Johns v Wu
[2019] NZHC 12
•17 January 2019
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2017-404-001781
[2019] NZHC 12
BETWEEN LESLIE ROY JOHNS and LEONIE MARY JOHNS
PlaintiffsAND
YUN FENG WU and XIAO WEI CHENG
First Defendants
AND
AUCKLAND COUNCIL
Second Defendant
Hearing: 17 & 18 September 2018, 20 November 2018 Appearances:
G J Round for Plaintiffs
E St John for First Defendant
S F Quinn for Second DefendantJudgment:
17 January 2019
JUDGMENT OF NICHOLAS DAVIDSON J
JOHNS and JOHNS v WU and CHENG [2019] NZHC 12 [17 January 2019]
INDEX
Para No
A. INTRODUCTION [1] Background [1] Litigation history and pleading [9] B. THE COVENANT
[14]
History [14] C. OVERVIEW OF EVIDENCE
[25]
The ‘Modal’ house and The Index [37] Inspection [45] A perspective [46] D. ISSUES RELEVANT TO INTERPRETATION AND ENFORCEABILITY OF THE COVENANT
[49]
The ‘costs’ or ‘value’ calculation under the covenant [49] What ‘build costs’ are relevant to the operation of the covenant? [50] The architectural and retrospective minimum build costs certification [55] Does the covenant apply to “secondary” dwellings? [56] E. IS THE COVENANT ENFORCEABLE IN WHOLE OR IN PART?
[65]
The competing positions [65] Interpretation / a replacement mechanism for the Index? [67] Rectification / Implication [80] Discussion [86] Bonnar [99] Conclusion as to a substitute mechanism – and compliance of this dwelling
under such
[101] An imperfect analogy to the Index [104] F. OBSERVATIONS
[112]
Is the Council’s decision to approve or not approve subject to judicial review,
and if so, by whom?
[113]
Does the Council owe a duty of care to neighbours, and if so, to whom? [125] Is the Council liable to the plaintiffs in negligence? [126] What loss have the plaintiffs suffered [127] G. SUMMARY OF JUDGMENT
[128]
Covenant [132] Concluding Comments [136] H. DISPOSITION
[138]
A. INTRODUCTION
Background
[1] The attempt to control the appearance and “value” of residential dwellings to maintain economic and aesthetic qualities of a neighbourhood has taken different forms over the years. Mechanisms can be found in District Plans (formerly Schemes), conditions of resource consents and instruments registered on land titles. This judgment concerns one such attempt more than 25 years ago by the registration of a (restrictive) covenant on certificates of title (identifiers), in what is now an attractive residential subdivision in Manurewa, Auckland.
[2] The covenant was registered pursuant to a memorandum of transfer dated 30 May 1990 when bare land in Auckland was sold by the then Manukau City Council for residential development. One Lot, to which the covenant applies, is now owned by the first defendants, Yun Feng Wu and Xiao Wei Cheng (“Mr Wu” and “Ms Cheng”). The covenant is discussed further in this judgment, but focus falls on sub-clauses which purport to impose a minimum ‘cost’ of construction, to impose a check on the design of a “residential building”, and to prohibit the use of specified construction materials.
[3] The factual setting is a small residential building of 60 m2, referred to as a ‘dwelling’ for this judgment, erected at the rear of a property at Peretao Rise, in ‘The Gardens’, in 2017. It is the second dwelling on the Lot as the principal dwelling was built some years ago. As such it will be described as the ‘secondary’ or ‘minor’ dwelling.
[4] The plaintiffs, Mr and Mrs Johns, with the support of some others in the neighbourhood, say this dwelling has been built in breach of the covenant registered on the title to Mr Wu’s and Ms Cheng’s property in favour of their property and others nearby. It was entered between Manukau City Council as transferor and Fletcher Building Limited (“Fletcher”) as transferee in 1990, when Fletcher bought residential land on which to build.
[5] The covenant applies to four Lots, and is clearly intended to maintain a “certain standard” of a new dwelling. In doing so, it set a base figure of $85,000.00 for the costs of construction of such building in 1985, adjusted by the annual movement of the New Zealand Institute of Valuers’ Modal Housing Cost Index (“the Index” or “the Modal Housing Index”). The difficulty is that the Index was discontinued in the late 1980s or 1990, perhaps even before the covenant was registered, but more or less contemporaneously. The covenant was intended to work in practice by application for ‘approval’ when building consent was sought from the Auckland Council (“the Council”), based on compliance with the covenant. The Council’s ‘approval’ is expressly not given or refused as a local authority under its statutory or regulatory powers, but as successor to the Manukau City Council, the original transferor. However the plaintiffs say it nevertheless performs a local government role when it considers approval under the covenant, relevant to the case for judicial review of the Council’s decision to approve this dwelling.
[6] Mr and Mrs Johns say the dwelling has been built in breach of the covenant, as they say it cost less to build than the Covenant requires as a minimum. They want the Court to order its removal. They claim against the Council for giving approval, they say wrongly. Mr Wu and Ms Cheng do not understand the degree of opposition they have faced, and the threat to the dwelling which was built as a “granny flat”. They regard it as a “well built and beautifully presented building”. When they began building they did not understand or even know about the covenant, and nor did their advisers. They have a young family. Mr Wu explained that the dwelling was designed and constructed with professional advice and they thought that they had a lawful building consent in all respects.
[7] Historically, the Council has only had to consider approval under the covenant on a very limited basis. It wants to know whether today it remains enforceable in whole or in part, and if so what is required to satisfy the covenant, and how the Council should undertake the ‘approval’ exercise. The Council does not enter the debate about whether the covenant is enforceable, but says if it is, then it has done everything that can be expected of it. Mr Wu and Ms Cheng say the covenant is unenforceable, at least as to the minimum ‘build cost’ of a dwelling, but if it is enforceable, they say that on any reasonable re-wording of the covenant by the Court as to the measure of
minimum ‘build costs’, the dwelling is compliant, or so nearly so that on all these bases no relief should be ordered by the Court.
[8] There is no doubt that Mr Wu and Ms Cheng have been through the mill, as there has been vigorous and at times hostile opposition to their construction of the dwelling. The build slowed right down and it was abundantly clear when Mr Wu gave evidence that he and Ms Cheng have been under a good deal of personal pressure. This was not helped by the actions of some of their opposition, including the involvement of a Mr Slavich under the pseudonym of “John Watson”, who maintained a vigorous and at times hostile correspondence critical of them, the Council, a quantity surveyor, and an architect asked by the Council to consider the design of the dwelling. Mr and Mrs Johns seek to distance themselves from his conduct and I find that they should not be regarded as the authors of that hostility, which went beyond reasoned opposition. Even so, this young couple faced public condemnation for building this dwelling, by signage and other communications. I find that Mr Wu and Ms Cheng acted with integrity at all times. There is not the slightest indication that they sought in any way to take wrongful advantage by not at first seeking approval of the Council to construction of the dwelling under the covenant, and then in the way they did so. Historically, the covenant has very seldom come before the Council and it may not have been understood by trade and professional advisers as operative given that.
Litigation history and pleading
[9] The plaintiffs sought an injunction for non-compliance with the covenant. Mr Wu and Ms Cheng eventually sought an unconditional approval from the Council having first obtained a ‘conditional’ approval which simply required compliance with the covenant. After the Council was told about the costs of building in 5 September 2017 and an architect certified the design, it gave its unconditional approval.
[10] Mr Wu and Ms Cheng sought orders to strike out the application for injunctive relief, but Muir J held that the case should proceed to trial.1 The plaintiffs seek an order for removal of the finished dwelling and claim in negligence against the Council
1 Johns v Wu [2017] NZHC 2831.
for issuing the consent in circumstances when they say it knew, or ought to have known, that it would not meet what they say is the minimum ‘build cost’ under the covenant. They do not rely on the covenant requiring certification of an architect as to the design as there is such certification, and it is unimpeachable. The plaintiffs also seek judicial review of the Council’s decision to issue consent (thus giving its approval), saying it was unlawful because it failed to bring to account relevant factors, and that the Council made an error of fact in approving the dwelling, and otherwise acted irrationally in refusing to review its decision to unconditionally approve the dwelling.
[11] The Council is the unitary territorial authority established under the Local Government (Auckland Council) Act 2009, and the successor to the Manukau City Council. It pleads that the minimum cost of a residential building under the covenant as of 2017 was approximately $266,000.00 (plus GST), adjusted for inflation, but otherwise the covenant applies to the first residential building on the land, not to ‘additional’, ‘secondary’ or ‘minor’ dwellings. Otherwise it says the minimum build costs under the covenant apply to the aggregate building costs of all buildings on the Lot. It pleads that it exercised all reasonable skill and care in discharging its obligations under the covenant, particularised as follows:
7.1The Second Defendant exercised reasonable skill and care and duly discharged its obligations under the Land Covenant in its capacity as successor to the Transferor in issuing its approval of 5 September 2017 and says that it relied on the following information:
7.1.1Report of Practical QS dated 31 July 2017
7.1.2Letter from Sills van Bohemen dated 5 September 2017
7.1.3Letter from Seagars Valuers dated 14 June 2017
7.1.4Vector letter dated 21 June 2017
7.1.5Email from Jennian Homes dated 15 June 2017
7.1.6Auckland Council invoices dated 15 August and 13 September 2016
7.1.7Development Contribution Notice from Auckland Council dated 28 September 2016
7.1.8Watercare invoice dated 20 April 2017 and various private contractor invoices.
[12] The Council also pleads that its ‘conditional’ approval of 30 June 2017 (which left satisfaction of the covenant to Mr Wu and Ms Cheng), and its final and unconditional approval of 5 September 2017, are not judicially reviewable, as these decisions were made as successor to the transferor Manukau City Council, not as a local authority exercising a statutory and regulatory function. However, the plaintiffs refer to s 12(2)(a) of the Local Government Act 2002, that:
(2)For the purposes of performing its role, a local authority has –
(a) full capacity to carry on or undertake any activity or business, do any act, or enter into any transaction.
[13] Before embarking on analysis of the covenant and its history, the significant issues for judgment are identified as follows:
(a)Is the covenant enforceable at law, in whole or in part, and if so:
(b)What are its terms?
(c)Does it have application to secondary or further dwellings?
(d)If so, does this secondary dwelling comply with the covenant?
(e)If the dwelling does not comply with the covenant, whether an order should be made that it be removed, and otherwise relief be ordered against the Council.
B. THE COVENANT
History
[14] The Manukau City Council was the product of amalgamation of Manukau County and Manurewa Borough in 1965. In the 1960s the Council bought land to construct a city centre, some of which was sold or leased. The block known as “The Gardens” was sold to Fletcher. Mr Walton gave evidence as Principal Property Advisor to the Auckland Council. He understands the covenant was intended to prevent the construction of substantially inferior homes, such as pre-fabricated
buildings, or the relocation of properties of an inferior standard, perhaps he suggests of a ‘bygone era’.
[15] The covenant was created by a Memorandum of Transfer whereby four land titles were transferred for the sum of $287,500.00, and bound for the benefit of residential Lots on two Deposit Plans, and further residential Lots to be subdivided as “the remaining land”. It relevantly reads (italics added for emphasis):
AND WHEREAS by Agreements in writing dated the 11th day of November 1988 the Transferor agreed to sell the above described land to FLETCHER RESIDENTIAL LIMITED at Auckland (hereinafter referred to as “the Transferee” UAND IN CONSIDERATIONI of the sum of $287,500 paid to the Transferor by the Transferee (the receipt of which sum is hereby acknowledged) the Transferor DOTH HEREBY TRANSFER to the Transferee all its estate and interest in the said piece of land above described: AND IN PURSUANCE of the premises and for the consideration aforesaid the Transferees so as to bind the said land above described and for the benefit of the remaining residential lots on Deposited Plans 119341 + 119342 and further residential Lots at present or to be subdivided from the said Deposited Plans 119341 + 119342 (hereinafter referred to as “the remaining land”).
DO HEREBY COVENANT AND AGREE with the Transferor for the benefit of the remaining land not heretofore transferred by the Transferor and also separately with each and every the registered proprietors of and for the benefit of the remaining land heretofore transferred to such proprietors by the Transferor that the Transferee will henceforth and faithfully observe perform fulfil and keep all and singular the stipulations and restrictions hereinafter set forth that is to say:
(a)That they will not use the land hereby sold or permit the same to be used for any trading or commercial purpose;
(b)That they will not erect or permit to be erected or placed on the land any glasshouse exceeding 200 square feet in area or any building which has previously been erected on another site or any caravan, hut or shed to be used as a dwelling or temporary dwelling on the land;
(c)That they will not commence or allow the commencement of the erection of a residential building on the land without having first obtained the approval to the plans and specifications thereof by the Transferor in its capacity as Vendor and not as the local authority issuing the building or other permit and in respect of which the following provisions shall apply:
(i)The exterior design of the building shall be approved by an architect nominated by the Transferor, provided that such approval shall not be required if the building has been designed specifically for the land by a registered architect.
(ii)The cost of such building shall at the time of approval of the plans have a value of not less than a base figure of $85,000
adjusted by the movement of the New Zealand institute of Valuers Modal Housing Cost Index from 1st December 1986 to the date of erection. (A certificate by a registered architect or registered valuer as to such value shall be accepted by the Transferor).
(iii)That no cellulose fibre reinforced cement sheeting shall be used for the exterior walls of the building except in special design situations approved by the vendor and the use of similar products in other forms shall be subject to the vendor’s approval with each case being considered on its merits.
(d)That they will not erect or permit to be erected any such building except in accordance with the approved plans.
(e)That they will at all times keep the weeds and grass on the land under control by not allowing them to exceed 12 inches in height.
TO THE END AND INTENT that each of the said stipulations and restrictions shall enure for the benefit of all the remaining land and every part thereof PROVIDED ALWAYS that the Transferor shall not be liable for any breach of the aforesaid covenants in respect of any part of the remaining land in respect of which the Transferor shall have executed a Transfer in favour of any purchaser thereof whether or not such Transfer shall have been registered AND PROVIDED FURTHER that the Transferor shall not be liable or called upon to contribute towards the cost of the erection or maintenance of any boundary or dividing fence between the land hereby transferred and any adjoining land the property of which the Transferor but this proviso shall not enure to the benefit of any purchaser of such adjoining land.
[16] This judgment mainly concerns sub-cls (c) and (d), and this seems to be the first case to bring sharp focus to sub-cl (c)(ii), its enforceability, and the role of the Council in approval of plans and specifications for a new build, “… in its capacity as Vendor, and not as the local authority issuing the building or other permit, …”
[17] Mr Quinn, counsel for the Council, explained that the Manukau City District Scheme (as it was) became operative on 1 May 1984, and the Second Scheme was proposed in 1989 and became operative on 14 April 1993. This covenant was entered on 30 May 1990, so the original Scheme was operative, and the second Scheme proposed at that time. Under the Scheme, the property was zoned Residential 4 and a “minor household unit” was a controlled activity requiring resource consent, which had to be granted subject to any conditions lawfully imposed.
[18] The Scheme set out assessment criteria for the residential 1, 2, 3 and 4 zones, under which the Council had regard to Objectives and Policies. An application for
consent was assessed against criteria which included whether the design and external appearance of any building was sensitive in terms of its scale, form, and harmony with the amenities of the neighbourhood, and whether development, to be integrated in itself, harmonised with the neighbourhood with regard to parking, service areas, screening, landscaping, design and external appearance of any building, on or off the site. A further element of assessment was whether the degree of separation protected residential use on adjoining land. Under the Second Scheme, “minor household units” were a controlled activity subject to the same criteria. Mr Quinn submits that the planning framework under both Schemes allowed for secondary or minor dwellings provided residential amenity was maintained, to protect the privacy and residential use of adjoining sites. This gave the potential for controls on the design and external appearance of the building, and other elements of integration. He submits the covenant is consistent with this approach, allowing for further development, but only of a particular quality to preserve the amenity of the environment. There was however no reference in the Scheme(s) to ‘build cost’, or minimum build costs.
[19] In 2018, under the Auckland Unity Plan (Operative in Part) (“AUP (OP)”) this area is zoned Residential-Mixed Housing Suburban Zone and up to three dwellings per site are permitted, subject to a set of Standards including building height, coverage and landscaped area. The objectives for the Zone are to increase housing capacity and intensity, although any development should maintain residential amenity in keeping with the suburban character of mainly two-storeyed buildings. Mr Quinn submits that in the evolution from the Scheme to the AUP (OP), the planning environment has changed, moving towards greater intensity of residential use, but still maintaining residential amenity.
[20] Mr Quinn was asked by the Court to inquire into the working history of the covenant, or similar covenants, and a search uncovered at least 17 (original) deposited plans, which included on average about 10 new titles. The covenant arises from Deposited Plans DP119341 and DP119342 and 21 of the 27 titles have the covenant registered against them. Nine properties in the area have secondary dwellings and of those, only two are subject to a covenant and neither derives from the same Deposited Plan from which 26 or 35 Peretao Rise derives. There is no record of the Council approving a secondary dwelling under the covenant, or any other form of such, but
rating details reflect primary and secondary dwellings, so building and resource consents have been granted for secondary dwellings.
[21] Mr Walton, giving evidence for the Council, referred to retrospective approval under a Covenant being sought for another dwelling already constructed, at the time of its sale. Approval was sought at the suggestion of the prospective purchasers, for part Lot 2, DP128035. Like this case conditional approval was given, whereby the Council ratified the design provided it conformed to the standards and conditions set out in the relevant covenant, without saying that it did.
[22] Mr Quinn and the Council looked for other properties subject to a similar type of covenant. On several Deposited Plans at least one site with a covenant is identified. On 17 Deposited Plans up to 177 sites may be subject to a covenant and Mr Quinn says it is clear that each covenant is for the benefit of properties which were part of the original deposited plan and that there was no intention that the covenant have a wider “neighbourhood” benefit other than indirectly. The Council has not been able to demonstrate or produce any evidence of the covenant approval process in practice beyond that detailed above. It would require a manual search of hard copy property files, not made available to the Court.
[23] Mr Quinn says the Council’s role in approving the covenant should be seen as a “certifier” not decision-maker. As a “certifier” it only has to know whether the exterior design has been approved by an architect nominated by the Council, or the dwelling been designed for the land by a registered architect; from a registered architect or registered valuer whether the build costs are of the “appropriate value” under the covenant; and that no cellulose fibre reinforced cement has been used for exterior walls. Subject to that, he says the covenant does not allow the Council any discretion. That begs the question of whether the dwelling meets the requirements under sub-cl (c) in any given case, but Mr Quinn is right that the Council can lawfully give its approval based on certifications of professional valuers and architects, and does not have to analyse the minimum build costs and whether they comply with the covenant, whatever it may mean.
[24] The principal issue for judgment derives from discontinuance of the Index, more than 25 years ago. The Index was discontinued about the time this covenant was entered and there was no substitute for it either through the Institute of Valuers or otherwise. For the covenant to be enforceable there has to be an equivalent to the Index, to provide a simple and consistent basis for certification as to build costs, or it becomes arbitrary, and thus unenforceable, and that is plainly not what the covenant was intended to achieve. Most of this judgment is concerned with this issue.
C. OVERVIEW OF EVIDENCE
[25] Mr Wu and Ms Cheng applied to the Auckland Council for a building consent on 1 July 2016, and commenced construction in June 2017 without seeking the Council’s approval required by sub-cl (c) of the covenant. The exterior design was not approved by a registered architect nominated by the Council, nor was the dwelling designed for the land by a registered architect. Although they were not at first alive to the covenant, once neighbourhood opposition was raised Mr Wu and Ms Cheng, already well into the build, sought Council approval.
[26] They spoke to the occupiers at 24 and 28 Peretao Rise, but the plaintiffs were not home. They spoke to the owners of 42 Kuripaka Crescent at the rear of the property who did not raise any issue at the time, and at 44 Kuripaka Crescent the owners were content with their plans. They saw that the properties bound were those at 3, 26, 28 and 35 Peretao Rise, and thought that the complaint came from the plaintiffs. When they visited them, the plaintiffs said they had lodged a complaint about the dwelling being constructed in breach of the covenant.
[27] Mr Walton for the Council reviewed the plans submitted with the building and resource consent applications, with the covenant to hand. He drafted a letter of approval dated 30 June 2017 which was sent out by a Council manager under delegated authority. The letter recorded Council approval, provided the building met the requirements of the covenant. It thus begged the question of whether the building would so comply, except by saying that it had to. To comply with the minimum build costs, the certification of a registered architect or valuer would suffice, but how they
would calculate such build costs was left to them in the absence of the Index, without any guidance.
[28] On 4 and 5 September 2017, Mr Walton received further information from Mr Wu and Ms Cheng, and he thought that it was “plain and reasonable” for anyone reviewing this to conclude that the dwelling exceeded the minimum build costs under the covenant.
[29] Mr Stevenson gave expert evidence for Mr Wu and Ms Cheng as a registered valuer and consultant employed by Seagars. He has long experience including membership of the Land Valuation Tribunal. He has been an expert witness on a number of occasions, and has been extensively involved in South Auckland land valuations since 1973. His evidence calculates the June 2017 equivalent of
$85,000.00 from December 1986. He peer reviewed the evidence for the plaintiffs.
[30] Seagars have maintained the cost of a ‘Modal house’ as a basis for statistical analysis of costs of other buildings, adjusted regularly by the “general increase in building costs and after consultation with quantity surveyors”. Mr Stevenson used the Index up to mid-1989 and Seagars’ own Modal House Cost estimates from that date onwards. He made a report of 14 June 2017 and then he was asked to review the effect of GST. He says that the movement in the Modal rate from December 1986 to June 2017 is up to 213 per cent and the $85,000.00 base figure has an equivalent value as at June 2017 of $266,000.00 plus GST or $241,752.00 plus GST depending on whether the base figure was inclusive or exclusive of GST.
[31] The actual costs incurred to erect the dwelling were $313,875.20, reflected in the Schedule to this judgment, but the plaintiffs say that those costs include components which are not part of the ‘build cost’ for the purpose of the Index and thus the covenant. Mr Wu and Ms Cheng provided supporting evidence of all payments reflected in the Schedule, but for $8,161.99.
[32] Mr Foote, a registered valuer, gave evidence that the value (not cost) of the dwelling was $335,000.00 as of June 2017 and at March 2018 he says the prime source documents which support his expert opinion have not been inspected for the plaintiffs.
[33] Mr White, giving evidence as an expert for the plaintiffs, referred to the discontinuance of the Modal Index. He consulted the New Zealand Statistics Department who advised that an appropriate replacement index was the Residential Capital Goods Index (RCGI), which he used. That records values back to 1989, not the period 1986-1989 when interest rates were abnormally high and building costs rose significantly. Mr White obtained records of the Modal Index for 1986 and 1987 and says it was based on build costs of $590.38/m2 in 1986, the average cost per square metre to build a standard Modal house of 92.9m2 in Manukau that year. (The witnesses differ about the size of the Modal house, but it was about 93m2 ). If the base build cost was $85,000.00 in 1986 when the Modal rate was $590.38/m2, Mr White said that would require a dwelling of 144m2 to be built (the covenant does not dictate the size of the house as such, nor the quality). That size dwelling, although not dictated by the covenant, was used by Mr White to apply his firm’s own “Standard Modal Rate” of $2,000m2 in Q2 2017, an increase of 238.76 per cent from 1986,
$287,946.00 plus GST.
[34] Mr Arugaman gave expert evidence for the plaintiffs as a chartered quantity surveyor. Under the professional name Prendos, he made a “preliminary cost estimate”. He excluded certain costs, not physically connected to the dwelling, such as removal/demolition, services outside the building, professional, legal and statutory fees, fittings and fixtures not in the estimate, financing, and GST; total costs of
$176,154.00 plus GST. Mr St John says that this does not fit with the plaintiffs’ acceptance of actual costs of the works incurred, reflected in the Schedule to this judgment.
[35] Mr Atkins swore an affidavit as a quantity surveyor, practising under the name “Practical QS”. He included a construction costs estimate of $308,722.00, external works of $31,402.00, professional and other fees of $27,650.00, and other PC allowances for landscape, contracts work and legal cost, of $6,500.00, a total of
$374,274.00 including GST.
[36] Mr Stevenson did not at first comment on the $2,000m2 figure adopted by Mr White for the plaintiffs, but it compares with Seagars’ own modal rate of $1,750m2. Mr White treated the base figure of $85,000.00 as exclusive of GST, but the covenant is silent on this point. As GST was introduced on 1 October 1986, and the land covenant was registered on 30 May 1990, the base build costs figure was to be adjusted having regard to a commencement date of 1 December 1986, both after the introduction of GST. Valuation guidelines require clarity about GST and most residential valuations are expressed as “inclusive”, and commercial/industrial valuations “exclusive” of GST as that is how they trade in the market.
The ‘Modal’ house and The Index
[37] The evidence which I accept is that this 60m2 dwelling built of weatherboard is of “pretty good quality” and “built quite well”, with a stud higher than usual, more than a standard kitset, and of a better type of construction. The plaintiffs’ evidence wrongly in my view paints a less flattering picture, but theirs is a subjective and adversarial perspective.
[38] I accept the evidence of Mr Stevenson who said the Modal Housing Index was based on a “pretty basic design house back in the 60s”. Some valuers have kept their own “Modal Index”, mainly for insurance purposes based on a benchmark square metre rate for construction, of a three bedroomed, one bathroom, timber-board home, of the kind which founded the Modal Housing Cost Index. The expert witnesses approached an ‘equivalent’ to the Modal Housing Index differently, and that approach depended in part on the valuation businesses with which they work. They set a range between $1,750.00 to $2,000.00 per m2 which, from a base of $85,000.00 until 2017/2018, makes a significant difference in itself.
[39] There is and has been no single and authoritative publication of rates equivalent to the Modal Housing Index. Its original purpose has long since gone, so no one could comparably, consistently, and simply, calculate what the build costs should be under the restrictive covenant. When the Index was in force, that was a very simple exercise.
$85,000.00 build costs in 1986 would escalate over the years by the movement in the Index. Any registered valuer or registered architect, even a lawyer, could do the sums.
No reference to the size of the dwelling was needed. It could have been small but of higher specification, or larger and of more modest specification. It just had to reach the minimum costs figure, whatever the size. That movement in the Index was based on the movement in the costs of building the modal house, but that did not dictate the size of any house subject to the covenant.
[40] The first issue addressed below is whether the covenant is still enforceable as to the minimum ‘build cost’, given that the mechanism for determining the minimum build costs was discontinued so long ago. Mr Round for the plaintiffs says the Court should give the reference to the Modal Housing Cost Index such meaning as it would convey to a reasonable person with all relevant background knowledge available to the parties when the covenant was entered. He says that is a “common-sense interpretation” against the “obvious factual background”, as that is what the parties intended.
[41] Of course, had the parties realised the Index had already been discontinued or was about to be, the same common-sense would have reflected in another mechanism, if there was one available. There has been no alternative to the Index available, but Mr Round submits that this is not a problem and a new and equivalent mechanism should be found, so the minimum cost requirement may live on, buttressed and determined by this judgment. The plaintiffs rely in substantial part on the evidence of Mr White and Mr Round says his “largely objective mechanism” helps determine the minimum build cost under the Covenant to be set against the relevant costs of this dwelling as reflected in the Schedule. The left-hand column records all the actual costs associated with construction of the dwelling, and the right-hand column sets out “claimable” costs which the plaintiffs say are those relevant to the covenant, excluding those which they say are irrelevant. It also reflects some elements marked “*”, for the purposes of this judgment, those held by the Court to be claimable on a narrow construction of the covenant.
[42] The Court has been left short of sound evidence about the components of build costs contemplated under the covenant, as they are those which made up the $/m2 Modal rate in 1986. This is critical to its meaning yet the parties are in dispute as to those components. They should not have been as there must be evidence available
somewhere of how the Modal rate per m2 was calculated in 1986, based on the size of the house, and a certain standard of materials. In the end, it does not matter, as this judgment demonstrates.
[43] The plaintiffs say that build costs come to approximately $270,000.00 based on the Schedule’s ‘claimable’ costs, below the minimum required under the Covenant as they assert it. Mr St John says the natural and ordinary meaning of sub-cl (c) is the total cost to construct. The plaintiffs say the costs are exclusive of GST, but as the covenant was executed in 1990 and GST was introduced on 1 October 1986, they are deemed to include GST as costs of residential property are GST inclusive. Mr St John says that the actual costs of $313,875.20 (inclusive of GST), are made up of:
(a) Construction: $263,163.73;
(b) Design: $11,511.50;
(c) Landscaping: $6,279.58;
(d) Council: $18,219.79;
(e) Earthworks: $920.00;
(f) Services: $2,012.50;
(g) Contribution: $11,769.10.
[44] Although he does not know the components which went into build costs under the Index, Mr St John says the Modal Housing Cost Index was created to follow the cost of the New Zealand Housing Corporation’s modest but good quality construction of a standard three-bedroom State House of 96m2, the sort of Housing Corporation stock built in Otara and Mangere. Mr Stevenson agrees that the Modal rate came from a “pretty basic designed house back in the 60s”. Mr St John says the restrictive covenant had no backstop when the MPI was discontinued, and that there is “no useful analogy”. He points out correctly that how each valuation firm calculates its own ‘Index’ was not explained, but essentially, it was to provide a benchmark for the m2 rate for today’s construction for a similar three-bedroom, one bathroom, timber board home. None of the valuer witnesses were responsible for calculating the numbers to which they referred, but rather gave evidence of the variation between $1,750m2 to
$2,000m2, some $24,000.00 for a 93m2 or 96m2 house. None of the witnesses knew how these figures were calculated “in house” nor how the rates were published. Mr
Stevenson’s evidence was that the $85,000.00 would adjust to $241,752.00 (exclusive of GST), and $266,000.00 (inclusive of GST) depending on whether GST was included in the base $85,000. Mr White’s evidence for the plaintiffs referred to a “Modal Building” of 144m2m and a $2,000 m2 build cost, with his adjusted base price of $287,946.00 (plus GST). Mr Atkins’ estimated build costs as a ‘valuation’ from the plans of $374,274.00 (GST inclusive), and this information was given to the Council. I will return to evaluate this evidence.
Inspection
[45] Although it does not bear on the outcome of this judgment, the Court inspected the dwelling, and despite some nearby residents telling Mr Wu and Ms Cheng that this is a “nasty building” which devalued their properties, it has been approved by a registered architect nominated by the Council, and the dwelling is, as they describe, a simple and well presented small dwelling tucked away at the back of their property. The dwelling is not visible from the street, nor from the plaintiffs’ house, as it is separated by two houses and a two-storey dwelling. The property slopes away from the street and the dwelling sits at the rear of the section, shielded in part by a fence. Mr Wu and Ms Cheng gave evidence of their builder being harassed and verbally abused, which Mr and Mrs Johns deny. A flyer of 12 August 2017 was critical of them for their “sub-standard building” said to be to the detriment of all properties in The Gardens, and there were complaints of professional incompetence against the quantity surveyor and the architect engaged in the approval process, but these were not made by Mr and Mrs Johns.
A perspective
[46] It will assist the reader of this judgment to understand that even with the wind blowing entirely in the plaintiffs’ favour, with the covenant recast as they contend, and assuming this ‘secondary dwelling’ falls within the covenant, with only ‘claimable’ costs included as they contend (see Schedule), this “transgressing” dwelling would fall short of the plaintiffs’ Index ‘equivalent’ by some $15,000.00. This is telling. Any build costs figure put to the Council or certified by a valuer or architect in terms of an estimate or quote will be variable, and usually costs go up, not down, unless subject to a fixed price quote. Estimates are notoriously on the low side. Another way of
looking at this is simply to say that something could be added to the dwelling which costs $15,000.00, for example a higher quality storm water system. Further, and more telling, is that there is no evidence as to what the alleged breach of the Covenant means to the plaintiffs in monetary or other terms. There is no evidence of loss of value, indeed no evidence of any loss at all. That is not surprising. This is a small, presentable, unobtrusive dwelling.
[47] This led to a pointed discussion with Mr Round during his closing submissions, and he realistically responded, while conceding nothing, by saying that rather more important than the fate of this dwelling to the plaintiffs and others who seek enforcement of the covenant, is that this judgment holds it still has a place, enforceable as to minimum build costs by some mechanism which the Court is asked to find. His concern only relates to minimum build costs, as the other terms of the covenant are enforceable, as to design and materials, assuming they relate to secondary or minor dwellings and multi-unit development.
[48] However, even getting to the point where the plaintiffs are held right in their approach to minimum build costs, they must surmount several obstacles, beginning with the enforceability of sub-cl (c)(ii) of the covenant, as a matter of law. There is no Modal Housing Index, and no clear substitute for it. It was associated with then Housing Corporation stock. There is evidence in this case of what it might look like if it were in force today, but that evidence differs. It is contested whether the covenant or any substitute for the Index applies to a secondary dwelling, and Mr Quinn queries whether the covenant is relevant in the current planning context, with new controls and standards under the City Plan, although of a different hue, and a move towards greater intensification of land use.
D. ISSUES RELEVANT TO INTERPRETATION AND ENFORCEABILITY OF THE COVENANT
The ‘costs’ or ‘value’ calculation under the covenant
[49] The apparent ambiguity as to whether the covenant applies to the minimum build ‘costs’ or the ‘value’ of the building in sub-cl (c)(ii) is illusory. Both words are used. ‘Costs’ and ‘value’ are not the same thing and the drafting is imprecise. Counsel
agree that the covenant measures build costs, not value, and that has support from the context. That word appears first in the clause, and ‘value’ I find is meant in the mathematical sense (i.e. where cost x = $80,000 the ‘value’ of cost x = $80,000). The sub-clause is from the outset about costs. That is my conclusion but another compelling factor is that the Modal Housing Index was based on the build costs of State housing, as opposed to the market value of State housing. It would be odd to fix a value against a costs index. Further, build costs calculated from a base dollar figure, adjusted by movement under an Index which is tied to a specific type and standard of housing, are more easily measurable than value, and less subject to uncertainty. In the planning stage of construction, quoted costs or an estimate can be produced, whereas a market valuation off the plans would require a third party valuer to be involved, or for the Council to carry out a valuation in a notoriously difficult setting. An architect would have no role in such a “valuation” exercise.
What ‘build costs’ are relevant to the operation of the covenant?
[50]Mr Wu and Ms Cheng say that the actual build costs incurred were
$313,875.20 (GST inclusive) reflected in the Schedule. Mr Round say that such costs should exclude some items in the Schedule to leave only those “claimable”, as Mr Stevenson calculated the inflation adjusted $85,000.00 by such index. He did not break out the build components but simply extrapolated the $/m2 rate from 1986 and then used an in-house version of the Modal Housing Index.
[51] Mr Walton, giving evidence for the Council, said that when it received further information about build costs from Mr Wu and Ms Cheng, and an architect’s report, it was reasonable for anyone reviewing this information to conclude the dwelling exceeded minimum build costs under the covenant. He did not address the exclusion of some costs as too removed from construction of the physical dwelling.
[52] It is of fundamental importance to know what components make up the build costs. The plaintiffs say such costs are those of constructing the building, the ‘hard’ components in the Schedule under ‘claimable’. The alternative view is that build costs extend to some or all ‘ancillary’ costs such as landscaping etc, and costs necessarily incurred such as consent fees. The Council takes no position on this issue, saying that
whatever the correct interpretation the threshold is met on a ‘best endeavours’ approach to find and apply a substitute mechanism for the Index.
[53] I have said there should not be such irresolution about this issue. The Index was derived from a standard but good quality (approximately) 93 m2 house which had a certain $/m2 build cost in 1986. This was the foundation for the $/m2 movement in the Index each year. The components of such a house must have been known in order to calculate the $/m2 figure in 1986 and beyond. There are other elements of a building project for a dwelling which go to make up the overall costs. I have considered the Schedule to this judgment, and the costs actually incurred and would exclude only those items which seem to me too far removed from the “cost of such building”. This is debatable, another uncertainty about the meaning of the covenant. Some elements of the Schedule which the plaintiffs exclude seem to me within the contemplation of what build costs the parties intended. I simply do not know. As it happens, even if I take the best case for the plaintiffs, and use the Schedule’s ‘claimable’ costs, with very minor inclusions of my own, it makes no difference to this judgment.
[54] I add some components from the left hand ‘actual’ column in the Schedule in the column “Added by Court”, as that in my view must be part of the build costs. This is to take a conservative approach, of advantage to the plaintiffs.
The architectural and retrospective minimum build costs certification
[55] These are not in issue. Architectural certification was provided under sub- clause (c)(i), although after construction had begun. Actual costs are known and retrospective approval relates to these, thus more accurate than an estimate.
Does the covenant apply to “secondary” dwellings?
[56] An interesting perspective on this question arose when Mr Wu said that he intends to subdivide, so this secondary dwelling will in the future become the principal dwelling on the subdivided section.
[57] At the hearing before Muir J, Mr Wu and Ms Cheng contended that the minimum build cost applies only to a primary or principal dwelling. This argument
was not pursued before me; their position in closing submissions being that “the meaning [of the covenant] is plain enough… a covenantee was required to ensure that any secondary dwelling was built to a minimum cost by reference to the [Modal] index”. The Council says this issue is unresolved, but did not make submissions, saying it is between the plaintiffs and the first defendants. The plaintiffs, obviously, maintain that the minimum build cost applies to all dwellings, not just this “secondary” dwelling, so would comprehend all units in an intensive development such as three townhouses.
[58] On the plain meaning of the words used in the covenant, the minimum build cost applies to all dwellings on the land. A distinction between ‘primary’ and ‘secondary’ dwellings does not reflect in the covenant. If a distinction had been intended it might reasonably be assumed that the drafters would have made that clear. There are good reasons why the parties may have intended the minimum build cost to apply beyond the primary dwelling including the possibility of subdivision. As Mr Round says, if the covenant were to be exhausted after the building of a primary dwelling “it would be a simple matter for a covenantor to build a small dwelling that barely met the requirements of the covenant, and then build whatever other further dwellings they saw fit”, subject to The Plan, which he says would defeat the clear intent of the covenant to maintain a certain standard of dwelling.
[59] A difficulty with this interpretation is that it constrains the ability to construct secondary dwellings on the site. The base figure, adjusted according to the Index, founds a minimum build costs requirement for a modest but good quality family home, probably bigger than the Modal House, of some 93m2 given the base costs of $85,000. The fact that there is a minimum cost requirement but not a minimum size requirement means that the intent of the covenant is primarily to control quality, not quantity. If that same base figure is applied to a secondary unit or ‘granny flat’ such as the dwelling in this case, that would be to hold the smaller unit to a quality standard or size matching the primary dwelling which seems to be something more than the Modal House, in size at least, for the purpose of this covenant.
[60] One of three conclusions can be drawn. First, the covenant says exactly what it means and the intention was to hold all dwellings to the same minimum build cost.
This view would be onerous and not in keeping with the more general purpose of the covenant, which is maintaining as a minimum a good standard of construction, and likely bigger than the Modal House. Secondly, it could be that the covenant sought to effectively bar people from building secondary dwellings, or at least dissuade them from doing so, by making it expensive. This would not be in keeping with the planning framework then or now, which permitted and permits the construction of what were once called ‘granny flats’ or perhaps now elderly parents’ flats. It is reasonable to assume that the drafters would have expressed such a purpose in a discrete clause had this been their intention. Thirdly, it could be that the covenant is clumsily worded, but the intent was to ensure that at least one dwelling on the property was up to the minimum build cost.
[61] For several reasons, I have come to the view that the third conclusion is correct. The covenant is clumsily worded overall, so it is not surprising that it is clumsy here too. The sub-clause which prevents the erection of sheds for use as dwellings adequately deals with the possibility that a really substandard smaller building might be put on the property. The overall intent of the covenant – to maintain aesthetic and property values in the area – is thus secured, as there must be at least one dwelling which meets the required minimum costs, and of an approved design, meanwhile owners are not precluded from building secondary dwellings (which will almost always add value). Third, a curious result of interpreting the covenant as restrictive of secondary dwellings is that it might lower property values. In the current housing market, the ability to produce rental income by constructing a secondary dwelling is attractive. A barrier to such might put off prospective purchasers.
[62] This interpretation gives effect to the intention of the drafters, and parties to the covenant to maintain a minimum standard and with reference to the base figure the size of the principal dwelling. Although the minimum build cost does not apply to secondary dwellings the other quality protections in the covenant may still apply. There is no inconsistency or absurdity arising out of requiring secondary dwellings to conform to the other requirements as to design and materials, and so in the case of these clauses the plain meaning – that they apply to all dwellings – applies.
[63] The Operative (part) Plan now permits infill housing in the area, and for a number of smaller dwellings to be built on a plot – none of which would be ‘primary’ or ‘secondary’ but ‘equivalents’. This demonstrates how the planning and consent framework has changed since the drafting of the covenant, but it cannot change the interpretation of the covenant itself. At least one dwelling on the land must conform to the minimum build cost of $85,000.00 adjusted of the Model Housing Index, and such minimum build costs cannot in my view be met by adding up the costs of more than one dwelling.
[64] This finding of itself means the plaintiffs case must fail. The minimum build cost restriction does not apply to Mr Wu and Ms Cheng’s secondary dwelling. However, this case raises other important issues about the interpretation of the covenant that will potentially affect future developments. For this reason, and in case I am wrong about the applicability of the minimum build cost of secondary dwellings, I will address those issues.
E. IS THE COVENANT ENFORCEABLE IN WHOLE OR IN PART?
The competing positions
[65] Mr St John for Mr Wu and Ms Cheng says the covenant is unenforceable as to minimum build costs as there is no Index and the Court cannot and should not find a substitute for it. Mr Quinn for the Council says its utility has reduced with changes to the planning framework through the evolution of the Schemes, and to the AUP (OP), and he suggests the need for the covenant has, in that sense, passed. He says it was useful in supporting intended outcomes for the residential zone, when it was created, but the planning objectives have changed and the permission, indeed expectation is now for more intensive development. Restrictions on development are contrary to that end, if the covenant has a dampening effect on these objectives. He says the covenant may conflict with the AUP (OP) which allows three dwellings on one site as a permitted activity. If the covenant applies as the plaintiffs contend, to each of three dwellings, he submits that is a ‘barrier’ to permitted activity by multiplying the base build costs adjusted by the Index (or equivalent) beyond what he says was intended, to control the size and quality of the principal dwelling. Mr Quinn also suggests the covenant is no longer required to ensure development to an appropriate standard, as
the AUP (OP) restricts building location and height, so appropriate residential amenity is maintained. In short, he says the utility of the covenant has expired. All this is contested by the plaintiffs who say the covenant sets minimum build costs with “aesthetic” standards protective of residential amenity and should continue to have that effect, with the mechanisms for determining minimum build costs set by this judgment now and for the future.
[66] The covenant as to minimum build costs can only ‘work’ in practice if the essential components of the Index can be replaced. The plaintiffs say this is a matter for rectification so that the covenant reads as Mr Round says the parties intended.
Interpretation / a replacement mechanism for the Index?
[67] A restrictive covenant will be construed in accordance with principles of contractual interpretation.2 It will be construed in the context of the environment in which it was intended to apply.3 Although covenants are on the Land Register and thus public documents, authority suggests the Courts are not constrained by rules of interpretation that apply to public documents.4 The starting point is the natural and ordinary meaning of the words in the covenant, but such a meaning is not attributed to the parties if they plainly intended another meaning.5 Under the law of contract, there must be certainty as to the essential terms. If the wording is unclear as to an essential term, and the Court is unable to attribute to the parties any particular contractual intention, then as a matter of law there may never have been a concluded contract.6 In this case, there was a clearly expressed intention, to impose minimum build costs, by the very simple mechanism of adjusting $85,000.00 in 1986 by the movement in the Modal Housing Index.
[68] The Index, the core component of this mechanism, has been long disestablished. Mr Quinn puts it that as there is no empirical equivalent to replace the
2 Elizabeth Toomey (ed) New Zealand Land Law (3rd ed, Thomson Reuters, Wellington, 2017) at [10.16.01].
3 Bonnar v Summerland Property Development Ld (2002) 8 NZCPR 616.
4 Big River Paradise Ltd v Congreve [2008] NZCA 78, [2008] 2 NZLR 402.
5 Yoshimoto v Canterbury Golf International Ltd [2001] 1 NZLR 523 (CA); Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 (HL).
6 Burrows, Finn, and Todd Law of Contract in New Zealand (5th ed at [3.7.6]; Scammell v Ouston
[1941] AC 251, 1 All ER 14.
Index, does that mean it is unenforceable, or is there another way in which the covenant can retain its lawful effect? The Court can in certain circumstances (discussed below) fix a new mechanism, or simply adopt a ‘static’ or ‘mobile’ interpretation. In Big River Paradise Limited, the Court of Appeal said:7
Where a court has a choice between a static or a mobile interpretation, the result of adopting the mobile interpretation is not to change the scope of the underlying contract.
[69] The central interpretative issue is whether the intention of the parties can and should be given effect by the Court’s finding of an ‘equivalent’ minimum build cost formula. Mr Round says that the drafters foresaw that adjustments to the base figure of $85,000 would need to be made over time, and reference to the Index, which had been established since the 1960s, demonstrates a long-term mechanism was intended to work. He is right as the movement in the Index provided an easy reference point to ratchet up the $85,000.00 base figure.
[70] He says this is not the first time the Court has been asked to determine whether a covenant may be rectified in the face of either a mistake in drafting or changes to extrinsic standards. At the heart of this exercise is the presumed intent of the parties. In Hosken v Wu, it was held that the proper approach to interpreting contractual provisions is to:8
Give them a meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the [original] parties in the situation they were in at the time of the contract.
[71] In Attorney General v Hodgson a right of way for ‘carriages’ in a nineteenth century easement was interpreted to include motor cars.9 In Texaco Antilles Ltd v Kernochan, the phrase ‘public garage’ was interpreted to include a petrol station.10 Although such an establishment was unknown at the time of the contract, the Court applied a ‘mobile interpretation’ and asked whether, if such an establishment had existed at the time, it would have been considered as falling within the definition.
7 Big River Paradise Limited v Congreve, above n 4 at [21].
8 Hosken v Wu [2013] NZHC 1506, (2013) 14 NZCPR 603 at [21].
9 Attorney-General v Hodgson [1922] 2 Ch 429.
10 Texaco Antilles Ltd v Kernochan [1973] AC 609 (PC).
Mr Round refers to Westminster City Council v Duke of Westminster.11 The parties to a lease chose to enter a covenant requiring that the premises be used to provide “dwellings for the working classes within the meaning of the Housing Act 1925 or any statutory modification or re-enactment for the time being in force.” After that term was taken out of the legislation, the Court held that the clause was still valid, as there was no evidence that the term ‘working class’ was obsolete, notwithstanding there was no longer a statutory definition.
[72] Mr Round submits that the Court should substitute a new mechanism in line with the intention of the parties at the time the covenant was entered, and there is evidence of ‘in-house’ modal rates said to approximate as what the Index might have represented in 2017. The plaintiffs accept that different valuers have different mechanisms for working out their ‘modal rate’ so they will differ as a matter of professional opinion. They submit Mr White’s modal rate should be preferred as they say that used by Mr Stevenson would meet only the cost of constructing an inferior dwelling.
[73] Mr St John submits that reference to the Index shows that the covenant proposed dwellings to be comparable in standard to Housing Corporation stock being built at the time, in the area. This is not quite right as the covenant adopted a base build costs figure of $85,000.00, which on the evidence was more than the build costs of the ‘Modal House’ some 93m2 at $590.00 $/m2. The covenant does not require a modal house to be built. Otherwise, he says the covenant does not anticipate any ‘backstop’ mechanism, and there is no sufficient analogy to the Index to keep its provisions alive. While some valuation firms have created their own ‘modal’ indices, these have been used primarily for insurance purposes, and how each firm calculates its own index varies, and that is not explained in the evidence before the Court, which he submits is vague. The witnesses did not know how $/m2 rates were calculated by their valuation businesses ‘in-house’. The $/m2 examples before the Court differ by up to 10%.
[74] Mr St John says the difficulties in this case of trying to find or calculate an equivalent to the Modal Housing Index means that nobody concerned with application
11 Westminster City Council v Duke of Westminster [1991] 4 All ER 136 (Ch).
of the covenant can readily ascertain the minimum build costs in today’s money. He agrees that the cases discussed in Big River Paradise Limited support the Court being able to substitute an alternative mechanism. However, he says there are limits to this and when the Court has a choice between a static or mobile interpretation, the result of adopting the mobile interpretation is not to change the scope of the underlying contract. That is another way of saying the bargain, and the intention of the parties, must remain the same.
[75] He submits that the essential mechanism to determine the build costs no longer exists and there is no construction or interpretation that can rescue the restrictive covenant from this deficiency. He says that the only way the restrictive covenant can become enforceable is if it is rectified. He refers to Preston & Newsom at page 170:12
Alternatively, the contractual machinery for resolving some matter might be frustrated, ineffective or lacking. If, in such a case, the court concludes that the true intention of the parties is that the matter is to be resolved in some objective manner, e.g. by reference to fairness or reasonableness, and that any stated machinery is inessential, the court can use its procedures to resolve the matter by inquiry and adjudication. [footnotes omitted]
[76] That essentially is what Mr Round asks the Court to do, but Mr St John refers to Associate Judge Doogue in Stockco Limited v Denize when he said:13
…[the] authorities only allow a party to fix a term when there is some objective criteria to be applied, such as the usual terms common in a particular trade or profession.
[77] Tipping J in Wellington City Council v Body Corporation 51702,14 discussed certainty in contract law:
[30] The position can be summed up in the following way. The essence of the common law theory of contract is consensus. It follows that for there to be an enforceable contract, the parties must have reached concensus on all essential terms; or at least upon objective means of sufficient certainty by which those terms may be determined. Those objective means may be expressly agreed or they may be implicit in which that been expressly agreed.
12 George Newsom, Preston & Newsom; Restrictive Covenants Affecting Freehold Land, (10th ed, London: Sweet & Maxwell, 2013) at 170.
13 Stockco Limited v Denize HC Auckland CIV-2010-404-5668, 22 February 2011 at [28] per Doogue AJ.
14 Wellington City Council v Body Corporate 51702 (Wellington) [2002] 3 NZLR 486 (CA) at [30]; see also Sharples Logging Limited v Weyerhauser New Zealand Limited HC Nelson CIV-2006- 442-000260, 3 April 2009 at [21]-[22].
Taking price as an example, for a contract to be enforceable the parties must have agreed upon the price, or at least they must have agreed upon objective means sufficient certainty whereby the price can be determined by someone else, or by the Court. If the price is left for later subjective agreement between the parties, the contract is not enforceable.
[78] Mr St John also refers to Sudbrook Trading Estate Ltd v Eggleton,15 where the House of Lords upheld a contract with a machinery provision for fixing the price of freehold properties. A provision to fix the price at a reasonable value determined by professional valuers was held to be decisive. Although the machinery was defective, it was objective. The Court provided its own machinery to uphold what was otherwise a valid contract. In Money v Ven-Lu-Ree Ltd,16 the Court was concerned with the sale of shares as opposed to property. There was no machinery to calculate the price or mediate a dispute between valuers, but as the Privy Council found the parties had mutually agreed the price was to be determined on an “objective” or “market” basis, the machinery was certain, and the price capable of determination by objective criteria.
[79] The position in New Zealand was made clear in the judgment of Blanchard J in Fletcher Challenge Energy Limited v Electricity Corporation of New Zealand Limited,17 where His Honour observed:
[62] We agree with Professor McLauchlan (“Rethinking Agreements to Agree” (1998) 18 NZULR 77 at p 85) that ‘an agreement to agree will not be held void for uncertainty if the parties have provided a workable formula or objective standard, or a machinery (such as arbitration) for determining the matter which has been left open’. We also agree with him that the Court can step in and apply the formula or standard if the parties fail to agree or can substitute other machinery if the designated machinery breaks down. This is generally the approach taken by this Court in Attorney-General v Barker Bros Ltd.
[63] However, if essential matters (ie legally essential or regarded as essential by the parties) have not been agreed upon and are not determinable by recourse to a mechanism or to a formula or agreed standard, it may be beyond the ability of the Court to fill the gap in the express terms, even with the assistance of expert evidence…It will be a matter of fact and degree in each case whether the gap left by the parties is simply too wide to be filled. The Court can supplement, enlarge or clarify the express terms but it cannot properly engage in an exercise of effectively making the contract for the parties by imposing terms which they have not themselves agreed to and for which there are no reliable objective criteria.
15 Sudbrook Trading Estate Ltd v Eggleton, [1983] 1 AC 444, [1982] 3 All ER 1.
16 Money v Ven-lu-Ree Ltd, [1988] 1 NZLR 685 2 NZLR 414 (CA), [1989] 3 NZLR 129 (PC).
17 Fletcher Challenge Energy Limited v Electricity Corporation of New Zealand Limited [2002] 2 NZLR 433 (CA) at [62] per Blanchard J.
Rectification / Implication
[80]Burrows Finn and Todd refer to the doctrine of rectification in this way:18
Equity has long dealt satisfactorily with cases where the parties have genuinely consented to all the terms of some contractual arrangement, but the terms in which the agreement are recorded do not accurately represent the mutual intentions of the parties. The document in question need not be purely contractual documents creating an interest in land such as leases or mortgages come within the equitable principle. In such cases the courts may order that the written instrument be rectified (that is, the writing recording the alleged agreement is corrected so that it reflects the true intentions of the two parties), allowing the court then to give effect to the modified document.
[81] Four criteria for rectification were outlined by Gibson LJ in Swainland Buildings Ltd v Freehold Properties. Parties seeking rectification must show that:19
(a)The parties had a common or continuing intention whether or not amounting to an agreement in respect of a particular matter and the instrument to be rectified (it is not enough that each party has formed a similar but uncommunicated belief as to a matter20);
(b)There was an outward expression of the accord;
(c)The intention continued at the time of the execution of the instrument sought to be rectified; and
(d)By mistake, the instrument did not reflect that common intention. [emphasis added]
[82] The doctrine of rectification does not seem to have application in this case. The covenant correctly set down the common intention of the parties. There was no mistake. There is no evidence that an alternative mechanism was ever contemplated if the Index was discontinued, and the discontinuance was about the same time the covenant was executed and registered. If a substitute mechanism is available, it must be available as a matter of construction of the contract alongside the appropriate rubric of an implied term, by ‘necessary implication’. Burrows Finn and Todd state that this is the appropriate course “when the drafter of the contract has omitted to cover a certain contingency, and this omission, unless remedied, may thwart the contract’s
18 John Burrows, Jeremy Finn, and Stephen Todd, above n 6, at 336.
19 Swainland Buildings Ltd v Freehold Properties [2002] 2 EGLR 71.
20 Kiriacoulis Lines SA v Compagnie d’Assurances; Maritime Aeriennes et Terrestres (CAMAT)
[2002] 2 Lloyd’s Rep 581 at 592.
purpose”.21 That seems arguably the case here – the covenant’s drafters did not consider the contingency of the Index being discontinued, although they should have.
[83] The classic statement of legal principles regarding implied terms of this type is that of the Privy Council in BP Refinery:22
[F]or a term to be implied, the following conditions (which may overlap) must be satisfied: (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that ‘it goes without saying’; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract.
[84] However, the Privy Council more recently clarified the use of this test, saying:23
[It] is best regarded, not as series of independent tests which must each be surmounted, but rather as a collection of different ways in which judges have tried to express the central idea that the proposed implied term must spell out what the contract actually means, or in which they have explained why they did not think that it did so.
[85] There is disagreement about whether the BP Refinery test remains authoritative, both in the UK24 and in New Zealand.25 Whether on the BP Refinery test, or on the modified, more streamlined Belize Telecom test, there is a case to be made here that a term should be implied. Although the term ‘business efficacy’ is perhaps not so apposite in a case involving a covenant, without a substitute mechanism the covenant will fail in one important respect and in that respect will cease to be ‘efficacious’. Implying such a term would not contradict any express term of the contract – it would just breathe new life into the term which has fallen away.
21 John Burrows, Jeremy Finn and Stephen Todd, above n 6 at 202.
22 BP Refinery (Westernport) Pty Ltd v President, Councillors and Ratepayers of the Shire of Hastings [1977] UKPC 13.
23 Attorney General of Belize v Belize Telecom Ltd [2009] 1 WLR 1988.
24 Marks & Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2015] UKSC 72, [2015] 3 WLR 1843.
25 Mobil Oil New Zealand Ltd v Development Auckland Ltd [2016] NZSC 89, [2017] 1 NZLR 48 at [81].
Discussion
[86] What the covenant is intended to achieve is clear enough: the primary dwelling (at least) must conform to certain standards, including a minimum build cost, which is determined by reference to an objective, external standard founded on the $/m2 cost of a modest but good quality family home in 1986. The movement in the Index was intended to maintain this base minimum cost, allowing flexibility as to size and specifications. Starting at $85,000.00 in 1986, the build costs would increase, as the Index directed.
[87] My interpretation of the covenant is that there was no intention that the minimum build cost would cease to apply should the Index be discontinued. It is more likely that this outcome was never contemplated, given the centrality of State Housing in the New Zealand economy, and thus no contingency was put in place. The parties assumed the Index was alive using the form of a covenant in place for some time, and would continue, and had they been asked they may have assumed there was or would be an equivalent, but there was no equivalent when the Index was discontinued. If, as a matter of construction, the essential elements of the Index can be distilled, and extrapolated to modern circumstances, as an equivalent and simple reference point for landowners, covenantees, certifiers, the Council, valuers and architects, this would give effect to the parties’ clear contractual intention.
[88]Criteria (4) under the BP Refinery test stands in the way of such implication.
Burrows Finn and Todd write:26
the requirement of clear expression follows from the “obvious” criterion, and it means that the term must be capable of clear and uncontroversial expression: if even those advocating the implication of a term have trouble formulating it, it will be difficult to persuade a court to imply it.
[89] If the parties had contemplated what any replacement mechanism would have looked like, they would have known the $595/m2 build cost of a dwelling in 1986, approximately 93 m2 in size, and the build components which went into the Modal House Index and the modest but good standard of those. Then they would have had to find an equivalent mechanism which tracked the increase in such ‘modal’ costs over
26 John Burrows, Jeremy Finn and Stephen Todd, above n 6, at 204.
time and apply that increase to $85,000.00 from 1986. Discontinuance of the Index itself would not be fatal to the covenant as to minimum build costs if such an ‘equivalent’ replacement could be found. An equivalent to the Index must have the same quality of ready reference year on year, as the Index provided. One immediately thinks of an inflation based Index of some sort, but the immediate check on that is the fact the Index was based on a particular size and standard of construction, not a broader inflationary measure.
[90] The difficulty is finding such a mechanism is amply shown on the evidence. It has not been possible to pin down what build components the Modal Index was measuring, nor an equivalent and referable standard. There is otherwise no referable equivalent to the Index. Mr St John made this point, saying:
The parties to the contract on which the restrictive covenant is found employed subjective criteria based on the [Index]. Although the legal effects of the [Index] were obvious at the time, there is no comparable pricing index which can act as a substitute, it must follow that the parties did not intend there to be a substitute.
[91] That amounts to saying the parties intended that the if the Index ‘died’ so did the minimum costs consideration, but I have said I do not think the parties did so intend, rather they never thought about it as dismissed above. Preston and Newsom reads:27
Alternatively, the contractual machinery for resolving some matter might be frustrated, ineffective or lacking. If, in such a case, the court concludes that the true intention of the parties is that the matter is to be resolved in some objective manner, e.g. by reference to fairness or reasonableness, and that any stated machinery is inessential, the court can use its procedures to resolve the matter by inquiry and adjudication. But, in Crest Nicholson Residential (South) Ltd v McAllister, Neuberger J held that prior approval of plans by the covenantee company itself was an essential feature of the building restriction before him and that the restriction was discharged when the company was dissolved.
[92] In Crest Nicholson, the claimant bought properties subject to a restrictive covenant.28 The covenant/s stated that "no dwellinghouse or other building shall be erected on the land… unless the plans drawings and elevation thereof shall have been previously submitted to and approved of in writing by the Company but such approval
27 George Newsom, above n 12, at 170.
28 Crest Nicholson Residential (South) Ltd v McAllister [2002] EWHC 2443 Ch at [71].
shall not be unreasonably or vexatiously withheld”. The ‘Company’ referred to in the clause had been dissolved 30 years before, and the applicant said the obligation had been discharged on dissolution of the Company. The Court agreed, finding as a matter of interpretation that the requirement for approval of plans would cease should the company be dissolved. The Court also held that were it necessary, the BP Refinery test was satisfied and an implied term could be read into the covenant that such would be the case. The Court did not follow previous decisions where it had been held that where a covenant allowed an exception to a prohibition if a particular person or body approved plans, and that person or body ceased to be, the prohibition becomes absolute unless the covenant was relaxed by the Lands Tribunal or by the consent of all covenantees.
[93] This does not directly analogise to these facts. In that case it was obvious that there was no possible substitute mechanism, as the approval was tied to a particular company, not an objective external standard. The Modal Index, while based on a particular standard and size of dwelling, was objective in the sense that it did not depend on a judgment call, but its maintenance by the Institute of Neighbours.
[94] In Re Malpass, the deceased had directed in his Will that his son would be offered the opportunity to purchase the deceased’s farm at “the agricultural value thereof determined for probate purposes … as agreed with the District Valuer'”.29 The District Valuer declined to value the farm, and the son applied to the Court for an alternative mechanism so that he could exercise his option under the Will. The Court held that the machinery for ascertaining the value of property was merely a “subsidiary and inessential part of the option” so the Court remedied it not through an implied term, but by a construction of the term as “a value to be determined in accordance with the Finance Act 1981”, which the Court considered a reasonable District Valuer would do.
[95] Here the Index does not merely serve as a proxy for ‘what the reasonable decision maker’ would do, as the Court found in Malpass. There is nothing objectively
29 Re Malpass (Deceased) [1985] Ch. 42.
‘reasonable’ about the Index as a standard minimum build costs in the area. It is what it is, or (now) “was what it was”
[96] In Sudbrook Trading Estate Ltd v Eggleton, the House of Lords provided machinery to uphold a contract with a defective price machinery provision.30 The price was to be “not less than 75,000GBP”, at a price agreed by two experts. The experts could not agree and, as there was no contingency in place, the lower Court said the contract failed for want of certainty, but the House of Lords explained:31
Templeman LJ, who delivered the judgment of the Court of Appeal, made a full review of the English authorities, and the conclusion which he drew from them was, in my opinion inevitably, adverse to the appellants' contentions. The fundamental proposition upon which he relied was, in his own words, “.…. that where the agreement on the face of it is incomplete until something else has been done, whether by further agreement between the parties or by the decision of an arbitrator or valuer, the court is powerless, because there is no complete agreement to enforce”. I agree that that is the effect of the earlier decisions but, with the greatest respect, I am of opinion that it is wrong. It appears to me that, on the exercise of the option, the necessary preconditions having been satisfied, as they were in this case, a complete contract of sale and purchase of the freehold reversion was constituted. The price, which was of course an essential term of the contract, was, for reasons which I shall explain, capable of being ascertained and was therefore certain.
[97]It went on to say (emphasis added):32
I recognise the logic of the reasoning which has led to the courts' refusing to substitute their own machinery for the machinery which has been agreed upon by the parties. But the result to which it leads is so remote from that which parties normally intend and expect, and is so inconvenient in practice, that there must in my opinion be some defect in the reasoning. I think the defect lies in construing the provisions for the mode of ascertaining the value as an essential part of the agreement. That may have been perfectly true early in the 19th century, when the valuer's profession and the rules of valuation were less well established than they are now. But at the present day these provisions are only subsidiary to the main purpose of the agreement, which is for sale and purchase of the property at a fair or reasonable value. In the ordinary case parties do not make any substantial distinction between an agreement to sell at a fair value, without specifying the mode of ascertaining the value, and an agreement to sell at a value to be ascertained by valuers appointed in the way provided in these leases. The true distinction is between those cases where the mode of ascertaining the price is an essential term of the contract, and those cases where the mode of ascertainment, though indicated in the contract, is subsidiary and non-essential — see Fry on Specific
30 Sudbrook Trading Estate Ltd v Eggleton, above n 15.
31 At 50.
32 At 51.
Performance (6th ed) paras 360, 364. The present case falls, in my opinion, into the latter category.
[98] The question may be put whether the mechanism for ascertaining the price in that context is an essential term or not. This makes sense, and is simpler than it sounds. Essentially the question is directed at ascertaining whether the Court can, by substituting one mechanism for another, be sure that it is giving effect to the intention of the parties. If it would run the real risk of imposing something not within that contemplation, it should steer clear of doing so. When the question is distilled to identifying essential or inessential terms, the difference between the parties reveals itself as a difference as to what the modal Index actually represents. If the Index ‘equivalent’ today is idiosyncratic and debatable, the criteria for which with any certainty be reconstructed, the use of it in the covenant makes the price mechanism an essential term. If it is simply a convenient way of tracking changes in the cost of constructing a basic home, it is more like an inessential term, which the Court might entertain reconstructing.
Bonnar
[99] In Bonnar v Summerland Property Developments Limited Heath J considered the interpretation of another restrictive covenant which imposed a minimum build cost.33 The covenant permitted the construction of a single dwelling house for which the current contract replacement cost was not less than $220,000, or two or more dwelling units for which the current contract replacement cost was not less than
$165,000 per unit. The replacement cost would be “increased by the amount of the percentage increase from August 1996 shown in the domestic building cost index for the Auckland area prepared by the New Zealand Master Builders Federation Inc or its successor”. Unlike this case, that mechanism was not the source of the issues at trial, and the judgment has only limited relevance here. Heath J held that restrictive covenants are to be interpreted “in tune with the commercial environment in which [they] are intended to function”.34 Words should be given their ordinary meaning, but
33 Bonnar v Summerland Property Developments Ltd (2002) 8 NZCPR 616 (HC).
34 At [36].
if something has clearly gone wrong with the language, the law does not require Judges to attribute an intention to the parties which they plainly could not have had.35
[100] The clear intention of the covenant was to give a degree of comfort to those buying within a subdivision, that standards would be maintained. The covenant did not provide an assurance that houses of a particular size would be built, so a small dwelling with superior materials would comply with the minimum cost. Heath J saw the covenant as self-policing, as a disincentive to the construction of low cost units. No expert, and no party for the purposes of this judgment, advanced the Master Builders’ mechanism referred to for this case. That is not surprising as in Bonnar there was no modal house base.
Conclusion as to a substitute mechanism – and compliance of this dwelling under such
[101] Assuming the covenant applies to this secondary dwelling, it was once referable to a publicly accessible Index, adjusted from time to time. The Modal Housing Cost Index was discontinued in about 1990 and has no “successor” index, but there is evidence of what the adjusted base figure might be today based on the asserted components of the Index and an attempt to calculate the movement in the Index over more than 30 years. The covenant as drafted was a workable imposition on the covenantor and covenantee land owners, their advisors, and the Council, with its straightforward reference to the minimum costs of a dwelling and its appearance. The certification of a valuer or architect based on a quote or an estimate would be enough to comply with the covenant. Actual costs would only be available for certification in a retrospective setting. The design quality would be controlled by the certification of an architect.
[102] Although the Modal Housing Index has long gone, many properties still have the impost of the covenant on them, and many take the benefit of it. The parties have engaged through experts in an entirely reasonable debate about some “equivalent” mechanism to be used by a certifying architect or valuer. They can only do their best to make an honest and informed attempt to approximate the minimum costs of
35 Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 All ER 98 (HL).
building, as if the Index applied. This is an entirely uncertain and contestable exercise. There is I find no single “equivalent” to the Index, so the Court, like the valuers and architects, can only make a ‘best endeavours’ approach to the issue, and determine whether such ‘best endeavours’ approach can carry beyond the facts of this case, to create repeatable machinery for other cases. If not it would meet no more than the facts of this case, and not provide a mechanism of universal application. I have indicated, and hold, the evidence does not allow a conclusion to carry beyond this judgment as a mechanism which will serve in other cases.
[103] Other elements of this judgment will have application, for example whether the covenant otherwise applies to secondary or other dwellings, and infill housing, such as a multiunit development, but the minimum build ‘costs’ are simply not determinable for application in other cases, and without that, the covenant is unenforceable. Otherwise, the passage of time means that the setting of what were at the time large sections, and ‘principal’ dwellings, has changed as the emphasis on infill housing has increased, in the market, and in the Council’s planning objectives. The only viable case for the plaintiffs I consider would turn on construction, or by necessary implication that the covenant should be re-worded or otherwise as a matter of construction, but the facts do not support such a conclusion.
An imperfect analogy to the Index
[104] I have concluded that the closest, but still wanting, ‘equivalent’ to movement in the discontinued Modal Housing Index is found in the evidence called for Mr Wu and Ms Cheng. It is not found by an ‘equivalent’ to the Modal Housing Index, but simply my preference for the ‘best endeavours’ approach to some sort of approximation of the Index. It is the antithesis of the simple reference to movement of the Index as expressed in the covenant, and an evidential conclusion that works only for this case. It would have no value whatsoever in another case.
[105] Even a narrow approach to the build costs actually incurred by Mr Wu and Ms Cheng comfortably falls within my judgment as to an approximate equivalent of movement in the Modal Housing Index, adopting an evidential measure applicable in 2017. The covenant did not require a “Modal house” to be built, only a house of
minimum build costs based on such. The covenant has other provisions restrictive as to design and materials but it does not set the size of the house except perhaps indirectly by influence of minimum build costs, so that the base figure as adjusted must be spent.
[106] The build components used for the Index should have been easily referable, to make sure that the certificate of an architect or registered valuer as to minimum costs addressed the same components, as otherwise they could not certify compliance. Build components aside, GST came into force in 1986, first at 10 per cent, then
12.5 per cent in 1989 and 15 per cent in 2010, and there is a question whether as of 1 December 1986 GST was included in the $85,000.00 base figure. It would be odd if GST being imposed altered the impost of minimum build costs. I think Mr Stevenson is right that residential housing costs are usually GST inclusive, and should be taken as such here.
[107] The Court has been provided with evidence as to how the Index would or may have moved, over nearly 30 years but any such evidence must be based on exactly the same build components used to found the Index in 1986, and there is no evidence of that. Mr Walton has extensive experience in local government, and qualifications in property related matters. I have referred to the extensive information given the Council to support the application for approval under the covenant. Mr Walton received a letter from Seagar & Partners, valuers, dated 14 June 2017 and an inspection report from architects Sills van Bohemen. He concluded that, it was “plain and reasonable” this minor dwelling exceeded the minimum standards required by the covenant. The Seagar report said the $85,000 base figure as at 1986 would be $241,752 exclusive of GST or $278,014 inclusive of GST. If the $85,000 is exclusive of GST the adjusted figure would be $266,000 exclusive of GST. His evidence has particular value for this judgment as it is simply a calculation of movement under a notional Index based on the same premise of the Modal House, and Modal Housing Index. The Schedule to this judgment reflects actual costs incurred. Mr Walton in my view correctly took any figures that did not stipulate whether or not GST was included, as inclusive of GST. There was no issue about the quality of the construction materials based on the architect’s report.
[108] As I prefer Mr Stevenson’s evidence I refer further to the Seagar’s Report. The use of a Modal House was part of a statistical base for the valuation of all types of dwellings, and other buildings, and goes back to the early days of the NZIV (New Zealand Institute of Valuers), in the 1940s. The standardised Modal House was adopted throughout New Zealand from 1965, when it was accepted by the NZIV as the national model. It is based on a single-storey dwelling of 92.9m2 with one bathroom, separate WC, laundry, three bedrooms, combined kitchen and dining area and separate lounge, made of weatherboard sheeting with timber joinery, galvanised hip room and hip roof with internal linings of gibraltar and plasterboard. The basic costs of such a house came from accepted contract prices provided by the then Housing Corporation, determined by work under way each month, analysed to produce a $/m2 figure. It was published until the ‘late 1980s’, due to “changes in the market” publication of a regular Index was then discontinued. Seagar & Partners maintained its own analysis of the cost of a Modal House for its statistical analysis of known costs on other buildings, adjusted annually by ‘the general increase in building costs after consultation with quantity surveyors and NZIV publications, up until to mid-1989”, then they produced their own modal house costs estimates from that date. It thus evolved from the Modal House Index to a conservative in-house opinion. Based on the single-storey modal dwelling referred to, in December 1986 the Modal $/m2 rate was $559.00m2, by mid-1990 $775.00m2, and in 2017 $1,500.00m2. The base figure of $85,000.00 in December 1986 calculates to the figures on the previous paragraph, applying this degree of movement in the Index and Seagars’ ‘Index’.
[109] Mr Stevenson wrote the Seagars Report and said that the four sites subject to the memorandum of transfer calculate out to a sale price of $71,250.00 per site and he interpreted sub-cl (c)(ii) as referring to a residential building with a base costs price of
$85,000.00, which he thought referred to the cost of a principle dwelling rather than a minor household unit. He says that in the mid-1980s there was a ratio reflected in land value of about $71,000.00, and $85,000.00 for construction improvements providing a contextual interpretation of what the covenant is intended to mean, according to Mr Stevenson.
[110] The imprecision of costing is shown by the Practical QS Report of 31 July 2017, signed off by Mr Atkins which refers to this 60m2 dwelling, two thirds of
the Modal House size, so logically build costs will be higher per $/m2 to reflect
$85,000 base costs. This dwelling is finished to a higher quality than the Modal House with timber weatherboards, facings and timber sills, double glazed aluminium joinery with fully tiled bathroom and with a higher-end finished kitchen. The “construction cost estimate” was $308,722.00, with external works of $31,402.00, professional fees of $9,867.00, building consent costs of $8,511.00, and development contribution of
$9,272.00, all up $367,774.00. There were provisional cost allowances for landscape, contract works and legal of $6,500.00 so in total the “direct costs of development” were costed at $374,274.00. A supporting document “residential summary – including GST” sets out the components of calculation, with some external works, $268,453.84 with external works of $27,305.85, a total of $340,123.64 GST inclusive. The average cost per square metre, including GST, is $5,145.37. The question is whether this would fall within the movement of the Index hypothetically reconstructed. However actual costs are better than the proxy of an estimate.
[111]I accept the evidence of Mr Stevenson as closest to establishing an adjusted
$85,000.00 base in 2017, but it is still essentially an opinion and contestable and has no application beyond the facts of the case. I conclude that even if the build costs in the Schedule under ‘claimable’ are to apply, approximately they are essentially above or close to Mr Stevenson’s calculations of the adjusted $85,000 base costs.
F. OBSERVATIONS
[112] The fundamental conclusion of this judgment is that the covenant is unenforceable as to minimum build costs but is otherwise in force, so I make observations about other elements of the plaintiffs’ case. I do so mindful that the conclusions of this judgment severs the covenant as to this application only to the principal dwelling for minimum build costs, but for all dwellings as to design and materials. That is how the covenant in my view was intended to work.
Is the Council’s decision to approve or not approve subject to judicial review, and if so, by whom?
[113] The plaintiffs say that the actions of the Council, as a territorial authority, are reviewable by the Court, and that it acted illegally in issuing the approval under the
covenant/s, and irrationally in refusing to review its decision. Mr Round says there is no ‘bright line” test of amenability to judicial review, and standing to bring judicial review proceedings. That contextual issue focuses on the nature and consequences of the exercise of powers. He refers to authority that the procedural obligations of a body performing a public function vary with context, so the exercise of a statutory power might involve natural justice obligations, but they may have less or no relevance to the same body when making another type of decision under statute:36
… the procedural obligations of a body performing a public function will vary with context. So, a public body exercising a particular statutory power may be bound by natural justice obligations, but such obligations may have less, or even no, relevance to the same body when making another type of decision under statute.
[114] Whether a decision about rebuild of the Christchurch Cathedral was judicially reviewable came before the Courts in The Great Christchurch Buildings Trust v Church Property Trustees.37 Chisholm J referred to Tipping J’s statement as to judicial review of the validity of a licence when he said:38
Any person who shows an honest interest in a public issue may invoke the processes of the Court to have the substantive matter of concern considered. It will usually be necessary to examine the substantive issue or issues before a decision on standing can be made. If the Plaintiff fails on the substantive issues the question of standing will be academic. If the Plaintiff would otherwise succeed it will be an unusual case in which either as a matter of discretion the Plaintiff will fail. It is my view that the only circumstance in which a Plaintiff should be shut out in limine for want of standing is where the Defendant can show that the Plaintiff lacks good faith or that the complaint is clearly frivolous, vexatious or otherwise untenable.
[115] The amenability of a decision of the Parole Board to judicial review came before the High Court where the Court noted the ‘liberality’ of judicial review, but said there was legitimate public interest where a parolee might live, so there was standing for the plaintiff to bring proceedings.39
This is a difficult question for resolution. The Whanganui District Council on behalf of the citizens of the district, do have an interest in the release of prisoners in their district. They cannot be dismissed as busy body litigants, whose with no interest in the outcome. Ordinarily, this interest would be sufficient to establish standing. Here, the Board’s position is that Parliament
36 Lab Tests Auckland Ltd v Auckland District Health Board [2008] NZCA 385 at [57].
37 The Great Christchurch Buildings Trust v Church Property Trustees [2012] NZHC 3045 at [69].
38 At [69] citing O’Neill v Otago Area Health Board HC Dunedin CP 50/91, 10 April 1992.
39 At [79].
has carefully prescribed who may participate in parole decisions. Parliament has not allowed general public interest bodies to participate.
[116] Mr Round refers to Royal Australian College of Surgeons v Phipps.40 A report by the College found professional deficiencies. The process leading to the report was judicially reviewable under the Judicature Amendment Act 1972, even though there was no statutory power of decision, or the power in large measure was contractual. Where questions of natural justice arise, the Courts are willing to review the exercise of power. This case is not a statutory power decision, but an approval process arising out of a former Council’s land ownership and it would be equally applicable if the former owner was not a public body, so the Council’s role as a Council is at stake and under scrutiny.
[117] Because the covenant lies across a number of properties, not just the first defendants’ property, it is for the benefit of an area, so the Decision has some ‘public’ element, but not the breadth of public interest as in most judicially reviewable decisions. In this regard, Tipping J said:41
A plaintiff should be shut out in limine for want of standing [only] where the defendant can show the plaintiff lacks good faith or that the complaint is clearly frivolous, vexatious or otherwise untenable.
[118] Mr Quinn says that the Court should determine the substantive issue before a decision on standing can be made, but whether the decision is open to judicial review or not, he submits the plaintiff has failed to establish that the ‘approval’ was wrong due to a failure to take relevant facts into account or irrational due to a refusal to review the issue of approval. Whether the Council acted unlawfully, or illegally, by failing to take into account relevant factors and made an error of fact, requires the application of the principles well established.
[119] The judgment of Richardson J in CREEDNZ Inc v Governor-General,42 is apposite to the facts, as this passage shows:
40 Royal Australian College of Surgeons v Phipps [1999] 3 NZLR 1 (CA).
41 O’Neill v The Otago Area Health Board, above n 38.
42 CREEDNZ Inc v Governor-General [1981] 12 NZLR 172 (CA) at 200.
If the relevant considerations are to be taken into account it is obvious that the decision-maker must not be misinformed as to established and material facts, including in that expression incontrovertible expert opinion.
[120]In Bryson the Court said:43
An ultimate conclusion of a fact-finding body can sometimes be so insupportable – so clearly untenable – as to amount to an error of law; proper application of the law requires a different answer. That will be the position only in the rare case in which there has been, in the well-known words of Lord Radcliffe in Edwards v Bairstow, a state of affairs “in which there is no evidence to support the determination” or “one in which the evidence is inconsistent with and contradictory of the determination” or “one in which the true and only reasonable conclusion contradicts the determination.
[121] There is no incontrovertible expert opinion in this case and determinations of fact will not be disturbed unless they are so clearly untenable as to amount to an error of law.44 The Council assessed compliance as best it understood the covenant and the evidence before it. In my view correctly, it thought the dwelling complied with the Covenant.
[122] The Council plainly took into account all relevant facts as Mr Walton explained, and expert opinion, and it does not have to go behind that, nor function as a court or tribunal, but makes a decision which meets the spirit and intent of the covenant. There are no grounds to suggest the Council in this case acted wrongly. It follows that there is no basis to conclude that the Council acted irrationally or wrongly in some way.
[123] Mr Quinn submits that no matter how the build costs are calculated, the information before the Council was that the costs were greater than the minimum required under the covenant, if it has any application at all. When the decision was made to approve the application, assuming the covenant to be enforceable, there was information that the $85,000.00 minimum build costs from 1986 would have increased under the Modal Housing Index equivalent to a maximum of $266,000.00 (plus GST) in the present day, and this is to be set against a Practical QS saying the costs of the house construction alone were $308,722.00. The plaintiffs say the actual costs were
43 Bryson v Three First Six Limited [2005] NZSC 23, [2005] 3 NZLR 721 at [26].
44 At [26].
$270,292.50 but that was not the evidence before the Council when it made its decision.
[124] I conclude that the Council’s decision is in principle and indirectly reviewable as it is essentially part of the building consent process. The Council has not in any way erred.
Does the Council owe a duty of care to neighbours, and if so, to whom?
[125] If the Council failed lamentably in the approval exercise, and a house were to be built in breach of an enforceable covenant which caused a covenantee proveable loss that suggests there may be a duty which reflects in tort. I do not decide this – simply make the observation.
Is the Council liable to the plaintiffs in negligence?
[126] The answer is no as there is no breach of duty, even if the covenant is enforceable.
What loss have the plaintiffs suffered?
[127] There is no evidence of loss whatsoever. The plaintiffs’ case is for full compliance or demolition. If the covenant was enforceable based on the preferred evidence, this building complies, or at worst so nearly so that relief should not be ordered.
G. SUMMARY OF JUDGMENT
[128] The covenant remains in force for all dwellings except for sub-cl (c)(ii) as to minimum build costs. I have been reluctant to reach final judgment as to the lawful effect of this covenant for the purpose of this case and beyond, because I feel better evidence should be available about the Index, GST, the components of the Modal House used to found the Index, and movement in the Index by another yardstick. However, there is no identifiable equivalent measure and even if I had concluded the Covenant remains enforceable, by finding an equivalent to the Modal Housing Index on the evidence, there was in my view compliance by Mr Wu and Ms Cheng, so no
relief would be ordered, and there would be no element of fault in the Council’s approval.
[129] The reference to the movement in Modal Housing Index allowed adjustment from the base figure of $85,000.00. The Index was based on a house of modest size and of good standard materials. The covenant simply refers to the costs of building, not the size, so within the adjusted base cost of $85,000.00, a larger or smaller build could meet that figure. The parties to the covenant contemplated a simple reference point, and given the then Housing Corporation’s role in the construction of what were State Houses, a covenant as to minimum costs was not imposing. The interpretation of the covenant was quite straightforward. All that was required was to take the
$85,000.00 and refer to the Index. The Modal House Index was set against a certain size and type of house, so it should have been easy to identify the build components of that house which were used for the Index. The same components would apply to produce the movement in the Index over time. For this judgment the Court has been asked to determine what build costs should be included, whether those that were incurred reflected in the Schedule, or those which the plaintiffs say are “claimable”. The answer lay in a direct reference to the build costs used for the Index.
[130] Without such an accessible and straightforward reference point equivalent to the Index, the parties and the Council have been left stranded now for decades. Even with the judgment I have reached as to what the movement of the Modal Housing Index may represent today, that is simply based on the disputed evidence in this case, which does not allow a single reference point for other cases as the covenant contemplated. While the Courts will often try to find an answer for what is ‘missing’, as a matter of business efficacy, any answer must be an equivalent, to substitute for that which is lost. There is no equivalent to the Index which can be set in concrete for future operation and enforcement of the covenant. I have concluded that the covenant is not enforceable in this respect, as to the minimum build costs. It could be that in another case there may be industry or other evidence which persuades a court that there is such a reference point which the Court may endorse under the business efficacy test. Those who take the benefit of other elements of the covenant will continue to do so. Design must accord with the covenant, and the use of materials is controlled by the covenant.
[131] However, if my conclusion as to enforceability of the minimum costs provision is wrong, then on the evidence which I distinctly prefer, this dwelling complies. Aside from these conclusions which are against the plaintiffs, I have concluded that the covenant has no application to a secondary or minor dwelling for reasons set out above. There is no default by the Council, nor any finding against the Council, because it can have no liability for giving its approval to something which is not enforceable at law in any event, or if enforceable, has been complied with by Mr Wu and Ms Cheng. Indeed, I consider the Council has done all it reasonably could, in very difficult circumstances. Mr Walton conducted the Council’s role impeccably.
Covenant
[132] The Council moved cautiously and properly in its approval process, and in its stance in this Court which has been to inform the Court of the history of the covenant and its application, to recognise the difficulty of the Council in considering approval, and not to advance a case against the covenant having lawful effect as it recognises there was a sound reason for it having been created in the first instance. This covenant stands alongside the provisions of the (part) Operative Plan which includes provisions which relate to amenity by the incorporation of rules and standards, and which reflects the demand for housing in Auckland. There is a shift in the Objectives of the Plan, towards multi-unit dwellings as permitted activities.
[133] When the covenant came into force it was easy to understand, comply with, and for the Council to approve. Indeed, the Council was relieved of the obligation to do very much at all if the professional certifications contemplated by cl (c)(ii) were available. The Council had no need to do any more, provided it was not conscious of some fundamental error in the approach taken by those certifying. How they would know that is problematical. In its prohibition on certain materials being used, and in the design being acceptable to an architect, the only potential difficulty in approval was the application of the Modal Housing Index to the base costs. There is no requirement for design of any particular kind.
[134] Even if there had been a technical or minor non-compliance with the covenant, and the build costs were less than the adjusted minimum price, there is no evidence
whatsoever as to the effect on the plaintiffs for the Court to consider the relief of demolition they seek. There is no valuation evidence, no evidence of the impact on the property or them, or any other land owner entitled to the benefit of the covenant.
[135] Even if I were to have upheld the entirety of Mr Round’s submission as to a replacement mechanism and its application to this secondary dwelling, I would not have ordered the relief which he pleads. This is a simple secondary dwelling at the rear of their section. It is well presented and in good order, as are the surrounds. It has some of the elements of a large garage, both in its simple structure and its appearance. It is no blot on the landscape, far from it, and it fits well, if tightly, into a very well-maintained section. It complies with the Operative Plan. Even with every element of the plaintiffs’ case going their way, adopting Mr Round’s equivalent of the Modal Housing Index, which I reject as referable, allowing for the exclusion of elements of the “build cost” as he seeks, this property would only fall short of the ‘equivalent’ to the index by some $15,000.00 and nothing has been advanced in evidence to demonstrate any loss to the plaintiffs as a result of such differential. This exemplifies just how difficult a task it is for the Council, architect, or valuer in determining compliance with the covenant. In most respects, it is contestable, with room for difference of opinion. That is why this judgment does not and cannot purport to lay down a blueprint for the future except by determining the questions of application to a secondary building, how GST should reflect in costs and the ‘Index”, and what components are for costing.
Concluding Comments
[136] Mr St John refers to “The Gardens Movement Society”, which stood against Mr Wu and Ms Cheng, as an “unpleasant feature of this litigation”. It claimed it had elected officers but had not, and such ‘officers’ have not been identified, nor has its membership, objects and minutes. The name suggests concerned community interest, but its conduct is challenged by Mr St John referring to signs which he says misled the public by asserting that the “rental unit” built at 26 Peretao Rise was “probably” in breach of a restrictive covenant, and that Court action taken was for the benefit of all property owners to “protect us from nasty rental building projects (which devalue all our properties)”. A leaflet was distributed by the plaintiffs saying that the dwelling
would probably cost about $130,000.00, describing it as “substandard”. It said that the Council put a stop to the building, but that is not so.
[137] Mr Slavich who was to the fore of the movement does not own a home in the neighbourhood, but he is the author of many of the emails produced to the Court, some accusing Council officers of bribery and corruption, and sent on behalf of The Gardens Movement Society. His conduct, including the use of a pseudonym and trenchant and inappropriate criticism of the Council, Mr Wu and Ms Cheng, and professionals involved, raises a question as to the response of the Court when considering an equitable remedy. However, I do not find Mr and Mrs Johns should be associated with Mr Slavich in these respects. They were strongly opposed to this dwelling but they had a point, as no approval was sought as the covenant required or seemed to do. This judgment does not need to address that conduct further.
H. DISPOSITION
[138] The first and second defendants and the Council are entitled to judgment as the plaintiffs’ case against them has been rejected in its entirety. The Covenant is in force for all residential dwellings but for sub-cl c(ii). The defendants are to file a memorandum as to costs by Thursday 7 February 2019, and the plaintiffs will reply by Thursday 14 February 2019. A teleconference may follow.
…………………………………………….
Nicholas Davidson J
Solicitors:
Law & Associates, Manukau City, Auckland (Plaintiffs) DLA Piper, Auckland (Second Defendant)
Yu Lawyers, Auckland (Defendants) Copy to:
E St John, Barrister, Auckland
SCHEDULE (GST INCLUSIVE)
Date Supplier Purpose Amount Claimable Added by Court * 06-May-16 B W Building Consultants 50% fee to obtain consent 2,012.50 2,012.50 04-May-16 Impact CCTV of
stormwater/sewer
954.40 954.40 30-May-16 BW Building Consultants Topographic Survey 1,725.00 1,725.00 14-June-16 Vijay Holdings Ltd Truss Plan 287.50 287.50 22-June-16 BW Building Consultants Resource consent 2,070.00 - 28-Jun-16 THL Design Group Engineering 1,725.00 1,725.00 28-Jun-16 BW Building Consultants Balance fee to obtain consent 2,047.00 1,023.50 15-Aug-16 Auckland CC Building Consent fees 5,877.30 5,877.30 16-Sep-16 Auckland CC Resource consent
fee
2,500.00 - 13-Sep-16 Auckland CC Resource consent fee 133.34 - 28-Sep-16 Auckland CC Development contribution 11,769.10 - 20-Apr-17 Water Care Infrastructure
Growth Charge
9,272.40 - 27-Apr-17 GEO Studio Retaining wall drilling 402.40 - 29-May-17 GEO Studio Hardfill conpact inspection 517.50 517.40 29-Aug-17 Vector Quote paid Electricity 2,012.50 - 07-Nov-17 Atlas Concrete (3 invoices) Concrete Pump 3,059.80 - 10-Nov-17 Placemakers Retaining Wall timber 2,099.97 - 10-Nov-17 Placemakers Deck timber 671.66 671.66 671.66 * 10-Nov-17 Placemakers Retaining Wall timber 134.55 - 11-Nov-17 Placemakers Retaining Wall concrete 59.95 - 23-Nov-17 Placemakers Retaining Wall 192.42 - 30-Nov-17 Placemakers Boundry Fence 77.75 - 30-Nov-17 Placemakers Boundry Fence 583.75 - 06-Dec-17 Wecam Electrical Electrical inspection 479.55 479.55 07-Dec-17 Placemakers Deck timber 388.66 386.66 386.66 * 11-Dec-17 Placemakers Boundry Fence 139.94 - 15-Dec-17 THL Design Group Engineering 690.00 690.00 28-Dec-17 Doug Li Enterprises development Ltd Landscaping 6,279.58 Star Echo Ltd Contract 255,000.00 255,000.00 313,163.52 270,000.00
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