Ali v West Village Capital Partners Ltd
[2021] NZHC 3090
•17 November 2021
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2021-404-001516
[2021] NZHC 3090
UNDER Land Transfer Act 2017 IN THE MATTER OF
An application under s 143 that caveat not lapse
BETWEEN
DANIEL ALI
Applicant
AND
WEST VILLAGE CAPITAL PARTNERS LIMITED
First Respondent
M P LIMITED
Second Respondent
Hearing: 20 September 2021
Further evidence and submissions received 1 and 11 October 2021
Appearances:
P J Wright and J A R Barrow for Applicant T J Herbert for Respondents
Judgment:
17 November 2021
JUDGMENT OF ASSOCIATE JUDGE P J ANDREW
This judgment was delivered by Associate Judge Andrew on 17 November 2021 at 3.30 pm
pursuant to r 11.5 of the High Court Rules Registrar / Deputy Registrar Date……………………………….
ALI v WEST VILLAGE CAPITAL PARTNERS LTD & OR [2021] NZHC 3090 [17 November 2021]
Introduction
[1] West Village Capital Partners Ltd1 owns unsold units in the Union Green development2 in central Auckland. It is now in receivership and liquidation.
[2] Daniel Ali applies for an order sustaining a caveat over four of the units3 in the development on the basis an institutional constructive trust operates over the units. Mr Ali says there was a common intention – held between him and West Village – that he would own those units, and that he has made a substantial financial contribution to the acquisition of the land. He claims it is unconscionable for West Village to now deny him any ownership right.
[3] Mr Ali initially invested funds with M P Ltd, previously called Echinus Ltd.4 The funds were almost immediately diverted, without Mr Ali’s knowledge, to the acquisition by West Village of the Union Green properties.
[4] As part of the original investment, Mr Ali and Echinus entered into share subscription agreements and agreements for sale and purchase of apartments that Echinus was to construct at 396 Queen Street, Auckland. That development never proceeded.
[5] Mr Ali and Echinus subsequently entered into replacement share subscription agreements and four related agreements for sale and purchase. Taken together, the effect of these contractual arrangements was that Mr Ali had the right to redeem shares in Echinus for four units in Union Green. West Village, as the owner of the Union Green units, was not a party to any of these contractual arrangements. The sale and purchase agreements were conditional on Mr Ali’s redemption of the shares on certain terms; most relevantly, within a four-year time period, by 21 July 2018. The share agreement then provided for automatic redemption. This did not happen, for reasons I explain further below. On 14 June 2021, Mr Ali issued a redemption notice of the shares. West Village says this notice was invalid.
1 West Village.
2 Union Green.
3 The units.
4 Echinus. For ease, I simply refer to the company as Echinus in this judgment, as the parties have done.
[6] In short, West Village’s position is that Mr Ali has no equitable interest in the four apartment units, requisite to sustain a caveat; at best, his rights are contractual, and he is entitled to cash pursuant to his contractual arrangements with Echinus. West Village also claims that there would be no utility in sustaining the caveat because of a higher-ranking secured debt that would trigger a mortgagee sale. It relies on s 103 of the Land Transfer Act 2017.5
The issues
[7]The key issues I must resolve are:
(a)Can Mr Ali establish a reasonably arguable case he has an equitable interest giving rise to a right of relief in respect of the land- - as he pleads, through a common intention constructive trust over the units?
(b)Are Mr Ali’s rights in respect of the units confined to the share redemption agreement and associated agreements for sale and purchase between Mr Ali and Echinus?
(c)If so, have Mr Ali’s rights to redeem the shares lapsed because of the operation of the sunset clause so that he now only has a right to cash?
(d)If Mr Ali establishes a reasonably arguable proprietary interest in the units to support a caveat, should I, as a matter of discretion, decline to discharge the caveat on the basis it would hold no utility because of the prospect of a mortgagee sale?
[8] A further subsidiary issue arises as to whether Echinus should have been a party to the proceedings.
5 LTA.
Factual background
[9] Mr Ali is an Indonesian national. In mid-2014 he decided to invest $1.5m in New Zealand to support his and his family’s application for permanent residency. As part of that, he decided to invest $1.25m in Echinus.
[10] Mr Ali’s investment is structured through several related agreements. First, there was a subscription agreement6 by which Mr Ali received redeemable shares in Echinus in the value of $1.7m.
[11] Second, there were four sale and purchase agreements by which Echinus would sell four units to Mr Ali in a proposed development at 396 Queen Street.7 As noted, the sale and purchase agreements were conditional upon Mr Ali’s redemption of the shares. This is what Mr Ali intended his $1.25m to be invested in.
[12] Third, Mr Ali also entered into an agreement with West Village by which it would rent the apartments out and pay Mr Ali the rental income.
[13] Pursuant to these agreements, Mr Ali paid $1.25m to Echinus in August and September 2014. He was issued with redeemable shares and was sent a corresponding share certificate.
[14] A very short time later, Echinus paid $500,000 of the funds provided by Mr Ali to West Village for the purchase of properties in Union Green. Mr Ali says he was unaware of this payment at that time and was only advised about it much later.
[15] Mr Ali says that most of his dealings with Echinus were through Mr Farhad Moinfar, a director of both Echinus and West Village.
[16] The 396 Queen Street development did not proceed. In 2015, Mr Moinfar suggested to Mr Ali that he might wish to replace his right to four units in the 396 Queen Street development with a right to four units in Union Green.
6 The original SA.
7 The 396 Queen Street development.
[17] Mr Ali entered into a new arrangement with Echinus (I return below to the question of whether he was legally represented at this time), comprising:
(a)A new subscription agreement entitled “subscription agreement for redeemable shares”;8 and
(b)Four new sale and purchase agreements between Mr Ali and Echinus for four units in Union Green.9
[18]The terms of the second SA included, relevantly:
(a)The agreement was backdated to 16 July 2014;
(b)Under the definitions, the agreement records, relevantly:
(i)“apartments” are defined as four specified units in Union Green;
(ii)“issue date” is defined as 21 July 2014, or another date the parties shall agree in writing; and
(iii)“redeemable shares” is defined as the $1,700,000 redeemable shares in Echinus – the terms of which are set out below at (f).
(c)By cl 4.4:
Agreements for sale and purchase: On the issue date, [Echinus] and [Mr Ali] will enter into an agreement for sale and purchase of each of the Apartments together with associated auxillary units which shall be in the form prepared by [Echinus] for that purpose and shall be conditional upon the redemption of the relevant number of Redeemable Shares for each Apartment pursuant to clause 3 of the Terms of the Redeemable Shares set out in schedule 1.
(d)Clause 6.1 provides the process for redeeming the shares:
Each notice or other communication given under this agreement must be in writing and sent by facsimile, personal delivery or by post to the address or facsimile number of address, and marked for the attention of the person, set out under that party’s name at the end of this Agreement.
8 The second SA.
9 The ASPs.
(e)Clause 7.1 is a standard form “entire agreement” clause combined with a non-oral modification clause;
(f)Schedule 1 sets out the “terms of redeemable shares”. As relevant:
(i)clause 3 provides:
Redeemable by the holder in 4 years: Any Redeemable Shares that have not already been redeemed will be redeemable in whole … by notice in writing accompanied by share certificates for the Redeemable Shares being redeemed
… given by the holder to [Echinus] at any time within the period commencing on the fourth anniversary of the Issue Date and ending one calendar month thereafter for the sum of
$1 per Redeemable Share. [Echinus] must redeem any Redeemable Shares covered by a Cash Redemption Notice within 90 days of receipt of a Cash Redemption Notice by making payment to the bank account advised by the holder.
(ii)clause 4 provides:10
Automatic Redemption on specified date: Any Redeemable Shares still outstanding on the fifth anniversary of the Issue Date will be automatically redeemed by [Echinus] for $1 per Redeemable Share by making payment to the bank account advised by the holder.
(g)The ASPs all contain a standard form no-caveat clause,11 which also provides for the appointment of Echinus as Mr Ali’s attorney to remove any caveat;
(h)Finally, as noted above, the ASPs were also conditional upon redemption of the shares.12
[19] At the time he entered into these new arrangements with Echnius, Mr Ali says that he was advised and understood that Echinus would develop Union Green.
[20] On 19 May 2015, the solicitors for Echinus and West Village sent a letter to the solicitors for Mr Ali, stating:13
10 I refer to this as the sunset clause.
11 Clause 19.18.
12 Clause 23.0.
13 The letter records Echinus at that time was named Myland Partners Limited. As above, for continuity I refer to the company as Echinus; its name change is not material in the context of this letter.
At the time of the issue of shares in [Echinus], it was anticipated that [Echinus] would itself be undertaking developments in Auckland city. However, [Echinus] itself has become an investor in the commonly owned group and developments rather than undertaking the development itself.
[21] In about June 2015, Echinus and Mr Ali also entered into a memorandum of understanding.14 Under the MOU, Mr Ali:
(a)was given an option to purchase two carparks in Union Green;
(b)was, from 16 September 2015, entitled to a coupon in the amount of 8 per cent per annum on the redemption value of the redeemable shares, being $8,500 per month.
[22] In September 2015, Mr Ali signed an individual employment agreement with Echinus.
[23] Echinus made coupon payments up until August 2021. West Village says payments Echinus made to Mr Ali after September 2018 were in error.
[24] In February 2020, Mr Ali became aware that the Union Green apartments were being advertised for sale. He texted Callum McFarlane15 on that issue, who responded:
Hi [D]aniel, there must be a clerical error by Barfoot and Thompson. I will call them and ask them to take them down with immediate effect.
[25] West Village says Mr McFarlane’s response was without West Village’s authority.
[26] On 14 June 2021, Mr Ali, by his solicitors, issued a redemption notice. West Village says it was invalid.
[27] By 16 June 2021, two of the four units subject to the agreements had been sold to third parties. West Village retained ownership of the remaining two. On 16 June 2021, Mr Ali lodged a caveat over the remaining, unsold units, claiming:
14 MOU.
15 Mr Ali describes Mr McFarlane as Mr Moinfar’s “right hand man”.
… A beneficial interest in the [caveat units] as cestui que trust of which [West Village] is trustee.
Receivership and liquidation
[28] On 14 September 2021, Andrew Grenfell and Kare Johnstone were appointed as receivers of West Village by Perpetual Corporate Trust Ltd (Perpetual) acting as custodian for QREOF Union Green Pty Ltd as trustee of the QREOF Union Green Trust (Qualitas),16 the special-purpose vehicle created to finance West Village. Qualitas says that it is beneficially entitled to security over all West Village’s assets. Qualitas has taken an assignment of the second-ranking finance and security arrangements originally put in place between Alta Twenty Twenty Limited17 and West Village in 2015. Also on 14 September 2021, Grant Reynolds was appointed liquidator of West Village.
[29] Perpetual, as the custodian for Qualitas, appears on the records of title for each of the caveated units.
[30] Alta was the original second-ranking secured lender to West Village when the project was commenced in September 2015. ANZ Bank was originally the first- ranking lender but has now been repaid. Alta is recorded on the general security deed18 and on the original mortgage instrument 10168064.3 registered against the land used in the developments (thereby including the caveated units).
[31] The receivers say West Village’s current indebtedness to Qualitas is in the order of $57m. They say West Village’s remaining assets (including the caveated units) hold substantially less value than the facility debt. Therefore, Qualitas’ position is that it is entitled to all realisations from West Village’s assets. Qualitas says that it has the benefit of all securities granted originally by West Village to Alta. They include the GSD (under which the receivers were appointed) and the mortgages over the unsold units (including the caveated units).
16 Peter Brian Lawlor, a director of the Qualitas group, in an affidavit (dated and sworn 30 September 2021) states at the time of the relevant transactions, this special-purpose vehicle was named “QREOF UG 50 CID Pty Limited (as trustee for the QREOF UG 50 CID Trust)”, but its name was changed in October 2019.
17 Alta.
18 GSD.
[32] On 14 September 2021, the liquidator consented to the receivers acting as agents for West Village for the duration of their appointment in accordance with s 31(2) of the Receiverships Act 1993.
[33] On 17 September 2021, solicitors for the receivers served notices under s 119 of the Property Law Act 2007 on West Village on behalf of both the receivers and Perpetual as mortgagees. The notices are due to expire on 15 November 2021.
[34] On 29 September 2021, the liquidator gave his consent to these proceedings continuing.19
Relevant legal principles
[35] In Botany Land Development Ltd v Auckland Council, the Court of Appeal summarised the relevant principles on an application20 for an order that a caveat not lapse:21
[24] The onus is on the caveator to demonstrate that it holds an interest in the land which is sufficient to support a caveat. The caveator must put before the Court a reasonably arguable case to support the interest it claims. An order for the removal of a caveat will only be made if it is clear that there was either no valid ground for lodging it in the first place or, alternatively that such ground as then existed has now ceased to exist. There is a residual discretion, once a reasonably arguable case has been established as to whether to make an order removing the caveat. This will be exercised only cautiously, for example, where the Court finds there is no practical advantage to maintaining a caveat and the caveator will not be prejudiced.
[36] Where there is a conflict between the evidence in affidavits, the Court will generally prefer the evidence of the caveator.22 However, as stated by Lord Diplock in Eng Mee-Yong v Letchumanan:23
Although in the normal way it is not appropriate for a judge to attempt to resolve conflicts of evidence on affidavit, this does not mean that he is bound to accept uncritically, as raising a dispute of fact which calls for further investigation, every statement on an affidavit however equivocal, lacking in
19 Companies Act 1993, s 248.
20 Pursuant to s 142 of the LTA.
21 Botany Land Development Ltd v Auckland Council [2014] NZCA 61, (2014) 14 NZCPR 813 (citations omitted). See also Philpott v Noble Investments Ltd [2015] NZCA 342.
22 Bethell v Rickard [2013] NZCA 68 at [22].
23 Eng Mee Yong v Letchumanan [1980] AC 331 (PC) at 341. For its application in New Zealand, see, for example, Barrett v IBC International Ltd [1995] 3 NZLR 170 (CA) at 175.
precision, inconsistent with undisputed contemporary documents or other statements by the same deponent, or inherently improbable in itself it may be.
[37] Section 138(1) of the LTA provides that a beneficiary under an express or implied trust has a caveatable interest where they can identify specific, ascertainable land and claim a beneficial interest in that land as a cestui que trust. For the purposes of sustaining a caveat over land, the beneficiary’s interest must be a proprietary interest in land;24 it must be more than a merely equitable interest,25 but an equitable interest which gives relief against the land in question itself may be sufficient to support a caveat.26
[38] A caveator must have a present and not merely potential interest in land.27 Institutional constructive trusts can give rise to equitable interests in land supporting a caveat; however, remedial trusts cannot, as they are brought into existence on an order of the Court that is “creative rather than simply confirmatory”.28
[39] To establish an institutional constructive trust, a claimant must show the following elements, laid down in Lankow v Rose:29
(a)contributions, direct or indirect to the property in question;
(b)the expectation of an interest therein;
(c)that such an expectation is a reasonable one; and
(d)that the defendant should reasonably expect to yield the claim and interest.
24 Guardian Trust and Executors Co of New Zealand Ltd v Hall [1938] NZLR 1020 (CA); Re Savage’s Caveat [1956] NZLR 118 (SC); Holt v Anchorage Management Ltd [1987] 1 NZLR 108 (CA).
25 Napier City Council v Residual Health Management Ltd HC Napier CIV-2004-441-35, 30 March 2004, at [20]; Willigers v McFarlane (2005) 6 NZCPR 885 (HC); Rutherford v Rutherford [2015] NZHC 878, [2015] NZAR 1303.
26 Wellesley Club Inc v Wellesley Property Holdings Ltd (2007) 8 NZCPR 421 (HC).
27 Philpott v NZI Bank Ltd (1989) 1 NZ ConvC 190,246 (CA) at 190,248 per Cooke P.
28 Fortex Group Ltd (in rec and liq) v MacIntosh [1998] 3 NZLR 171 (CA) at 171–172 per Tipping J.
29 Lankow v Rose [1995] 1 NZLR 277 (CA) at 294 per Tipping J.
[40] While Lankow v Rose concerned the relationship property context, these principles “are not to be confined to that setting” and form part of a wider concept of constructive trusts,30 as described in Jacobs’ Law of Trusts in Australia:31
The constructive trust differs from the resulting or implied trust in that, although a resulting or implied trust also arises by operation of law in the case of presumed resulting trusts as distinct from automatic resulting trusts, the courts presume that a trust was actually intended and in the face of evidence to the contrary, may conclude that the presumption has been rebutted. In the case of a constructive trust, the inquiry is not solely as to the actual or presumed intentions of the parties, but as to whether, according to the principles of equity, it would be a fraud for the party in question to deny the trust. As Cardozo CJ put it, ‘When property has been acquired in such circumstances that the holder of the legal title may not in good conscience retain the beneficial interest, equity converts him into a trustee’. It has been said that the trust is constructive in the sense that equity construes the circumstances by explaining or interpreting them; equity does not construct the trust, rather it attaches legal consequences to the circumstances. Moreover, the constructive trust demands the staple ingredients of express and resulting or implied trusts: subject matter, trustee, beneficiary and personal obligation attaching to the trust property.
Has Mr Ali established a reasonably arguable case a common intention
constructive trust exists?
[41] Mr Ali contends there is a common intention constructive trust operative over the caveated units, of which he is the beneficiary. Counsel for Mr Ali relies on the Court of Appeal’s judgment in Almond v Read determining that a common intention constructive trust simply describes one circumstance in which a reasonable expectation will be found to exist.32. In that case, the Court held:33
Where a contribution is made on the basis of a pre-existing common intention that the contributions will result in a proprietary interest, there will be no difficulty in establishing a reasonable expectation. …
[42] In its recent decision in Mills v Laboyrie,34 the Court of Appeal considered Almond v Read and the distinction between reasonable expectation constructive trusts and common intention constructive trusts. The Court held:
30 Li v 110 Formosa (NZ) Ltd [2020] NZCA 492 at [136].
31 J D Heydon and M J Leeming Jacobs’ Law of Trusts in Australia (8th ed, LexisNexis, Chatswood, 2016) at [13-01] (citations omitted). See also Paragon Finance plc v D B Thakerar & Co (a firm) [1999] 1 All ER 400 (CA) at 409. This passage was cited by the Court in Li v 110 Formosa (NZ) Ltd, above n 30.
32 Almond v Read [2019] NZCA 26 at [71].
33 Almond v Read, above n 32, at [69].
34 Mills v Laboyrie [2021] NZCA 450.
[52] There are a variety of factual circumstances which will be recognised as sufficient to create a constructive trust. However, we incline to the view that the taxonomy of the differently-labelled constructive trusts is a somewhat sterile exercise. To coin the observation of Tipping J in Partridge v Moller, the roads all lead to Rome. Furthermore, as Mark Bennett observed:
It would of course be odd to use the terminology of “reasonable expectations” where there were actual expressed intentions: reasonable expectations are used to ascertain the existence and content of equitable interests in the absence of expressed intentions.
[53] We are not attracted to the proposition that a CICT is a “subset” of a RECT (if indeed that is what this Court contemplated in Almond v Read). We say that for two reasons. First, we prefer the view of Cooke P that it is unnecessary to fall back on reasonable expectations if a common intention is apparent. Secondly, that analysis sits more comfortably with the fact that remedies may differ as between a constructive trust based on expectations and one based on common intention. In the former the remedy is strictly proportionate to reasonable expectations based upon contribution. In the latter the Court fulfils the common intention of the parties, notwithstanding that the intended rights may be disproportionate to contribution.
[54] Hence we conclude that a CICT is not precisely the same as, but is a close relation of, a RECT. Either pathway provides the basis for the Court to recognise a constructive trust so as to prevent an unconscionable result. We record that we see no basis for the criticism of the final statement of the [High Court] Judge in the following passage:
[76] The review of this case law demonstrates the danger in dismissing a case simply because it does not fit perfectly into a pre- defined category of constructive trust. Although the plaintiffs base their claim for an institutional constructive trust on an express common intention, the language of reasonable expectations could have just as easily been used without any substantive change to the cause of action. …
(citations omitted)
[43] As noted, caveat proceedings are of a summary kind; the test to be applied is one of a reasonably arguable case. The application of that test proves difficult in the complex and somewhat opaque circumstances here. Certain evidently critical facts have not been fully tested. Mr Ali does not, at this stage, allege fraud, but there are troubling aspects of the factual matrix which mean that dishonesty cannot be excluded. It would be premature in advance of discovery and further investigation, to do so.
[44] There are two particularly troubling aspects of this case. First, there was an arguable initial misappropriation of Mr Ali’s funds when Echinus applied funds, intended to be applied to acquiring units in the 396 Queen Street development, to the
Union Green development, only notifying Mr Ali afterwards. Second, the absence of any evidence before me as to whether and what mechanism was intended to operate as between Echinus and West Village to deliver title to the units to Mr Ali upon the redemption of shares under the second SA.
[45] The starting point for my analysis is that there was an initial misappropriation of Mr Ali’s funds. He invested funds in Echinus for the express purpose of buying units in the 396 Queen Street development. However, prima facie without his knowledge, those funds were immediately diverted and used to purchase the Union Street land. This is not an aspect Mr Wright, for Mr Ali, focused on in submissions. However, I consider the nature of the misappropriation of funds may arise as an issue for trial and require further examination; for example, whether it gives rise to a Quistclose35 trust or a resulting trust. As it has not been pleaded as such, and counsel has not addressed me on this, I make no determination beyond raising it as a potentially arguable issue.
[46] West Village contends that regardless of the initial transfer of funds for the purpose of the Union Green land acquisition, Mr Ali’s rights are now defined by the second SA and ASPs. Mr Herbert submits Mr Ali entered into these replacement arrangements with full knowledge and that the parties – critically – could and did not have any common intention, nor reasonable expectation, that Mr Ali acquire an interest in land other than via the redeemable shares process. Mr Herbert submits, therefore, that because Mr Ali did not validly redeem the shares, triggering the ASPs, he does not have an equitable interest in the land to support a caveat; he has only contractual rights as against Echinus in respect of the redeemable share agreement.
[47] West Village is not a party to these contractual arrangements. It thus cannot enforce such arrangements against Mr Ali. Echinus is a party to the arrangements, but of course it is not the landowner. However, as discussed further below, these contractual arrangements are part of the factual matrix relevant to determining whether an institutional constructive trust has been established.
35 In accordance with the House of Lords’ decision in Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567 (HL); see also Twinsectra Ltd v Yardley [2002] UKHL 12, [2002] 2 AC 164. For recent New Zealand application see, for example, Li v 110 Formosa, above n 30.
[48] The circumstances surrounding Mr Ali signing the replacement contractual agreements are unclear. He was legally represented in relation to the original SA and ASPs, but there was no evidence before me as to whether he was similarly represented in 2015. It is also notable that the second SA and ASPs are silent on the question of what legal mechanism Echinus was to use to obtain the land from West Village to deliver to Mr Ali in the event that Mr Ali redeemed his shares and the ASPs become unconditional. There is no additional evidence before me to fill this lacuna, either. Mr Ali says he does not know and has never been informed. He says he was presented with a fait accompli. As Mr Wright submitted, absent fraud, there must have been some legally binding arrangement between West Village and Echinus.
[49] There are many unanswered questions. The evidence is far from complete. It may be that Mr Ali’s rights as against West Village cannot in principle be restricted to the limited proprietary route provided under the second SA and ASPs. That is because West Village is not a party to these contractual arrangements and counsel have not raised or addressed me on issues of privity here. However, on the facts, I do not see how a claim to an institutional constructive trust could be based on anything other than the terms of the 2015 contractual arrangements. To establish that an institutional constructive trust operates over the Union Green units (as opposed to the 396 Queen Street development) Mr Ali has to rely on the 2015 arrangements and it cannot be unconscionable for West Village to rely on those, even if it is not a party to them. It may be, as Mr Wright submitted, that West Village and Echinus are arguably both at fault in some way in not providing full disclosure to Mr Ali of what mechanism there is to deliver title from West Village to Mr Ali. However, in my view, that does not constitute an unconscionable denial of a proprietary interest in the sense required by the Lankow v Rose test. I conclude the terms of the second SA and ASPs are critical to the issue of whether Mr Ali can establish an institutional constructive trust. They provide the critical context for determining whether both the common intention, or expectation, element and the unconscionability element of any institutional constructive trust have been made out.
[50] I further find that based on the terms of the second SA and associated ASPs, Mr Ali has established, arguably, that an institutional constructive trust operates over the units. There was a common intention or expectation, to which West Village must
have been a party, that Mr Ali was to have an interest in the land; his interests are not limited to a simple share interest, as West Village contends. I accept that the ASPs are conditional upon Mr Ali as purchaser redeeming his shares in Echinus. However, in my view, this case is distinguishable from cases in which there is a simple share interest in property, for example through a holding company.36 Here, Mr Ali was a conditional purchaser, albeit his rights in the land did not crystallise until such time as he redeemed his shares. As a purchaser under a conditional contract, arguably an equitable interest in the land at Union Green arose. I refer to Morte Holdings Ltd v ANCL Investments Ltd, which also concerned sunset clauses in a development project, in which the Court held:37
[10] In the case of conditional contracts where the parties intend to be bound and to remain bound subject to the fulfilment of the condition, an equitable interest in the land may also arise. In such circumstances there is a reasonable expectation by virtue of the agreement for sale and purchase that the registered proprietor will not act inconsistently with the purchaser’s contingent interests in the land until the outcome of the condition is ascertained. Equity will provide remedies if the vendor’s actions materially endanger that expectation. The beneficial interest will cease if the contract is avoided for failure of the condition in the same way as it may for cancellation for breach or upon non-payment of the purchase price.
[51] As was the case in Morte Holdings Ltd, the ASPs in this case contain no-caveat clauses. That is a very clear indication that the parties anticipated that an equitable interest could arise.38 Such a clause predicates the existence of an equitable interest that could otherwise be protected by caveat. In the circumstances, where Mr Ali has arguably redeemed his shares triggering a direct right to the units, it would be unconscionable for West Village to deny him any ownership interest.
[52] While I find there is a reasonably arguable common intention constructive trust and the caveat should be maintained until trial, I wish to record several further points. First, there is obvious merit to the submissions by Mr Herbert, for West Village, that even if there was a conditional contract, the contract has been avoided for failure by Mr Ali to have redeemed his shares by the sunset date of 21 July 2019. On that date, it is clearly arguable that under cl 4 of Schedule 1 to the second SA, Mr Ali’s
36 See in contrast, for example, Li v 110 Formosa (NZ), above n 30.
37 Morte Holdings Ltd v ANCL Investments Ltd [2016] NZCA 494, (2016) 18 NZCPR 268.
38 Morte Holdings Ltd v ANCL Investments Ltd, above n 37, at [19].
redeemable shares automatically redeemed, leaving Echinus liable only to pay him cash. On his own evidence, Mr Ali did not seek to redeem the redeemable shares for units until 14 June 2021. Therefore, even if there was originally an arguable interest in the land, no such interest had existed at the time the caveat was lodged.39
[53] I also acknowledge there is some force in Mr Herbert’s argument that even if Mr Ali did hold an equitable interest, it was always on these time-limited terms as contemplated by the contractual arrangements. It thus cannot be contended that the parties held a common intention that Mr Ali would hold an equitable interest past the agreed to expiry timeframe. However, it is also reasonably arguable that the sunset clause was not triggered because Echinus did not, as cl 4 of Schedule1 to the second SA requires, make payment to the bank account advised by Mr Ali. The terms of that clause arguably must be strictly complied with by Echinus before West Village could rely on any automatic redemption to defeat Mr Ali’s claim to an interest in land. Absent strict compliance by Echinus, it would arguably be unconscionable to do so. West Village’s contention that Echinus did not know Mr Ali’s bank account, when Echinus (with prima facie, close connection on the evidence before me), was making coupon payments to Mr Ali’s bank account is, on the evidence before me, spurious. Equally, West Village’s contention that Mr Ali did not (as required by cl 2 of Schedule1 of the second SA) serve his redemption notice on the correct address of the company, is an unattractive and weak one.40
[54] In weighing all these competing arguments, I find that it is reasonably arguable West Village and Mr Ali held a common intention the funds Mr Ali clearly applied to the units would give rise to a proprietary interest and these are issues for trial. I cannot and need not resolve them at this summary stage; the threshold of a reasonably arguable case is made out, albeit it appears Mr Ali faces some obstacles at trial.41
39 For example, as was the case in Mahon v The Station at Waitiri Ltd [2017] NZCA 387.
40 The notice to redeem the redeemable shares was not served at the address or facsimile number referred to by Echinus in the SA. The notice was served at the new registered address for Echinus as reflected in the Company Office records. It is arguable that in accordance with the Court of Appeal decision Lendlease Capital Services Pty Ltd v Arena Living Holdings Ltd [2021] NZCA 384 at [41] that there was sufficient compliance with the notice requirements.
41 That might also include the application of cl 2 of Schedule 1 to the SA and the obligation of Echinus to “use reasonable endeavours to secure the release of the Relevant Apartment(s) from any security covering them and keep the holder informed as to its progress.
In light of s 103 of the LTA, is there utility in maintaining the caveat?
[55]Section 103 of the LTA provides:
Transfer of mortgaged land by mortgagee sale
(1)The estate or interest of a mortgagor in land vests in the purchaser of the land on registration of a transfer instrument executed by a mortgagee for the purpose of exercising a power of sale under a mortgage.
(2)The estate or interest transferred vests in the purchaser freed of and discharged from –
(a)liability under the mortgage; and
(b)any other mortgage or interest that does not have priority over the mortgage or that is not binding on the mortgagee.
(3)The transfer instrument cannot be registered if the mortgage is subject to a submortgage.
[56] The scheme of s 103 was analysed by Bell AJ in Lepionka & Co Investments Ltd v Naldapat Ltd:42
[12] On the exercise of a power of sale by a mortgagee, the court may order the removal of a caveat, even though the caveator has a reasonably arguable case for the interest claimed in the caveat. The caveat is removed, not because there was not an interest in land under s 138, but because the mortgagee takes priority over the interests and the interests claimed under the caveat will be extinguished under s 103 of the Land Transfer Act on the transfer of title ...
[57] There may well be merit to the respondents’ submissions on the application of s 103. However, the critical issue that arises under that section is whether I can safely conclude Qualitas has the benefit of a registered mortgage that ranks ahead of any arguable equitable interest of Mr Ali and accordingly, priority in terms of s 103(2).
[58] The respondents’ position is, in reliance on s 103(2), that there is no utility in maintaining the caveat on the basis Qualitas has the benefit of a registered mortgage that always ranked ahead of any interest of Mr Ali. The substance of West Village’s claim is that it should be permitted to sell the land because otherwise the mortgagee will sell it and there will be a loss. Mr Herbert further submits:
42 Lepionka & Co Investments Ltd v Naldapat Ltd [2019] NZHC 1646, citing Jenssen v Jenssen CA 246/90, 13 December 1990.
(a)Following default under the GSD and mortgage, Perpetual as security holder, may enter into possession of and sell the caveat units.
(b)If the caveat remains in place, Qualitas (via its custodian Perpetual) will need to exercise its power of sale in order to transfer any of the caveat units to purchasers in order to pay secured debt. Perpetual would be able to transfer free of any interest of Mr Ali by virtue of s 103(2).
(c)Perpetual also has the power to adopt an existing agreement for sale and purchase under s 187 of the Property Law Act. This would be an option in respect of any existing pre-sales (for example, over two of the caveated units).
(d)On registration of the transfer executed by the mortgagee, Mr Ali’s claimed interest as notified by the caveat would be extinguished unless he could establish that his interest has priority over the mortgagee or if Perpetual had consented to the interest being binding upon it. There is no evidence of such circumstances and Qualitas says it was not aware of Mr Ali’s claims until very recently. Mr Herbert says given the nature of Mr Ali’s claims, and the lack of any direct contractual relationship with West Village, this seems inherently correct.
[59] In determining whether to exercise my discretion to discharge the caveat and because of the operation of s 103, it is important to recall that the discretion must be exercised cautiously and only if the Court is completely satisfied that the legitimate interests of a caveator will not thereby be prejudiced.43 The onus is on West Village as the party challenging the caveat to show the caveat provides no practical advantage to the caveator, or that the caveator’s interests can reasonably be accommodated in some other way.44 There is a presumption that once a caveator has established an arguable case, that the caveat is the appropriate means of protecting the caveator’s interests.45
43 Pacific Homes Ltd v Consolidated Joineries Ltd [1996] 2 NZLR 652 (CA) at 656.
44 Neil Campbell “Caveats” in DW McMorland and others Hinde McMorland and Sim Land Law in New Zealand (online ed, LexisNexis) at [10.003(c)].
45 Ibid.
[60] I agree with Mr Wright’s further submission that the question of whether the residual discretion should be exercised must be assessed as between Mr Ali and West Village, and not between Mr Ali and the mortgagee. The mortgagee is not a party to these proceedings. It would be unfair to treat the present application as an application by the mortgagee to have the caveat removed on the grounds of the exercise of discretion. The mortgagee can only ever exercise rights as a mortgagee. Mr Ali cannot be required in these circumstances to defend his caveat against the interests of a mortgagee who is not a party to the proceedings. Mr Ali’s rights and interests vis-à- vis the mortgagee have not been, and cannot be, properly tested in this application. In the circumstances, it would be a breach of the rules of natural justice for Mr Ali to have to defend his caveat against the wholly unexplored and unquantified position of the mortgagee.
[61] Critically, the issue of whether Mr Ali’s interests protected by the caveat is subject to the mortgagee’s claimed priority has not been tested. Furthermore, as noted, not only is there a dearth of evidence as to whether and what legal mechanism Echinus has for the delivery of West Village’s land to Mr Ali, there arguably has not been full disclosure here of the respondents’ dealings with the mortgagee. I note that until recently the mortgagee was a second mortgagee.
[62] In reaching these conclusions, I make no criticism of the receivers or liquidators. However, there is a regrettable degree of murkiness about the critical transactions at issue. I find that the respondents have not satisfied me that the legitimate interests of Mr Ali as caveator will not be prejudiced by the removal of the caveat, or that such removal is inevitable because of the application of s 103. It remains to be seen whether the mortgagee can simply sell the land despite Mr Ali’s arguable equitable interest in it. That issue is not before the Court and would likely require consideration of different issues to those before the Court here.
[63] I have already noted above that the ASPs contain no-caveat clauses. I accept that such clause is relevant to the exercise of discretion but in this case provides no basis for exercising it in favour of West Village. In this regard I note the Court of
Appeal’s summary of the effect of such clauses in Morte holdings Ltd v ANCL Investments Ltd:46
[24] A no-caveat clause does not prevent a caveatable interest from arising and a court therefore retains the jurisdiction to uphold the caveat. However, the no-caveat clause is relevant to the court’s discretion as to whether to sustain it. This is made clear by a number of New Zealand decisions. The Court’s ability to enforce a no-caveat clause despite the statutory right has been seen as an aspect of the residual discretion a court has to remove a caveat, notwithstanding that a reasonably arguable case has been shown for the claimed interest. ...
[64] Finally, I record that in light of my finding on Mr Ali’s claim to an arguable institutional constructive trust over the units, it is not necessary to address Mr Ali’s alternative claim of proprietary estoppel.
Should Echinus be a party to the proceedings?
[65] I reject Mr Herbert’s submission that Echinus, being neither the registered proprietor of the units nor the party that triggered the need to sustain the caveats, should never have been a party to this application.
[66] On the contrary, I find that in terms of r 4.56 of the High Court Rules 2016, Echinus’s presence before the Court was necessary for me to adjudicate and settle the questions arising in these proceedings. The substance of West Village’s opposition to the application was to put at issue the contractual arrangements between Mr Ali and Echinus and, on that basis, to contend Mr Ali had no proprietary interest in the units.
[67] As Mr Wright submitted, the contractual relationship between Echinus and West Village is unclear. The respondents, having provided no information about this critical issue, cannot in my view, rely on their opacity to seek a dismissal of the proceedings against one of them. As I have concluded, both Echinus and West Village are implicated in my finding an institutional constructive trust operates over the units. Their exact roles and whether I am correct in that conclusion, is a matter for trial.
46 See Morte Holdings Ltd v ANCL Investments Ltd, above n 37.
Result
[68] I grant Mr Ali’s application dated 28 July 2021, seeking an order that caveat instrument number 12156577.1 not lapse. Accordingly, the caveat is to remain.
[69] This order is conditional upon Mr Ali filing and serving substantive proceedings for specific performance and other relief, within 14 days, and taking steps to prosecute those proceedings promptly.
[70] As to costs, I am of the preliminary view, that having succeeded, Mr Ali is entitled to costs from the respondents, and on a 2B basis plus disbursements. If the parties cannot agree on costs, then memoranda (no more than three pages) are to be filed within 14 days.
[71]I reserve leave to the parties to apply for further directions.
Associate Judge P J Andrew
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