Chen v Sanctuary Developments no.8 Limited
[2019] NZHC 1476
•22 July 2019
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2018-404-001291
[2019] NZHC 1476
BETWEEN CHAO MING CHEN
Plaintiff
AND
SANCTUARY DEVELOPMENTS NO 8 LIMITED
Defendant
Hearing: 2 February 2019 Appearances:
J A Wickes for the Applicant
L M Van and R A Idione for the Respondent
Judgment:
22 July 2019
JUDGMENT OF ASSOCIATE JUDGE SARGISSON
This judgment was delivered by me on 22 July 2019 at 11.30 a.m. pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar Date.......................................
Solicitors:
Loo & Koo, Auckland Anthony Harper, Auckland
CHEN v SANCTUARY DEVELOPMENTS NO 8 LTD [2019] NZHC 1476 [22 July 2019]
Introduction
[1] This proceeding concerns a caveat lodged by the applicant, Chao Ming Chen, on 6 June 2018, over a property at 9 Princes Street, Auckland (property).1 Mr Chen applies for an order that the caveat not lapse pursuant to s 145A of the Land Transfer Act 1952.
[2]The caveat claims an interest in the Princes Street property:
Pursuant to loan agreement and deed of arrangement dated 30 June 2015 whereby Chao Ming CHEN is the lender and the registered proprietor, Sanctuary Developments No. 8 Limited, is the borrower and the loan is agreed to be secured by a second mortgage over the said land.
[3] The respondent, Sanctuary Developments No 8 Limited (Sanctuary), is now the registered proprietor of the property, having acquired it in October 2016 for conversion to residential apartments. It opposes the order sought.
[4] The Court has made an interim order that the caveat not lapse pending the outcome of the application.
The dispute in a nutshell
[5] It is not in dispute that the parties entered into the loan agreement that is cited in the caveat (Loan Agreement), or that Sanctuary is indebted to Mr Chen for
$5 million, most of which it used for the deposit on its purchase of the property. It is also common ground that pursuant to the Loan Agreement Mr Chen had an entitlement
– upon settlement of the purchase of the property – to an equitable interest in a proposed second mortgage over the property as security for his advance. But there the parties’ positions diverge.
[6] Sanctuary says it is “crystal clear” that the interest claimed in the caveat no longer exists. It argues that under the Loan Agreement the proposed mortgage was to be held by a trustee for private investors – of which Mr Chen was to be only one of a number – pursuant to an investment scheme operated by Gilligan Sheppard Ltd known
1 Title Identifier NA12D/152 – caveat number 11138144.1, registered on 6 June 2018.
as the GS Scheme (GS Scheme); and that the mortgage was obviously intended to be conditional on the GS Scheme attracting sufficient interest to satisfy Sanctuary’s bank it should become the main funder. The GS Scheme did not proceed due to lack of interest. Sanctuary contends that ultimately it made other arrangements with Mr Chen which overtook the Loan Agreement.
[7] Sanctuary also has a fall-back position; it is that Mr Chen is estopped from relying upon the claimed interest and for that reason (and others) the Court ought, in its residual discretion, to order that the caveat lapse.
[8] Mr Chen rejects Sanctuary’s contentions. He takes the position that under the Loan Agreement the mortgage was not conditional on the success of the GS Scheme and his right to insist on the mortgage has not been lost.
Law on summary removal of caveats
[9] The application is made under s 145A of the Land Transfer Act 1952. It relevantly provides:
(1)The registered proprietor of any estate or interest in the land protected by a caveat against dealings (other than a caveat lodged by the Registrar) may apply to the Registrar for the caveat to lapse.
(2)The Registrar must give the caveator notice of an application under subsection (1).
(3)The caveat lapses with the close of the prescribed period after the date on which the notice under subsection (2) is given unless—
(a)the caveator has earlier given to the Registrar notice that an application for an order to the contrary has been made to the High Court; and
(b)an order to that effect has been made and served on the Registrar within the prescribed period after the date on which the notice under paragraph (a) is given to the Registrar.
[10] The principles that apply under s 145A are well established. The summary procedure for removal of a caveat against dealings is unsuitable for the determination of disputed questions of fact.2 The onus under s 145A lies with the party applying to
2 Sims v Lowe [1988] 1 NZLR 656 (CA) at 659–660.
sustain the caveat to show there is a reasonably arguable case for the interest claimed, whether legal or equitable.3 However an order for removal will not be made unless it is patently clear that the caveat cannot be maintained, or there was no valid ground for lodging it or such a ground no longer exists. Where there is a conflict between the affidavits, the Court will generally prefer the evidence of the caveator.4
[11] Where the parties’ rights depend on the interpretation of a contract the Court may need to be aware of the factual matrix. Where the contract is sufficiently clear or key facts are not contested the Court may rule a particular interpretation is not tenable.5
[12] The nature of the caveat must be adequately and accurately described in the caveat instrument.6
[13] Even if the caveator establishes an arguable case for the interest claimed the Court retains a residual discretion to remove it (which must be exercised cautiously).7 Relevant considerations include whether removal will prejudice the legitimate rights of the caveator, whether the caveat serves any useful purpose, and whether there are alternative safeguards available.8
[14] It is for Mr Chen to show that he has an arguable case for the interest he claims. If the interest no longer exists the caveat should be removed; if it arguably exists, it is for Sanctuary to show grounds why the court should remove it.
[15] For reasons set out in this judgment, I am satisfied that Mr Chen has made out a reasonably arguable case for the order he seeks. I am satisfied that the caveat ought not to lapse.
3 Bethell v Rickard [2013] NZCA 68 at [22].
4 ibid.
5 At [29]; by way of example see also Lindsay v Noble Investments Ltd [2015] NZCA 588.
6 Land Transfer Act 1952 s 137(2).
7 Pacific Homes Ltd (in rec) v Consolidated Joineries Ltd [1996] 2 NZLR 652 (CA).
8 At 656.
Background
[16] On 30 June 2015 Sanctuary entered into an unconditional agreement to buy the Princes Street property for $43 million. An earlier conditional agreement to purchase the property had lapsed because Sanctuary could not raise the necessary funding.
[17] Also on 30 June, Mr Chen agreed to advance $5 million to Sanctuary to be used for the deposit on the purchase and they entered into the Loan Agreement. Mr Chen advanced the $5 million, and on 3 July 2015 Sanctuary used $4.5 million from the advance to pay the deposit.9
[18] Following Mr Chen’s advance, Sanctuary set about finding further funds to meet the balance of the purchase price. The balance was due 50 working days after 30 June 2015. Time was short. There was also the question of the funding to undertake the conversion to apartments.
[19] Presumably lessons were learned from the previous unsuccessful drive to secure funding. This was the aforementioned GS Scheme. Sanctuary had worked closely – and ultimately unsuccessfully – with Gilligan Sheppard Ltd (a financial services firm) to facilitate an equity investment scheme as part of a blended funding model to allow bank funding alongside a fund of contributions from private investors. In broad outline the position relating to the GS Scheme was:
(a)Gilligan Sheppard Nominees Ltd would be involved as trustee to hold securities for advances on behalf of private investors pursuant to a proposed Trustee Agreement.
(b)The private investors would provide two ‘tranches’ of funding – the first tranche being $5 million for the deposit and the balance between $8 and $13 million (to make a total of up to $18 million) to go towards the balance of the purchase price at settlement – with Sanctuary’s bank providing the balance of the required funding for
9 There is a suggestion in the evidence that the balance met the agent’s fee, but nothing turns on that in this proceeding.
the project. Tranche 1 funding would be rolled into Tranche 2 and secured upon settlement of the property purchase.
(c)If Tranches 1 and 2 combined did not reach the minimum level required to persuade Sanctuary’s bankers to proceed, Sanctuary would exercise its right to walk away from the purchase; and the private investors’ funds would be refunded with interest, unless the Trustee negotiated some other arrangement with Sanctuary on behalf of the investors to their satisfaction.
(d)As time progressed it became apparent that the level of interest was insufficient to achieve the minimum level of funding from private investors to make the GS Scheme (and the entire project) a viable proposition for the bank. The result was that the original agreement for sale and purchase did not proceed. Private investors’ funds were returned.
[20] In any event, Sanctuary says that when it entered into the second agreement for sale and purchase and the Loan Agreement it still believed that it could get the GS Scheme “up and running”. But it acknowledges there was no certainty the GS Scheme would succeed and posits that Mr Chen had to have known (which he denies) that the promise of the mortgage made in the Loan Agreement was contractually tied to the success of the GS Scheme.
[21]What is clear is that:
(a)Sanctuary committed itself to the purchase of the property unconditionally. The only assured funding was Mr Chen’s and one way or another Sanctuary had to find the balance of the purchase price, with or without the aid of additional private investors, and without the certainty that it would be able to “roll” Mr Chen’s advance in with those of a second tranche of investors.
(b)It was not in Sanctuary’s interest to be contractually bound – if the second tranche investors did not materialise – to proceed with the
GS Scheme simply to satisfy its obligation to provide Mr Chen with a second mortgage. Sanctuary required the flexibility to opt in or out of the GS Scheme.
[22] Sanctuary emphasises that the Loan Agreement entered into against that backdrop was based on the GS Scheme but signed by both parties in the knowledge that the GS Scheme might not proceed and that inevitably the mortgage to secure Mr Chen’s loan would be conditional on the success of the GS Scheme. It says the Loan Agreement must be interpreted with these factors in mind.
[23] Despite retaining a level of confidence about the likely success of the GS Scheme throughout July and August 2015, Sanctuary’s confidence proved unfounded. Apart from Mr Chen, few other private investors showed interest in making up the second tranche in the GS Scheme. On 7 September 2015 Sanctuary sent out an email to those who had expressed interest advising that the GS Scheme would not proceed, and that the project would be proceeding under a different funding model. Gary Groves, the director of Sanctuary, postulates that was the point when Sanctuary ceased being obliged to offer up a mortgage to Mr Chen upon settlement of the purchase of the property.
Is there a tenable argument that the mortgage was not conditional on the success of the GS Scheme?
[24] The operative provisions of the 30 June 2015 Loan Agreement (the Covenants) refer to Mr Chen’s agreement to advance the $5 million and the duration of the term of the loan plus the agreed interest and profit share. They provide expressly for Mr Chen’s advance to be secured by a second mortgage (to come into effect on settlement of Sanctuary’s purchase of the property) and stipulate that the mortgage security “will be held by the GS on behalf of Chen”. There is also a provision dealing in a broad-brush manner with the resolution of conflict between the Loan Agreement and the GS Scheme. These clauses are as follows (emphasis added):
1. CHEN agrees to loan the total sum of $5,000,000 to [Sanctuary] on the commencement date of the loan (as per reference schedule attached), and [Sanctuary] agrees to repay the principal amount, interest and profit share 10
working days following the completion and settlement of the PROJECT (as per reference schedule attached).
2. The principal repayment, interest and profit share calculation and repayment shall be based on the SCHEME and are described in reference schedule attached to this AGREEMENT.
3. At settlement of the Purchase of 9 Princes Street, Auckland Central, the loan will be secured by a second mortgage over the development property. The security will be held by the GS on behalf of Chen.
.…
7. If there is any conflict between the provisions of this Deed and the Scheme, the provisions of this Deed shall apply.
[25] Clause 3 is at the centre of the parties’ dispute and begs the question of what the parties intended the effect of the second part of the clause would be should the GS Scheme not go ahead. The starting point for the Court in embarking on its interpretation is to consider the question in the light of the agreement as a whole.10 The wider context in which the loan agreement was entered into is also clearly relevant.
[26] The Background provisions to the Loan Agreement contain references to the funding model in the GS Scheme, as modified to apply to the new situation and Mr Chen; and make clear that the Loan Agreement is “drawn based on” the GS Scheme. They also indicate that it is within the context of the GS Scheme that Gilligan Shepherd Nominees Ltd will act as trustee for Mr Chen and hold securities on his behalf under a trustee agreement.
[27]These provisions state (emphasis added):
B. This agreement is drawn based on the Equity Investment Scheme (“SCHEME”) facilitated by Gilligan Sheppard in which Gilligan Sheppard Nominee Limited (“GS”) will act as trustee on behalf of Chen and hold the securities on behalf of Chen under a Trustee Agreement.11
C.The Equity Investment Scheme (SCHEME)
10 See Firm PI 1 Ltd v Zurich Australian Insurance Ltd [2014] NZSC 147, [2015] 1 NZLR 432; endorsed by the Court of Appeal in Ward Equipment Ltd v Preston [2017] NZCA 444, [2018] NZCCLR 15 at [57].
11 I think the emphasised words are telling. They suggest it is only if the GS Scheme is used that Gilligan Sheppard Nominees Ltd becomes trustee and a trustee agreement is used. If the GS Scheme falls away the need for a trustee does also. The promise to give a mortgage seemingly stands regardless.
The Scheme is facilitated by GS to fund the purchase and eventual residual apartment development at 9 Princes Street, Auckland Central.
Tranche 1 – to fund the deposit requirement when the purchase of 9 Princes Street becomes unconditional, from payment of deposit to settlement of the purchase in August 2015. The interest rate for Tranche 1 is 50% per annum calculated monthly and compounded for the period from payment of deposit to settlement of the purchase. To compensate the investor for the Tranche 1 settlement risk, the interest receivable on settlement will be a minimum of
$1,500,000 (i.e. the investor will earn the greater of interest earned or
$1,500,000 on settlement). The Principal amount plus interest earned is rolled into Tranche 2.
Tranche 2 – to fund the settlement of the purchase of 9 Princes Street in conjunction with bank and/or Vendor funding, from settlement of the purchase to completion, and settlement of the PROJECT. The interest rate for Tranche 2 is 15% per annum calculated monthly and compounded. The Principal amount plus interest earned from both Tranche 1 and Tranche 2 will be repaid following completion and settlement of the PROJECT.
Profit share – the Investor/Lender in the Scheme (including Chen) shall receive a 40% share of the total net development profits shared pro-rata with total Principal amount lent to the completion of Tranche 2. (as per project feasibility and profit share calculation attached).
[28] The remaining part of the Loan Agreement is the reference schedule that is cited in the Covenants. The schedule lists the terms of Mr Chen’s advance (as already laid out in the body of the agreement). It also sets the terms governing the drawdown of Mr Chen’s advance:
As one lump sum or in parts as [Sanctuary] deem to be appropriate, on the later of:
(a) [Sanctuary] confirms in its professional judgement that the written offer of vendor finance in conjunction with the bank’s funding offer is satisfactory and within the acceptable margin as per project feasibility;
(b) [Sanctuary] confirms in its professional judgement that the total equity funding is sufficient for the purchase to proceed;
(c) Deposit becoming payable as per arrangement with the Vendor of 9 Princes Street, Auckland Central.
[29] Sanctuary argues that under the Loan Agreement it is not obliged to use the GS Scheme as a condition of using Mr Chen’s advance. Taking the provisions of the Loan Agreement as a whole, there does not appear to be a binding obligation to do so.
[30] Mr Chen does not argue the contrary. He says he was not particularly aware of the details of the GS Scheme or concerned with it. On his account, if Sanctuary
was not wedded to the GS Scheme it hardly mattered to him whether Sanctuary opted out of it in favour of another funding model.
[31] But it does not necessarily follow that the requirement in clause 3 of the Loan Agreement to give a mortgage security for Mr Chen’s advance falls away simply because Sanctuary opted out of using the GS Scheme. Mr Chen says what mattered to him was that under the agreement his advance was to be secured by a mortgage. Whether or not there was a trustee was of little consequence to him. At bottom, his argument is the requirement for a mortgage was not in any way conditional on whether Sanctuary chose to opt in or out of using the GS Scheme – rather, it was the requirement that he must allow a trustee to act for him pursuant to a trustee agreement under the scheme that was conditional on the scheme going ahead.
[32] Viewed in this light, I am satisfied that Mr Chen’s position is arguable. Sanctuary may well be right that it had the ability to opt out of the GS Scheme funding model and that the agreement was not a bar to its doing so. But:
(a)Clause B of the Background provisions makes clear that the Loan Agreement was based on the investment scheme (the GS Scheme) “in which” Gilligan Sheppard Nominees Ltd was to act as a trustee. Arguably, if the GS Scheme was abandoned there would be no call for the collective “umbrella” security. Mr Chen would remain the sole private investor.
(b)The reference schedule to the Loan Agreement suggests Sanctuary was not to draw down Mr Chen’s advance unless satisfied about the availability of funding to support the feasibility of the project. It refers to different sources of funding and contains nothing to bind the drawdown of Mr Chen’s loan to the use of the GS Scheme, which arguably only serves to support Mr Chen’s position that his mortgage was not conditional upon the use of the GS Scheme.
(c)Clause 3 of the Loan Agreement states unequivocally that “the loan will be secured by a second mortgage”. Arguably clear words
are needed to extinguish that right, but there are none. The requirement for a trustee is also in that clause but is simply for the benefit of Sanctuary, enabling it to enforce the requirement that Mr Chen join with other private investors under the umbrella of a trustee-held mortgage for the purposes of the GS Scheme. However, if Sanctuary waived its right to use the GS scheme it would waive its right to require Mr Chen to join in a collective security held by a trustee under the GS Scheme.
[33] I make no definitive findings on these matters. The essential point for the purpose of the present application is that they lend some support Mr Chen’s contention that his position is arguable. The position Sanctuary takes on the agreement is not “crystal clear” and the fact both sides look for support to the surrounding facts demonstrates that the appropriate interpretation of the Loan Agreement is wholly unsuitable for determination in the context of the application.
[34] I turn then to consider whether, as Sanctuary contends, there were subsequent events that show Mr Chen cannot sustain an argument that he retains the interest claimed.
Was the Loan Agreement overtaken by subsequent arrangements between Sanctuary and Mr Chen which clearly show he no longer has an arguable claim to an equitable mortgage?
[35] Sanctuary contends the obligation to give a mortgage upon settlement of the purchase of the Princess Street property (which it does not concede ever took effect) and indeed the entire Loan Agreement were overtaken by several events. It relies upon:
(a)a letter of 24 September 2015;
(b)a personal loan agreement of 6 October 2015; and
(c)a fee payment arrangement of 3 June 2016 paired with a related letter of 20 July 2017 regarding an offer of preference shares.
[36] Sanctuary’s position is that these documents make entirely clear that the obligation to provide a mortgage and indeed the entire the Loan Agreement fell away.
[37]I deal with each in turn.
The letter of 24 September 2015
[38] On 24 September 2015, having been asked to do so by Sanctuary (in order to reassure prospective lenders, particularly BNZ), Mr Chen signed a letter addressed to Sanctuary’s solicitor at Anthony Harper which he put on his own letterhead.
Dear Sylvia,
I understand that during the settlement process of 9 Princes Street BNZ bank may wish to be advised on the background of the fund utilised to make deposit payment for the purchase of the property.
I can confirm that as a personal arrangement between friends I have contributed the deposit fund for Gary [Groves] to utilise for the purchase of the property on behalf of Sanctuary … There is no security demanded and none was offered for this fund.
In support of the settlement process I am happy to provide you and the bank with an introduction of myself.
…
[39] Mr Chen continues by providing some details about his relationship to Mr Groves (who he had known for many years since opening a store in the Auckland CBD) and saying he was impressed by the Princes Street project and was confident of its success. He finishes the letter by stating:
Based on our friendship and mutual trust I considered documentation for the arrangement to be unnecessary. While some of your colleagues in New Zealand may find this absence of documentation to be unusual I trust you understand that this is a common occurrence between trusted friends in my cultural background.
[40] Mr Chen acknowledges that he sent this letter to Sanctuary’s solicitor, Sylvia Chea of Anthony Harper. But he deposes:
I understood from that letter that I was confirming that, pending settlement of the purchase of 9 Princes St, my advance was unsecured. I did not take legal advice before signing the letter.
[41] The parties have very different views about the significance and effect of the letter. Before coming to those differences, I pause to refer briefly to events leading up to the letter.
[42] The deposit had been paid on 3 July 2015. As the settlement date for the property purchase fast approached it looked increasingly unlikely that there would be sufficient other investors to make up the second tranche of funding required to make the GS Scheme viable. The only certainty appears to have been Mr Chen’s advance. By 7 September 2015 Sanctuary knew it could not settle on time and had sent an email to interested investors advising that if the project was to proceed it would not be under the GS Scheme model of funding. The vendor of the property threatened to exercise its rights under the agreement for sale and purchase. The prospect of cancellation and forfeiture of the deposit (provided by Mr Chen) loomed.
[43] Sanctuary adjusted its approach to seeking funding. Sanctuary turned to BNZ to see if it could secure alternative bank funding on more favourable terms from those it had previously been entertaining.
[44] During this fraught period, Sanctuary wanted to show BNZ and other potential funders that it was not bound to give a mortgage to secure Mr Chen’s loan. Mr Groves deposes that every lender Sanctuary approached “wanted information about the source of the $5 million deposit … and confirmation that [it] was not secured and would not affect their security”.
[45] Mr Chang, a manager working for Sanctuary, says he asked Mr Chen if he could assist in dealing with the concerns of potential lenders about the origin of the deposit and that Sanctuary was hopeful that BNZ would take the place of the primary lender. He says ‘I recall saying that … the lenders could not be certain that [Mr Chen] did not have an entitlement to a mortgage….” and that it was agreed Mr Chen would
write a letter to provide confirmation that the $5 million was advanced on an unsecured basis. The parties disagree as to who drafted the letter. Mr Chen says it was Sanctuary’s solicitor; Mr Chang says he helped Mr Chen. The email chain indicates that both probably worked together on the letter. As discussed, it was sent on 24 September.
[46] As it happened, the settlement date for the purchase of the property had passed without Sanctuary having the ability to settle. Also on 24 September, the vendor’s solicitors wrote reserving the vendor’s rights, and on 25 September they issued a settlement notice.
[47] Sanctuary asserts that Mr Chen’s intention at the time was undoubtedly to confirm his understanding that he had no entitlement to security for his advance (not just before settlement but after settlement) and to provide necessary assurance to that effect to BNZ. Sanctuary’s position is that Mr Chen was very aware that he would lose his deposit unless BNZ provided the funding for settlement. This required him to provide the necessary assurance to BNZ. In Mr Chen’s evidence in reply he states he knew that if funding could not be found the deposit which he had funded would be forfeited. However, he is adamant that the clear basis for his advance remained that once the purchase was settled he would have a second mortgage behind that of the bank. He states:
I was concerned about the deposit being lost which would impact on my ability to recover my advance. I was prepared to sign the letter if it would facilitate settlement. In signing the letter I rationalised that my security would be behind that of the BNZ anyway should BNZ advance funding.
[48] Mr Chen’s account may be correct and cannot be dismissed peremptorily. The fact that Sanctuary holds certain opinions about Mr Chen’s professed beliefs or intentions is not determinative. The letter is not a sufficient basis for determining that Mr Chen lost his claimed interest. It does not say to Sanctuary that Mr Chen agrees to abandon the right to a mortgage. It does not clearly purport to vary or cancel the Loan Agreement of 30 June; it does not record the existence of the Loan Agreement or of any agreement to change or abandon it. The letter is written as if there never was such an agreement, which cannot be true. The parties cannot change the fact that they entered into the Loan Agreement after the fact by implication. The letter’s purpose
was to persuade the bank of a position that conflicted with the Loan Agreement, and it achieved this by misrepresenting the agreement the parties had factually made.
[49] It may be that if BNZ had acted upon the letter at the time (which it did not) it might have had remedies against one or both parties, but I am not satisfied I should regard the letter as a ‘crystal clear’ cancellation of the Loan Agreement. I am also satisfied that Mr Chen’s explanation cannot be dismissed as patently wrong.
The personal loan agreement of 6 October 2015
[50] Despite Mr Chen’s letter, following its settlement notice the vendor cancelled the agreement for sale and purchase and gave notice that the deposit had been forfeited. Sanctuary worked desperately for the next few days to find a solution. It says it kept Mr Chen advised, and after much negotiation the solicitors for the vendor agreed to a non-negotiable option to purchase that was open until 30 September. The option permitted Sanctuary to credit the deposit against the purchase price, which Sanctuary says it explained to Mr Chen. Sanctuary accepted the vendor’s offer and continued its efforts to raise the balance of the purchase price. Mr Groves deposes that during this period Sanctuary says BNZ continued to make enquiries about the source of funds paid for the deposit, and “[Sanctuary] decided as a result to draft a new agreement to document [Mr Chen’s] loan”. This was signed by Mr Chen and Mr Groves on 6 October 2015.
[51] The 6 October 2015 document is entitled “Private Loan Agreement”. The title page records that the agreement is between Mr Chen and Mr Groves (rather than Sanctuary which is not a party). It states that it “documents the private financial arrangement” under which Mr Chen provided $4.5 million for the deposit on the purchase of the property.12 It describes the term of the loan as being from 3 July 2015 to the settlement and completion of the 9 Princes Street residential project, and provides for repayment upon the expiry of the term together with a “mutually agreeable share of the proceeds” of the property development in the form of cash payment in one lump sum, transfer of ownership of apartment units of equivalent value, or a combination of the two.
12 The balance of $500,000 having provided the real estate agent’s fee.
[52]The personal agreement is discussed by Mr Grove, who states in his evidence:
I was named as the borrower personally and [Mr Chen] as the lender. Naturally, none of the terms of the GS Scheme were transposed to this document.
[53] Mr Groves claims that the brief agreement document “simply sought to capture what little information we knew about the loan at that time”. He states that this document “supersede[d] the only other legal document describing the loan which had been signed on 30 June 2015”. He also claims that this was critical in persuading BNZ to lend and that “Sanctuary’s ability to secure borrowing sufficient to complete the purchase turned on [Mr Chen’s] statements in the disclaimer letter [of 24 September 2015] and personal agreement that $5 million advance was unsecured”.
[54] There is however no evidence from the bank to support this contention and the agreement itself raises obvious issues as to enforceability and the extent to which a bank would wish to rely upon it.
[55] As with the 24 September letter Mr Chen does not accept that he and Sanctuary intended to change the agreement between themselves. He acknowledges he knew the letter was to go to BNZ but denies knowing it went to anyone else. He says:
I had no knowledge that the 24 September 2015 letter and the Personal Loan Agreement were provided by the Defendant to anyone other than the BNZ. I had no knowledge that further loans had been granted by the defendant to Waimauri Limited and Miraka LLC. For a time after the purchase went through, Mr Chang and Mr Groves would give me regular updates on the project and supply me with figures including presale figures.
[56] The personal loan agreement is not an agreement with Sanctuary and arguably does not have any effect on the Loan Agreement at all. It is limited to outlining Mr Chen’s profit arrangement and does not address security or the cancellation of Mr Chen’s rights against Sanctuary under the Loan Agreement.
[57] As with the letter of 24 September, the personal loan agreement’s purpose was seemingly to persuade the bank by misrepresenting the true position between Sanctuary and Mr Chen. However, two individuals purporting to recast the background of their arrangement via private agreement to satisfy new lenders does not
conclusively prove that the agreement between Mr Chen and Sanctuary was varied or cancelled.
[58] While I am satisfied that both parties were involved in the manipulation of the true position, I am not satisfied that the interest claimed in the caveat has therefore certainly been lost.
Settlement of the purchase
[59] The purchase of the property settled on 16 October 2015 and title transferred to Sanctuary. First, second and third mortgages were registered in the names of BNZ and two construction funders Waimauri Ltd and Miraka LLC. Mr Groves’ evidence is that these lenders had received copies of the 24 September 2015 letter.
[60] I come next to the fee pay agreement of 3 June 2016 and the preference share offer.
Fee payment agreement of 3 June 2016 and preference share offer
[61] Mr Chen deposes that in April or May 2016, Mr Groves contacted him regarding problems with a Mr Edney, the registered director of Waimauri Ltd. Mr Chen gathered Mr Edney had been under the impression that the deposit funding had come from Mr Groves himself and was concerned about the origins of the funding for the deposit. Mr Chen deposes that he got the impression Mr Groves wanted to take steps regarding the deposit to placate Mr Edney’s concerns.
[62] Mr Groves’ account is that “following settlement and with the benefit of time” he revisited Mr Chen’s investment, as he felt the personal loan agreement was “inadequate”. He contends that Mr Chen had no form of security and there were no fixed or clear terms regarding interest and payment and he came up with a plan to provide preference shares to protect Mr Chen’s investment. Mr Groves apparently also had his own position in mind, as he describes the “intention” as being twofold:
… to provide some alternative form of security for [Mr Chen] as he did not have any security in the Property, and [to] supersede the interim Personal Loan Agreement.
[63] On 27 May 2016 Sanctuary passed a resolution committing to issue Mr Chen 5 million preference shares at $1 each. These were to be issued on the date of the first drawdown of funding towards the property.
[64] On 3 June 2016 Mr Grove, acting as director of Sanctuary, and Mr Chen signed a fee payment agreement (fee payment agreement) pursuant to the 27 May resolution committing to issue the preference shares. The agreement provided for Sanctuary to provide to Mr Chen $250,000 on the date the preference shares were issued and a further $310,000 on the date of the preference shares being redeemed by Sanctuary.
[65] Mr Groves says Mr Chang, on behalf of Sanctuary, contacted Mr Chen about the proposal. Mr Chen responded promptly and confirmed that the proposal set out in the email was consistent with the agreement he had with Sanctuary in 2015. Mr Chen’s email dated 3 June 2016 stated:
hi jono
sorry for the late reply
please pass on my acknowledgement that Mr Hsieh and myself have received and accepted the Fee Payment Agreement along with the Preference Shares Document from Sanctuary Group.
Well unnecessary as we both feel the project has so far been an incredibly successful one with impressive response as proven with sale figures in such short time. We are confident Gary and his team will continue to deliver great results.
We both understand and appreciate the security offered here for our initial equity investment.
…
[66] Subsequently, on 20 July 2017 Mr Chang for Sanctuary sent Mr Chen an email stating:
We are completing the first construction drawdown with the development funders.
As the last part of the junior funders’ compliance check we are to report the background of the initial fund of $5,000,000 and your relationship with Sanctuary. To ensure that I am reporting correct facts please kindly confirm the following by return email.
1. You (Chao Ming Chen) have provided a lumpsum
$5,000,000 funding to Sanctuary in 2015;
2. Sanctuary and yourself have established a structure for this unsecured fund with Preference Shares, to be issued to you upon the first construction drawdown for the project;
3. The dividend is calculated at 15% per annum capitalised;
4. You understand that you and Sanctuary are subordinated to all lenders and creditors and that your preference shares rank in priority to Sanctuary;
5. You understand and acknowledge the right of all lenders and creditors being paid ahead of you and Sanctuary;
6. I understand that the Preference Shares entitle me to dividend and principal repayment, but do not entitle me to possession and administration of Sanctuary Developments No 8 Ltd.
I look forward to your email reply in confirming that you understand and acknowledge all of the above.
[67]Within half an hour Mr Chen responded:
Hi Jono
confirm the below point is inline with the agreement I had with Sanctuary from back in 2015
thanks Jimmy
[68] Sanctuary’s position is it and Mr Chen clearly both understood that the fee payment agreement was to provide Mr Chen with security in the form of an equity investment in Sanctuary, where otherwise he would have had no security due following the abandonment of the GS Scheme.
[69] Mr Chen denies that his email is anything more than a confirmation of his position that the Loan Agreement of 2015 still stands. His position is that the resolution to issue shares and the fee payment agreement were simply an attempt by Mr Groves to placate Mr Edney’s (and possibly others’) concerns about the origins of the funding. Mr Chen disputes that he accepted that the fee payment agreement was his only form of security, instead contending that his right to a mortgage under the original Loan Agreement remained extant. He says no money was ever paid and no shares were ever issued to him. He suggests that he merely viewed those documents
as “bits of paper that the Defendant was using to keep its creditors placated” but which did not reflect the reality of his arrangement with Sanctuary.
[70] Mr Groves acknowledges that no shares have been issued. He deposes as follows:
The first construction drawdown for the project was also the trigger for Sanctuary paying [Mr Chen] $250,000 under the Preference Share Agreement. Unfortunately, the company constitution was incomplete and had not been approved by the lenders. As a result the lenders refused to authorise a
$250,000 drawdown for payment to [Mr Chen]at the agreed time. There were, however, other discussions with [Mr Chen]about how the $250,000 obligation could be met, including whether an arrangement could be reached regarding rental arrears.
[71] Counsel for Sanctuary submits that the subsequent failure to issue shares does not detract from Sanctuary’s contention that the Loan Agreement has been superseded and the right to a mortgage has been lost. She submits the appropriate course may now be for Mr Chen to sue for specific performance regarding the shares, but that right does not support his attempt to maintain the caveat.
[72] I do not see that the position is quite so clear. At first glance the preference share arrangement looks like a deal between Sanctuary and Mr Chen. In simple terms, Sanctuary passes a resolution, makes an offer based on that resolution to Mr Chen, and Mr Chen accepts. But implicit in the offer is that Sanctuary had legal capacity to make an offer capable of being legally implemented. It seems that, at the time Mr Groves passed the resolution, Sanctuary’s constitution was incomplete and had not been approved by the lenders. Sanctuary then adopted a constitution which made performance of the whole arrangement impossible. On that basis, it is arguable the arrangement or deal is not binding on Mr Chen. If Sanctuary had represented the true position Mr Chen may well not have accepted the deal.
[73] On this basis, it is also plainly arguable that the loan agreement was not superseded by the fee payment agreement and that the entitlement to call upon the mortgage was not lost.
Remaining grounds relied upon in opposition
[74] Counsel for Sanctuary submits that it relies on several remaining grounds for opposing the order that Mr Chen seeks.
[75] Counsel submits that there is a straightforward case for lapsing the caveat based upon estoppel. The thrust of the argument is that Sanctuary has committed itself to its lenders on the basis of the representations it and Mr Chen made to its lenders.
[76] It will be clear from my characterisation of Sanctuary’s behaviour in making those representations throughout this judgment that I do not think there is an arguable basis upon which Sanctuary itself may rely upon estoppel. It seems clear that Sanctuary and Mr Chen deliberately set out to misrepresent the contractual basis for Mr Chen’s advance in order to persuade various potential lenders to commit. That may well found some rights in contract or tort for the lenders themselves, but those parties have not raised the issue of estoppel on this application. At this juncture I consider it would be inappropriate to consider the point further.
[77] Council also submits that I should use my discretion to direct that the caveat lapse because it is now impossible on the facts for Sanctuary to give Mr Chen a second mortgage. I agree with counsel for Mr Chen that it may well be too late to give him a second mortgage, but it is not too late to give him a mortgage that has a lesser priority to those that have already been registered.
Result
[78] For the reasons I have set out, I am satisfied that it is appropriate to make an order that the caveat not lapse. I order accordingly.
[79]I make the following further orders:
(a)Mr Chen is to bring substantive proceedings within 15 working days to establish his entitlement to a mortgage and he is to diligently pursue the proceedings.
(b)Should he fail to take such steps, leave is reserved for Sanctuary to seek an order that the caveat does not lapse. Such an application may be made by memorandum in this proceeding on 3 working days’ notice.
[80] As costs follow the event Mr Chen is entitled to costs on his application on a 2B basis plus disbursements as fixed by the Registrar.
Associate Judge Sargisson
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