Mortre Holdings Ltd v ANCL Investments Ltd
[2016] NZCA 494
•1 November 2016 at 11.30 am
| IN THE COURT OF APPEAL OF NEW ZEALAND |
| CA318/2016 [2016] NZCA 494 |
| BETWEEN | MORTRE HOLDINGS LIMITED |
| AND | ANCL INVESTMENTS LIMITED |
| Hearing: | 7 September 2016 |
Court: | Asher, Mallon and Whata JJ |
Counsel: | B O’Callahan and C Choi for Appellant |
Judgment: | 1 November 2016 at 11.30 am |
JUDGMENT OF THE COURT
AThe appeal and cross-appeal are dismissed.
BThe appellant must pay the respondent costs for a standard appeal on a band A basis and usual disbursements.
____________________________________________________________________
REASONS OF THE COURT
(Given by Asher J)
Introduction
The appellant, Mortre Holdings Ltd (Mortre), owned a seven‑hectare property at Snell’s Beach in Warkworth. It sold that land to the respondent, ANCL Investments Ltd (ANCL). ANCL intended to subdivide the property to create a number of lots, and there was provision in the agreement for two of those lots to be transferred to Mortre if the subdivision was completed within a certain time.
Mortre has lodged a caveat against the title to protect its contingent interest in the two lots. The agreement for sale and purchase dated 24 October 2014 (the agreement) contained a no-caveat clause. Mortre applied under s 145A of the Land Transfer Act 1952 for an order that the caveat not lapse. ANCL opposed that application on the grounds that Mortre did not have a caveatable interest in the property and had breached the no-caveat term of the agreement.
This matter came before Associate Judge Bell. In a reserved judgment delivered on 27 June 2016 he ordered that the caveat be removed.[1]
[1]Mortre Holdings Ltd v ANCL Investments Ltd [2016] NZHC 1413.
Mortre now appeals that decision to this Court.
Background
Mortre sold the property to ANCL because it had fallen into arrears with the bank and was facing a mortgagee sale. It has not been contested for the purpose of these proceedings that the sale by Mortre to ANCL was at an under-value. The term in the agreement to transfer to Mortre two lots of the subdivision was to help compensate for the sale at an under-value. Given the arguments that have been put to us, it is necessary to set out some of the further terms of sale that were part of the agreement:
20.0 The parties agree as follows:
20.1In addition to the Purchase Price, subject to the terms of this agreement, the vendor retains the Vendor's Contingent Interest in part of the Property.
20.2The purchaser will, subject to clause 20.8, hold the Vendor’s Contingent Interest, should it crystallise, on trust for the vendor. The vendor will not at any stage lodge any caveat against the title to the Property to protect this interest.
20.3The purchaser will use reasonable endeavours to proceed to obtain the Consents, and if obtained, subject to clause 20.8, to implement the Consents and to obtain the New Titles. At its discretion the purchaser (or any subsequent purchaser as referred to in clause 20.8 below (“Subsequent Purchaser”)) may sell any or all those parts of the Property generally shown as lots 1 & 2 on the Existing Plan and apply the proceeds in reduction of indebtedness.
20.4Notwithstanding any other provision of this agreement, in the event that the New Titles have not issued within 3 years of the date of this agreement (time being of the essence), the Vendor’s Contingent Interest will not crystallise and the purchaser (including any Subsequent Purchaser) shall have no further obligation to the vendor, whether to provide it with the Selected Sites, pay any further consideration, or otherwise. Accordingly, for the avoidance of doubt, if the New titles have not issued within 3 years of the date of this agreement (time being of the essence), the purchaser (or any Subsequent Purchaser) will then be entitled to do what it chooses in relation to the Property, which could include, without limitation, electing to sell the Property or any part of it with or without completing Development Stage 1 and/or Development Stage 2, electing to retain the Property with or without completing Development Stage 1 and/or Development Stage 2, or electing to retain the Property and proceed with an alternative development of it following which it may sell all or some of the Property.
20.5On completion of the Development Stage 1 (if completed) the purchaser (or any Subsequent Purchaser) may, at its discretion, proceed with Development Stage 2.
20.6 Subject to clause 20.8, the Vendor’s Contingent Interest crystallises:
(a)on issuing of the New Titles referred to in clause 20.3 above …
(b)should the purchaser (or any Subsequent Purchaser) elect to proceed with Development Stage 2 (provided the New Titles have issued within 3 years of the date of this agreement) on the issuing of Code Compliance Certificates for the dwelling units to be erected on the Selected Sites by the purchaser or any Subsequent Purchaser (conforming to the purchaser’s or the Subsequent Purchaser’s designs for such sites) and in such event shall comprise the Selected Sites with the dwelling units thereon.
20.7The Vendor’s Contingent Interest will be transferred to the vendor no later than 6 calendar months of the crystallisation pursuant to clause 20.6 above.
20.8The vendor acknowledges and agrees that the purchaser may elect to obtain the Consents (if it is able to obtain the Consents) and then sell the Property (or part hereof) with the benefit of the Consents, prior to the New Titles issuing. If so, the purchaser will obtain from such Subsequent Purchaser a deed of covenant, in a form prepared by the purchaser, in favour of the vendor, whereby the Subsequent Purchaser covenants to be bound by the relevant terms of this clause 20. Once it has obtained such deed of covenant from the Subsequent Purchaser, the purchaser is unconditionally and irrevocably released from any obligations that it may have pursuant to this agreement.
20.9…
“Vendor’s Contingent Interest” means the interest of the vendor in that part of the Property comprising the Selected Sites contingent on firstly the New Titles issuing within 3 years of the date of this agreement and secondly on the purchaser (or any Subsequent Purchaser) proceeding with Development Stage 2.
(Emphasis added.)
The agreement settled on 25 November 2014. ANCL must obtain title to the new titles by 23 October 2017 before Mortre can obtain the benefit of the transfer of two lots. Progress is slow and Mortre has no control over it. ANCL has no particular incentive to complete in time. Clause 21 of the agreement provided that the parties will work with each other in good faith to deal with matters not addressed in the agreement. However, while in the affidavit filed in support of the caveat Mr Morison, the director of Mortre, is critical of what he suggests are less than adequate efforts to progress matters by ANCL, there is no proceeding alleging any breach of the agreement or other cause of action based on a failure to make reasonable efforts to secure the new titles, and no claim for specific performance.
Was there a caveatable interest?
General
Associate Judge Bell held that Mortre had a caveatable interest in the land. ANCL has cross-appealed against that decision and we consider this first. Is it reasonably arguable that Mortre has a caveatable interest?[2]
[2]The requirement that the caveator demonstrate an arguable claim comes from Holt v Anchorage Management Ltd [1987] 1 NZLR 108 (CA) at 117.
The primary purposes of a caveat are to protect the caveator’s beneficial interest from being defeated by registration of a dealing[3] and to give notice of the caveator’s interest.[4] 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.
[3]Land Transfer Act 1952, s 137; and Abigail v Lapin [1934] AC 491 (PC) at 500.
[4]Holt v Anchorage Management Ltd, above n 2, at 113.
It follows that where equity would intervene to stop a vendor from deliberately setting out to undermine a purchaser’s rights in an agreement for sale and purchase of land, and could intervene to require performance of terms of the agreement, there should also be a sufficient interest in the land to support a caveat. In the case of unconditional contracts for the sale of land, it is generally said that the purchaser obtains an equitable interest in the land upon execution of the contract.[5] In such a situation the vendor is seen in equity as being a trustee for the purchaser of the estate sold, and the beneficial ownership passes to the purchaser, but the vendor has a right to retain possession of the estate until the purchase money is paid.[6]
[5]Lysaght v Edwards (1876) 2 Ch D 499 at 506.
[6]At 506; and Kauri Developments Ltd v Nicholson (1986) 2 NZCPR 532 (HC) at 538.
In the case of conditional contracts where the parties intend to be bound and to remain bound subject to the fulfilment of the condition, an equitable interest in the land may also arise.[7] In such circumstances there is a reasonable expectation by virtue of the agreement for sale and purchase that the registered proprietor will not act inconsistently with the purchaser’s contingent interest in the land until the outcome of the condition is ascertained. Equity will provide remedies if the vendor’s actions materially endanger that expectation.[8] The beneficial interest will cease if the contract is avoided for failure of the condition in the same way as it may for cancellation for breach or upon non-payment of the purchase price.[9]
[7]Bevin v Smith [1994] 3 NZLR 648 (CA) at 665; and McDonald v Isaac Construction Co Ltd [1995] 3 NZLR 612 (HC) at 619.
[8]See discussion in KL Liew “Conditional Contracts and Caveatable Interests: A Mutual Exclusion?” (1995) 14 U Tas LR 63 at 64.
[9]Bevin v Smith, above n 7, at 665.
It was said in Bevin v Smith:[10]
There will be some conditional contracts, particularly those subject to true conditions precedent, where the parties cannot be regarded as intending that equitable title will pass to the purchaser until the condition is waived or fulfilled.
[10]At 665.
The equitable interest does not equate to the unconditional equitable ownership of the land as it does for an unconditional contract, but it is more than a contractual or personal right. Contractual intention to create an interest evinced in the contract is critical.[11]
[11]See D W McMorland “A new approach to precedent and subsequent conditions” (1980) 5 Otago LR 469.
The interest arises as a matter of equity, rather than contractually as a specific term of the agreement, or from a term such as the term in this agreement requiring good faith. The purchaser’s interest has differences to an interest in the land that arises following an unconditional contract. As was observed by Mason and Deane JJ in Legione v Hateley:[12]
A competing view — one which has much to commend it — is that the purchaser’s equitable interest under a contract for sale is commensurate, not with her ability to obtain specific performance in the strict or primary sense, but with her ability to protect her interest under the contract by injunction or otherwise.
[12]Legione v Hateley (1983) 152 CLR 406 at 446. Mason and Deane JJ ultimately did not adopt or apply this view. There is criticism of the approach of Mason and Deane JJ by Brennan J in his dissent in the same case and in WMC Gummow “Forfeiture and Certainty: The High Court and the House of Lords” in PD Finn (ed) Essays in Equity (Law Book Company, Sydney, 1985) 30 at 35–37. See also Stern v McArthur (1988) 165 CLR 489 at 552 where Deane and Dawson JJ took the view the extent of the purchaser’s interest is to be measured by the protection that equity will give to the purchaser.
Where a vendor is obliged to carry out certain steps to bring about the condition, equity will require the vendor’s conscience to comply with that obligation and will protect a purchaser from actions by a registered proprietor that may defeat the purchaser’s interest. The purchaser is entitled to expect that the vendor will make reasonable efforts to obtain the necessary approvals and will do nothing in the meantime to act inconsistently with the purchaser’s interest.[13] Indeed, the right of a party to seek specific performance can extend to a conditional contract, the performance sought being the defaulting party taking steps to perform a condition.[14]
[13]There is a well-established implied obligation to take reasonable steps to fulfil a conditional contract: WR Clough & Sons Ltd v Martyn [1978] 1 NZLR 313 (CA) at 317; Steele v Serepisos [2006] NZSC 67, [2007] 1 NZLR 1 at [5] per Elias CJ, [22]–[25] per Tipping J; [91]–[92] per McGrath J; and [133] per Anderson J; Singh v Potters Park Property Ltd [2015] NZCA 146 at [42]; and John Burrows, Jeremy Finn and Stephen Todd Law of Contract in New Zealand (5th ed, LexisNexis, Wellington, 2016) at [8.2.5].
[14]Steele v Serepisos, above n 13, at [133] per Anderson J.
The development of the law in New Zealand and Australia in this area was analysed in Bevin v Smith.[15] In that case it was accepted that an equitable interest may pass to a purchaser under a conditional contract, although it may not necessarily amount to the full equitable title.[16] The condition in question related to the consent of the statutory board rather than a condition of the type in this agreement that turns on a reconfiguration of title and the creation of lots of land that are not yet in existence. However both conditions involved in essence the obtaining of statutory or regulatory approvals.
On these facts
[15]Bevin v Smith, above n 7, at 660–665.
[16]At 663 and 665.
While in the cases we have referred to it has been the purchaser who is the caveator, this case is unusual as it is the vendor, Mortre, that has lodged the caveat. The usual positions are reversed but nothing turns on that. ANCL submitted that this agreement was fundamentally different to an ordinary conditional agreement for sale and purchase. Reliance was placed on the references in the agreement to Mortre’s interest “crystallising” and it was submitted that until that happened there was no interest in the land. It was submitted that the expressed intent is not to create any interest until the conditions are fulfilled. We consider that submission.
While the lots to be transferred to Mortre are not yet created, the land from which they will be created exists. The equitable interest relates, before that subdivision, to the undivided land. The reference in cl 20.1 to the vendor retaining the vendor’s contingent interest in part of the property indicates that Mortre has an ongoing interest in the land. So does the reference to the “Vendor’s Contingent Interest” in selected sites in the property in cl 20.9. The use of the word “crystallise” throughout cl 20 does not indicate an absence of an interest prior to crystallisation, but rather a contingent interest that may arise if certain things happen in the future. We agree with the Associate Judge that it means the end of the contingency, nothing more.[17] The statement in cl 20.2 that the contingent interest, should it crystallise, will be held “on trust” for the vendor is consistent with a trust arising after the agreement becomes unconditional, but it is not inconsistent with there being a lesser equitable interest prior to that event.
[17]Mortre Holdings Ltd v ANCL Investments Ltd, above n 1, at [33].
Therefore, the use of the word “crystallise” does not show a contractual intention not to create an interest in the land. It is not uncommon for purchasers to sign agreements for lots that are still to be created, by the vendor obtaining approval of a subdivision and ultimately obtaining titles to new lots. In this case we do not see a distinction between a purchaser promising to create lots and transfer them back to the vendor, and the more common situation of a vendor agreeing to create lots and to transfer them to a potential purchaser. Nor do we see the time limit for the creation of the new lots as altering the status of the equitable interest, although that interest may expire at the specified date. The interest is there from the outset and is not deferred until some future event or time, although it may end on that event or at that time.
Finally, there is a very clear indication that the parties anticipated that an equitable interest could arise, by the inclusion of the no-caveat clause. Such a clause predicates the existence of an equitable interest that could otherwise be protected by caveat. This is confirmed by the particular words in para 20.2 “not at any stage”, which indicate that the bar will apply both before and after the contract becomes unconditional.
Therefore we conclude that it is seriously arguable that Mortre maintained an equitable interest in the land capable of being protected by caveat, and we dismiss the cross-appeal.
The no-caveat clause
The effect of the no-caveat clause
Although there is a statutory right to lodge a caveat to protect an interest in the land under s 137 of the Land Transfer Act, the parties may seek to contract out of or waive the statutory right. Clauses not to lodge a caveat are commonly inserted into agreements for sale and purchase and other conveyancing documents. There can be good reason for such clauses. Given that caveats prevent the registration of instruments affecting the caveated land, they impose a severe practical impediment to a registered proprietor who wishes to deal in the land. The prohibition can stop a registered proprietor who is a developer from arranging funding by preventing the registration of mortgages, or from registering instruments to effect a subdivision. This can place unreasonable pressure on such a registered proprietor whose only legal remedy will be through the courts. Unscrupulous caveators can force a favourable settlement through the pressure of a caveat that is holding up urgent dealings.
The question that arises is whether the statutory right to lodge a caveat is absolute and overcomes a contractual no-caveat clause. Although the Courts initially had some doubts as to the enforceability of no-caveat clauses, such no‑caveat clauses are recognised as not contrary to public policy, and as valid and enforceable.[18] The caveat regime protects parties from the consequences of indefeasibility, but parties should be able to waive that protection. As was said by Elias J in Cash Handling Systems Ltd v Augustus Terrace Developments Ltd:[19]
I do not accept that such clauses are inherently undesirable … The evidence of both of the experts called confirms the substantial commercial difficulties that can be caused for a registered proprietor by the lodging of the caveat. In such circumstances I consider that it is not contrary to public policy for a tenant to contract not to exercise the protection available as a matter of general law.
[18]For suggestions to the contrary see Sail City Motors North Shore Ltd v Reddish HC Auckland M1700/89, 23 November 1989 at 5–6; and Lintel Pines Pty Ltd v Nixon [1991] 1 VR 287 (SC) at 290.
[19]Cash Handling Systems Ltd v Augustus Terrace Developments Ltd (1996) 3 NZ ConvC 192,398 (HC) at 192,411.
Cash Handling Systems Ltd was applied by this Court in Landco Albany Ltd v Fu Hao Construction Ltd.[20] The Court declined to recognise a public policy invalidation of no-caveat clauses and observed that there were reasonable commercial and private reasons why such clauses might be stipulated and accepted.[21]
[20]Landco Albany Ltd v Fu Hao Construction Ltd [2006] 2 NZLR 174 (CA) at [53].
[21]At [50].
A no-caveat clause does not prevent a caveatable interest from arising and a court therefore retains the jurisdiction to uphold the caveat. However the no-caveat clause is relevant to the court’s discretion as to whether to sustain it. This is made clear by a number of New Zealand decisions.[22] The court’s ability to enforce a no‑caveat clause despite the statutory right has been seen as an aspect of the residual discretion a court has to remove a caveat, notwithstanding that a reasonably arguable case has been shown for the claimed interest.[23] So an analogy has been drawn between discretionary remedies such as caveats and interlocutory injunctions,[24] and interlocutory orders to preserve property.[25]
[22]Pacific Homes Ltd (in rec) v Consolidated Joineries Ltd [1996] 2 NZLR 652 (CA) at 656; Castle Hill Run Ltd v NZI Finance Ltd [1985] 2 NZLR 104 (CA) at 106; Stewart v Kaipara Consultants Ltd [2000] 3 NZLR 55 (CA) at [23]; Raiser Developments Ltd v Trefoil Properties Ltd [2008] NZCA 73, (2008) 9 NZCPR 161 at [48]; and Botany Land Development Ltd v Auckland Council [2014] NZCA 61, (2014) NZCPR 813 at [24].
[23]Landco Albany Ltd v Fu Hao Construction Ltd, above n 20, at [52].
[24]Eng Mee Yong v Letchumanan [1980] AC 331 (PC) at 335.
[25]New Zealand Limousin Cattle Breeders Society Inc v Robertson [1984] 1 NZLR 41 (CA) at 43; and Castle Hill Run Ltd v NZI Finance Ltd, above n 22, at 106.
In Landco Albany Ltd v Fu Hao Construction Ltd this Court said that the judicial discretion whether to remove or sustain a caveat might be informed by the existence of a no-caveat clause.[26] Thus even if there is a serious question that there is an interest in the land, the court has the power if there is a no‑caveat clause to decline to sustain the caveat. While the question of whether the caveator has an arguable case of an equitable interest is unaffected by the caveator being in breach of a no-caveat clause, the clause is relevant to the exercise of the discretion.[27]
[26]Landco Albany Ltd v Fu Hao Construction Ltd, above n 20, at [52].
[27]See DW McMorland and others Hinde McMorland and Sim Land Law in New Zealand (online looseleaf ed, LexisNexis) at [10.008].
Such a clause can be a basis for the exercise of the discretion because a court will not lightly condone a breach of contract, particularly when the term of the contract has an obvious commercial purpose. While, like the Associate Judge, we hesitate to set a strict test of the type proposed in Campbell on Caveats,[28] nevertheless we accept that the threshold for exercising the discretion to remove or not sustain a caveat filed in breach of a no-caveat clause is not high (while recognising the need for caution).[29]
[28]Mortre Holdings Ltd v ANCL Investments Ltd, above n 1, at [47]; and Neil Campbell Campbell on Caveats (LexisNexis, Wellington, 2012) at [2.6].
[29]Pacific Homes Ltd (in rec) v Consolidated Joineries Ltd, above n 22, at 656; and Stewart v Kaipara Consultants Ltd, above n 22, at [23].
We do not accept the submission of Mr O’Callahan for Mortre that the Court should adopt the approach that unless the Judge is completely satisfied the legitimate interests of the caveator would not be prejudiced by an order for removal of the caveat, the caveat should be sustained.[30] There is no practical or policy reason to require such a high threshold, which would render no‑caveat clauses of little practical use.
On these facts
[30]Mr O’Callahan relied on Pacific Homes Ltd (in rec) v Consolidated Joineries Ltd, above n 22, at 656.
Against this background we turn to the question of whether the Associate Judge was correct in exercising his discretion to refuse to sustain the caveat despite the arguable case of an interest in the land. As we have said, the threshold is not high when the caveat is lodged in breach of a no-caveat clause. In approaching the question as we have indicated, there will have to be good reason to sustain a caveat lodged in breach of an express contractual obligation. However, we recognise that in certain circumstances, including, for instance, repudiation by the registered proprietor or where there is evidence of prima facie fraudulent dealing, the discretion will not be exercised.
Mortre has provided an undertaking to the Court to consent to reasonable dealings to enable the issue of new titles, but that is of little assistance to it in the exercise of the discretion, given the irremediable consequences that might ensue from a delay in the progress of the subdivision. There is no evidence of the financial strength of Mortre to give such an undertaking, and there is evidence that it has been in financial difficulties. It is questionable whether an undertaking has the same significance as in an interim injunction proceeding, as there is a statutory right to register a caveat, subject to the qualifications we have already mentioned.
Mr O’Callahan in his submissions went on to point to a number of factual matters indicating a breach of the reasonable endeavours clause at cl 20.3 of the agreement to obtain the consents. Those arguments on the factual sequence were designed to show that ANCL could have moved more speedily in the resource consent process and to pursue the development. He argued that it was not necessary for the appellant to wait until 23 October 2017, the expiry of three years, to show breach of the reasonable endeavours clause.
We mean no disrespect to Mr O’Callahan in not going through each of his factual arguments in turn. There have been various delays in progressing the subdivision. These may or may not have been the fault of ANCL. It is not possible to say that any deliberate delay or lack of reasonable endeavour has been shown or is even seriously arguable, at this time. We agree with Associate Judge Bell that while it does look increasingly unlikely that the titles will issue in time “the difficulty is in making that call part way through the project.”[31] As he said:
[57] If title will issue within the three years, there will have been no need for the caveat. If title will not issue inside the three years, but ANCL has used reasonable endeavours, there will be no justification for the caveat. Mortre could only justify a caveat if title will not issue inside the three years as a result of ANCL not using reasonable endeavours under cl 20.3. That cannot be established now.
[31]Mortre Holdings Ltd v ANCL Investments Ltd, above n 1, at [56].
Given that we are unable to discern any repudiatory conduct on the part of ANCL or any wish to accept such repudiation if it exists on the part of Mortre, we see no basis for sustaining the caveat. The contract is extant, and the lodging of the caveat was a breach of the no-caveat clause. As the Associate Judge said, Mortre took the risk of non-performance by ANCL without the protection of a caveat.[32] At this point there is no clear breach of cl 20.3 or other disentitling conduct.
Outcome
[32]At [58].
In our assessment the Associate Judge was correct to exercise his discretion to decline to sustain the caveat despite the arguable case. In entering into the agreement Mortre had agreed to leave the progress of the development to ANCL, and to allow it to proceed without the disadvantage of a caveat on the land. The evidence adduced at this point has not been sufficient to show that there is a real risk that Mortre’s interest in the land will be lost through any failing by ANCL.
There is a more fundamental issue that arises in relation to the exercise of the discretion. Mortre’s purpose in lodging the caveat is not argued to be to stop dealings in the land or to obtain a present right to the land by specific performance. As stated earlier, there is no claim before the Court for breach of contract or for any specific remedy. It is difficult to see any purpose in lodging the caveat, other than to establish a nuisance value and a negotiation tool. This indicates at the very least that the lodging of the caveat is at this point premature.
A refusal to sustain the caveat does not leave Mortre without remedies in the future. It is open to it to take steps now to seek relief for breach of contract, or it may emerge that ANCL’s conduct can be shown to be likely to destroy Mortre’s interest under the contract. In that event, the lodging of a caveat might be justified and the Court might exercise its discretion in favour of Mortre. Mortre may also have available the remedies of an injunction and specific performance. These are all matters that may arise in the future.
In our view the decision to refuse to order that the caveat not lapse was correct.
Result
The appeal and cross-appeal are dismissed. For the avoidance of doubt we order that the caveat be removed.
We invited submissions on the question of costs. In these circumstances costs should follow the event, despite the failure of the cross-appeal.
The appellant must pay the respondent costs for a standard appeal on a band A basis and usual disbursements.
Solicitors:
Kirkland Morrison O’Callahan & Ho, Auckland for Appellant
Buddle Findlay, Auckland for Respondent
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