GP96 Limited v PVG Securities Trustee Limited
[2019] NZCA 325
•23 July 2019
| IN THE COURT OF APPEAL OF NEW ZEALAND I TE KŌTI PĪRA O AOTEAROA |
| CA258/2019 [2019] NZCA 325 |
| BETWEEN | GP96 LIMITED |
| AND | PVG SECURITIES TRUSTEE LIMITED |
| CA272/2019 | ||
| BETWEEN | GP96 LIMITED | |
| AND | F M CUSTODIANS LIMITED | |
| Hearing: | 3 July 2019 |
Court: | Gilbert, Wylie and Thomas JJ |
Counsel: | A R B Barker QC for Appellant |
Judgment: | 23 July 2019 at 3 pm |
JUDGMENT OF THE COURT
AThe appeal in CA258/2019 is dismissed.
BThe appeal in CA272/2019 is dismissed.
CIn CA258/2019, the appellant must pay costs to each respondent for a standard appeal on a band A basis and usual disbursements.
DIn CA272/2019, the appellant must pay costs to the respondent for a standard appeal on a band A basis and usual disbursements.
____________________________________________________________________
REASONS OF THE COURT
(Given by Wylie J)
Introduction
There are two appeals before the Court arising out of separate proceedings but both involving the same transaction. Both appeals are against a decision given by Gendall J on 28 May 2019 in the High Court at Christchurch.[1]
[1]GP96 Ltd v F M Custodians Ltd [2019] NZHC 1183.
In appeal CA258/2019, the appellant, GP96 Ltd (“GP96”), appeals Gendall J’s decision to:
(a)grant an application made by the first respondent, PVG Securities Trustee Ltd (“PVG”) and order removal of a caveat lodged by GP96 against one of two titles to a property situated at 96 Lichfield Street, Christchurch (“the property”); and
(b)order that GP96 not relodge a caveat against either of the titles to the property without the leave of the Court.
In appeal CA272/2019, GP96 appeals Gendall J’s decision declining:
(a)to enlarge orders made by Chisholm J in 2011,[2] by restraining the respondent, F M Custodians Ltd (“FMC”), from settling an agreement for sale and purchase dated 11 December 2018 relating to the property and entered into between PVG and the purchaser, Elizabeth Harris (“Mrs Harris”); and
(b)to restrain FMC from discharging or authorising any discharge of its mortgages over the property, or from assigning or registering any transfer of those mortgages.
Background facts
[2]GP96 Ltd v F M Custodians Ltd (2011) 12 NZCPR 489 (HC).
As noted, the property was in two titles. It was formerly owned by a company known as Lichfield Ventures Ltd (in liquidation) (“LVL”). LVL was a subsidiary of Property Ventures Ltd (in liquidation) (“PVL”), a company controlled by a developer and entrepreneur, David Henderson. Mr Henderson was LVL’s sole director.
In October 2006, FMC advanced $8.7 million to LVL. The borrowing was guaranteed by PVL and Mr Henderson and it was secured by way of a first mortgage over one of the titles to the property. The advance should also have been secured by way of a first mortgage over the other title to the property but, as a result of an error made by the solicitors instructed, this did not occur. A mortgage in favour of FMC was belatedly registered against the second title in November 2009, but as a second mortgage, as is explained in the next paragraph.
LVL also borrowed monies from Dominion Finance Group Limited (“DFG”) at much the same time. This advance was secured by a mortgage over both titles to the property. The mortgage was registered in June 2007. The DFG mortgage was a first mortgage over one title, and a third mortgage over the other title (DFG already had an existing second mortgage over this title).
By October 2009, LVL was in financial difficulties. It had defaulted under its term loan contract with FMC and FMC had obtained judgment against Mr Henderson. By deed dated 8 October 2009, FMC, LVL, a company known as Livingspace Properties Ltd (“Livingspace”), PVL and Mr Henderson agreed to vary the term loan agreement between FMC and LVL. The loan balance was written down to $8.7 million and staged repayments were agreed. Livingspace was a subsidiary of PVL and it was associated with Mr Henderson. It was occupying and running a business from the property. It agreed to guarantee LVL’s obligations to FMC and to provide FMC with a first ranking general security agreement over its assets. It also agreed to execute a formal lease of the property from LVL, for a term of six years, with two rights of renewal, each of six years. Mr Henderson agreed to guarantee Livingspace’s obligations under the lease. The lease was required to be approved by FMC before execution.
A deed of lease — approved by FMC — was entered into between LVL, Livingspace and Mr Henderson on 5 November 2009. Relevantly, cls 26 and 27 provide as follows:
Total Destruction
26.1IF the premises or any portion of the building of which the premises may form part shall be destroyed or so damaged
(a)as to render the premises untenantable then the term shall at once terminate, or
…
Partial Destruction
27.1IF the premises or any portion of the building of which the premises may form part shall be damaged but not so as to render the premises untenantable and:
(a)the Landlord’s policy or policies of insurance shall not have been invalidated or payment of the policy moneys refused in consequence of some act or default of the Tenant; and
(b) all the necessary permits and consents shall be obtainable:
THEN the Landlord shall with all reasonable speed expend all the insurance moneys received by the Landlord in respect of such damage towards repairing such damage or reinstating the premises and/or the building but the Landlord shall not be liable to expend any sum of money greater than the amount of the insurance money received.
…
27.4If any necessary permit or consent shall not be obtainable or the insurance moneys received by the Landlord shall be inadequate for the repair or reinstatement then the term shall at once terminate but without prejudice to the rights of either party against the other.
The lease was not registered against the titles to the property.
There is nothing to suggest that DFG consented to the lease. DFG’s loan manager at the time the DFG advances were made to LVL has deposed that he was aware that Livingspace was operating a business from the property. He says that it was his and DFG’s expectation that a formal lease would be drawn up. However, by the time the lease was entered into, DFG was in receivership. The receivers have confirmed that there is nothing in their files to suggest that the lease was brought to their attention or that they consented to it. Nor have Livingspace, LVL or their parent company, PVL, produced any records indicating that DFG as mortgagee consented to the lease.
On 5 March 2010, receivers were appointed to PVL and, on 18 June 2010, to some of the assets of Livingspace (but not the lease).
On 23 July 2010, Livingspace purported to assign its interests under the lease to GP96. The deed of assignment was signed by Mr Henderson on behalf of Livingspace, GP96 and LVL. He also signed for himself as guarantor. GP96 was another company associated with Mr Henderson. Its shares are held by a trustee company. The sole director of the company is now Mr Henderson’s wife.
Three days after the assignment, receivers were appointed to the remainder of Livingspace’s assets, including the lease, and the following day, PVL was placed into liquidation.
There is nothing to suggest that DFG consented to the assignment, and a consultant to FMC has deposed that FMC did not consent.
On 4 September 2010, the property was damaged in the first of the Christchurch earthquakes.
On 29 November 2010, Mr Henderson was adjudicated bankrupt and, on 13 December 2010, Livingspace was placed into liquidation. Its liquidation was followed three days later by the liquidation of LVL.
On 22 December 2010, LVL’s initial liquidators gave notice to FMC disclaiming LVL’s interest in the property. There is a dispute about this notice. If it was valid, the property passed as bona vacantia to the Crown.
On 22 February 2011, the property suffered further earthquake damage. The property was placed in the “red zone” and access to it was forbidden. GP96 vacated and it has not paid rental under the lease since the February earthquake (or perhaps earlier — there is a dispute as to this).
On 16 April 2011, FMC gave notice to GP96 that it was entering into possession of the property as mortgagee on the basis that the lease had been terminated pursuant to cl 26.1(a), the leased premises having been rendered untenantable. Declaratory orders recording FMC’s claim and that it had entered into possession were made by the High Court by consent, without prejudice to the rights of GP96 and FMC and noting that the “lawfulness” of FMC’s possession was disputed by GP96. The Court did not declare that the premises were untenantable.
GP96 then applied to the High Court for an injunction to prevent FMC from taking any further steps in connection with the claimed termination of the lease. Chisholm J considered cl 26.1(a) and the affidavits that had been filed by both parties.[3] He considered that GP96 had an arguable case that the building had not been rendered untenantable by the February 2011 earthquake. He made an order preventing FMC from “demolishing, selling or leasing [the property] until the substantive matter [was] heard or until further order of the Court”. The substantive proceedings were then due to be heard on 8 August 2011, but it was adjourned by consent, because, it seems, FMC was then negotiating with the insurers of the property. Neither GP96 nor FMC have taken any steps since to reactivate the proceedings.
[3]GP96 Ltd v F M Custodians Ltd, above n 2.
As noted above at [5] and [6], there was some difficulty with the registration of FMC’s mortgage. It believed it should have received a first mortgage over both titles to the property, and it commenced proceedings against the solicitors it had instructed to act for it at the time. It also claimed against DFG. The litigation was settled. The solicitors admitted liability and, in 2012, FMC and DFG entered into a deed of priority. The deed is undated, but nothing turns on that. FMC and DFG agreed that FMC would take priority over DFG for all monies secured under its mortgages up to the sum of $8.7 million, together with not more than 24 months’ interest and all costs and expenses incurred in protecting or enforcing its security. FMC also agreed with DFG that if, at any time, DFG sold the property in the exercise of the power of sale contained in DFG’s second mortgage, then FMC would provide DFG with a discharge of its mortgages upon payment of the priority sum. The deed of priority was registered on 14 March 2012. As a result, DFG’s first mortgage over one of the titles was subordinated to FMC’s mortgage, and FMC now has first mortgages over both titles.
Negotiations between FMC and the property’s insurer were drawn out and, on 2 July 2015, FMC issued proceedings against the insurer. On 6 July 2015, GP96 gave notice purporting to renew the lease for a period of six years as from 6 October 2015. On 13 July 2015, FMC gave notice purporting to decline consent to the renewal of the lease and denying that GP96 still had a lease.
DFG had been placed into receivership in September 2008. On 16 December 2016, the receivers assigned the debt and the related mortgage to a company known as SPF No. 10 Ltd. A transfer of the mortgage was registered on 19 December 2016. In August 2017, SPF No. 10 Ltd in turn agreed to assign the debt and mortgages to a nominee to be appointed by PVL’s then liquidator — Robert Walker.[4]
[4]The background to these assignments is discussed in PricewaterhouseCoopers v Walker [2017] NZSC 151, [2018] 1 NZLR 735.
On 28 May 2018, the proceedings between FMC and the insurer were settled and FMC received an insurance pay-out of $12,220,888. On 25 June 2018, GP96 enquired whether or not FMC was intending to use the insurance monies to reinstate the property pursuant to cl 27.1 of the lease. On 13 July 2018, FMC replied advising GP96 that the insurance monies had been applied by it to the secured debt pursuant to the mortgages, and that it was its intention to distribute the same to its investors. GP96 did not seek to prevent it from taking this step.
PVG was established in August 2018 and Mr Walker nominated it to take the assignment of SPF No. 10 Ltd’s rights and interests in the securities formerly owned by DFG. PVG took the assignment of the debt and mortgage and a transfer of the mortgage was registered on 27 August 2018.
At some stage, probably in 2018, Mrs Harris approached FMC and expressed an interest in purchasing the property. She was referred by FMC to PVG.
On 6 September 2018, PVG, as second mortgagee, issued Property Law Act 2007 notices and served the same on the Treasury on behalf of the Crown (on the basis that the property had been disclaimed). On 12 September 2018, GP96 lodged a caveat against one of the titles to the property, claiming a leasehold interest in the property. On 5 October 2018, the Property Law Act notices expired unremedied and, on 11 December 2018, PVG, as second mortgagee, in the exercise of its power of sale, entered into the sale and purchase agreement with Mrs Harris. The purchase price under that agreement is $2 million. The agreement is conditional. Inter alia, and on satisfaction of various conditions for Mrs Harris’ benefit, it required PVG to apply to the High Court for removal of GP96’s caveat.
On 21 December 2018, PVG and FMC entered into a deed. Inter alia, they agreed as follows:
(a)To enable settlement of the agreement with Mrs Harris, FMC will execute an authority in favour of PVG’s solicitors so that they can register a discharge of the FMC mortgages.
(b)PVG will do all things reasonably necessary to settle the agreement for sale and purchase, including making application to the High Court to remove GP96’s caveat.
(c)Upon settlement of the agreement with Mrs Harris, the sale proceeds will be applied as follows.
(i)PVG will receive $255,000;
(ii)FMC will receive the balance of the sale proceeds; and
(iii)once FMC has received a determination from the Inland Revenue Department as to whether GST is payable on the insurance proceeds FMC has received, and if GST is not payable, then FMC will pay to PVG the balance of the net sale proceeds that exceeds FMC’s priority amount. This could result in a payment to PVG of $461,174.
The conditions in favour of Mrs Harris were satisfied and, on 19 February 2019, PVG filed an originating application seeking removal of GP96’s caveat. On 4 March 2019, GP96 filed a without notice application seeking further orders to enlarge the interim injunction granted in its favour by Chisholm J in May 2011. Osborne J declined to deal with the matter on a without notice basis in a minute issued on 6 March 2019 and the competing applications came before Gendall J on 15–16 April 2019.
The High Court decision
Gendall J noted the two applications before him. He considered that it was appropriate to deal with PVG’s caveat removal application first, noting that the outcome of that application might determine GP96’s application to enlarge the interim injunction put in place by Chisholm J. The Judge then recited the relevant facts, observing that the 2011 interim orders were intended to preserve GP96’s claim to a leasehold interest in the property until final determination of the dispute between it and FMC, but that the hearing of that dispute had been adjourned. He also noted that the parties had not taken any steps since, and that the interim orders therefore remained in force. He recorded that FMC had settled the insurance claim and applied the proceeds in repayment of the secured debt, relying on a clause in the mortgage document. The Judge next recorded GP96’s assertion that FMC was intending to participate in, and do all it could to facilitate, the sale of the property, and that by so doing, it was breaching the terms of the interim injunction. He noted GP96’s claim to an entitlement under the lease, and PVG’s assertions that any lease over the property was not binding on or enforceable against it, that the lease was entered into without its consent or the consent of its predecessors in title, and that, as second mortgagee, it was entitled to exercise its rights to sell the property free of the lease.
The Judge then turned to consider PVG’s application to remove the caveat. He discussed the relevant legal principles applicable to the removal of caveats under both the Land Transfer Act 1952 and the Land Transfer Act 2017. He observed that a lease by definition creates an interest in land, and that under the 2017 Act, a person claiming an estate or interest in land, whether capable of registration or not, can lodge a caveat. The Judge considered the key issue to be whether or not PVG had consented to the November 2009 lease between LVL and Livingspace and the July 2010 assignment to GP96. He considered that there was nothing in the evidence to suggest that the lease and the assignment were brought to the attention of the receivers of DFG, or that their consent was sought or provided. As a result, he found that the lease did not take priority over the interests of PVG as second mortgagee, and that it was not binding on PVG. He therefore held that the caveatable interest asserted by GP96 had to yield to PVG’s registered mortgage, and that PVG’s application to remove the caveat must succeed.[5]
[5]GP96 Ltd v F M Custodians Ltd, above n 1, at [40]–[60].
For completeness, the Judge considered some additional arguments advanced by the parties:
(a)He considered that an argument advanced by PVG that the lease had been disclaimed had merit. He left to one side whether or not the requirements for a valid disclaimer had been met.[6]
(b)He observed that if GP96 had been able to establish that it had an arguable interest in the property under the lease enforceable against PVG, the Court would still have had a residual restriction to remove the caveat. He noted that the lease which GP96 relied on contained a provision to the effect that the lessee would not register a caveat in respect of its interests under the lease. This was relevant to the Court’s residual discretion.[7]
(c)While there were arguments as to whether the building was tenantable, he left those to one side.[8]
(d)There was no evidence to support GP96’s assertions that there was an abuse of process, Land Transfer Act fraud, or dishonesty on the part of either PVG or FMC. Rather the transaction before the Court involved “… simply a long overdue and defaulting mortgage and the resulting arms-length commercial mortgagee sale transaction with an independent third party”.[9]
(e)The balance of convenience favoured the removal of the caveat, even if GP96 had been able to establish against PVG an arguable interest in the property enforceable by way of a caveat.[10]
[6]At [62]–[65].
[7]At [66]–[69].
[8]At [70]–[71].
[9]At [72].
[10]At [73]–[74].
The Judge considered that the Court had jurisdiction to restrain GP96 from lodging further caveats. He considered that such an order was appropriate.[11]
[11]At [75]–[78].
The Judge then turned to GP96’s application for further orders in relation to the 2011 interim injunction. He noted that the Court had an inherent jurisdiction to rescind or vary the 2011 order if the circumstances had changed, so as to require such an order. He considered that there was a reasonable argument that the liquidator of LVL had disclaimed LVL’s reversionary interest in the property, and that that disclaimer effectively terminated the lease. Further, he was satisfied, on all the evidence before him, that the landlord had not received any insurance monies as a result of the earthquake damage, and that FMC had properly applied the insurance monies towards the secured indebtedness of LVL as mortgagor in accordance with the mortgage. The Judge considered that as a result, and in accordance with its provisions, the lease was therefore terminated because the insurance monies received by the landlord were effectively nil, and consequently inadequate for the repair or reinstatement of the property. The Judge held that GP96 had no ongoing basis for its claim to a permanent or interim injunction, that there were significant changed circumstances and that the interim injunction was no longer appropriate. He lifted the interim injunction order made by Chisholm J.[12]
Submissions
[12]At [79]–[94].
Mr Barker QC, for GP96, argued that FMC approved the terms of the lease to GP96, that the lease requires that the proceeds of any insurance payment be applied towards reinstatement of the property, and that FMC is bound to comply with that obligation. He noted that FMC introduced Mrs Harris to PVG, and argued that because FMC had difficulties in transferring the property free of the lease, PVG had agreed to sell the property as second mortgagee and pass on the proceeds of sale to FMC in return for a fee. He referred to the agreement entered into on 21 December 2018. He noted that the parties were open as to why they had structured the sale agreement with Mrs Harris in this way, observing that a recital to the agreement records as follows:
PVG has not consented to the Lease. For this reason, FMC considers that there will be a better realisation for FMC in permitting PVG to sell the Property and benefit from the variation and priority arrangements referred to in [the deed] so that the property can be sold unencumbered of the Lease.
Mr Barker argued that if the sale to Mrs Harris proceeds, GP96’s interest in the property will be denied. He submitted that FMC, both as consenting mortgagee and as mortgagee in possession, is bound by the covenants in the lease, including the obligation to reinstate the property from the insurance proceeds received. He submitted that FMC cannot derogate from the grant of the lease, and that the arrangements entered into between FMC and PVG breach that obligation. He further argued that the sale to Mrs Harris was entered into in breach of the 2011 interim orders, and that the clear purpose was to defeat GP96’s interest in the lease. He submitted that if PVG had that intention at the time it took the transfer of the DFG mortgage, there was Land Transfer Act fraud, and that if it formed the intention after transfer, it is nevertheless exercising its power of sale for an improper purpose.
Mr Francis, for PVG, disputed GP96’s assertion that its agreement to sell the property amounts to fraud under the Land Transfer Act, or that it is part of a dishonest scheme to cheat or deprive GP96 of its alleged leasehold interest. He noted that each of them, PVG, Mrs Harris and FMC is an independent and arm’s length commercial party. He argued that PVG is a registered mortgagee entitled to rely on its security to apply the insurance proceeds against its debt. He noted that settlement of the agreement between PVG and Mrs Harris depends on PVG obtaining Court orders removing the caveat, and that those orders were granted given PVG’s right as mortgagee, which has statutory priority absent PVG’s consent over the subsequent unregistered lease. He also denied that PVG has been paid a fee for undertaking the mortgagee’s sale. He asserted that in reality, PVG has negotiated a variation of its priority arrangements with FMC to best advance its (PVG’s) position. He argued that the effect of a mortgagee’s sale will always be to extinguish subordinate interests, such as the interests of a lessee under an unregistered lease to which the mortgagee has not consented.
Mr Bayley, for FMC, argued that FMC was entitled to apply the insurance monies towards repayment of its secured debt. He argued that FMC’s consent to the lease did not affect its claim as mortgagee to the insurance proceeds, and that similarly, FMC’s status as a mortgagee in possession does not affect its claim as mortgagee to the insurance proceeds. He argued that the lease has been terminated, by the liquidator’s disclaimer, or because the property is untenantable, or because FMC has lawfully applied the insurance proceeds towards its secured debt with the result that the landlord has no insurance monies to fulfil its obligation to reinstate. As an alternative, he argued that if the lease is still on foot, the sale by PVG is not subject to the lease, because PVG and its predecessors did not consent to the lease. He denied that there is any scheme between PVG and FMC to circumvent the interim injunction and submitted that there was no subterfuge in the arrangements entered into.
We were presented with a comprehensive list of issues agreed by counsel. The first broad issue was whether or not GP96 has a reasonably arguable claim to a valid and current interest under the lease. The second issue was whether or not GP96 is entitled to an injunction against FMC prohibiting it from participating in the sale process, and the third issue was whether or not PVG was entitled to the order removing the caveat. Each issue contained various sub-issues.
Analysis
Does GP96 have a reasonably arguable claim to a valid and current interest under the lease?
Mr Barker responsibly acknowledged that “if GP96 is not able to establish (at the very least) a reasonable argument that it had the benefit of the lease, then the appeal must fail”. He was referring to the appeal in CA258/2019 where GP96 seeks to maintain its caveat in reliance on the lease which it says was assigned to it.[13]
[13]GP96 Ltd v F M Custodians Ltd, above n 1, at [32].
We agree with Mr Barker and consider that it is appropriate to consider this issue first. If GP96 never acquired an interest under the lease, or if it has lost such interest as it had under the lease, then it cannot maintain its caveat.
GP96 only has to show that it has a reasonably arguable case to support the interest it claims.[14]
[14]Botany Land Development Ltd v Auckland Council [2014] NZCA 61, (2014) 14 NZCPR 813 at [24].
Notwithstanding the length of time that has passed since the injunction proceedings were filed, there is a comparative dearth of factual material available to us. There are a number of affidavits filed, but (with one exception) they deal only with the present application for removal of the caveat. The affidavits that were before Chisholm J have not been made available to us (with the one exception). Nor have any of the deponents been cross-examined and there are no findings of fact as such. These factors make it impossible to express a final view on many of the issues raised.
Was the lease a genuine transaction from the outset?
We agree with Mr Barker that, on the available evidence, the lease was a genuine and proper transaction. It was entered into pursuant to the deed of 8 October 2009 to which FMC was a party. FMC had to grant its approval for the lease before it was executed, and it did so. There is nothing on the papers before us to impugn the lease at its inception.
Was there a valid assignment of the lease?
The relevant facts are set out above at [11]–[13]. As noted, Mr Henderson signed the assignment on behalf of all parties — landlord, lessee, assignee and as guarantor.
Chisholm J noted that the assignment was not consented to by FMC.[15] He recorded that issues concerning the validity of the assignment had been raised in related High Court proceedings, and that FMC was there alleging that the assignment was invalid, because Livingspace was in receivership at the time, and because the receivers did not participate. He considered that these issues could not be resolved in the course of the hearing before him.
[15]GP96 Ltd v F M Custodians Ltd, above n 2, at [8]–[9].
Gendall J also left the issue to one side, because he considered that no definitive decision was required.[16]
[16]GP96 Ltd v F M Custodians Ltd, above n 1, at [43].
The assignment occurred shortly after receivers had been appointed to some of Livingspace’s assets and immediately before receivers were appointed to Livingspace’s interest in the lease. It occurred when PVL and its various subsidiary companies were under considerable financial pressure. Indeed, PVL was placed into liquidation only four days after the assignment and Livingspace shortly thereafter. Further, there is nothing to suggest that there was any consideration for the assignment. The assignment was to a company apparently controlled by Mr Henderson. We do not know whether GP96 was a subsidiary of PVL but there must nevertheless be a suspicion that the assignment was a voidable preference under the relevant provisions in the Companies Act 1993.
Nor is there anything to suggest that either FMC, or DFG, consented to the assignment. As against this, there is no requirement in the lease for the mortgagee’s consent. The only requirement is that the landlord give consent. It is arguable that that consent was given by Mr Henderson on behalf of LVL. As noted above at [4], he was its sole director. Further, and in any event, s 240(2) of the Property Law Act provides that an assignment of a lease is effective even if the consent of the landlord is not obtained.
FMC argued that the terms of its mortgages provided that the failure of LVL as mortgagor to obtain its written consent to the assignment constituted a default, and that GP96 must have been constructively aware of this provision given the overarching involvement of Mr Henderson. Be this as it may, we are not persuaded that this default provision affects the validity of the assignment.
There are a number of questions unanswered on the factual material before us, and we cannot finally determine the issue given the relative paucity of information available. For present purposes, we are prepared to accept that GP96 has a reasonably arguable claim that there was a valid assignment of the lease from Livingspace to it, and that the assignment was effective to transfer the leasehold interest to it.
Was the lease disclaimed?
The relevant facts are set out above at [16]. As noted, LVL’s initial liquidators gave notice to FMC on 22 December 2010 disclaiming LVL’s interest in the property.
The effect of the disclaimer does not seem to have been raised before Chisholm J.
The issue was raised before Gendall J. He considered that there was a reasonable argument that the liquidators of LVL had disclaimed LVL’s reversionary interest in the property soon after the company was placed into liquidation, and that that disclaimer effectively terminated the lease.[17] He did not however consider it necessary for him to definitively decide the issue, and he expressly left to one side whether or not the requirements for a valid disclaimer had been met.
[17]GP96 Ltd v F M Custodians Ltd, above n 1, at [62]–[65] and [83].
It was submitted for GP96 that there has been no valid disclaimer of the lease, and that if there has been, it relates only to LVL’s interests and does not impact on GP96’s interests. Mr Barker argued that while it is relatively commonplace for a liquidator to disclaim a company’s interest as lessee under a lease, there is debate as to whether a liquidator can disclaim an interest as lessor.[18] He further submitted that any disclaimer of land is not valid unless it is made by deed,[19] and that there is nothing to suggest that there was a deed executed by LVL’s liquidators. He also argued that if the disclaimer was valid, then the liquidators were required to give notice to GP96 pursuant to s 269(4) of the Companies Act. In addition, he put it to us that the liquidators did not disclaim the lease, but rather disclaimed LVL’s interest in the property. He referred to s 269(3)(b) of the Companies Act and noted that a disclaimer does not affect the rights of other persons except to the extent necessary to release the company from its liabilities. He argued that even if there has been a valid disclaimer, GP96’s rights under the lease have not been extinguished, that it still has the right to possession and use of the property, and that it can enforce that right against the Crown.
[18]Re Richmond Commercial Developments Ltd (in stat man) (1990) 5 NZCLC 66,336 (HC) at 66,340–66,341.
[19]Property Law Act 2007, s 17.
Mr Francis referred to the notice of disclaimer given by the liquidator, and to the liquidator’s first report dated 24 January 2011 where the disclaimer was recorded. He referred to a decision of the High Court of Australia,[20] and a decision of the High Court in this country,[21] and argued that the disclaimer was effective to terminate the lease. He left the main thrust of the argument on this point to Mr Bayley.
[20]Willmott Growers Group Inc v Willmott Forests Ltd (receivers and managers appointed) (in liq) [2013] HCA 51, (2013) 251 CLR 592.
[21]Body Corporate 207715 v McNish [2015] NZHC 2848, [2016] 2 NZLR 429 at [36].
Mr Bayley submitted that the lease did not survive the disclaimer. He argued that service on GP96 was not required because s 269(4) of the Companies Act provides that notice of disclaimer must be given only to those whose rights are, to the knowledge of the liquidator, affected. He pointed out that no evidence has been called by GP96 to say that it was not given notice, and further, that the circumstances around the assignment from Livingspace to GP96 were such that LVL’s liquidators may well have had no knowledge of the alleged rights of GP96. He also noted that the liquidator’s report, referring to the disclaimer, was filed in January 2011, and he argued that thereafter it was a matter of public record that the property had been disclaimed. He noted the assertion made by GP96 that any disclaimer is required to be way of deed. He pointed out that GP96 had not called any evidence to establish that the liquidators did not execute a deed. As to the effect of the disclaimer, he referred to Willmott Growers Group Inc v Willmott Forests Ltd, where the High Court of Australia held that the liquidator of a lessor can disclaim a lease. French CJ, Hayne and Kiefel JJ noted that the effect of such disclaimer is as follows:[22]
[I]t is critically important to recognise that the tenants do not stand as third parties divorced from the rights, interests and liabilities of the company which are to be brought to an end. In every case the tenant is the party that has the liability, interest or right which is correlative to the relevant right, interest or liability of the company. … the company’s rights, interests and liabilities in respect of the leases cannot be brought to an end without bringing to an end the correlative liabilities, interests and rights of the tenants.
…
[T]he liabilities [of the lessor] that would be terminated by disclaimer of the leases include its obligations to provide quiet enjoyment and not derogate from the grant of exclusive possession of the land. And as the liquidators further submitted, again correctly, it necessarily follows that the tenants’ rights to quiet enjoyment and, non-derogation are terminated by the disclaimer of the leases with consequent termination of the company’s correlative liabilities or duties. It follows that the tenants’ estates or interests are also brought to an end.
Mr Bayley accepted that Willmott was decided on a different footing to the present case, because there the liquidators of the lessor disclaimed the lease and here the liquidators of LVL disclaimed the land. He nevertheless argued that termination of an unregistered lease is a necessary consequence of disclaiming the reversion, and that, accordingly, any rights GP96 had under the lease came to an end upon the disclaimer by LVL’s liquidators of the property.
[22]Willmott Growers Group Inc v Willmott Forests Ltd (receivers and managers appointed) (in liq), above n 20, at [54]–[55] (footnotes omitted).
Once again, we do not consider that we have sufficient materials before us to deal with this issue:
(a)We do not know whether or not LVL’s liquidators made the disclaimer by way of deed. There is nothing in the materials before us to suggest that there was such a deed. Rather, the notice of disclaimer given by the liquidators to FMC on 22 December 2010 was sent by way of letter, and one of the liquidator’s stated in the letter as follows:
I hereby give notice that I disclaim the company’s interest in the following assets … 96 Lichfield Street, Christchurch.
This suggests that the disclaimer was given by way of letter and not by deed, but we cannot be confident in that regard. There has been no discovery, and there is no affidavit from LVL’s liquidators at the time. The liquidator’s first report does not address the point. It simply records that on 22 December 2010 the liquidators disclaimed various assets of LVL, including the property at 96 Lichfield Street, as there was no equity or income available from the property for creditors.
(b)There is nothing in the materials before us as to whether or not the liquidators gave notice of the disclaimer to GP96. While there is force in Mr Bayley’s argument that liquidators are only required to give notice in writing to persons whose rights are, to the knowledge of the liquidators, affected by the disclaimer, we do not know whether or not the liquidators knew of the lease. It was unregistered but that does not preclude knowledge of it. There is an additional problem — if they did know about the lease, we do not know whether or not the liquidators knew of the assignment to GP96.
It is our preliminary view that the observations made in Willmott do not assist. They were made in a different context. The argument made by Mr Bayley prima facie cuts across s 269(3) of the Companies Act. It provides that a disclaimer does not, except so far as necessary to release the company from a liability, affect the rights or liabilities of any other person. The intention behind s 269, dealing with the power of liquidators to disclaim, is to give relief from liability in respect of onerous obligations, and to do so with as little disturbance as possible to the rights and liabilities of third parties.[23] For example, the disclaimer of a lease by an insolvent assignee does not release the original lessee from liability to pay rent;[24] nor does the disclaimer of a lease by the liquidator of the lessee release guarantors of the lease.[25] This suggests that a disclaimer of the reversion may not affect the rights of a lessee because cancellation of the lessee’s rights is not necessary to release the company from its liability in respect of the reversion. The issue was not, however, argued fully before us. We would prefer to leave the matter until it is properly before the court. For present purposes, we are prepared to accept that it is arguable that such rights as GP96 has under the lease were not terminated by the disclaimer given by LVL’s liquidators on 22 December 2010.
Was the lease terminated because the property became untenantable?
[23]Re Carter & Ellis, ex parte Savill Brothers [1905] 1 KB 735 (CA) at 742.
[24]Hill v East and West India Dock Co (1884) 9 App Cas 448 (HL).
[25]Drake City Ltd v Tasman-Jones [2016] NZHC 899, [2019] NZAR 637 at [42]. See also Hindcastle Ltd v Barbara Attenborough Associates Ltd [1997] AC 70 (HL) at 88.
The relevant provision in the lease — cl 26.1 — is set out above at [8]. It provided that if the premises or any portion of the building was destroyed or damaged so as to render the premises untenantable, then the lease was terminated.
This issue was discussed by Chisholm J. It is clear from his judgment that he had a number of affidavits before him as to the state of the building, most of which are not before us. He considered that GP96 had an arguable case that the building was not rendered untenantable in terms of cl 26.1 by the earthquake on 22 February 2011. Indeed, he observed that on the evidence then available, GP96’s case could be described as “relatively strong”.[26]
[26]GP96 Ltd v F M Custodians Ltd, above n 2, at [41].
Mr Reid — a consultant to FMC — filed an affidavit in the proceedings before Chisholm J. We have a copy of that affidavit. He also swore a further affidavit in the caveat proceedings in March 2019. He there deposed that, following the February 2011 earthquake, the property suffered further damage in later earthquakes in April, June and December 2011. He said that the building was and remains “red stickered”, and that this means that the property cannot be used even though the red zone cordon, imposed immediately after the February 2011 earthquake, has been lifted. He said that the front façade of the building presents significant structural concerns, and that it is temporarily propped up using scaffolding. He said that there has been further damage to and deterioration of the building over the intervening years, referring specifically to damage caused to internal doors and doorframes when the building was entered immediately following the February 2011 earthquake, subsequent water ingress, rodent infestation, droppings from nesting pigeons, extensive vandalism from forced entry, extensive invasive work for the purposes of investigating damage as part of the insurance proceedings, and flooding when the water supply to the building was turned back on. He said that the building is dangerous to enter and a health and safety risk.
GP96 did not respond to these assertions in its affidavits in the present proceedings.
Gendall J left to one side the question as to whether the earthquake damage to the property rendered it untenantable in terms of cl 26.1 of the lease.[27]
[27]GP96 Ltd v F M Custodians Ltd, above n 1, at [71].
We have significant reservations as to whether or not the property remains tenantable. It seems unlikely that it does, but we note the preliminary views expressed by Chisholm J to the contrary. Those views were expressed in May 2011 and they were not challenged on appeal. We have not seen many of the affidavits on which the Judge based his observations. It is clear that a number of the deponents before him were expert engineers and/or building assessors. As against this, we only have Mr Reid’s affidavits — one sworn in the 2011 proceedings and the other in March 2019, deposing as to more recent damage. Mr Reid does not say when the more recent damage occurred. It seems reasonably clear that much of it is ongoing. Further, Mr Reid said that as a result of advice previously received by quantity surveyors, FMC understands that substantial repairs to the property could take one to two years, depending on which repair strategies are adopted.
Given these various matters, and the incomplete state of the evidence, we are not prepared to find that the property was rendered untenantable, and that cl 26.1 was engaged. We are prepared to accept that GP96 has a reasonable argument that the lease remains on-foot, notwithstanding the damage which the property has suffered, both as a result of the various earthquakes and subsequently.
Application of insurance proceeds
The relevant clauses — cls 27.1 and 27.4 — are set out above at [8]. In short, they provided that if the property was damaged, but not so as to be untenantable, the landlord was to expend all insurance monies received by it towards repairing the damage. The landlord was not, however, liable to spend more than the amount of the insurance monies received. If the monies received were inadequate for the repair, then the lease terminated, but without prejudice to the rights of either party against the other.
We have also recorded above that FMC brought proceedings against the insurer, which were ultimately settled, and that FMC received an insurance pay‑out of $12,220,888. As noted above at [23], it advised GP96 that it was intending to apply the monies to its secured debt, asserting that it was entitled to do so under its mortgages.
The mortgage granted to FMC by LVL extended to the proceeds of any insurance over the property. Clause 4, dealing with the extent of FMC’s security interests, provided that LVL, as the party granting the mortgages to FMC, assigned to FMC “absolutely all of its right, title and interest (present, future, legal and equitable) in land proceeds”. The words “land proceeds” were defined to mean all monies payable to LVL as the party granting the mortgage arising out of the ownership of the property and any proceeds of insurance. Clause 8 of the mortgage placed an obligation on LVL to insure the property, and, importantly, cl 8(b) provided as follows:
If insurance moneys become payable in respect of the destruction of or damage to any building or other improvements on the land then the mortgagee may, at the mortgagee’s sole option, apply the insurance proceeds or direct that they be applied either in or towards rebuilding or repairing the buildings and improvements or in or towards payment of the secured moneys (even though those moneys may not have otherwise fallen due). …
Gendall J was satisfied on the evidence before him that LVL had not received any insurance monies as a result of the earthquake damage to the property to use for repair or replacement, because FMC had properly applied all of the insurance monies towards the secured indebtedness of LVL as mortgagor as the mortgage entitled it to do. He held that as a result, and in accordance with its provisions, the lease was terminated because the insurance monies received by the landlord were effectively nil, and consequently inadequate for the repair or reinstatement of the building.[28]
[28]GP96 Ltd v F M Custodians Ltd, above n 1, at [84].
Mr Barker argued that FMC had approved the lease and consented to it. He submitted that it could not therefore exercise its powers under the mortgage in a way which derogated from the lease. He referred to a decision of Stringer J — Tattley v Wagstaff — where it was noted as follows:[29]
The consent of the mortgagee to a lease does not in any way prejudice or affect his rights and remedies under his mortgage, except that, if he exercises his powers under the mortgage, he can only do so without derogation to the lease to which he has consented.
Mr Barker argued that FMC’s decision to apply the insurance proceeds to its secured debt derogated from the lease, and that FMC was obliged to honour the landlord’s obligations created by the lease and hand the insurance monies over, so that the landlord could comply with cl 27.1. He also noted that FMC claims to be in possession of the property, and that in that capacity, it is subject to the landlord’s obligations under the lease.
[29]Tattley v Wagstaff [1924] NZLR 813 (SC) at 815.
Mr Francis was content to support Mr Bayley’s submissions in regard to this point.
Mr Bayley argued that Gendall J’s finding was correct. He noted that FMC gave notice to GP96 on 13 July 2018 that it was applying the insurance proceeds towards the secured debt, and that GP96 did not issue any further proceedings in that regard, nor seek injunctive relief to contest FMC’s proposed course of action. He referred to the relevant provisions in the mortgage, and argued that FMC’s rights under the mortgage took priority over GP96’s rights under its unregistered lease. He put it to us that FMC had priority to the insurance proceeds, and that its consent to the lease did not affect that priority.
It is clear from the mortgage that the insurance proceeds were secured in favour of FMC, and that FMC was entitled to apply those insurance proceeds against the secured debt. The issue is whether or not FMC’s rights under the mortgage are affected by the fact that it consented to the lease in favour of GP96, or by the fact that it is in possession of the property as mortgagee.
We note that, absent consent, FMC’s rights under its registered mortgages took priority over such rights as GP96 had under its unregistered lease, applying the ordinary principles of indefeasibility of title. Registration under ss 62 and 63 of the Land Transfer Act 1952 and under ss 51 and 52 of the Land Transfer Act 2017, confers on mortgagees, as registered proprietors, an indefeasible title which is immune from adverse claims not registered or noted prior to the mortgage, such as claims from an unregistered lessee.[30]
[30]Frazer v Walker [1967] NZLR 1069 (PC) at 1075; and Capital & Merchant Investments Ltd (in rec) v Russell Management Ltd (2009) 10 NZCPR 199 (HC) at [12]
Section 119 of the Land Transfer Act 1952 provided that no lease of mortgaged land was binding upon the mortgagee, except so far as the mortgagee consented thereto. The Supreme Court has observed that this provision was an exception to the general rule of indefeasibility,[31] and that indefeasibility does not override consent.[32]
[31]Cashmere Capital Ltd v Carroll [2009] NZSC 123, [2010] 1 NZLR 577 at [75].
[32]At [76].
There is no equivalent provision in the Land Transfer Act 2017. Commentators have suggested that under the new Act, it is likely that the tests applied under the 1952 Act will continue to apply – that is, a mortgagee will be bound by a lease if he or she has consented to it.[33] We agree with this suggestion. It is implicit from the 2017 Act. Section 103(2)(b) provides that, if a mortgagee exercises his or her power of sale contained in a mortgage, any purchaser will take the land free of any liability under the mortgage and free of any other mortgage or interest “that is not binding on the mortgagee”. A mortgagee who consents to a lease assumes binding obligations. He or she must allow the lessee to have quiet enjoyment of the mortgaged premises. If the mortgagee sells the property, he or she must sell it subject to the lease.
[33]DW McMorland and others Hinde McMorland and Sim Land Law in New Zealand (LexisNexis, online ed) at [9.074].
In our judgment, by consenting to a mortgage, a mortgagee does not however bind him or herself to the lessor’s personal covenants.
There is a distinction between personal covenants and covenants affecting the land. It has been held by the Supreme Court of New South Wales, when discussing a provision in all material respects similar to s 119 of the Land Transfer Act 1952, that although a consenting mortgagee is bound by a registered lease, that does not mean that the mortgagee becomes answerable for any breach of the lessor’s personal covenants contained in the lease.[34] The Court noted as follows:[35]
Although [the mortgagee] is bound by the registered lease, that does not mean that it was answerable for any breach of the lessor’s personal covenants contained in the lease. [The lessee’s] case appeared to proceed on the basis that, [the mortgagee] having consented to the lease, it was bound by all the obligations of [the lessor/mortgagor] as lessor and was amenable to any set-off [the lessee] had against [the lessor/mortgagor]. However, s 53(4) does not impose on a mortgagee all of the obligations of the lessor contained in a lease to which it has consented – it merely renders the mortgagee’s interest in the land subject to that of the lessee under the lease. It does not render the mortgagee liable to perform the lessor’s personal covenants at the suit of the lessee.
[34]Elite Promotions & Management Pty Ltd v 5A Investments Pty Ltd [2011] NSWSC 590, (2011) 80 NSWLR 686.
[35]At [107].
In our view FMC did not, by consenting to the lease, assume LVL’s personal obligations, such as the obligations to pay outgoings, to maintain and repair the property, and to insure the property. In particular, we do not consider that, by consenting, FMC assumed LVL’s positive obligations under cl 27.1 of the lease to apply any insurance monies received towards reinstatement or repair of the property. That is a personal covenant given by LVL as landlord. It does not relate to the land except indirectly and it does not create or enlarge such interest as GP96 may have in the property pursuant to the lease.
To hold otherwise would create an extraordinary result. A mortgagee consenting to a lease would commit itself to any obligation contained in the lease. The consenting mortgagee would, for example, become liable for the costs of reinstatement if the lease so provided; it would have to commit itself to a construction contract, to the possibility of unforeseen variations to that contract, and to cost overruns. Mortgagees would be converted from lenders into unwilling developers. It defies commercial common-sense to suggest that a mortgagee’s consent to a lease imposes such risks and burdens on the mortgagee. Mortgagees are first and foremost lenders. They are entitled to exercise the powers conferred under their securities to protect their own positions. Where a mortgagee has consented to a lease, he or she must not interfere with the lessee’s possession, and, if the mortgagee sells the mortgaged property, then he or she must do so subject to the lease. The mortgagee does not, however, assume the lessor’s personal obligations.
Nor does FMC’s status as a mortgagee in possession affect its right to apply the insurance proceeds to the secured debt.
The rights and obligations of mortgagees in possession are set out in subpart 6 of the Property Law Act. Relevantly, s 150(1) of that Act provides that a mortgagee in possession of mortgaged land may take “any proper and necessary measures for the protection, insurance, maintenance, preservation or repair of the land”. Section 150(2) provides that a mortgagee in possession of mortgaged land is not, however, under any duty to take any of these measures, except so far as the cost of those measures can be met from income from the land received as mortgagee in possession. Under s 4, income, in relation to land, includes rents and profits. An insurance payment received by a mortgagee consequent upon material damage to the leased premises is not rent or profits. It is not income received from the land. Further, the powers given to mortgagees in possession under s 150 exist regardless of the lease, and they are not powers which create an obligation owed to the lessee. A mortgagee must account for monies applied in the exercise of its powers to the mortgagor, and to those holding a subsequent encumbrance.[36] There is no requirement that a mortgagee in possession account to unregistered lessees.
[36]Property Law Act, ss 152 and 155.
There is also no statutory obligation placed on a mortgagee obliging him or her to use insurance monies received as mortgagee for reinstatement. Rather s 147 of the Act provides that a mortgagee in possession of mortgaged land that is subject to a lease “may” exercise all the powers of the lessor. This does not mean that the mortgagee is required, by taking possession, to assume all obligations of the lessor, whether personal or otherwise.
The actions of FMC in entering into possession of the property do not enlarge or reduce the extent to which FMC was bound by the lease and we do not consider that FMC’s status as a mortgagee in possession affects its priority claim to the insurance monies under its registered mortgage.
As a consequence, cl 27.4 of the lease is engaged. LVL, as landlord (and the Crown, as the owner of the property assuming that the disclaimer was valid), has received no part of the insurance monies paid out consequent upon the damage to the property. LVL (and the Crown) cannot repair or reinstate the property having received nothing from the insurer and, pursuant to cl 27.4, the lease has terminated. GP96 has no further right or interest under the lease.
As a further consequence, GP96 cannot meet the onus on it as caveator to demonstrate that it holds an interest in the property sufficient to support its caveat. There was no valid ground for lodging the caveat in the first place, and Gendall J was correct in holding that PVG was entitled to an order removing the caveat.
We also consider that the Judge was correct to order that no further caveat should be lodged. While such order was arguably unnecessary, because s 146 of the 2007 Act states that a second caveat cannot be registered in respect of the same interest where a previous caveat has been removed, it is clear that the Court has jurisdiction to restrain further caveats being lodged, particularly in cases where caveats have been lodged not for the purpose of protecting some interest in land, but rather to impede an impending mortgagee’s sale.[37]
[37]Clos Farming Estates Pty Ltd (receivers & managers appointed) v Easton [2001] NSWSC 525, (2001) 10 BPR 18,845 at [74], cited in McMorland, above n 33, at [10.022A].
The Judge considered that an order preventing a further caveat from being relodged was appropriate. In the circumstances of this case, we agree.
Should the interim injunction be lifted?
This issue can be dealt with relatively briefly.
Mr Barker properly accepted that, if the Court were to conclude that the lease has come to an end pursuant to cl 27.4, this would constitute a material change of circumstances.
We have held that cl 27.4 does apply, and that such interest as GP96 may have held in the lease has been terminated. The insurance monies were received by FMC and applied by it against the secured debt some years after the interim injunction was granted in 2011. When the matter was before Chisholm J, the evidence was that FMC had not then decided what it would do with any insurance monies. Further, PVG had not, as at 2011, committed to a mortgagee’s sale of the property.
These various changes of circumstances require that the interim injunction be rescinded. The Court has jurisdiction to so order.[38]
[38]Foodtown Supermarkets Ltd v Tse (No 2) (1987) 2 PRNZ 545 (HC) at 546.
In our view, Gendall J was correct to lift the interim injunction made in 2011 and to decline GP96’s application to enlarge that order, and to make further orders. Once the insurance monies were applied to the secured debt and the lease came to an end, GP96 had no interest to protect.
Result
The appeal in CA258/2019 is dismissed.
The appeal in CA272/2019 is dismissed.
In CA258/2019, the appellant must pay costs to each respondent for a standard appeal on a band A basis and usual disbursements.
In CA272/2019 the appellant must pay costs to the respondent for a standard appeal on a band A basis and usual disbursements.
Solicitors:
Canterbury Legal, Christchurch for Appellant
Meredith Connell, Auckland for First Respondent in CA258/2019
Rhodes & Co, Christchurch for Second Respondent in CA258/2019 and Respondent in CA272/2019
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