F M Custodians Ltd v Pinot Rouge New Zealand Ltd HC Auckland CIV 2010 412 28
[2010] NZHC 1415
•9 August 2010
IN THE HIGH COURT OF NEW ZEALAND DUNEDIN REGISTRY
CIV 2010 412 000028
BETWEEN F M CUSTODIANS LIMITED Applicant
ANDPINOT ROUGE NEW ZEALAND LIMITED
Respondent
Hearing: 21 June 2010
Appearances: J V Ormsby and J W A Johnson for Applicant
C S Withnall QC and S M D Guest for Respondent
Judgment: 9 August 2010 at 2.30pm
JUDGMENT OF ASSOCIATE JUDGE OSBORNE
Introduction
[1] Central Otago Pinot Noir Estate Limited (“Copnel”) subdivided land at McArthurs Ridge near Alexandra. The development included a number of lifestyle blocks planted in grapes (“planting blocks”).
[2] The respondent (“Pinot Rouge”) in 2004 purchased a planted block of approximately 9 hectares. By a contract between Copnel and Rhona Anne Rodger (the latter nominating Pinot Rouge as purchaser), Pinot Rouge was also to receive on completion of the subdivision a proportional share (as tenant in common) in land within the subdivision known as the “Infrastructure Lots”. By the contract, Copnel agreed to hold the Pinot Rouge share in the Infrastructure Lots on trust for Pinot Rouge. The transfer of Pinot Rouge’s planting block was immediately registered.
Pinot Rouge did not then take steps to caveat its interest in the Infrastructure Lots.
F M CUSTODIANS LIMITED V PINOT ROUGE NEW ZEALAND LIMITED HC DUN CIV 2010 412
000028 9 August 2010
[3] In February 2007, as the subdivision was heading towards its third (of seven) stages Copnel obtained an $8,000,000.00 term (12 month) loan from the applicant in this proceeding, FM Custodians. Copnel gave a mortgage to FM Custodians over various lots at McArthurs Ridge, including some Infrastructure Lots. The mortgage was registered against the agreed titles on 4 May 2007. The term loan subsequently fell into default. Copnel has not repaid the loan. FM Custodians was taking steps towards a mortgagee sale when Pinot Rouge lodged first one caveat (in October
2008), claiming an estate or interest in three Infrastructure Lots, and then a second caveat (in June 2009), claiming an interest in one Infrastructure Lot. Each caveat claimed such interest “by virtue of the 2004 agreement for sale and purchase between [Copnel] and Pinot Rouge”.
The application
[4] FM Custodians applies under s 143 Land Transfer Act 1952 (“the Act”) for an order that the two caveats lapse in relation to three of the affected titles.
[5] The application relies upon two grounds.
[6] The first ground is that Pinot Rouge had no interest in the titles. Mr Ormsby for FM Custodians abandoned reliance on this ground as the evidence clearly establishes Pinot Rouge’s arguably equitable title (arising from the 2004 contract).
[7] It is FM Custodians’ second ground of application which the Court must determine. FM Custodians asserts that Pinot Rouge’s interest does not affect the ability of FM Custodians to effect a sale of the Infrastructure Lots at mortgagee sale.
The grounds of opposition
[8] The grounds of opposition as filed by Pinot Rouge were these:
a.The Respondent has a caveatable interest in the lands under and pursuant to an agreement for sale and purchase made between it and the registered proprietor of the lands at the time thereof.
b. Appearing from the affidavits to be filed and sworn herein.
[9] Thus, Pinot Rouge expressed specific grounds of opposition to meet FM Custodians’s first ground of application (which fell away by the hearing). There were no express grounds set out in opposition to FM Custodians’ second ground.
[10] For specific identification of Pinot Rouge’s grounds of opposition one has to look to the written submissions filed by Mr Withnall in advance of the hearing. Those were set out in Mr Withnall’s submissions as being that:
a.[Pinot Rouge] has a caveatable interest in the Properties by having equitable title to a share of the land shown as Lots
61, 14 and 50 on the plan attached to its agreement for sale
and purchase (“the Infrastructure Lots”); and
b. that its interest was registered on the Properties (sic) certificate of title prior to the Applicant’s Mortgage pursuant to encumbrance 5836440.5.
[11] At the hearing Mr Withnall confirmed that Pinot Rouge was not asserting that there was an arguable case that FM Custodians’ registered interest as mortgagee was defeasible by reason of fraud under s 63 of the Act.
[12] The Pinot Rouge case was therefore summarised by Mr Withnall in his written submission in this way:
It is submitted that it not necessary for the Respondent to establish Land Transfer fraud if it can establish that the Encumbrance gave notice of its interest in the property prior to the registration of the Applicant’s mortgage.
The Respondent’s caveat simply seeks to re-affirm the Respondent’s interest identified in the Encumbrance in the face of a clear attempt to deprive of its interest in the infrastructure lots.
Principles generally applicable to an application for removal of caveats under s
143 Land Transfer Act
[13] There was no issue between counsel as to the principles applicable to the present application. I adopt as a convenient summary of the principles the list in Land Law (loose leaf ed, Brookers at [2.9.06A]) (which were in turn substantially extracted from judgments of Associate Judge Faire):
1. The Court may make an order that a caveat be removed: Catchpole v
Burke [1974] 1 NZLR 620, at p 623.
2. If it is clear that there was no valid ground for lodging a caveat, or that the interest which in the first place justified the lodging of the caveat no longer exists, such a caveat should be removed: Sims v Lowe [1988] 1
NZLR 656, at p 659.
3. The onus under ss 143, 145 and 145A lies on the caveator to show that there is a reasonably arguable case for the interest claimed: Castle Hill Run Ltd v NZI Finance Ltd [1985] 2 NZLR 104.
4. The caveat, being a creature of statute, may be lodged only by a person upon whom a right to lodge it has been conferred by statute. It is not enough to show that the lodging and continued existence of the caveat would be in some way advantageous to the caveator: Guardian Trust and Executors Co of NZ Ltd v Hall [1938] NZLR 1020 (CA), at p 1025.
5. For the purpose of the application, the caveator must therefore show that he/she is entitled to, or beneficially interested in, the estate referred to in the caveat by virtue of an unregistered agreement or an instrument or transmission or of any trust (expressed or implied): s 137.
6. What the caveator must establish is an arguable case for claiming an interest of the kind in s 137.
7. Even if the caveator establishes an arguable case for the interest in the land claimed, the Court retains a discretion to make an order removing the caveat although it will be exercised cautiously: Pacific Homes Ltd (in rec) v Consolidated Joineries Ltd [1996] 2 NZLR 652; (1996) 3 NZ ConvC 192,459 (CA).
8. Delay is a relevant factor to be weighed in the exercise of the Court’s wide discretion. Delay is more important where there is specific prejudice. What is required is a consideration of all the circumstances: Varney v Anderson [1988] 1 NZLR 478, at p 480.
9. The summary procedure for removal of a caveat against dealings is wholly unsuitable for the determination of disputed questions of fact. Accordingly, the Court in Sims v Lowe [1988] 1 NZLR 656 said (at pp
659-660):
“that an order for the removal of such a caveat will not be made under s 143 unless it is patently clear that the caveat cannot be maintained either because there was no valid ground for lodging it or that such valid ground as then existed no longer does so.”
10. Once the caveator has established an arguable case for the interest claimed, the Court has an overall discretion as to whether the balance of convenience is for or against leaving the caveat in place: McMahon v McMahon [1997] NZFLR 145 (CA), at p 149.
[14] As I have indicated, it was common ground by the hearing that Pinot Rouge had a reasonably arguable case as to the interest which it had caveated. The
submissions of counsel understandably focussed on the seventh proposition in the above list, namely the Court’s discretion to make an order for removal even where an arguable interest has been made out. Mr Withnall properly recognised the existence of the discretion but developed his submissions upon the basis that the Court could not ignore the encumbrance as it amounted to a registration of Pinot Rouge’s interest in the Infrastructure Lots.
The registered proprietor’s estate
[15] FM Custodians registered its interest as mortgagee on 12 September 2005. It asserts that its registered mortgage therefore has priority over the unregistered interest of Pinot Rouge. Its submission is that the registration of Pinot Rouge’s caveat on 17 October 2008 cannot defeat the prior registered interest on FM Custodians.
[16] In the hearing before me the focus of Pinot Rouge was upon Encumbrance 5836440.5 which had been registered on 12 December 2003. Pinot Rouge asserts that that registration constituted a registration of Pinot Rouge’s interest prior to the registration of the FM Custodians’ mortgage. With that encumbrance registered upon the title, it is the Pinot Rouge position that FM Custodians’ estate or interest is subject to Pinot Rouge’s interest.
[17] Section 62 of the Act, which provides that the estate of a registered proprietor is paramount, establishes the principle of indefeasibility which is central to the Torrens system of title.
[18] The detailed provisions of s 62 are these:
62 Estate of registered proprietor paramount
Notwithstanding the existence in any other person of any estate or interest, whether derived by grant from the Crown or otherwise, which but for this Act might be held to be paramount or to have priority, [but subject to the provisions of Part 1 of the Land Transfer Amendment Act 1963], the registered proprietor of land or of any estate or interest in land under the provisions of this Act shall, except in case of fraud, hold the same subject to such encumbrances, liens, estates, or interests as may be notified on the folium of the register constituted by the grant or certificate of title of the
land, but absolutely free from all other encumbrances, liens, estates, or interests whatsoever,—
(a) Except the estate or interest of a proprietor claiming the same land under a prior certificate of title or under a prior grant registered under the provisions of this Act; and
(b)Except so far as regards the omission or misdescription of any right of way or other easement created in or existing upon any land; and
(c)Except so far as regards any portion of land that may be erroneously included in the grant, certificate of title, lease, or other instrument evidencing the title of the registered proprietor by wrong description of parcels or of boundaries.
[19] As Pinot Rouge at the hearing did not assert fraud, the focus of Pinot Rouge’s case was that it is entitled to protection through a prior registered encumbrance, the terms of which encumber the title with an obligation to transfer to Pinot Rouge an interest, as tenant in common, in the Infrastructure Lots.
[20] I now turn to examine the Pinot Rouge encumbrance argument. This requires first a consideration of the nature and extent of the registered encumbrance and, secondly, a consideration of any entitlements of Pinot Rouge arising out of the encumbrance.
The encumbrance
What is an encumbrance?
[21] An “encumbrance” is any memorial on the title, which interferes with any otherwise lawful use of the land by the registered proprietor, by creating a charge or interest over the land for the benefit of another: see Hodge v Applefields Limited (1997) 3 NZConvC 192,500 at 192,503 per John Hansen J (subsequent appeal dismissed: (1998) 3 NZConvC 192,726 (CA)).
The use of encumbrances
[22] In Jackson Mews Management Limited v Menere [2010] 2 NZLR 347 the Court of Appeal had cause to consider the way in which New Zealand conveyancers use “the rentcharge device” of a Memorandum of Encumbrance for purposes other than securing a sum of money. In that case certain rights had been secured by an encumbrance on the title of units in a retirement village. Flowing out of practice and precedents developed by Professor Brookfield, widespread use developed of the rentcharge device to secure ongoing obligations, to mutual advantage, in retirement villages and other group housing situations: see the judgment of Hammond and Chambers JJ at [46]. The encumbrance in the present case involves precisely such a rentcharge device (the annual rent in this case being $1).
The provisions of this Memorandum of Encumbrance
[23] On 12 December 2003 Copnel as the registered proprietor caused a Memorandum of Encumbrance to be registered over certain titles in the McArthurs Ridge development. The encumbrance affects each of the titles the subject of this proceeding.
[24] The Memorandum of Encumbrance was in these terms:
MEMORANDUM OF ENCUMBRANCE PARTIES
(1) CENTRAL OTAGO PINOT NOIR MANAGEMENT LIMITED (“the Manager”)
(2) CENTRAL OTAGO PINOT NOIR ESTATE LIMITED (“the owner”)
BACKGROUND
A. The Owner is the registered proprietor of an estate in fee simple in all the land described of Certificates of Title, OT
1007221393 and OT 1103 (all Otago Registry) (“the Property”).
B. The Manager and the Owner are parties to the Deed attached to this
Memorandum as Schedule 1 (“the Deed”).
NOW THIS MEMORANDUM WITNESSES that the Owner encumbers the
Property with the annual rent charge and on the terms and conditions
described in Schedule 2 to better secure to the Manager performance by the
Owner of the Owner’s duties and obligations under the Deed.
Dated 24 November 2003
Signed for and on behalf of CENTRAL OTAGO PINOT NOIR ESTATE LIMITED as Owner in the presence of
R Shulz
Director
R W Thayer Director/Authorised signatory
[25] I note particularly that the operative clause of the Memorandum of
Encumbrance stated that:
…the Owner encumbers the Property with the annual rent charge and on the terms and conditions described in Schedule 2…
[26] Schedule 2 is in this form:
SCHEDULE 2
TERMS AND CONDITIONS OF ENCUMBRANCE The terms and conditions of this Encumbrance are as follows:
1.The term of this Encumbrance is for 999 years commencing on the date of this Memorandum.
2. The annual rent charge shall be the sum of one dollar ($1.00)
payable on 1 January in each year, if demanded by that date.
3. Sections 63, 64, 64A, 70, 73, 104 (subject to section 64A(2)(b) and
126G of the Property Law Act and sections 154 and 156 of the Land
Transfer Act 1952 apply to this Memorandum.
4.The Manager shall not be entitled to any of the powers and remedies given to the mortgagees by the Property Law Act 1952 or the Land Transfer Act 1952.
5.For the avoidance of doubt it is agreed that, subject to clause 7(b) of the Deed of Covenant contained in Schedule 1 of this Memorandum, any person who is an owner or occupier of the Property shall no longer be liable to perform and observe the covenants in this Memorandum when that person ceases to be an owner or occupier but nothing in this clause shall operate to relieve that person from liability for breach of covenant arising before that person ceases to be an owner or occupier of the Property.
6.The Manager shall not be required to grant its consent to the following instruments which may be executed by the Owner in respect of the Property;
(a) The creation, variation or surrender of an easement (Section
90E(3) Land Transfer Act 1952);
(b)The variation of a mortgage instrument or priority of mortgages (Section 102(4) and Section 103(3) Land Transfer Act 1952);
(c) The registration of the lease, lease variation instrument or surrender of lease (Section 115(4), Section 116(7) and Section 120 Land Transfer Act 1952).
[27] The recitals and the operative clause of the Memorandum of Encumbrance thus both referred to “the deed” being Schedule 1 to the Memorandum of Encumbrance and cl 5 of Schedule 2 also referred to Schedule 1, this time as “the Deed of Covenant”.
The provisions of the Deed of Covenant
[28] The Deed of Covenant was entered into by Copnel (as owner) and Central
Otago Pinot Noir Management Limited (as manager).
[29] By the Deed of Covenant Copnel as owner entered into covenants with the manager. Clauses 1 – 3 related to the irrigation water supply system which would be needed for the plantable areas. Clause 1 recognised that it would not be practicable to register easements to identify and protect irrigation lines and that it would not be practicable to deal with changing irrigation requirements by changed easements. Clauses 4 and 5 dealt with the rights of access – Copnel granted the manager a right of way in gross for vineyard purposes.
[30] Clauses 6 – 7 referred to a management contract entered into between the owner and the manager for the development, management and operation of the vineyards. Of particular importance to the Pinot Rouge case are covenants of Copnel as owner contained in cl 7. The owner covenants to:
(a) remain a party to the management contract; and
(b)have any purchaser of a planting block enter into a novation agreement (set out at Schedule 3), whereby the purchaser became bound under the management contract; and
(c)promptly make payment of monies due and payable to the manager under the management contract; and
(d)refrain from impeding the management of the wine area as a single vineyard.
[31] The final covenant, contained in cl 7(e), is :
7. The Owner covenants with the Manager that it shall:
…
(e) Upon a sale of part of the Property containing a Plantable
Area, transfer to the purchaser a proportional share in Lots
61, 14 and 50 DP [ } (“the Infrastructure Lots”) to the intent that the Infrastructure Lots shall not be transferred except in conjunction with a Property containing a Plantable Area.
[32] Clause 8 is headed “Contracts Privity Act” and provides:
8.The Owner acknowledges pursuant to section 4 of the Contracts Privity Act 1982, that the covenants by the Owner under this Deed may be enforced by the Manager and any other owner for the time being of any allotment or allotments containing Plantable Areas subdivided from the Property after the date of this Deed.
[33] Clause 9 is an interpretation clause.
[34] Finally, cl 10 deals with the expiry of the covenants under clauses 6 and 7 – providing that they will expire upon the expiry or earlier termination of the management contract. The clause goes on to state:
Except as provided in this clause 10, the covenants set out in this Deed shall apply in perpetuity.
[35] I may summarise the provisions and covenants which Pinot Rouge relies on as follows:
1.The covenants between owner and manager are for the benefit of and enforceable by owners for the time being of planting blocks (cl 8).
2.The owner is not to transfer infrastructure lots except in conjunction with a planting block (cl 7(e)).
3.The covenants apply in perpetuity unless the management contract earlier expires.
What are the terms and conditions of the encumbrance?
[36] Mr Withnall summarised the importance of the Memorandum of Encumbrance in this way. He said that the purpose of the encumbrance was that it was there to protect interest in the Infrastructure Lots. He said the arrangement was set up in advance so that there was notice on the title of the entitlement of any future purchaser to take a proportionate share of the lot. He said that the recognition of such interest is contained in the terms and conditions of the encumbrance because in a sense “the encumbrance is the Deed”.
[37] Mr Ormsby urged the Court to the view that the “terms and conditions of encumbrance” as set out in Schedule 2 of the Memorandum of Encumbrance are to be regarded as the only terms and conditions of the encumbrance. In particular, he urged the Court not to have regard to the terms of the Deed of Covenant (at Schedule
1 of the Memorandum) except to the extent that the terms of the Deed are incorporated into the terms and conditions in Schedule 2.
[38] Mr Ormsby’s submission has the significant attraction in relation to the comprehension of a person inspecting the title and reading the encumbrances and other interests registered. When the Memorandum of Easement says that its terms are those set out in Schedule 2, and Schedule 2 contains only a modest number of terms and conditions and does not duplicate all the covenants of the Deed of Covenant, it might be regarded as unsatisfactory and uncertain to hold that all the covenants in the Deed of Covenant were also incorporated into the Memorandum of Encumbrance.
[39] There are, however, a number of features of the Memorandum of Encumbrance which point towards the Deed of Covenant being fully incorporated into the Memorandum of Encumbrance:
1.The operative clause – although in the operative clause the owner “encumbered the property with the annual rentcharge and on the terms and conditions described in Schedule 2” that is expressly stated to be in order “to better secure to the Manager performance by the Owner of the Owner’s duties and obligations under the Deed”. The Court of Appeal has already noted (in Jackson Mews Management Limited v Menere – above at [22]) the widespread use of the rentcharge device to secure ongoing obligations to mutual advantage, in retirement villages and other group housing situations. The rentcharge device in relation to this grouping of vineyard lifestyle blocks arguably, if not probably, intended to secure the obligations contained in the Deed of Covenant, to mutual advantage.
2.Terms and conditions of encumbrance – Clause 5 of Schedule 2 (set out above at [26]) excuses performance of “the covenants in this Memorandum” on certain conditions and “subject to clause 7(b) of the Deed of Covenant”. The use of the term “the covenants” might itself be considered significant in that the only express covenants are those contained in the Deed of Covenant which is Schedule 1 to the Memorandum. Again, arguably if not probably, this would indicate that the terms and conditions of encumbrance assume that the obligations of the owner under the covenants and the Deed of Covenant encumber the title.
3.The structure of the documentation of the Memorandum of Encumbrance – There is a logical order to the documents comprising the Memorandum of Encumbrance which is consistent with the view that the owner as registered proprietor has also encumbered the property with the covenants in the Deed of Covenant. Thus the owner/registered proprietor executes the Memorandum of
Encumbrance and immediately attaches the covenants as Schedule 1. It then attaches the terms and conditions including the rentcharge device. Finally, it attaches (notice to the world) as Schedule 3, the novation agreement which a purchaser of any plantable area will be required to execute, under the terms of cl 7 of the Deed of Covenant (which identifies the form of novation agreement as “Schedule 3”).
4.Entire bundle – the interlocking nature of the documents forming the Memorandum of Encumbrance and the internal references consistently point to a requirement to read all four documents together. At least arguably none is a mere background document. Rather, each document arguably records and gives notice of interest.
[40] As Mr Withnall put it, “the encumbrance has to be by way of rentcharge”. That device leads to the general structure of the encumbrance documentation. The obligations of the registered proprietor are arguably those drawn from the documentation as a whole.
Does Pinot Rouge have, through the encumbrance, a prior registered interest?
[41] I have found it arguable that the encumbrance, through arguable incorporation of cl 7(e) of the Deed of Covenant, itself protects the interest of those who purchase and become owners of planting blocks.
[42] Having established his foundation in argument for the extent of the encumbrance, Mr Withnall turned to the way in which the interest of Pinot Rouge in particular was said to have been registered. Mr Withnall said this:
[Pinot Rouge] submits the Encumbrance was a registered notification of its equitable title to a share in the Infrastructure Lots. [FM Custodians’] interest as mortgagee is servient in priority to [Pinot Rouge] on the titles for the Properties.
[43] Mr Ormsby, for FM Custodians, submitted that Pinot Rouge’s assertion that it had a prior registered interest could not succeed for a number of reasons. One in particular is in my judgment conclusive and I focus on that.
[44] In particular, Mr Ormsby submitted that the Memorandum of Encumbrance cannot act as notification of Pinot Rouge’s interest on the register as it is not open to a person to notify an interest on the register before the interest is created. In this case the Memorandum of Encumbrance was registered on the titles to the Infrastructure Lots on 12 December 2003. The contract between Copnel and Rhona Anne Rodger was entered into on 2 February 2004.
[45] Even accepting that it is arguable that the Memorandum of Encumbrance through the Deed of Covenant gave planting block purchasers protection, such interest and protection could arise only as and when each purchaser acquired through an agreement for sale and purchase an equitable estate. That was where a proportional interest in the Infrastructure Lots was established and given to Pinot Rouge. In the case of Pinot Rouge that occurred on an unspecified date, after Ms Rodger entered into her contract, when Ms Rodger nominated Pinot Rouge as purchaser. At that point Pinot Rouge acquired its caveatable interest.
[46] If Pinot Rouge then wished to preserve the priority to which it was entitled, it needed to register a caveat as notice to the world of its priority.
[47] Pinot Rouge subsequently took title of the purchased block (Lot 36) on
31 March 2004.
[48] There is no doubt that at the settlement of its purchase of Lot 36, Pinot Rouge had a right in personam as against Copnel to take a transfer of a proportional share in the Infrastructure Lots. By the express terms of the contract, Copnel now held Pinot Rouge’s share on trust for Pinot Rouge. But Pinot Rouge took title to only Lot 26. It did not caveat the titles from which the Infrastructure Lots would be created, nor did it subsequently do so until on 17 October 2008 it caused to be registered the caveats with which this proceeding is concerned.
[49] In summary, the interest of Pinot Rouge did not arise until February 2004 and when it did arise at that time Pinot Rouge did not in relation to the titles (which it subsequently caveated) take any steps to protect its interest by the registration of a caveat.
[50] The indefeasibility provisions of the Torrens system work through the ability of any member of the public to inspect the register in relation to each title. In the absence of notice on that title (or fraud) others are able to enter into transactions with those holding registered interests knowing that they will take free of unregistered interests. As is stated by the author of the Laws of New Zealand Mortgages at [109]:
This position is emphasised if the unregistered interest is not even protected by a caveat
Reference is made for this proposition to Ruapekapeka Sawmill Co Ltd v Yeatts [1958] NZLR 265. In that case, Haslam J upheld the right of a mortgagee to take possession of mortgaged premises which included a flat in which the defendant held an equitable life interest. His Honour said at p 272:
In my view of the deed, the second defendant could have protected her rights by caveat; but she did not do so. It is possible that, had she been entitled only to a bare right to reside in the property, she could have protected herself in the same manner. Salmond J., in Wellington City Corporation v Public Trustee [1921] NZLR 423, 434; [1921] G.L.R. 283, 287, was not prepared to accept the dictum to the contrary in Staples v Corby (1901) 19 NZLR 517; 3
G.L.R. 158. If the second defendant had registered a caveat, with an adequate recital of the nature of her claim, she would have given the plaintiff some warning of her rights, even if the registration had itself been outside the scope of s. 137 of the Land Transfer Act 1952.
[51] In this case, as in Ruapekapeka Sawmill case, the party now asserting its interest took no steps in relation to the affected titles to give any warning of its equitable interest to those dealing with the registered proprietor.
[52] Section 182 of the Act is headed “Protection of Purchasers” but covers all persons taking any transfer from the registered proprietor. It provides:
182 Purchaser from registered proprietor not affected by notice
Except in the case of fraud, no person contracting or dealing with or taking or proposing to take a transfer from the registered proprietor of any registered estate or interest shall be required or in any manner concerned to inquire into or ascertain the circumstances in or the consideration for which that registered owner or any previous registered owner of the estate or interest in question is or was registered, or to see to the application of the purchase money or of any part thereof, or shall be affected by notice, direct or constructive, of any trust or unregistered interest, any rule of law or equity to the contrary notwithstanding, and the knowledge that any such trust or unregistered interest is in existence shall not of itself be imputed as fraud.
[53] Section 182 is relevant to the present case. Pinot Rouge asserts that at a date before the mortgage was granted and registered over the Infrastructure Lots Pinot Rouge itself had acquired an equitable (unregistered) interest. Pursuant to s 182 even had FM Custodians acquired notice of such interest that notice is not of itself to be imputed as fraud. In short, any information acquired by the mortgagee as to the prior interest does not of itself amount to land transfer fraud, let alone come near to qualifying for protection through registration. A person inspecting the register of the Infrastructure Lots is not required to embark on an investigation as to what transactions have taken place in relation to other lots in the development.
Outcome
[54] The onus was upon Pinot Rouge to establish an arguable case for the interest in the land claimed. It has such an arguable case.
[55] That is not the end of the matter. As identified in the principles referred to above (at [13]) the Court retains a discretion to make an order removing the caveat. In Sims v Lowe at 659 – 660, (see above at [13]9) Somers J (for the Court) addressed one situation in which a caveat will be removed although there was an arguable case for the interest claimed. That lay in the situation where a valid ground has once existed but no longer does. A similar situation arises where the interest claimed, although arguably valid, cannot override the prior interest registered, in this case of a mortgagee.
Removal now or later?
[56] In times past, there had been uncertainty as to whether a mortgagee might bring an application for removal of a caveat under s 143 before it had entered into a contract for the sale of the mortgaged property: see Bennion et al New Zealand Land Law (2nd ed, Brookers, Wellington, 2009) at 4.5.01. That question has been resolved in the judgment of this Court in Public Trust v Toussaint (2004) 5 NZ ConvC
194,034 in which Associate Judge Gendall disagreed with the proposition that an application for removal of a caveat would be premature before a contract for sale was entered into. I adopt His Honour’s observations at [57] in which he said:
If this were the case then from a commercial perspective, a number of unfortunate consequences would inevitably flow. First, it would introduce an inherent and natural uncertainty into the whole mortgagee sale process. Secondly, given normal delays in the Court process, there would be inevitable delay in completing settlements on sales concluded by mortgagees if s 143 applications could not be made until agreements were signed. Thirdly, interest (probably at a penalty rate) and costs would continue to amass to the detriment particularly of a mortgagor, but also possibly a mortgagee. Fourthly, issues concerning occupation and care of a mortgaged property would remain and could cause difficulty until an ultimate purchaser could complete settlement. All this would be illogical and unsupportable in any commercial sense.
[57] Section 143 of the Act entitles this Court to:
...make such order in the premises…as to the Court seems meet.
[58] The order I make below reflects the form of order adopted by the Associate
Judge in Public Trust v Toussaint and in my judgment is appropriate to this case.
Would the caveats serve a purpose?
[59] There is an alternative argument open to FM Custodians which might also lead to the conclusion that the caveats ought not to be sustained.
[60] Once it became clear in Mr Withnall’s submissions that the Land Transfer Act fraud argument was not being pursued by Pinot Rouge and that Pinot Rouge placed its justification upon an interest protected by the encumbrance, Mr Ormsby submitted that the caveats lodged in October 2008 could serve no useful purpose. It was Mr Ormsby’s implicit submission that caveats lodged after the registration of another party’s interest should not be sustained when they purport to cover precisely the same interest as it protected for the caveator under a previously registered instrument. In this case it is Pinot Rouge’s argument that “its interest was registered on the properties’ certificates of title prior to the applicant’s mortgage pursuant to encumbrance 5836440.5”. Thus (it flows from Mr Ormsby’s submission) the subject matter for Court determination should be upon the nature of the interest protected by the encumbrance (which is what Pinot Rouge says gives it priority over the mortgage of FM Custodians). If Pinot Rouge is correct in its argument, and what appears on the register is sufficient to give notice to the world of Pinot Rouge’s asserted rights,
then those rights will affect subsequent purchasers, including purchasers through a mortgagee sale. As FM Custodians will be conveying the property subject to such encumbrances as are registered, it is an abuse on the part of Pinot Rouge to register caveats which prevent dealings including by mortgagee sale.
[61] I find force in the proposition that in such a case the Court has power under s 143 Land Transfer Act to order removal of the caveats. The provisions of s 143 itself are wide enough to permit the Court to make such order. The general principles which I have identified above at [13] generally inform the discretion of the Court under s 143 but the Court must be careful not to elevate those principles into exclusive criteria.
[62] In the event, it is unnecessary for me to determine the application on this basis.
Orders
[63] I order that:
• Caveat 5782040.1 lodged on Computer Freehold Register with Unique
Identifiers 139100 and 210478 Otago Land District Registry; and
• Caveat 8197042.1 lodged on Computer Freehold Register with Unique
Identifier 1839977 Otago Land District Registry;
shall be removed upon presentation to the District Land Registrar in Otago of a transfer or transfer for registration from FM Custodians Limited as mortgagee to the mortgagee’s purchaser or purchasers.
[64] I reserve leave to counsel to apply for directions to implement the form of this order.
Costs
[65] There is no reason in this case for costs not to follow the event.
[66] At the conclusion of argument counsel accepted that this was appropriately categorised as a 2B case.
[67] I order that the respondent pay the applicant’s costs of and incidental to this application. I certify for the applicant’s costs of filing and serving a verified list of documents and of inspection. I further certify for the travel and one night’s
accommodation of counsel in relation to the hearing.
Solicitors
Wynn Williams & Co., Christchurch
Van Aart Sycamore Lawyers Ltd., Dunedin
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