Brown v TF5 Limited

[2025] NZHC 1744

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2025-404-476

[2025] NZHC 1744

UNDER

Section 143 of the Land Transfer Act 2017

IN THE MATTER

of an application for an order that caveat 13103021.1 not lapse

BETWEEN

JULIAN EDWARD BROWN

Applicant

AND

TF5 LIMITED

Respondent

Hearing:

18 June 2025 (by AVL)

Appearances:

S Jeffs for Applicant

W E Andrews for Respondent

Judgment:

30 June 2025

JUDGMENT OF ASSOCIATE JUDGE LESTER

This judgment was delivered by me on 30 June 2025 at 12.00 pm pursuant to Rule 11.5 of the High Court Rules

Registrar/Deputy Registrar

……………………………….

BROWN v TF5 LIMITED [2025] NZHC 1744 [30 June 2025]

[1]    In February 2022, Julian Brown (Julian) and Troy Flavell (Troy) entered into what is called a property sharing agreement pursuant to which they were going to subdivide a residential property in Auckland.1

[2]    The intent of the agreement being the property would be subdivided, sold and after the costs of development and the repayment of debt, the profit would be divided between Julian and Troy. Unfortunately, Julian and Troy purchased at what appears to have been the top or near the top of the market. It was envisaged the subdivision would be completed within a year, however, that proved to be optimistic.

[3]    The purchase price of the property was $1,405,000 with Julian and Troy each contributing $200,000 and $1,050,000 being borrowed from a second-tier lender. That lender also took security over Troy’s home.

[4]    Title was taken on 16 February 2022. Financing, which included the capitalisation of interest (on top of the $1,050,000 referred to above), was to be repaid after one year. The level of the debt grew significantly. By early 2024, Julian and Troy realised they had to sell the property and recognised they  were going to  incur a loss.   The property was taken to auction on 3 March 2024 but attracted no bids.    A post auction offer of $1,170,000 was received. Julian and Troy countered at

$1,395,000, but the purchaser’s best offer was $1,275,000, which they declined to accept.

[5]    A Property Law Act notice (PLA notice) was issued to Troy by the lender on 24 May 2024. At that point the second-tier lender was owed $1,323,949.08. That, together with rates arrears and other costs payable to the lender, meant the amount to repay the mortgage as at 3 September 2024 had grown to $1,407,778.38.

[6]    On 4 September 2024, Troy, having refinanced, transferred the property to himself and FM Trustees 458 Ltd and on the same day transferred the property to the respondent, TF5 Ltd. By the time of this transaction, the relationship between Julian and Troy had broken down.

1      The agreement is between Julian  Flavell,  his  then  wife  Cherie  Flavell  and  FM  Trustees  458 Limited, as trustees of the De Flavell Trust. However, for the purposes of this judgment, it is sufficient that I refer to Troy as the contracting party.

[7]    Julian has lodged a caveat over the property now in the name of TF5 Ltd. The interest claimed is:

The Caveator contributed towards the purchase price of the subject land which was documented via a Property Sharing Agreement dated 15 February 2022 which expressly stated that the Caveator held a ½ equi[t]able share in the land and had a right to register a caveat over the land. Accordingly the Caveator claims a beneficial interest in the land pursuant to a resulting and/or constructive trust. The Registered Owner is not a bona fide purchaser for value without notice of the claim. The Registered Owner therefore holds a ½ equitable share in the land on trust for the Caveat.

[8]    TF5 Ltd applied to lapse the caveat, prompting Julian to bring an application for an order that the caveat not lapse.

[9]    That application is founded on cls 1, 2, and 12 of the property sharing agreement which provide:

Ownership of the Property

1.Notwithstanding the Trust will be the sole registered owner of the Property, Julian shall have  a  ½  unregistered  equitable  share  in  the Property.

2.The Trust declares that it shall hold a one-half share in the Property in trust for the benefit of Julian.

…

Caveatable Interest

12.The parties mutually agree that Julian shall have a right to register     a caveat over the Property (and/or subdivided lots as proposed above) to protect his proprietary interest in the Property (and/or subdivided lots).

[10]   The essence of the opposition is that with the property market falling and the values being as I have described above, there was no equity in the property at the time it was transferred, over which Julian could have a beneficial interest. Ms Andrews, counsel for Troy, submits the caveat does not offer any practical advantage to Julian, and there is no realistic prospect of him receiving a return of the funds he contributed to the subdivision development.

[11]Troy obtained a valuation dated 20 August 2024 which values the property at

$1,400,000 (including GST). The valuation records the purchase price at $1,450,000

and notes that the market has softened since then. Mr Jeffs, counsel for Julian, does not contest the 20 August 2024 valuation.

[12]   TF5 Ltd purchased the property on 4 September 2024 for $1,370,000. The refinancing required just over $1,400,000. Troy borrowed enough to cover this and other costs, which I refer to below.

[13]   Troy was the borrower when the property was initially purchased. It is clear Troy held Julian’s half-share on trust for Julian. Troy incurred liability to the lender as part of acquiring the property, half of which, as I have said, was to be held for Julian. Troy was obliged to repay the amount borrowed, so much is clear from the issue of the PLA notice and that is not disputed.

[14]The learned authors of Equity and Trusts in New Zealand state:2

Trustees who enter into business transactions in the course of their duties are personally liable for any debts that are incurred in the course of those transactions. However, such trustees are entitled to be indemnified against those liabilities from the trust assets and for the purpose of enforcing the indemnity the trustee has a charge or lien over those assets.

…

The trustee’s lien is a beneficial proprietary interest in the trust assets which has priority over the beneficiaries’ rights to such assets.

(footnotes omitted)

[15]   Had Troy sold the property to a third party purchaser, all of the sale proceeds would have gone to meeting the secured debt and the costs of sale. There would have been no funds available to Julian and the trust would have ceased to exist, as the trust property would have been transferred to a bona fide purchaser for value.

[16]   How is that situation different to the one that occurred here, that is, Troy selling the property to a company that he controls? Mr Jeffs submits that Troy transferred the property to TF5 Ltd in breach of the express trust. He says Julian was not consulted, did not consent to the transfer and received no consideration. He submits Troy had no

2      Andrew Butler (ed) Equity and Trusts in New Zealand (2nd ed, Thomson Reuters, Wellington, 2009) at [30.2.1].

lawful excuse or justification for the transfer. Mr Jeffs submits that Julian can follow his interest in the property into the hands of TF5 Ltd which received the property subject to Julian’s pre-existing interest. Mr Jeffs develops the submission that TF5 Ltd is not a bona fide purchaser for value without notice as Troy, as TF5 Ltd’s sole director and shareholder, fixed TF5 Ltd with his knowledge. Mr Jeffs says this means that TF5 Ltd received the property with actual knowledge of Julian’s pre-existing equitable interest. Mr Jeffs submits the transfer was in breach of trust.

[17]   That analysis would make sense if there had been value in the property not extinguished by the trustee’s right to be indemnified. A trustee’s right to be indemnified from trust property is not conditional upon obtaining the consent of beneficiaries as the trustee’s right has priority over the beneficiary’s rights.

[18]The learned authors in Law of Trusts and Trustees state:3

A trustee’s right of indemnity does not arise only after payment has actually been made by the trustees. It extends to a liability to pay. The trustee is not bound to pay out of the trustee’s own pocket first but may immediately pay out of the trust fund.

(footnotes omitted)

[19]   Julian does not produce any evidence to show that the acquisition by Troy was at an undervalue. Again, the August 2024 valuation is not disputed. The market was tested in March 2024 resulting in an offer following the auction less than that paid by Troy.

[20]   Julian’s position can be tested against the fact that he was prepared to sell the property for $1,395,000, that being the counter-offer made by Troy and Julian after the auction. The price paid by Troy is, in real terms, better than that counter-offer as it allowed the payment of $1,405,000 to the secured creditor as part of the refinancing.

[21]Mr Jeffs, in dealing with the no equity point, submits:

No positive equity: Property  rights  are  distinct  from  loan  obligations.  Mr Brown’s equitable interest in the Property exists regardless of any secured

3      Chris Kelly and others Garrow and Kelly Law of Trusts and Trustees (8th ed, LexisNexis, Wellington, 2022) at [24.107].

debt levels. These are distinct. There are also disputes as to whether the Property should have been subdivided and sold, and around financing. Thus the equity position of the Property is contested.

[22]   Mr Jeffs submits the point about the lack of equity is to “… conflate property rights with the financial performance of an investment.”

[23]   However, this submission ignores the fact that a trustee’s right of indemnity has priority over Julian’s equitable interest. To that extent, the financial performance of the investment, which is relevant to whether the trustee’s right of indemnity had to be relied on, is linked to whether Julian’s equitable interest would continue.

[24]   Whether Troy acquiring the property is seen as him taking it in specie in satisfaction of his right to be indemnified, or him “buying” it as part of the refinancing in September 2024, is not material. The real issue is whether Troy provided proper value.   The point of the indemnity is that trust property or its value is received by     a trustee to compensate the trustee for a liability they have incurred in the course of their trusteeship.

[25]   Mr Jeffs submitted that the effect of Troy acquiring the property is that the potential for the subdivision to create a profit or at least return to the partners of their upfront costs, is now lost to Julian. So much is true — but, the subdivision potential of the property is reflected in its August 2024 valuation. Mr Jeffs submits that values can fluctuate and that as the refinancing documents in respect of the loan Troy took in September 2024 show, he intends to continue work on the subdivision to secure any available profit for himself. Again, so much is true but again, the property subdivision potential was reflected in its value as at its August 2024 valuation.

[26]   Immediately prior to the transfer to Troy, the property was over-encumbered. The registered first mortgagee’s entitlement to the value of the property meant Julian’s equitable interest had no value. Troy exercising his right to be indemnified from the trust property meant Julian’s interest in the joint venture ceased to exist. The trust recorded in the February 2022 agreement came to an end as the trust property (Julian’s half-share) became the property of Troy by virtue of his right to be indemnified. It follows Julian has no interest in the land held by TF5 Ltd.

[27]   Just what the point of maintaining the caveat is, was not articulated by Mr Jeffs. Any preliminary work carried out on the subdivision is taken into account in the August 2024 valuation. The valuation records that:

The property is considered to have an above average risk profile at present pending issues of obtaining resource consent to subdivide the property.

[28]   If Julian has any criticism of Troy’s efforts in advancing the subdivision or in managing how it was rented out, they are matters that may sound in damages for breach of the property sharing agreement, not an interest in the caveatable land. While it is called a property sharing agreement, it was in substance a partnership agreement.

[29]   At the end of the day, the only way Troy could meet his indebtedness to the lender was to call on his indemnity. His refinancing in fact protected the joint venture/partnership from further losses. A forced sale by the mortgagee would have almost certainly produced a lower price than the market value. Julian would have been obliged by the February 2022 agreement to have met half the shortfall. Troy’s actions protected Julian from further loss.

[30]   Mr Jeffs emphasised the threshold to maintain a caveat is relatively low. With reference to the Court of Appeal decision in Green & McCahill Holdings Ltd v Ara Weiti Development Ltd, Mr Jeffs submitted that the caveat should only be removed if it is patently clear that it cannot be sustained.4 Mr Jeffs submitted the Court will not try to determine difficult questions of law requiring full analysis and argument. However, a trustee’s right to be indemnified in respect of obligations incurred in the course of their trusteeship is well established and uncontroversial. Mr Jeffs rightly pointed out that Julian’s application has not been opposed on the basis that Troy was exercising a right of indemnity, but in substance that is what Troy’s opposition amounts to. His opposition highlighted there was no equity in the property at the time it was acquired by Troy.

[31]   I have already referred to Troy taking the property “in specie” under his indemnity. Provided proper value is given, in my view, it cannot be the case that a trust should be forced to incur the costs of sale to a third party in order to convert trust

4      Green & McCahill Holdings Ltd v Ara Weiti Development Ltd [2022] NZCA 218.

property to cash against which the indemnity can be exercised. At the risk of labouring the point, the acid test is value. A trustee taking trust property in specie pursuant to their indemnity, will have to be careful to ensure that value is provided, but we come back to the point that the price paid by Troy is not contested.

[32]   The application to sustain the caveat is declined on the basis that Julian no longer has an equitable interest in the property held by TF5 Ltd. That equitable interest came to an end when the trust property was taken (or purchased) by Troy pursuant to his rights to be indemnified for his obligation to the secured lender. Troy’s right to be indemnified prevails over Julian’s beneficial interest, resulting in Julian’s beneficial interest being extinguished.

Costs

[33]   TF5 Ltd has been successful in resisting the application and is entitled to costs on a 2B basis together with disbursements as fixed by the Registrar.

Associate Judge Lester

Solicitors:

Lawler & Co, Auckland (for Applicant)

Vodanovich Law, Auckland (for Respondent)

Copy to counsel:

S Jeffs, Barrister, Auckland (for Applicant)

W E Andrews, Barrister, Auckland (for Respondent)