Lynch v FCL CL Limited
[2024] NZHC 2117
•31 July 2024
IN THE HIGH COURT OF NEW ZEALAND INVERCARGILL REGISTRY
I TE KŌTI MATUA O AOTEAROA WAIHŌPAI ROHE
CIV-2024-425-42
[2024] NZHC 2117
UNDER the Land Transfer Act 2017 IN THE MATTER
of an application for an order under s 143 of the Land Transfer Act 2017 that a caveat not lapse
BETWEEN
MONIQUE HUNE LYNCH and LUKE ALEXANDER SANSOM
Plaintiffs
AND
FCL CL LIMITED, as trustee of the FCL CL TRUST
Defendant
CIV-2024-425-41 UNDER
the Land Transfer Act 2017
IN THE MATTER
of an application for an order under s 143 of the Land Transfer Act 2017 that a caveat not lapse
BETWEEN
MARTA YATES
Plaintiff
AND
FCL CL LIMITED, as trustee of the FCL CL TRUST
Defendant
Hearing: 16 July 2024 Appearances:
D G Chesterman for Applicants S A Grant for Respondent
Judgment:
31 July 2024
JUDGMENT OF ASSOCIATE JUDGE LESTER
LYNCH v FCL CL LIMITED [2024] NZHC 2117 [31 July 2024]
[1] Monique Lynch and Luke Sansom purchased a residential apartment off the plans from FCL CL Limited (FCL). Ms Yates, by a separate contract, also purchased a unit in the same development being constructed by FCL in Queenstown. I will refer to the plaintiffs in this proceeding as the purchasers as, by and large, their circumstances are the same.
[2] The purchasers seek by summary judgment, specific performance of their agreements. As the purchasers are in the same position, neither counsel suggested the outcome of their applications should differ.
[3] I have the advantage in preparing this judgment of having Associate Judge Paulsen’s judgment of 9 April 2024 between the same parties.1 That judgment concerned an application by the purchasers to sustain their caveats over the development land. I fully adopt Judge Paulsen’s summary of the background which I set out below.
[4]I will refer to the defendants in this judgment as either FCL or the vendor.
Summary of dispute
[5] FCL exhausted its funding facility for the development due, it says, to delays and costs increases resulting from the COVID-19 pandemic. When the purchasers would not agree to increase the purchase price for their units, FCL purported to cancel their agreements relying on a force majeure clause. The purchasers lodged caveats over the head title which FCL regarded as a further breach of the agreements giving rise to an independent entitlement to cancel. Associate Judge Paulsen maintained the purchasers’ caveats in his judgment of 9 April 2024 and the evidence from that proceeding is by consent produced in this proceeding along with further evidence.
[6] The following statement of the background is taken largely unchanged from Associate Judge Paulsen’s judgment — neither counsel suggested his Honour’s summary was not accurate (albeit FCL has appealed the outcome).
1 Lynch v FCL CL Ltd [2024] NZHC 700.
Background
[7] The dealings between the parties took place against the background of the COVID-19 pandemic. The first case of COVID-19 was reported in New Zealand on 28 February 2020 and the Government introduced COVID-19 restrictions from 14 March 2020.
[8] FCL is the owner of a residential property development, involving the construction of 28 residential apartments within three separate apartment blocks on McAdam Drive, Jack’s Point, Queenstown (the Development). The director of FCL is Dean Franklin. The development is FCL’s sole construction project. Construction work on the development commenced in January 2021.
[9] The purchasers entered into agreements with FCL to purchase off the plans units within one of the three blocks known as “Clubhouse Lane Building 3”. The agreement between Ms Lynch and Mr Sansom and FCL was entered into on 23 August 2020. The agreement between Ms Yates and FCL was entered into on 10 February 2021.
[10]The agreements included the following terms:
(a)a force majeure clause that reads as follows:
In the event of any act of God, earthquake, flood, fire, storm, adverse weather conditions or other natural events, war, riot, civil disorders, epidemic or pandemic, significant money or economic developments, acts of Government, substantial damage to or destruction of the Development or Vendor’s Land, or any other unforeseen difficulties with the Vendor’s Land (as a building site) or any other event beyond the reasonable control of the Vendor whether similar or not (“Specified Event”), which shall prevent the Vendor from commencing or continuing construction of the Development or render it impractical for the Vendor to commence or continue construction of the Development, then the Vendor may by notice in writing to the Purchaser advise of the Specified Event and cancel this agreement.
(emphasis added)
(b)a no-caveat clause that reads as follows:
The Purchaser will not lodge a caveat against the Vendor’s Land unless a separate record of title for the Unit has been issued and the Vendor is in default of any of its obligations under this agreement. In the event the Purchaser lodges a caveat contrary to the restrictions in this clause (which restrictions are essential to the Vendor) the Vendor will be entitled to require the Purchaser to remove the caveat. The cost of such removal, including any costs or expenses incurred by the Vendor in relation to such removal will be borne by the Purchaser. In the event the Purchaser fails to remove the caveat within three (3) working days of the Vendor’s request, the Vendor may immediately and without further notice do either or both of the following:
(a)Take all necessary steps at the Vendor[s] cost to obtain immediate removal of the caveat. The Purchaser agrees that production of a copy of this agreement to LINZ together with a written statement from the Vendor that the Purchaser has failed to comply with a notice issued by the Vendor in terms of this clause will be sufficient authority to permit LINZ to remove the caveat from the Vendor’s title;
(b)Cancel this agreement and forfeit the Deposit.
[11] The agreements became unconditional on 30 November 2020 and 17 February 2021 respectively.
[12] Between late 2021 and July 2022, FCL provided project updates and confirmed matters were progressing well towards completion. On 21 July 2022, FCL provided a project update accompanied by a covering email referring to supply challenges, including delays with access to labour and materials caused by the nationwide building boom, and requested an extension to the completion date of 12 months to 30 November 2023. This required a variation to the agreements. The parties agreed to vary the terms of the agreements by substituting the following clause:
If the Settlement Date has not occurred by 30 November 2023 the Purchaser may at the Purchaser’s election at any time thereafter cancel this agreement by notice in writing. If the agreement is cancelled pursuant to this clause the Vendor shall immediately refund the Deposit and Net Interest to the Purchaser and neither party shall have any further right of claim against the other.
[13] Between November 2022 and April 2023, FCL provided further project updates. On 12 July 2023, FCL issued a project update in which request was made that the purchasers agree to an increased purchase price by 28 July 2023 and to a further extension for completion to July 2024. Relevantly it reads:
Unfortunately, due to Covid related delays, and its effect on the escalation of material, labour and funding costs, the existing funding facility is no longer sufficient to complete the Clubhouse Lane project. As a result, a proactive decision now needs to be made on how to best realise the value of this investment.
In order to secure the additional funding required to complete the project and fund the significant cost escalation, the financier requires the developer to immediately inject further significant cash contributions into the project. In addition the financier is seeking purchaser support via increasing individual purchase prices.
[14] The 12 July 2023 update went on to say the market was strong and provided a table of appraised market values for individual units. It also went on to state:
Time unfortunately is not on our side with our financier requiring unanimous signed agreements from all purchasers returned by no later than 4pm, Friday 28th July 2023.
The financier also requires the agreements to further extend the sunset dates until July 2024 in order to secure the additional funding.
You will shortly receive via your solicitor an individual letter detailing the funding proposal for your apartment at Clubhouse Lane, and a variation agreement.
(emphasis added)
[15] In the 12 July 2023 Project Update, Mr Franklin described the apartment as “… being relatively close to completion…”.
[16] On 17 July 2023, Mr Franklin emailed the purchasers with variation agreements to increase the purchase prices and extend the sunset dates. In the case of Ms Lynch and Mr Sansom, the purchase price was to increase from $795,000 to
$1,094,000 (a $299,000 increase). In the case of Ms Yates, the increase was from
$1,301,000 to $1,548,000 (a $247,000 increase). The purchasers had until Friday 28 July 2023 to sign the variation agreement and return it “to secure the continuation of the project”. Mr Franklin’s email stated:
Due to the increased delivery costs outlined in the project update shared with you yesterday, a purchase price renegotiation is necessary to resecure funding for the Clubhouse Lane project to be completed. I want to emphasise that this request has only been made as a last resort and following a period of intense negotiation with the project funders. They have committed to supporting the
development to completion, but this requires additional funding that will have to be shared between the developer and our original purchasers. …
(emphasis added)
[17] Also, in the 17 July 2023 letter to the purchasers, Mr Franklin referred to his “… commitment to getting this development finished…”.
[18] The purchasers did not sign the variation agreements but did not reject the request for a price increase out of hand. However, ultimately no agreement was reached to amend the purchase price.
[19] On 1 September 2023 (in respect to Ms Lynch and Mr Sansom) and 13 September 2023 (in respect to Ms Yates), FCL’s solicitors sent a letter to the purchasers’ solicitors giving notice that the contracts would be cancelled unless the applicants agreed to increase the purchase prices under the agreements by specified dates. No agreement being reached, the notices of cancellation came into effect. I set out parts of the letter later in this judgment.
[20] On 22 and 28 September 2023 respectively, the purchasers lodged caveats against the head title of the development to protect their interests under the agreements.
[21] On 31 October 2023, FCL’s solicitors wrote to the purchasers’ solicitors demanding the removal of the caveats. They stated the purchasers’ agreements had already been cancelled and, in addition, relied on the no-caveat clause in the agreements, saying that the caveats had to be removed within three working days.
[22] The purchasers did not remove the caveats and received notice from the Registrar-General of Land that FCL had applied to lapse them. On 22 and 29 November 2023 respectively, the purchasers filed their applications that the caveats not lapse. Appropriate notice was given of this to the Registrar-General of Land.
[23] On 14 November 2023 and 11 December 2023, FCL’s solicitors wrote again to the purchasers’ solicitors and, without prejudice to their position that the agreements
had already been cancelled, gave a further notice purporting to cancel the agreements for breach of the no-caveat clauses in the following terms:
The vendor’s position is that the Agreement with your client was cancelled with effect from 5 pm on [8 September and 22 September 2023]. Without prejudice to that position, and to the extent that the Agreement has not already been validly cancelled (which is denied), our client hereby gives notice pursuant to clause [40.1(b)/39.1(b)] that the Agreement is cancelled and the deposited [sic] forfeited.
Summary judgment principles
[24] The purchasers in maintaining their caveat had to satisfy a relatively low threshold. In that context, Ms Grant, counsel for FCL, “quite correctly” acknowledged:2
… the difficulty [FCL] faces in maintaining that the caveats should be lapsed on this basis, given the low threshold the [purchasers] must satisfy and the plethora of disputed factual issues that have a bearing on the matter.
[25] In this context, of course, the purchasers have a very different onus. They must establish FCL has no arguable defence.3 The disputed factual matters are potentially against them in this context as the Court will not determine disputed issues of fact or attempt to resolve issues which require further discovery or potentially expert evidence.
[26] There is evidence about the timing of the Government’s response to the COVID-19 pandemic and the impact of COVID-19 on the construction sector. I am satisfied it is arguable that FCL put in place funding on a considered basis for the Development, that such funding had to be extended because of cost escalations, the delays in obtaining materials and skilled labour brought about by the COVID-19 pandemic. The extent of the impact of the COVID-19 pandemic, whether such should have been reasonably foreseeable by FCL and whether that should have a bearing on the application of the force majeure clause, are not suitable for determination in this context.4
2 Lynch v FCL CL Ltd, above n 1, at [29].
3 High Court Rules 2016, s 12(2).
4 FCL used independent quantity surveyors to quote the build cost of the project, had those costings tested and included a contingency in its funding arrangement, however, building costs escalated by over 50 per cent, which went beyond the contingency.
[27] The evidence also shows that it is at least reasonably arguable (and probably not disputed), that FCL’s funder in August 2023 ceased funding the Development — FCL’s facility had been exhausted. As I will detail below, FCL put in place an extension or variation to the facility (which is referred to in Mr Franklin’s 12 July 2023 update referred to at [13] and [14] above). It was that finance extension which led to FCL to call for the purchasers to agree to increase the amount they would pay for their units.
Defence summarised
[28] FCL says it has a reasonably arguable case that it validly cancelled the purchasers’ agreements either under the force majeure clause or for breach of the no caveat clause and therefore the application for summary judgment must be dismissed. It says there are disputed factual issues associated with its right to cancel meaning whether either cancellation was valid cannot be resolved in a summary judgment context.
The operation of force majeure clauses
[29] As Associate Judge Paulsen had to address the law on force majeure clauses, I again gratefully adopt his summary of the principles. His Honour carefully reviewed the principles as he ultimately considered they were determinative of the application without him having to deal with disputes of fact. The following is taken from paras
[30] and following of his Honour’s judgment of 9 April 2024.
[30] A force majeure clause is a term of a contract that may entitle a party to bring an end to the contract or to be excused from performance under it upon the happening of some specified event or events. These will usually (but not necessarily) be an event or events beyond its control.5
5 Hugh Beale (ed) Chitty on Contracts (35th ed, Thomson Reuters, London, 2023) vol 1 at 27-060.
[31] The general principles of interpretation of contract terms are applicable to force majeure clauses. As noted in Chitty on Contracts:6
… a modern court is more likely to apply the same approach as that which it would take to the interpretation of any other term of the contact, at least where the parties to the contract are of roughly equal bargaining power and have access to legal advice. That said, the courts are likely to insist on the use of clear words given that the function of the clause is generally to shield a party from what would otherwise be a liability in damages in respect to its non-performance.
[32] In addition to a list of specified events which the parties have agreed will fall within the scope of the force majeure clause, the clause will often contain other requirements that must be satisfied before it can be relied upon. What this means is that once it has been established that an event which falls within the scope of the clause has occurred, it must next be considered whether the event has had the required impact on the ability of the contracting party to perform its obligations. Much depends upon the terms of the particular clause.
[33] The proper approach to contractual interpretation is an objective one, to ascertain the meaning the document would convey to a reasonable person having all the background knowledge reasonably available to the parties at the time of the contract.7 However, if the language used, construed in the context of the whole contract, has an ordinary and natural meaning that will be a powerful indicator of what the parties meant.8 Chitty on Contracts notes that where one party seeks to invoke the protection of a force majeure clause which states that it is to be relieved of liability if it is prevented from carrying out its obligations under the contract or is unable to do so, it must show the performance has become physically or legally impossible and not merely more difficult or unprofitable.9
[34]Under the clause that applies in this case, a specified event must:
... prevent [FCL] from commencing or continuing construction of the Development or render it impractical for [FCL] to commence or continue construction of the Development …
6 At 27-067.
7 Firm PI 1 Ltd v Zurich Australian Insurance Ltd [2014] NZSC 147, [2015] 1 NZLR 432 at [60].
8 At [63].
9 Chitty on Contracts, above n 5, at 27-075.
[35] There is no suggestion that a specified event, be it COVID-19 or some other event, prevented FCL from commencing construction of the Development. The issue therefore arises whether a specified event prevented FCL from continuing construction of the Development or rendered it impractical for it to continue construction of the Development.
[36] Ultimately, Associate Judge Paulsen concluded that FCL had not satisfied him that construction of the Development was not prevented or impractical at any stage and in fact continued throughout and will continue to completion.
[37] Again, in this context it is for the purchasers to show that FCL does not have an arguable defence in respect of the issue of whether it was impractical for it to continue construction to completion.
What does impractical to continue construction mean?
[38] It is common ground that when the force majeure clause refers to it being impractical to continue construction, it means impractical to complete construction. Ms Grant confirmed this in her submissions:
79. The clause expressly covers events outside the control of [FCL] that prevent it from “continuing construction”. This term must objectively mean completing the Development rather than being able to carry out minor works to hold the position after the Specified Event has occurred.
[39] My references to the factual disputes in this case do not mean the purchasers necessarily fail. It is not uncommon in a summary judgment context for a plaintiff to say: “Even if you accept what the defendant says, I am still entitled to judgment”. I am satisfied that this is one of those cases and that the purchasers are entitled to summary judgment. I now give my reasons for that conclusion.
The status of the Development funding as at cancellation — could FCL complete construction?
[40] The notices of opposition assert that there are factual issues that cannot be determined in this context; one being whether FCL had obtained funding by 13 September 2023 to continue with the Development.
[41] The starting point is what FCL’s solicitors advised the purchasers in their letters of 1 September and 13 September 2023. Recall that in his 12 July 2023 project update ([14] above), Mr Franklin advised that all purchasers had until 28 July 2023 to agree to the price increase. However, on 1 September and 13 September 2023, FCL’s solicitor advised:
3.The funder initially required, as a condition of further funding, 100% buy-in from purchasers in the Development to a proposal to increase the purchase price of units in the Development (Proposal).
4.Although there was not 100% buy-in, the funder has said that a sufficient proportion of purchasers have agreed to the Proposal that it is willing to assist with funding to enable the Development to be completed …
5.The only way the Development can be completed is if the sale agreements for purchasers of units who did not, or could not, agree to the Proposal (Contracts) are cancelled and the units are on-sold at prices satisfactory to the funder. There will not otherwise be sufficient funds to ensure that all units can be completed.
[42] The above represents FCL’s solicitors advising that the funder “… is willing to assist with funding to enable the [D]evelopment to be completed” and had dropped the requirement of the 100 per cent buy-in. Paragraph [5] of the letter does not specifically address the funder’s requirements rather, it must address what FCL wanted given para [4]. As expanded on below, this means funding to complete the Development had been offered or negotiated as at 1 September 2023 albeit it was not documented until 7 December 2023 — in short, FCL had solved the funding shortfall.
[43] We know para [5] of FCL’s solicitor’s letter was not correct as the units subject to the purchasers’ contracts have not been “… on-sold at prices satisfactory to the funder”, yet construction on FCL’s case recommenced in January 2024 (if not earlier as addressed below) and is continuing.
[44]Para [12] of the same letter advises:
12.Our client hopes that your client understands that the approach our client has chosen has been selected to ensure that settlement of the greatest percentage of purchasers’ contracts can be achieved, albeit it at a higher price.
[45] Paragraph [12] of the letter reinforces that the approach adopted at that time was to “… ensure that settlement … can be achieved …” (my emphasis) — being Mr Franklin’s commitment in his 17 July 2023 letter set out at [17] above. As at 1 September 2023 Mr Franklin was sufficiently certain of the new funding for him to refer to ensuring settlement.
[46] Mr Franklin, in his affidavit in the caveat proceeding, replied to Ms Yates’ evidence that none of the project updates leading up to the July 2023 update indicated that FCL’s funding was affected by COVID-19. Mr Franklin replied as follows:
58.I accept that the dire financial situation that FCL CL found itself in was not disclosed until there was a solution to the problem that would mean that the Development could be completed. Until I had a way forward, I did not think it helpful to anyone to make these announcements. To do so prematurely could have had disastrous consequences, particularly in a small market like Queenstown.
(my emphasis)
[47]However, Mr Franklin in his affidavit for this proceeding, says:
10.By September 2023, there were positive indications from ANZREC Lender LLC (ANZREC) that it might be willing to provide sufficient funds to complete the construction of the three buildings. This was on the strict condition that purchasers would either have to agree to pay more for their units or agree to their agreements being cancelled and their units being sold at current market values. It was made clear by ANZREC that if these terms were not acceptable to the purchasers, it would not fund the ongoing construction of the three buildings.
[48] Again, this is not what happened. Funding was obtained without the purchasers’ units being on-sold. The condition that all purchasers had to agree to increase their purchase price was dropped, as confirmed by FCL’s solicitor on 1 September 2023. What Mr Franklin instructed his solicitor to put in the letter of 1 September 2023 is watered down to: “positive indications” that the funder “might be willing” to fund completion. Mr Franklin does not offer an explanation as to this change of emphasis which is inconsistent with his reply evidence in the caveat proceeding.
[49] In short, FCL had not given up on the Development nor had its funder. Mr Franklin, for reasons I address below, had he told the purchasers he was committed
to the Development being completed. At the date of its purported cancellation of the purchasers’ contracts, FCL at worst did not know what the final shape of funding would be, but we are told in FCL’s solicitor’s letter of 1 September 2023 that “…a sufficient proportion of purchasers have agreed to …” increasing their purchase price and the need for all purchasers to agree to increase their purchase price had been dropped. This is contemporary advice is as to the funder’s position which is not contradicted by the funder — nor does FCL’s solicitor seek to explain his clear advice in the 1 September 2023 letter even though he has sworn an affidavit.
Evidence from the funder
[50] Evidence from the funder comes from a Mr Strathdee who acts, in his words as “… point-person on the ground to originate, manage and execute the investments that are made” on behalf of overseas institutional investors who make property-related investments.
[51] Mr Strathdee describes the cessation of funding and that the funder advised FCL that no further funds would be made available after 28 July 2023 unless and until new equity arrangements and increased sales revenue for the Development had been secured.
[52]Under the heading “Implementation of the requirements”, Mr Strathdee says:
11.It then took several months for FCL to reach arrangements with purchasers in the Development to either increase purchase prices to prices to a level that was sufficient to cover the increased costs required to complete the Development, or to cancel agreements where purchasers could not or would not agree to increase the prices they were to pay, so that the apartments that they had purchased could be resold.
12.This was a pre-requisite to underwriting the additional funding that was needed for the project. In addition, Arena called on further equity contributions from other projects that it had funded to related entities of FCL and which were cross collateralized with the FCL facilities that funded the Development. The profits of those projects were applied to the costs of the Development in order to meet some of the costs that were required to complete the project.
13.On account of the complexities that were involved in extending Arena’s debt financing facilities for the Development and the time that was required to confirm final costs to complete to the level of detail
necessary to support additional funding under those facilities, there was a complete cessation of funding after 2 August 2023, and it was not until December 2023 that any further funds were made available to FCL to enable it to continue with the construction of the buildings in the Development. A copy of the drawdown certificate dated 11 December 2023 for $3,173,549. Is at page 5 of the Bundle.
[53] This evidence is consistent with the position advised by Mr Franklin in the 12 July 2023 update noted at [14] above that the funder required “unanimous signed agreements from all purchasers”. However, the evidence does not contradict the statement by FCL’s solicitor in the cancellation letters of 1 September 2023 and 13 September 2023 that the requirement all purchasers agree to up their price had been dropped. As noted by Mr Chesterman, counsel for the purchasers, paras [11] and [12] of Mr Strathdee’s evidence are in general terms, with no detail as to dates. Mr Strathdee does not say the cancellation letters were wrong in saying the requirement that all buyers sign, had been dropped.
[54] In any event, when Mr Strathdee refers to a pre-requisite for additional funding, he must have been referring to the funder’s original requirements because by the time the funding was put in place, that is formally signed off in December 2023, it was clear that the purchasers in this case had not accepted the cancellation and had lodged caveats.10
[55] On 12 September 2023, Ms Yates’ solicitor enquired of FCL’s solicitors as to the outcome of FCL’s meeting with its lender that week, FCL’s solicitors replied: “In terms of funding, my client has not been unable to secure the necessary funding to complete the development at this stage”.
[56] One assumes the double negative in the quoted passage above was inadvertent, albeit this is not addressed. However, Ms Yates received a cancellation letter on 13 September 2023 in the same form as that received by Ms Lynch on 1 September 2023. Ms Yates was advised that her contract was cancelled as at 22 September 2023.
10 I note Mr Strathdee does not say continued funding of the project from now is linked to the outcome of this proceeding.
[57] The best position for FCL is that funding was in fact more equivocal than its own solicitor’s letter suggested. However, such equivocality in that regard as it now asserts, in my view, was not sufficient for it to cancel the purchasers’ agreements. While a real possibility funding on acceptable terms to complete the Development existed, it could not be said it had become impractical to continue the Development.
[58] It is not enough to rely on a force majeure clause to say that a triggering event may have arisen, or it is uncertain that a triggering event has happened. Here, funding for the completion of the Development had been agreed, albeit not documented, or was at the least looking likely even if FCL’s watered down position as to its likelihood for this hearing is correct.
[59] Before the force majeure clause in this case applies, a triggering event must have occurred. The end of one finance facility does not make it impractical to continue a project if a new facility on acceptable terms is available. Only if no funding was available could it be said it was impractical for FCL to complete construction of the Development. That was not the state of affairs as at the purported cancellations because, as I have said, FCL either had or was exploring practical alternatives to continue funding the Development and indeed was successful in doing so.
[60] The onus is on the party relying on a force majeure clause to show that a triggering event has occurred. Nonetheless in the summary judgment context the purchasers must show that FCL does not have an arguable defence in respect of this issue but, in my view, they have done so because at the time of cancellation it was not yet certain that it was impractical for the Development to be completed. That is borne out by what actually occurred.
[61] Until it was clear that alternative finance could not be obtained, it could not be said that it was impractical on the grounds of lack of finance to continue, that is to complete, the Development.
[62] Whether it was impractical to continue, that is to complete the Development, has to be assessed in context. FCL had every incentive to complete the Development. FCL owned the land on which the Development was being built which, I was told, had
a value of $5,000,000. The assessed total building cost for the Development was
$28,473,000. Funding of $26,200,000 came from the funder, requiring FCL to put in
$2,270,000.00 borrowers’ equity to fund the difference. The facility was guaranteed by Mr Franklin and secured over assets of entities connected to FCL. By the time the funding had run out in August 2023, the Development was “relatively close to completion” to quote Mr Franklin ([15] above).
[63] FCL says it has foregone its profit to keep the Development alive. That may well be true but by keeping the Development alive, it preserves its equity contribution (land and build contribution $7,270,000) and Mr Franklin avoids liability under his guarantee and avoids claims against the collateral security. That reality shapes the assessment of whether completion of the Development was considered practical by FCL. In a wider commercial sense, it was very practical for completion to occur to avoid the consequences just noted and, of course, work to complete the Development recommenced when further funding was confirmed. The reality is that FCL considered it practical to complete the Development from its advice to purchasers on 12 July 2023 that it had negotiated finance to do so.
[64] It makes no difference that the purchasers disagreed with that part of the financing plan which initially required the purchasers to agree to up their purchase price. As we have seen, that requirement of the funder was dropped. That sufficient other purchasers were willing to do so or willing to cancel their agreements is, in my view, irrelevant. Once sufficient purchasers had agreed to up their purchase price, the requirement of the funder was satisfied. That FCL may have wanted the purchasers to agree to increase their price to help restore FCL’s profit or minimise its losses did not render completion impractical. Mr Franklin’s evidence is that his “… understanding [FCL] is required to treat all purchasers in a similar even-handed manner” is incorrect if it is intended to mean FCL could cancel the purchasers’ contracts if they did not increase their purchase prices.
[65] The purchasers are not “freeloading” on what other purchasers were prepared to do as FCL suggests rather, the purchasers are entitled to insist on performance of their contracts on the completion of the Development because funding to complete had been obtained. FCL’s asserted desire to treat purchasers the same does not engage
the force majeure clause. That is all the more when the 1 September 2023 and 13 September 2023 letters informed the purchasers that sufficient buyers had already agreed to increase their purchase price to permit the further funding to occur — why in those circumstances would the purchasers agree to a significant price increase?
[66] Accordingly, I am satisfied that even on the evidence advanced by FCL, a triggering event had not occurred, that is, it had not become impractical for FCL to complete the Development. FCL was exploring further funding alternatives and had received, if not a commitment to funding as reported in its own solicitor’s letter, then positive indications that funding was available. Uncertainty that a triggering event had occurred is not enough. On FCL’s evidence the point had not been reached where completion was impractical.
In any event is a hiatus in the continuation of construction enough?
[67] On FCL’s case, construction work ended in early September 2023 and recommenced in January 2024. The purchasers say that some work continued on site throughout but its exact character is in dispute. This alleged continuation of construction work on the Development is the second factual issue raised in the notices of opposition.
[68] FCL describes activity identified by the purchasers on site after cancellation as being to make the premises secure and watertight. While it is not a term used by FCL, the idea is that the site was being mothballed.
[69] However, there is an aspect of work identified by the purchasers and supported by photographic evidence that occurred during hiatus that is not related to water proofing or making the site secure.
[70] As Ms Lynch and Luke Sansom live overseas, Mr Sansom Snr was keeping an eye on the Development given it was in his neighbourhood. He produces a number of photographs of workers on site after the claimed cessation of work. Mr Franklin’s evidence is that prior to the cessation of work there were between 60—85 workers on site at any one time. The photographs produced by Mr Sansom Snr show relatively few workers on site on various parts of the Development. From the photographs it is
not possible to be definitive in most cases as to the type of work being carried out. However, at least in one case is clear that the work being carried out was not related to waterproofing or security, that is it was a continuation of construction rather than a mothballing of the Development.
[71] The aspect of work which, in my view, falls outside the type of mothballing work asserted by FCL, is the installation of a large area of concrete involving that area being boxed, reinforcing installed and concrete poured and finished.
[72] Mr Sansom Snr’s affidavit in respect of the concrete work was affirmed on 31 January 2024 for the caveat proceeding. He describes the concrete work in detail and produces photographs taken between 27 November 2023 and 4 December 2023 showing the large area of concrete being prepared and poured. Ms Grant attempts to explain this away by saying this work was undertaken only 10 days before the date of the funding agreement and at a time when it could be assumed the documents were reasonably well advanced.
[73] Ms Grant also referred to this not being work to advance the Development “as a whole”. The reference to “as a whole” is a gloss on the words in the force majeure clause. At the very least, the concreting work described by Mr Sansom Snr was continuing construction work which is not explained by work being required for security or watertightness, assuming such work was not in fact continuing construction work but purely mothballing works.
[74] The head contractor for the Development is Formcrete Construction Limited (Formcrete). Mr Price is the general manager of Formcrete.
[75] Mr Price, in an affidavit filed for the summary judgment hearing, says that on 18 August 2023 he told Formcrete’s sub-contractors to cease work because he had been told by Mr Franklin that funding had ended and all construction work was to cease. Mr Franklin is the sole director of Formcrete.
[76] While Mr Price responds to Mr Sansom Snr’s evidence about the work on site (with the exception of the concrete work I mentioned above), Mr Price does not
respond to a post he made on Linkedin on 27 October 2023 produced in evidence at the caveat hearing.
[77] The Linkedin post was made on 27 October 2023. It was said at the hearing that Mr Price was unauthorised to make this post, but that is not the point. The post is probably more relevant because it was not subject to prior review or approval by FCL. The post contains two photographs and is headed “Friday photo progress update… Clubhouse Lane & Village Works Lots”. Of course, this post was made by Mr Price at a time that he would have it that he had been told all work was to cease on site. Mr Price does not explain why he was posting “Friday photo progress update” at the end of October when all work was meant to have ceased in August on Clubhouse Lane.
[78] One of the comments made in respect of the post is: “What a stunning location. When will the Clubhouse Lane development be completed? Are there still apartment[s] available for sale?”
[79] Mr Price responded on 27 October 2023: “… by 2nd Qtr next year … Yes only have a couple left”. This is not the response of a company that has been told to down-tools and is concerned at having outstanding invoices. As I have said, no explanation is offered by Mr Price in respect of this post.
[80] In a sense, this work is the other side of the coin of the completion of the Development not being impractical as FCL knew further funding was approved albeit not documented.
[81] That a funding facility was exhausted on day one, but a new funding facility was obtained on say day three, does not mean that on day two FCL could cancel. Economic circumstances would not mean on day two it was impractical to continue.
[82] Put colloquially, FCL had too much skin in the game to let the Development fall over. Seeking to increase its profit or minimise its losses through increasing the sale price to the purchasers did not render completion impractical.
[83] FCL’s position begs the question at exactly what date the triggering event to invoke the force majeure clause occurred. Mr Grant submits the key date was when FCL’s original funding was exhausted. I do not accept that at the moment the original facility was exhausted it became impractical for the Development to be completed. Ms Grant submitted completion was impossible as at the exhaustion of the facility. At that point there was no funding to complete. But the contracts were not cancelled because there was no funding to complete — they were cancelled because the purchasers would not agree to up their price after FCL’s solicitor had advised that requirement of the funder had been dropped. Performance of the contract, that is completion of the Development, had not become impossible. Mr Chesterman referred to a party wishing to rely on a force majeure clause having to take all steps to mitigate or avoid the effect of the event that has occurred.11 Certainly, Mr Franklin did not consider completion impossible. He committed to complete the agreement and put in place the funding to do so and as noted at [46], he did not inform purchasers of the funding issue until there was “a solution to the problem that would mean that the Development could be completed” until there was a “way forward”. A solution to the funding issue was in place as recorded in FCL’s solicitor’s letter of cancellation when cancellation was not required by the funder.
[84] At no point on FCL’s evidence, from its letter of cancellation to the signing of the formal funding agreement on 7 December 2023, was there a time when there was not a realistic prospect of further funding being available.
[85] Accordingly, while “on the ground” construction work may have been minimal, at no point was there a decision by FCL not to complete the Development nor a time when it became impractical to do so because funding could not be obtained.
11 Paul David KC, “Contract Issues for Exceptional Times – Frustration and Force Majeure” ADLS CPD Seminar, (15 March 2021) at 30. Mr David does not give specific authority for his statement but reference to Chitty on Contracts (footnote 5 above), confirms that to rely on a force majeure provision the event must be beyond the parties’ reasonable control and could not have been overcome by avoiding taking reasonable steps. See Chitty on Contracts, above n 5 at 27-066 for authorities.
The effect of the caveat being lodged in breach of the contractual terms
[86] FCL relies on an independent right of cancellation being breach of the no caveat clause. FCL cancelled the contracts without prejudice to its position as such had already been cancelled. Ms Grant submits this independent ground means that the contracts are at an end and there are no valid contracts to be enforced.
[87] Associate Judge Paulsen dealt with this issue in detail in his judgment of 9 April 2024. His Honour noted the common law requirement that a cancelling party under a contract must be ready, willing and able to perform. His Honour referred to the following passage from Noble Investments Ltd v Keenan, where the Court of Appeal noted that the purpose of the rule was to ensure that a party does not benefit from its own wrong and noted:12
A party could be seen as benefiting from its own wrong if it seeks by cancellation to deprive the other party of the benefit of the contract in circumstances where the other party’s breach is a direct result of breach committed by the party seeking to cancel the contract. Non-payment of a deposit could come into this category where, for example, the vendor needs to use the deposit to fulfil his or her obligations under the contract. This is not the case here, however, as the deposit was to be held by a stakeholder. A party could also be seen as benefiting from its own wrong where it is unable or unwilling to perform its obligations under the contract and seeks to avoid liability for its own breach by cancelling the contract on the basis of the other party’s breach.
(emphasis added)
[88] It is clear beyond doubt that at all relevant times, FCL was not willing to perform its obligations under the contracts with the purchasers. That position does not alter with my conclusion that FCL’s cancellation under the force majeure clause was invalid. As Ms Grant submits, that conclusion means that the contract remained on foot and lodging the caveat was prima facie a breach of the agreement. The real issue however is the effect, if any, of that breach.
[89] The fact is, as I will discuss when I turn to the issues relating to the discretion, FCL’s position left the purchasers with no option but to lodge caveats. FCL’s actions forced the purchasers’ hand. As FCL was not willing to perform its obligations under
12 Noble Investments Ltd v Keenan [2006] NZAR 594 at [47].
the contract and indeed, to the date of the hearing of their applications, denied those obligations, it was not entitled to cancel pursuant to the principle enunciated in Noble Investments Ltd. I note when FCL gave notice of cancellation in respect of this ground, it said it would be forfeiting the deposits — such advice would understandably have been of concern to the purchasers.
Discretion in respect of the application for specific performance
[90] That the purchasers would not be entitled to specific performance if they established that the contracts had not been cancelled, was not raised in the notice of opposition. FCL’s position throughout was that it was entitled to re-sell. That was FCL’s stated intent. The purchasers’ position as to the status of the contract has been upheld.
[91] I do not accept Ms Grant’s submission that there was no need to lodge the caveats. With FCL’s position being it would resell and with FCL on its own case being in a difficult financial position, any damages claim could have been worthless. The purchasers really had no choice.
[92] Ms Grant submitted that had the purchasers really believed their positions were at risk, they should have applied for an injunction. However, in reply, Mr Chesterman referred to Mortre Holdings Ltd v ANCL Investments Ltd, where Justice Asher delivering the judgment of the Court said:13
[8] The primary purposes of a caveat are to protect the caveator’s beneficial interest from being defeated by registration of a dealing and to give notice of the caveator’s interest. It must be recognised that a caveat can have a far wider reach than an injunction. An injunction affects only the specified parties, whereas a caveat, through its blocking function and notice to third parties, can stop transactions that a purchaser does not know about and therefore would not be able to injunct.
(footnotes omitted)
[93] Given FCL’s stated intention to resell the purchasers’ properties, a caveat was called for to give notice to third parties.
13 Mortre Holdings Ltd v ANCL Investments Ltd [2016] NZCA 494, (2016) 18 NZCPR 268.
[94] Ms Grant submits that the presence of the caveats has had an adverse impact on the marketing of the units. There is no evidence of this. The evidence is that of the 28 units, 23 agreed to increase their price or cancel, five did not, but three are in negotiations leaving only the two plaintiffs/purchasers in this proceeding holding out
— it is not clear what further marketing is taking place. As noted at [79], Mr Price in October 2023 said only a couple of units were available.
[95] Ms Grant submitted that the purchasers have given no evidence that they are able to perform the agreement. Having not put any aspect of the right to seek specific performance in issue, this is not a point that can be seriously maintained. Both parties deposed they were ready, willing and able to settle. If either purchaser does not settle, then FCL will be able to cancel.
[96] I was informed that the Development is not yet complete and individual titles have yet to issue. There is an order in each proceeding that each purchaser is entitled to an order for specific performance of their respective agreements. Leave is reserved to apply further should the need arise.
Costs
[97] Mr Chesterman wished to be heard on costs. His costs memorandum (not more than five pages) is to be filed within 15 working days. Any reply (also not more than five pages) is to be filed within a further 15 working days.
Associate Judge Lester
Solicitors:
AWS Legal, Queenstown (for Applicant) Foley Hughes, Auckland (for Respondent)
Copy to counsel:
D Chesterman, Barrister, Auckland S Grant, Barrister, Auckland
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