Green v Conveyancing Shop Lawyers Limited

[2017] NZHC 1965

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2015-404-003011 [2017] NZHC 1965

BETWEEN

NICHOLAS GREEN

Plaintiff

AND

CONVEYANCING SHOP LAWYERS LIMITED

Defendant

Hearing:	16 August 2017
Appearances:	E Grove for Plaintiff M Dennett for Defendant
Judgment:	16 August 2017

[ORAL] JUDGMENT OF WOOLFORD J

Solicitors/Counsel: Mr Grove, Auckland Kennedys, Auckland

GREEN v CONVEYANCING SHOP LAWYERS LIMITED [2017] NZHC 1965 [16 August 2017]

Introduction

[1]      In  a  statement  of  claim  dated  14  December  2015,  the  plaintiff  claims damages for negligence and breach of an implied contractual obligation against a law firm which acted for him in the purchase of a leasehold estate in a property at

37 Canberra Avenue, Lynfield.

[2]      The claim is set down for a two day hearing on Monday, 21 August 2017.  On

7 August 2017, Palmer J set a separate question down for hearing today on the basis that if it is determined in the defendant’s favour, it is a complete defence to the plaintiff’s claim.

The question

[3]      The question to be determined is whether the due diligence clause in the agreement for sale and purchase made the agreement conditional upon the plaintiff being satisfied with the terms of the lease.

The due diligence clause

[4]      The due diligence clause reads:

19.0This Agreement is conditional upon the Purchaser being satisfied that the property is suitable for the Purchaser’s intended use of the property at the agreed purchase price following the Purchaser undertaking a due diligence investigation of the property and all aspects relating to the  property as [t]he purchaser thinks fit  and confirming the same to the vendor by 4.00 pm on that day which is five working days after the date of this Agreement.  This clause is inserted for the sole benefit of the Purchaser.

[5]      The agent who acted on the sale was Barfoot & Thompson Limited.   The clause was inserted by the agent as a special condition to a standard form agreement for  sale  and  purchase  of  real  estate  approved  by  the  Real  Estate  Institute  of New Zealand Incorporated and the Auckland District Law Society Incorporated. The clause was apparently taken from a directory of agreement clauses and practice notes published by Barfoot & Thompson and a law firm, Glaister Ennor.  The directory included a commentary that the clause was a subjective but nevertheless reasonably standard due diligence agreement.

Defendant’s submissions

[6]      The defendant refers first of all to the plaintiff’s claim that if the defendant had advised him of the effect of two provisions in the lease – the option to purchase the freehold estate and/or the rent review clauses – the plaintiff would have during the due diligence period cancelled his purchase of the leasehold estate.

[7]      The defendant then refers to its affirmative defence that, whatever it may have done or not done, it did not cause the plaintiff to suffer any loss.   That was because the due diligence clause did not make the agreement conditional on the plaintiff obtaining legal advice on the purchase and the terms of the lease.   The defendant submits that this is a case of simply looking at and determining what the due diligence clause means and then determining whether in the circumstances the plaintiff would have been entitled to invoke the clause and cancel the contract.  The defendant submits that on its own the clause makes commercial sense and is not ambiguous.  Accordingly there is no need to look at the factual matrix behind the clause.

[8]      The defendant concentrates on the words in the due diligence clause, “the intended use of the property”.  The defendant submits that the plain meaning of the word “use” is that of a functional quality of an object.  The defendant submits that the meaning of “intended use” in the due diligence clause is in  relation to the property being fit for the purpose for which the purchaser was looking to purchase it. That must therefore relate only to the physical and structural aspects of the property and what it could be used for, including the town planning and zoning or permitted use aspects of the property.

[9]      The defendant accepts that the due diligence clause is a condition subsequent to the agreement so, if a purchaser is not satisfied that the property is suitable for its intended use, then the purchaser has the ability to cancel the contract.   But the defendant submits a purchaser is only able to do so if he is not satisfied with the intended use of the property.  This particular clause is therefore narrow and does not effectively provide the purchaser with an option to purchase as some other widely framed due diligence clauses may do.

[10]     The defendant submits that the freeholding and rent review clauses in the lease do not relate in any way to the plaintiff ’s intended use of the property.  The intended use is connected to the physical use of the property and the clauses are not relevant to any such use.

[11]     The  defendant  submits  that  the  due  diligence  clause  did  not  entitle  the plaintiff to cancel the agreement if he was not satisfied with the terms of the lease. Therefore,  no  matter  what  advice  the  defendant  provided  the  plaintiff  on  the purchase or the lease in the circumstances the plaintiff was not able to cancel the agreement in the due diligence period.  On that basis, the defendant submits that the separate question should be answered in the negative and the plaintiff cannot succeed with his claim against the defendant.

Discussion

[12]     The thrust of the defendant’s case is that the words, “the intended use of the property” should be given a narrow interpretation as relating only to the physical and structural aspects of the property and what it could be used for, including the town planning and other zoning or permitted use aspects of the property.

[13]     With respect, I do not agree. The words cannot really be taken out of context. Firstly, “the property” is defined in the agreement itself as being a leasehold estate, being lease 7671015.1 and the renewal B814574.1 relating to 37 Canberra Avenue, Lynfield, CT 400512.  I accept that a leasehold estate is a bundle of rights, nothing more.  So when the clause relates to “the property” it relates to those bundle of legal rights and not just to the physical and structural aspects of the land.

[14]     Secondly, the clause also refers to the property “at the agreed purchase price” which again goes beyond the physical and structural aspects of the land.  In this case, there was an option to purchase the freehold estate contained in the lease.  That was one of the bundle of legal rights in the leasehold estate and must impact on the value of the property.  The manner of calculating the cost to purchase the freehold estate would be material for the price to be paid for the leasehold estate. Thirdly, the clause relates to a due diligence investigation of “all aspects relating to the property as [t]he

purchaser thinks fit”.  Again this draws the clause beyond physical and structural aspects of the property.

[15]     I  am  therefore  of  the  view  that  the  due  diligence  clause  provides  for  a subjective determination without obligation to disclose reasons.  It cannot restrict the matters that the plaintiff could take into account.  As noted by Abbott AJ in La Rosa v MacEnnovy Trust Ltd:1

In my view it goes to the very heart of a due diligence investigation that the property has the value ascribed to it, and is likely to retain that value.

[16]     In conclusion, I am therefore of the view that there is no reason to limit the due diligence clause to relate solely to the functional aspects of the physical property at 37 Canberra Avenue, Lynfield.  The separate question is answered in the plaintiff’s favour.  The due diligence clause in the agreement for sale and purchase made the agreement conditional on the plaintiff being satisfied with the terms of the lease.  He was therefore able to cancel the agreement for sale and purchase on his review of the freeholding and rent review clauses of the lease following receipt of advice from his

lawyer about the effect of the clauses.

Woolford J

1      La Rosa v MacEnnovy Trust Ltd (2011) 11 NZCPR 930 at [37].