An obligation to “carry on the business” – High Court defines the principles in Laundy’s Case

A decision regarding the sale and purchase of a hotel in Pyrmont that has impacts on many current transactions has recently been handed down from the High Court of Australia. The primary question in the case revolved around “carrying on” provisions, a standard contract provision included in almost all Hotel (and sale of business) transactions. The interpretative scope of what that phrase actually means has now been determined.

The Facts

In January 2020, Laundy Hotels (Quarry) Pty Ltd (the vendor) and Dyco Hotels Pty Ltd (the purchaser) entered into an agreement to purchase the Quarryman’s Hotel and associated business (the Hotel) in Pyrmont for $11.25 million. Completion of the land and business contracts were initially contracted to occur on the 30th and 31st of March 2020 respectively.

During the period post-exchange and pre-completion the COVID-19 pandemic occurred – bringing with it, mandatory public health orders. During that time, the Hotel was not providing dine in services and was instead operating as a takeaway food and beverage business. On 25 March 2020, the purchaser informed the vendor that it would not complete the contract because the vendor was not ready, willing and able to complete due to its breach of clause 50.1 which required the vendor to “carry on the Business in the usual and ordinary course as regards its nature, scope and manner …”. The vendor disagreed, subsequently served a notice to complete, and terminated the contract once completion did not occur at the expiry of the notice to complete.

“Usual and ordinary course…”

Clause 50.1 of the contract provided that “from the date of the contract up until Completion, the vendor must carry on the Business in the usual and ordinary course as regards its nature, scope and manner.” This type of clause is generally accepted and included in contracts involving the simultaneous sale of land and its associated business, as is usual in hotel transactions. The key question was whether the vendor’s operation of the Hotel which was limited by public health orders, and not operating with the full scope at the time the contract had been entered into constituted a breach of clause 50.1.

The Findings

The High Court found that the vendor did comply with the obligation as the proper construction of the clause implied that “the vendor’s obligation…. is moulded by, and subject to, the law as in force from time to time”. It was also further reasoned that because the Hotel operates pursuant to its liquor and gaming licence, contravention of public health orders could place that licence at risk and thus actually cause a breach of the clause.

The High Court also investigated several other provisions in the contract including the vendor’s warranties and excluded warranties and found that the requirement for the carrying on of the Hotel to be lawful was not required to be stated in the contract, as the nature of the Hotel required specific legal authority to continue to operate.

What does this case mean for hotel transactions?

The case puts beyond doubt that the a vendor’s ability to continue to operate the business in the “usual and ordinary course” is subject to what is actually permissible at law, which may change from exchange to completion. A vendor cannot be compelled to continue to operate a business contrary to law or regulations to fulfil a contractual promise to a purchaser.

For vendors, it is important to ensure that your warranties, excluded warranties and “carrying on” provisions are flexible enough such that sudden changes in the broader regulatory landscape can be accommodated for, and amendments are made to sale and purchase agreements to follow this decision to put purchasers on notice of what may be deemed to be a somewhat obvious interpretation. Purchasers will need to understand that “carrying on” and other similar clauses do not mean that on completion a purchaser will receive the identical business that has initially been contracted for, as the business may be subject to change depending on unforeseen legal and regulatory impositions.

However, should the legal and regulatory framework remain constant, “carrying on” provisions will continue to provide the requisite protection for purchasers as vendors will be obligated to adhere to these contractual provisions.

Legislative Wrap-Up 2022: Grant of option now dutiable

On 19 May 2022, the Duties Act 1997 (NSW) was amended by the State Revenue and Fines Legislation Amendments (Miscellaneous) Act 2022 (NSW) (the Act). Upon its royal assent, a new head of duty and substantial amendments to the current Act were made and imposed on transactions which result in a “change of beneficial ownership”.

Pursuant to s 8(1)(b)(ix) of the Act, the term “change in beneficial ownership” includes:

• • the creation of dutiable property;
  • the extinguishment of dutiable property;
  • a change in equitable interests in dutiable property;
  • dutiable property becoming the subject of a trust; and
  • dutiable property ceasing to be the subject of a trust.

The above is designed to broaden the scope of transactions which are now considered dutiable under this Act.

How does this affect you?

One of the most important outcomes from the introduction of this legislation is that duty is now payable on the grant of an option.

Under ss 11(1)(K) of the Act, an option to purchase land in NSW is a creation of dutiable property. Pursuant to s 8(3) of the Act, the creation of dutiable property constitutes a change of beneficial ownership. Therefore, duty is now payable on a grant of an option to purchase land in NSW.

At the time the Act came into effect, there was much ambiguity on whether the above assessment was in fact correct. However, Revenue NSW have been quick to suppress any uncertainty, noting the following in their published guidance notes:

“A put option and/or call option granted over dutiable property in NSW (such as over land or an interest in land) is a ‘change in beneficial ownership’.  This means that duty is payable on any grant fee paid for a put and/or call option entered into from this date”.

“Section 8(1)(b)(ix) of the Duties Act 1997 introduces duty on certain transactions that results in a change of beneficial ownership of dutiable property. This includes the creation of dutiable property. This means that duty will be payable on the grant of a put and/or call option.”

The Act also made the following amendments which must be noted:

• • duty on acknowledgement of trust;
  • providing for a refund of foreign purchaser surcharge duty/ surcharge land tax in relation to a transfer of land, after the transfer, the land is used by the transferee whole or predominantly for commercial and industrial purposes; and
  • the introduction of a new anti-avoidance regime into the Taxation Administration Act, which replace anti-avoidance provisions in Part 11A of the Duties Act.

Legislative Wrap-Up 2022: Corporations Act gets a new virtual look

In late February, the Corporations Amendment (Meetings and Documents) Act 2022 (Cth) (Meetings and Documents Act) came into effect, amending the Corporations Act 2001 (Cth) (Corporations Act). Shaped by the evolving role technology plays in a post-COVID world, the Meetings and Documents Act came with a raft of changes.

What has changed?

The Meetings and Documents Act accommodates for the increasingly virtual nature of business by amending sections 249R and 252P of the Corporations Act to allow a meeting of members to be held online. In addition to being held physically, meetings can now be held at both physical venues and virtually (a hybrid meeting), or entirely virtually, if the technology has been consented to by all directors.

As well as this, the Meetings and Documents Act also allows for technology-neutral signing of documents, so long as the method of signing properly identifies the person and indicates their intention and is as reliable as would be appropriate.

Sole director signing now easier

The Meetings and Documents Act also amended the Corporations Act to permit a sole director of a company that has no company secretary to sign under s 127(1) of the Corporations Act. Previously, a sole director could only sign under s 127(1) if they were also the company secretary. Importantly, this change means the assumptions made under s 129(5) as to the due execution of company documents applies and extends to documents which are signed by a sole director only, without the signature of a company secretary.