Halliday v Bank of New Zealand
[2012] NZHC 3099
•21 November 2012
For a Court ready (fee required) version please follow this link
IN THE HIGH COURT OF NEW ZEALAND NAPIER REGISTRY
CIV 2012-441-489 [2012] NZHC 3099
UNDER The Declaratory Judgments Act
BETWEEN M M HALLIDAY, H R HALLIDAY, R H THOMSEN AND P D HOLT AS TRUSTEES OF THE M M AND H R HALLIDAY FAMILY TRUST
Applicants
ANDBANK OF NEW ZEALAND Respondent
CIV 2012-441-185
AND BETWEEN BANK OF NEW ZEALAND Applicant
ANDM M HALLIDAY, H R HALLIDAY, R H THOMSEN AND P D HOLT AS TRUSTEES OF THE M M AND H R HALLIDAY FAMILY TRUST Respondents
Hearing: 29 October 2012 (Heard at Wellington)
Counsel: J Toebes for the Applicant
D J O'Connor for the Respondent
Judgment: 21 November 2012
JUDGMENT OF MALLON J
HALLIDAY v BANK OF NEW ZEALAND HC NAP CIV 2012-441-489 [21 November 2012]
Table of contents
Introduction ....................................................................................................................................... [1]
The evidence ...................................................................................................................................... [3]
The farm ......................................................................................................................................... [3] The sale of the farm ........................................................................................................................ [7] RCL (In liquidation) ..................................................................................................................... [15] The forestry after the sale ............................................................................................................. [17] Bank becomes mortgagee ............................................................................................................. [19] Bank becomes first mortgagee...................................................................................................... [26] Subsequent events ......................................................................................................................... [30] The proposed mortgagee sale ....................................................................................................... [34]
Is the forestry a “chattel” ............................................................................................................... [35] Who owns the trees ......................................................................................................................... [43]
Should the caveat be removed ........................................................................................................ [45]
Is there an enforceable agreement ................................................................................................ [45] Agreement was with RCL ............................................................................................................. [48] The registration of the first and second mortgages on transfer .................................................... [49] The registration of the Bank’s mortgages ..................................................................................... [51] Supervening fraud/in personam claim .......................................................................................... [55] The mortgagee’s power of sale – interest with priority ................................................................ [59] The mortagee’s power of sale – consent ....................................................................................... [63]
Result ................................................................................................................................................ [65]
Introduction
[1] This proceeding concerns ownership of a forestry on a Hawke’s Bay farm which is to be sold by mortgagee sale. The Bank of New Zealand (“the Bank”) seeks to sell the farm, including the forestry, pursuant to its power of sale under a first registered mortgage over the farm property. The MM & HR Halliday Family Trust (“the Hallidays”) says that it owns the forestry pursuant to an agreement entered into with the mortgagor (“the Thomsens”) when the farm was sold to the Thomsens by interests associated with the Hallidays. The Hallidays estimate that the current value of the standing forestry is around $140,000 and that its final harvest value is about $500,000 to $600,000.
[2] Before me for determination are:
(a) an application by the Hallidays for a declaration that the forestry is a chattel, not a fixture to the land;
(b)an application by the Hallidays for a declaration that the forestry on the property is owned by the Hallidays, and not the Bank; and
(c) an application by the Bank to remove a caveat lodged by the
Hallidays.
The evidence
The farm
[3] The farm was owned by the Halliday interests between 1928 and 2005. The farm was in the name of Raumati Land Company Limited (“RCL”). The shareholders of RCL were: the MM & HR Halliday Family Trust (the trustees being Michael Halliday, Helen Halliday, Roger Thomsen, Philip Holt), Estate P E
Halliday,1 Estate G W Halliday,2 Mary Wesley, Helen Halliday and Michael
Halliday. Michael Halliday and his wife, Helen, lived on the property.
[4] The farm is a 460.9 hectare property. The farm had sheep and beef stock on the property. Six forestry blocks (of pinus radiata) were also planted on 43 hectares of the farm. The largest of these forestry blocks was the “Middle Hill” block which was 12.9 hectares. The other five blocks varied in size between 1.7 hectares and
5.3 hectares. Michael Halliday was passionate about the forestry, and won awards and held appointments as a result of his forestry work.
[5] The Hallidays were customers of the Bank at its Napier branch. The Hallidays had been customers since 1995. From 2003 Michael Connor became their account manager. He was aware of the forestry blocks and Michael Halliday’s passion for the forestry.
[6] In early 1994 three parties (who had family connections with the Hallidays) entered into an agreement with Michael Halliday in respect of the forestry. It was agreed that these parties would pay for establishing and managing the Middle Hill woodlot, with Michael and Helen Halliday to receive 40 per cent of the net proceeds of harvest and the remaining 60 per cent would be split equally between the three other parties. There was no written agreement recording this arrangement but the evidence is that the parties “had a very clear understanding of the obligations of each party”. In accordance with this arrangement, the three parties made various payments for the forestry from 1994 onwards.
The sale of the farm
[7] The Hallidays wished to sell the farm. On 18 March 2005 Morice Associates
Ltd (“MAL”) provided a valuation report for RCL on the property. The market
valuation was $4,490,000 (including chattels and the forestry) made up as follows:
1 Mr P E Halliday was Michael Halliday’s brother.
2 Mr G W Halliday was Michael Halliday’s father.
Improvements $ 620,000
Land value $ 3,625,000
Market value (excluding chattels & forest) $ 4,245,000
Plus chattels $ 15,000
Plus forestry $ 230,000
$ 4,490,000
[8] Michael Halliday provided the valuation report to the intended purchasers, the Thomsens. RCL (In Liquidation) entered into an agreement for sale and purchase with the Thomsens dated 31 August 2005, with that date also being the possession date. Based on the MAL valuation, the purchase price was $4.2 million plus GST. That the purchase price excluded the forestry is confirmed by the special conditions of sale, which included an agreed apportionment of the purchase price as follows:
(a) dwellings and curtilage $ 420,000 (b) land, including winter feed $ 3,450,000 (c) non residential improvements $ 290,000 (d) plant and equipment $ 25,000 (e) residual chattels $ 15,000
[9] The special conditions of sale included the following clause:
19. Trees
19.1.1 The parties agree that trees growing within the forestry blocks identified on the map appended to Appendix 3 are not included in the sale.
19.1.2 On settlement the Vendor and the purchaser will enter into a forestry right in respect of these trees on the terms [sic] out in Appendix 3.
[10] As referred to in clause 19.1.1, a map was attached to the agreement for sale and purchase which identified the forestry blocks. As referred to in clause 19.1.2, Appendix 3 to the agreement for sale and purchase set out terms for the forestry
right. Appendix 3 provided that the Grantor granted to the Grantee “a sole and exclusive forestry right in gross for the Term to maintain and harvest the Crop” on the terms and conditions set out. The commencement date was 18 July 2005. There was provision to set out details of the crop, expiry date and payment terms. This was left blank in respect of each lot. The terms and conditions of the forestry right included the following:
12.2 The Grantor will ensure that any agreement for the disposal of any interest in the Land or the Retained Area includes notice of the terms of this forestry right.
12.3 The Grantor will not grant any licences, rights or other interests relating to the Land or the Retained Area during the Term if the Grantee’s rights under this forestry right might be adversely affected as a result.
...
14.1 The property in all trees growing on the Woodlots at the date of this right is and will be vested in the Grantee despite of any rule of law or in equity to the contrary.
[11] The purchase price of the agreement for sale and purchase of the farm was to be financed by the Thomsens partly by vendor finance and partly by other finance. At this time the Thomsens were not customers of the Bank, but they were friends with Mr Connor. It was arranged that Mr MacDonald, who also worked in the Napier branch of the Bank, would look to provide Bank financing for the balance of the purchase price. In the event, the purchase by the Thomsens was financed by vendor finance in the sum of $2.84 million secured by a first mortgage over the property and an advance from the Thomsens’ parents of $1.9 million secured by a second mortgage. Working capital, by way of a current account facility of $100,000, was funded by the Bank. This Bank facility was secured, by a security agreement, over the livestock.
[12] At the time of the purchase, Mr MacDonald inspected the property with Mr Thomsen. According to a letter from the Bank’s solicitors in connection with this litigation, during that inspection “Mr Thomsen stated that Hallidays would be retaining ownership of the forestry, with their interest to be protected by way of a forestry right.” Mr MacDonald provided a brief affidavit for these proceedings. The affidavit did not refer to this inspection. Mr MacDonald was required to attend the
hearing for cross-examination. He was asked about this inspection. He agreed that he had inspected the property and that Mr Thomsen had mentioned that some of the trees were not part of the sale and would continue to be owned by the vendor. He did not ask Mr Thomsen to explain what part of the forestry was being retained by the Hallidays. Mr MacDonald said that he was not interested in the detail of this, because it became clear that the Bank was at this stage providing only working capital funding secured over the livestock.
[13] Mr Connor, the Hallidays’ Bank representative, also seems to have understood that the Hallidays were retaining ownership of the trees. His affidavit for this proceeding said:
Based on my discussions with Mike Halliday and the terms of the sale and purchase agreement dated 31 August 2005, held in the bank’s file, my understanding was that the Halliday Trust still owned the trees and would be harvesting the trees in the future.
[14] The transfer of title to the Thomsens was registered on 10 January 2006. The transfer instrument referred to the transfer of the “fee simple”. No easement or profit à prendre was referred to in the transfer. RCL was the registered first mortgagee and various other persons (referred to as the “Thomsens’ parents”) were the registered second mortgagees.
RCL (In liquidation)
[15] The farm was RCL’s sole asset. In anticipation of the sale, on 26 August
2005 RCL was placed into voluntary liquidation by a special resolution of the shareholders. The company was solvent. The purpose of the liquidation, as confirmed by an affidavit from the liquidator of RCL, was to distribute the company’s assets (from the sale of the farm) to the shareholders of the company. Mr Connor was informed of this. The Bank was also provided with the liquidator’s first report showing that RCL was solvent with an estimated surplus to creditors of more than $4 million.
[16] In accordance with what was intended, the liquidator’s affidavit shows the allocation of the farm sale proceeds to RCL’s shareholders. The liquidator’s
evidence is also that the trustees of the MM & HR Halliday Family Trust “purchased the forestry interests from the other remaining minority shareholders of the Company, when the Company was in liquidation.” Mr Connor says that he was aware that the Halliday Family Trust was purchasing the remaining shares of the minority shareholders of RCL. On 6 April 2006, the first mortgage was transferred from RCL to the trustees of MM & HR Halliday Family Trust and to Mr Halliday. On 12 August 2006 RCL was struck off the Companies Register.
The forestry after the sale
[17] As to the forestry right agreement, Michael Halliday’s affidavit evidence is
that after the sale to the Thomsens:
The parties subsequently drafted a written forestry right agreement in accordance with the sale and purchase agreement. The agreement was amended by the parties, but never signed.
[18] Between 2005 and 2006 the Hallidays paid the costs for thinning the Middle
Hill block and for “third lift pruning” on another block. The cost for this was
$10,991.36. During January and February 2007 the Hallidays harvested two of the forestry blocks (the Woolshed and Top Folly blocks). The proceeds of this harvest amounted to $162,869.41. They retained these proceeds. During 2007 the Hallidays paid for re-fencing of the blocks and rehabilitating the skid sites and tracks with grass seed and fertiliser. The total cost for this work was $21,133.18. Also during
2007 the Thomsens invoiced the Hallidays in the sum of $12,437.43 (for fences and fertiliser) and $1,504.35 (for transport and fertiliser) in relation to the forestry.
Bank becomes mortgagee
[19] In the latter part of 2007 the Thomsens were seeking further finance from the
Bank. In relation to this, Mr MacDonald received a valuation from MAL dated
27 August 2007. The valuation stated that it was “further to instructions received from Mr K Thomsen” for the purposes of assessing a market valuation for mortgage lending purposes. The front page of the valuation contained a summary. That summary gave a brief description of the property. It gave a market valuation
(including chattels and forests) as at 2 August 2007 of $5,462,000. That valuation was made up of:
(a) improvements: $865,000; (b) land value: $4,520,000;
(c) realty value (excludes chattels and forests): $5,385,000 (d) chattels: $15,000; and
(e) forestry: $62,000.
[20] The front page of the MAL valuation also set out that there were three separate sections to the valuation:
(a) Section 1 being the “market valuation of land and buildings and valuation overview”;
(b) Section 2 being “market valuation of forestry”; and
(c) Section 3 being “statement of valuation policies”.
[21] Section 2, being the valuation of forestry, included a preamble which said:
This valuation of the Pinus radiata plantation applies specifically to the trees and does not include any land or land improvements. The valuation represents an estimate of the market value of the tree crop being the value that should be realised between a willing buyer and a willing seller in an arm’s length transaction.
...
As per your instructions the valuation for the Pinus radiata has been conducted on the basis of the unregistered, unsigned Forestry Right (see appended). The stumpage assessment in this valuation has been adjusted for the intended share for the Grantor. The valuation is subject to reassessment should the provisions of this Forestry Right change.
[22] The appended unsigned Forestry Right was between the Thomsens (as Grantor) and RCL (as Grantee). The commencement date was 18 July 2005. The schedule contained a division of harvest proceeds as follows:
Radiata Pine Woodlots Division of Harvest Proceeds
Lot 1 “Middle Hill” 66% Grantor/34% Grantee Lot 2 “Post Office” 50% Grantor/50% Grantee Lot 4 “Young Grass” 20% Grantor/80% Grantee Lots 7 & 8 “Hay Barn and Quarry” 20% Grantor/80% Grantee Lots 11 & 12 “Woolshed and Top Folly” 100% Grantee
[23] Apart from the inclusion of these details, the unsigned Forestry Right was in the same terms as Appendix 3 to the agreement for sale and purchase of the farm (including clauses 12.2, 12.3 and 14.1).3
[24] Mr MacDonald’s affidavit filed for this proceeding said that “[a]t no time during my employment” with the Bank “was I, or to the best of my knowledge anyone at the Bank, ever provided with a form of forestry right for any part of the properties”. Mr MacDonald was cross-examined about this statement in light of the MAL valuation of 27 August 2007. Mr MacDonald, who is no longer an employee of the Bank, said that when he prepared his affidavit he did not have access to the Bank’s file. He also said that:
(a) He recalls asking for a valuation at this time, but does not recall providing any instructions to MAL in respect of the forestry right nor speaking to Mr Morice (the valuer) about it;
(b)He did not read the appendices to the valuation report – he was only interested in the front page summary which stated that the market
valuation was $5,462,000;
3 Refer [10] above.
(c) In the application for a letter of credit which he prepared for the increased facility he included the total valuation of $5,462,000 (which included $62,000 for forestry);
(d)He would not have been interested in the trees because, unless the Bank is “securing forestry”, generally the Bank does not attribute much to trees in a valuation for security purposes.
[25] Having received this valuation, on 28 November 2007 the Bank agreed to increase the Thomsens’ facility by an additional $100,000. Initially the Bank’s security for this funding was registered as a third mortgage. By a deed of priority registered on 13 December 2007 the Bank became the second mortgagee and the Thomsens’ parents’ mortgage was converted to a third mortgagee position.
Bank becomes first mortgagee
[26] Repayment of the first tranche of the vendor finance (in the sum of
$1.4 million) was due on 31 August 2008. By 4 September 2008 these funds had not been received. The Hallidays were nervous because they had purchased an orchard and had settlement for that purchase pending on 8 September 2008. They requested bridging finance from the Bank. Mr Connor’s diary note of this request, which is dated 4 September 2008, notes that a copy of the agreement for sale and purchase of the farm and the first mortgage were on file.
[27] The Bank was asked to consider providing finance to the Thomsens so that they could repay the vendor finance and the Bank would replace the Hallidays as first mortgagee. Mr Connor was managing the Hallidays’ account and Mr MacDonald was managing the Thomsens’ account. Mr MacDonald says that the Bank did this under “Chinese walls”. He said that this meant that he did not access the Hallidays’ file and Mr Connor did not access his file, except to the extent that the Thomsens may have made some information available to Mr Connor, with whom they were friends. He did not say whether the Hallidays and the Thomsens knew and understood the Bank’s Chinese walls.
[28] Mr MacDonald says that “Mr Connor had a personal interest in ensuring that not only was Mr Halliday getting his vendor finance [repaid] but Mr Thomsen was being looked after and had the continued support of the Bank.” Mr MacDonald says that there was considerable pressure on Mr Connor to get an approval and that, in turn, there was pressure on him to approve finance for the Thomsens. He said it was a “very, very difficult approve”. By this stage the viability of the farm was questionable. The Thomsens were proposing a dairy conversion and, unless that occurred, the cash flows indicated that the farm was not viable. Mr MacDonald says that in hindsight he should not have approved the refinancing. However the Bank did agree to provide finance to replace the original vendor financing provided by the Hallidays. As a result, on 9 September 2008, the Hallidays’ first mortgage was discharged and the Bank became the first mortgagee.
[29] Mr MacDonald was asked about whether he obtained a copy of the agreement for sale and purchase between RCL and the Thomsens. He does not believe he would have obtained a copy at the time of the original current account financing or the extension of that facility in 2007. For the original financing he would have only needed to have the stock list and a valuation for that. For the extension in 2007 he had the MAL valuation. He initially said that “I certainly had a sale and purchase agreement in my file by the time we refinanced Mr Halliday”. He said that he did not see that agreement but “[t]here would be one on file and that would have been a duty of my business analyst to ensure there was a copy of the sale and purchase agreement on bank file.” However he then contradicted this, saying that he “may still not have requested a sale and purchase [agreement] at that point ... the farm had already been sold a year or two earlier so we were just re-financing vendor finance when we took that mortgage”. He said that he could not be sure now because he had not seen what was on his file for the purposes of this proceeding.
Subsequent events
[30] On 14 January 2010 the Hallidays registered a caveat over the property. The estate or interest claimed in that caveat was “Pursuant to a certain agreement regarding forestry rights dated 18 July 2005 made between the caveators and [the Thomsens]”.
[31] The Thomsens defaulted on their repayment obligations to the Bank. On
7 July 2011 receivers were appointed to the mortgagor under the general security agreement granted in favour of the Bank. On 29 July 2011 Property Law Act notices were served.
[32] On 29 August 2011 the Bank’s solicitors wrote to the Hallidays’ solicitors requesting details of the forestry rights agreement in respect of which the caveat had been lodged. On 5 October 2011 the Hallidays’ solicitors enclosed an unsigned forestry rights agreement saying that “[t]his is the document which we wish to register as a Forestry Right.” The agreement was in the same form as Appendix 3 to
the agreement for sale and purchase4 and that which was appended to the MAL
valuation dated 27 August 20075 except that the schedule with the division of harvest proceeds was as follows:
Radiata Pine Woodlots Division of Harvest Proceeds
Lot 1 “Middle Hill” 100% Grantee
Lot 2 “Post Office” 50% Grantor/50% Grantee Lot 4 “Young Grass” 20% Grantor/80% Grantee Lots 7 & 8 “Hay Barn and Quarry” 20% Grantor/80% Grantee Lots 11 & 12 “Woolshed and Top Folly” 100% Grantee
[33] The Bank responded that it did not know about the claimed forestry right and did not consent to it. It requested that the Hallidays withdraw the caveat. The Hallidays declined to remove the caveat and contended that the Bank knew about the forestry rights agreement. The Hallidays said that the parties to the forestry rights agreement had “not agreed on some very minor detail that was to go into it but the
receivership intervened.”
4 Refer [10] above.
5 Refer [22]-[23] above.
The proposed mortgagee sale
[34] The Bank wishes to sell the property by tender. As at the date of the hearing, the draft tender documents seek offers by the end of November, with an intended settlement date of the end of May 2013 (able to be varied by agreement).
Is the forestry a “chattel”
[35] The Hallidays seek a declaration that the forestry is a chattel and not a fixture attached to the land. The issue arises because all fixtures attached to the land at the time of a sale pass to the purchaser under the sale contract unless it is otherwise agreed, whereas chattels remain the property of the vendor.6 If the forestry is a chattel then the Hallidays say that it cannot be part of the property over which the mortgagee has obtained an interest.
[36] The Hallidays say that the parties’ subjective intentions are relevant to determining whether the forestry was a chattel or a fixture. They say that the intention of the Hallidays and the Thomsens was that the forestry was a chattel because they agreed that the forestry would be retained by the Hallidays and was not part of the sale. They say that the Bank knew this and that this knowledge is also relevant to whether the forestry was a chattel.
[37] The Hallidays rely on cases that are concerned with the situation where the supplier of goods brings something on to the land and the question is whether those goods have become fixtures and therefore part of the realty.7 In determining that question the courts have looked at the circumstances of the case, but the main
relevant factors are the degree of annexation to the land and the object of
6 Hinde McMorland & Sim Land Law in New Zealand (looseleaf ed, LexisNexis) at [6.039].
7 Elitestone Ltd v Morris [1997] 2 All ER 513 (HL) suggests that there are three categories ((i) a chattel; (ii) a fixture; or (iii) part and parcel of the land itself) not two ((i) a chattel; or (ii) a fixture) and this was found to a useful analysis in Auckland City Council v Ports of Auckland Ltd [2000] 3 NZLR 614 (CA) at 632.
annexation.8 It is a question of law when a chattel has become part of the land and the test for determining that is an objective one.9
[38] The Hallidays contend that Lockwood Buildings Ltd v Trust Bank Canterbury Ltd supports their position that the parties’ subjective intentions are also relevant to whether something is a chattel or part of the land. 10 I do not agree. It was accepted in Lockwood Buildings that the parties may regulate the issue as between themselves.11 But that does not mean that the parties’ contract can regulate the issue as against third parties who obtain interests in the land and who do not have notice of the contractual position. That would be contrary to the principle of indefeasibility of title as given effect to under the Land Transfer Act 1952.12 Under that Act there is nothing to prevent the parties from agreeing to exclude from the sale interests in respect of the land or to confer rights over the land. That agreement confers an equitable interest until it is converted to a legal interest registered on the title or it is severed and removed from the land.13 The equitable interest will confer a right to lodge a caveat but, in the absence of a caveat, it will be defeated by the registration, without fraud, of a transfer or other adverse instrument.14
[39] The Land Transfer Act defines “land” as including “all trees and timber thereon or thereunder lying or being, unless specially excepted.”15 An interest in that part of the land that is a forestry can be granted by the owner of the land to another person. That interest can be registered on the title as a profit à prendre.16 A profit à prendre is a right to take from the land (i.e. to severe and remove) some part of it. In
contrast, an easement confers only the right to utilise the land in some way (e.g. a
8 Elitestone Ltd v Morris at 518, Lockwood Buildings Ltd v Trust Bank Canterbury Ltd [1995] 1
NZLR 22 (CA) at 25 and 28.
9 Lockwood Buildings Ltd v Trust Bank Canterbury Ltd at 30, Elitestone Ltd v Morris at 516 and
524.
10 Lockwood Buildings Ltd v Trust Bank Canterbury Ltd.
11 Lockwood Buildings Ltd v Trust Bank Canterbury Ltd at 29; Seddon v Ryans Carriers Ltd HC Wellington CP82/91, 9 March 1995 is an example of contractual arrangements between parties giving Mrs Seddon an interest in rhododendrons not on her land, such that she could claim damages from the driver of a truck who crashed into them. Issues of indefeasibility of title did not arise.
12 Land Transfer Act 1952, s 62.
13 Melluish v BMI (No. 3) Ltd [1996] 1 AC 454 (HL) at 473.
14 This is the analysis put forward in Hinde McMorland & Sim Land Law in New Zealand at
[6.041] and I agree with it.
15 Land Transfer Act 1952, s 2.
16 Forestry Rights Registration Act 1983, ss 2A and 3.
right of way).17 Once severed and removed the trees are chattels (i.e. moveable goods).
[40] In this case, when the forestry was planted, it became part of the realty. Chattels (the seedlings or similar) were brought onto the land but they lost their character as chattels when they were planted and grew on the land. The contractual arrangements between RCL and the Thomsens, that the Hallidays would continue to own the trees, did not convert the trees into chattels. Similarly, any knowledge the Bank had of the contractual arrangements did not alter the nature of the trees. It remained part of the land.
[41] The parties did, however, intend by their contractual arrangements to exclude the trees from the sale to the Thomsens. The effect of the contractual arrangements was to confer on RCL an equitable interest in the land in respect of the trees (in the same way that an owner of land might confer on a third party an equitable interest in the trees.) The parties intended that this interest would be given effect to by a forestry right agreement entered into on settlement. Under that forestry right agreement RCL would be able to look after the trees while they grew, and to harvest and remove them. Once harvested they would become chattels. The forestry right agreement, therefore, was to provide the mechanism by which the parties’ intention that RCL would continue to own the trees was given effect to.
[42] For these reasons I decline to make a declaration that the forestry is a chattel. It would only become a chattel if and when harvested pursuant to the forestry right agreement. Who has an interest in the trees, and whose interest has priority over any competing interest, is a separate question. The Bank’s knowledge is relevant to that question, which is discussed below in relation to the Bank’s application for removal
of the caveat.
17 Hinde McMorland & Sim Land Law in New Zealand at [16.008].
Who owns the trees
[43] The Hallidays seek a declaration that the forestry on the property is owned by them, not the Thomsens or the Bank.
[44] RCL and the Thomsens intended that RCL would retain ownership of the trees. Clause 19.1 of the agreement for sale and purchase specifically provided this. This intent was also reflected in the sale price, which did not include any amount for the trees. The parties’ subsequent conduct reflected this intent: the Hallidays tended to the trees, harvested two of the blocks, and retained the proceeds of the harvest without any protest from the Thomsens. However the parties did not protect that intention by registering RCL’s interest as a profit à prendre. Had they done so, that would have protected the interest against other adverse instruments, such as a registered mortgage. The question now is whether the Hallidays’ interest is subject to adverse instruments registered against the title. The answer to that question is discussed below in relation to the Bank’s application for removal of the caveat.
Should the caveat be removed
Is there an enforceable agreement
[45] The Bank seeks an order removing the caveat lodged by the Hallidays. Where a mortgagee applies to remove a caveat, the caveator must show a reasonably arguable case for the interest claimed. The Hallidays claim they have an interest under an agreement regarding forestry rights dated 18 July 2005 between them and the Thomsens. The Bank says that the Hallidays do not have a reasonably arguable case for that claimed interest because there is no agreement dated 18 July 2005. It says that, even if there was such an agreement, it would be unenforceable because there was no agreement as to the division of the proceeds of harvest.
[46] There is no doubt that by contract (the agreement for sale and purchase of the farm) the parties agreed that RCL owned the trees. They also agreed that the parties would enter into a forestry right agreement in respect of the trees on the terms set out
in Appendix 3 (which was dated 18 July 2005). Their subsequent conduct was consistent with that. The evidence on behalf of the Hallidays is that the forestry right agreement was drafted and amended, but never signed and that the parties had not agreed on “some very minor detail”. It is unclear what that detail was, although the different allocations of the harvest proceeds as between Grantor and Grantee suggests that the parties may have been negotiating what the division of proceeds
would be.18
[47] On the basis of this evidence, in my view it is reasonably arguable that RCL had an equitable interest in the trees. As between RCL and the Thomsens, RCL would have a claim against the Thomsens if, for example, the Thomsens denied RCL its interest in the trees by harvesting the trees and retaining the proceeds. Whether the parties may have yet to agree what the Thomsens would be paid for, in effect, the use of the land on which the trees were growing is a separate issue, which is properly determined if and when the issue were to arise as between the Thomsens and the Hallidays. I therefore reject the Bank’s claims that the caveat should be removed because there is no agreement dated 18 July 2005 and the parties had not agreed on the division of proceeds of the harvest.
Agreement was with RCL
[48] Next the Bank says any such agreement was to be entered into by RCL and there is no evidence that its assets were distributed to the Hallidays before it was struck off the register. I reject this submission. On the evidence it is reasonably arguable that all the assets of RCL, including the interest in the trees, were distributed to the Hallidays. That is the liquidator’s unchallenged evidence. Therefore, in my view, the Bank has not shown that there is no reasonably arguably
case for the interest claimed on this basis.
18 The 1994 agreement with the three investors on the Middle Hill Block suggests that the Hallidays would not have agreed to the allocation of proceeds in the version of the forestry agreement attached to the MAL valuation provided to the Bank in 2007.
The registration of the first and second mortgages on transfer
[49] The Bank says that any interest under the forestry agreement was defeated when the transfer of the property was of the “fee simple” and no profit à prendre was specified in the transfer, nor registered under the Forestry Rights Registration Act
1983. It says that the registration of the transfer of fee simple on the first mortgage of RCL and the second mortgage of the Thomsens’ parents, without the registration of any forestry right, defeated any equitable interest that RCL had under the forestry right to be granted in terms of Appendix 3 to the agreement for sale and purchase. It says that, because of this, its knowledge or conscience at the time its mortgages were registered is irrelevant.
[50] I do not agree. RCL retained its equitable interest in the trees. It could have registered a profit à prendre prior to the Bank’s mortgage and that would then have had priority over subsequent registered interests.19 Additionally, had the parties wanted to give the profit à prendre priority over their registered interests, there is no doubt that the first mortgagee (the Hallidays) would have consented to that. There is also no evidence to suggest that the Thomsens’ parents would have done otherwise,
noting that they consented to the 2007 memorandum of priority so that the Bank replaced the Hallidays as first mortgagee. It is therefore necessary to consider the position when the Bank’s mortgages were registered.
The registration of the Bank’s mortgages
[51] The Bank registered a third mortgage on 28 November 2007. It became second mortgagee in December 2007 when the memorandum of priority was registered. It became first mortgagee on 9 September 2008. The Bank says that its interest as mortgagee is indefeasible. I agree with that submission, but note that this
is subject to fraud.20 While the law in relation to supervening fraud may be
19 Under s 62 of the Land Transfer Act 1952 the registered proprietor of an estate or interest in land holds that estate or interest subject to such encumbrances, liens, estates, or interests as may be notified on the register.
20 See for example, Hinde, McMorland & Sim Land Law in New Zealand, above n 6, at [15.005].
unsettled, it is clear that fraud in getting on the register is an exception to indefeasibility.21
[52] It is unclear if the Hallidays knew that the Bank had become third, and then second, mortgagee in 2007 and therefore whether it could have taken steps before then to protect its interest in the trees. The Thomsens knew of the Hallidays interest in the trees and that they were conferring interests in the land to the Bank. The Thomsens had informed the Bank at the time of the original purchase that the trees were being retained by the Thomsens. The Thomsens had also informed MAL of the forestry right prior to the Bank agreeing to advance the further funding in 2007 secured by the third/second mortgage. In light of these facts a claim for fraud in relation to the Thomsens’ actions would have difficulty.
[53] As to the Bank’s actions, in my view the Bank had knowledge of the Hallidays’ unregistered interest in the trees. It had that knowledge through what Mr MacDonald was told by the Thomsens at the time of the purchase and by MAL in its valuation. It does not matter that Mr MacDonald did not pay any attention to this. He was told the facts. He therefore had notice and that notice amounts to knowledge. Without deciding this point (because it is unnecessary to do so on the present applications), I also consider that it may be arguable that the Bank had knowledge of the Hallidays’ interest in the trees through Mr Connor’s knowledge. The Bank may have chosen to operate “Chinese walls” but it is not clear on the evidence what the Hallidays and the Thomsens knew about that and the parties did not address in any detail whether Mr Connor’s knowledge is the Bank’s knowledge.
[54] However knowledge alone is not fraud for the purposes of the Land Transfer Act.22 And on the evidence before me, the Bank’s actions in registering its mortgages do not appear to have been done with an intention to defeat the Hallidays’
interest in the trees or to take advantage in some way of the unregistered status of
21 Land Transfer Act 1952, s 62. Peter Blanchard “Indefeasibility under the Torrens System in
New Zealand” in David Grinlinton Torrens in the Twenty-first Century (LexisNexis, Wellington,
2003) discusses whether supervening fraud is land transfer fraud and expresses the tentative view that it is not.
22 Land Transfer Act 1952, s 182.
that interest.23 Even if there was an arguable case for Land Transfer Act fraud, there is still the question of whether that would save the caveat from removal from the register because of the effect of s 105 of the Land Transfer Act (discussed below).
Supervening fraud/in personam claim
[55] The Hallidays contend that there is supervening fraud by the Bank in exercising its power of sale in the knowledge of the Hallidays’ claim to the trees. As is said in Hinde McMorland & Sim Land Law in New Zealand the question of whether fraud may supervene after registration may be “less important that it
seems”.24 A claim in personam can be made by a party who can establish against the
registered proprietor a recognised cause of action at law in equity that involves unconscionable conduct relating to the land.25 It is here that I consider the Hallidays’ claim, that the Bank is estopped from asserting that the trees are not chattels, is relevant. For the Hallidays it is submitted that estoppel by convention applies.26 The Bank’s submissions did not address this. They focussed instead on the question of whether the trees were a chattel, whether the forestry right agreement was enforceable, and the indefeasibility of the mortgagee’s power of sale.
[56] As is said in Hinde McMorland & Sim,27 and recognising that the in personam doctrine is still being developed by the Courts, rights in personam may be enforced “in relation to interests arising by estoppel” and “[c]onstructive trusts may be imposed on registered proprietors who repudiate obligations which they have themselves undertaken in relation to the land.” The applications before me were for
declarations that the trees were chattels and owned by the Hallidays, and for the
23 The case referred to me which is most similar on the facts to the present facts is Bobs Cove Developments Ltd v Strategic Nominees Ltd HC Wellington CIV-2010-485-61, 26 April 2010 where fraud was not found to be arguable. Blanchard, above n 21, at 44-45 discusses the topic of what more than knowledge is required in the New Zealand context to establish fraud, and the answers to the questions His Honour posed there would not support a finding of fraud.
24 Hinde McMorland & Sim Land Law in New Zealand, above n 6, at [9.022].
25 At [9.023]. And at [9.041], “the doctrine of indefeasibility does not deprive the Courts of their equitable jurisdiction” and so far as the doctrines of equity “are not inconsistent with”
indefeasibility under the Land Transfer Act “they may be enforced against a registered proprietor”.
26 The principles set out in National Westminster Finance New Zealand Ltd v National Bank of
New Zealand Ltd [1996] 1 NZLR 548 (CA) are relied on.
27 Hinde McMorland & Sim Land Law in New Zealand, above n 6, at [9.052].
removal of the caveat. Leave was granted for the applications to be brought by originating application. The submissions were not put on the basis of whether there was an in personam claim. Whether such a claim is made out is better determined on the basis of the ordinary procedures (with discovery and evidence given in the ordinary way).
[57] For the purposes of the Bank’s application to remove the caveat the question is whether the Hallidays have an arguable claim to the interest claimed. Here the Thomsens agreed that the trees were owned by the Hallidays. The Bank were told that too, both at the time of purchase and before the mortgage in 2007 was registered. Before the Hallidays’ first mortgage was discharged the Bank had a copy of the agreement for sale and purchase. It is arguable that there was a common understanding between the Bank (arguably at least through Mr Connor), the Thomsens and the Hallidays, that the Hallidays owned the trees. The Hallidays acted in reliance on that common understanding to their detriment when they incurred the on-going costs in managing the trees after the farm was sold. It is arguable that it is now unconscionable for the Bank to exercise the power of sale without recognising the (arguable) common understanding.
[58] There is then an issue as to whether such a claim can support a caveat.28 As this too was not part of the submissions before me (the Bank correctly contended that if the trees were chattels that could not support a caveat), I err on the side of caution. That is, I proceed on the basis that it is arguable that an estoppel (or constructive trust) claim is a caveatable interest because a potential remedy available on such a claim is to order the grant of the interest in the land.29 I consider that this is a preferable course to, for example, requiring the Hallidays to seek an injunction
restraining the sale.30
28 Hinde McMorland & Sim Land Law in New Zealand, above n 6, at [10.010]. I consider that the caveat as lodged is arguably wide enough to be a caveat in respect of such an interest.
29 The approach taken in Wellesley Club Inc v Wellesley Property Holdings Ltd (2007) 8 NZCPR
421 at [35]-[40].
30 Hinde McMorland & Sim Land Law in New Zealand, above n 6, at [10.010 (h)] referring to Re
Haupiri Courts Ltd (No 2) [1969] 2 NZLR 353.
The mortgagee’s power of sale – interest with priority
[59] The Bank says that its power of sale is indefeasible. It relies on s 105 of the Land Transfer Act. The effect of that section is that when a mortgagee exercises its power of sale, the estate passes free of any estate or interest but subject to two exceptions. If these exceptions are not made out, the purchaser (under the mortgagee sale by the Bank) will be entitled under the Land Transfer Act to clear title and it
would generally follow that the caveat should be removed.31
[60] The first exception is in respect of any “estate or interest created by any instrument which has priority over the mortgagee”. For reasons already discussed, the Hallidays’ unregistered interest in the trees does not have priority over the Bank’s registered mortgage32 unless perhaps there is conduct which in equity would result in the deferral of priority.33 It is not clear however that an equitable claim is intended to fall within the wording of this exception. There is some authority to the effect that s 105 is impliedly subject to the fraud exception.34 However other commentary suggests that it is arguable that the absence of an express exception in s 105 for fraud indicates that Parliament did not intend that it would be subject to fraud.35 If the latter view is the preferable one, an equitable in personam claim would not be within the first exception.36
[61] As discussed above, the more likely claim against the Bank is not Land Transfer Act fraud, but an in personam claim for estoppel. Even if in personam claim is not intended to be within this first exception to s 105, the Court, in its
equitable jurisdiction, might grant relief for that claim in respect of the land prior to
31 Hinde McMorland & Sim Land Law in New Zealand, above n 6, at [23,457] supports this conclusion.
32 See for example Hinde McMorland & Sim Land Law in New Zealand, above n 6, at [15.005],
“the equitable interests will be defeated in the sense that they will not affect the interest of the
registered mortgage.”
33 An expression from National Mutual Finance (1988) Ltd v Berryman HC Wellington M451/91,
2 October 1991.
34 Son v Ko (2006)5 NZ ConvC 194,354 at [37].
35 Land Law (online looseleaf ed, Brookers) at [LT62.10(3)]. See also Blanchard, above n 21, expressing the tentative view that the statute is concerned with fraud in getting onto the register,
but dishonesty thereafter may create a personal obligation that can be enforced in personam on the basis of a recognised legal or equitable claim.
36 If an equitable claim was within the first exception that would probably cut across the Court’s view as to what is required for “consent” under s 105 of the Land Transfer Act 1952 as discussed under the next heading of this judgment.
the registration of any transfer by the Bank to a purchaser in the exercise of the Bank’s power of sale. Therefore in my view s 105 does not require the removal of the caveat at least at this point.
[62] The Bank says that this case is on “all fours” with Bobs Cove Developments Ltd v Strategic Nominees Ltd.37 I agree that the facts are very similar. However there is a potentially material distinction. In that case there was evidence from the relevant employee at the Bank that, although it knew of the agreement between vendor and purchaser that a certain block within the property was excluded from the sale, it intended to register its mortgage over the entire property and to have recourse to the entire property if there was a default in the loan. This was in the context of a vendor and purchaser who were directly related. In those circumstances the Court
concluded that the Bank’s actions were not unconscionable. There was therefore no basis on which the interest claimed by the vendor had priority over the mortagee’s interest. Here there is no evidence that the Bank intended to have security over the trees (Mr MacDonald’s evidence is that he paid no attention to the value of the trees and Mr Connor’s evidence was that the trees belonged to the Hallidays) and the Thomsens and RCL were not related parties.
The mortagee’s power of sale – consent
[63] The second exception under s 105 of the Land Transfer Act is an estate or interest which, because of the mortgagee’s consent, is binding on it. There is no doubt that the Bank did not consent when specifically asked to in October 2011. The submission for the Hallidays is that the Bank’s earlier knowledge and conduct amounts to implied acceptance of the Hallidays’ ownership of the trees.
[64] The difficulty with the Hallidays’ submission is that consent as referred to in s 105, does not have an expansive definition.38 Positive conduct is required.39 A “mortgagee who is aware of a third party’s interest, and passively stands by, making
no objection, has not consented”.40 The evidence before me shows knowledge and a
37 Bobs Cove Developments Ltd v Strategic Nominees Ltd, above n 23.
38 Cashmere Capital Ltd v Carroll [2009] NZSC 123, [2010] 1 NZLR 577 at [75].
39 At [79].
40 At [79].
passive standing by without objection (and arguably a common understanding founding an estoppel claim), but no more. I therefore consider that the consent exception under s 105 is not made out.
Result
[65] I decline to make the declarations sought. I also decline to make an order that the caveat (as identified in the Bank’s application) is to be removed from the title upon lodgement by e-dealing of a transfer in exercise of power of sale of the Property authorised by Bank of New Zealand. It is important that the Hallidays diligently pursue any in personam claim they may wish to bring. If they do not do so, leave is reserved to the Bank to apply further. As neither party has been successful on their respective applications I consider that costs on these applications should lie where they fall.
Mallon J
Solicitors:
Lunn & Associates, Napier
J T Law, Wellington
7