Patterson v Alsaloom
[2020] NZHC 2307
•4 September 2020
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2020-404-188
[2020] NZHC 2307
UNDER Section 143(3) of the Land Transfer Act 2017 IN THE MATTER OF
an application by the applicant that Caveat No.11519692.1 (North Auckland Land Registry) not lapse
BETWEEN
KEVIN BARRY PATTERSON
Applicant
AND
RAFAD ALSALOOM and RMC TRUST COMPANY LIMITED
Respondents
Hearing: 6 August 2020 Appearances:
RO Parmenter for the Applicant DJ Rooke for the Respondents
Judgment:
4 September 2020
RESERVED JUDGMENT OF ASSOCIATE JUDGE SMITH
This judgment was delivered by me on 4 September 2020 at 4pm pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Solicitors / Counsel:
R Parmenter, Auckland
Gibbs Mills Livingstone, Auckland
Patterson v Alsaloom [2020] NZHC 2307 [4 September 2020]
[1] The applicant (Mr Patterson) applies for an order under s 143 of the Land Transfer Act 2017 (the LTA) that a caveat registered by him on the title to a property owned by the respondents at 20 Sommerville Road, Howick (the property), not lapse.
[2] The caveat (No.11519692.1 – “the caveat”) was registered by Mr Patterson on 11 October 2019. The claimed estate or interest in the property, as described in the caveat, was “as cestui que trust of which the Registered Proprietor is a trustee”. In his submissions for Mr Patterson, Mr Parmenter advised that the trust on which Mr Patterson relies is of the “institutional constructive trust” kind (described later in this judgment), arising from an oral understanding between the parties, and subsequent payments made by Mr Patterson into a joint bank account opened by the parties, from which the costs of certain rebuilding work on the property was paid. Mr Patterson says that the payments he made, and certain work he carried out on the property, were made and done on the basis that he would receive in exchange an ownership interest in the property.
[3] The respondents oppose the application. They say that the caveat insufficiently describes Mr Patterson’s claimed interest, and that he has no estate or interest in the property in any event.
Background
[4] In June 2018 Mr Patterson, who had been a tenant in a house on the property (“the house”) for over five years, received from the respondents a formal 42 days’ notice to terminate the tenancy. The notice was given on the basis that the respondents wished to sell the property. Mr Patterson began looking for new accommodation.
[5] Mr Patterson says that his household during the term of his tenancy consisted of himself and four other people, none of whom were family members. Over the years, he had had a variety of flatmates living in the house.
[6] On 24 September 2018, the house caught fire. It appears that the fire was deliberately lit by one of Mr Patterson’s flatmates/sub-tenants, with whom he had had an argument. In any event, the house was seriously damaged, beyond the point where it could be occupied by Mr Patterson and his flatmates.
[7] Responsibility for the fire was important, particularly as the respondents had allowed their insurance cover on the house to lapse before the date of the fire. Mr Alsaloom came to the view that Mr Patterson had no right to have sub-tenants living in the house who were not part of his immediate family, and that Mr Patterson was liable under the tenancy agreement for the acts of the flatmate who started the fire.
[8] In a discussion within a day or two after the fire, Mr Alsaloom told Mr Patterson that he considered he had a right to sue him and others for the fire. Mr Patterson said in his evidence that he had no idea why he might be at risk of legal liability for the fire, but he “let [Mr Alsaloom] carry on”.
[9] Mr Patterson says that he then put a proposition to Mr Alsaloom, under which he and the respondents would share the costs of rebuilding the house in exchange for Mr Patterson acquiring a half share in the property on an “as is” basis. Mr Patterson would pay a total of $500,000. Of this, $300,000 was to be in cash and the remainder to be borrowed by him. The $500,000 would be applied to rebuilding the house.
[10] Mr Patterson says that he and Mr Alsaloom had a positive and constructive discussion about the opportunity to enlarge the house and re-clad the upper floor to make more money out of it as a future rental property. His evidence was to the effect that Mr Alsaloom was generally receptive to the idea of a partnership between himself and Mr Patterson, saying that he had a vacant property at Waiuku which, when the rebuild was completed at the property, he and Mr Patterson could develop together afterwards. Mr Patterson says that Mr Alsaloom told him:
Let’s not waste time and money with lawyers with you being sued.
[11] The idea of Mr Patterson acquiring the property, or an interest in it, was not new. There had been some discussion about a possible purchase before the fire, and Mr Patterson’s evidence was that Mr Alsaloom had asked him in a text message “why don’t you buy the property?” Mr Patterson then obtained a report from a firm of registered valuers which put a market value of $1,230,000 on the property (including chattels and any GST), as at 29 June 2018. Mr Patterson made an offer of $1,150,000 to Mr Alsaloom for the property, but he got no response.
[12]After the fire, Mr Patterson’s impression was that the rebuild might cost around
$300,000. He says that he typed a draft joint venture proposal document based on his discussions with Mr Alsaloom, but he never got around to giving the document to him. He says that he thought he had a deal with Mr Alsaloom under which he would contribute to the cost of the rebuild and acquire in exchange an interest in the property, and he believed he could trust Mr Alsaloom.
[13] For that reason he was prepared to proceed with the arrangement without having it documented and signed. In October 2018 he began paying money into a joint bank account established by Mr Alsaloom and himself at the Botany Town Centre branch of the ASB Bank.
[14] The parties have differing views on why this joint bank account was opened. Mr Patterson says that it was set up to facilitate his payments into the joint venture he had agreed with Mr Alsaloom, under which he would become a part owner of the property. He said in his evidence that he had repeated his joint venture proposal to Mr Alsaloom about five times, and that he and Mr Alsaloom met outside the Botany Town Centre ASB Bank several times for discussions. Mr Patterson said in his affidavit:
We agreed, certainly, on 12 October 2018, because we then went straight into the bank and opened a joint account … I deposited $3,000 to get things started. It can be seen that I completed the initial funding with $35,000 on 18 October. I had full signing authority on the account.
[15] Mr Alsaloom tells a different story. His starting point is that Mr Patterson was in breach of the tenancy agreement in subletting rooms in the house. Mr Alsaloom had discovered before the fire that this had been happening, as issues had arisen with the sub-tenants over various events of public disorder, and Mr Alsaloom had received complaints from neighbours (including complaints that some of the sub-tenants had been noisy and violent, and had disturbed nearby residents).
[16] When Mr Alsaloom discussed the fire with Mr Patterson, Mr Patterson confirmed that he had had a homeless person living in the room where the fire started, and that he had had a row with this person for not paying rent. The person is believed to have started the fire after this argument. Mr Alsaloom then did some research on
the relevant provisions of the Residential Tenancies Act 1986, and told Mr Patterson that he considered him liable for the fire damage.
[17] What was then agreed between Mr Alsaloom and Mr Patterson was not, on Mr Alsaloom’s evidence, a joint venture agreement to share the costs of the rebuild and transfer part of the ownership to Mr Patterson. The only agreement was that Mr Patterson would pay half the rebuild costs, in settlement of the respondents’ claims against him for breach of the tenancy agreement. As Mr Alsaloom put it in his evidence, it was either that arrangement or the respondents would sue Mr Patterson for the whole cost of the rebuild. Mr Patterson would pay his half share of the costs into the joint bank account, and Mr Patterson and Mr Alsaloom would work together to rebuild the property.
[18] Mr Alsaloom explained that in agreeing to this arrangement he took into account that he was then living in Australia, he had no insurance, and he had no available assistance to carry out the rebuild (work that would otherwise have been handled by the insurer). He needed some help. Also, he could not obtain further finance against the security of the property.
[19] The last matter agreed (on Mr Alsaloom’s version of the events) was that, when Mr Patterson had paid his half share of the rebuild costs, and the house had been rebuilt, Mr Patterson could then re-occupy the house under a new tenancy agreement from the respondents.
[20] Mr Alsaloom says that there was never any mention of Mr Patterson obtaining an ownership interest in the property (although he acknowledges that Mr Patterson did offer to buy the property “as is”, an offer he rejected).
[21] After the opening of the joint bank account on 12 October 2018, the parties spent two months on a clean-up process at the property. During that period, Mr Patterson made payments into the joint bank account.
[22] Mr Patterson says that he carried out certain design work for the rebuild, using existing house plans he had obtained. He says that he produced near-scale concept plans, showing plan and elevation views. By the middle of November 2018, an architect had been appointed, and a temporary tarpaulin was in place to protect the interior of the house. There were several failures with the temporary tarpaulin protection, but Mr Patterson came up with a reinforced design that kept the tarpaulin tight for the next four months.
[23] Mr Patterson says that he made it known to other parties during this period that he was a part-owner of the property, but Mr Alsaloom says he has no knowledge of that.
[24] Mr Alsaloom generally downplayed Mr Patterson’s claimed contributions to the rebuild. He says that it was he who undertook the clean-up and securing of the property; Mr Patterson only paid funds into the joint bank account. Mr Patterson was also working in his usual business. Mr Patterson may have done things after Mr Alsaloom returned to Australia before Christmas 2018, but he has not produced any invoices to support that claim.
[25] Mr Patterson says that, each time a payment was requested for the rebuild work, he arranged for a bank cheque or direct credit to be deposited to the joint bank account. After Christmas 2018, he also made some payments ($3,200 per month) on the respondents’ mortgage.
[26] A building consent was eventually issued for the rebuild work, and Mr Patterson was asked to uplift the consent and pay the fee. He did that on 18 April 2019. Mr Alsaloom then returned to Auckland to oversee the building work, which was carried out by a contracting group. Mr Patterson visited the site regularly during the work, and did various jobs from time to time.
[27] Mr Patterson says that, during the rebuild, Mr Alsaloom asked him to have a sale and purchase agreement drawn up. Mr Patterson then produced a “short draft JV proposal”, in which he included details of his expenditure up to 27 May 2019. The “short draft JV proposal” was the same document he had prepared in the period
between the date of the fire and the opening of the joint bank account on 12 October 2018, which he never got around to giving to Mr Alsaloom. This document, described as “Partnership Document” (“Draft”), included the following:
… The Partnership is formed for the purposes of renovating/rebuilding; partial transfer of ownership; and operation of the rental property … as a residential property [at the property] as a residential dwelling. Including any subsequent proposals that might eventuate in the future by mutual agreement.
The property will be held jointly by the partners … Each partner will have a 50% share in the property.
The partners agree that the property has a market value of $1.0m. [Mr Alsaloom] agrees to sell 50% of the property for $500,000. [Mr Patterson] agrees to purchase a 50% share for $500,000 made up of $300,000 in cash and
$200,000 by a mortgage facility.
A bank account will be established with ASB Bank for the operation of a partnership. All rental income and outgoings will be operated from this account.
… [Mr Patterson] will fund the restoration for up to $300,000 in cash payments on a timely basis from capital and current earnings. Should restoration exceed $300,000 costs, [Mr Alsaloom] will fund $50,000 to compensate for [Mr Patterson] advancing non-restoration funds to cover [Mr Alsaloom’s] existing mortgage on the property, subsequently each party will be shared 50/50 up to an additional $150,000 costs.
[Mr Patterson] will manage the property in the long term. Various options will be pursued … [Mr Patterson] will receive an agreement management fee of % on gross rental income paid from partnership funds on a monthly basis.
[28] With the “short draft JV proposal”, Mr Patterson provided Mr Alsaloom with a summary of expenditure to 27 May 2019, showed that he had paid a total of $147,800 into the “Joint Venture ASB Account”. The summary said that Mr Patterson had made various other payments direct to suppliers, plus four mortgage instalment payments ($3,200 each) on the respondents’ mortgage. The additional payments (including the mortgage payments) Mr Patterson says he made, total $26,266.79. With the payments made into the joint bank account, Mr Patterson says that he had paid a total of
$174,066.79 on the project by 27 May 2019. He subsequently paid a further $1,811.11 in respect of the property.
[29] Mr Patterson says that he asked Mr Alsaloom for a summary of the respondents’ expenditure of the funds advanced by Mr Patterson, but Mr Alsaloom did not read the documents Mr Patterson had given him, and he evaded the enquiry about what he had done with the money paid by Mr Patterson.
[30] Mr Alsaloom acknowledges that, in the course of the rebuilding work, Mr Patterson made various proposals to buy into the property. However he rejected them. His evidence was that he did not ask for any sale and purchase agreement to be drawn up. He accepts that Mr Patterson did produce the “JV proposal”, but he says that he never agreed to the terms in it. Mr Patterson was offering various deals different from what the parties had originally agreed,
[31] A number of discussions between the parties ensued. Mr Patterson says that the discussions led him to believe that Mr Alsaloom was “not entirely happy with our deal”. On one occasion, Mr Alsaloom responded angrily to a proposal about changing the mortgage arrangements, and referred to the respondents’ loss in equity in the property.
[32] Mr Patterson says that he then reviewed his stance on the valuation of the property. He told Mr Alsaloom that if he wanted to change things, Mr Patterson would be happy to treat the $180,000 (approximately) that he had contributed as an investment, in exchange for a smaller ownership share in the property (rather than continue payments to the $500,000 level initially agreed). On that basis, Mr Patterson calculated that he would have a 15 per cent interest in the property, which would rise to 35 per cent if he assumed liability for 50 per cent of the existing mortgage.
[33] That possible solution was not progressed. Mr Alsaloom neither agreed nor disagreed with it.
[34] By July 2019, it was apparent to Mr Patterson that trouble lay ahead. He consulted his solicitor, and the solicitor spoke to Mr Alsaloom.
[35] Several days later Mr Alsaloom asked him when he was going to make his next payment. In response, Mr Patterson told him that he [Mr Alsaloom] did not seem to be living up to his end of the deal (what was he doing with the money?). Mr Patterson told Mr Alsaloom that he had stopped paying until there was certainty. He reminded Mr Alsaloom that he was open to re-negotiating the deal, so that Mr Patterson would have a smaller equity in the property.
[36] Mr Alsaloom still did nothing in response, and Mr Patterson was unsure where Mr Alsaloom stood. He waited for a short time, and then instructed his solicitors to put the caveat on the title to the property.
[37] In January 2020, Mr Patterson was scheduled to head off overseas for 10 days. He says that, prior to his departure, Mr Alsaloom asked him for a sale and purchase agreement to reflect the possible change in terms that Mr Patterson had suggested. Mr Patterson replied that he would be returning to run the rental accommodation from the property, on the basis that the repair work was expected to be completed by the end of February 2020. That expectation was overtaken by events, because the respondents then made their application to remove the caveat.
[38] In his affidavit, Mr Alsaloom said that the joint bank account was used to “record payments” made by Mr Patterson. He went on to say:
… I then paid or transferred to the Respondents’ ASB Bank account funds as needed to pay the repair and related and other costs.
[39] Mr Alsaloom explained that the joint bank account was separate from the rental account into which Mr Patterson paid his rent.
[40] Mr Alsaloom says that the rebuild work was substantially completed on or about 29 March 2020, subject to final inspection by the Council. The estimated cost of the repairs is $350,000, and the one-half Mr Patterson agreed to pay is therefore
$175,000. Mr Alsaloom’s evidence was that Mr Patterson has only paid $151,000 (into the joint bank account) in reduction of that sum.
[41] Mr Alsaloom says that the garage at the property was undamaged by the fire, and it was used by Mr Patterson to store furniture and chattels recovered from the property. Mr Patterson paid rent into the rental account from February 2019 to June 2019 (total $16,000), when he removed his property. The tenancy was recorded as formally having ended on 17 September 2019, when both parties signed a bond refund form authorising the release of $2,340 to the respondents’ bank account.
[42] Mr Alsaloom denies that the four payments of $3,200 made by Mr Patterson were made to meet the respondents’ mortgage commitments on the property. He says that the payments were made for repair costs and rental costs in accordance with the parties’ agreement. He says that there were never any partnership discussions “as such”.
[43] In his reply affidavit, Mr Patterson said: “I had no liability for the fire, so why would I agree to pay half the repairs? Why would I commit to pay a sum which was unknown?” He also queried why the parties would have set up a joint bank account if he were nothing more than a funder/worker.
[44] Mr Patterson says that he became alarmed and suspicious when Mr Alsaloom was unwilling to negotiate a written agreement during the period the rebuilding work was undertaken. He said that Mr Alsaloom waved away his request, stating “wait until the final figures at the end”.
Legal principles
Applications to sustain caveats generally
Section 138 of the LTA materially provides:
138 Caveats against dealings with land
(1) A person may lodge a caveat against dealings with an estate or interest in land (a caveat against dealings) on the basis that the person—
…
(b)has a beneficial estate or interest in the land under an express, implied, resulting, or constructive trust.
…
[45]Section 143 of the LTA materially provides:
143 Lapse of caveat against dealings
(1)The following persons may apply to the Registrar for the lapse of a caveat against dealings affecting an estate or interest in land:
…
(b) the registered owner or a person acting for or on behalf of the registered owner of the estate or interest affected by the caveat.
(2)The Registrar must give notice of an application under subsection (1) to the caveator.
(3)A caveat to which an application relates lapses unless,—
(a)within 10 working days after the date on which the Registrar gives notice of an application under subsection (1) to the caveator, the caveator gives notice to the Registrar that an application has been made to the court for an order that the caveat not lapse; and
(b)within 20 working days after the date on which the caveator gives a notice to the Registrar under paragraph (a) (the relevant period), an order of the kind referred to in subsection (4) is served on the Registrar.
(4)The orders are—
(a)an order that the caveat not lapse:
(b)an interim order that the caveat not lapse:
(c)an order adjourning the application.
(5)The caveat lapses if the court makes an order to that effect before the close of the relevant period.
(6)If the court makes an order under subsection (4)(b) or (c), the caveat will not lapse if, after the close of the relevant period,—
(a)the court makes a final order that the caveat not lapse; and
(b)the order is served on the Registrar.
(7)If the court makes an order under subsection (4)(b) or (c), the caveat will lapse if, after the close of the relevant period,—
(a)the court makes a final order that the caveat lapse; and
(b)the order is served on the Registrar.
…
[46] Regulation 5 and Schedule 2 of the Land Transfer Regulations 2018 require that a caveat against dealings in land of the kind registered by Mr Patterson in this case must contain:
A description of the nature of the estate or interest claimed by the caveator (which must be stated with sufficient certainty) …
…
Details of how the estate or interest claimed is derived from the registered owner.
[47] In this case, there is no issue over the timely service of the notices required to be given under s 143(2) and (3), and on 18 February 2020 Gault J made an order under s 143(4)(c) adjourning the application.
[48] The relevant principles relating to applications to sustain caveats generally, were summarised by the Court of Appeal in Philpott v Noble Investments Ltd as follows:1
(1)The onus is on the applicant for an order sustaining the caveat to demonstrate that he or she holds an interest in the land that is sufficient to support the caveat, but the applicant need not establish that definitively;
(2)It is enough if the applicant puts forward a reasonably arguable case to support the interest claimed;
(3)The summary procedures involved in applications to sustain caveats are not suited to the determination of disputed questions of fact; an order for the removal of a caveat will only be made if it is patently clear that the caveat cannot be maintained – either because there is no valid ground for lodging it in the first place, or because such a ground no longer exists; and
(4)If the applicant discharges his or her burden, the Court retains a discretion to remove the caveat, which it exercises on a cautious basis. Before it removes the caveat, the Court must be satisfied that the caveator’s interest would not be prejudiced by the removal.2
Interests claimed under a constructive trust
[49] Where the estate or interest relied upon by the caveator is said to be that of a beneficiary under a constructive trust, counsel agreed that the recent judgment of Van Bohemen J in Batusov v Batusova provides a helpful summary of the law.3 In Batusov, the Judge noted that, in accordance with s 138(1)(b) of the Land Transfer Act 2017, a person may lodge a caveat on the basis that the person has an interest in the land under an express, implied, resulting or constructive trust. To sustain a caveat, the
1 Philpott v Noble Investments Ltd [2015] NZCA 342.
2 Stewart v Kaipara Consultants Ltd [2000] 3 NZLR 55 (CA) at [23].
3 Batusov v Batusova [2020] NZHC 1272 at [37]-[41].
constructive trust must be an institutional constructive trust arising by operation of the principles of equity, as distinct from a remedial constructive trust imposed by the Court in circumstances where, without Court intervention, no trust would arise.4
[50] In this case, Mr Parmenter argues that there was an institutional constructive trust, of the kind recognised by Tipping J in Lankow v Rose.5 The essential requirements of this kind of constructive trust are that the plaintiff must have contributed in more than a minor way to the acquisition, preservation or enhancement of the defendant’s assets, whether directly or indirectly, and that in all the circumstances the parties must be taken reasonably to have expected that the plaintiff would share in them as a result.6
[51] In order to establish that equity should regard a defendant’s denial of a claimant’s interest to be unconscionable, a claimant needs to prove:7
(i)contributions, direct or indirect to the property in question;
(ii)the expectation of an interest therein;
(iii)such an expectation is a reasonable one; and
(iv)the defendant should reasonably expect to yield the claim and interest.
[52] In its recent decision in Almond v Read, the Court of Appeal approved the statement by the authors of Equity and Trust in New Zealand that the common factor in institutional constructive trusts is the unconscionability of the defendant in denying the plaintiff an equitable interest in the relevant property because of a previous understanding, whether subjectively agreed upon between the parties, or more commonly deemed by the law to have been appropriate in the circumstances. A common category of constructive trust is where contribution has been made to the
4 Batusov v Batusova, above n 3, at [37]-[38].
5 Lankow v Rose [1995] 1 NZLR 277 (CA).
6 At 282.
7 At 294.
acquisition, improvement or maintenance of property, or its value, by a party other than the registered proprietor.8
[53] On the issue of the parties’ intentions, or reasonable expectations, the Court of Appeal in Almond referred to its decision in Gormack v Scott, where Cooke P said:9
First, … Where there has been an expressed common intention applicable to the circumstances that have arisen, it is unnecessary to fall back on reasonable expectations.
Secondly, if (as the Judge thought here) the common intention was too vaguely expressed to receive implementation as such, the evidence bearing on common intention may still be relevant in considering the reasonable expectations of the parties;
Thirdly, in considering reasonable expectations, attention is not to be confined to the inception of the relationship or the time when any property in question was purchased. The inquiry extends to the whole circumstances and history of the relationship …
[54] The Court of Appeal in Almond clarified what is sometimes referred to as a “common intention constructive trust”.10 That expression simply describes one type of situation in which a reasonable expectation will be found to exist. There is no conceptual distinction between a constructive trust based on common intention and one based on reasonable expectation. However proof of a common intention can be sufficient to establish a reasonable expectation.11
[55] In another very recent High Court decision, Daisley v Ark Contractors Ltd, Walker J reviewed the principles relating to the two types of constructive trust, and when an interest under a trust will confer an equitable property right.12 Her Honour confirmed that an institutional constructive trust exists in its own right, and a Court merely declares its existence. In contrast, a remedial constructive trust only exists when created by the Court.13
8 Almond v Read, [2019] NZCA 26, (2019) 5 NZTR 29-036 at [66]-[69].
9 Gormack v Scott [1995] NZFLR 289 (CA) at 293.
10 Almond v Read, above n 8, at [71].
11 Batusov v Batusova, above n 3, at [39].
12 Daisley v Ark Contractors Ltd [2020] NZHC 793 at [176]-[181].
13 At [176].
[56] Walker J described the central concern of an institutional constructive trust as being to remedy the unconscionability of a defendant denying the plaintiff an equitable interest.14 It is the element of consent or intention (or lack of either of those, as the case may be) that triggers the institutional constructive trust which arises to reverse the defendant’s unconscionability.15
[57] Walker J noted in Daisley that the Courts have been reluctant to apply the Lankow v Rose principles to commercial dealings, although there is nothing to suggest that such claims are confined to the relationship property context.16 Her Honour noted that in any event the type of contractual arrangement with which she was concerned in Daisley was “relational with joint venture characteristics, rather than purely commercial”.17
The Issues
[58]There are three issues for determination:
(1)Was the claimed estate or interest in the property sufficiently described in the caveat?
(2)Is it reasonably arguable for Mr Patterson that there was an institutional constructive trust of the kind he has alleged?
(3)If the answer to Issue (2) is “yes”, should the Court nevertheless exercise its discretion to refuse to make an order that the caveat not lapse?
[59]I will address each of those issues in turn.
14 Daisley v Ark Contractors Ltd, above n 12, at [177], referring to the judgment of Millett LJ in
Paragon Finance Plc v DB Thakerar & Co [1999] 1 All ER 400 (CA) at 409.
15 At [178], referring to Andrew Butler (ed) Equity and Trusts in New Zealand (Thomson Reuters, Wellington, 2009) at [61.13.2.1].
16 At [181], referring to Hudson v Robway Farms Ltd [2012] NZHC 748 at [32], and Li v 101 Formosa (NZ) Ltd [2018] NZHC 3418 at [191].
17 At [181].
Issue (1) – Was the claimed estate or interest in the property sufficiently described in the caveat?
[60]The relevant part of the wording of the caveat is:
As cestui que trust of which the Registered Proprietor is a trustee.
Counsel’s submissions
[61]Mr Parmenter submitted that that wording is perfectly adequate.
[62] Mr Rooke submitted that the wording is defective, because it does not refer to the nature of the claimed trust (a constructive trust).
[63] Mr Rooke submitted that the caveat must state with sufficient certainty what land or interest the caveator claims. Every caveat against dealings must also show how the estate or interest claimed has been derived from the registered proprietor. He submitted that the Courts apply this requirement strictly. For example, a caveator will not be permitted to rely at the hearing on a claimed interest which is different from that stated in the caveat.18
[64] Mr Rooke noted that a less strict approach has been taken where the caveator has claimed a constructive trust arising from contributions made in the course of a de facto relationship. In such cases, the Courts have sustained caveats that made generalised claims to constructive trusts without particulars of dates or circumstances. However, that lenient approach has not been applied to claims for constructive trusts in commercial contexts.19 That is particularly the case where the basis of any alleged trust is not self-apparent, as the party whose title is caveated will simply not know the basis for the alleged claim of trust.
[65] Mr Rooke did acknowledge, however, that a caveat worded in precisely the same fashion as the caveat in this case was upheld by the Court of Appeal in Zhong v Wang.20
18 Referring to Colin Adams Ltd v Baker CA178/98, 5 May 1999 and Dixon v Laurie McGoverne Ltd HC Christchurch M254/00, 6 October 2000.
19 Referring to Allen v Hogan Developments Ltd (2001) 4 NZConvC 193,420 at [39].
20 Zhong v Wang (2006) 7 NZCPR 488.
Discussions and conclusions
[66] In Zhong v Wang, the majority of the Court of Appeal held that the underlying purpose of the caveat regime could be undermined if too strict an approach were taken to the detail required to describe the interest claimed and its derivation from the registered proprietor.21 What is important is that the registered proprietor and the Court understand the nature of the interest claimed and the basis of that claim.22
[67]In their joint judgment on Zhong v Wang, Wild and Heath JJ said:
[54] As a general rule for [the purposes of s 137(2)(b) of the Land Transfer Act 195223], it is sufficient to identify the form of trust alleged. While it would have been preferable for Mr Zhong’s caveats to refer expressly to a resulting or constructive trust, there can be no doubt that an interest of the type to which s 137(1)(a)24 refers was claimed. In our view, the caveats complied with s 137(2)(b).
[55] Applying the same test, did the caveats comply with s 137(2)(c)25? In our view, they did. There was a clear link between the named trustee (Mr Wang) and the registered proprietors, of which he was one. The caveats made it clear that the interest was derived from Mr Wang’s involvement with Mr Zhong. The nature of the involvement would have been self-evident to Mr Wang.
[68] Heath and Wild JJ considered that it is unnecessary to require a caveator to explain the precise basis from which the interest qua beneficiary arises. Section 137(2)(c) of the 1952 Act applied to all types of interest that gave rise to a caveatable interest. The derivation of the interest claimed by the caveator might need greater explanation in some cases than in others, but the derivation was sufficiently described on the facts with which the Court was concerned in Zhong v Wang.
[69] Mr Rooke acknowledged that the Court has accepted a very broad general description of a constructive trust claim in a caveat where the parties have been in a de facto relationship, but he submitted that the position is different when the parties
21 Zhong v Wang, above n 20, at [58].
22 At [53].
23 Which required that a caveat against dealings must state with sufficient certainty the nature of the estate or interest claimed by the caveator.
24 Section 137(1)(a) of the Land Transfer Act 1952 provided that certain persons could lodge caveats against dealings in any land under the Act. One of those entitled to lodge a caveat under s 137(1)(a) was a person who “claims to be entitled to, or to be beneficially interested in, the [registered proprietor’s] land or estate or interest by virtue of … any trust expressed or implied …”
25 Section 137(2)(c) of the Land Transfer Act 1952 required that the caveat contain the following information: “how the land or estate or interest claimed is derived from the registered proprietor”.
have been in an arms-length commercial relationship, as in this case. In support of that submission, he relied on the judgment of Master Faire in Allen v Hogan Developments Ltd, where one of the parties in an arms-length commercial relationship lodged a caveat “as beneficiary by virtue of a constructive trust … in respect of which the registered proprietors are [the plaintiffs] as trustees and the caveator as beneficiary”. Master Faire observed that the caveat did not show how the estate or interest was derived from the registered proprietor. The Master said:26
[39] … If reliance is placed on the allegation that a trust exists, it should briefly state the nature and basis for the trust. I am satisfied that the caveat lodged in this case did not comply. Whilst a general description of constructive trust may be appropriate [where] the parties claim by virtue of a de facto relationship, it is an entirely different matter where the parties, as they are in this case, are in an arms-length commercial transaction. The basis for any alleged trust is not self-apparent. The party whose title is caveated will simply not know what the basis for the alleged claim of trust is, if simply a bald statement to that effect is made in the caveat. In short, it does not state “How the estate or interest claimed is derived from the registered proprietor”.
[70] In this case, I think the position is governed by the Court of Appeal decision in Zhong v Wang. There, the case was a commercial one, where Mr Wang agreed to invest a substantial sum of money provided by Mr Zhong, and the wording of the caveat was precisely the same as it is in this case. The majority of the Court of Appeal held that it is sufficient to identify the form of trust alleged, but the fact that the caveat in Zhong v Wang did not identify whether Mr Zhong was claiming a resulting or constructive trust did not render the caveat defective. The Court was satisfied that an interest of the broad type described at s 137(2)(b) of the Land Transfer Act 1952 was claimed, and the Court considered that was sufficient to meet the fundamental requirement that the registered proprietor and the Court understand the nature of the interest claimed and the basis of the claim.27
[71] The judgment of the majority in Zhong v Wang noted that the nature of the involvement of Mr Zhong would have been self-evident to Mr Wang, and I think the same can be said of Mr Patterson’s involvement with the property in this case. This is not a case like Allen v Hogan Developments Ltd, where the Master considered that the
26 Allen v Hogan Developments Ltd, above n 19, at [39].
27 At [53] and [54].
registered proprietor might simply not know what the basis for the alleged claim of trust was.
[72] In this case, Mr Alsaloom acknowledged in his evidence that he received the “JV proposal” from Mr Patterson, and that would have been before the caveat was lodged. The JV proposal expressly referred to a bank account being established with ASB Bank for the operation of a partnership between Mr Patterson and Mr Alsaloom, with Mr Patterson funding the restoration of the house (up to a cost of $300,000) and paying a further $200,000 secured by mortgage over the property. The JV proposal said that each partner would have a 50 per cent share in the property.
[73] By the time the caveat was lodged on 11 October 2019, the joint bank account with ASB Bank had already been opened, and Mr Patterson had paid a substantial sum of money (he says approximately $180,000) into the joint bank account. Both parties knew that that money had been paid into the account for the purpose of restoring the house.
[74] It is true that there was no binding written agreement between the parties under which Mr Patterson would obtain a share in the property, but that is not the nature of his present claim, which is based on Mr Patterson’s contributions to the property and his claimed (reasonable) expectation that he would have an interest in it. Whether that expectation was a reasonable one is not the issue I am presently concerned with. It is enough that, by the time the caveat was lodged, the nature of Mr Patterson’s claimed involvement, as just described, would have been self-evident to Mr Alsaloom. He would have appreciated that the only conceivable trust interest Mr Patterson might have claimed in the property was a constructive trust claim, arising from his contributions into the joint bank account and his expectation (confirmed by the JV proposal) that he was to obtain an interest in the property.
[75] In the particular circumstances of this case, then, I am satisfied that the caveat contained a sufficient description of the nature of the interest claimed by Mr Patterson, and sufficient details of how that interest is said to be derived from the registered owners of the property. I accordingly find for Mr Patterson on Issue (1).
Issue (2) – Is it reasonably arguable for Mr Patterson that there was an institutional constructive trust of the kind he has alleged?
Discussion and conclusions
[76] All Mr Patterson had to do to have his caveat sustained was to put forward a reasonably arguable case for the interest claimed. He did not have to establish that interest definitively.28
[77] In Sims v Lowe 29, Somers J said, delivering the joint judgment of himself and Gallen J:
… it … has been consistently held, that an order for the removal of such a caveat will not be made under s 143 unless it is patently clear that the caveat cannot be maintained either because there was no valid ground for lodging it or that such valid ground as then existed no longer does so. …The patent clarity referred to will not exist where the caveator has a reasonably arguable case in support of the interest claimed.
(citations omitted)
[78] I am satisfied that Mr Patterson has made out his case under this heading. In my view it is not patently clear that the caveat cannot be maintained.
[79] The fundamental problem for the respondents is the joint bank account. Why was it set up at all if the payments Mr Patterson made into it were simply payments made pursuant to an agreement to settle a damages claim the respondents had against Mr Patterson? Why would damages payments of that sort not have been made into an account operated solely by the respondents? And why would Mr Patterson have full signing authority on the joint bank account if it were only being used for the respondents’ receipt of payments by Mr Patterson to settle a damages claim against him?
[80] None of these questions were satisfactorily answered by Mr Alsaloom in his evidence. Mr Alsaloom said in his evidence that the joint bank account was used to “record payments” made by Mr Patterson, and that he then paid or transferred to the respondents’ own ASB Bank account funds as necessary to pay for repair and other
28 Philpott v Noble Investments Ltd, above n 1.
29 Sims v Lowe [1988] 1 NZLR 656 (CA) at 659-660.
costs. But that does not explain the existence of the joint bank account, and Mr Patterson’s signing authority on it. From the respondents’ point of view, their own bank account could have operated perfectly well as a record of payments made by Mr Patterson – there would have been no need for him to be involved in the operation of the account.
[81] Yet it is clear that there must have been some understanding between Mr Alsaloom and Mr Patterson before they walked into the ASB Bank and opened the joint bank account.
[82] In his submissions, Mr Rooke acknowledged that Mr Patterson’s belief (that in making the payments into the joint bank account he was buying a share in the property) might be arguable, but he questioned whether such belief was credible. Mr Rooke went on to submit that it is not clear whether the advance (i.e the payments made by Mr Patterson) was for the purpose of furthering a “deal” between the parties to the effect that Mr Patterson would take a half share in the property, or to settle differences arising from the respondents’ claim for compensation against Mr Patterson. He noted that it is not the role of the Court to determine substantive issues.
[83] Whether Mr Patterson’s “arguable” view of the arrangement is or is not credible would not normally be a matter to be determined on an application such as this, and the acknowledged lack of clarity in the evidence over whether the “deal” for which Mr Patterson contends might have been made, serves to confirm that it would not be appropriate for the Court to hold that it is “patently clear” that Mr Patterson’s version of the events would not be upheld at a trial.
[84] Nor is it clear why Mr Patterson would have been involved with design work for the restoration of the house, or uplifting the Building Consent and paying the Building Consent fee, if his involvement was merely that of a prospective defendant in a damages claim who had agreed to make payments up to a specific amount to settle the claim.
[85] Another matter which raises questions on the evidence, is why Mr Alsaloom did not promptly and vigorously raise the claimed damages settlement when Mr Patterson produced the JV proposal. That would have been an obvious time for Mr Alsaloom to have asserted, strongly and in writing, that the joint bank account established at the ASB Bank had not been established for the operation of any “partnership”, but as a receptacle for the damages payments Mr Patterson had agreed to make. But it appears that there was no such rejection of the JV proposal from Mr Alsaloom.
[86] For all those reasons, it cannot be said that it is patently clear that Mr Patterson did not have an expectation that he would have an interest in the property as a result of the contributions he made into the joint bank account and/or the work he says he did on the restoration of the house. Nor is it possible to say on a summary application such as this whether Mr Patterson’s expectation that he would have an interest in the property was not reasonable, or that the respondents should not reasonably expect to yield the claim and interest for which Mr Patterson contends. All of those are matters for trial, in a proceeding Mr Patterson will have to commence to establish any interest he might have in the property.
[87] On the question of the “reasonableness” or otherwise of Mr Patterson’s expectations, it may be that the evidence at trial will show that there was a “common intention constructive trust”, of the kind described by the Court of Appeal in Almond v Read. The issue would be whether a common intention of the kind alleged by Mr Patterson existed when Mr Patterson and Mr Alsaloom walked into the ASB Bank and set up the joint bank account.30 If at that time there was such a common intention, Mr Patterson would not need to show that his expectation of obtaining an interest in the property was a reasonable one: proof of a common intention can be sufficient to establish a reasonable expectation.31
[88] As I have said, there must have been some common intention when the parties set up the joint bank account. And Mr Alsaloom’s failure to adequately explain why a joint account would be required if his version of the arrangement were correct, and his
30 Almond v Read, above n 8, referred to at [52] - [53] of this judgment.
31 Batusov v Batusova, above n 3, at [39].
apparent failure to assert his version of the arrangement (the settlement of a damages claim) when Mr Patterson proffered a document recording an incompatible version, leave the Court unable to say that Mr Patterson’s version of the “common intention” is clearly wrong.
[89] That rather takes the sting out of Mr Rooke’s submission that Mr Patterson’s claimed expectation could not be reasonable because of his (allegedly) clear liability for the fire under the provisions of the Residential Tenancies Act 1986. If there was a common intention consistent with Mr Patterson’s contention that he would receive a share in the property (even if the extent of that share had not been agreed), the reasonableness of his expectations would not fall to be considered. It would follow also that the respondents (as parties to such a common intention) should arguably have to yield to Mr Patterson’s interest in the property.
[90] Those matters are sufficient for me to decide this issue. There are substantial matters that can only be determined after the parties have provided discovery, and witnesses have been cross-examined, and such matters cannot be determined in a summary procedure such as the present.
[91] I conclude that the answer to Issue (2) is “yes” – it is reasonably arguable for Mr Patterson that there was an institutional constructive trust of the kind he has alleged.
Issue (3) - If the answer to Issue (2) is “yes”, should the Court nevertheless exercise its discretion to refuse to make an order that the caveat not lapse?
[92] Mr Rooke submitted that the Court retains a discretion to remove a caveat despite there being a reasonably arguable basis. That is subject to the proviso that the caveator’s legitimate interests should not be prejudiced by that exercise of the Court’s discretion.
[93] Mr Rooke submitted that Mr Patterson would still be free to make a claim against the respondents or Mr Alsaloom, and if the caveat were to remain it would significantly prejudice the ability of the respondents to deal with the property for some significant time. In balancing the competing interests, the Court may consider that Mr
Patterson has for a long time never had the protection of a caveat, and (on his case) he advanced funds towards a share of the property without concern about security.
[94] Mr Rooke also submitted that it was questionable whether Mr Patterson cancelled the deal. In circumstances where he arguably cancelled the “deal” and withheld further payment, he should not be protected for what he has paid just because he now finds his speculative investment at greater risk.
Discussion and conclusions
[95] First, I do not think it appropriate to speak in terms of Mr Patterson having “cancelled” the “deal” when he stopped making further payments. His claim to an equitable interest in the land is not based on the existence of any enforceable contract. It is based on a combination of contributions made to the property, and a reasonable expectation, shared with the respondents, that he would obtain a share in the property as a result.
[96] Nor is it clear that Mr Patterson “cancelled” the arrangement. When it became clear to him that Mr Alsaloom did not wish to proceed on the basis of 50/50 sharing between the parties Mr Patterson did not purport to cancel the “deal” and demand his money back. What he did was offer to vary the arrangement for which he contends. On the varied arrangement, he would still have a substantial interest in the property, reflecting the sum of $180,000 he says that he put into it.
[97] Of course the respondents may argue that Mr Patterson’s willingness to lower his sights in terms of the extent of his share in the property may raise a question over the existence of any common intention, but that is simply one of a number of factors which will have to be weighed on the issue of what Mr Patterson’s expectations were, and whether they were reasonable.
[98] Nor do I think it matters that Mr Patterson made his contributions to the property (if that is what they were) without requiring any formal security. That would be the position with almost every situation where a caveator relies on contributions made to the land giving rise to a constructive trust in his or her favour.
[99] Finally, I am not satisfied the caveat could be removed without prejudice to Mr Patterson’s claimed interest. Mr Alsaloom resides in Australia and there is no evidence of the financial position of either of the respondents. It cannot be said with sufficient certainty to justify the course Mr Rooke asks me to take, that Mr Patterson would be no worse off if he were an unsecured creditor of the respondents, as opposed to having an equitable interest in the property.
[100]For those reasons, the answer to Issue (3) is “no”.
Result
[101]I make the following orders:
(1)That the caveat (Caveat No. 11519692.1) not lapse.
(2)Directing Mr Patterson to commence a proceeding in this Court for declaratory or other appropriate relief vindicating his claim to an institutional constructive trust in the property, within 20 working days. If Mr Patterson fails to file and serve such a proceeding within that period, or if he subsequently fails to diligently prosecute that proceeding, leave is reserved to the respondents to apply under s 142 of the LTA to remove the caveat.
(3)Costs are awarded to Mr Patterson on a 2B basis, with disbursements to be fixed by the Registrar.
Associate Judge Smith
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