Lyon v AK651441 Limited
[2014] NZHC 1178
•29 May 2014
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2012-404-406 [2014] NZHC 1178
BETWEEN ALISTAIR MARK STUART LYON
First Plaintiff
AK3694975 LIMITED as corporate trustee of the LAZONA TRUST Second Plaintiff
AND
AK651441 LIMITED as corporate trustee of THE QUAY TRUST
First Defendant
RMCL LIMITED Second Defendant
GEOFFREY LAWSON RIDLEY Third Defendant
QST LIMITED Fourth Defendant
Hearing: 12, 13 and 14 May 2014 Counsel:
SH Barter for Plaintiffs
PJ Dale for DefendantsJudgment:
29 May 2014
JUDGMENT OF FOGARTY J
This judgment was delivered by me on 29 May 2014 at 4.30 p.m., pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date: ………………………….
Solicitors: Barter & Co, North Shore City
Ellis Law, Auckland
LYON v AK651441 LTD [2014] NZHC 1178 [29 May 2014]
The subject property and its acquisition
[1] Mr Lyon and Mr Ridley are long-term business associates. They both worked together at Chase Corporation in the 1980s. In the 1990s, Mr Lyon began his own property developments through a company called Mission Corporation (Mission Corp) and employed Mr Ridley as the development manager.
[2] By 1994, Mr Ridley’s remuneration on projects depended on the success of the project and he was getting a percentage of the profit of two projects – Remuera Road and Midcity. It was Mr Ridley’s idea to consider investment in the Quay Street property which is the subject of this litigation. The property is Maori leasehold land in Quay Street in Auckland. It is a large site of 11,555m2. The leasehold interest was 150 years and was being assigned by Magellan Orakei Limited, a corporate offshoot of Ngati Whatua o Orakei Maori Trust Board.
[3] Prior to purchasing the lease, Messrs Lyon and Ridley developed a plan of purchase and development of the property as a joint venture, 50/50.
[4] They conceptually divided the property into three principal sites which would be leased long-term, and another site upon which they would build 20 retail/commercial units which would be resold. As a later development, at Mr Lyon’s suggestion, they decided also to build 20 residential units above the retail and commercial units (sometimes, jointly called the secondary units). The plan therefore was to develop these retail and commercial units and sell them. Mr Lyon said that the proceeds from these sales would repay fully the Westpac debt, leaving the three principal unit sites mortgage-free and able to be on-sold or redeveloped after the expiry of the 40 year subleases applying to these sites. He said that he and Mr Ridley referred to this as “our superannuation fund”. Mr Ridley disputed this. He said the original funding was for the land purchase only ($5,475,000) but that further funding was needed, and that it was wrong to say Westpac would be fully repaid. Mr Ridley also disputes ever referring to the transaction as “our superannuation fund” and did not recall Mr Lyon saying that.
[5] I prefer Mr Lyon’s recollection. Obviously Westpac, as the purchaser’s
banker, would likely fund the construction. Mr Ridley did not dispute that the plan
was to sell the retail and residential units. There is no evidence that these men discussed, at the time, using the property as security for other ventures. That was a real possibility in the nature of things. The three principal sites were to be a longer term investment.
The dispute
[6] Since the acquisition of the lease in 1996, the concept of development, as just described, has essentially been completed over a period of time. In Mr Lyon’s absence from active involvement in the affairs of the property, Mr Ridley has gained greater and greater control of the cashflow. Then in 2008, Mr Ridley transferred the three principal units to an entity under his complete control.
[7] The plaintiffs claim that Mr Ridley and his interests now have a duty to account. They claim that Mr Ridley has breached a joint venture agreement which essentially divided the profits from the project 50/50 and the beneficial interest in the lease 50/50 between Mr Lyon and Mr Ridley.
[8] For his part, Mr Ridley’s argument is that while there was such a joint venture initially, it ended. It ended when the deal was restructured in 1997, Mr Lyon’s 50 per cent interest being replaced by a loan via a structure known as Lazona.
[9] At the heart of this dispute is a fundamental difference between the parties as to the scope of the Lazona structure. Mr Ridley says that it replaced the joint venture. Mr Lyon says that it had a limited objective of restructuring the cashflow from the development and sale of the secondary units and was never intended to replace the remaining beneficial interest in the lease, particularly the value of the 40 year subleases to the three principal units and the opportunity for redevelopment at their expiry.
Legal and equitable method and transfer of interests in land
[10] Care has to be taken in the method used to analyse and resolve the dispute between the parties. These are in significant respects dealings in land. It is common
ground that an oral agreement was entered into between Mr Lyon and Mr Ridley as to the holdings and share of the benefits of the acquisition, on a 50/50 basis. No one can suggest that that oral agreement can itself be enforced as a disposition of interests in land. This is because of s 49A of the Property Law Act 1952, which provided:
49A Certain instruments to be in writing
(1) No legal interest in land may be created or disposed of except by writing signed by the person creating or conveying the same or by his agent lawfully authorised in writing in that behalf, or by will, or by operation of law.
(2) A declaration of trust respecting any land or any interest in land shall be manifested and proved by some writing signed by some person who is able to declare such trust or by his will.
(3) A disposition of an equitable interest or trust subsisting at the time of the disposition shall be in writing signed by the person disposing of the same or by his agent lawfully authorised in writing in that behalf, or by will.
(4) This section does not affect the creation or operation of resulting, implied, or constructive trusts.
(5) Nothing in this section shall—
(a) Invalidate dispositions by will; or
(aa) Affect the creation of any lease—
(i) Of land subject to the Land Transfer Act 1952, for a term of less than 3 years; or
(ii) Of any other land, for a term not exceeding one year;
or
(b) Affect any interest validly created before the commencement of this section; or
(c) Affect the right to acquire an interest in land by virtue of taking possession; or
(d) Affect the operation of the law relating to part performance. (6) This section is in substitution for sections 1 to 3 and 7 to 9 of the
Statute of Frauds 1677 of the Parliament of England, and those
sections shall cease to be in force in New Zealand, except in respect of the creation or conveyance of any interest in land, or a declaration of trust, or a disposition of an equitable interest or trust, before the commencement of this section.
[11] That Act was replaced by the Property Law Act 2007 which, however, preserved the effects of the law prior to the enactment by s 367. Sections 367(3) and (4) of the Property Law Act 2007 provides:
367 Existing matters, proceedings, and instruments
(3) No alteration in the law made by this Act affects—
(a) a right, interest, title, immunity, or duty, or a status or capacity, existing under the law so altered and immediately before 1 January 2008; or
(b) the validity, invalidity, effect, or consequences of—
(i) an instrument of the kind to which this Act applies and that came into operation before 1 January 2008; or
(ii) anything done or suffered before that date.
(4) All instruments of the kind to which this Act applies and that came into operation before 1 January 2008 must, to give effect to subsection (3), be read and construed as if the law existing immediately before 1 January 2008 continued to have effect, and must be given only the effect and consequences that they would have had under that law.
[12] Considerable care, therefore, needs to be taken with any use of the oral joint venture agreement. Second, so far as possible I think this case falls to be decided upon an analysis of the numerous instruments in writing created during the life of the investment.
[13] I have been invited to give weight to discussions between the parties and their advisers as to the merits of structures to be created and plans as to the creation of tax effective structures. There are minutes of discussions between Mr Lyon and Mr Ridley, their solicitors and their accountants/tax advisers. There is also at least one note of discussions with in-house personnel, including Mr Tim Martin.
[14] The plaintiffs have been criticised for not calling any of these persons as witnesses. I do not think that is a criticism. Firstly, none of those individuals were privy to the oral joint venture agreement which, as the reader will find, is accepted by all sides as having come into effect before this investment and development, but in respect of the same. Secondly, it is contrary to principle for a Court to hear
evidence by anybody, let alone the professional advisers, as to the meaning and intent of the written documents. The relevant documents are to be construed in the usual way, that is, objectively.
[15] It is impossible to do justice to the arguments of counsel by summarising them. So in this judgment I have elected to analyse the documents between the parties in chronological order, resolving as I go the contest as to the meaning and/or effect of the particular instrument. I think this method is sound as the concept of title to land both at common law and equity is continuous. By that I mean that at any point in time the law enables one to identify who has the legal interest and whether the beneficial interest is separate, by reason of the legal owner being a fiduciary.
Legal personalities and trust relationships
[16] To aid the reader, it seems appropriate to begin with a list of the different entities and trust relationships which figure in the transactions to be analysed. In case it is not understood, a trust is not a legal personality. Rather, a trust is a relationship between persons, where one set of persons (the trustees) own assets for the benefit of others (the beneficiaries).
Magellan
[17] Magellan Orakei Limited, the vendor of the 150 year lease.
Mark Lyon
[18] He is the first plaintiff.
Mission No 2 Trust
[19] This is a Lyon trust meaning the beneficiaries are members of the Lyon family.
AK3694975 Limited
[20] This is the second plaintiff’s limited liability company incorporated well after the main events and, from January 2012, is the current trustee of the Lazona Trust and so the lender of the Lazona loan.
Birchwood
[21] Birchwood Management Limited, a Ridley management company.
The Lazona Trust
[22] The Lazona Trust is a trust created by deed on or about 22 April 1997 under which deed Mark Lyon is the appointer and a discretionary beneficiary along with his children. Mr Lyon appointed the second plaintiff as trustee of this trust by deed dated 23 January 2012.
Lazona Limited
[23] This is a Lyon company which was the trustee of the Lazona Trust in 1997.
AK651441 Limited (MQSL)
[24] This is a limited liability company which purchased the 150 year lease. At that time, in 1996, it was named Mission Properties (Quay Street) Limited. After the oral joint venture agreement, it was renamed Midpoint Investments (Quay Street) Limited. “Midpoint” to reflect the new relationship. This was its name at most of the material times. In this judgment it is referred to by an acronym of that second name, MQSL.
RMCL Limited
[25] The second defendant originally named: Ridley Management Consultants
Limited. As the original name suggests, it is a Ridley company. It acquired 99 of the
100 shares of MQSL in 1996, Mr Ridley held the other. It now has all. It is the trustee of the RMCL Trust.
The RMCL Trust
[26] This is a Ridley family trust.
Mr G L Ridley
[27] He is the third defendant. He was, at all material times, a close business associate of Mr Lyon. He was originally subordinate to him. He is the now the sole director of MQSL and the sole shareholder of RMCL. He is the appointor of the beneficiaries of the RMCL Trust and the Quay Trust.
Quay Trust
[28] This is a Ridley trust whose discretionary beneficiaries are Mr Ridley and his children.
QST Limited
[29] This is the fourth defendant. Its director and sole shareholder is Mr Ridley and it is a corporate trustee of the QST Investment Trust. The three principal units were transferred to it.
QST Investment Trust
[30] This is a Ridley trust.
The 150 year lease
[31] This is the shorthand term for the lease purchased by MQSL from Magellan.
The joint venture agreement
[32] Before MQSL acquired the 150 year lease, Mr Lyon and Mr Ridley agreed that the property (the 150 year lease) would be owned on a 50/50 basis and any profits would be split on a 50/50 basis. They agree this was a joint venture agreement.
The three principal units
[33] These were three sites within the area of the sublease earmarked for 40 year leases, taken up by Mobil, McDonalds and KFC, on very advantageous terms to the lessor. The first 15 years of rent were paid in advance. The buildings constructed for these sublessees’ businesses were constructed at their own expense. The buildings pass with the sublease expiry, at the end of 40 years, to the beneficial owner of the lease at that time.
The commercial units
[34] This is the first floor of 20 retail units, which were constructed on the balance of the subleased area, with the intent that they would be sold.
The residential units
[35] These are 20 residential units to be constructed on the first floor above the commercial units underneath, again to be sold.
The secondary units
[36] This is reference to the combined commercial and residential units.
Mission No 2 Trust
[37] This was a Lyon family trust in existence prior to MQSL purchasing the lease from Magellan.
SAD fund
[38] This was a Lyons sickness, accident and death fund, called the Lyons Limited
Welfare Fund. It loaned $1.35m to the Lazona Trust.
Effect of resolutions following upon the execution of the agreement for sale and purchase of Quay Street
[39] The following analysis follows sequentially the creation of legal interests, and beneficial interests prior to and consequent upon the purchase of the 150 year lease by MQSL on 22 February 1996.
[40] MQSL was incorporated on 6 October 1994. At the time of the purchase of the 150 year lease it had one director, Mr Lyon. All the shares were held by Mr Lyon and his business associate, Mr Ridley, as trustees of the Mission No 2 Trust. The terms of that trust has not been sighted by the Court but there is no dispute that the beneficiaries - whether vested, contingent or discretionary – comprise Lyon interests. The trust provided no benefits to Mr Ridley or his family.
[41] On 22 February 1996, MQSL entered into the agreement to purchase the 150 year lease from Magellan. The consideration was $5,475,000. Possession was to be the later of 20 November 1996 or five working days after the vendor was able to deliver a registerable lease. The written agreement for sale and purchase does not carry an endorsement that MQSL purchased as a trustee. So it cannot be presumed without more evidence that the beneficial owner of the lease was different from MQSL.
[42] A month later, on 21 March 1996, there were changes within MQSL. Mr Ridley was appointed an additional director of MQSL. 99 of the 100 shares were transferred from Messrs Lyon and Ridley to RMCL, leaving one share in the names of Messrs Lyon and Ridley. The share transfer form describes the transferor as “Mark Stuart Lyon and Geoffrey Lawson Ridley (jointly as trustees of the Mission No 2 Trust)” and the transferee is described as “Ridley Management Consultants Limited (as trustee of the RMCL Trust)”. The consideration for the transfer is expressed to be 50 cents.
[43] On any view of it, the value of the lease acquired from Magellan was in the millions of dollars. MQSL was liable to pay Magellan, the lessor, $5,475,000 for the benefit of the 150 year term.
[44] Where valuable shares are transferred for nominal consideration, here 50 cents, there is, subject to evidence to the contrary, a presumption that the transferee holds the shares upon a trust in favour of the transferor. In Prest v Petrodel Resources Ltd.1 Lord Sumption said:
[49] Of the other five properties owned by PRL the first category complies as three properties ... acquired by the company in December 1999 and March 1996, in each case for a nominal consideration of one pound. Since no explanation has been forthcoming for the gratuitous transfer of these properties to PRL, there is nothing to rebut the ordinary presumption of equity that PRL was not intended to acquire a beneficial interest in them. The only question is who did hold the beneficial interest. Flat 4, 27 Abbey Road was transferred by the husband who had originally bought it in his own name in 1991 before PRL was incorporated. There is therefore an ordinary resulting trust back to the husband which is held by him subject to the charges in favour of Ali United Bank and BMP Parabus.
[45] Lord Sumption did not explain why there is a resulting trust back. The explanation is contained in another House of Lords judgment, Westdeutsche Landesbank Girozentrale v Islington LBC2 where Lord Browne-Wilkinson explained that the presumption of equity when land is transferred from A to B for no consideration is that for B to assert absolute ownership of the land without any other evidence would be against B’s conscience, so equity will not allow it. Such a result is, in Lord Browne-Wilkinson’s words:3
incompatible with the basic premise upon which all trust law is built, viz that the conscience of the trustee is affected. This occurs when he finds he has acquired the land for no consideration.
[46] Mr Lyon disputes that he has ever intended to give nor has given the whole of the beneficial interest in the lease to Mr Ridley’s trust, RMCL.
[47] Mr Lyon’s evidence was that this project marked a change in their relationship where instead of Mr Ridley getting a retainer, the project would be done jointly. Mr Lyon said that before MQSL signed the agreement to purchase the
property:
1 Prest v Petrodel Resources Ltd [2013] UKSC 34 at [49] per Lord Sumption.
2 Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669.
3 At 709.
[23] Geoff and I agreed to develop the Quay Street property under a joint venture. We agreed the property would be owned on a 50/50 basis and any profits would be split on a 50/50 basis.
[24] We also agreed that I would partly fund the purchase of the property through one of my trusts and any advance would be repaid with basic interest. This was the context for the transactions that I have summarised to date including the transfer for a nominal fifty cents.
[48] In his brief of evidence, Mr Ridley agreed with these paragraphs without qualification.
[49] Mr Lyon then links that MQSL transaction to a declaration of trust by MQSL, made on 21 March 1996 shortly thereafter. On 22 March 1996, the company name of MQSL was changed to Midpoint Investments (Quay Street) Limited. There is an undated declaration of trust which, on Mr Lyon’s evidence, would have been executed around about the same time. Here are the entire terms of this document:
DECLARATION OF TRUST DEED dated this day of March 1996
MIDPOINT INVESTMENTS (QUAY STREET) at Auckland (“the
Company)
BACKGROUND
A. The Company under its previous name Mission Properties (Auckland) Limited is named as the purchaser pursuant to an agreement for sale and purchase dated 22 February 1996 (“the Agreement”) and has agreed to purchase all the land described as Lot 23 Quay Street (“the Property”).
B. The Company entered the Agreement to purchase the Property as a trustee for a trust to be formed.
C. It is intended that the Company will take title to and become the registered proprietor of the Property.
D. The Company wishes to record the terms and conditions on which the Agreement was entered into by the Company and the terms and conditions upon which the Company is to hold the property.
NOW THIS DEED WITNESSETH
The Company declares that the Property is to be purchased by the Company upon trust for a trust to be formed and will hold the Property pursuant to the terms of the trust deed establishing the trust when the trust is formed.
EXECUTED
SIGNED for and on behalf of MIDPOINT INVESTMENTS (QUAY STREET) LIMITED by its directors
”Ridl ey”
Director
”Lyon ”
Director
(Emphasis added.)
[50] This declaration is inconsistent with the share transfer inasmuch as it refers to a transfer of 99 (of the 100) shares to Birchwood Management Limited, “as trustee of the RMCL Trust.”
[51] Four points should be noted about this declaration of trust. Firstly, it is undated but there is no doubt it was executed by Messrs Lyon and Ridley as directors. Second, paragraph B of the background confirms in writing that the company entered into the agreement to purchase the sublease as a trustee for a trust to be formed. That is not for any existing trust such as the Mission No 2 Trust which is a Lyon interest.
[52] We know from the oral agreement of joint venture that this preamble makes sense as it would be inconsistent with the joint venture for the Lyons family to have all the benefit of this purchase. The next point is that the deed is intended to witness and confirm that the property is to be purchased upon a trust to be formed and will hold the property pursuant to the terms of the trust deed establishing the trust when the trust is formed.
[53] This point raises two subsidiary issues. The first is, is this sufficient compliance with the requirement of the law that land transactions, including trusts, be in writing? Second, can the Court receive and apply the oral evidence of the joint venture agreement, take into account the previous history of the discretionary trust structures adopted by both Mr Ridley and Mr Lyon, and come to the conclusion that Messrs Ridley and Lyon were agreeing orally that the trust to be formed would be separate Lyon and Ridley trusts holding the beneficial interest in equal shares?
[54] For separate reasons, neither Mr Barter nor Mr Dale, as counsel for the respective parties, quibbled with these considerations. It was common ground between their two clients, Messrs Lyon and Ridley, that there was such a joint venture on those terms, at that time. Mr Ridley agreed there would be two trusts. There was no quibble on Mr Ridley’s part because it has consistently been his case that the joint venture ended with the adoption of the Lazona structure a year later.
[55] It is the case for Mr Ridley that it is the Lazona transaction which replaced the joint venture. Mr Ridley confirmed this in cross-examination:
QSo do you accept really though that the way in which this commenced is that from the date you signed this document on behalf of the company, given what you then did in the next few weeks, really from the day this agreement was signed you intended the two of you to develop it jointly at that point?
A Correct, yes.
QAnd your evidence about the end of the joint venture because, is relatively simple, isn’t it, you say that virtually at the very stroke of the pen of the signing of the Lazona Agreement it ended?
A Yes.
QNot before then, not after then and nothing to do with anything else, absolutely at that point the agreement ceased to be?
A That is my understanding.
[56] I am satisfied that the March declaration by MQSL is a sufficient declaration of trust to comply with s 49A of the Property Law Act 1952. I follow Salmon J in Thexton v Thexton,4 who said:5
[52] In order to create a trust there must have been either a transfer of the shares or a declaration of trust by David junior so as to bring about complete constitution. Whilst it is not difficult to find an intention on the part of David junior, the existence of a declaration of trust presents problems. There is no written document existing so other evidence of the existence of such a declaration is required. If the trust is not completely constituted then absent consideration on the part of the beneficiary, the trust is not binding, on the settlor: equity will not assist a volunteer. A declaration of trust does not require a technical form of expression, it is a question of construction whether the words used, taking into account the surrounding, circumstances amount to a clear declaration of trust. What is needed is the manifestation of
4 Thexton v Thexton [2001] 1 NZLR 237.
5 At [52].
an intention to declare a trust: Paul v Constance [1977] 1 All ER 195. Where no words exhibiting the necessary intent are used it may in exceptional cases be possible to infer a declaration of trust from acts showing, that a person has constituted themselves as trustee, i.e. from conduct evincing an intent to deal with his property so that somebody else to his own exclusion acquires the beneficial interest in his property.
[57] Section 49A of the Property Law Act 1952 traces back to the first Statute of Frauds 1677. Salmon J’s reasoning is consistent with a long line of consistent authority that some writing will suffice as evidence of the existence of an interest in land, even if that writing is not a full description of the interest. Second, given the declaration by MQSL that it holds the land on trusts to be formed, it follows MQSL is not the beneficial owner of the lease. MQSL cannot stand in the way of perfecting the beneficial interests. On the facts, Messrs Lyon and Ridley at that point had
agreed orally to hold the beneficial interest in the lease in equal shares.6 They each
had a general power of appointment, which could be exercised, and were intended to be exercised to create a trust. History shows they would each want to form discretionary trusts for their respective family interests.
[58] So the Court reaches a conclusion, which was not in dispute, that prior to the
Lazona transaction, the lease was held by MQSL on trust for two trusts to be formed
- one a Lyon family trust, the other a Ridley family trust - in equal shares. The prior transfer of the MQSL shares to Birchwood did not displace this declaration of trust. These trusts were to be formed respectively by Mr Lyon and Mr Ridley. These two men had separate general powers of appointment of the beneficiaries. Prior to the exercise of that general power, Mr Lyon and Mr Ridley were respectively the beneficiaries of the trusts that they had a general power to form and appoint the beneficiaries.
The Lazona transaction
[59] The Lazona transaction came the following year, 1997, after the purchase was settled.
[60] The Lazona transaction is a loan agreement between Lazona Limited, as trustee of the Lazona Trust (the lender) and MQSL, as trustee of the Quay Trust and
the guarantors. MQSL acknowledges a debt of $1,250,000 to the lender, Lazona Limited. (This is the same amount as the sum advanced by another trust controlled by Mr Lyon, to settle the purchase.) The terms of the advance are repayment within five years, or of such earlier date, the basic interest amount to be capitalised and compounded annually and “additional interest amount”, payable at the end of the “project”. The basic interest was defined in normal commercial terms referencing it to the bank bill buy rate.
[61] The loan agreement contained a special definition of the additional interest
amount. “Additional interest amount” means:
(a) One half of the aggregate profits and losses arising out of the Project for each year or part year since the commencement of this agreement, such profits and losses to be calculated in accordance with the Statements of Standard Accounting Practice and Financial Reporting Standards promulgated from time to time by the Institute of Chartered Accountants of New Zealand, provided that such profits and losses shall be calculated for these purposes prior to deduction of:
(i) Any Basic Interest Amount or Amounts;
(ii) Any Interim Interest Amount or Amounts; and
(iii) Any management fees paid under this agreement to the
Borrower or any entity associated with the Borrower, Less
(b) The aggregate of all Basic Interest Amounts which have accrued since the commencement of this agreement, and all Interim Interest Amounts paid under this agreement.
(Emphasis added.)
[62] “Project” means:
The project to be undertaken by the Borrower on the Borrower’s property in
Quay Street, Auckland.
[63] The defendants argued that it was not intended there be any Lyon ownership of the 150 year lease after execution of the Lazona loan agreement because of cl
17.14:
Entire arrangement
This agreement contains all terms of the arrangement between the parties and supersedes and extinguishes all prior agreements, discussions and arrangements between the parties with respect to the matters covered hereby. (Emphasis added.)
[64] The critical resolution to decide the scope of that clause is the meaning of the
phrase, “with respect to the matters covered hereby” in the entire agreement.
[65] This document is described on its backing sheet as a loan agreement. Clause
2.1 says:
The parties acknowledge the borrower is indebted to the lender in the amount of $1,250,000. The lender may advance further monies pursuant to this agreement. All such amounts are included in the advance.
[66] The defendants rely on cl 17.14 as extinguishing the joint venture and the
shared ownership of the 150 year lease, by MQSL’s March 1996 declaration of trust.
[67] The plaintiffs say that that is a misconstruction of the scope of the Lazona loan agreement. The argue that the Lazona agreement is confined to the goal of delivering to the Lyon interests the 50 per cent entitlement to the profits of the “project” but does not disturb the 50 per cent ownership of the lease. It will be recalled that the joint venture oral agreement separates the two.7 The plaintiffs argue that the phrase “with respect to the matters covered thereby” confines the scope of the entire arrangement clause to replacing Mr Lyon’s entitlement to a share of the profits from construction and sale of the commercial and residential units, with an
entitlement to “basic” and “additional” interest.
[68] In my view, this dispute is resolved by determining the scope of the “project”
as used in the definition of “additional interest amount”.
[69] It will be noted that the definition of “project” says nothing more than the project to be undertaken on the borrower’s property. However, that definition distinguishes the “project” from the “property”.
[70] The deed also anticipates that the interest payments are likely to be repaid within five years, as noted above. That is for the basic interest amount anyway. Clause 2.2 provides for penalty rate interest if interest is not paid within 14 days and that cl 2.2(e) appears to be referring to basic interest and to the additional interest amount.
[71] The context, explained in the introduction, informs the meaning of “project” as distinct from “the Borrower’s property”. Mobil, KFC and McDonalds were constructing their own buildings on the land which they sub-leased for forty years. These commercial giants did not require any financing or significant management by Midpoint, or Messrs Lyon and Ridley. Recall that they had paid upfront their first 15 years of rental.
[72] What did involve intensive management by Mr Ridley was the construction of 20 commercial units and 20 residential units. This was clearly a significant task. This is particularly so when containing cost, consistent with quality of construction, was directly relevant to the economic gains to be obtained from this exercise. Recall also that Mr Ridley did not bring any capital to the purchase of the lease, nor to the construction of the4 commercial and residential units. His contribution was his management skills and commitment of time.
[73] It is also important to keep in mind the agreed paragraphs [23] and [24] of Mr Lyon’s brief.8 In this context the Lazona structure provided for 50 per cent division of the profits of the project to reach the Lyon interests by way of the additional interest amount. The Lazona “loan agreement” had nothing to say about the ownership of the 150 year lease.
[74] I am satisfied, on the balance of probabilities, that the construction and sale of those retail and residential units was the “project”. That fits also with the services that Mr Lyon needed from Mr Ridley. The “property” is the 150 year leasehold interest.
[75] The Lazona agreement leaves untouched the beneficial interest in the lease held by the lessee, MQSL. That interest could be kept for 150 years simply by paying the rental each year. As such it can be appreciated as a passive investment, which does not need a project, at least for the first 40 years. Paying rent is not usually described as a project.
[76] A further contextual reinforcement of this analysis is that the Lazona agreement was guaranteed by the Midpoint companies and Mr Ridley but Mr Ridley’s guarantee was only as to 50 per cent. This is by cl 4.5 of the deed. There was no guarantee by Mr Lyon. Mr Lyon was always intended to be the beneficial end receiver of the basic and additional interest amount. The receipts went to Lazona Limited as trustee for the Lazona Trust which, as we have seen, is a Lyon trust.
[77] The rest of the agreement is as one would expect in a loan agreement. The term of the agreement is confined by the project. If the project is defined as the construction of the units and their sale, then that is the ambit of the matters covered in this loan agreement.
The significance and consequence of the Quay Trust
[78] Mr Ridley gave evidence that the trust referred to in the declaration of trust of March 1996 was never finalised. As already recorded, Mr Ridley’s state of mind was that he thought the Lazona structure replaced the joint venture and that such obligations as he owed, as controller, were confined to meeting the interest payments under the Lazona loan.
[79] In April 1996, his brother, Trevor Ridley, had entered into a deed with MQSL settling $100 on MQSL to hold on trust for a class of discretionary beneficiaries, being principally his family, himself reserving the role as an appointor. This became known as the Quay Trust.
[80] There is no reference in that April 1996 deed to the Quay Street sublease or the project.
[81] Mr Ridley agreed that at the time he executed the deed on behalf of MQSL, Mr Lyon was still a director. He also agreed that there were no minutes or resolutions of the company to accept this trust. That the trust was effectively for his benefit.
[82] Mr Ridley’s evidence muddled the sequence of events (words in square brackets are my comments):
… Mark’s interest advanced 1.25 [this is a reference to the SAD funds used in part payment of the purchase price in 1996]. He did this complex restructuring and they then wanted to restructure all this stuff. They came up with, um, Lazona Limited as trustee of the Lazona Trust lender [this is in
1997]. Midpoint Investments (Quay Street) as trustee of the Quay Trust borrower [this was in 1996 unbeknown to Mr Lyon, and before Lazona] and then all this loan document and basically what happened they then did a check swap to repay all the other advances so all the money, the dealings was then between Midpoint Investments (Quay Street) as trustee of the Quay Trust and Lazona Limited and Lazona Trust [Mr Lyon’s belief]. After that all other dealings extinguished [Mr Lyon’s belief].
[83] The Quay Trust is created in April 1996. This is almost a year prior to the Lazona structure. There is no evidence that the Lazona structure was identified before the Quay Trust was created. There is nothing in the Quay Trust which suggests it is implementing the resolution of MQSL, that it held the benefit of the lease upon trust to be formed. After the Lazona agreement was put in place, however, Mr Ridley treated the Quay Trust as the beneficial owner of the sublease.
[84] Mr Ridley’s belief that the Lazona loan took out all of Mr Lyon’s interest, including the joint venture, explains his subsequent behaviour as controller of the cashflow of MQSL. For he no longer considered himself obliged to account to Mr Lyon for anything other than satisfaction of the obligations of the Lazona loan.
[85] Mr Lyon says that the Quay Trust was only disclosed to him in 2013. I have seen no evidence that he knew about it before the Lazona transaction.
Subsidiary points and inconsequential facts
[86] Mr Dale submitted there is no obvious reason why the Lazona Trust trustee is a plaintiff. He submitted the only plaintiff that needs to be considered is Mr Lyon in
person. However, there is some doubt in the evidence as to performance of the Lazona loan, particularly to the extent that the second plaintiff, the current trustee, has an interest and right to performance of the Lazona loan.
[87] Mr Lyon’s cause of action depends on a proposition that his beneficial interests survive the Lazona restructure on the basis that his beneficial interests were secured by MQSL’s written declaration of trust in March 1996.
[88] Mr Dale argues that the principal difficulty of all the pleaded causes of action is Mr Lyon’s own evidence where, at [44], he said:
Gosling Chapman’s advice at this point was that I could not as a director, shareholder or beneficiary of the development entity could not be a director, shareholder or beneficiary of the development entity because I would taint the transaction as a property developer which would have adverse tax consequences.
Mr Lyon made a similar statement in his brief where he said:
I could not be seen to have any direct involvement, whether by way of shareholding or directorship. This was the sole reason for the apparent shareholding.
[89] Mr Fielding, a business confidant of Mr Lyon, said:
However, I was aware that Mark’s involvement in the project needed to be
hidden because otherwise the profits could be tainted or taxable.
[90] I am dubious as to the admissibility of this evidence to the construction of the Lazona agreement. I have not relied upon it. But in case it is admissible, all of these remarks can be read as confined to the project. It was the project which was producing assessable income. The three 40 year leases are consistent with a passive investment.
[91] On the evidence before me, there was a long-term intent by Mr Lyon to hold onto his 50 per cent share of the lease as an interest in land, at least until the 40 year leases of the anchor tenants terminated. The Lazona agreement is consistent with that intent.
Remedies
Breach of the joint venture agreement by Mr Ridley
[92] There were a number of causes of action. The first cause of action by the plaintiffs was for breach of the joint venture agreement. The second plaintiff is not a party to that joint venture agreement. In the course of the foregoing reasoning, I have made findings of breach of the joint venture agreement by Mr Ridley, particularly by a misinterpretation of the effect of the Lazona loan.
[93] Downstream of the Lazona agreement, Mr Ridley acted upon the belief that he now effectively owned all the benefits of the lease, including the interest in land, the 150 year lease that the joint venture was at an end. That his only obligations were defined in the Lazona loan. He made numerous decisions which are overall the subject of a remedy of seeking accounts.
[94] In respect of the breach of the joint venture agreement, the plaintiff has listed the following:
32.In breach of the JV Agreement the Third Defendant (Ridley) either personally or through the First Defendant:
(a) Failed to repay the Westpac loan of $2,000,000 upon the sale of the
20 commercial and 20 residential units;
(b) Used the Westpac facility for his own benefit;
(c) Borrowed further funds for his own use from Westpac which borrowings are secured by way of mortgage against the Principal Units;
(d) Failed to account to the Plaintiffs for profits from the sale of all of the Secondary Units;
(e) Failed to account to the Plaintiffs for rental paid by Mobil, KFC and
McDonalds;
(f) Retained for his own benefit the Plaintiffs’ share of the profits from
the leasehold interest;
(g) Disposed of the Plaintiffs’ interest in the joint venture, by
transferring the leasehold interest to the Fourth Defendant on 22
December 2008.
(“the breaches”)
33. The breaches have caused loss to the Plaintiffs as follows:
(a) The loss of the Plaintiffs’ half share interest in the Principal Units
which was transferred to the Fourth Defendant on or around
22 December 2008;
(b) The loss to the Plaintiffs of a 50% share in the rental received in respect of the Principal Unit occupied by Mobil for the period from
3 April 2000 to present.
(c) The loss to the Plaintiffs of a 50% share in the rental received in respect of the Principal Units occupied by McDonalds and KFC for the period from 3 August 2011 to present.
[95] As remedies in respect of this cause of action, breach of joint venture, the plaintiffs seek the following:
(A) A declaration that the Third Defendant breached the JV Agreement by procuring the transfer of the JV interest from the First Defendant to the Fourth Defendant;
(B) A declaration that the Third Defendant breached the JV Agreement by failing to account either personally or through the First and/or Fourth Defendant to the Plaintiffs for their half share of the rental paid by Mobil for the period from 3 april 2000 to present;
(C) A declaration that the Third Defendant breached the JV Agreement by failing to account either personally or through the First and/or Fourth Defendant to the Plaintiffs for their half share of the rental paid by McDonalds and KFC for the period from 3 August 2011 to present;
(D) Such other relief as the Court deems appropriate; (E) Interest;
(F) Costs.
[96] Declarations are made accordingly as to (A), (B) and (C). The question of such other relief and question of interest and costs are deferred, to be taken up in the remedy of taking accounts, which I will turn to shortly.
Breach of fiduciary duty by Mr Ridley
[97] The second cause of action by the plaintiffs is for breach of fiduciary duty. It is alleged that Mr Ridley owes fiduciary duties to Mr Lyon by virtue of the joint venture. In the light of the decision of Chirnside v Fay9 I am not sure that this is a
separate cause of action. It is clear from that decision that Mr Ridley did owe the
9 Chirnside v Fay [2007] 1 NZLR 433 (SC).
duties set out in para 36 of the second amended statement of claim which are pleaded as:
(a) A duty of loyalty and to act in good faith;
(b) A duty not to place himself in a conflict of interest with the venture; (c) A duty not to obtain unauthorised profits from the venture;
(d) A duty to account to Mark Lyon for any unauthorised profit obtained by opportunity arising through the venture;
(e) A duty not to appropriate the joint venture to his sole account.
[98] The pleadings under that cause as to breach overlap the pleadings as to breach of the joint venture in all respects except two:
(f) Retaining for his own benefit (or the benefit of the First Defendant and/or fourth Defendant being trustees of trusts set up for Ridley’s benefit) the Plaintiffs’ share of the profits from the sale of the Secondary Units;
(g) Retaining for his own benefit (or the benefit of the First Defendant and/or Fourth Defendant being trustees of trusts set up for Ridley’s benefit) the Plaintiffs’ share of the rental from the Principal Units.
[99] The pleading as to the losses following the breach of fiduciary duty is the same. The declarations are effectively the same except for seeking a declaration of breach of fiduciary duty. The previous declarations that I have already granted shall be interpreted as breaching the joint venture agreement, including within that breach of fiduciary obligations within the joint venture agreement.
[100] There may possibly be a difference in remedy as equitable remedies for breach of fiduciary obligation are potentially different from common law remedies for breach of contract. Both common law and equitable remedies are available by the first plaintiff against the third defendant, Mr Ridley.
Knowing receipt and breach of trust by QST
[101] The first cause of action by the plaintiffs against QST is knowing receipt and breach of trust. Again, this cause of action is available for the first plaintiff but not for the second plaintiff.
[102] QST is a vehicle of Mr Ridley’s, to which the principal units have been assigned by MQSL. All this was done at the direction of Mr Ridley. He was QST’s guiding mind and intention. It is his state of mind that is relevant.
[103] There is a difference between receiving funds and breach of trust and knowing receipt and breach of trust. The plaintiffs have not proved dishonesty on the part of Mr Ridley.
[104] The MQSL trust is in favour of both the first plaintiff and Mr Ridley, who are to be restored to their position as beneficial owners of 50 per cent of the land interest, i.e. the 150 year lease. This follows from the Lazona agreement being confined to replacing the joint venture agreement as to distribution of the profits from the project, the project being confined to the development and cashflow and/or proceeds of sale of the retail and residential units.
[105] The remedies of taking accounts are available against Mr Ridley and his trusts, in the context that it was as a director of MQSL resolving to hold the land on trust that he became a fiduciary and has an undischarged duty to implement that resolution by an agreement with Mr Lyon to give effect to that declaration of trust back in March 1996.
[106] Accordingly, the remedies sought are amended slightly. There is a declaration that the principal units are held by the fourth defendant. The fourth defendant has the legal title over the principal units but held subject to an obligation in equity, shared with Mr Ridley (in his case, an obligation both in contract, and in equity) to re-transfer the units back to MQSL. MSQL in turn is a trustee pursuant to its declaration of trust made in March 1996, which trust are to be formed by Messrs Lyon and Ridley so that the Lyon and Ridley interests each have a beneficial 50 per cent interest in the MQSL’s legal ownership of the 150 year sublease.
[107] There is a general order, in favour of both plaintiffs, for accounting of all receipts received by Mr Ridley or any of his entities, of rentals received, particularly from the principal units but also from the retail and residential (secondary) units if they have not been included in the additional interest cashflow, net of costs. That
accounting particularly includes rental received by the fourth defendant from
McDonalds and KFC for the period from 30 August 2011 to the present.
[108] All the pleadings seek such other relief as the Court deems appropriate. It became apparent during the trial that the Lyon interests have not had a full accounting and therefore do not know the full ramifications of the breach of the joint venture agreement and breach of trust. For example, the sublease appears to have been used as security for other advances by Westpac Bank for other ventures. To the extent that that security was necessary or required by the Bank as a condition of lending, the plaintiff may well have a claim to a share of the benefits of the investments made possible by the continued bank charge over the sublease. The question of such liability is reserved.
[109] There is also a general plea for interest. Again, interest is payable to both plaintiffs in respect of funds which should have been paid earlier but have been diverted elsewhere. But the resolution of that liability is probably best dealt with in a general rendering of accounts by Mr Ridley and his entities in favour of the first plaintiff and MQSL as trustee of the trusts to be formed pursuant to the 1996 resolution on the 50/50 basis.
[110] There is a general of leave to apply for further remedies. These might include the appointment by the Court of a specialist accountant to control the process of taking accounts, with powers of investigation. Leave is reserved to apply to extend any orders made in favour of the first plaintiff to the second plaintiff.
[111] It is, however, the hope of this Court that enforcement of these remedies will not be necessary. The issue which has divided the parties has been the consequence of the Lazona agreement.
[112] If that point is to be taken on appeal, the Court would be amenable to considering a stay of remedies on terms, preferably agreed by the parties or, if necessary, imposed by the Court.
[113] The first plaintiff is entitled to costs for the proceedings to date, down to this judgment on a 2B basis, to be quantified and payable now. Leave is reserved as to any entitlement to costs by the second plaintiff. If the parties cannot agree on costs, submissions, limited to five pages each and exchanged in draft first, should be filed.
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