Fisk v Fargher Construction Limited (in liquidation)

[2018] NZHC 2252

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

I TE KŌTI MATUA O AOTEAROA TE WHANGANUI-A-TARA ROHE

CIV-2018-485-353

[2018] NZHC 2252

IN THE MATTER OF

the liquidation of FARGHER

CONSTRUCTION LIMITED (IN LIQUIDATION)

UNDER

section 284 of the Companies Act 1993

BETWEEN

JOHN HOWARD ROSS FISK and MARCUS JAMES McMILLAN

Applicants

AND

FARGHER CONSTRUCTION LIMITED (IN LIQUIDATION)

First Respondent

NAVILLUSO HOLDINGS LIMITED

Second Respondent

Hearing:	3 August 2018
Counsel:	R J Gordon for applicants T W Sage for respondents
Judgment:	29 August 2018

RESERVED JUDGMENT OF ASSOCIATE JUDGE JOHNSTON

Issue

[1]        When is a structure part of the land upon which it is situated so that the owner and lessor of the land can assert ownership of the same?

[2]        That is the essential issue in this case in which the liquidators of Fargher Construction Limited (in liquidation) seek an order that two buildings erected by

FISK and McMILLAN v FARGHER CONSTRUCTION LIMITED (IN LIQUIDATION) [2018] NZHC 2252

[29 August 2018]

Fargher on land leased to it by the second respondent, Navilluso Holdings Ltd, are owned by them.

The factual background

[3]The factual background is largely uncontentious.

[4]        Fargher was a construction company. It was the A1 Homes franchisee for the Hawke’s Bay, Gisborne and Taupō areas. A significant proportion of the company’s business involved the construction of A1 homes.

[5]        On 23 May 2011 Navilluso (as lessor) and Fargher (as lessee) entered into a deed of lease in relation to a plot of land owned by Navilluso in Maraekakaho Road, Hastings.

[6]        The land was adjacent to another plot occupied by a subsidiary of Navilluso, Tumu Merchants Ltd, which traded as a builders’ merchant.

[7]        The term of the lease commenced on 1 June 2011 and was for three years. The key terms of the lease are important. I will need to return to them in due course.

[8]Fargher erected certain buildings on the land:

(a)two A1 show homes, the building of which was expressly contemplated in the lease;

(b)an office building from which Fargher thereafter operated its business; and

(c)a storage shed which Fargher used for general storage purposes.

[9]        Fargher incurred all costs associated with the construction of the office building and the storage shed. These were approximately $100,000. Fargher insured the buildings in its name.

[10]      On 5 August 2014 the parties executed a second deed of lease whereby Navilluso leased the property to Fargher for a further term of three years commencing on 1 June 2014 in materially similar terms.

[11]      During the first six years one show home was built on the land and later sold and removed, and a second show home constructed, all without objection by Navilluso.

[12]      On 27 April 2017, the parties executed a deed of variation. This extended the term of the second lease to 31 May 2020 and provided for a rent increase from the original $12,000 to $13,000 (both plus GST) per annum. Otherwise the terms remained unchanged.

[13]      By late 2017, Fargher was facing financial difficulties. It listed the office building and the storage shed for sale and removal. No objection was raised by Navilluso. However, on the evidence, it may be that Navilluso was unaware of this.

[14]      On 23 February 2018 Fargher passed a special resolution placing the company in liquidation and appointing the applicants as liquidators. The liquidators have entered into a contract to sell the office building and the storage shed to a third party for $80,000.

[15]It is relevant to record that as at the date of liquidation, Fargher owed:

(a)Navilluso $2,009.05; and

(b)Navilluso’s subsidiary, Tumu, $81,025.39.

[16]Neither debt is secured or preferential.

Summary of the parties’ positions

[17]      The contest in this case is as to the ownership of the office building and the storage shed, which the evidence indicates have a collective market value of $80,000

(though that figure, it would seem, does not take into account any cost of reinstating of the land post removal).

[18]      The liquidators say that Fargher retained ownership of these two buildings throughout and they are entitled to sell them for removal for the benefit of the company’s creditors. Navilluso says that, upon their completion, they became part of the land which it owns.

The law

[19]      The question of when a structure erected on land becomes part of the land is one of those areas of the law which is not without its complexities and has generated a significant amount of litigation.

[20]      The submissions made by Mr Gordon on behalf of the liquidators and Mr Sage on behalf of Navilluso did not differ materially as to the principles involved. Where they parted company was as to their proper application here.

[21]And indeed the principles are tolerably clear.

[22]      The modern test as to whether a chattel has become part of the land on which it sits focuses on:

(a)whether the chattel is annexed to the land and the degree of annexation; and

(b)the purpose of any annexation.

[23]      The inter-relationship between these twin indicia is pleasingly symmetrical. Where there is no or insufficient annexation, prima facie the chattel is not part of the land, and the party contending that it should be regarded as such has the burden of establishing this by reference to the objectively assessed purpose of annexation. Where there is sufficient annexation, prima facie the chattel is part of the land, and the party contending that it should not be regarded as such has the burden of establishing this.

[24]Thus, the dispositive issues in this case reduce themselves to the following:

(a)were the office building and the storage shed affixed to the land?

(b)and:

(i)if not, then is Navilluso able to establish that the parties intended them to become part of the land?

(ii)if so, then are the liquidators able to establish that the parties did not intend them to become part of the land?

Were the buildings affixed to the land?

[25]The answer to this first question is clearly yes.

[26]It is common ground that:

(a)The office building was built on piles set into the ground, as were the majority of smaller structures built in New Zealand prior to the mid- 20th century. My understanding is that the floor joists were attached to the piles by some means (no doubt by stapled wire as is conventional). Services – electricity and plumbing – were connected to the structure.

(b)The storage shed was built on a poured concrete slab which has become the prevalent form of construction for smaller structures. The evidence is that the superstructure was affixed to the slab by means of masonry bolts. No services were provided to the storage shed.

[27]      The leading authority on the degree of annexation necessary to set up a prima facie case that a chattel has become part of the land is still Holland v Hodgson where Blackburn J said that:1

… an article which is affixed to the land even slightly is to be considered as part of the land.

1      Holland v Hodgson (1872) LR 7 CP 328 at 335.

[28]      I am satisfied that, by the means described, these two buildings were sufficiently affixed to Navilluso’s land to render them prima facie part of that land.

[29]      That of course means that the burden rests on the liquidators to demonstrate, by reference to objective evidence as to the purpose of annexation, that the parties intended that Fargher should remain the owner of the two buildings.

Purpose of annexation

[30]This second question is the key issue in the case.

[31]      In relation to this, Mr Gordon emphasised the following aspects of the evidence:

(a)First, he referred to aspects of the original lease between the parties dated 23 May 2011. In the first schedule, the premises leased by Navilluso to Fargher were described as “An area of land of approximately 600 square metres …”. Clause 46 provided that although the lease was for a term of three years, it was terminable by Navilluso on six months’ notice in the event that Fargher ceased to use Tumu as its principal supplier of building products. The first schedule provided that the rental payable to Navilluso by Fargher was $12,000 (plus GST) per annum, which the evidence established reflected the fact that the lease was for bare land. Clause 47 provided that fencing and other site improvements were  Fargher’s sole responsibility.  In   cl 49 Navilluso acknowledged that it was Fargher’s intention to build show homes on the site and that they would be owned by a third party. Mr Gordon’s submission was that all of those aspects of the lease, objectively considered, suggested that the parties were conscious that bare land was being leased by Navilluso to Fargher and that the latter would be erecting buildings on the land which would be owned by it or its nominee. This he suggested was compelling evidence upon which the Court could conclude that the purpose of the annexation of any structure built on the property was not to incorporate it in the land.

(b)Second, Mr Gordon submitted that as Fargher had built the office building and the storage shed during the term of the first lease, and that the parties then re-negotiated a second lease for a further three year period on 5 August 2014 which was in materially identical terms (including as to rental), that reinforced the objective evidence as to their intention.

(c)Third, Mr Gordon submitted that this was further reinforced by the deed of amendment to the lease executed on 27 April 2017 which demonstrated that the parties had turned their minds to the amount of rental but had agreed to  increase  it  by  only  $1,000  (plus  GST)  per annum, which could not possibly reflect the difference in value for rental purposes of the property with and without the office building and the storage shed on it.

(d)Fourth, Mr Gordon submitted that the degree of annexation was at the lower end of the scale. In this regard he pointed to the uncontested evidence of Mr Fargher that the office building and the storage shed — just like the show homes — had been constructed in a manner which meant that they could be removed easily with no or minimal damage to them.

(e)Fifth, he submitted that the lease specifically contemplated Fargher building show homes on the property for subsequent sale and removal. This, he said, further demonstrated that the parties had in mind this type of use for the property.

(f)Sixth, Mr Gordon pointed to the fact that when Fargher had advertised the office building and the storage shed for sale and removal prior to the company’s failure, Navilluso had not objected.

(g)Finally, Mr Gordon suggested that there was good reason to think that this assertion of ownership of the office building and the storage shed

after Fargher’s liquidation was an opportunistic attempt on the part of Navilluso to recover the debts which the company owed to it and Tumu.

[32]      Mr Sage began his submissions in response by acknowledging that the factual background was largely agreed, but picked up on five points of difference which I deal with at this stage:

(a)First, he submitted that whilst Mr Gordon referred to the evidence that the modest rental payable under the lease throughout reflected the fact that  Navilluso  was  renting  bare  land  to  Fargher,  that  ignored   Mr O’Sullivan’s evidence on behalf of Navilluso that the tenancy arrangements were part of a wider commercial arrangement between the parties that effectively required Fargher to source its building supplies from Navilluso’s subsidiary, Tumu. However, the real force of the liquidators’ submissions is that the rental was set at a time when the office building and the storage shed were not built and it remained effectively at the same level throughout the tenancy arrangements.

(b)Second, Mr Sage referred to the fact that Mr Gordon’s submissions describe the office building and the storage shed as “transportable”. He said that only Mr Fargher applied that description to them and that it was not supported by the evidence. He pointed to Fargher’s application for building consent, which contains no such description of the buildings. I have already concluded that these buildings are prima facie part of the land by reason of the degree to which they are annexed. Having reached that conclusion, I am not convinced that this point takes us any further. In a sense, all buildings are removable and transportable. The issue is the ease with which they can be removed and transported.

(c)Third, Mr Sage points out that, in his affidavit evidence, Mr Fargher explains what his intentions were in relation to the buildings. He submits that evidence as inadmissible, or at least not helpful, because it

is evidence of Mr Fargher’s and the company’s subjective intention. I agree.

(d)Fourth, Mr Sage submits that on the evidence the Court should not conclude that Navilluso acquiesced to Fargher’s intended sale of the office building and the storage shed up until the company failed and it saw itself – and its subsidiary – as exposed. He says that Navilluso was unaware of that intention until after the liquidators were appointed and set about the process of selling the buildings. I accept that the evidence is inconclusive on this point.

(e)Finally, Mr Sage questions the value of the buildings. The liquidators put the value at $80,000. Mr Sage submits that, on their own evidence, the value is likely to be closer to $55,000 after the cost of making good is brought to account. Frankly, I cannot see that this is an important point.

[33]      Turning to the application of the legal principles, Mr Sage emphasised the following points:

(a)First, he submitted that the degree of annexation in this case was substantial. He referred to the method of construction in the case of each of the buildings that I have already described. He submitted that the liquidators’ evidence as to the ease with which the buildings may be removed is “incomplete”. He pointed out that their removal would leave behind the piles on which the office building is constructed and the concrete pad on which the storage shed is constructed. He says that the liquidators’ case seems to proceed on the basis that the piles and the concrete pad are part of the land, and if those parts of the construction form part of the land, then it is artificial to treat the superstructures as chattels. Again, having regard to my earlier conclusion that the office building and the storage shed are both affixed to the land, I am not sure how far this argument takes Mr Sage. I see nothing artificial in treating the necessary foundations for the buildings as one component of the

construction and the buildings themselves as another component, recognising that the buildings were designed to be severed at that juncture so that the superstructures were transportable. Acknowledging that that will leave the foundation components in situ, Navilluso is entitled to rely on the make good provision in the lease to require the liquidators to remove the foundation components.

(b)turning to the purpose of annexation, Mr Sage referred me to what he described as the leading New Zealand authority of Lockwood Buildings Ltd v Trust Bank Canterbury Ltd, in which Tipping J said:2

So both the degree of annexation and its object must, on this approach, be patent to all to see. If, therefore, simply on the visual appearance of the object in question the Court is led to the conclusion that by dint of the degree and object of its annexation it was intended to become part of the realty, that that conclusion cannot be affected by evidence of a wider kind addressed to the object of the annexation. Similarly, if on a purely visual approach the Court can infer the intention that the chattel was not intended to become part of the land, no wider evidence may alter that conclusion.

In my view, the approach articulated in Lockwood Buildings has been superseded by the approach adopted by the House of Lords in Elitestone v Morris3 and since followed in this country.4

(c)Mr Sage concluded his submissions on this point in the following terms:

21.        NHL’s submission is that the appropriate considerations for the Court are:

21.1the visual appearance of the Buildings, summarised at

[13] above, being such that they appeared to be part and parcel of the land – they are not obvious there the nature of temporary buildings;

21.2the buildings will require demolition in order to remove them;

2      Lockwood Buildings Ltd v Trust Bank Canterbury Ltd [1995] 1 NZLR 22 (CA) at 29.

3      Elitestone Ltd v Morris [1997] UKHL 15, [1997] 2 All ER 513.

4      See Auckland City Council v Ports of Auckland Ltd [2000] 3 NZLR (CA) at [72]–[73].

21.3the building consent for the Buildings contains no reference to the Buildings being temporary or removable (whereas it does refer to the separate show home on the Premises as being temporary); and

21.4the purpose of the Buildings were used for (office use and storage) is generic and does not suggest they were removable. The shed in particular does not serve any specific purpose and was not built in a specific way to house any special machinery or tools used by FCL.

22.Those considerations must lead to a conclusion that the Buildings are part and parcel with the land.

[34]      In my judgment, the liquidators have discharged the burden of establishing, by reference to objective evidence, that the shared purpose of the annexation of these buildings to Navilluso’s land was not that they should become part of that land, but rather that they should remain chattels owned by Fargher.

[35]      The decisive aspects of the evidence which lead me to that conclusion are the following:

(a)The parties’ tenancy arrangements unequivocally provided that Navilluso was leasing bare land to Fargher.

(b)The rental, which reflected that what was being leased was bare land, remained unchanged before and after the office building and the storage shed were built. As Mr Sage submits rental was just one component of the parties’ tenancy arrangements. However, in my view, the other component of the tenancy arrangements whereby Fargher’s lease was terminable by Navilluso if it stopped sourcing building supplies from Tumu was independent of the rental.

(c)Fargher built the office building and the storage shed entirely at its own cost. It would have made no commercial sense for Fargher to have invested $100,000 in erecting these two buildings when it did not have secure tenure for more than six months at any given time had it not been understood between the parties that Fargher retained ownership of them.

(d)In my assessment, the degree of annexure of those two buildings to the land was the minimum necessary to obtain territorial local authority consent to their erection and ensure that they were fit for purpose. I accept Mr Fargher’s evidence that they were built so as to be as readily removable and transportable as possible.

[36]      In short, I am persuaded that both parties proceeded throughout on the basis that Fargher would remain the owner of the office building and the storage shed and remain entitled to deal with those items of property as it saw fit.

Liquidator’s alternative contention

[37]      The liquidators submit that even if I were to conclude that the office building and the storage shed erected on Navilluso’s land became part of that land I should conclude that they are nevertheless fixtures that Fargher is entitled to remove.

[38]      Although I have reached a conclusion favourable to the liquidators on the primary issue, I nevertheless deal briefly with this secondary issue in case my conclusions need to be revisited.

[39]      The law has long recognised that the proper balance between landlord and tenant necessitates exceptions to the general rule that a fixture becomes part of the land owned by the landlord.

[40]Such fixtures are referred to as tenants’ fixtures.

[41]Prominent amongst this category of fixtures are trade fixtures.

[42]      Hinde McMorland and Campbell say that the category of trade fixtures will be construed generously in favour of the tenant on the policy ground that it is in the public interest that industry be encouraged.5

5      See Hind McMorland & Campbell’s Principles of Real Property Law at 6.043.

[43]      Mr Gordon submitted on behalf of the liquidators that if the office building and the storage shed are fixtures then they are trade fixtures which Fargher is entitled to remove and take with it at the conclusion of the lease. He contended that there is no doubt on the evidence that the two buildings were erected on the land by Fargher at its cost in the course of and for the purpose of carrying out its business and that this conclusion is consistent with the terms of the tenancy arrangements between the parties which provided that alterations or additions made during the term of the lease were the property of the landlord unless they were removed at the end of the lease. He points also to r 47.1(f) of the lease and submits that the office building and the storage shed “had not become integral to the land”. He submits that r 47.1(f) and the fifth schedule itemising landlord’s fixtures, which is blank, only serve to reinforce that the office building and the storage shed were never landlord’s fixtures.

[44]      In response Mr Sage refers to the examples of trade fixtures given by Garrow & Fenton6 which include “looms, machinery, engines, boilers, counters and shelving in a shop, glass houses and petrol pumps”. He refers me also to Lord Denning’s judgment in New Zealand Government Property Corp v H M & S Ltd where his Lordship describes tenant’s fixtures in these terms:7

The term “tenant’s fixtures”, for present purposes, means those fixtures which the tenant themselves fixed into the premises for the purposes of his trade, that is, for the business of the theatre, but which do not become part of the structure itself … . Whereas “landlords fixtures” for present purposes means those fixtures which the tenant himself fixes to the premises so that they become part of the structure itself … . Instances are improvements made by the tenant by putting in new doors or windows in place of those that were there before, or a new frontage or a new safety curtain. These improvements become part of the structure itself. The tenant cannot remove them when his term comes to an end.

[45]      Mr Sage also refers to s 266(5) of the Property Law Act 2007 which defines lessor’s fixtures as:

… a chattel that has been affixed to the premises (for example, a fence erected on the land), in such a manner that it becomes part of the structure of a building or otherwise becomes integral to the land … .

6      See Garrow & Fenton’s Law of Personal Property in New Zealand at 3.7.

7      New Zealand Government Property Corp v H M & S Ltd [1982] QB1145 at 1157.

[46]      He submitted that the office building and the storage shed fall outside the types of fixtures referred to by Garrow & Fenton and in New Zealand Government Property Corp and are caught by the definition of landlord’s fixtures in s 266(5).

[47]      Where it necessary for me to do so I would conclude that, if the office building and the storage shed in this case were fixtures, they are trade fixtures which Fargher was entitled and remains entitled to remove.

[48]      For the reasons outlined in relation to the primary issue, my judgement is that this is what the parties agreed. I accept Mr Gordon’s submission that in this context there is no distinction to be drawn between a building and other chattels. It is unquestionably the case on the evidence that Fargher erected the two buildings on the site in the course and for the purposes of its business. Although I accept that buildings do not fall comfortably within the category of fixtures which one would normally associate with a tenant’s trade fixtures, I can see no reason in principle why buildings cannot be regarded as a trade fixture.

A further point

[49]      A point that was not raised by either counsel in argument is that, even if I had reached different conclusions in relation to the two issues canvassed above, the liquidators might still have a claim in equity against Navilluso for having contributed value to its property.

[50]As the case was not argued on that basis, I take it no further than that.

Conclusion

[51]      For those reasons I am satisfied that Fargher and its liquidators are the owners of the office building and the storage shed on Navilluso’s land and entitled to deal with them, subject to any make-good obligations that they may have.

[52]      Counsel did not address costs and I reserve them. I expect costs can be resolved by agreement. But if not, counsel may file and serve memoranda and I will deal with them on the papers.

Associate Judge Johnston

Solicitors:

Minter Ellison Rudd Watts, Wellington for applicants Sainsbury Logan and Williams, Napier for respondents