Cashmere Capital Limited v Crossdale Properties Limited
[2012] NZHC 1920
•2 August 2012
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
CIV 2008-409-825 [2012] NZHC 1920
BETWEEN CASHMERE CAPITAL LIMITED Plaintiff
ANDCROSSDALE PROPERTIES LIMITED First Defendant
ANDGARY WILLIAM CAMPBELL Second Defendant
ANDPATRICK KEVIN CARROLL Third Defendant
ANDTHOMAS WILLIAM RAINY Fourth Defendant
ANDB V STANGER Fifth Defendant
ANDMARGARET MARY TERESA CUNNEEN
Sixth Defendant
ANDPATRICK KEITH BROWN Eighth Defendant
ANDJUNE H PARSONS Ninth Defendant
ANDMARY ELLA LORY Tenth Defendant
Hearing: 26 July 2012
Counsel: G A Hair for plaintiff
N Till QC for fourth, sixth, eighth and tenth defendants
Judgment: 2 August 2012
RESERVED JUDGMENT OF DOBSON J
CASHMERE CAPITAL LIMITED v CROSSDALE PROPERTIES LIMITED HC CHCH CIV 2008-409-825 [2
August 2012]
The proceedings
[1] The plaintiff in these proceedings (Cashmere/the mortgagee) seeks orders to enable it to exercise its power of sale under a mortgage granted to it by the first defendant (Crossdale), over the titles to a number of residential units in suburban Christchurch. Crossdale granted occupancy of each of the units pursuant to documents styled as Occupation Loan Agreements that have been treated, in the course of argument, as coming within the definition of an occupation right agreement (ORA) for the purposes of the Retirement Villages Act 2003 (the RV Act). A number of the occupants have conceded the mortgagee’s entitlement to exercise its power of sale. Four of the occupants continue to oppose the mortgagee exercising that power, claiming that various provisions in the RV Act afford protections for them that prevent the mortgagee doing so.
[2] Cashmere originally sought orders by way of an application for summary judgment. In two separate judgments, Fogarty J declined the plaintiff’s application, and subsequently granted summary judgment in favour of the defendants.1 Those judgments were varied by the Court of Appeal, which disagreed with Fogarty J on his finding that the mortgagee had consented to the terms of occupancy agreements between Crossdale and the individual occupants, but nonetheless found for the
occupants on a new ground. This related to the effect of an Order in Council declaring the units to be a retirement village under the RV Act, giving rise (on the Court of Appeal’s analysis) to an implicit duty on the Registrar-General of Lands to enter a memorial on the respective titles which would grant the occupants priority
over the mortgagee.2
[3] The Supreme Court reversed the effect of that judgment, ruling that the consequences of the making of an Order in Council did not extend to the presumptive entry of a memorial on the titles. The Supreme Court was concerned
that other issues that had been argued were inappropriate for determination by
1 Cashmere Capital Ltd v Crossdale Properties Ltd HC Christchurch CIV 2008-409-825,
9 September 2008 and 13 November 2008.
2 Cashmere Capital Ltd v Crossdale Properties Ltd [2009] NZCA 185, [2009] 3 NZLR 612.
summary judgment and therefore directed that the issues should be resolved at a substantive trial.3
[4] Since then, some of the grounds of opposition to the mortgagee exercising its power of sale have been abandoned. Before reviewing the issues that are still to be resolved, it is appropriate to explain the factual background.
Factual background
[5] Crossdale has, since 1986, been registered as the proprietor under cross leasehold and freehold certificates of title of individual units in Curletts Road, Upper Riccarton, Christchurch. The property had previously comprised motel units. Crossdale entered into agreements with occupants of individual units that constituted interest free loans from the occupant to Crossdale in return for a right to occupy the unit in question during the occupant’s lifetime. The loans were to abate by five per cent, with the balance repayable when the occupant vacated, or on the death of the occupant, at which time possession of the unit would revert to Crossdale. The loans were unsecured, and did not create any proprietary interest. One of the mutual covenants in the ORA was as follows:
(b) The rights of the Resident under this Agreement are the rights and privileges herein expressly granted and notwithstanding anything hereinbefore contained or implied do not entitle the Resident to any proprietary interest in or charge over the properties or assets of the Landlord nor does this Agreement constitute a registrable lease.
[6] The occupants were also liable to pay a weekly services charge. Arrangements of this type between Crossdale and those of the occupants still opposing the exercise of the power of sale were all entered into between June 1999 and November 2006, with their loans ranging from $35,000 to $44,000.
[7] Throughout its period of ownership, Crossdale always borrowed against the security of the property with at least one mortgage registered against the relevant titles. In August 2006, Cashmere advanced $875,000 to Crossdale secured by a first mortgage over the titles to the units occupied by the defendants. The group of units
over which Cashmere took security was not the whole property. Cashmere’s mortgage was registered in September 2006 and Crossdale’s obligations as mortgagor were supported by a guarantee completed by the principal shareholder and director of Crossdale, the second defendant, Mr Gary Campbell (Mr Campbell). The loan was for one year. It went into default and Cashmere took steps under the Property Law Act 1952 intending to exercise its power of sale of the property. In April 2008, the amount outstanding was $1,121,672.57 and I was advised by counsel that, with interest since then, the present sum owed is some $1.198 million.
[8] No form of interest for the occupants was registered against the relevant certificates of title for each of their units, nor did any of them lodge a caveat against the titles to notify their interest. Mr Till submitted that a caveat would not have been sustainable in light of the covenant cited in [5] above. Accordingly, at the time each of the relevant occupants made their respective advances to Crossdale, they became unsecured creditors, with rights to occupy a unit on terms that gave them no proprietary interest.
[9] In February 2008, Cheryl Hamilton, an employee of Cashmere, visited the properties in relation to Cashmere’s intended sale of them. Ms Hamilton was advised by certain of the occupants that they treated themselves as owners of the units, and that they had paid Mr Campbell various sums up to $50,000 for the rights to their units. It is not disputed that, until this visit, Cashmere was unaware of the nature of the arrangements between Mr Campbell/Crossdale and the occupants.
[10] In April 2008, Cashmere commenced the present proceedings, seeking orders that would confirm its rights to exercise the power of sale under its mortgage.
[11] At the end of May 2008, solicitors acting for at least some of the occupants made an application to the Minister of Housing for a declaration that the properties constituted a retirement village under s 103 of the RV Act. That application was not made on notice to Cashmere as mortgagee, and on 30 June 2008 an Order in Council was made under s 103(2)(b)(i) of the RV Act, declaring a total of 22 units to be a retirement village for the purposes of the RV Act. Those units included the ones over which Cashmere held its first mortgage.
[12] In June 2008, Cashmere entered judgment against Mr Campbell for the amount then outstanding. On his own petition, Mr Campbell was adjudicated bankrupt in August 2008. Cashmere believes he is resident in Australia.
[13] In response to enquiries made by solicitors for Cashmere, they were advised in August 2008 of briefing notes and an aide memoire for the Minister prior to
making the Order in Council which had noted:4
that a declaration of status of the units as a retirement village did not equate to registration and that registration of a memorial against the
certificates of title was essential for the protection under the RV Act;
that on its own, an Order in Council would not confer on the residents any of the protections provided by the RV Act without registration
occurring;
part of the registration requirement was for an operator to demonstrate financial viability and in the circumstances it was not believed that
Crossdale was likely to be able to meet the requirements for registration.
[14] Crossdale has taken no part in the proceedings. It is a fair inference that Mr Campbell misrepresented to Cashmere the terms on which occupants were in residence in the units, or at least dealt with Cashmere on terms that left them with an impression that no such long-term occupancy on serviced terms was involved. Nor is there any evidence that Mr Campbell put the occupants on notice of his having mortgaged the units, but there is no readily identifiable duty on him to do so.
The Retirement Villages Act 2003
[15] The purpose of the RV Act is specified in s 3 to be:
3 Purpose
The purpose of this Act is—
(a) to protect the interests of residents and intending residents of retirement villages:
(b) to enable the development of retirement villages under a legal framework readily understandable by residents, intending residents, and operators:
...
Section 3 continues with six more specific aims that are to be pursued to effect or further the purposes in (a) and (b). They include providing a regulatory and monitoring regime for retirement villages and providing an environment of security and protection of rights for the residents of retirement villages.
[16] Section 10 of the RV Act requires that all retirement villages be registered. It imposes an obligation on the operator of a retirement village to ensure that it is registered. An operator is required to lodge with the Registrar of Retirement Villages an application for registration providing relatively extensive details.5 The details to be provided include the address of any holder of security interest registered against the certificates of title comprising the retirement village.
[17] Once a retirement village is registered, the Registrar must notify the Registrar-General of Land of that registration, which triggers an obligation on the Registrar-General to note on every certificate of title a memorial in the following terms:6
Subject to section 22 of the Retirement Villages Act 2003 (which provides priority for the rights of residents ahead of the rights of holders of security interests).
[18] Once such memorials are registered, the Registrar-General must give notice of the memorial to the holder of any security interest registered against the certificate of title.7
[19] Section 22(1) of the RV Act provides that once a memorial under s 21 of the
RV Act has been registered against titles, the holder of a security interest or any receiver or liquidator or statutory manager of property comprising the retirement
5 Section 10(2).
6 RV Act, s 21(3).
village cannot dispose of it other than as a going concern, and cannot evict any resident or exclude any resident from use of facilities to which the resident is ordinarily entitled. That restriction is subject to an exception if consent in writing to the proposed course is provided by at least 90 per cent of the residents after they have received independent legal advice.
[20] The holder of a security interest may also apply to the High Court for an exemption from the constraints in s 22(1) of the RV Act, and the Court has a discretion to grant such an exemption subject to any conditions that the Court considers appropriate.8 The RV Act provides no guidance on the criteria to be considered by the Court on any such application. Counsel were not aware of any such applications having been brought.
[21] Once the RV Act was in force, those negotiating to acquire interests as occupants in a retirement village, and advisers acting for them, would focus on the necessity for registration, as the key to protecting their interests. The constraint on the powers of a mortgagee to effect a sale, including on terms granting vacant possession to a purchaser, depended on the existence on the certificate of title of a memorial under s 21 of the RV Act.
[22] Section 12 of the RV Act provided separately for the application of the registration requirements to retirement villages existing when that part of the Act came into force. Operators in that situation were required to make application for registration within six months from the day on which s 12 came into force, and operators could not offer occupancy to anyone after 12 months from the day on which the section came into force unless the retirement village had been registered under the RV Act.
[23] Here, the competing interests of the security holder and the occupants are affected by two factors. First, all four of the occupants who are still resisting the exercise by Cashmere of its power of sale as mortgagee acquired their interests as occupants before Part 2 of the RV Act came into force on 1 May 2007. They therefore acquired their contractual interests in a legal environment in which there
was no specific statutory protection for occupants of retirement villages and they would have been left to assess the risks involved in making unsecured advances to the owner of the retirement village.
[24] Secondly, there were clearly material omissions or deficiencies on the part of Crossdale and Mr Campbell. It seems strongly arguable, at the least, that Mr Campbell was operating the property as a retirement village in terms of the definition in s 6 of the RV Act, and that he breached the obligation to register an existing retirement village as required by s 12 of the RV Act. It also seems likely that he failed to disclose to Cashmere, at the time of his borrowing from it, that the property offered as security ought to have been registered under the RV Act, with the constraints for a mortgagee that would follow from that. Whatever rights the occupants have to claim repayment of the current extent of advances to Crossdale, together with any bases for a claim against Mr Campbell, should realistically be assumed to be worthless.
[25] In these circumstances, Mr Till QC argued for the occupants that primacy should be given to their interests, and that the issue should be resolved on the basis that I should protect their position as if registration had occurred, even although it has not. However, the approach of the Supreme Court in the ultimate appeal from the summary judgment phase of these proceedings is inconsistent with any expansive implication of the protections intended to be provided for occupants under the RV Act.
[26] The Court of Appeal had found that once an Order in Council had been made declaring the property to be a retirement village, then the obligation on the Registrar- General of Lands was triggered to note a memorial on the certificates of title for the land comprising the retirement village under s 21 of the RV Act. The Court of Appeal’s analysis equated the declaration of status as a retirement village under
s 103 of the RV Act, with registration of the village as such.9
9 Cashmere Capital Ltd v Crossdale Properties Ltd [2009] NZCA 185, [2009] 3 NZLR 612 at
[30], [33].
[27] The Supreme Court reversed that finding. It treated the purposes for which the Minister might recommend to the Governor-General that an Order in Council was necessary were more limited than, and different from, the process of registration of a retirement village. It was only that step which in turn triggered the Registrar- General’s obligation to enter memorials on certificates of title.10
[28] As to the source of protection for occupants, the Supreme Court observed:11
The 2003 Act protects residents against the exercise of power of sale by mortgagees by giving residents the priority provided for in ss 21 and 22. The problem for the residents of course is that such protection only arises on registration of the village on the application of an operator and the noting of the title by the Registrar-General.
[29] I am bound to adopt the Supreme Court’s analysis of the manner in which the RV Act applies to protect the occupants. With respect, I am entirely comfortable doing so because the process for registration and opportunities for those with existing security interests against properties comprising a retirement village dovetails with, rather than conflicting with, the important principle of indefeasibility of title.
[30] Mr Hair argued that any extension of the scope of protection for occupants provided by the RV Act had either to be explicitly spelt out in the provisions, or operating so clearly by implication that the extended protection “leapt off the page”. He invited analogy with the analysis of Tipping J in the Supreme Court’s decision in
Regal Castings Ltd v Lightbody.12 That case involved the scope of fraud that would
defeat indefeasibility principles under the Land Transfer Act 1952. The relevant provisions of that Act had to be read in light of provisions in the Property Law Act
1952. For a necessary implication in the statutory context, Tipping J required the point to follow “as a matter of inevitable logic Parliament must have [so] intended”.13
[31] That analysis is a helpful analogy. Parliament could have gone further in the
RV Act, but to do so in respects that intruded on the important principle of indefeasibility of title would reasonably require the extent of intrusion to be
10 Cashmere Capital Ltd v Carroll [2009] NZSC 123 at [38]-[44].
11 At [61].
12 Regal Castings Ltd v Lightbody [2009] 2 NZLR 433 (SC).
13 At [141].
explicitly stated and defined. Alternatively, it would have to arise very clearly from the terms and structure of other provisions. It is not a case in which I would be prepared to make any such implication.
[32] The RV Act applies to afford protections to occupants, to the extent that the processes contemplated by the RV Act have actually occurred. There is no scope for treating registration as having occurred when it has not. Had there been registration under the RV Act in this case, it is likely that Cashmere would have applied under s 22(3) of the RV Act for exemption from the constraint on exercise of its powers as mortgagee, given the circumstances in which it made its advance, apparently unaware of the status of the property as a retirement village.
[33] On any such application, it would be likely that a relevant consideration would be the status of the occupants as pre-RV Act acquirers of their interests. They acquired at times when they could reasonably be expected to take other steps to protect their position (or accept their vulnerability to the adverse outcome that has ensued), and they could not look to a statutory regime that was not then in force. Alternatively, for those who acquired when the relevant provisions in the RV Act were known but not in force, they ought to have been alerted to the necessity for registration under s 12 of the RV Act once those provisions came into effect. That awareness would trigger the need to ensure the operator complied with the obligation to register, and to pressure him to do so.
[34] From Cashmere’s perspective, it is insistent that it would not have lent money to Crossdale if its first mortgage security would be compromised by the status of the properties as a retirement village. Those are factual circumstances that do not encourage attempts to imply a wider regime of protection for the occupants.
Other grounds that prevent the mortgagee exercising power of sale
[35] Mr Till’s final alternative was a general appeal to the unconscionability of permitting Cashmere to enforce its security, and he submitted that the relief the mortgagee seeks should be denied it in equity. He criticised Cashmere for not making sufficient enquiries at the time of making the advance to Crossdale, to
discover that Mr Campbell was operating the property as a retirement village. He suggests that Cashmere was on notice that Mr Campbell operated another retirement village in Invercargill. Arguably, it would have become apparent to Cashmere that the property was being operated as a retirement village had it asked for, and perused, a copy of the ORA. Alternatively, a visit to the property and enquiry of occupants would have revealed at the time of the advance what was subsequently gleaned by Ms Hamilton in February 2008. From this perspective, it was argued that the mortgagee ought to accept some responsibility for the drop in the value of the security it took by virtue of the constraint that would apply, if the property had been registered as a retirement village, and the s 21 memorial had been endorsed on the titles.
[36] This argument amounts to an attempt to invoke the Court’s equitable jurisdiction to set aside the mortgage as being unconscionable to a third party, the occupants of the property. Establishing a claim in equity could invalidate the underlying obligation that the mortgage secures.14 This jurisdiction complements the Court’s statutory power to re-open or set aside mortgage agreements in certain circumstances.15
[37] However, any challenge to the validity of an agreement secured by a mortgage requires evidence of unconscionable conduct as between the mortgagee and mortgagor, or mortgagee and guarantor of that mortgage, but does not extend to third parties. Mr Till’s submissions characterise the mortgagee’s unconscionable conduct as failing to make adequate enquiries when put on notice that third party interests in the property may exist, even although these were not registrable at the time the security was granted. Even if there was evidence of unconscionable conduct on the part of the mortgagee, there is no principled basis on which it could
be invoked in equity by a third party.
14 See, for example, undue influenced exerted on a mortgagor or guarantor: Wilkinson v ASB Bank
Ltd [1998] 1 NZLR 674.
15 See, for example, where a mortgage has been obtained by misleading and deceptive conduct in breach of the Fair Trading Act 1986, or where the mortgage instrument is considered oppressive in terms of the Credit Contracts and Consumer Finance Act, s 127(1): Dungey v ANZ Banking Group Ltd [1997] NZFLR 404.
[38] In any event, I am not prepared to make any finding on the evidence that there was a material failure by Cashmere to research the true nature of the property, to an extent that would disentitle it to exercise the legal powers granted under the terms of security it took for its advance. There was nothing in the terms of the application for finance, or the valuations relied upon, to signal the use of the property as a retirement village. The credit application described them as “8 x 2 bedroom rented units …” and the complex was described as having “…tremendous potential for eventual use or sale as a motel complex”. The application noted that it adjoined a substantial tract of land that was used as a motor camp, and that Mr Campbell was happy to “sit on it” (ie the property) in the meantime and use the appreciating value to support other projects. The description of the subject property as “units” could be contrasted with the description of Mr Campbell’s development in Invercargill that was described as a retirement village.
[39] The brokers who promoted the credit application on Mr Campbell’s behalf to Cashmere described the units as being rented at $185 per week, calculating that four units were therefore generating some $38,480 per annum in rental. A summary valuation accompanying the application dated 29 August 2006 made no reference to the grant of rights to occupy the units for the life of the occupants which, in valuation terms, would reasonably be expected to constitute an impediment to
attributing market value to the units.16
[40] Mr Hair acknowledged that Cashmere did have a representative in Christchurch at the time of the advance, but denied any suggestion that competent assessment of the risk being assumed necessarily required a representative of the mortgagee to conduct a physical inspection. Although such step might be prudent, I accept that, in light of the extent of information that was provided to the mortgagee, the omission to conduct a physical inspection (implicitly extending to some form of exchange with one or more of the occupants) cannot be made out.
[41] I am far from satisfied that Cashmere’s conduct has contributed in a way that ought to disentitle it from exercising the power of sale that it relied upon in making
its advance.
16 ABD, Vol 1 at 23, 29 and 32.
[42] In the end, the indefeasibility of title enables secured lenders to rely on the state of the register as reflecting the quality of security they obtain.
Conclusion
[43] Accordingly, I am satisfied that the mortgagee is entitled to orders confirming its entitlement to exercise its mortgagee’s power of sale of the units. If this point was reached, Mr Hair volunteered on behalf of Cashmere a commitment not to exercise the power of sale for a period of at least two months, and, if all else failed, Mr Till acknowledged that a breathing space of that period would be of assistance to the defendants. I do not propose making it a term of the relief now granted to the mortgagee, as there is no need to rely on that offer to make out the entitlement to the relief granted. I anticipate that Cashmere will conduct itself in good faith in compliance with the assurance offered to the Court.
[44] In the circumstances, there will be no order as to costs.
Dobson J
Solicitors:
Malley & Co, Christchurch for plaintiff
Steel & Co, Christchurch for fourth, sixth, eighth and tenth defendants
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