HUIJIE ZHANG AND BRUCE CHAN PERMA LIMITED
[2024] NZHC 3146
•29 October 2024
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2024-404-1402
[2024] NZHC 3146
BETWEEN HUIJIE ZHANG
Applicant
AND
BRUCE CHAN
First Respondent
PERMA LIMITED
Second Respondent
Hearing: 21 October 2024 Counsel:
M Colthart for the Applicant
K Robinson / M Roelfs for the First and Second Respondents
Judgment:
29 October 2024
JUDGMENT OF ASSOCIATE JUDGE BRITTAIN
This judgment was delivered by me on 29 October 2024 at 12 Midday.
Pursuant to Rule 11.5 of the High Court Rules.
…………………..
Registrar/Deputy Registrar
Solicitors/Counsel:
Righteous Law, Auckland Wynyard Wood, Auckland
FortyEight Shortland Barristers, Auckland
ZHANG v CHAN [2024] NZHC 3146 [29 October 2024]
Introduction
[1] The second respondent, Perma Ltd (Perma), developed nine town houses in Te Atatū. The development was marketed off the plans. In October 2021, the applicant, Huijie (Jess) Zhang (Ms Zhang), signed a contract (the contract) to purchase one of the town houses (the property) from Perma.
[2] Construction was completed in 2023. Title for the property and a code compliance certificate for the building on the property (the building) had issued by August 2023, triggering settlement.
[3] Ms Zhang obtained a building report prior to settlement. Ms Zhang says that the building is defective. Ms Zhang purported to cancel the contract on 19 September 2023. Perma did not accept the cancellation, treating it as a repudiation of the contract. Perma purported to cancel the contract.
[4] Perma has filed a proceeding against Ms Zhang in the District Court claiming damages for breach of contract. Ms Zhang has counterclaimed for the return of her deposit of $100,000 (the deposit), and for damages for other losses.
[5] Ms Zhang claims an equitable lien over the property in respect of the deposit. She has lodged a caveat against the title to the property relying on that interest.
[6] Perma acknowledges that a purchaser who is entitled to recover a deposit from a vendor has an equitable lien that will support a caveat.1 However, Perma’s position is that Ms Zhang’s purported cancellation of the contract was wrongful, so she has no right to recover the deposit. Perma also relies on a clause in the contract which prohibits the registration of a caveat (the no caveats clause).
[7] Perma commenced the lapsing procedure under the Land Transfer Act 2017, and Ms Zhang now applies to sustain her caveat.
1 Frances v Dalton [2024] NZCA 528 at [66].
Sustaining caveats — the legal principles
[8] The legal principles applicable to applications to sustain caveats were confirmed by the Court of Appeal in Philpott v Noble Investments Ltd:2
[26] The applicable legal principles which governed the application to sustain the caveats, and which now govern this appeal, are as follows:
(a)The onus is on the applicants to demonstrate that they hold an interest in the land that is sufficient to support the caveat, but they need not establish that definitively;
(b)It is enough if the applicants put forward a reasonably arguable case to support the interest they claim;
(c)The summary procedures involved in applications of this nature are not suited to the determination of disputed questions of fact. An order for the removal of a caveat will only be made if it is patently clear that the caveat cannot be maintained — either because there is no valid ground for lodging it in the first place, or because such a ground no longer exists; and
(d)When an applicant has discharged the burden upon it, the Court retains discretion to remove the caveat which it exercises on a cautious basis. Before it does so the Court must be satisfied that the caveator’s legitimate interest would not be prejudiced by removal.
[9] The existence of a no caveats clause is a factor taken into account when the Court exercises its discretion to sustain or remove a caveat.3
The issues
[10] The parties agree that Ms Zhang is entitled to a return of the deposit if she has validly cancelled the contract for breach by Perma, and that this would give rise to an equitable lien that is sufficient to sustain her caveat. Therefore, the issues for determination are:
(a)Is it reasonably arguable that Perma breached its contractual obligations?
2 Philpott v Noble Investments Ltd [2015] NZCA 342.
3 Landco Albany Ltd v Fu Hao Construction Ltd [2006] 2 NZLR 174 (CA) at [52].
(b)Is it reasonably arguable that Ms Zhang had the right to cancel the contract?
(c)Should the no caveats clause be enforced?
Is it reasonably arguable that Perma breached its contractual obligations?
[11] Ms Zhang relies on express vendor warranties and warranties implied by the Building Act 2004 (BA).
[12] Under cl 7.3(5) of the contract, Perma warranted that it had obtained the necessary building consent for the building work, the works were completed in compliance with the consent and a code compliance certificate was issued.
[13] Clause 30.1 of the contract requires Perma to rectify any defects or other faults in the building notified to Perma in the 12 months commencing on the date of the code compliance certificate.
[14] Clause 31.1 of the contract prohibits Ms Zhang from withholding any part of the purchase price on settlement, or from claiming any set-off on settlement, by reason of any defect or fault in the building. Clause 31.1 limited Ms Zhang to the remedy of damages for reasonable rectification costs if the vendor failed to rectify a defect or fault.
[15] Perma has a strong argument that s 34 of the Contract and Commercial Law Act 2017 (CCLA) restricts Ms Zhang to the express remedy in cl 31.1 of the contract for any breach of the express vendor warranties, abrogating the rights of cancellation usually afforded by ss 35 to 49 of the CCLA.
[16] I do not need to address that argument, because the issues that arise in this case can be determined based on the warranties implied into the contract by pt 4A of the BA. The parties agree that the contract was subject to the warranties in s 362I of the BA (the warranties), and that s 362K of the BA prohibits the parties from contracting out of the warranties and the remedies in the BA.
[17]Section 362I of the BA relevantly provides:
362I Implied warranties for building work in relation to household units
(1)In every contract to which this section applies, the following warranties about building work to be carried out under the contract are implied and are taken to form part of the contract:
(a)that the building work will be carried out—
(i)in a proper and competent manner; and
(ii)in accordance with the plans and specifications set out in the contract; and
(iii)in accordance with the relevant building consent (if any):
(b)that all building products to be supplied for use in the building work—
(i)will be suitable for the purpose for which they will be used; and
(ii)unless otherwise stated in the contract, will be new:
(c)that the building work will be carried out in accordance with, and will comply with, all laws and legal requirements, including, without limitation, this Act and the regulations:
(d)that the building work will—
(i)be carried out with reasonable care and skill; and
(ii)be completed by the date (or within the period) specified in the contract or, if no date or period is specified, within a reasonable time:
(e)that the household unit, if it is to be occupied on completion of building work, will be suitable for occupation on completion of that building work:
(f)if the contract states the particular purpose for which the building work is required, or the result that the owner wishes the building work to achieve, so as to show that the owner relies on the skill and judgement of the other party to the contract, that the building work and any building products used in carrying out the building work will—
(i)be reasonably fit for that purpose; or
(ii)be of such a nature and quality that they might reasonably be expected to achieve that result.
(2)Subsection (1) has effect despite any provision to the contrary in any contract or agreement, and despite any provision of any other enactment or rule of law.
[18] Perma accepts that the building had defects on the settlement date and when Ms Zhang purported to cancel the contract. Perma concedes that it is possible that
there were breaches of the warranties. Counsel for Perma, Mr Robinson, submitted that the key issue is whether those breaches allowed Ms Zhang to cancel the contract.
Is it reasonably arguable that Ms Zhang had the right to cancel the contract?
[19]Sections 362M, 362N and 362O of the BA relevantly provide:
362M Remedies if breach of warranty can be remedied
(1)This section applies in any case where the breach of warranty can be remedied.
(2)If this section applies, the client may require the building contractor to remedy the breach (including repairing or replacing defective building products supplied by the building contractor or the building contractor’s subcontractor).
(3)If the building contractor, after being required to remedy the breach, refuses or neglects to do so, or does not succeed in doing so within a reasonable time, the client may—
(a)have the breach remedied by someone else and recover from the building contractor all reasonable costs incurred in having the breach remedied; or
(b)cancel the contract in accordance with section 362P.
…
362NRemedies if breach of warranty cannot be remedied or breach is substantial
(1)This section applies in any case where the breach of warranty cannot be remedied or the breach is substantial.
(2)If this section applies, the client may—
(a)obtain from the building contractor damages in compensation for any reduction in value of the product of the building work below the price paid or payable by the client for that work; or
(b)cancel the contract in accordance with section 362P.
…
362O Meaning of substantial breach
For the purposes of section 362N, a breach of warranty is substantial if—
(a)a reasonable client fully acquainted with the nature and extent of the breach would not have entered into the residential building contract; …
…
[20] Under ss 362N and 362O(a), Ms Zhang had an election to cancel the contract if Perma was in breach of a warranty and a reasonable purchaser fully acquainted with the nature and extent of the defects would not have entered into the contract.
[21] Mr Robinson submitted that the test, whether a reasonable purchaser fully acquainted with the nature and extent of the defects would not have entered into the contract, requires consideration of:
(a)the contractual right to remediation of defects under clause 30.1 of the contract; and
(b)evidence that, when the defects arose in 2023, Perma was willing to fulfil that obligation.
[22] Evidence of Perma’s willingness to perform its contractual obligations in 2023 is not relevant. Section 362O(a) must be assessed as at the date of formation of the contract. The assumed knowledge of the reasonable client pertains to the nature and extent of the breach and the terms of the contract.
[23] Mr Robinson sought to equate “substantial” with a breach of warranty that cannot be remedied. I reject that submission:
(a)Section 362N(1) distinguishes between: cases where a breach of warranty cannot be remedied; and cases where a breach of warranty is substantial. These are two distinct concepts. Mr Robinson’s interpretation would conflate the two concepts.
(b)It is possible for a breach of warranty to be substantial even though it is capable of remediation. If so, the purchaser can elect to require remediation under s 362M or cancel under s 362N.
[24] I must consider whether it is reasonably arguable, on the affidavit evidence filed in this proceeding, that a reasonable purchaser in 2021 with knowledge of the future defects would have signed the contract.
[25]The pertinent evidence regarding the defects in the building is:
(a)A report from Jeremy Millichamp (Mr Millichamp), a licenced building practitioner, following his inspection of the building on 4 September 2023. The report was commissioned by Ms Zhang.
(b)A report from Justin Mackay (Mr Mackay), commissioned by Perma. Mr Mackay does not list his qualifications in the report. The report is stated to be a “Pre-Sale Inspection”. Mr Mackay inspected the building on 26 October 2023. Mr Mackay does not state whether he reviewed Mr Millichamp’s earlier report, which is not referenced in any way.
(c)A second report from Mr Millichamp dated 4 August 2024, which responds to Mr Mackay’s report.
[26] There is affidavit evidence from a director of Perma, Mr Jeffrey Chan, regarding some remedial work carried out by Perma after receipt of Mr Millichamp’s first report. There is evidence of correspondence from the solicitor first instructed for Ms Zhang, which included expressions of opinion by the solicitor and Ms Zhang regarding the scope of the remedial work required. I have placed no weight on the opinions of the parties or their solicitors.
[27] Mr Robinson acknowledged that it is not possible for the Court to resolve competing expert evidence in a summary hearing on affidavits. Mr Robinson reminded me that I am not required to uncritically accept all affidavit evidence, and I can reject affidavit evidence if it is untenable. The opinions expressed by Mr Millichamp in his reports do not fall into that category:
(a)There are defects recorded by Mr Millichamp that are not recorded as observed by Mr Mackay, but no further explanation is offered by Mr Mackay.
(b)Mr Mackay does not opine that Mr Millichamp’s opinions are wrong. There is no expert evidence to contradict Mr Millichamp’s opinions.
[28] I do not need to traverse Mr Millichamp’s observations and opinions in detail. His reports run to more than 50 pages. Most significantly, his reported observations include:
(a)there is a 15 mm fall in the floor of bedroom 3;
(b)there is inadequate sealing and painting to the underside of some of the vertical weatherboard cladding, and cracking in the ends of some of that cladding above the joinery head flashings, and the affected boards must be replaced; and
(c)numerous examples of a lack of clearance between claddings and finished ground levels.
[29] Mr Millichamp describes these defects as significant, requiring substantial repairs or urgent attention and rectification. There is no expert evidence as to the scope of the remedial work that is required to remedy these defects, or the cost of that work.
[30] Mr Mackay also observed examples of insufficient sealing and painting to the underside of some of the cladding boards and cracking of some of the cladding boards.
[31]I find that it is reasonably arguable that:
(a)the defects summarised in [28] above (the defects) existed in the building on the settlement date and when Ms Zhang purported to cancel the contract on 19 September 2023;
(b)the defects existed as a result of Perma’s breaches of the warranties;
(c)a reasonable purchaser fully acquainted with the defects would not have entered into the contract in October 2021, notwithstanding clause 30.1 of the contract, which is broadly consistent with Perma’s obligation to remedy defects under the BA;
(d)Ms Zhang was entitled to cancel the contract on 19 September 2023;
(e)Ms Zhang is entitled to the deposit; and
(f)Ms Zhang has an equitable lien in the property for the amount of the deposit, sufficient to sustain the caveat.
[32] Based on these findings, I do not need to consider the numerous other defects raised by Mr Millichamp in his reports.
Should the no caveats clause be enforced?
[33]Clause 33.1 of the contract provides:
The purchaser shall not lodge a caveat against the title to the Land or against the new certificate of title to be issued for the Property. If the purchaser breaches this obligation, then, without prejudice to all other rights of the vendor, the purchaser shall be liable to pay all costs and losses suffered by the vendor arising from the breach, including the vendor’s legal costs on a client/solicitor basis.
[34] Mr Robinson submitted that the clause is unambiguous and survives cancellation of the contract. The Court should uphold the parties’ bargain even if satisfied that Ms Zhang has a reasonably arguable basis for a caveat.
[35] A caveator can be discharged from compliance with a no caveats clause if a caveator validly cancels the contract. The learned authors of Hinde McMorland and Sim say:4
The third question is whether a “no caveat” clause precludes a Court from sustaining a caveat. Where, because the caveator had cancelled the contract, the lodgement of the caveat did not constitute a breach of contract, the answer is surely No.
[36] It is reasonably arguable that Ms Zhang has validly cancelled the contract, discharging Ms Zhang from compliance with cl 33.1. The caveat was lodged several months after Ms Zhang gave notice of cancellation. I do not accept that cl 33.1 survived cancellation.
4 DW McMorland and others Hinde McMorland and Sim Land Law in New Zealand (online ed, LexisNexis) at [10.008].
[37] If clause 33.1 survived cancellation, the threshold for exercising the discretion to remove a caveat filed in breach of a no caveat clause is not high, although there remains a need for caution. There must be a good reason to sustain a caveat filed in breach of a no caveat clause.5
[38] The contract contemplated that Ms Zhang’s deposit would be protected because it was held by a stakeholder until title to the property and the code compliance certificate for the building issued, triggering settlement. That occurred, and the stakeholder released the deposit to Perma in compliance with the terms of the contract. However, this leaves Ms Zhang unprotected for her deposit if Ms Zhang was entitled to cancel because the building is not code-compliant.
[39] Perma is free to sell the property, which would defeat Ms Zhang’s proprietary interest in the property — the caveat remains necessary to protect that interest.
[40]I exercise the discretion in favour of sustaining the caveat.
Result
[41]Caveat 12992987 shall not lapse pending further order of the Court.
[42] My preliminary view is that costs should follow the event on a 2B basis. If the parties are unable to agree on costs, then:
(a)the applicant may file and serve written submissions on costs, of no more than three pages, by 8 November 2024;
(b)the respondent may file and serve written submissions on costs, of no more than three pages, by 15 November 2024;
(c)I will then determine costs on the papers.
Associate Judge Brittain
5 Mortre Holdings Ltd v ANCL Investments Ltd [2016] NZCA 494, (2016) 18 NZCPR 268 at [26].
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