Standard real estate contract terms provide for the adjustment of rental prepayments as between buyer and seller on a pro rata basis to reduce the purchase price the buyer must pay.
The longer the future period to which the prepayment relates, the greater the proportion of the rent already received by the seller that must be applied as the reduction.
Carolyn Olcorn operated an equestrian centre in Upper Plenty, 50km North of Melbourne, that included an Olympic size riding arena, stables and farmhouse.
In April 2012 she granted a 99 year lease to Vodafone- in exchange for $350k prepaid rent – of 100 m² in an elevated portion of the property, for a telecommunications tower.
When she came to list the property for sale in May 2017, she instructed the agent disclose the lease and to any potential buyer and advise them that no further rent payments would be received from the lessee.
One such buyer who showed a keen interest in the 20ha property was Rimon Toma.
On his several pre-contract inspections he repeatedly sought information about the lease apparently to “have confirmation that all the rent had been prepaid”.
About 10 days after first expressing interest in the property, Toma’s increased offer of $900k was accepted and the parties signed a contract that included by way of special condition an acknowledgement that Vodafone was not obliged to make any further rent payments for the remaining 94 years of the lease of the mobile phone tower site.
The following day his solicitors sought confirmation from Ms Olcorn’s lawyers that “rental in the total sum of $385k will be an adjustable item at settlement”.
He prepared settlement figures that included a purchase price adjustment in his favour of $330k.
It was then realised that Olcorn’s solicitor had failed to negative the standard contract adjustment provision insofar as it related to the rental prepayment.
Olcorn refused to settle and as you would expect, Toma sued for specific performance.
When the dispute came before the Victorian County Court in 2018, Olcorn swore that she had expressly told Toma that “there would be no adjustment”.
The trial judge rejected that evidence.
He accepted though Ms Olcorn had entered into the contract believing there would be no rental adjustment. There was no other explanation to signing the sale at just 65% of her asking price at the start of the marketing period.
But to avail herself of the defence of “unilateral mistake” to defeat the buyer’s specific performance claim, Olcorn also had to prove that Toma knew she was labouring under that misapprehension.
Toma had sought information about the tower lease and the rental prepayment on many occasions. His solicitors raised the rental adjustment in correspondence the very next day after the contract was signed.
That letter was evidence – according to the court – that Toma knew there would be a dispute about the adjustment and hence had knowledge at the time the contract was entered into, Olcorn intended a different outcome.
On appeal, Justice Stephen McLeish in delivering the lead judgment agreed that the letter “revealed an awareness of the mistake…[that was] kept secret until after the exchange and [was] likely to result in a dispute as soon as the mistake was exposed”.
Ms Olcorn was permitted to escape the contract on the basis of her unilateral mistake because Toma had “taken advantage” of that misapprehension.
The solicitors who drafted the contract were also spared some embarrassment with the trial judge finding that “this is not a case where parties would have assumed that an ordinary adjustment for rent would apply”.