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So far Patrick Cussen has created 10 blog entries.

When is a Memorandum of Understanding or a Heads of Agreement Legally Binding?

We often see matters where clients have negotiated the terms of a business deal with another person and the parties then sign a short form document (usually called a Heads of Agreement or Memorandum of Understanding) that embodies the terms of the deal with the intention of executing a more formal agreement later.

What happens if the parties cannot agree on the terms of the formal agreement?  Can a party that wants to proceed with the deal force the other party to go ahead? Or can the party that doesn’t want to proceed walk away?

The answer to this question is the lawyer’s standard answer: “It depends”.

The document needs to be clear about the parties’ intentions as that will determine the issue.

 

Masters v Cameron

The leading decision in this area is the High Court case of Masters v Cameron (1954) 91 CLR 353.

That case established that there are 3 possible scenarios:

  • The parties have reached agreement and intend to be immediately bound. However, the parties propose to have the terms restated in a form which will be fuller or more precise but not different in effect.
  • The parties have completely agreed on the terms of their bargain and intend no departure from or addition to those terms. However, the parties have made performance of one or more of the terms conditional on the execution of a formal document.
  • The intention of the parties is not to make a concluded bargain at all, unless and until they execute a formal contract.

The High Court then identified that determining which scenario applies depends on “the intention disclosed by the language the parties have employed, and no special form of words is essential to be used in order that there shall be no contract binding upon the parties before the execution of their agreement in its ultimate shape”.

Later cases have established a fourth category – that is, cases where the parties are content to be bound immediately and exclusively by the terms on which they have agreed, while expecting to make a further contract in substitution for the first contract containing additional terms.

 

Cahill v Kiversun

A recent case that considered a Masters v Cameron scenario was the Supreme Court case of Cahill v Kiversun Pty Ltd; Molonglo Group (Australia) Pty Ltd v Cahill [2017] VSC 641.

Kiversun owned property in Collingwood.  Cahill and Molonglo were both property developers.

On 15 July 2016 Kiversun and Cahill signed a document headed “Agreement to Purchase”.  This document contemplated that there would be a formal contract prepared, but did not clearly state whether the parties intended the Agreement to Purchase to be legally binding.

On 29 July 2016, Kiversun signed a second document agreeing to sell the property to Molonglo for $10.15 million.

On 31 July 2016, Kiversun’s solicitors provided a formal contract to Cahill (this contract was prepared by Molonglo’s solicitors).  Under the Agreement to Purchase, Cahill had 5 days to accept the terms of the contract provided to it or Kiversun had a right to “withdraw from the sale”.  This contract included terms that Molonglo and Kiversun knew Cahill would not accept.

On 4 August 2016, Kiversun and Molonglo signed a formal contract by which Molonglo agreed to purchase the property.  This contract was conditional on Cahill failing to sign the other contract.

When Cahill did not return the signed contract with the deposit by 8 August 2016, Kiversun indicated that unless Cahill returned the signed contract by close of business, Kiversun would withdraw from the sale.  Cahill lodged a caveat over the property that day.

Molonglo lodged a caveat over the property the following day.

The court held that the Agreement to Purchase between Kiversun and Cahill was a binding contract.

Kiversun and Molonglo argued that the Agreement to Purchase was not a binding agreement.  Their major argument was that the document included the words “[t]his offer is conditional upon the purchaser’s solicitor’s approval of the final contract of sale and [s 32 statement]”.  They submitted that the use of the word “offer” indicated that there was no binding agreement.  However, the court held that the fact that Kiversun had a right to “withdraw from the sale” if the documents were not returned within 5 days was inconsistent with the claim that the document was only an offer rather than an agreement.

Molonglo has appealed to the Victorian Court of Appeal in this case.  Interestingly, Kiversun has not appealed.

This case highlights that it is extremely important that if:

  • someone has negotiated a deal but does not want to be legally bound until some other event has occurred or a formal document is prepared; or
  • someone has negotiated a deal and wants the other party to be legally bound

that any document that is signed reflects the desired outcome.

Ideally, the document should clearly state whether or not the document is intended to be binding.

 

Contact Patrick Cussen, Nicole Wilson or Konnie Lontos if you or a client are about to sign a Heads of Agreement or Memorandum of Understanding and you want advice about the legal effect of the document.

By Patrick Cussen

By |March 19th, 2018|Uncategorised|0 Comments

Konnie Lontos Joins the Team

We are very pleased to welcome lawyer Konnie Lontos to Bernie O’Sullivan Lawyers. Konnie works predominantly in commercial matters including negotiating and drafting agreements and documenting commercial transactions including sales of businesses and commercial leases. With a Bachelor of Laws, a Bachelor of Business (Banking and Finance) and a Graduate Diploma in Legal Practice, Konnie provides exceptional practical legal advice to our clients. Attention to detail, a solid work ethic and strong working relationships enables Konnie to achieve positive results that meet clients’ expectations.

By |September 26th, 2017|Uncategorised|0 Comments

Let’s Get Physical: Changes Affecting the Small Business Company Tax Rate

We are regularly told to be more active for our physical wellbeing.

Similar advice now applies to companies – they need to be less passive.

To qualify for the small business company tax rate of 27.5%, a company needs to be a “small business entity” – that is, the company needs to carry on a business and have an aggregated turnover of less than $10 million.

On 18 September 2017, the Federal Government released draft legislation to “clarify that passive investment companies cannot access the lower company tax rate for small businesses”.

Before the proposed change, there was some doubt as to whether a company that derived investment income (such as rent, dividends and interest), or that received distributions of income from discretionary trusts, was carrying on a business so that it qualified for this concessional rate.

The ATO website states:

    “It is not possible to definitively state whether a particular company is carrying on a business. This is always question of fact. Based on the overall impression of the activities of a company and the relevant indicia of whether a business is carried on.  However, where a company is established and maintained to make profit for its shareholders, and invests its assets in gainful activities that have a prospect of profit, then it is likely to be carrying on business. This is so even if the company’s activities are relatively passive, and its activities consist of receiving rents or returns on its investments and distributing them to shareholders.”

This statement by the ATO was not particularly clear.

The Government has now moved to resolve doubt by the release of the draft legislation.

Under the draft legislation, a company will only qualify for the small business company tax rate of 27.5% if:

  • the company carries on a business;
  • the company has an aggregated turnover of less than $10 million; and
  • the company’s “base rate entity passive income” is not more than 80% of its assessable income.

Base rate entity passive income includes dividends, interest, royalties, rent, gains on discounted securities and capital gains (whether derived by the company directly or through a trust or partnership).

If the draft amendments are enacted in their current form, they will have effect from 1 July 2016.

Keep in mind that the threshold of 80% of assessable income is quite high. Therefore, a company may be able to qualify for the small business company tax rate even if the company derives significant levels of passive income.

Income distributions from trusts are not necessarily passive income. Under the draft legislation, if a trust conducts an active business and distributes that income to a corporate beneficiary the income will not be base rate entity passive.

However, as a company will need to carry on a business to qualify for the small business company tax rate of 27.5%, many (if not most) “bucket companies” that receive income distributions from a discretionary trust will be subject to tax at a rate of 30%.

By |September 26th, 2017|Uncategorised|0 Comments

Small Business CGT Concessions and Property Sales

One of the consequences of the housing boom in Melbourne is that properties that have been used for farming businesses for many years are being sold to developers. These sales often raise significant tax issues.

Some of the more interesting examples on which we have worked include:

  • A husband and wife acquired a property of about 95 acres in 2003. The owners of the property operated a market garden and raised livestock on the property. In 2009, the owners could no longer actively work in the business, but they continued to operate the market garden and raise livestock with help from family and friends. In 2013, the owners ceased to operate the market garden and leased that part of the property to a neighbour but continued to raise livestock on the balance of the property.

    The owners received an offer for the sale of the property. Under the offer, the purchaser would pay some instalments with the bulk of the purchase price payable in 2021.

    We advised the owner to structure the sale by granting an option to the purchaser, with a series of payments for the initial grant of the option and later extensions of the option.

    We acted to obtain a private ruling that confirmed when the option was exercised the profit from the sale of the property would qualify for the small business 15-year exemption. This meant the profits from the sale were tax-free.

  • We were asked to provide advice to the executors of an estate where the major assets were a farming property and an adjoining airfield. The estate provided for a life interest for the deceased’s widow with the balance of the estate to be shared equally between their children.

    We acted to obtain a private ruling from the ATO that confirmed the profits on the sale of the airfield and the farm were capital gains that qualified for the small business 50% reduction. There was an issue about whether the airfield qualified as an active asset because the bulk of income from the airfield was payments for rights to occupy the property. However, we were able to demonstrate that the property still qualified as an active asset.

    The ruling also confirmed the tax treatment on a proposed split of the estate between the life interest holder and the children.

    However, we had to advise the family that although they had been actively operating the farm and the airfield for over 30 years, the sale did not qualify for the small business 15-year concession or the small business retirement concession. Because the life interest holder was entitled to 100% of the income but had no entitlement to capital, there was no “significant individual” in relation to the estate.

  • A private company controlled by two brothers had been operating a market garden business on about 134 acres for 25 years.

    The company entered into an agreement with a property developer for the development and subdivision of the property into more than 500 residential lots with associated services (shops, schools and community facilities).

    We acted to obtain a private ruling from the ATO that confirmed the profits on the sale of the subdivided lots were capital gains and qualified for the small business 15-year exemption. This meant the company could pay the entire profit to the two brothers tax-free.

These examples demonstrate there are different approaches that can be used to address the tax issues on sales of property which have been used for business purposes.
Patrick Cussen and Rob Warnock can assist you with tax effective structuring on sales of business assets.

By |September 26th, 2017|Uncategorised|0 Comments