Kai Iwi Tavern Limited v The New Zealand Guardian Trust Company Limited
[2013] NZHC 821
•18 April 2013
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2010-404-6357 [2013] NZHC 821
BETWEEN KAI IWI TAVERN LIMITED Plaintiff
ANDTHE NEW ZEALAND GUARDIAN TRUST COMPANY LIMITED
First Defendant
ANDON THE WING TRUSTEES LIMITED Second Defendant
ANDNIGHTINGALE FINANCE LIMITED First Third Party
ANDTORY PROPERTY FINANCE LIMITED Second Third Party
ANDCBRE RICHARD ELLIS (AGENCY) LIMITED
Third Third Party
ANDFISHER TRUSTEE LIMITED Fourth Third Party
Hearing: 17 September 2012
Appearances: R J Katz QC for Plaintiff
M J Tingey and N F D Moffatt for First Defendant
M G Kirkland and J R Farquhar for Second Defendant and First, Second and Fourth Third Parties
S C Gollin and K J Verkerk for Third Third Party
Judgment: 18 April 2013
JUDGMENT OF PETERS J
This judgment was delivered by Justice Peters on 18 April 2013 at 5 pm pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Date: ...................................
KAI IWI TAVERN LIMITED V THE NEW ZEALAND GUARDIAN TRUST COMPANY LIMITED HC AK CIV-2010-404-6357 [18 April 2013]
Introduction
[1] The issue in this case is whether a payment of commission by the first defendant (“NZGT”) to the third third party (“CBRE”) was made in accordance with s 179(2)(c) of the Property Law Act 2007 (“Act”). The plaintiff’s (“Kai Iwi”) case is that the payment was not so made and that the sum paid to CBRE should, in fact, have been paid to Kai Iwi. NZGT and the third parties to the proceeding, all of whom were joined by NZGT, contend that the payment to CBRE was made in accordance with s 179(2)(c).
Background
[2] At all relevant times Waterloo Buildings Limited (in liquidation) (“Waterloo”) was the registered proprietor of 18 Waterloo Quadrant, Auckland (“property”).
[3] NZGT, the fourth third party or its predecessor (“Fisher”) and Kai Iwi were mortgagees of the property in that order of priority. The second defendant is no longer a party to the proceeding and it is unnecessary to consider its position further. The first and second third parties are associated with Fisher. I refer to NZGT and the third parties as “the defendants”.
[4] On 29 February 2008 NZGT gave notice to Waterloo of the latter’s default under its mortgage.[1] Waterloo did not remedy the default.
[1] Property Law Act 2007, s 119.
[5] By agreement dated 31 March 2008 (“Agency Agreement”), Waterloo appointed CBRE to negotiate a sale of the property to Gamos Services Limited (“Gamos”) or nominee and agreed to pay commission to CBRE on any such sale. There is no dispute that the commission ultimately paid to CBRE was payable under the Agency Agreement.
[6] On 28 May 2008 Waterloo as vendor and Gamos as purchaser entered into an agreement for sale and purchase of the property (“agreement”). The purchase price
was $15,250,000 plus GST if any. Included in the agreement were terms that Waterloo would pay CBRE’s commission and that the deposit would be paid to and held by an agreed stakeholder pending settlement, and a direction to that stakeholder to pay the commission due to CBRE upon settlement.
[7] The circumstances in which Waterloo and Gamos agreed the stakeholder, the change in stakeholder and how the deposit was held pending settlement were the subject of considerable argument before me. However, for the reasons given below, it is unnecessary for me to address that argument in any detail.
[8] On 2 July 2008 the agreement was declared unconditional. Gamos notified Waterloo that it had agreed to novate the agreement to Telsar Investments Limited (“Telsar”) as purchaser and that funds to pay the deposit were in hand.
[9] On 8 July 2008, NZGT gave notice to Telsar that it adopted the agreement pursuant to s 179(1) of the Act.[2] Section 179(1) reads as follows:
[2] Ibid, s179.
179 Mortgagee may adopt agreement for sale and purchase
(1) If, at any time during which the mortgagee is entitled to exercise a power to sell mortgaged property, the whole or any part of the property is subject to an agreement for sale and purchase entered into by the current mortgagor or any former mortgagor, the mortgagee may elect, by notice served on the purchaser, to adopt the agreement for sale and purchase.
[10] There is no dispute that NZGT was entitled to adopt the agreement as it did.
[11] The deposit of $1,526,468.01 was paid to Bell Gully (NZGT’s solicitors) as stakeholder on 10 July 2008, CBRE rendered an invoice to Waterloo on 11 July 2008 and NZGT and Telsar settled the sale on 1 August 2008. On settlement, Telsar paid the balance of the purchase price and the proceeds of sale were then disbursed, with commission of $343,125 being paid to CBRE. Payments were also made to mortgagees who had priority to Kai Iwi, namely NZGT and Fisher. The proceeds of sale were insufficient to enable any sum to be paid to Kai Iwi as a subsequent
mortgagee.
[12] Kai Iwi does not dispute that commission was payable by Waterloo to CBRE. Its case is that Waterloo alone, as vendor, was liable to pay the commission; that, as an “adopting mortgagee”, NZGT was obliged to apply the proceeds of sale in accordance with ss 179(2)(c) and 185(1) of the Act; and that those provisions require that the sum paid as commission should have been paid to Kai Iwi.
[13] The defendants defend the claim on three grounds.
[14] The first is that the commission was paid by Bell Gully as stakeholder, pursuant to the direction to which I have referred.
[15] The second is that a mortgagee who adopts an agreement under s 179(1) adopts all the vendor’s obligations under the agreement, including in this case the obligation to pay the commission. Counsel for Kai Iwi and the defendants made submissions as to what is meant by the words “to adopt the agreement for sale and purchase” in the context of s 179(1) and the extent to which an adopting mortgagee becomes subject to or assumes some or all of the liabilities of the vendor under the agreement.
[16] The third ground of defence is that, contrary to Kai Iwi’s case, the payment to CBRE was made in accordance with ss 179(2) and 185. I am satisfied that the case can be decided on consideration of these provisions.
[17] Given that conclusion, it is unnecessary to consider the first and second grounds of defence and the claims that the defendants made against each other in the event Kai Iwi succeeded. There is force, however, in counsel for Kai Iwi’s submission that s 179(2)(c) is mandatory and is to be applied, regardless of the terms of the agreement adopted by the mortgagee.
Discussion
[18] Section 179(1) was introduced in the Act. There is no predecessor provision.
The legislation originated from the Law Commission’s report to which counsel for
Kai Iwi and the defendants referred me.[3] I do not consider that the report assists with the resolution of the particular issues that arise in this case.
[3] Law Commission A New Property Law Act (NZLC R29, 1994).
[19] Counsel agreed that, having adopted the agreement, NZGT was required by s 179(2)(c) of the Act to account for the proceeds of sale “as though the property had been sold by” NZGT.
[20] The relevant parts of s 179 reads as follows:
179 Mortgagee may adopt agreement for sale and purchase
(1) [See [9] above].
(2) On making an election under subsection (1),—
(a) the mortgagee has all the rights and powers in relation to the purchaser that the current mortgagor would have had as vendor of the property; and
(b) the mortgagee may execute all assurances and do all other things necessary to effect the transfer or assignment of the property; and
(c) the mortgagee must account for the proceeds of the sale as though the property had been sold by the mortgagee.
...
(4) The adoption of an agreement for the sale and purchase of property by a mortgagee does not affect any liability in respect of the agreement of the current mortgagor, or any former mortgagor, who entered into or is otherwise bound by the agreement.
[21] Counsel agreed that regard must be had to s 185 of the Act in determining whether the payment to CBRE was made in accordance with s 179(2)(c). Section
185 makes provision for the application of proceeds of sale by a mortgagee of mortgaged property. Section 185 replaced s 104 Land Transfer Act 1952. The particular question which arises is whether the payment of commission to CBRE was within s 185(1)(a), being the payment of an amount referred to in s 185(2) and, particularly, s 185(2)(d).
[22] Section 185 reads as follows:
185 Application of proceeds of sale of mortgaged property
(1) The proceeds arising from the sale by a mortgagee of mortgaged property must be applied—
(a) first, to the payment of all amounts (if any) referred to in subsection (2), together with interest on those amounts at the agreed rate (if any) at which interest is payable on the principal amount secured by the mortgage:
(b) secondly, to the payment of amounts secured by any other mortgage, encumbrance, or security interest over the property to the extent that it has priority over the mortgagee's mortgage:
(c) thirdly, to the repayment of all amounts (if any) paid or advanced by the mortgagee for the purpose referred to in paragraph (b), together with interest on those amounts at the agreed rate (if any) at which interest is payable on the principal amount secured by the mortgage:
(d) fourthly, to the payment of amounts secured by the mortgage (to the extent that those amounts have not been paid under paragraphs (a) to (c)):
(e) fifthly, to the payment of amounts secured by any subsequent mortgage, subsequent encumbrance, or subsequent security interest over the property if—
(i) the subsequent mortgage, subsequent encumbrance, or subsequent security interest is registered; or
(ii) the subsequent mortgage, subsequent encumbrance, or subsequent security interest is unregistered, but the mortgagee has actual notice of it:
(f) sixthly, to the payment of any surplus to the current mortgagor.
(2) The amounts are amounts reasonably paid or advanced at any time by the mortgagee—
(a) for the protection, insurance, maintenance, preservation, or repair of the mortgaged property; or
(b) for the payment of rates or other outgoings; or
(c) to meet the expenses of the mortgagee in entering into possession, or in doing anything that a mortgagee in possession is required or entitled to do; or
(d) with a view to the realisation of the security (including any additional amount referred to in section 120(2) or 129(2)).
...
[23] In its statement of claim,[4] Kai Iwi alleges that the commission was an unsecured liability of Waterloo and “not a cost of realisation recoverable by [NZGT] under s 185(2)(d)”. The thrust of Kai Iwi’s submissions on this point was that liability to pay commission to CBRE arose as a cost of a sale effected by Waterloo, not by NZGT. Counsel for Kai Iwi referred me to authorities concerning s 104 Land Transfer Act 1952. These authorities addressed the circumstances in which purchase money, arising from a sale effected by a mortgagee, might be applied to pay GST on
[4] Third Amended Statement of Claim, 17 May 2012 at [95].
a supply as an “expense occasioned by the sale”.[5] Counsel for Kai Iwi submitted
[5] Commissioner of Inland Revenue Department v Edgewater Motel Ltd [2003] 1 NZLR 425 (CA);
that such recovery was allowed if the mortgagee had “sold” the property and not otherwise. Counsel submitted that, as the sale in this case was made by Waterloo, the commission was not an amount paid with a view to the realisation of the security.
[24] With respect to counsel, the authorities to which he referred me turned on whether or not the sale had been effected by the mortgagee because those were the only circumstances in which s 104 Land Transfer Act 1952 applied. I do not consider those authorities bear on the issue that arises in this case, namely the effect of s 179(2)(c).
[25] In my view, the combined effect of ss 179(2)(c), 185(1)(a) and 185(2)(d) was to require NZGT to pay CBRE’s commission from the proceeds of sale in priority to the mortgagees.
[26] I accept that the commission was paid as a result of an obligation assumed by Waterloo, that Waterloo and not NZGT effected the sale of the property and that Waterloo remained liable to pay the commission to CBRE. However, I do not consider these matters material to the question of whether, having adopted the agreement, NZGT was liable to pay CBRE’s commission.
[27] Section 179(2)(c) requires an adopting mortgagee to account “as though” it
had sold the mortgaged property. If NZGT as mortgagee had sold the property, I am satisfied that it would have appointed an agent to effect a sale and that it would have
agreed to pay the agent commission on any sale obtained. As counsel for the defendants submitted, if that had occurred, NZGT would have been obliged by s 185(2)(d) to pay the agent’s commission in priority to itself and to any other mortgagee.
[28] It follows in my view that NZGT was obliged to pay the commission to
CBRE, regardless of the matters referred to in [26].
Result
[29] To conclude, I am satisfied that the payment of commission made by NZGT to CBRE was made in accordance with the relevant provisions of the Act. I dismiss Kai Iwi’s claim accordingly.
[30] I trust the parties can agree the matter of costs between them but they should submit memoranda if they are unable to do so.
..................................................................
M Peters J
Solicitors:
Bytalus Legal, Auckland: [email protected]
Bell Gully, Auckland: [email protected] / [email protected] Kirkland Morrison: [email protected] / [email protected] Minter Ellison Rudd Watts, Auckland: [email protected] /
Counsel:
R J Katz QC, Auckland: [email protected]
Rob Mitchell Builder Ltd (in liquidation) v National Bank of New Zealand Ltd (2004) 21 NZTC
18,397 (CA); and Simpson v Commissioner of Inland Revenue Department [2012] 2 NZLR 131 (CA).
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