mrs Vatselias and Mrs Hogan, were family (together known as the Vatselias family). The fifth appellant, Marble Plus Pty Ltd, was a company owed by the Vatselias family. Since 1994 Mr Hogan had been working for the Vatselias family, and in 1998 he was promoted to managing director of the family’s business after he married a daughter of the Vatselias family, Mrs Hogan.

In 2008 Mr Hogan invested in a company (to be later known as CTA ) which needed a large manufacturing space. He and Mr Doueihi together looked for premises large enough for both CTA and Marble Plus to operate. Upon finding a suitable property the parties agreed that the Vatselias family would purchase the property and there would be a lease arrangement from the family to CTA to allow CTA to operate out of the premises.

Although Mr Doueihi (on behalf of the family) and Mr Hogan negotiated a few key terms such as rent, term, option period, and payment of outgoings, the agreement was never formalised in writing. It had been the previous practice within the family to lease property between family members and their companies without a formal agreement, and the parties mutually relied on “family honour” between the parties. CTA incurred enormous expense fitting out the premises and the parties carried on a landlord/tenant relationship for over 12 months.

In July 2011 Mr and Mrs Hogan separated. Shortly after the separation Mr Hogan sought to formalise the lease agreement to protect CTA ‘s interests, however the Vatselias family only offered CTA a short term lease with an increased rent of 40%. Failing negotiations between the parties, CTA commenced proceedings against the family to enforce the terms of the lease agreement. Without a formal agreement the common law was useless – Mr Hogan turned to equity seeking a remedy for the Vatselias family’s refusal to honour their agreement.

On behalf of CTA Mr Hogan argued that he had relied on the “family honour” that existed within the family as an assurance that the informal lease arrangement would by honoured by the parties. He had never intended for the lease to be formalised in writing, however CTA had gone to considerable expense in reliance of the representation made by the Vatselias family that the agreement would be honoured. Mr Hogan asked the Court to recognise the arrangement as creating an equitable propriety estoppel that would form unconscionable conduct if the defendants were allowed to resile from their representations. The Vatselias family argued that an equitable proprietary estoppel was not made out because Mr Hogan had never assumed that a “particular legal relationship” existed between the parties, and it was unreasonable for Mr Hogan to make that assumption given the absence of a complete agreement.

The Court of Appeal upheld the decision of the trial judge, who found in favour of Mr Hogan/CTA. In his judgment Justice Gleeson reiterated the principle of equitable proprietary estoppel by quoting Walton’s Stores (Interstate) Ltd v Maher (1988) HCA 7 (at 404) “ a person whose conduct creates or lends force to an assumption by another that he will obtain an interest in the first person’s land and on the basis of that expectation the other person alters his position or acts to his detriment, may bring into existence an equity in favour of that other person, the nature and extent of the equity depending on the circumstances.” [131].

In relation to unconscionability, Justice Gleeson made reference to Justice Brennan’s comment in The Commonwealth v Verwayen (1990) 170 CLR 394 at 428-429, “ equitable estoppel yields a remedy in order to prevent unconscionable conduct on the part of the party who, having made a promise to another who acts on it to his detriment, seeks to resile from the promise.” [136].

The question of whether an equitable proprietary estoppel had arisen was based on the circumstances of the case, namely the nature of the assumption made by Mr Hogan/CTA, and whether it was reasonable to rely upon it.

The Court reasoned that the nature of the assumption was that Mr Hogan assumed that CTA would have a proprietary interest in the land – not a contractual relationship with the appellants – and this was in keeping with the case law in equitable proprietary estoppel. Further the Court found that given the family’s history of not formalising lease agreements and that Mr Hogan was a member of the family at the time of the arrangement, it was reasonable of him to rely on the assumption he made by representations of the Vatselias family, notwithstanding that the lease agreement was incomplete.

Finally, the Court found that it would be unconscionable for the Vatselias family to later refuse to honour the arrangements negotiated with Mr Hogan. Equitable proprietary estoppel was the appropriate remedy to prevent unconscionability by the Vatselias family.

The parties were ordered by the trial judge to enter in a formal lease agreement and on appeal the appellants were required to pay the defendant’s costs.

The principles applied in this case may have an effect on any number of business and/or family relationships:

• certain property arrangements between family members or friends where the agreement has not been formalised in writing such as leasing arrangements, property development, sale and purchase of land;
• deceased estates where a family member was previously led to believe that they were to receive an interest in property;
• certain property settlements between couples where representations were made to the ex-partner that they would receive an interest in the other partner’s family property.

The two important lessons to remember are:

• It is always best practice to formalise property arrangements in writing with the assistance of legal advice and drafting. The cost of preparing a formal document is novel compared to the cost of expensive litigation proceedings when a dispute arises.
• Individuals and/or companies may have a right in equity where a contract does not exist – if you think you have an equitable right to a property which has not been otherwise documented, we recommend that you seek legal advice.