K P Malcolm Limited v Malcolm HC Rotorua CIV 2008-463-403
[2011] NZHC 611
•18 February 2011
IN THE HIGH COURT OF NEW ZEALAND ROTORUA REGISTRY
CIV 2008-463-403
BETWEEN K P MALCOLM LIMITED First Plaintiff
ANDKENNETH PETRIE MALCOLM AND SYLVIA JANE MALCOLM
Second Plaintiffs
ANDLINDA MARGARET MALCOLM First Defendant
ANDCLIVE STUART MALCOLM Second Defendant
Hearing: 27-29 September 2010
Appearances: E Hudson and D Reynolds for the Plaintiffs
M McKechnie for the Defendants
Judgment: 18 February 2011 at 2:00 pm
JUDGMENT OF WOODHOUSE J
This judgment was delivered by me on 18 February 2011 at 2:00 p.m. pursuant to r 11.5 of the High Court Rules 1985.
Registrar/Deputy Registrar
……………………………………
Counsel:
Mr E Hudson, Barrister, Hamilton
Mr M McKechnie, Barrister, RotoruaInstructing Solicitors:
Mr M McGhie, Solicitor, Tauranga
Jensen Waymouth, Solicitors, Taupo
K P MALCOLM LIMITED AND ANOR V MALCOLM AND ANOR HC ROT CIV 2008-463-403 18
February 2011
Introduction
[1] This case concerns ownership of a farm called Ferndale. The defendants, Linda and Clive Malcolm, who were married, are the registered proprietors of Ferndale. The second plaintiffs, Kenneth and Sylvia Malcolm, are Clive Malcolm’s parents. The second plaintiffs, through the first plaintiff company, own an adjoining farm (the company farm). The plaintiffs claim to be entitled to a beneficial interest in Ferndale on the basis of a constructive trust. The claim is not denied. The principal issue is one of quantification of the share of the plaintiffs.
The parties
[2] The company is the registered proprietor of the company farm. Kenneth and Sylvia Malcolm, directly or through their family trust, own all of the shares in the company and are the owners of the farming business. Although the plaintiffs have distinct legal interests, it will generally be unnecessary to draw that distinction.
[3] The defendants, Linda and Clive Malcolm, were married in February 1983. They separated in 1997. In this proceeding there are no legal claims as between Linda and Clive Malcolm in respect of Ferndale. However, the plaintiffs’ claims were defended by Linda Malcolm alone. Clive Malcolm took no formal position in the proceeding, although he did provide evidence, having been called for the plaintiffs. Although Clive Malcolm took no formal position in respect of the plaintiffs’ claims, it is both necessary and appropriate to proceed on the basis that the plaintiffs’ claims are against Linda and Clive Malcolm jointly. The shares in Ferndale have to be determined as between the plaintiffs on the one hand and Linda and Clive Malcolm on the other. It will then be for Linda and Clive Malcolm to determine how their combined share, as determined by this judgment, is to be dealt with.
The original claims : primary claim abandoned : partial agreement at hearing
[4] In an amended statement of claim the plaintiffs advanced four causes of action. The first was that they were entitled to the entire beneficial interest in Ferndale pursuant to a resulting trust. It was contended, in essence, that the entire purchase price of Ferndale had been provided by the plaintiffs, together with further payments required following acquisition, giving rise to the resulting trust presumption that Linda and Clive Malcolm held the entire beneficial interest in Ferndale in trust for the plaintiffs. The second cause of action was a claim to a constructive trust pursuant to which the plaintiffs were entitled to a share in Ferndale. This is the claim that was in the end advanced at the hearing. I will shortly explain the nature of it in a little more detail. The third cause of action was described as a claim based on an “expressed common intention”. The fourth claim was that Linda and Clive Malcolm, by their conduct and assurances to the plaintiffs, were estopped from denying that the plaintiffs had an interest in Ferndale.
[5] In opening for the plaintiffs, Mr Hudson confirmed advice given a few days earlier that the resulting trust claim was not being pursued. Mr Hudson also advised that the “expressed common intention” and equitable estoppel causes of action were not being pursued as separate causes of action, although he said elements of those claims were relevant to the remaining cause of action – the constructive trust claim. In the event, the elements of those other claims do not have any real relevance to the central issue of quantification arising on the constructive trust claim.
[6] Although Linda Malcolm accepted that the plaintiffs are entitled to an interest based on a constructive trust, with the central issue being one of quantification only, the essential elements of the constructive trust claim require noting. The constructive trust claim was founded, firstly, on contributions made by the plaintiffs “both directly and indirectly to the acquisition, preservation and enhancement of Ferndale”. All of the significant contributions pleaded and advanced in evidence are financial contributions, and were either pleaded with particulars of the money contributed, or were items for which a money value is readily calculable. It was further pleaded that the plaintiffs made their contributions with the expectation that “such contributions would secure for them and preserve for them an interest in
Ferndale” and, in effect, that this was a reasonable expectation because of the conduct of the defendants, including what they said to the plaintiffs. The relevant formal claim is for a declaration that the defendants hold Ferndale “on trust for the benefit of [the plaintiffs] in such shares as the Court thinks fit”.
[7] Following Mr Hudson’s opening, Mr McKechnie, for Linda Malcolm, advised that, as a consequence of the modification of the plaintiffs’ claims, and based on the scope of them as explained by Mr Hudson in opening, there might be some prospect of settlement as the live issues at this point were ones going to quantification. In relation to quantification, Mr McKechnie sought confirmation that the plaintiffs were not contending that the plaintiffs’ expectations as such, and the reasons for those expectations, could affect the quantification. Mr Hudson confirmed that the plaintiffs’ claim was solely to a share of Ferndale with that share to be assessed having regard solely to contributions.
[8] Following that discussion counsel agreed that it would be helpful if they had further discussions with their clients with a view to recording the essential agreement in writing. This resulted in an agreement being recorded in writing as follows:
Following the discussions between Your Honour and counsel this morning it was suggested that counsel prepare a document which recalls [sic – the word should obviously be records] what has thus far been agreed. This is now set out:
1.It is agreed that the First and Second Plaintiffs by reason of contributions direct and indirect to the property had a reasonable expectation that they had an interest in that property known as Ferndale.
2.The Court is asked to quantify the respective parties’ interests in the property having regard to and balancing their respective direct and indirect contributions to Ferndale.
Legal principles
[9] Mr Hudson submitted that the principles established in the leading cases dealing with de facto relationships, such as Lankow v Rose1, can be applied in circumstances such as the present. Mr McKechnie did not take issue with the
general proposition. In my opinion it is appropriate to apply the relevant principles established by Lankow v Rose. It is to be emphasised that the principles of relevance in this case are those relating to quantification. Two citations will suffice.
[10] Hardie Boys J said, at 282:
The essential requirements I see to be twofold: that the plaintiff contributed in more than a minor way to the acquisition, preservation or enhancement of the defendant's assets, whether directly or indirectly; and that in all the circumstances the parties must be taken reasonably to have expected that the plaintiff would share in them as a result. Both statements need some amplification. In the first place, by contributions to assets one is not referring to those contributions to a common household that are adequately compensated by the benefits the relationship itself confers. The contribution must manifestly exceed the benefits. Putting it in conventional estoppel terms, the plaintiff's contributions must have been to his or her detriment; or in Canadian terms they must have resulted by the end of the relationship in the enrichment of one to the juristically unjustified deprivation of the other. Further, the contributions need not be in money; they may be in services or in any other respect. But there must be a causal relationship between the contributions and the acquisition, preservation or enhancement of the defendant's assets for, as a claim to a constructive trust is a proprietary claim, a claim to an interest in property, the contributions must have been made to assets; not necessarily to particular assets, but certainly to the defendant's assets in general. The contributions may then be recognised by the imposition of a trust over a particular asset or particular assets, which may in turn be quantified or satisfied by a monetary award.
[11] At 295, under the heading “Quantification” Tipping J said:
There seems to be a view in some quarters that once qualifying contributions have been shown which justify some interest, the amount of that interest is at large and is to be determined according to broad notions of justice with a greater or lesser degree of analogy with the matrimonial property regime which applies to legal marriages. Any such approach is, in my judgment, erroneous. It ignores the fundamental difference between a legal marriage and a de facto marriage. Broadly speaking, in the case of a legal marriage the Matrimonial Property Act 1976 requires equal division unless the spouse resisting equality can show grounds for a different division. Under the Act the status of wife or husband gives each spouse a presumptive half-share.
In the case of a de facto union, the claimant does not start from a presumptive half-share but rather from nothing. A de facto claimant must demonstrate first a case for an interest and then what that interest should be. The interest must broadly reflect the contributions. Arithmetical precision will generally be unattainable and is in any event not necessary. The Court must, however, do its best to reflect in the assessed shares the value of the claimant's contributions. That value will represent, if uncompensated, the amount of the unjust enrichment accruing to the defendant which in turn is the amount of the claimant's sacrifice.
The contributions must be judged from a proprietary point of view. …
Background facts
[12] Because the issue for determination is one of quantification, it is unnecessary to set out a lot of the background facts contained in prepared briefs of evidence and in the bundles of documents. For the same reason, a number of matters involving conflicting evidence do not need to be considered. The enquiry was further narrowed by a measure of agreement between experts called for the plaintiffs and the defendants on each side. There was expert evidence on each side from an accountant, a farm consultant, and a farm valuer.
[13] In 1967 Kenneth and Sylvia Malcolm began farming on the first acquired part of the company farm. The company farm was expanded to its present area in
1974.
[14] Kenneth and Sylvia Malcolm have five children. Clive Malcolm is the second eldest of the children. Based on his age at the date of hearing it appears that he was born in about 1960. He left school at the age of 15. He said that when Ferndale was purchased in 1993 he was 33 and said: “I had been working with dad since I had left school”.
[15] Linda and Clive Malcolm were married in February 1983. Following the marriage they lived in one of the houses on the company farm. This was a standard issue Lands and Survey style farm cottage. Clive Malcolm worked long hours on the farm. He was paid a modest wage by his parents, together with the benefit of the home on the farm, provision of meat and other allowances common in the industry.
[16] Linda and Clive Malcolm have two children, Laura born in 1988 and Richard born in 1991. Before Laura was born Linda Malcolm also worked on the company farm every day. I am satisfied that Linda Malcolm worked hard. That conclusion is based not only on Linda Malcolm’s evidence, but also the evidence of Clive
Malcolm. For example, there was the following in Clive Malcolm’s evidence:2
Q.… Prior to the acquisition of Ferndale, which was 1993, what was Linda’s input into the day to day farming operations prior to the purchase of – of Ferndale?
A. Prior – well probably prior to us having children, which is prior to
Ferndale, she was with me everyday almost on the farm. Q. And what sort of assistance did she give on the farm?
A. Fencing, drafting, shearing, docking everything really.
[17] I am satisfied that both Clive and Linda Malcolm contributed in a reasonably substantial way to the plaintiffs’ farming operation, to the overall financial benefit of the plaintiffs, making due allowance for the wages and other benefits received by Clive Malcolm. Linda Malcolm was not separately paid by the plaintiffs.
[18] In 1992 Kenneth Malcolm and his sons Clive and Graham discussed the possibility of making an offer to purchase Ferndale. They agreed that Clive Malcolm should approach the owner and make an offer to buy the farm for
$500,000, which Clive Malcolm did in July 1992. The offer was declined at that time, but in January 1993 the owner telephoned Kenneth Malcolm and accepted the offer. A draft agreement for sale and purchase was prepared with Clive and Linda Malcolm recorded as the purchaser. The agreement was entered into in February
1993. Linda and Clive Malcolm took possession in March 1993 and settlement was effected on 1 July 1993. The plaintiffs paid a deposit of $25,000. The balance of the purchase price came from a loan from the Rural Bank Limited. The balance required to settle the purchase, inclusive of GST and after a credit for the deposit, was
$518,750.
[19] A mortgage was granted to the Rural Bank. This provided security over Ferndale and over the company farm. The mortgage was therefore executed by Linda and Clive Malcolm, as well as by the company and by Kenneth and Sylvia Malcolm, and their co-trustee in the family trust. All of the parties executing the mortgage were bound by the usual personal covenants in respect of the loan from the Rural Bank. The relevance of this is that, although the balance to settle the purchase of Ferndale was $518,750, the total secured and subject to the personal covenants, including those of Linda and Clive Malcolm, was $900,000. The balance of the loan was not applied to the purchase of Ferndale. Some was applied to the purchase of
stock, but that is not relevant to the present proceeding. There was some immediate expenditure on Ferndale, but the source is not clear from the evidence and, in any event, on the basis of the figures provided by the plaintiffs’ accounting expert, the expenditure of this sort in the first year was just over $9,000. One large portion of the balance was clearly identified as refinancing of the plaintiffs’ existing Rural Bank loan of $207,000.
[20] There is clear evidence that, whilst the purchase of Ferndale had immediate advantages in expanding the total farming operation of the plaintiffs, the longer term intention of Kenneth and Sylvia Malcolm was that Clive and Linda Malcolm would take over Ferndale entirely. This is recorded in a document compiled by Kenneth Malcolm in 1995 and which he gave to Clive and Linda Malcolm at the time. Relevant parts of it are:
Letter and Philosophy Settling Sons on Farm. As at 10 Jul 1995.
The Purchase of Ferndale was done with the definite intention of belonging to Clive and Linda, with the Debt repayment of the Loan being undertaken by the overall Farming operation. With the value of the amount owing at
$500,000.
In the long term my intention does not expect that money to be repayed [sic]. My intention is to set up Graham and Jo-ann on a similar carrying capacity
peice [sic] of Land with a similar debt structure.
As I can see my way clear my intention is to set up Gary in a similar way, with the exception that I would expect Gary to make up a shortfall of approximately $200,000 on a say $700,000 enterprise which would see all three sons on economic properties with a similar debt structure, after Gary has made up his shortfall either in cash or in not receiving advances until his shortfall has been made up.
I believe this shortfall is taking into recognition of the contribution that has been put into the existing enterprise by both Clive and Graham and their respective Wives.
At some time in the not too distant future, after obtaining sufficient land to achieve these aims, and also having enough land and security to guarantee a lifetime income base for Sylvia and myself, I would hope to allow all three Sons the opportunity to Farm their individual peices [sic] of Land as individuals, with the ownership of their own stock.
[21] Kenneth Malcolm said in evidence that his “philosophy changes from time to time due to the circumstances”. I have, of course, had regard to all of Mr Malcolm’s evidence about this memorandum. My conclusion is that it accurately recorded his intentions, and I infer those of Sylvia Malcolm as well, in respect of Ferndale for Clive and Linda Malcolm, and also in respect of their other sons. Intentions of this nature for the children of farmers are common enough and understandable. As discussed below, Linda and Clive Malcolm left Ferndale in 1997, but a continuing intention on the part of Kenneth Malcolm in respect of the ownership of Ferndale was recorded in a letter from the plaintiffs’ accountant to Linda Malcolm’s solicitors on 13 April 2000. The plaintiffs’ accountant referred to a discussion he had had with the solicitor and said he had reported the conversation to Kenneth Malcolm. The letter includes the following:
On the question of ownership of Ferndale, the farm belongs to Clive and Linda, and Ken is happy to stop farming the property on the basis that Clive and Linda take over servicing the debt incurred to purchase the farm. It is probable that they would have a negative equity on the property.
[22] In addition to Kenneth Malcolm’s intentions for Clive and Linda Malcolm, as recorded in the 1995 document, I also readily infer that there was an expectation on the part of the plaintiffs, and an acceptance on the part of Linda and Clive Malcolm, that for a period of time Linda and Clive Malcolm would work hard for a modest income. This meant that Clive Malcolm directly, and Linda Malcolm largely indirectly (at least after the first child was born), contributed to the capital of the plaintiffs, or at least to the entire farm revenue which was retained by the plaintiffs, while not being in a position over this period to build up any significant capital, or even savings, of their own. All of the farming revenues went to the plaintiffs.
[23] Once Ferndale was acquired a combined farming operation was carried on. Ferndale and the company farm were treated as a single farm. Kenneth Malcolm put it this way:
39.Having taken over Ferndale, it was incorporated into the rest of the farming business. It was not run as a separate farm. There was effectively no boundary. Stock was transferred from one property to the other depending on what was appropriate at any particular point of time.
[24] Most of the stock was existing stock of the plaintiffs, or acquired by the plaintiffs (including stock purchased for $130,000 using part of the Rural Bank loan). However, Linda and Clive Malcolm borrowed $40,000 from the National Bank. This loan was used to buy 100 head of cattle and they retained the income from these animals.
[25] The evidence establishes that from March 1993, when possession of Ferndale was taken, until April 1997, when Clive Malcolm stopped working for the plaintiffs, he made a major contribution to the plaintiffs’ farming business as farm manager, but he was paid (including allowances) at, or not much above, the rate of a farm hand. The evidence further establishes that over this period, Linda Malcolm also worked for the plaintiffs’ farming operation on average one day a week, but there was no payment to her.
[26] I have come to these conclusions notwithstanding contrary contentions from Kenneth Malcolm made either to the experts engaged on the plaintiffs’ behalf or directly in evidence. Kenneth Malcolm overstated the wages and related benefits received by Clive Malcolm and understated Clive’s role in the plaintiffs’ farming operation. This is made clear in cross-examination of John Stantiall. Mr Stantiall is an agricultural consultant who gave evidence for the plaintiffs. His evidence was directed to the wages and other benefits received by Clive and Linda Malcolm and the relationship of those to industry standards. The thrust of this evidence was that in the period 1993-1997 the wages and related benefits received by Clive and Linda Malcolm exceeded average wages and benefits for a farm hand. The premise for the analysis was that Clive Malcolm’s role was the same as or equivalent to that of a farm hand.
[27] Mr Stantiall had been misinformed by Kenneth Malcolm both as to the level of wages and the role played. This is made clear in the following cross-examination of Mr Stantiall:3
Q.... As I understand it the source of your information has primarily been Mr Ken Malcolm?
3 Notes of evidence p 74 l 25- p 75 l 32.
A. Yes.
Q.Did he tell you that his son, Clive, undertook the majority of the day to day management decisions in relation to Ferndale?
A. Ah, that’s not what I understood, no. Q. That’s not what he told you is it?
A. No.
Q.And neither did he tell you that Clive Malcolm undertook most of the day to day management decisions, not only in relation to Ferndale but to the whole Malcolm farming operation?
A. Yeah, it's certainly not the way I understood it no.
Q.And not only was Mr Malcolm the source, Mr Ken Malcolm the source of that information but when you prepared your first report, he was the source of the information about what wages were paid to Clive, wasn’t he?
A. Yes.
Q. And those figures were wrong weren’t they? A. Yes. That’s since been corrected.
Q. They were significantly wrong, Mr Stantiall, were they not? A. Ah, we didn’t use the right information at the time, correct. Q. You accept they were significantly wrong?
A. Yes, sir.
Q. And they came to you from Ken Malcolm didn’t they?
A.Well, there was some analysis of the accounts and I think they have perhaps misinterpreted the information that was in them,
Q. Look at this document please. WITNESS REFERRED TO FIRST REPORT
Q. Is that the first page of your first report which was attached to your first brief of evidence?
A. Yes sir.
Q. And does that not record that the information in relation to the wages was supplied to you by Mr Ken Malcolm?
A. Yes sir.
Q. Did you make any effort to independently verify that information?
A. Um I was working with the accountant at the time to get that information.
Q.Well who did you get it from, did you get it from Ken Malcolm or from the accountant?
A. Well I guess the initial source was from Ken.
[28] The facts as I find them are, firstly, that Clive Malcolm was paid by the plaintiffs $1,650 per month over the period from 1993 to 1997. That is $19,800 per annum. There was no separate payment to Linda Malcolm. In addition Clive and Linda Malcolm had the use of the house on Ferndale, certain expenses met by the plaintiffs, and meat for home consumption. In respect of Clive Malcolm’s level of responsibility, I am satisfied that he was the equivalent of what is described as “farm
manager 2” in a farm remuneration survey that was put in evidence as exhibit A.4
Clive Malcolm’s position as a farm manager in this category is borne out by the evidence of Clive Malcolm and Linda Malcolm. The only other evidence of fact on this question came from Kenneth Malcolm. In the end there was probably not a great deal of difference in the evidence of these three witnesses but, to the extent that there was, I prefer the evidence of Clive and Linda Malcolm. In addition, Kenneth Malcolm’s advice to Mr Stantiall as to the position held by Clive Malcolm was markedly different from Kenneth Malcolm’s advice to the Rural Bank area manager when the application was made for the loan in 1993. The report of the area manager includes the following:
A previous local councillor, Ken retains full financial control and oversees the general running of the operation while eldest son Clive undertake [sic] the majority of the day to day management on the property. Both sons working on the property are married. A strong Family operation with above average personal factor and adequate financial control.
[29] There was evidence from the farm consultants which enables a broad calculation to be made of the difference between Clive Malcolm’s actual income (including allowances) and what it would have been if he had been paid as a farm manager with his level of responsibility. This was evidence from Mr Stantiall for the plaintiffs, as just noted, and from Russell Whyte for Linda Malcolm. Mr Whyte produced the remuneration survey noted above and in footnote 4. This indicates that
4 Survey conducted by Baker & Associates (Wai) Limited, July 2002.
the total value of the remuneration to a farm manager would be approximately twice that of a farm hand (or a broadly equivalent category such as a “fencer general” as referred to in the Baker report) and at least 75% more than the remuneration received by Clive. The difference becomes greater when regard is had to the fact that Linda Malcolm was not paid.
[30] Linda and Clive Malcolm also substantially improved the grounds around the house they moved into. Clive Malcolm, in addition to his abilities as a farm manager, was also mechanically skilled and attended to a lot of the maintenance and repairs for machinery on the farm.
[31] Clive Malcolm stopped working on the farms in April 1997. His reasons, in his own words, were as follows:
22. …
I was responsible for much of the day to day running of the farms and had been for several years.
I felt that I wanted to be in control of my own future. I wanted to run the farm as a standalone unit.
My real beef was that I felt that I was very much responsible for the earning of the income on the farms, but had no say in how it was spent.
At the time I did not always agree with some of Dad’s decisions.
23. I put it to Dad that I wanted to go it alone with Ferndale.
He was not having a bar of it. It would be true to say that we had quite a heated discussion.
When Dad would not agree with what I wanted to do, I quit there and then on the spot.
While Linda and I remained on the farm for another three months, I
did not continue to work for Dad.
Kenneth Malcolm essentially agreed with Clive Malcolm as to the circumstances leading to the rift.
[32] Clive and Linda Malcolm left Ferndale in October 1997. In November 1997
Clive Malcolm and Linda Malcolm separated. Neither Linda nor Clive Malcolm has received any benefit from Ferndale since they left it in October 1997.
[33] There was evidence of various proposals made by the plaintiffs, and by one or other or both of the defendants, in relation to Ferndale after Linda and Clive Malcolm left. In view of the agreement reached at the beginning of the hearing it is unnecessary to consider this evidence.
The plaintiffs’ direct financial contributions to Ferndale : the evidence of the experts
[34] The basic methodology for calculation of the plaintiffs’ direct financial contributions was agreed between the accounting experts, Mr Dobson and Mr Read; that is to say, they agreed on the appropriate way to treat claimed contributions of the plaintiffs in each financial year from 1 July 1993 through to 2010. This included the plaintiffs being credited with the present day value of each financial input.
[35] The financial contributions were in two categories. The first category was the purchase price of $500,000. The figure was not in issue and both accountants agreed that it should be treated as a cash contribution or input of the plaintiffs. The sum credited to the plaintiffs as a contribution by them, including the increase to adjust for present value, is $1,333,000.
[36] The other category of financial input was expenditure on a number of items over the 17 year period. I will refer to these as “farm expenses”. The first report came from Mr Dobson. He obtained the details of farm expenses from annual financial statements of the plaintiffs and other entities associated with the plaintiffs, together with information provided by Kenneth Malcolm and his son Graham. Mr Dobson said that separate financial statements had not been prepared for Ferndale. I infer from this, and other evidence, that Mr Dobson was considerably dependent on Kenneth and Graham Malcolm for identification of farm expenses said to be related to Ferndale and on their advice as to the precise nature of the expense. Mr Dobson noted that the information from Kenneth and Graham Malcolm was based on their
recollections in respect of particular matters. Mr Read, whilst confirming his agreement with methodology and the accuracy of calculations done by Mr Dobson, did not independently verify individual items of farm expenditure.
[37] The accountants agreed that, for the purposes of assessing the plaintiffs’ share of Ferndale based on financial contributions, the farm expenses had to be of a capital nature. Mr Dobson recorded six categories of farm expense said to be of a capital nature. Mr Read was of the opinion that three items should not be included as capital expenditure. Having noted that there was this difference, it will assist to consider a separate question before coming back to this one and recording my conclusions on the three items in dispute.
Gross or net value of plaintiffs’ contributions
[38] The separate question is whether the credit to which the plaintiffs should be entitled for all their contributions, whatever the components, should be a gross figure, or a net figure arrived at by deducting an appropriate allowance for benefits received by the plaintiffs. Mr Dobson in his first report identified the point and provided alternative calculations, one being the gross value of inputs and the other the net value. The net value was calculated by proceeding on the assumption that the plaintiffs had a long term lease of Ferndale from the defendants, with a notional lease rental deducted from the gross figure to arrive at a net value of financial inputs. Mr Dobson, in his initial report and in briefs of evidence, did not express an opinion as to the appropriate approach. I think it is fair to say that Mr Dobson at least implicitly acknowledged, in the course of cross-examination, that there was a solid argument in favour of bringing into account benefits received by the plaintiffs. Mr Read was in no doubt that benefits obtained by the plaintiffs should be set off against their financial inputs so that the calculation of net value was the proper approach. In closing submissions Mr Hudson accepted that the benefit to the plaintiffs did need to be taken into account. This was a responsible and proper acknowledgement. I am in no doubt that benefits received by the plaintiffs as claimants do need to be brought
into account and set off against contributions they made (the expenses they incurred).5
[39] Mr Dobson and Mr Read were in agreement as to the figure to be deducted from the gross contributions. This figure was a notional rent paid over the years on the assumption that the plaintiffs had leased Ferndale from the defendants. The rent was a market rent assessed and agreed by other experts. A base rent was fixed at three dates: at 1993, when Ferndale was acquired, in 1997 and in 2009. This meant, amongst other things, that the initial rent was assessed having regard to the underdevelopment of Ferndale when it was acquired. The agreed sum to be deducted for a notional lease rental over the 17 year period is $885,000.
Disputed capital items
[40] I come back to the principal difference between Mr Dobson and Mr Read as to whether the three items of farm expenses should be included in the financial contribution of the plaintiffs to Ferndale. The three items of expenditure that are in question were for fertiliser, water supply and fencing. Before recording my conclusions on each category, some general observations can be made in light of the evidence on this topic.
[41] Mr Dobson and Mr Read discussed the issue on the basis that it was a question of determining whether the expense was of a capital nature or maintenance. In that regard, Mr Dobson and Mr Read recorded in their memorandum of agreement:
The tax treatment of expenditure is of limited relevance to establishing whether or not the contribution was capital or maintenance. Tax treatment may indicate that something is deductible but doesn’t indicate if there is a long or short term benefit arising from the expenditure.
5 If any authority is required for this conclusion, it is contained in the observations of Hardie Boys J in
Lankow v Rose [1995] 1 NZLR 277 (CA) at 282, in the passage cited in this judgment at [10].
The accountants jointly confirmed a statement by Mr Read in his brief of evidence which was as follows:
I have not been advised how K & S Malcolm or their trading entities have treated the inputs (costs) in their Financial Statements when incurred over the years. Most are likely to have been written off as expenditure when incurred as this treatment is allowable for tax purposes for the majority of the expenses (e.g. fencing, fertiliser, rates, insurance etc).
[42] The accountants’ reference to “long or short term benefit arising from the expenditure” alluded to a further and more fundamental point. Although this is a case arising out of family arrangements, and ones which sadly came to an end in ways which had not been anticipated at the beginning of the venture, a business was being operated on Ferndale and the company farm. On the present issue this is amplified by the agreement that, if the net approach is adopted, which it must be, the plaintiffs are to be treated as if they had entered into a long term lease with the defendants, in the market, and on an arms-length basis. Approaching the matter in this way, there is a general question as to whether, in a long term lease of a farm of this nature, the costs in question would be required to be borne by the lessee or reimbursed by the lessor. The evidence from Mr Whyte, the farm consultant called as an expert by Linda Malcolm, was that it would be unusual for a long term lease of a farm of this nature to provide for compensation to the lessee for improvements. Mr Whyte did not exclude the possibility that some long, or longer term, leases could have a provision entitling the lessee to compensation because, in any particular case, that would depend on negotiations. But his evidence based on the usual position in the market was clear. And it was evidence based on considerable expertise and experience. This included relevant and direct experience in negotiating long term leases of farms, including farms in the King Country where Ferndale is located. There was no other evidence sufficient to persuade me that Mr Whyte’s evidence of the general position should not be accepted.
[43] There is a further point, broadly related to the one just discussed. This is that generally a lessee would not be under an obligation to spend money on items which might usually be categorised as producing an improvement, or as being capital in nature, rather than maintenance in respect of which there would be a legal obligation. Given that the lessee has a choice, expenditure of this nature would generally not be
undertaken unless the lessee expects to increase the productivity of the farm which in turn would be expected to increase the return to the lessee. And the lessee is in control of timing. The lessee can make a calculation as to whether the remainder of the lease term is sufficient to enable the lessee to recoup the expense with an added profit. In this regard it is relevant to emphasise the point earlier adverted to; on the approach of the experts in this case, this was a lease which has turned out to be for
17 years. There is some artificiality in that because there was no lease in fact when the farm was purchased in 1993, or when Linda and Clive Malcolm left in 1997, but I cannot ignore the underlying reality of the effective control of the plaintiffs. And it is in my opinion reasonable to infer from the evidence that, when the plaintiffs spent the money that is now in question, they were anticipating that they would have a continued control of Ferndale for an extended period. And this is reasonably likely to be the case in fact into the future.
Fertiliser
[44] I will now consider the three items of expenditure in dispute. In my opinion the claim for fertiliser should not be allowed as a contribution by the plaintiffs. This is on the basis that it was conventional maintenance, and all of the experts agreed that a maintenance item would be borne by the lessee. The broader issues did not come into play; it was not a capital item on any basis. This was confirmed by one of the plaintiffs’ experts, Mr Doyle, an expert in the valuation of farms. There was the
following in cross-examination:6
Q. Now it’s Mr Tizard’s7 proposition that the application [of] fertiliser over the period from 1997 to 2010 is essentially no more than would be expected of a long term occupier of the property and that in any event, the application of that fertiliser reflects that in a increase in production which is received by the occupier, do you take issue with that proposition?
A. Ah no, it’s maintenance.
Q.Right. And the level of application as you say here, is between ’93 and ’97 was only slightly above maintenance levels, you see that?
A. I do.
6 Notes of evidence p 88 ll 14-24.
7 Mr Tizard was the farm valuation expert who gave evidence for Linda Malcolm.
Water supply
[45] The claim for water supply is disputed. Mr Dobson included expenditure on water supply between 2000 and 2007 of similar amounts in each year (averaging around $3,500). This is a total of approximately $28,000 before the increase for present day value. Kenneth Malcolm’s evidence-in-chief on this was as follows:
Ferndale was susceptible to drying out. On two occasions it has run out of water. Six large tanks have been installed. These are fed from Ranganui [part of the company farm] through lines which were installed on Ferndale.
[46] Kenneth Malcolm’s evidence establishes the expenditure and, broadly, the nature of it. However, it does not follow that this should be treated as an item requiring the notional lessor (the defendants) to compensate the lessee (the plaintiffs). Having regard to the general considerations earlier discussed, it is reasonably apparent that the plaintiffs will have derived benefits from the expenditure, and being expenditure of a relatively modest sum on an annual basis. There is a further consideration. This is that there is no legal security of supply of the water. If the question was approached on the basis of an arms-length lease in the market, with Ferndale now to revert to the lessor, the lessor could not legally require the neighbour (the plaintiffs) to continue to supply water.
[47] Notwithstanding those reservations relating to this item, I do consider that half of the claim should be allowed. The absence of legal security of supply is a factor which I consider should be set to one side because it would be artificial to ignore how this occurred and the de facto security that exists.
Fencing
[48] The remaining item is fencing. There was a degree of confusion at one point as to the length of fencing that was maintained or repaired and the length of new fencing. However, I accept Kenneth Malcolm’s evidence that between 1993 and
1997 600 metres of new fencing was erected and between 1997 and 2009 a further
5,600 metres of new fencing was erected. The result of this was to increase the fenced paddocks at Ferndale from 9 to 25. It is clear from all of the evidence that
repair and general maintenance of fencing is an expense to be borne by the tenant or lessee. The position in respect of new fencing is less clear. The evidence is that, in general, increasing the number of paddocks was likely to increase productivity. A farm reverting to the lessor at the end of a lease, with a substantially increased number of paddocks, with new fencing or fencing fully maintained, would result in the lessor obtaining a benefit. Against this the lessee will have been in a position to determine when the expense should be incurred in order to reap the benefits of increased production during the course of the long term lease.
[49] In this case the total net expenditure recorded by Mr Dobson (that is to say, the basic expenditure before increases for present value) was $45,720 between 1994 and 2009. Of this, over $40,000 was spent between 2004 and 2009, with a significant sum – $18,720 – spent in 2007.
[50] Notwithstanding Mr Whyte’s expert opinion, which I accept in respect of what might generally be expected to occur in the market, I do consider that the plaintiffs are entitled to a credit for the expenditure of $40,420 in the period 2004 to
2009. Again proceeding on the notional basis that the lease is to come to an end in
2010, the plaintiffs would not have had much opportunity to derive compensating benefits from this fencing.
The overall calculation
[51] The overall calculation of the gross value of the plaintiffs’ direct financial contributions to Ferndale, the notional lease rental, and the resulting net value, as calculated by Mr Dobson and Mr Read, was helpfully summarised in a table in the memorandum of agreement between Mr Dobson and Mr Read. I will reproduce this table in full:
John Dobson Stephan
Read
$ in 000s Gross value Net value Net value Purchase price 1,333 1,333 1,333 Plus: Financial inputs (after tax) 271 271 21 Less: Notional lease rental N/A (885) (885) Net value of financial inputs 1,604 720 470
[52] The “purchase price” is the original purchase price of $500,000 provided by the plaintiffs adjusted for present value (as noted at [35] above). The item “financial inputs (after tax)” is what I have referred to as “farm expenses”. The totals calculated by Mr Dobson of $271,000 and Mr Read of $21,000 are the totals for present value of the individual farm expenses each expert allowed. The difference arises from Mr Read’s removing from the calculation all of the claims for fertiliser, water supply and fencing. The “notional lease rental” is, of course, the agreed figure calculated in the manner discussed at [38]-[39].
[53] Mr Dobson’s calculation of $271,000 for farm expenses at present value will need to be reduced in accordance with my conclusions relating to the claims for fertiliser, water supply and fences. A rough and ready assessment of the new figure may be made by calculating the total of the farm expenses allowed by this judgment, including those not in dispute but before adjustment for present value, as a percentage of the total farm expenses included in Mr Dobson’s figure before adjustment for present value. On the base figures available to me the percentage of the new figure is around 54% of the old figure. Applying this to Mr Dobson’s total of $271,000 produces a revised allowance for farm expenses, roughly adjusted for present value, of $146,340. Using that figure would result in a net value of all financial inputs of $594,000 as against Mr Dobson’s net value total of $720,000.
[54] I have made a calculation in this way because the precise figure should be calculated by Mr Dobson and Mr Read. I am also uncertain whether I have all of the figures for the 2010 financial year. The figure is approximate as it does not allow for the particular dates on which the allowed and disallowed farm expenses were incurred with the corresponding different adjustments for present value. I will therefore make provision in the formal order enabling the appropriate calculations
and adjustments to be made. I assume the figure will be readily agreed by Mr Dobson and Mr Read, but if there is an issue it can be referred back to the Court. In the meantime, the approximate figure of $594,000 as the plaintiffs’ contribution has utility as a guide.
The value of Ferndale
[55] The valuers agreed that the current market value of Ferndale (being at September 2010) was $1,792,750 (excluding GST). They had also been asked to assess market value at July 1997, and they agreed that the value then was $587,500 (excluding GST). The valuation at July 1997 was initially provided by Mr Doyle, the plaintiffs’ valuer, and presumably because Clive Malcolm had ceased work on the farms shortly before that date. However, no claim was advanced on the basis that the respective shares of the plaintiffs and defendants should be assessed as at July 1997. Mr Dobson prepared his various figures up to 2010 and Mr Read proceeded on the same basis. It is appropriate to assess the respective shares based on the value at September 2010. Because the shares can be fixed as percentages this will can take account of any fluctuation in value while the parties sort out the implementation of this judgment, should the need arise. That will also give them some flexibility.
[56] Based on the agreed valuation of $1,792,750, and the approximate calculation of the net value of the plaintiffs’ direct financial contributions to Ferndale of
$594,000, the plaintiffs would be entitled to a 33% share of the total value of
Ferndale. The defendants, jointly, would have a 67% share.
Claims to further contributions
[57] Mr McKechnie advised that Linda Malcolm accepted that the plaintiffs’ share should not be less than the percentage calculated on the basis of Mr Read’s figure of
$470,000 for the net value of financial inputs. He submitted that the figure should be
$470,000, on the basis that the total sums for fertiliser, water supply and fencing should be disallowed. However, he accepted that in principle the figure could be
between Mr Read’s $470,000 and Mr Dobson’s $720,000. This was a responsible acknowledgement in the light of the evidence. And in that regard I might note that Mr Dobson readily acknowledged, in respect of the two figures, that “there may in fact be a position in between given the nature of the expenditure”.8
[58] Mr Hudson submitted in respect of the farm expenses that all of the items included in Mr Dobson’s calculations should be allowed as contributions by the plaintiffs. He further submitted that there were additional contributions by the plaintiffs which should be brought into account and which further increase the plaintiffs’ share beyond the share based on Mr Dobson’s calculation of direct financial contributions. Mr Hudson provided careful and reasonably detailed submissions in this regard, and I have taken account of these submissions. It is fair to say that a number of the matters referred to had already been taken into account in Mr Dobson’s calculations. Amongst other things, contrary to one submission, full allowance was made, by Mr Read as well as by Mr Dobson, for all relevant financial assessments relating to the plaintiffs’ provision of the purchase price and their payment of interest on the money borrowed. Some of the submissions by Mr Hudson, to the effect that there were additional contributions, involved matters which, if allowed, would result in double counting in favour of the plaintiffs.
[59] The principal category of contribution advanced by Mr Hudson not already taken into account in the assessments by the accountants, and not already considered in this judgment, was an indirect contribution said to arise from the plaintiffs’ exposure to risk in borrowing the money when Ferndale was purchased. Related to this was a submission that, in effect, the purchase could not have been achieved had the plaintiffs not provided the company farm, and the plaintiffs’ stock and plant, as security for the total borrowed from the Rural Bank.
[60] It is correct that the plaintiffs were exposed to risk. I also accept that Ferndale could not have been bought without the additional mortgage security of the company farm. But I am not persuaded that this constitutes an additional contribution warranting any, or at best any significant, increase in the plaintiffs’ shares beyond the proportion resulting from the accountants’ calculations as
adjusted. There was a tendency in Kenneth Malcolm’s evidence and Mr Hudson’s submissions to globalise figures that apparently supported the plaintiffs’ case and to diminish or ignore the other side of the ledger. Reference was made to the total borrowed by the plaintiffs of $900,000. Whilst it was acknowledged that the sum then applied to the purchase of Ferndale was $518,750, the exposure to risk was more broadly presented in relation to the total of $900,000. And if the total of
$900,000 is considered, the impact of this in relation to risk was overstated by relating that sum solely to the value of the company farm and the plaintiffs’ stock and plant at the date of purchase of Ferndale. The net value was approximately $1.6 million. No account was taken of the value of Ferndale over which the Rural Bank also held security for the total loan and which the defendants owned. The tendency to overstate the figures to the plaintiffs’ advantage was taken further by the fact that the figure of $1.6 million was the plaintiffs’ equity after allowing for the existing loan from the Rural Bank of $207,000. That loan was repaid. When considering any quantification of the plaintiffs’ exposure to risk, and if that is assessed in relation to the total borrowed of $900,000, it was a borrowing against land, stock and plant with
a total approximate value (bringing Ferndale in at $500,000)9 of $2.3 million.
[61] The interest payments required to be met by the plaintiffs increased substantially. But the plaintiffs, controlling the entire farming business on the combined farms, including Ferndale, had the capacity to generate substantially increased income. And the calculation by Mr Dobson has taken account of the servicing of the debt relating to the purchase of Ferndale. The plaintiffs’ risk, to the extent that such things can be quantified beyond what the accountants have already done, was further diminished by the fact that not only was security taken over Ferndale, as well as over the company farm and the plaintiffs’ stock, but Linda and Clive Malcolm also provided their personal covenants. In his submissions Mr Hudson described the risk for Linda and Clive Malcolm as “minimal”. I do not agree with that description.
[62] Mr Hudson in the end submitted that the plaintiffs’ share should be assessed at 90%, and that this should be 90% of $1.13 million. The figure of $1.13 million was submitted to be the equity in Ferndale. For reasons already recorded, the shares
relate to the total value of Ferndale; the plaintiffs have sole responsibility for any existing debt.
[63] With due respect to Mr Hudson, there is simply no foundation for the submission that the plaintiffs are entitled to a 90% share; there is no principled basis for leaping from a share of around 33% to a share close to 100%. The reasons for this are in large measure contained in the discussion to this point. But it is appropriate to make some further and broader observations.
[64] The express acknowledgement by the plaintiffs that they do not have a resulting trust claim is important. It means that the plaintiffs acknowledge that they are not entitled to the entire beneficial interest in Ferndale notwithstanding the fact that, in substance,10 they provided the entire purchase price. The plaintiffs abandoned the resulting trust claim because to maintain it would have required them to assert that title was taken in the name of Linda and Clive Malcolm to secure a benefit for the plaintiffs by fraudulent means – evasion of stamp duty.11 To go back to the assertion of a claim to close to 100% comes close to reasserting what was solemnly disavowed. Having withdrawn the resulting trust claim, the plaintiffs cannot come back to essentially the same position by moving without any principled foundation from the position established on the basis of the careful analysis by the experts of their actual contributions, and using a methodology which provides full
compensation at present value.
[65] The principles to be applied are those referred to in the leading authorities, and including those set out in the judgments of Hardie Boys and Tipping JJ in Lankow v Rose cited at [10] and [11] above. Amongst other things, as noted by Tipping J, and extending the principle beyond a de facto union, the plaintiffs as the claimants do not start from a presumptive share “but rather from nothing”. A principled basis has been provided by the accountants and other experts, based on the facts provided by the plaintiffs, to fix the plaintiffs’ share at around 33%. There has to be a principled basis to go beyond that. There is no principled basis to take the
10 The accounting for the purchase appears to have effectively treated Linda and Clive Malcolm as having paid for Ferndale because the financial statements record a debt to the plaintiffs from Linda and Clive Malcolm for the purchase monies.
11 See Potter v Potter [2003] 3 NZLR 145 (CA) at [20].
share to 90%. And the only significant argument for an increase – the risk assumed by the plaintiffs – does not in my judgment provide justification for any significant increase.
[66] This conclusion is fortified if account is taken of the further benefits received by the plaintiffs from uncompensated contributions from Clive and Linda Malcolm. For reasons earlier discussed, I consider there were reasonably substantial contributions from the defendants which provided net benefits to the plaintiffs. These have not been brought into account in the calculations by Mr Dobson and Mr Read, but they do need to be brought into account.
[67] There are, however, two other matters requiring consideration. Clive Malcolm abruptly stopped working for the plaintiffs in April 1997. No doubt Kenneth and Graham Malcolm effectively and promptly took up the reins. But if the matter is considered on an arms-length business basis between employer and employee, that abrupt action would justify a degree of compensation to the plaintiffs. Since the principal issue of quantification has been approached on a notional business basis between lessor and lessee, this matter requires a similar appraisal. But looking at it in this way also requires account to be taken, so far as possible, of the circumstances leading to Clive Malcolm’s ceasing to work for the plaintiffs.
[68] The other point is that there is no evidence that Linda or Clive Malcolm, since they left Ferndale in October 1997, have had to do any of the things that an owner of a farm would generally have responsibility for when the farm has been leased. The extent of those responsibilities are likely to vary considerably from case to case. But whatever the precise extent, the defendants have been relieved of them by the plaintiffs.
[69] I consider that a reasonable allowance for the matters I have just discussed is
5% of the value of Ferndale. For the avoidance of doubt, this means that, if the recalculation of the share based on the direct financial contributions is 33%, as earlier estimated, the total share of the plaintiffs will be 38%.
Costs
[70] There were no submissions on costs, and understandably so. My provisional, but reasonably firm, opinion is that each party should bear their own costs. However, as there were no submissions on the question the leave that I am reserving in the next section includes leave to make any submissions on costs.
Implementation
[71] Counsel agreed that there should be no further orders at this stage following determination of the shares of the plaintiffs on the one hand and the defendants on the other. That will allow the parties an opportunity to consider alternatives in relation to implementation. In addition there is the need for the accountants to do the recalculation.
[72] Accordingly, I will at this stage make general orders as follows:
a) The plaintiffs are entitled to a beneficial interest in Ferndale in a percentage calculated in accordance with this judgment.
b)As between the plaintiffs and the defendants, the plaintiffs have sole liability for any debts secured over or relating to Ferndale and the plaintiffs shall indemnify the defendants in that regard.
c) If the parties are unable to agree on the percentage of the plaintiffs’ share, or on any other matter arising from this judgment, leave is reserved to make further application for determination of the outstanding issues, and either party may file a memorandum requesting a telephone conference to determine the further steps required to be taken.
d)Leave is also reserved to apply for formal orders to give effect to the allocation of beneficial interests in Ferndale.
e) If there is any issue as to costs the party seeking costs shall file and serve a memorandum and the other party shall respond within 20
working days.
Peter Woodhouse J
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