Body Corporate Number 205990 v The Sheriff

[2012] NZHC 3379

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2012-404-005625 [2012] NZHC 3379

BETWEEN  BODY CORPORATE NUMBER 205990

Plaintiff

ANDTHE SHERIFF First Defendant

ANDCOLLEGE CHAMBERS LIMITED Second Defendant

Hearing:         12 December 2012

Appearances: T J Herbert for Plaintiff

No Appearance for First Defendant
J Anderson for Second Defendant

Judgment:      12 December 2012

ORAL JUDGMENT OF CHISHOLM J

[1]      This proceeding arises out of a sale by auction to the second defendant of a unit within the plaintiff’s body corporate which was established under the Unit Titles Act 1972.  The sale was conducted by the first defendant pursuant to an order of this Court made on 2 October 2010 for the purpose of satisfying a judgment of this Court.  The judgment relates to Body Corporate levies owed to the plaintiff by the registered proprietors of the unit.

[2]      Following the sale a deposit was paid by the second defendant to the first defendant and settlement of the purchase was scheduled to take place within 28 days. However, the second defendant refused to settle on the terms required by the first defendant and in due course the first defendant purported to rescind the agreement.

[3]      The plaintiff seeks declarations under the Declaratory Judgments Act 1908, first, that the agreement was properly rescinded and is at an end, and, secondly, that

BODY CORPORATE NUMBER 205990 V THE SHERIFF HC AK CIV-2012-404-005625 [12 December 2012]

the deposit has been forfeited. Alternatively, the plaintiff seeks a declaration that the agreement is now incapable of specific performance.

[4]      By way of counter claim the second defendant asserts that it was always ready, able and willing to settle in accordance with the agreement for the sale of the unit, and still wishes to do so.  It claims that the first defendant wrongly refused to settle  in  accordance  with  the  agreement.    It  seeks  declarations,  first,  that  the agreement did not require the second defendant to be responsible for repayment of the registered proprietors’ mortgage in favour of the ASB Bank, secondly, that the purported recision of the agreement is void and of no effect, and, thirdly, return of its deposit.  In the alternative, it seeks a declaration that the agreement be specifically performed.

[5]      The first defendant abides the decision of the Court.

Background

[6]      When the auction was conducted on 9 March 2011 the outstanding levies owed to the Body Corporate by the registered proprietors of the unit (which arose from “leaky building” issues) stood at around $125,000.  At the auction a solicitor’s letter indicating that the successful bidder would be liable for these levies was read out. That is not, and has never been, an issue.

[7]      After the auction  the second  defendant,  as  the  highest  bidder,  signed  an agreement recording that the purchase price was $80,000, a deposit of 10% would be paid, and the purchase would be completed in accordance with the particulars and conditions of sale.

[8]      A mortgage entered into by the registered proprietors in favour of ASB Bank and securing around $178,000 was registered against the unit title.  Clause 14 of the particulars and conditions of sale stated:

The sale pursuant to this agreement is subject to mortgage No. 7101089.1 which will be repaid from the proceeds of the sale of the property.

This clause that lies at the heart of the dispute that has given rise to this proceeding.

[9]      Shortly  before  settlement  correspondence  passed  between  the  solicitors acting for the first and second defendants.   The solicitors for the first defendant confirmed that they had requested a discharge of the ASB mortgage and a settlement statement dated 4 April 2011 for settlement on 6 April 2011 was forwarded to the solicitors for the second defendant.   This settlement statement showed a purchase price of $80,000, an $8000 credit for the deposit, apportionment of rates, and a debit for the body corporate levies of almost $130,000.  The amount required to settle on

6 April 2011 was approximately $201,000.  A transfer was signed on behalf of the first defendant in anticipation of settlement.

[10]     On  settlement  day  the  solicitors  for  the  second  defendant  advised  the solicitors for the first defendant that they were ready to settle and that they required the first defendant’s settlement undertakings.  In response the solicitors for the first defendant gave a number of undertakings and stated:

ASB mortgage:

The condition of sale to which your client agreed in clause 14 provides that the sale is subject to mortgage 7101089.1 which will be repaid from the proceeds of the sale of the property.   Given that the sale is subject to the mortgage it follows necessarily that your client purchaser is liable for repayment.   That is logical, as well as being the legal position given the value of the property and the relatively nominal price that your client is paying.    The  only  way  in  which  we  can  repay  the  mortgage  from  the proceeds of the sale of the property is for the amount required to settle the discharge  with ASB  Bank  to  be  part  of  the  amount  that  your  client  is required to settle less the consideration of $80,000.  In other words, the ASB mortgage needs to be dealt with in much the same way as payment of the Body Corporate levies.

The letter was accompanied by an amended settlement statement which included the

ASB mortgage as a debit. The amount required to settle was increased accordingly.

[11]     This drew an immediate email response from the solicitors for the second defendant who said that they were ready to settle on the basis of the settlement statement  dated  4  April  2011.    They  rejected  the  proposition  that  the  second defendant should in some way be responsible for repayment of the ASB mortgage.

They reiterated that they were ready, willing and able to settle in accordance with the settlement statement of 4 April 2011.

[12]     A stalemate developed.  In due course a settlement notice was issued by the first defendant and upon failure of the second defendant to comply with a notice the first defendant purported to rescind the agreement on 31 May 2011.  Further attempts to resolve the matter failed. This proceeding was issued on 18 September 2012.

Clause 14

[13]     For the plaintiff Mr Herbert argued that this clause means the property was sold “subject to mortgage” in accordance with the special meaning attributed to those words by s 203 of the Property Law Act 2007.  In other words, the purchaser assumed responsibility for the mortgage.  Mr Herbert submitted that this reflects that the first defendant, who is nothing more than a conduit, could only sell the interest of the registered proprietors in the unit which was subject to the mortgage in favour of ASB.  He also claimed that clause 14 did not necessarily require the whole of the mortgage to be repaid from the proceeds of sale.

[14]     In response Mr Anderson emphasised the importance of reading clause 14 as a whole.  Read in that way it simply means that the mortgage over the title was to be repaid by the first defendant from the proceeds of the sale.  Mr Anderson submitted that  if  the  purchaser  had  been  required  to  make an  additional  payment  for the mortgage the clause would have expressly said so.   Moreover, details would have been provided at the auction so that any potential purchaser would have known the additional amount that they had to pay.

[15]     I agree that clause 14 needs to be construed in its entirety.  It also needs to be construed within the context of the particulars and conditions of sale as at the time of the auction.

[16]     Adopting that approach I am satisfied that clause 14 simply records that while the mortgage would still appear on the title at the time of sale (because the first defendant would not have the funds to repay it at that time) it would be paid off by

the first defendant from the proceeds of the sale as soon as they were received on settlement.    To  my  mind  the  plaintiff’s  suggestion  that  the  purchaser  would effectively have to assume responsibility for the repayment of the mortgage contradicts the clear impression created by the clause (that the first defendant would pay off the mortgage from the sale proceeds).  Given that the first defendant would be receiving and handling the sale proceeds, the clause could only mean that he, not the successful bidder, would be paying off the mortgage.

[17]     In my view the surrounding circumstances are entirely consistent with this interpretation.  There was specific reference at the auction to the levies for which the successful bidder would assume responsibility.  If the successful bidder was also to assume  responsibility for  the  mortgage  there  would  surely have  been  a  similar explanation, particularly as to the amount that the successful bidder would have to pay in respect of the mortgage.   The evidence indicates that this information was known to the first defendant, which makes it even more significant that it was not passed on to potential purchasers.

[18]     It is also very significant that the initial preparations for settlement were on the basis that the mortgage would be repaid by the first defendant from the proceeds of sale without the purchaser having to pay an additional amount matching the sum of the mortgage.  That was the basis on which the settlement statement of 4 April

2011 was forwarded.  Moreover, the first defendant’s solicitors took steps to arrange a release of the mortgage which is completely inconsistent with Mr Herbert’s suggestion that clause 14 did not necessarily require the mortgage to be repaid in full.  Apart from that, a plain reading of the clause can only mean that the mortgage would be repaid in full.

[19]     Mr Herbert placed considerable reliance on s 203 of the Property Law Act which relevantly provides:

203Person who accepts transfer, assignment, or transmission of land personally liable to mortgagee

(1)      If a person accepts, subject to a mortgage, a transfer, assignment, or transmission of mortgaged land,—

(a)      the person becomes personally liable to the mortgagee—

(i)       for the payment of all amounts and the performance of all obligations secured by the mortgage; and

(ii)      for  the  observance  and  performance  of  all  other covenants expressed or implied in the mortgage; and

(b)       the mortgagee has all remedies under or in connection with the mortgage directly against that person as if that person were the person who gave the mortgage.

(2)       Subsection (1) applies whether or not the person who accepts the transfer, assignment, or transmission has signed the instrument of transfer, assignment, or transmission.

(3)       Subsection (1) is subject to anything to the contrary expressed or implied in the mortgage or any other instrument.

...

Mr Anderson countered Mr Herbert’s argument relating to this section on the basis

that the section did not apply in this case.

[20]     I agree with Mr Anderson.  Subsection (3) makes it clear that the section does not apply if there is anything to the contrary expressed or implied in any instrument. The relevant instrument in this case (in particular clause 14) made it clear that the second defendant was not accepting a transfer of the mortgage because it was to be paid off by the first defendant from the proceeds of sale.  Thus there is an express, or at the very least an implied, indication that s 203 does not apply.

[21]     It follows that the second defendant is entitled to a declaration that clause 14 of the agreement did not require the second respondent to be responsible for the repayment of any loan of the registered proprietors of the unit to ASB Bank.

Recision

[22]     The first defendant rescinded the agreement on the basis that the second defendant had wrongly refused to settle.  On my interpretation the converse is the case.  It was the first defendant who wrongly refused to settle on 6 April 2011 when the second defendant was ready, willing and able to do so.

[23]     The first defendant is entitled to a declaration that the purported recision of the agreement on 31 May 2011 was void and of no effect.

Specific performance

[24]     A number of arguments have been advanced by Mr Herbert in opposition to the second defendant’s counter-claim for a declaration that the agreement be specifically performed in terms of the first respondent’s settlement statement dated

4 April 2011.   One argument is that delay by the second defendant should count against it.   Mr Herbert submitted that in fact it was the plaintiff who made the running whereas it should have been the second defendant who was doing so.

[25]     Another argument is that the Court does not have sufficient information to be satisfied that the second defendant is now financially able to settle.   Mr Herbert objected to the Court receiving a letter dated 10 December 2012 from the second defendant’s solicitors confirming that the second defendant had the necessary resources to complete the settlement.

[26]     While there has been delay, it is obvious that behind the scenes the parties have made attempts to resolve the matter.  Moreover, the delay between the failure to settle and today’s hearing has not been particularly significant.  I am not prepared to exercise my discretion against granting relief on the grounds of delay.

[27]     I am also satisfied that the second defendant is able to settle. A director of the second  defendant  has  sworn  an  affidavit  to  that  effect  and  the  letter  from  its solicitors, which I am prepared to take into account notwithstanding Mr Herbert’s objection, confirms that situation.  I also note that the amount involved is relatively small and there is no solid foundation for the suggestion that the second defendant might not be able to complete settlement.

Orders

[28]     There will accordingly be a declaration in terms of paragraph [23] above that

the first defendant’s purported recision was void and of no effect.  Given that I am

prepared to make a declaration as to specific performance, the second defendant will not require an order for the return of its deposit.

[29]     Although  I  am  prepared  to  make  a  declaration  that  the  agreement  be specifically performed, some modification of the declaration sought is required.  The declaration sought is to the effect that the agreement be specifically performed in terms of the first respondent’s settlement statement dated 4 April 2011.  However, as discussed with counsel, the second defendant as purchaser should also meet rates (and any other body corporate levies that might have arisen since the settlement statement was issued) down to the present time.  That would have been the situation if settlement had been effected on settlement date.  By the same token, the second defendant will also be entitled to the share of any settlement of the “leaky building” claim that might relate to the unit in question.

[30]     Consequently, there will be a declaration that the agreement be specifically performed in terms of the first defendant’s settlement statement dated 4 April 2011 which is to be updated to the date of actual settlement to take into account further rates and body corporate levies between the time of that settlement statement and actual settlement.  Settlement must be completed as soon as possible.

[31]     For the purposes of clause 14 “the proceeds of the sale of the property” means the amount received by the first defendant from the second defendant on settlement.   In other words, those proceeds are to be used to pay off the ASB mortgage before any payment is made to the plaintiff.   If that means that there is little, if anything, to go to the body corporate, that is unfortunate.  But it represents the agreement between the first and second defendants.

Charging order

[32]     It has just been brought to my attention by Mr Anderson that there is a charging order over the unit in question and he wishes the situation in relation to that order to be clarified.   Mr Herbert suggested that the Body Corporate would be reluctant  to  release  the  charging  order  if  it  did  not  receive  the  whole  of  the outstanding levies from the first defendant.

[33]     To avoid leaving that matter in limbo I will make the following additional orders which should prevent any misunderstanding:

(a)      The settlement proceeds paid by the second defendant to the first defendant  will  include  the  levies  referred  to  in  the  settlement statement of 4 April 2011 plus any further levies that might have arisen since that time.

(b)Regardless of whether the first defendant is able to account to the plaintiff for those levies (after paying off the ASB mortgage), the second defendant will have paid the levies and is entitled to a release of the charging order.  It cannot be expected to make payment twice.

(c)      On settlement the first defendant is to hand to the second defendant a discharge of the charging order.

[34]     While there might still be issues between the plaintiff, the first defendant and the registered proprietors, I am not prepared to leave the door open to the plaintiff to come back against the second defendant for what is effectively a second bite at the levies. As I see it, the second defendant is the innocent party in this whole saga.

Costs

[35]     In the normal course of events the second defendant, as the successful party, would be entitled to costs from the plaintiff who initiated the proceeding.  However, the  first  defendant  played  a  significant  role  in  the  events  giving  rise  to  the proceeding and the possibility of costs against him needs to be considered.   That issue cannot be resolved today because the first defendant, having agreed to abide the decision of the Court, is not represented today.

[36]     Counsel for the three parties are to confer and attempt to resolve the issue of costs.   If a solution cannot be found memoranda will need to be filed, following which I will resolve the issue.  Memoranda (which should not individually exceed three pages) should be filed by the end of January 2013.  In the hope that it might

assist counsel in their discussions, I have already indicated to Mr Anderson that I do not accept that this is a case for indemnity costs.  On the other hand, my preliminary view is that an uplift on 2B costs would be appropriate, possibly in the vicinity of

50%.

[37]     As to whether the first or second defendants should bear the costs, my initial impression is that if a heavier share of costs is to be borne by anyone, it should be borne by the first defendant rather than the plaintiff because the first defendant conducted the sale and rescinded the agreement.  Having said that, I am not privy to communications between the plaintiff and first defendant and the situation might be different if the first defendant was simply following the plaintiff ’s instructions.

Leave

[38]     Leave to apply further is reserved to all parties.

Solicitors:

T J Herbert, P O Box 3320 Shortland Street, Auckland,  [email protected]

Crown Law, DX SP20208, Wellington,  [email protected]

John Anderson, P O Box 155-012, Auckland,  [email protected]