Jack O'Neill Northcroft Limited v Northcroft 18 Limited

[2000] NZCA 327

IN THE COURT OF APPEAL OF NEW ZEALAND CA 230/00

BETWEEN	JACK O’NEILL NORTHCROFT LIMITED
Appellant

AND	NORTHCROFT 18 LIMITED
Respondent

Hearing:	2 November 2000  (at Auckland)
Coram:	Thomas J
Fisher J Panckhurst J
Appearances:	A H J Commons for Appellant
G S Millar for Respondent
Judgment:	14 November 2000

JUDGMENT OF THE COURT DELIVERED BY PANCKHURST J

Table of Contents
Paragraph Number
Introduction Background Facts The Purchaser’s Claim The Summary Judgment Application Conclusions	[1] [2] [10] [13] [19]

Introduction

1. The appellant (defendant in the High Court proceeding) belatedly sought summary judgment in relation to the claim against it for unfair trading or contractual misrepresentation.  Master Gambrill dismissed the application and along the way declined leave in terms of Rule 138(3) to seek judgment subsequent to the time of service of the statement of defence.  With reference to the substance of the case she considered it was unsuited for summary judgment, since an evaluation of evidence was required to determine the merits.

Background Facts

1. The appellant, Jack O’Neill Northcroft Limited (the vendor) owned a commercial property at 18 Northcroft Street, Takapuna.  The property was let as a shop, as offices, and to Contours Exclusive Limited (Contours), the major tenant, which operated a women’s health studio. 

2. In December 1997 the property was offered for sale by auction.  A letter from Contours was read out by the auctioneer.  It said:

   To Whom It May Concern

   Re:Sale of No. 18 Northcroft Street

   Please be aware that as tenants of said building.

   As a company we are struggling to survive and it is unlikely with the present rent structure we will be able to continue trading.

Yours faithfully

C M Gordon

The respondent Northcroft 18 Limited was not present at the auction.  It alleges it was not aware of the Contours’ statement.  A sale at auction did not eventuate. 

1. An agreement for sale and purchase dated 3 March 1998 was subsequently concluded between the vendor and Northcroft 18 Limited (the purchaser) for a price of $1.7m.  The agreement was conditional upon “due diligence”.  Relevantly for present purposes the purchaser had fifteen working days within which to investigate legal and resource issues, and the financial viability of its purchase.

2. Special condition 17 of the agreement provided:

   The purchaser acknowledges that the vendor is currently negotiating with a prospective purchaser for the Contours gymnasium business.  The vendor undertakes to inform the purchaser of any proposed changes to the lease during the conditional period for his approval.

Thereby it is apparent that the purchaser was on notice concerning at least the possibility that Contours may cease to be the major tenant.

1. On about 19 March 1998 the agreement was varied, in that the purchase price was reduced from $1.7m to $1.6m.  A single page headed “Variation to Agreement” was signed by the parties.

2. The same day an agent of the vendor wrote to a guarantor of Contours’ tenancy obligations including the following:

   Contours Takapuna has not fully paid the rent for this month together with outstanding outgoings totalling $14,135.08.

A copy of the letter was sent to the vendor’s real estate agent who, in turn, on 21 – 22 March, provided a copy of the letter to the purchaser with the comment that the letter was something the purchaser needed to be aware of.

1. On 26 March 1998 a further variation was signed, whereby the purchase price was again reduced, this time to $1.55m, and a minor change was also made with reference to payment of the deposit upon the agreement becoming unconditional.  The same day the purchaser by letter confirmed that it had completed due diligence to its satisfaction and that “the agreement (as varied by todays date) is now unconditional”.

2. Although the agreement provided for settlement and possession on 30 June 1998 such did not occur until 23 December of that year.  In the meantime Contours had quit the premises and the parties had worked through various significant differences in order to achieve settlement.  In the present summary judgment context it is not necessary to refer to these aspects.

The Purchaser’s Claim

1. Two causes of action are advanced.  The first is pursuant to the Fair Trading Act 1986.  It is alleged that the copying of the letter of 19 March 1998 to the purchaser, being the letter whereby a guarantor was advised of Contours’ default in payment of rent and outgoings for the month, gave rise to a misrepresentation or was conduct which was misleading or deceptive in terms of the Act.  Paragraph 13 of the amended statement of claim under the heading “Misrepresentation” includes the following:

   ... the tender of the letter of 19 March 1998 ... was incorrect to the extent that not only was rental for the month of March, together with outstanding outgoings, totalling $14,135.08 outstanding, but Contours Takapuna Ltd as tenant was either insolvent or expected itself to be insolvent and/or unable to meet rental.  The (vendor) thereby misrepresented the value of the tenancy (“the misrepresentation”).

Then followed a pleading that had the purchaser known the true position it would not have made the purchase agreement unconditional.

1. An alternative cause of action is advanced pursuant to the Contractual Remedies Act 1979.  It is based upon the same circumstances, namely that the letter of 19 March 1998 was a misrepresentation because it conveyed only part of the total picture.  The plaintiff purchaser maintains that provision of the letter concerning the March arrears was misleading, absent the more significant information in Contours’ auction statement that it was “struggling to survive”.

2. The amount claimed with reference to both causes of action is $285,580.  This figure represents the cost of financing at a higher interest rate and a loss in capital value attributed to the instability of the major tenant.  In short, the purchaser asserts that had Contours been a stable long-term tenant a more advantageous interest rate would have been attainable and that the capital value of the property would have been enhanced.

The Summary Judgment Application

1. The purchaser issued its proceeding in September 1999 and a statement of defence was filed the following month.  Discovery and in due course interrogatories followed.  Two interrogatories directed to the purchaser were:

Q.Did the 19 March 1998 letter ... advising that Contours had not fully paid the rent for that month together with outstanding outgoings, infer to the (purchaser) that Contours was a sound tenant?

A.No.  The letter meant no more than that the tenant was in the stated level of arrears.  It did not mean either that the tenant was sound or unsound.

Q.If the answer ... is no, what step(s) did the (purchaser) take to investigate the financial stability of Contours following the 19 March 1998 letter?

A.None.

It appears these answers excited the vendor’s belated application for entry of summary judgment pursuant to Rule 136(2).  Leave to bring the application was required pursuant to Rule 138(3), since several months had passed since the vendor had filed its statement of defence.

1. In support of the application a director Mr Jack Chapman swore a detailed affidavit.  It recited the history of the agreement for sale and purchase, including considerable reference to events in the second half of 1998 prior to the late settlement of the agreement in December of that year.  In July 1998, on account of the failure to achieve settlement at the end of the previous month, the parties agreed to vary certain terms of the agreement with reference to a new settlement date.  One such term included:

   ... the purchaser will settle in full without deduction and will accept the building and tenants as they are ...

2. The gist of the argument in support of the summary judgment application was that the purchaser’s claim was misconceived since on any view of matters there was no misrepresentation or misleading/deceptive conduct on the vendor’s part.  Special condition 17 of the agreement placed the purchaser on notice that change was afoot in relation to Contours continuing as the major tenant.  Moreover, provision of a copy of the 19 March 1998 letter concerning the arrears was neither deceptive, misleading, nor a misrepresentation of the actual position.  To the contrary the letter accurately conveyed the immediate arrears position, and reasonably placed the purchaser on notice that the situation with reference to Contours required consideration and evaluation.  The purchaser’s response, to complete due diligence and make the agreement unconditional without further inquiry concerning the Contours’ lease, was foolhardy.  In short, the purchaser was the author of its own misfortune and there was nothing untoward in the vendor’s conduct.

3. Mr Tuke, a director of the purchasing company, swore an affidavit in opposition.  That affidavit included the following in paragraph 4:

   ... Northcroft 18 Limited did not exist until created for this particular acquisition.  Part and parcel of development is considering all the options which necessarily includes (the) value of commercial buildings according to the quality of tenancy, and consideration of funding a purchase and retaining the property pending any redevelopment, based upon cashflows from the property.  Whatever longer term usage of the property, Northcroft 18 needed the rental stream (Contours comprised 70%) in order to pay mortgage interest.  The Contours lease continued through till January 2001.  There was therefore also the possibility that the tenant might exercise a right of renewal in 2001.  There are always a range of possible uses and development options for a particular building.  All those factors impacted on the viability of acquiring the property and the future prospects of development.  ...”

The affidavit also explained the reasons for the price variations to the contract, generally that the purchaser was able to demonstrate various problems with the premises which warranted the reductions. 

1. With reference to the “December auction letter” from Contours Mr Tuke deposed that it did not become known to the purchaser until July 1998 and a copy of the letter was not seen until March of the following year.  Save for the observations in the extract above, he did not comment upon inquiries made with reference to the Contours’ tenancy in the course of the due diligence process.  The affidavit concluded on this note:

   Scope of this Affidavit

   13.I have been advised by my solicitor that as the Chapman affidavit is in support of an application (in effect) to strike out the claim, the full evidence on the events he describes does not need to be addressed.  I have restricted this reply to flag just the main features;  so as to point out the major areas where Northcroft 18 does not accept what Mr Chapman has stated.

2. Consistent with the terms of the affidavit, counsel argued that in a summary judgment context it was inappropriate to explore the purchaser’s response to the arrears letter of March 1998, since that was a matter which should await evidence at the hearing.  When pressed concerning how a letter which contained adverse information concerning the tenant, gave rise to a misrepresentation concerning “the value” of such tenant, counsel was driven back to events earlier in time.  It emerged that the intended gist of the purchaser’s case is that the stark statement concerning Contours’ financial position as at December 1997 was never brought to the purchaser’s attention.  This complaint, rather than a focus upon the March arrears letter, is the basis of the case for the purchaser.

Conclusions

1. Although the case as presently framed with reference to the March 1998 letter is highly questionable, and does not seem to disclose a sustainable cause of action, we cannot be satisfied that if reframed as indicated above it may be salvagable.  If the vendor said or did something which left a false impression as to the full extent of Contours’ financial difficulties throughout the due diligence process, there may be an arguable cause of action.

2. In any event in the light of the exchanges which occurred between the Bench and counsel, we think it is just that as in a strike-out context the plaintiff purchaser be afforded an opportunity to amend its pleadings.  As to the scope of Rule 136(2), the types of cases for which it is intended, the relationship between it and the strike out process (Rule 186), and the consequences inter parties of its exercise we note the observations of the Court in Westpac & Another v Kembla New Zealand Ltd CA50-1/2000 judgment 9 November 2000, at paras [58] – [79].

3. We of course express no concluded view as to the desirability of amendment.  It is for the purchaser’s advisors to reconsider matters in the light of the observations in this judgment.  It should be borne in mind that even if the case is reshaped as to the basis of the alleged unfairness or misrepresentation, the conduct of the purchaser in the course of due diligence and in confirming the agreement will nonetheless fall to be objectively assessed.  That of course is an aspect which was essentially beyond the scope of the present argument, where the focus was upon the first requirement of conduct by the vendor capable of being misleading, deceptive or amounting to a misrepresentation.

4. The vendor also challenged the award of costs against it in the High Court, being $3000 plus disbursements.  It was submitted that at most costs according to scale, being $1430.00, should have been allowed.  In light of the different view we have reached with reference to the merits and our conclusion that the purchaser should have an opportunity to amend, we do not consider that the award below can stand.  It is quashed and likewise we make no award in this Court.  In all the circumstances costs with reference to both the application and the appeal are reserved for future consideration in light of developments.

Solicitors:

Martelli McKegg Wells & Cormack, Auckland, for Appellant