Masterton Investments Limited v Watson

[2021] NZHC 1681

IN THE HIGH COURT OF NEW ZEALAND MASTERTON REGISTRY

I TE KŌTI MATUA O AOTEAROA WHAKAORIORI ROHE

CIV-2020-435-19

[2021] NZHC 1681

BETWEEN

MASTERTON INVESTMENTS LIMITED

Plaintiff

AND

DENIS ERIC WATSON

Defendant

Hearing:	4 May 2021
Counsel:	S P Maloney for plaintiff K P Sullivan for defendant
Judgment:	7 July 2021

JUDGMENT OF ASSOCIATE JUDGE JOHNSTON

Introduction and background

[1]                  On 3 December 2019 the parties entered into an unconditional agreement for the sale and purchase of a commercial property in Masterton, whereby the plaintiff, Masterton Investments Ltd (MIL), agreed to sell and the defendant, Mr Denis Watson, agreed to purchase the property for $1.7 million (exclusive of GST). The agreement provided for a deposit of $50,000 to be paid by 13 December 2019, and the balance of the purchase price to be payable on settlement which was to take place on 31 March 2020.

[2]                  It is common ground that Mr Watson did not pay the deposit or settle the transaction.

[3]                  MIL put the property back on the market and eventually sold it to a third party for $1,300.000.00

MASTERTON INVESTMENTS LIMITED v WATSON [2021] NZHC 1681 [7 July 2021]

[4]                  MIL now sues Mr Watson and claims damages reflecting the difference between the sale and purchase price in the original contract and the price at which the company eventually sold the property, and other losses, together with interest and costs. It’s claim totals $453,597.98. MIL applies for summary judgment.

[5]                  Mr Watson opposes that application. He says that he has defences to the claim against him. First, he says that when it appeared that he would not be able to settle the original contract the parties negotiated an alternative agreement whereby MIL would lease the property to him for a year, at the conclusion of which term he would settle the sale and purchase transaction (“lease to buy”). He says that, after the parties reached a  final  agreement,  MIL  sold  the  property  to  the  third  party.  Second, Mr Watson says that MIL failed to take reasonable steps to mitigate its loss, and cannot visit the entire difference between the two sale and purchase agreements on him.

[6]                  On those bases, Mr Watson contends that MIL’s application for summary judgment should be dismissed and that its claim should go to trial in the usual way.

[7]                  Counsel were on common ground in terms of the principles relating to summary judgment. Mr Maloney summarised these in terms with which Mr Sullivan did not take issue:

17.The plaintiff bears the onus of proving that the defendant has no defence to any cause of action in the statement of claim. The words “no defence” require the plaintiff to establish the absence of any real question to be tried, and have been interpreted as:

“no bona fide defence, no reasonable ground of defence, no fairly arguable defence”.

18.However, where the plaintiff’s evidence is sufficient to convince the Court that it is (without more) entitled to the relief claimed, the defendant must respond with sufficient particulars to persuade the court that he has a credible defence (this is often referred to as the “tactical burden of proof”).

19.The Court should take a robust and realistic approach to affidavit evidence in the summary judgment context and is entitled to scrutinise affidavits to ensure they pass the “threshold of credibility”. There should be internal consistency and affidavits should be supported by documentary evidence where available.

20.The Court is not bound to accept statements which lack precision, are inconsistent with contemporary documents, or are inherently improbable.

21.As stated in JD Rai & Sons Ltd v Patel & Ors:

“the object of the procedure would be thwarted if spurious defences or plainly contrived factual conflicts were permitted to prevent judgment being obtained.”

[Footnotes omitted.]

[8]                  Thus, the issue for determination is whether the defences advanced to MIL’s claim by Mr Watson and summarised earlier are arguable — only if MIL can establish that they are not, is it entitled to summary judgment.

The lease to buy agreement

[9]                  In a nutshell, this defence is that the parties entered into a replacement agreement and in doing so both lost any rights that they may have had to rely on the original agreement.

[10]              Mr Watson’s contention is that in the course of correspondence between the parties and their solicitors during April, May and June 2020, they entered into a binding agreement whereby MIL would lease the property to him for a year, at the conclusion of which they would settle on the terms agreed in the original agreement.

[11]              An issue that emerged when the parties exchanged synopses of submissions prior to the hearing was whether or not s 24 of the Property Law Act 2007 — the present iteration of the Statute of Frauds — has any application. In his synopsis of argument Mr Maloney contended that it did, submitting that “… the lease to buy agreement is a contract for the disposition of land and must comply with the provisions of s 24 of the Property Law Act 2007. Specifically, it must be signed by the party against whom it is sought to be enforced”.   He went on to discuss the exception to    s 24, that is to say the equitable doctrine of part performance that is preserved in s 26, and the implications of that doctrine in the present context. In responding Mr Sullivan submitted that s 24 of the Property Law Act has no application:

72.The plaintiff has failed to appreciate and address the exception expressed in s 24(2) of the PLA which records that a disposition of land to which s 24 applies does not include a short-term lease.

73.A short-term lease is defined in s 207 of the PLA to be a lease for a term of one year or less, precisely the length of time that the parties chose for the lease in the lease to buy agreement.

74.Section 208 of the PLA simply states that “a short-term lease may be made orally or in writing”.

[12]              In the face of that submission Mr Maloney did not persist with the contention that s 24 of the Property Law Act prevented Mr Watson from propounding the alleged lease to buy agreement as a defence.

[13]At the conclusion of the hearing I reserved my judgment.

[14]              On revisiting counsel’s submissions, it was not obvious to me that s 24 of the Property Law Act could be dismissed as having no application in this case. As the point was really not argued before me, I issued a minute in which I invited counsel to make further submissions. Both Mr Maloney and Mr Sullivan filed and served submissions. It may be necessary to come back to this issue.

[15]              There is no doubt that from early April 2020 the parties, through their solicitors, were negotiating for a lease to buy agreement along the lines described earlier. Moreover, by 23 June 2020 they had reached a measure of agreement. There are therefore two issues. The first is whether the parties reached a concluded agreement or whether the propounded agreement is void for uncertainty. If the contention that an enforceable agreement was reached is arguable, then it will be necessary to consider whether s 24 of the Property Law Act applies so as to render the agreement unenforceable.

[16]              On 1 April 2020 MIL’s solicitors proposed to Mr Watson’s solicitors “that settlement is pushed out to 31 March 2021, and that my client leases the property in the interim at market rental and on standard ADLS terms” and asked if MIL would regard such an arrangement as “acceptable in principle”, concluding by saying that if so then Mr Watson’s solicitors could “prepare something more formal for your client to look at”.

[17]On 3 April 2020 MIL served a settlement notice on Mr Watson.

[18]              On 7 April 2020 MIL’s solicitors replied to Mr Watson’s solicitor’s email of  1 April 2020. In their reply MIL’s solicitors made it clear that the company was not agreeing to the proposal, in principle or otherwise, but sought further detail as to the same.

[19]              On 14 April 2020 Mr Watson’s solicitors replied suggesting that the terms of any lease to buy arrangement would include the following:

Tenant: Manuka Toa Ltd

Rent: Market rental payable one month in advance.

Term: 1 year with settlement under the ASP to occur at the end of that time. Lease: Standard ADLS terms apply.

This would likely take the form of an amendment to the ASP to extend the settlement date, and an agreement to enter into a lease. We would acknowledge that your rights are reserved under the ASP by way of a lease default — i.e. a lease default would bring settlement to date forward to the date that the lease is terminated.

Let me know what you think. Happy to discuss as well [mobile telephone number]

[20]              On 16 April 2020 Mr Watson’s solicitor, Mr Davies, made a file note (in the form of an email to himself) apparently recording a telephone conversation that he had had with MIL’s solicitor, Mr Carruthers, earlier that day. The substantive component of the file note says that Mr Carruthers had “discussed the matter with his client and wants our client to put some “skin in the game”. That means they would want a substantial deposit on the purchase and at least one but hopefully two or three months’ rent in advance”. He went on to say that he had pushed back on this explaining that Mr Watson’s “existing cash flow was tied up in his business and that while he is good for the rental he is not wanting to have money tied up in security”. Mr Davies concluded by recording that he had “asked [whether] a personal guarantee would be okay” and that Mr Carruthers had said he “would consider that if they had information about [Mr Watson’s] personal assets”. Mr Davies concluded by saying that he would take instructions and revert.

[21]              On 20 April 2020 Mr Watson’s solicitors emailed MIL’s solicitors saying that he — Mr Watson — was not in a position to offer to pay a substantial deposit but that he would be prepared “to stretch to provide two months rent in advance. Can you please let me know if that works?”.

[22]              On 22 April 2020 MIL’s solicitors responded to Mr Watson’s solicitors saying that “without a substantial deposit [MIL] have little faith that [Mr Watson] will meet its obligations” and asking Mr Watson’s solicitors to give further consideration to providing value of the sort which might give MIL the comfort it was looking for.

[23]              On 23 April 2020 MIL became entitled to cancel the agreement on account of Mr Watson’s failure to settle.

[24]              On 8 May 2020 MIL’s solicitors emailed Mr Watson’s solicitors again asking whether they had any further instructions.

[25]On 19 May 2020 Mr Watson’s solicitors replied saying that he — Mr Watson

— would “like to lease the premises and buy those premises in a year and will pay two months in advance. He mentioned that he is known to WCM Legal and that might give you some comfort as to his bona fides”. They invited a response to that proposition.

[26]              On 26 May 2020 MIL’s solicitors responded to Mr Watson’s solicitors saying that if the proposed lease to buy arrangement was “to proceed, [they were] instructed to propose an annual rental of $120,000 p.a. plus GST and OPEX” and sought agreement to that. They added that MIL “would expect that the 2 months rent paid would be held as a bond (not a payment in advance)”. Finally, they said that if those terms were agreeable to Mr Watson “then [they would] come back to [Mr Watson’s solicitors] with a full substantiated breakdown of the proposed arrangement.”

[27]              On 4 June 2020 Mr Watson’s solicitors responded asking for “an idea of what the OPEX would include”.

[28]              On 10 June 2020 MIL entered into a conditional agreement to sell the property to a third party.

[29]              On 11 June 2020 MIL’s solicitors provided Mr Watson’s solicitors with a break down of the categories of opex that MIL suggested be payable in terms of the proposed lease.

[30]              On 19 June 2020 Mr Watson’s solicitors emailed MIL’s solicitors saying that Mr Watson was: “ok with the OPEX. So to summarise we will need to vary the Agreement to provide for a 12 month lease before completing purchase in 12 months. [Mr Watson] agrees to pay 2 months rental on signing, then will pay monthly in advance after 2 months, and OPEX monthly in arrears. Would you like us to prepare the lease?”

[31]              MIL’s solicitors responded by email on 22 June 2020 saying “No that is not correct nor agreeable. It is proposed that the 2-months rent is to be payable as a bond (not a payment in advance)”.

[32]              On 23 June 2020 Mr Watson’s solicitors replied asking for confirmation that MIL’s solicitors were “envisaging that the bond will be returnable at the end of the lease (most likely applied to the purchase price)”.

[33]              On 24 June 2020 the sale and purchase agreement between MIL and the third party  became  unconditional  and  on  26  June  2020  MIL’s  solicitors  informed  Mr Watson’s solicitors that the property had been resold.

[34]              In my view, against that background, it is at least open to Mr Watson to argue that, as at 23 June 2020, the parties, through their solicitors, had reached agreement to vary the original sale and purchase agreement, or entered into a new arrangement to the effect that MIL would lease the subject property to Mr Watson for a one year period commencing on 1 April at the conclusion of which the parties would settle on the original terms for its sale and purchase.

[35]              On behalf of MIL, Mr Maloney submitted that the parties did not reach agreement on essential terms of the proposed arrangement. In particular he submitted that they did not reach “agreement on when the lease was to commence, the identity of the proposed lessee, or the amount of rent payable”.

[36]              It appears to me from the reference in Mr Watson’s solicitor’s original email of 1 April 2020 that settlement be pushed out to 31 March 2021, and the fact that from that point on both solicitors proceeded on the basis that any lease would be for a one year period, that the parties negotiated on the basis that the lease was to commence from the settlement date of the original transaction — 1 April 2020. In my view, it is of no consequence whether the parties expressly identified who the ultimate lessee/purchaser would be. The original sale and purchase agreement was between MIL and Mr  Watson.  Whilst,  for  commercial  reasons,  it  seems  unlikely  that  Mr Watson would have envisaged leasing or purchasing himself, given the terms in which the parties reached agreement, unless he could persuade MIL to agree to any nominee as a lessee and purchaser, it is Mr Watson who would have been bound by the terms of the arrangement. I do not follow the submission that the parties did not agree on the amount of the rental. In their email dated 26 May 2020 MIL’s solicitors identified the annual rental as $120,000 per annum plus GST and opex. The items to be included in opex were subsequently agreed and it seems clear that it was agreed that Mr Watson would pay a bond of two months’ rental.

[37]              I do not say that all of those matters were settled to the point where there was an enforceable arrangement between the parties. It is unnecessary for me to reach a conclusion on that.

[38]I do however conclude that Mr Watson has an arguable case to that effect.

Section 24 of the Property Law Act 2007

[39]Section 24 of the Property Law Act provides:

24       Contracts for disposition of land not enforceable unless in writing

(1)A contract for the disposition of land is not enforceable by action unless—

(a)the contract is in writing or its terms are recorded in writing; and

(b)the contract or written record is signed by the party against whom the contract is sought to be enforced.

(2)In this section, disposition does not include—

(a)a short-term lease; or

(b)a sale of land by order of a court or through the Registrar.

[40]              Historically, the common law has always treated interests in real property as being of particular importance, and this is reflected in s 24 which is essentially an evidential provision providing that, whatever arrangements parties might reach orally, unless they are committed to writing, they are unenforceable.

[41]              There are exceptions. One of these is an exception for leases of no more than a year’s duration. This is captured in s 24(2).

[42]              For MIL Mr Maloney submits that even if the parties reached an agreement that was sufficiently certain to be enforceable at law,  it is unenforceable in terms of  s 24. Mr Maloney’s submission is predicated on the proposition that what the parties were negotiating was a global arrangement involving a lease to buy and included both components of that arrangement, that is to say, a lease for a period of a year and a sale and purchase arrangement to be settled at the conclusion of that term. Mr Sullivan for Mr Watson on the other hand invites the Court to regard the arrangement as having two separate components. As he submitted, the sale and purchase agreement was already in writing and the parties had simply agreed to defer settlement for 12 months and independently agreed to a 12 month lease which falls within the exception contained in s 24(2).

[43]              Again, in my view, the position advanced on Mr Watson’s behalf is not without some force.

[44]              There is perhaps a further  argument  that  might  have  been  advanced  on Mr Watson’s behalf, that is to say that the arrangement was in fact committed to writing; its written form consisting of the exchanges of emails referred to earlier, all of which might be said to have been signed on behalf of MIL by their solicitor.

[45]              This argument may or may not have to draw upon what is sometimes referred to as the authenticated signature fiction.

[46]              On balance I am  inclined  to  the  view  that  the  argument  advanced  on  Mr Watson’s behalf is an arguable one.

Damages

[47]The second limb of Mr Watson’s argument need be addressed only briefly.

[48]              On his behalf, it is said that MIL did not take adequate steps to mitigate its loss or, to put it more bluntly, perceiving that they were in a position to recover damages from Mr Watson to cover the difference between the price he had agreed to pay for the property and any lesser price at which they were able to sell it to a third party, were cavalier in selling it for $1,300,000.00.

[49]              Mr Maloney’s contention on behalf of MIL in response to this argument is effectively that they engaged a reputable real estate firm, Gollins Commercial, and, through that firm’s principal, Mr Chris Gollins, marketed the property as strongly as they were able and accepted the only offer that they received.

[50]              It is not of course for a plaintiff to prove that they have taken every step to mitigate their loss, but rather for a defendant seeking to defend the proceedings on the basis that a plaintiff has failed to mitigate loss to establish that failure. However, once the issue is at large it is not unreasonable for the Court to expect to hear independent expert evidence as to value in a case such as this. Although, had this defence been the only basis for Mr Watson’s opposition to the application for summary judgment, he may have faced difficulties, nevertheless, this too is an issue that in my view cannot be determined on the untested affidavit evidence before the Court.

Conclusion

[51]              In my judgment, MIL has not established that Mr Watson does not have an arguable defence to its claim. The matter must be resolved at trial. MIL’s application for summary judgment is dismissed.

Costs

[52]              Following an unsuccessful application for summary judgment, the convention is that no costs orders follow. My preliminary view is that no order should follow here. However, counsel may come back with memoranda in the usual way if they wish to contend for another outcome on costs.

Associate Judge Johnston

Solicitors:

Upper Hutt Law Ltd, Upper Hutt for plaintiff Avid Legal, Wellington for defendant