Fitzroy Engineering Group Limited v Technix Group Limited HC New Plymouth CIV 2010-443-102
[2010] NZHC 930
•20 May 2010
IN THE HIGH COURT OF NEW ZEALAND NEW PLYMOUTH REGISTRY
CIV-2010-443-000102
BETWEEN FITZROY ENGINEERING GROUP LIMITED
Plaintiff
ANDTECHNIX GROUP LIMITED Defendant
CIV-2010-443-000029
AND BETWEEN FITZROY ENGINEERING GROUP LIMITED
Applicant
ANDTECHNIX GROUP LIMITED Respondent
Hearing: 13 April 2010
(Heard at AUCKLAND)
Appearances: J G Miles QC and P J Wright for Plaintiff/Applicant
J B M Smith and J L W Wass for Defendant/Respondent
Judgment: 20 May 2010 at 12 noon
JUDGMENT OF VENNING J
This judgment was delivered by me on 20 May 2010 at 12 noon pursuant to Rule 11.5 of the High
Court Rules.
Registrar/Deputy Registrar
Date……………
Solicitors: Dennis King Law, New Plymouth
Greenwood Roche Chisnall, Wellington
Copy to: J G Miles QC, Auckland
P Wright, Auckland
JBM Smith, Wellington
FITZROY ENGINEERING GROUP LIMITED V TECHNIX GROUP LIMITED HC NWP CIV-2010-443-
000102 20 May 2010
Introduction
[1] As its name suggests, Fitzroy Engineering Group Ltd is an engineering company. It carries out a substantial part of its operation from premises in New Plymouth. The premises are owned by Technix Group Ltd, which leases the premises to Fitzroy.
[2] The lease provides for an option to purchase. It also contains a right of pre- emption. Fitzroy wishes to exercise the option to purchase. It has engaged the option process under the lease. After the option process was instigated, but before Fitzroy had given notice of its desire to purchase, Technix received an offer to purchase the property. The offer was from a charitable trust associated with Technix’s director, Mr Matthews. Technix advised Fitzroy of that offer and triggered the pre-emptive right under the lease.
[3] Fitzroy says Technix is not free to accept the offer from the trust, or to sell to any other party until the option process provided for in the lease is completed. On the other hand, Technix says that under the provisions of the lease it may accept an offer at any time, and that as Fitzroy has not exercised its pre-emptive rights it is free to sell to the trust.
[4] The practical consequences are important to the parties. Under the option provisions Fitzroy only has to purchase the land and premises used by it. On the other hand, under the right of pre-emption, Fitzroy could be obliged to purchase additional land. Further, the parties expect that the purchase price calculated under the option provisions will be significantly less than the price at which the charitable trust is prepared to purchase the land and that Fitzroy would have to meet under the right of pre-emption.
Procedural matters/undertaking
[5] The parties have been unable to resolve their differences. Fitzroy sought an order preserving a caveat it had lodged against the title. It also issued separate proceedings seeking a permanent injunction restraining Technix from dealing with
the property, including by way of accepting any offers for the sale and purchase of that property together with an order for specific performance of the agreement.
[6] The proceeding was transferred from New Plymouth to this Court for an urgent hearing. With the co-operation of counsel the matter was able to be brought on and heard promptly. Pending hearing Technix gave an undertaking to the Court not to accept the offer by the charitable trust or any replacement offers made by the charitable trust (or any other entity) pending the hearing of the substantive proceeding and caveat application. At the outset of the hearing counsel confirmed that undertaking would be extended until a period of five working days after delivery of the Court’s judgment on this matter.
The land in issue
[7] Fitzroy leases its premises from Technix under a deed of lease dated 1
September 1992. The lease was for an initial term of ten years from 1 September
1992 with one right of renewal of ten years less one day. Although no formal deed exercising the option to renew was ever executed the parties accept the lease was effectively renewed. It therefore expires on 31 August 2012.
[8] The premises leased to Fitzroy included land and buildings. The land was defined as:
“that part of the land of [Technix] described in the First Schedule hereto as outlined in red on the plan attached hereto (hereinafter called “the land”).
[9] The land described in the First Schedule was all that parcel of land comprised and described in Certificate of Title H3/1058 (Taranaki Registry) subject to such encumbrances and memoranda shown therein.
[10] In addition to the land as defined, the lease provided for Fitzroy to also take on lease certain buildings and improvements together with fittings, fixtures and chattels as contained in a third schedule to the lease, (the building) with both land and building collectively being called “the premises”. The lease was subsequently
varied on 29 March 1995 to include further buildings and their associated land as part of the premises.
[11] The land delineated in red on the plan attached to the lease was only part of the land contained within H3/1058. So, as far as the land was concerned, Fitzroy leased an unsubdivided part of the land comprised and described in Certificate of Title H3/1058 from Technix.
[12] Technix and a related company also owned further adjoining land. During the course of the lease Technix and its related company subdivided their land holdings leading to the cancellation of the existing titles, including H3/1058, with the result that the land leased to Fitzroy was then included within a new lot, Lot 1
DP 20360 contained within a new title, TNL 1/920. The subdivision was in part required because of the movement or re-alignment of the head of the Mangaone Stream which formed the boundary to the existing titles. The land in TNL 1/920 incorporated approximately one third of a hectare more than the land formerly contained in CT H3/1058. Apart from the change in the land area in TNL 1/920 there was also a change to the easements, covenants and restrictions relating to the land formerly in H3/1058 as a consequence of the subdivision.
The option to purchase
[13] For present purposes, the material parts of the option to purchase contained in the lease are:
3.25 OPTION TO PURCHASE
(a) The Tenant will have the option to purchase the area as outlined in blue on the attached plan (“the land”) and the plant listed in the Third Schedule hereto at any time during the term of the lease while [Technix] is the owner of the land. The option shall operate as follows:
(i) The Tenant shall give the Landlord notice in writing of its desire to investigate such option.
(ii) Immediately upon receiving the notice from the Tenant the Landlord shall arrange an investigation into the cost and procedure for subdividing the land from the whole of the land described in the First Schedule hereto for the purpose of sale to the Tenant. ... The extent of such investigation shall be by agreement between the
Landlord and the Tenant. The cost of such investigation shall be shared equally by the landlord and the Tenant.
(iii) Provided that the result of the investigation does not show a requirement for local body conditions which will materially affect any other land owned by the Landlord then the Landlord shall have no right to object to the said subdivision proceeding.
(iv) If after the investigation referred to above the Tenant wishes to continue with the option procedure then the Tenant shall advise in writing the Landlord of his desire to exercise such option and then the Landlord and the Tenant shall each appoint an independent Registered Valuer with experience in the valuation of commercial properties. Each valuer shall value the land and buildings without consultation with the other. ...
[14] The remaining provisions of cl 3.25(a) provide a formula to fix the current market value of the land and for settlement. The clause also confirms that the tenant and landlord will share equally in all costs relating to the subdivision contemplated by the clause.
[15] The land to which the option applied (that land outlined in blue) was larger in area than the land subject to the lease (outlined in red) but was still less than the original area of land contained in CT H3/1058 (and consequently is less than the total land area in TNL 1/920). Attached to this judgment is a plan of the relevant land area showing the land subject to the lease outlined in red and the land subject to the option outlined in blue. The additional land in Lot 1 DP 20360 includes the land adjoining Kerrs Road on the one side and the land to the northeast. The land incorporating the irregular shaped buildings is contained within a separate parcel of land, Lot 2.
[16] So the practical position was, that before Fitzroy could purchase the land that was subject to the option, a subdivision would be required. Clauses 3.25(a)(i) to (iii) provided for an investigation about the costs and procedure relating to the subdivision.
[17] By letter of 9 May 2007 Fitzroy’s solicitors activated the option to purchase provisions of the lease by giving notice to Technix in the following terms:
2.In terms of clause 3.25 of [the] lease, conferring an option to purchase, [Fitzroy] hereby gives you notice in writing of its desire to
investigate the option to purchase, pursuant to clause 3.25(a)(i) of such deed of lease.
[18] Although the letter gave notice of Fitzroy’s wish to investigate the option, it seems that shortly after the notice was given, the parties agreed to put the procedure on hold. On 8 August 2007 Technix wrote to Fitzroy referring to the letter of 9 May
2007, recording that:
... at a meeting at Technix on the 11 May 2007 you requested that Technix not proceed with the investigation regarding the option to purchase. Consequently Technix has taken no further action in this matter, and believes the notice to be withdrawn.
[19] In response Fitzroy wrote on 28 August 2007 stating that at the meeting on
11 May 2007 it was agreed the investigation would be “put on hold” while Fitzroy worked through a possible sale. Fitzroy confirmed that the sale had not eventuated and requested Technix to “now proceed with the investigation” (referring to the investigation of the option as set out in the earlier letter of 9 May 2007).
[20] Technix accepted that the process was re-activated. Mrs Matthews, the group executive of Technix responded by email, noting the letter was “received and underway”. Mrs Matthews sent another email on 19 September 2007 to Mr Martin, a director of Fitzroy, confirming Technix was underway with scoping what was required to subdivide the property. Fitzroy replied by email on the same date asking to be involved in that process.
[21] It appears that other issues concerning the lease then arose between the parties, including a rent review and an accident compensation claim, and those issues took precedence over the investigation into the subdivision. The next relevant event in relation to the investigation process appears to be a letter of 23 July 2008 from Fitzroy’s solicitors. In that letter the solicitors wrote to counsel for Technix to record:
... our client does not relinquish or waive any of its rights in relation to the option to purchase.
[22] Despite that letter, the matter then seems to have fallen into abeyance again for about a year. The next event appears to be a letter from Fitzroy’s solicitors to
counsel for Technix on 20 August 2009. The solicitors noted that Fitzroy required Technix “to proceed with the option to purchase procedure as set out in the lease”. It sought copies of the estimates Technix had received together with copies of the letters of instructions given to the individuals to be involved in the investigation into the subdivision. It concluded with the advice that “[Fitzroy] requires the investigation to be undertaken without delay”.
[23] Mrs Matthews replied. She advised that for personal reasons she would be away from New Zealand for a time, but suggested a meeting when she would be back in New Zealand. She also said that Technix was working on the matter and that she intended to report back about the end of October. Fitzroy’s solicitors wrote on
16 October 2009 saying that if satisfactory progress was not made by the end of October 2009 they had instructions to issue proceedings for specific performance. Technix then provided a detailed investigation proposal on or shortly after 27
October 2009. Fitzroy did not accept the proposal. It responded, setting out its position in a letter of 18 December 2009. In short, Fitzroy considered that the extent of the investigation proposed by Technix exceeded what might reasonably be needed for the purposes of the investigation contemplated by cl 3.25(a).
[24] The parties were not able to agree on the scope of the investigation. Further correspondence then ensued about that issue. The matter remains unresolved at present.
[25] In the meantime, on 4 December 2009, Fitzroy registered a caveat against
TNL 1/920 relying on the option to purchase in the lease.
The trust’s offer to purchase
[26] The trigger for these proceedings was the trust offer for the land in early
2010.
[27] Clause 3.25(c) of the lease provides:
If the Landlord receives any acceptable offer to purchase the land referred to in the First Schedule hereto or the land at any time during the term of the
lease the Landlord shall not accept the offer without first offering same to the Tenant for sale in writing on identical terms. The Tenant may elect to purchase the said land on those terms by entering into a written agreement to purchase same and by paying ten per cent (10%) of the purchase price as a deposit within fourteen (14) days of the date that the Tenant receives the Landlord’s written notice. The balance shall be payable within one (1) month from receipt of the Landlord’s written notice.
[28] As noted, the land referred to in the first schedule was all of the land in the CT H3/1058. The second reference to “the land” in cl 3.25(c) must be construed as a reference to the definition of land in the earlier part of cl 3.25, namely cl 3.25(a) which is the land outlined in blue.
[29] On 25 February 2010, before the issues between Fitzroy and Technix about the scope of the investigation process could be resolved, Technix gave Fitzroy notice pursuant to cl 3.25(c) of the lease that it had received an offer to purchase the land contained within TNL 1/920. The purchaser was the John B Matthews Charitable Trust or nominee. The purchase price was 12.3 million dollars.
[30] Fitzroy said Technix was not entitled to invoke cl 3.25(c) of the lease and effectively put it to the election of whether to exercise its pre-emptive right under that clause for two reasons. First, once the option to purchase was triggered Technix could not accept an offer or sell to another, and second, part of the land, the subject of the proposed agreement for sale, included the additional area of land in TNL 1/920 following the boundary adjustments so that the offer to purchase did not relate to the land defined in cl 3.25(c) in any event.
[31] Technix did not accept the first objection, and to meet the second objection, it subsequently presented an alternative offer on 10 March 2010 at an adjusted lower price, so that Fitzroy would only have to pay for land that cl 3.25(c) contemplated could be sold by Technix under the clause.
Fitzroy’s case
[32] Fitzroy submits that as it has initiated the option process, there is a conditional sale and purchase agreement in its favour, which prevents Technix from selling the land to a third party. Alternatively, it submits that once the option process
was instigated Technix cannot subvert the process by seeking to sell to a third party: (cl 3.25(b)), or by accepting an offer for sale from a third party and thereby requiring Fitzroy to buy under the right of pre-emption: (cl 3.25(c)).
[33] If both those arguments fail, Fitzroy submits that Technix cannot invoke the pre-emptive right in cl 3.25(c) by reference to land other than that referred to in the clause and that, as the proposed sale to the charitable trust relates to the entire land within TNL 1/920 (and contains different encumbrances), it is therefore different to the land referred to in cl 3.25(c), and the clause cannot apply.
[34] Finally, Fitzroy says that the current offer does not correspond to the terms of the right of pre-emption as to payment and completion of the proposed sale and is not a bona fide arms-length offer from an independent third party given that Mr Matthews is both the managing director of Technix and the settlor of the charitable trust.
Technix’s case
[35] Technix submits that Fitzroy has not yet exercised the option to purchase. That would only occur when notice was given under cl 3.25(a)(iv). Technix says that the mere giving notice of desire to investigate the option is not the same as exercising the option itself so that there was no conditional agreement for sale and purchase in place.
[36] Technix next submits that there is no basis for the argument that by Fitzroy giving notice of its desire to investigate the option, but not yet having exercised the option, Technix was in some way precluded from selling the land to any party under, and in compliance with, cl 3.25(c). It relies on the provisions of cl 3.25(c) which contemplate Technix receiving an offer “at any time during the term of the lease”.
[37] As to the “technical” matters raised by Fitzroy, Technix says first that the new title issued following the boundary adjustment could not affect Technix’s ability to proceed under cl 3.25(c) anymore than it could affect Fitzroy’s right to pursue the option to purchase under cl 3.25(a).
[38] Finally, Technix says that the fact the land was proposed to be sold to a charitable trust settled by Mr Matthews did not prevent the offer being a bona fide one. The trust was a separate legal entity registered under the Charitable Trusts Act
1957.
The issues for the Court
[39] The issues in this case are:
• The nature of the rights created by cl 3.25(a);
• Whether cl 3.25(a) prevails over cl 3.25(c);
• The effect of the previous subdivision and issue of the new title;
• Does the offer from the trust come within cl 3.25(c)?
The nature of the rights created by cl 3.25(a)
[40] Fitzroy pleads that it has exercised the option to purchase and an agreement for sale and purchase came into existence at that time. It also seeks to support the caveat on that basis. Mr Smith submitted that an enforceable agreement for sale and purchase could only come into effect once cl 3.25(a)(iv) was invoked. Resolution of the issue depends on the precise nature of the option created by cl 3.25(a).
[41] The legal analysis of the nature of an option to purchase has been the subject of discussion in a number of cases. In Murray v Scott & Anor; Waho v Smith & Anor[1] Cooke J discussed the nature of an option at 655–656 as follows:
[1] Murray v Scott & Anor; Waho v Smith & Anor [1976] 1 NZLR 643 at 655–656.
The question whether the option was an agreement to alienate by way of transfer, within the meaning of s 224(3), calls for some excursion into the realm of the perhaps academic riddle "What is the nature of an option?" Three or four answers are traditionally in competition, namely - and assuming that the option is an option to purchase:
1
(i) An irrevocable offer to sell; or, more fully stated, an offer to sell coupled with a contract, made for consideration or by deed, not to revoke it.
(ii) A conditional contract of sale.
(iii) Either of the first two, but the difference being one of form only and not of any practical effect.
(iv) Perhaps, either of the first two and the difference depending on form but having some practical effect.
The irrevocable offer theory is probably the one most commonly adopted in New Zealand. For instance all the judgments in the Court of Appeal in Reporoa Stores Ltd v Treloar [1958] NZLR 177 are expressed in those terms, as is the judgment of the Court of Appeal delivered by Turner J in Willetts v Ryan [1968] NZLR 863. But in neither case was the theory of conditional contract of sale discussed, nor apparently would it have made any difference which theory was adopted. The irrevocable offer theory is also common, though far from universal, in other jurisdictions. A recent illustration in England is Mountford v Scott [1975] Ch 258; [1975] 1 All ER
198 in the Court of Appeal. It is championed by Mr W J Mowbray in an article, "Who can Exercise an Option" (1958) 74 LQR 242, and his
conclusions are accepted as "seeming" to be correct in Megarry and Wade's
Law of Real Property (4th ed) 578. The treatment in 9 Halsbury's Laws of
England (4th ed) para 235 is on similar lines.
The conditional contract of sale theory is argued in Salmond and Williams on Contracts (2nd ed) 131-134. It was recently accepted by Gibbs J in his judgment in the High Court of Australia in Laybutt v Amoco Australia Pty Ltd (1974) 48 ALJR 492, 497-499; 4 ALR 482, 494-498, at least as regards the grant of an option so called. Gibbs J reserved his opinion if the form used is expressly an offer together with an agreement not to revoke it. His judgment contains a review of the conflicting Australian authorities and some of the conflicting English authorities. The judgment of Chapman J in Re Rangihuia Kingi to Mokau Coal and Estates Co [1917] NZLR 127 appears at first sight to lean towards the conditional contract to sell theory, but can also be explained simply on the footing, which no one disputes, than an option to purchase gives an equitable interest in the land.
The theory that there is a difference in form but no difference in "legal operation" is argued in Corbin on Contracts, vol 1A (1963) sec 262. In Braham v Walker (1961) 104 CLR 366 Dixon CJ saw:
". . . not . . . much reason why parties if they choose may not throw an option into the form of a conditional contract of sale and not much reason why offer and acceptance in simple contract should form the basis of a contract under seal" (ibid, 376).
The judgment of Gibbs J in Laybutt v Amoco Australia Pty Ltd contains reasons suggesting that a difference in form might have a difference in practical result. With respect, however, as far as I can see this has never been demonstrated conclusively. Should form be relevant, it is noteworthy that the clause in the present case, providing as it does for the drawing up of an
agreement for sale and purchase if the option is exercised, is more suggestive of an irrevocable offer than of a conditional contract of sale.
[42] The trend in New Zealand seems to be to prefer the analysis that an option to purchase is to be regarded as an offer, coupled with a contract not to revoke the offer: Alexander v Tse;[2] Jane v Ben Hall Properties Ltd.[3] Whether the option constitutes a revocable offer or a conditional contract is best determined on the construction of the option agreement: O’Halloran Enterprises Pty Ltd v Williamson.[4] In Murray v Scott itself, Cooke J considered that the fact the clause provided for the drawing up of an agreement for sale and purchase if the option were to be exercised suggested an option more in the form of an irrevocable offer than of a conditional contract of sale. The result of the analysis may well depend on the particular terms of the option in the particular case.
[2] Alexander v Tse [1988] 1 NZLR 318 (CA) at 324–325.
[3] Jane v Ben Hall Properties Ltd [1979] 2 NZLR 68 (CA) at 73 per McMullin J.
[4] O’Halloran Enterprises Pty Ltd v Williamson [1979] VR 33, at 40 per Kaye J.
[43] Whichever analysis is preferred, the grant of an option to purchase will generally create an immediate equitable interest in the land that will support a caveat: London and South Western Railway Co v Gomm;[5] Morland v Hales;[6]
Mountford v Scott.[7] The rationale is that the grantee of the option has the right to
call for a conveyance of the land, a right which the Court would enforce by specific performance.
[5] London and South Western Railway Co v Gomm (1882) 20 Ch D 562 at 580-581.
[6] Morland v Hales (1910) 30 NZLR 201.
[7] Mountford v Scott [1975] Ch 258 (CA).
[44] However, the option clause in the present case is not a simple, or bare, option clause. Clause 3.25(a) effectively has two parts to it. First, the process required to investigate the subdivision required to give effect to the option to purchase. That process is contained in cl 3.25(a)(i)–(iii). Second, the formal exercise of the option to purchase and the machinery provisions to fix the purchase price and settlement: cl 3.25(a)(iv)–(ix). For the avoidance of doubt cl 3.25(a)(x) then confirms that the cost of the subdivision required to enable settlement of the subdivided land is to be shared by the parties. The option to purchase which is contained in cl 3.25(a)(iv) cannot be exercised until the process in cl 3.25(a)(i) to (iii) has been completed. Given the two stage process contemplated by cl 3.25(a), in my view the appropriate
analysis of the clause in the present case is as an offer to sell, following an investigation process, coupled with a contract not to revoke the offer nor to take steps to frustrate the investigation process.
[45] Importantly, until the investigation process provided for by the first stage is completed, Fitzroy cannot exercise the option to purchase contained in cl 3.25(a)(iv). Nor can it waive that process, as Technix has rights under the process as well. The result of the investigation may show a requirement for local body conditions which materially affect other land owned by Technix. There is obviously room for debate as to what is meant by “materially affect”. Clause 3.25(a)(iii) expressly contemplates the possibility a situation may arise where the subdivision would materially affect Technix’s other land. It is not entirely clear what rights Technix would have in those circumstances. Implicitly it could object to the proposed subdivision. The scope and extent of the objection is open for interpretation. The parties have not sought to resolve those issues at this hearing and reserve their positions in relation to the circumstances that may arise. For present purposes, however, the result is that Fitzroy does not have an immediate right to exercise the option under cl 3.25(a)(iv) and is not entitled to call for specific performance of the sale of the subdivided land to it.
[46] It follows that I agree with Mr Smith’s submission that, until the investigation process has been completed and the tenant has advised the landlord in writing of his desire to exercise the option under 3.25(a)(iv), not even a conditional agreement for sale and purchase is in effect.
[47] The interest claimed in the caveat is an interest “as purchaser by virtue of a conditional agreement for sale and purchase between the caveator as purchaser and the registered proprietor as vendor arising out of cl 3.25 of a deed of lease dated 1
September 1992...” For the reasons given above, Fitzroy is not a purchaser by virtue of an agreement for sale and purchase arising out of that clause. The interest claimed in the caveat cannot be sustained. The application to preserve the caveat is dismissed.
Does cl 3.25(a) prevail over cl 3.25(c)?
[48] Fitzroy’s alternative argument relies on the relationship between the various rights to purchase the land granted to Fitzroy under cl 3.25. Mr Miles submitted that once cl 3.25(a) was engaged the option process must be followed through and Technix was not free to sell the land to anyone else until that process was completed. Mr Smith’s contrary argument for Technix was that the wording of cl 3.25(c) “at any time during the term of the lease” was clear. If Technix received an offer acceptable to it at any time, even while the investigation process under cl 3.25(a) was underway, then 3.25(c) was engaged.
[49] Resolution of the issue requires interpretation of the contract to determine the meaning to be given to cl 3.25 of the contract generally and cl 3.25(a) and 3.25(c) in particular.
[50] In Investors Compensation Scheme Ltd v West Bromwich Building Society[8]
[8] Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 All ER 98 at
114-115; [1998] 1 WLR 896
Lord Hoffman suggested the following approach to the interpretation of contracts:
(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.
(2) The background was famously referred to by Lord Wilberforce as the ‘matrix of fact', but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.
(3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them.
(4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the
meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax (see Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] 3 All ER 352, [1997] 2 WLR 945).
(5) The ‘rule’ that words should be given their `natural and ordinary meaning' reflects the commonsense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in Antaios Cia Naviera SA v Salen Rederierna AB, The Antaios [1984] 3 All ER 229 at 233, [1985] AC 191 at 201:
“... if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business common sense, it must be made to yield to business common sense.”
[51] Lord Hoffmann’s approach was endorsed by the Court of Appeal in Boat
Park Ltd v Hutchinson[9] and followed in a number of subsequent cases.
[9] Boat Park Ltd v Hutchinson [1999] 2 NZLR 74 at 81-82 (CA).
[52] Recently, in Vector Gas Ltd v Bay of Plenty Energy Ltd[10] the Supreme Court had the opportunity to consider the approach to contractual interpretation. Blanchard J said:
[10] Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5 at [5] per Blanchard J.
to correctly understand words in a contract they must be placed in their full context (famously called by Lord Wilberforce the “factual matrix”) [Reardon Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989 (HL) at p 997.]
Blanchard J also confirmed it is not essential to find an ambiguity before proceeding to look at the background to a contract to assist in interpreting the language used.[11]
[11] Ansley v Prospectus Nominees Unlimited [2004] 2 NZLR 590 (CA) at para [36]; Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 110 (HL) at para [37]; and Franklins Pty Ltd v MetcashTrading Ltd [2009] NSWCA 407 at [14] – [18]; [63] and [239] – [305].
Tipping J said:[12]
[12] At [19] per Tipping J.
The ultimate objective in a contract interpretation dispute is to establish the meaning the parties intended their words to bear. ... The language used by the parties, appropriately interpreted, is the only source of their intended
meaning. As a matter of policy, our law has always required interpretation issues to be addressed on an objective basis. The necessary inquiry therefore concerns what a reasonable and properly informed third party would consider the parties intended the words of their contract to mean. The court embodies that person. To be properly informed the court must be aware of the commercial or other context in which the contract was made and of all the facts and circumstances known to and likely to be operating on the parties’ minds.
McGrath J said:[13]
[13] At [57]–[58] per McGrath J.
... It is now seen as necessary, as Lord Wilberforce said in delivering the judgment of the House of Lords in Prenn v Simmonds in 1971, [1971] 1
WLR 1381 at p 1384 to place the contractual language in its context to:
inquire beyond the language and see what the circumstances were with reference to which the words were used, and the object, appearing from those circumstances, which the person using them had in view.
In 1976, Lord Wilberforce elaborated on the nature of the surrounding circumstances which provide legitimate contextual assistance in ascertaining the meaning of contractual language, when delivering the judgment of the majority of the House of Lords in Reardon Smith Line Ltd v Hansen-Tangen, [1976] 1 WLR 989 at pp 995 – 996 saying:
In a commercial contract it is certainly right that the Court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties were operating.
[53] Wilson J arguably took a more restrictive approach, by noting three exceptions to the general principle that words of an enforceable commercial contract should be given their ordinary meaning in the context of the contract in which they appear. Wilson J identified the exceptions as ambiguity, where the words do not make commercial sense, and estoppel.[14] However, Wilson J suggested the difference
between Lord Hoffmann’s approach and his may be more apparent than real.[15]
[14] At [119]–[129] per Wilson J.
[15] At [128].
[54] For his part, Gault J did not consider that the case required any detailed examination of the principles applicable to contractual interpretation.
[55] The common thread I draw from comments of the Supreme Court and the approach that I adopt in this case is that, to interpret a commercial contract, the words of the contract must be considered against the background of the commercial
purpose of the contract and in the context of the circumstances within which the contract was concluded.
[56] The context of the circumstances in which the lease came to be completed in
1992 is important. Mr White-Robinson, Fitzroy’s managing director, says that he was directly involved in the negotiations with Mr Matthews of Technix for the purchase of the business assets of Fitzroy Engineering Ltd which, at the time was a subsidiary of Technix. It was effectively a management buy-out. The negotiations ran from 1991 until July 1992. Fitzroy ultimately purchased the business assets of Fitzroy Engineering Ltd from Technix under an agreement concluded in July 1992. As part of the negotiations the parties agreed to enter the lease so that Fitzroy could continue to operate the engineering business from the existing premises. Mr White- Robinson’s unchallenged evidence is that at the time of agreeing to purchase the business neither he nor Fitzroy could afford to purchase the land as well as the business.
[57] To provide security to Fitzroy, but still provide for a lease for a period of less than 20 years, (which the parties understood would trigger an automatic subdivision), the parties agreed to an initial ten year term with a right of renewal for ten years less one day. The parties clearly contemplated that Fitzroy would likely want to purchase the land if it became in a financial position to do so during the course of the lease. The engineering business conducted from the site was a large scale operation. To shift the base of operations would cause significant disruption to the business.
[58] It was against that background that cl 3.25 was incorporated into the lease. Although cl 3.25 is titled “option to purchase”, it protected Fitzroy’s right to purchase the land subject to the lease in the following circumstances.
a) first, when Fitzroy was in a financial position to purchase the leased property, it could initiate its purchase of the land by engaging cl
3.25(a), the option to purchase process;
b)second, if during the course of the lease, Technix decided that it wanted to sell then cl 3.25(b) applied. Technix was first required to offer the land to Fitzroy;
c) third, if Technix was approached by a purchaser wishing to purchase at a price and on terms acceptable to Technix, cl 3.25(c) required it to offer the land to Fitzroy for sale on identical terms before accepting the offer.
[59] The obvious intent of cl 3.25 was to put Fitzroy in the position that, during the term of the lease, it had the security of being able to purchase the leased land used by it for its business if it was able to and also that Technix could not sell that land without Fitzroy having the opportunity to purchase it first.
[60] It is significant in my judgment, in addition to the rights of pre-emption, the clause provided that Fitzroy could initiate a purchase itself. It is also relevant that the various rights under cl 3.25 were different in a material aspect. The option under cl 3.25(a) was only in relation to the land outlined in blue. Fitzroy’s obligation, or commitment, was limited to that land if it exercised the option under cl 3.25(a). Both clauses 3.25(b) and (c) however, also applied in the case Technix wished to sell or received an offer for the entire land contained within H3/1058. If those clauses were invoked by Technix, and Fitzroy exercised its right of pre-emption, it had to purchase additional land that it may not have wanted. Further, both clauses 3.25(b) and (c) could be initiated by Technix and required a response from Fitzroy within 14 days.
[61] On the other hand, as the option under cl 3.25(a) related to the land outlined in blue on the attached plan, which was only part of the land in the existing title, the parties must have understood that the exercise of the option process under cl
3.25(a)(i) would always require a subdivision. They must also have understood and accepted both the investigation and any subsequent subdivision process contemplated by cl 3.25(a) was always going to take considerably longer than 14 days. The parties accepted that by agreeing to the provisions of clause 3.25(a).
[62] While Mr Smith is correct in submitting that this was not a relational contract, both parties were obliged to take reasonable steps to comply with their obligations in terms of the bargain they had made. The obligations are similar to the obligations of a purchaser under a conditional contract: Connor v Pukerau Store Ltd.[16] Specifically, in this case, once Fitzroy engaged the investigation process, Technix was bound to proceed with the process in good faith to enable Fitzroy to be able to decide whether to exercise the option to purchase. Technix would not be entitled to avoid what it agreed to under cl 3.25(a) by invoking cl 3.25(b) while the
investigation process was under way and nor is it able to avoid them by purporting to invoke cl 3.25(c) on the basis of the trust’s offer.
[16] Connor v Pukerau Store Ltd [1981] 1 NZLR 384.
[63] It follows, that in my judgment, to give effect to the parties’ intention, the reference to “at any time during the term of the lease” in cl 3.25(c) must be read as “at any time during the term of the lease other than when cl 3.25(a) or (b) have been engaged”. For example, if Technix had decided to sell and had offered the land to Fitzroy under cl 3.25(b) as required, but then, during the 14 day period when Fitzroy was considering the matter, Technix received a better offer from another party for the land, it would plainly not be entitled to invoke cl 3.25(c) and require a response from Fitzroy under that clause until the 14 day period provided in cl 3.25(b) had expired. To that extent at least, the reference to “at any time during the time of the lease” in cl 3.25(c) would not have any practical effect and would be read down. Similarly, once cl 3.25(a)(i) to (iii) is invoked, there is a process (as opposed to in the 14 day time period) to be undertaken by both parties which Technix cannot unilaterally frustrate.
[64] Clause 3.25(a) as a whole is to be construed as an offer to sell which Fitzroy cannot invoke until the investigation process has been completed, but also as a contract by Technix not to revoke the offer nor to frustrate the investigation process by invoking cl 3.25(b) or 3.25(c). If the clause is read literally as Mr Smith submitted, then if, once Fitzroy had engaged the investigation process, Technix decided that it could achieve a better price for the sale of the land or that it did not want to subdivide the land it could effectively frustrate the operation of 3.25(a) and Fitzroy’s rights under it by engaging 3.25(b) or, as in this case, by purporting to
accept an offer and triggering cl 3.25(c) at any stage before the investigation process was completed. That would render Fitzroy’s rights to purchase the lesser area of land (outlined in blue) nugatory.
[65] To read cl 3.25(c) down in this way accords with the commercial background to the contract and also with what must have been the parties’ understanding at the time the contract was made, that if the option process under cl 3.25(a) was invoked, the investigation would involve time and cost (to both parties).
[66] It is not a matter of implying a term into the contract as submitted by Mr Smith, rather, it is a matter of construing what the parties intended to achieve by the terms of their contract, cl 3.25 in general, and cl 3.25(a) in particular.
[67] The above interpretation still leaves cl 3.25(c) with purpose and effect. For example it applies during the entire term of the lease (a period of one day short of twenty years) and during the second renewed term of the lease.
[68] Mr Smith submitted that the practical consequences of the above interpretation would place an unreasonable restraint upon Technix’s ability to deal with its own land. But, by agreeing to cl 3.25 of the lease at all, Technix accepted restrictions in the way it could deal with its own land during the currency of the lease.
[69] There is perhaps more practical force in Mr Smith’s argument that the restriction on Technix’s ability to otherwise sell the land, once cl 3.25(a) was invoked, could run for an extended period. It already has in this case, although Technix does not suggest that Firzroy’s rights have lapsed for delay. The answer to this point, however is that it has always been open to Technix to respond promptly to the process initiated by Fitzroy under cl 3.25(a). While cl 3.25(a)(ii) contemplates that the extent of the investigation will be by agreement between the parties, the ultimate responsibility to arrange the investigation is on Technix. Technix controls that time period as it has the responsibility to arrange the investigation. Fitzroy had an obligation to take reasonable steps to comply with its obligations under the process. If Technix considers that Fitzroy was being unreasonable there are
arbitration provisions in the lease to resolve that issue if necessary. Technix has (and had), the ability to advance the matter either under the arbitration provisions in cl 3.29 of the lease or through the Court. It has not done so. While the investigation process has been significantly delayed in this case, both parties allowed that to happen, at least until the recent correspondence.
[70] It follows that I conclude that Technix was not entitled to trigger cl 3.25(c) as the investigation process under cl 3.25(a) has not been completed.
The effect of the previous subdivision
[71] In the circumstances it is strictly unnecessary to consider the alternative arguments for Fitzroy, firstly that Technix is not entitled to engage 3.25(c) and require Fitzroy to purchase the land as the land as defined in cl 3.25(c) is different to the land subject to the offer and secondly, that the offer is not a true arms-length and independent offer and accordingly is not an offer for the purposes of cl 3.25(c) in any event.
[72] However, in deference to Counsel’s submissions and in case it becomes relevant I express my findings on those matters. Fitzroy pleads in the alternative that, by virtue of the subdivision that occurred during the term of the lease, certificate of title H3/1058 has been cancelled so that Technix cannot now invoke the pre-emptive right in reliance on an offer to purchase the land in TNL 1/920.
[73] The subdivision took place some years ago. There is no suggestion it was undertaken with a view to defeating Fitzroy’s rights under cl 3.25. It seems to have been prompted by movements in the bed of the Mangaone stream which served as a physical boundary. The resulting adjustments have resulted in an increase in the land area in the replacement title of some 0.3027 hectares. There have also been changes to the easements, covenants and restrictions. They include a right of way and storm water right as specified in an easement certificate, and rights in gross in favour of the New Plymouth District Council in relation to electricity and sewage.
[74] Mr Smith submitted that the mere change in title could have no effect on the continued operation of cl 3.25(c). I accept that a difference in terminology or reference to the land could have no effect. The right of pre-emption under cl 3.25(c) is in relation to “the land referred to in the first schedule hereto or the land”. The land referred to in the first schedule is described in that schedule in detail. The reference to the certificate of title H3/1058 in the first schedule is, to that extent, no more than part of the description of the land. I agree with Mr Smith that the change in title identifier is not material. It is the change in the land area itself, however, that is relevant.
[75] If there was a minor, immaterial adjustment of the type contemplated by the Court of Appeal in Clough & Sons Ltd v Martyn and Ors[17] there would be force in Mr Smith’s submission that the Court should not adopt an interpretation which results in the clause being nullified. However, I am not able to accept the submission that the addition of a further 0.3027 hectares together with further encumbrances, including further easements, can properly be regarded as so minor or immaterial that the land referred to in cl 3.25(c) is essentially the same as the land in the first schedule.
[17] Clough & Sons Ltd v Martyn and Ors [1978] 1 NZLR 313.
[76] In Spijkerbosch v O’Malley[18] the Court had to consider a similar situation. The plaintiffs had a right of pre-emption under a lease. The right applied to the premises which, although contained within the defendant’s title, only occupied approximately 75 per cent of it. There was no separate title for the premises leased by the plaintiffs. Despite the right of pre-emption, the defendants transferred a half- interest in the entire land to another party. The plaintiffs brought an action against them arguing for specific performance or, in the alternative, damages in lieu of specific performance.
[18] Spijkerbosch v O’Malley (1989) 1 NZ ConvC 190,150.
[77] Smellie J accepted the argument for the defendants, that the plaintiffs were not entitled to an order for specific performance or damages in the alternative on the basis initially advanced. The plaintiffs’ right was a right of first refusal to purchase
the premises described in the lease. It was not a right of first refusal to purchase the whole of the land. He concluded:[19]
In the end the insurmountable difficulty for the Plaintiffs is that the right of first refusal in fact never arose because the First Defendants never reached the point where they wished “to sell the premises”. And reaching that point was a condition precedent to the obligation to first offer the premises to the Plaintiffs.
[19] At 190,153
[78] Smellie J observed that if the plaintiffs had become aware of the defendants intention to sell before the sale was completed, the Court may have been prepared to grant injunctive relief, but the point had passed.
[79] A similar, strict, approach was taken by the Court in Sarten v Long[20] on a caveat argument. The Court re-affirmed that a party wishing to invoke a right of pre- emption must do so in terms corresponding precisely to the right of pre-emption.
[20] Sarten v Long [2004] 5 NZCPR 58 at [37].
[80] In the present case, Technix cannot insist on its right to trigger the pre- emptive right and force Fitzroy to respond to that right and exercise its right of pre- emption in relation to land which is not strictly the same land as the land subject to and identified in the lease as subject to the right of pre-emption.
[81] It is not a case of a minor difference in obligation. Clause 3.25(c) provided that the right could be exercised in relation to one of two blocks of land, either all of the land described in the first schedule (as initially contained in CT H3/1058) or alternatively the land delineated in blue on the plan attached to the lease. The land which Technix seeks to enforce the right of pre-emption is substantially larger in area (by in excess of 0.3 of a hectare) and is subject to additional convenants. Even accepting, on Technix’s argument, that Fitzroy is not being asked to pay anything additional for that land, it is still being asked to assume an additional burden, namely the obligations of ownership that run with the additional land. An obvious example is rates. It may also impact on the price that Fitzroy is required to pay for the balance of the land in any event, given the price that the trust was prepared to pay for the land was initially calculated on the entire land area. There are also the additional covenants attaching to the land in TNL 1/920.
[82] Mr Smith then suggested that if the right of Technix to sell under cl 3.25(c) is void because the land is no longer comprised and described in the same title as before, then the option to purchase was equally void and Fitzroy could not succeed in so far as its argument relied on cl 3.25(a). I do not accept that. Clause 3.25(a) always contemplated that an exercise of the option to purchase the land subject to the option would require a subdivision of the land. The land is still owned by Technix. The introductory words of cl 3.25(a) are that Fitzroy is to have the option “to purchase the area as outlined in blue on the attached plan ... at any time during the term of the lease while [Technix] is the owner of the land.” The clause is still enforceable in its terms despite the amalgamation of titles.
[83] On this ground also, I find that Technix is not entitled to insist upon the right of pre-emption under cl 3.25(c).
Does the offer from the trust come within cl 3.25(c)?
[84] The last point taken by Fitzroy in its pleading is that the trust’s offer is not a bona fide arms-length offer from an independent third party. Mr Miles made the point that the offer was presented by the John B Matthews Charitable Trust, where Mr Matthews was managing director and effectively the majority shareholder of Technix and also controlled the trust. He submitted when regard was had to the provisions of the offer, it was more along the lines of a joint venture rather than a genuine arms-length offer for the purchase of land.
[85] On Mr Matthews’ evidence, which is again uncontested, I accept that the trust is a bona fide charitable trust which Mr Matthews has established for proper purposes. It also has a proper interest in purchasing the land in issue.
[86] The question is what cl 3.25(c) of the agreement for sale and purchase requires. On my interpretation, it requires Technix to have received an acceptable offer to purchase the land and then to offer the land to Fitzroy on identical terms. The clause goes on to provide for payment of a 10 per cent deposit with the balance payable within one month. It does not resolve the issue of what the position would
be if the provisions of the proposed agreement for sale and purchase are contrary to the express provisions of the lease (as to deposit or settlement).
[87] It is perhaps unlikely that the provisions of an offer as to the payment of the deposit and balance would be the same as the provisions of cl 3.25(c). The two can be reconciled on the basis that the provisions of the clause would apply as default provisions if the provisions in the offer for sale and purchase were more onerous. Where, however, the provisions in the proposed offer which Technix is prepared to accept are more favourable to the purchaser, then Fitzroy will be able to accept those terms and conditions. Despite the fact there are a number of unusual provisions in the offer, if I would have found against Fitzroy on this point.
Conclusion
[88] However, for the foregoing reasons, I have concluded that once Fitzroy had instigated the investigation process under cl 3.25(a) of the lease, Technix was not entitled to purport to sell the property and engage cl 3.25(b), nor to accept an offer and trigger the right of pre-emption under cl 3.25(c) until the investigation process had been concluded and Fitzroy had made a decision whether or not to exercise the option available to it under cl 3.25(a)(iv).
[89] The issue then is the appropriate remedy. Mr Miles argued for orders for specific performance. As the option to purchase has not been formally engaged under cl 3.25(a)(iv) and possibly may never be formally engaged, there is no basis for an order for specific performance of an agreement for sale and purchase.
[90] Fitzroy is, however, entitled to an injunction preventing Technix from offering to sell the land outlined in blue on the plan attached to the lease “the option land” (whether on its own or as part of a sale of a larger area of land containing the option land) or from accepting the current offer from the trust, or any other offer from another party for the purchase of the option land or land containing the option land, pending completion of the investigation process under cl 3.25(a)(i)-(iii) and any election by Fitzroy to exercise its option to purchase the option land under cl 3.25(a)(iv). Order accordingly.
[91] It should be unnecessary to make an order for specific performance to require the completion of the investigation process. However, in the event it becomes necessary, I reserve leave for either party to seek further orders in relation to the performance of the parties respective obligations under cl 3.25(a)(i)-(iii).
[92] For the reasons given earlier, the application to preserve the caveat is dismissed. The caveat is to be removed.
Costs
[93] Fitzroy has largely succeeded. Although the caveat has been removed, Fitzroy has obtained an injunction to protect its interests and to prevent Technix continuing with the sale to the trust.
[94] Fitzroy should have costs on a 2B basis for all steps taken and the proceedings in CIV-2010-443-102 including the hearing. In the caveat proceedings, Technix is to have costs of entering a notice of opposition. All costs should be on a
2B basis and are to be fixed by the Registrar if counsel cannot agree. Disbursements
are also to be as fixed by the Registrar.
Venning J
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