Property Ventures Investments Ltd v Regalwood Holdings Ltd

[2010] NZSC 47

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In the Supreme Court of New Zealand

SC 85/2008
[2010] NZSC 47

BETWEEN     PROPERTY VENTURES INVESTMENTS LIMITED
Appellant

AND   REGALWOOD HOLDINGS LIMITED
Respondent

Hearing:         25 June 2009

Court:  Elias CJ, Blanchard, Tipping, McGrath and Wilson JJ

Counsel:         A J Forbes QC for Appellant
N R W Davidson QC and H M Smith for Respondent

Judgment:      28 April 2010

JUDGMENT OF THE COURT

AThe appeal is allowed and the orders made in the High Court on the summary judgment application are set aside.  That application is dismissed.

B        The proceeding is remitted to the High Court.

CThe respondent must pay the appellant costs in the sum of $15,000 together with its reasonable disbursements to be fixed if necessary by the Registrar.  The costs order in the Court of Appeal is reversed.

REASONS

Para No

Elias CJ  [1]
Blanchard, McGrath and Wilson JJ  [28]
Tipping J  [89]

ELIAS CJ

[1]      Regalwood Holdings Limited obtained in the High Court summary judgment for a declaration that it had validly cancelled a contract to sell to Property Ventures Investments Limited a commercial building for a purchase price of $1,500,000.  The basis of cancellation was Property Ventures’s failure to settle on Regalwood’s settlement statement for the balance owing on the purchase price (after payment of the deposit of $100,000), time having been made of the essence.  Regalwood also obtained summary judgment for forfeiture of the deposit and for discharge of Property Ventures’s caveat against Regalwood’s title.  An appeal by Property Ventures to the Court of Appeal was dismissed.  In holding that Regalwood had been entitled to cancel the contract, the High Court and Court of Appeal rejected Property Ventures’s contention that the cancellation was invalid because Regalwood was not in a position to perform its obligations as vendor under the contract while in material breach of a contractual warranty as to compliance at settlement with the Building Act 1991. 

[2]       It was assumed for the purpose of the summary judgment proceedings that Regalwood was in breach of the warranty because determination of the question of breach (which is not conceded by Regalwood) was accepted to be a dispute of fact not suitable for resolution on summary judgment application.  The effect of the assumed breach was substantially to reduce the benefit of the contract to Property Ventures as purchaser.  Affidavit evidence before the High Court, untested because of the course taken, estimated the costs of achieving compliance with the Building Act at $500,000.  Despite the significance of the assumed breach in a contract for a total purchase price of $1,500,000, the Courts below were in agreement that it could not justify Property Ventures in declining to settle but simply left it free to obtain damages in an action brought after settlement.  That conclusion was reached in application of clause 6.5 of the Agreement for Sale and Purchase, in the form contained in the seventh edition (2) of the standard terms for sale and purchase of real estate approved by the Real Estate Institute of New Zealand and Auckland District Law Society:

6.5Breach of any warranty or undertaking contained in this clause does not defer the obligation to settle.  Settlement shall be without prejudice to any rights or remedies available to the parties at law or in equity, including but not limited to the right to cancel this agreement under the Contractual Remedies Act 1979.

[3]      I am of the view that summary judgment should have been declined and the claim by Regalwood should have proceeded as an ordinary action.  On the facts assumed for the purposes of summary application I consider that the plaintiff could not have satisfied the Court that the defendant had no defence to the claims.  If Regalwood were found at trial to be in breach I consider it would follow from the apparent materiality of the breach to the subject of the contract that Regalwood was not entitled to serve its settlement statement under clause 9.1 of the Agreement for Sale and Purchase.  In those circumstances it would not have been “in all material respects ready able and willing to proceed to settle” in accordance with its obligations.   Clause 6.5 would not apply since the purchaser would not then have been under an “obligation to settle”.  If the matter proceeds by way of ordinary claim Property Ventures itself would have had the opportunity to cancel and counterclaim for relief under s 9 of the Contractual Remedies Act 1979 or for damages or, alternatively, to seek specific performance of the contract with abatement of the purchase price or other conditions.  I consider that the breach of warranty would amount equally to misdescription of the property within the scope of clause 5.4 of the agreement.  (In this, I disagree with the view taken in the Court of Appeal, and adopted by Blanchard and Tipping JJ in this Court, that a warranty as to the condition of property on settlement is not a misdescription within the meaning of clause 5 because not of present fact at the time of the contract.)  But, in any event and irrespective of the application of clause 5.4, it is my view that such material breach of warranty would exclude the operation of the settlement requirement in clause 6.5. 

[4]       
The validity of the vendor’s cancellation was not suitable for summary determination.  On any view, the vendor would not have been able to obtain specific performance on the assumed facts, at least without abatement of the purchase price.  The discretionary remedy of declaration should not have been granted in such circumstances on summary application.  The serious dispute on the facts had to be addressed in determining whether the purchaser had a defence to the claims for declaration of validity and forfeiture of the deposit.  The materiality of any breach had to be assessed in order to do equity between the parties.

[5]       I would therefore allow the appeal and remit the matter to the High Court.  I reach the same outcome as Blanchard and Tipping JJ more directly.  I do not agree with the view that the “settlement” referred to in clause 6.5 can mean something less than the settlement envisaged by the contract (payment of the balance of the purchase price).  An interpretation which results in the extent of the purchaser’s settlement obligation being a matter for re-negotiation or estimation in all cases of breach of warranty under clause 6 (immaterial as well as material) would I think lead to undesirable uncertainty and would bring about the very gamesmanship clause 6.5 seems to have been designed to prevent.  Lingens v Martin did not suggest such result in relation to a breach of warranty which was also a misdescription of the subject of the contract.  The Court of Appeal there, while referring to the opportunity for the parties to agree on a compromise, looked to the ability of either party to seek specific performance as the mechanism for resolution, should agreement not prove possible and the purchaser wish to proceed.  The jurisdiction of the Court to grant specific performance on conditions (including compensation in abatement of the purchase price) allows either party to bring matters to a head and avoids making either an unsecured creditor as to significant value transferred at settlement ahead of a proper reckoning.  It was open to either party to sue for specific performance without giving a settlement notice.

Background

[6]      The facts are fully canvassed in the judgment of Blanchard J.  Of significance is Property Ventures’s response to Regalwood’s settlement notice, which raises the absence of acknowledgments by the vendor of compensation or of compliance with its obligations under the contract.  The letter of 20 May 2005 makes it clear that Property Ventures was considering cancellation and damages or alternatively a claim for specific performance with abatement of purchase price, but indicates that it lacked information about the impact of the apparent breach, the cost of remedying it and the vendor’s attitude to compensation.  That lack of information was confirmed by the subsequent letter of 7 April 2006.  Property Ventures’s solicitors there took the position that Regalwood had not shown it was able to comply with its warranties:

If it is not able to do so then the only way to progress matters is for the parties to be able to assess the costs of that non-compliance.  We therefore suggest that you take further instructions from your client and either provide us with satisfactory evidence that your client is in a position to comply with its warranties or that it is willing to realistically discuss the costs of non-compliance.

In further correspondence on 18 May 2006 Property Ventures referred to Regalwood’s refusal to release a report it had obtained from consulting engineers as to achieving compliance and advised that it was obtaining its own report to assess the loss to it, before instituting proceedings against Regalwood.  Four days later Regalwood cancelled.  Nearly a year later Regalwood instituted the proceedings for declaration and summary application which are the subject of the present appeal.

[7]      In the High Court, the argument concentrated on the application of clause 5.4 of the agreement and whether equitable compensation had been claimed before cancellation.  Associate Judge Christiansen held that the correspondence did not amount to a demand for compensation in writing before settlement, as required by clause 5.4.  He thought it significant that the correspondence kept alive the options of Property Ventures’s own cancellation, followed by a claim for damages, or alternatively a claim for specific performance with abatement of purchase price:

The rights of the parties crystallised on 22 May 2006 with the issue of the notice of cancellation.  Before then [Property Ventures] had not, in writing, specified a claim for compensation, much less did it make an election whether to proceed or to cancel, rather it appears it determined to take a middle road with the purpose of retaining a reduction in the price to settle.

[8]      Property Ventures’s appeal to the Court of Appeal was unsuccessful.  The Court of Appeal considered that any breach of warranty could not be material because the terms of clause 6.5 obliged Property Ventures to settle the agreement in full without abatement of the purchase price.  It held that clause 5.4 of the Agreement for Sale and Purchase did not apply to the warranty of compliance with the Building Act contained in clause 6.2 (and that Lingens v Martin was therefore to be distinguished) because clause 5.4 applied only to warranties in force at the date of the agreement.  Under clause 6.2, by contrast, the vendor’s warranties are given as at the date of the giving and taking of possession.  The Court also doubted whether clause 5, which is headed “title, boundaries and requisitions” extended beyond matters of title or boundaries, questioning statements to the opposite effect in Lingens v Martin.  It expressed further doubt about the continued applicability of the reasoning in Lingens v Martin given that clause 6.5 was not present in the third edition of the standard Agreement for Sale and Purchase in issue there.  The Court of Appeal considered the effect of clause 6.5 was that other remedies available to the purchaser for breach of warranty were to be exercised after settlement at the full purchase price has taken place.  On this basis it held that Property Ventures had no right to defer settlement until compensation had been agreed upon (as it thought had been permitted in Lingens v Martin).  Because of its conclusions, it was not necessary for the Court of Appeal to consider whether valid demand in writing had been made by Property Ventures in accordance with clause 5.4.

Clause 6.5 does not require a purchaser to settle where the vendor is in material breach

[9]      As already indicated, I am unable to read the reference to “the obligation to settle” in clause 6.5 as referring to other than the settlement provided for in the agreement.  I do not agree therefore with Blanchard and Tipping JJ that clause 6.5 is not to be understood as referring to “settlement in full”, if payment of the balance of the purchase price is envisaged on settlement by the contract.  I consider that the Court of Appeal was right to hold as much.  I do not think any other meaning reasonably available and, as I have already suggested at [5], I think any other interpretation introduces undesirable uncertainty if any breach of warranty, however insubstantial, requires abatement on or before settlement.  Clause 6.5 in my view is competent to require the purchaser to settle where there is a breach of warranty, preserving to him all remedies including under the Contractual Remedies Act, except when the breach of warranty is such as to have been material to the entry into the agreement.  Then it does not compel settlement.  This result follows from application of the equitable principle described in Flight v Booth and is consistent with the principles governing cancellation of contracts more generally, now contained in s 7(4) of the Contractual Remedies Act. 

[10]     Clause 6.5 is in its terms a type of “compensation clause”.  It purports to require a party to the contract to complete and seek remedies after settlement.  Clause 5.4 of the agreement (confining the remedy for errors or misdescriptions of the property or title to compensation and purporting to exclude annulment of the sale) is another such “compensation clause”, although in different terms and containing an explicit acknowledgement of an entitlement to compensation if claimed before settlement.  Compensation clauses are not effective to compel settlement against an unwilling purchaser if the effect of the breach or error in description is such that it may reasonably be inferred that the purchaser would not have entered into the agreement had it been known.  This is the effect of the principle described in Flight v Booth.  Although the principle has generally been applied to compensation clauses like clause 5.4 which address misdescription of property or title, it is one of more general application.  As Voumard describes:

Although the actual decision in Flight v Booth related to the right of a purchaser to be discharged from a contract for a misdescription in the contract of the premises to be sold, the principle embodied in the case is of wider application, and it operates to confer on either party to a contract the right to be discharged from further performance of her or his obligations where there has been a breach by the other party of any stipulation without which the injured party might never have entered into the contract at all. 

In my view the principle applies whenever a compensation clause purports to restrict the ability to cancel for material breach.

[11]     The more common application of the principle in Flight v Booth has been in relation to compensation clauses for misdescription of property or title.  At common law deficiencies in respect of errors or misdescriptions in the subject of the sale were treated as a want of title.  Equity modified this rigour by establishing that where the deficiency was not substantial the vendor could obtain specific performance on condition of compensation to the purchaser.  In such cases the purchaser lost the right to cancel the contract or obtain damages for its breach.  Specific performance was not however available to a vendor where the deficiency was substantial.  When compensation clauses were adopted, purporting to secure greater freedom to the vendor to insist on settlement if compensation was given, Flight v Booth preserved an exception for errors and misdescriptions which substantially changed the bargain contracted for. 

[12]     If the vendor can give the purchaser substantially what he agreed to buy, the vendor is entitled to specific performance of the agreement, subject to compensation.  “Compensation” generally means an abatement in the purchase money allowed to the purchaser for some diminution or deterioration in the value of property contracted to be sold. 

[13]     If the vendor is not able to convey in substance what was agreed to be sold, he is not entitled to insist on performance by the purchaser and cannot obtain specific performance from the court unless the purchaser is willing to consent to the decree on condition of compensation.  A defect of substance may be in the “quantity or the quality of the property, the extent of the vendor’s interest therein or the character of the title”.  If the purchaser is not willing to take the defective property with compensation, he is entitled to cancel and recover damages but in the alternative he may himself seek specific performance with compensation.  This is the “larger right” available to a purchaser recognised by Viscount Haldane in Rutherford v Acton-Adams:

Subject to considerations of hardship [the purchaser] may elect to take all that he can get, and to have a proportionate abatement from the purchase money.

[14]     As Casey J said about the compensation clause in issue in Holmes v Booth (which was in the form of clause 5.4):

It is well established that the apparently wide scope of this standard clause will not deprive the purchaser of his right to cancel, if the effect of the error or misdescription is material and substantial “so far affecting the subject matter of the contract that it may reasonably be supposed that, but for such misdescription, the purchaser might never have entered into the contract at all …” (Flight v Booth).  All relevant matters are to be taken into account in deciding from an objective point of view whether Mr Booth might never have entered into this contract.  The fact that the parties included the warranty about tenancies is obviously a cogent factor indicating materiality, as are the buyers’ purposes in acquiring the property and the use to which he intended to put it.  The absence of any decrease in value due to the misdescription is no more than one relevant factor.

On the facts assumed for summary judgment, Regalwood could not on this approach have obtained specific performance against Property Ventures if it was unwilling to take the property with the defect, even if Regalwood offered compensation. 

[15]     The Court of Appeal held that the inclusion of clause 6.5 meant that the Sale and Purchase Agreement was materially different from those in issue in Lingens v Martin and Holmes v Booth.  It therefore distinguished those cases.  I consider, for reasons given at [18] to [24], that the Court of Appeal was wrong to hold that clause 5.4 did not also apply to the breach of warranty in issue.  More importantly, however, I think it was in error in failing to apply the principle in Flight v Booth to the breach of warranty in issue. 

[16]     Clause 6.5 deals with all breaches of the warranties and undertakings contained in clause 6.  Some are not capable of raising the principle in Flight v Booth, either because they are not concerned with the property itself or because they are not significant enough in their impact to be material.  Clause 6.5 is I think effective to require settlement where breach of warranty is not within the scope of the rule in Flight v Booth.  In such cases the purchaser is left to post-settlement remedies.  The position in relation to misdescription is different under the approach adopted in Lingens v Martin.  The Court of Appeal there held that a purchaser entitled to compensation under clause 5.4 is not left to pursue remedies after settlement, but is entitled to compensation on or before settlement.  It did not limit the adjustment pre-settlement to cases of defect in the property so material as to disentitle the vendor from obtaining specific performance.  It is not necessary to express a concluded view in this case (where the assumed defect is material in the Flight v Booth sense and would preclude the vendor obtaining specific performance against an unwilling purchaser) but it seems to me that the approach in Lingens v Martin is sound because the obligation on the purchaser to accept a defective property or title (where the defect is not such as to disentitle the vendor from obtaining specific performance) is achieved only by agreement of the parties or through the specific performance jurisdiction of the court.  Clauses 5.4 and 6.5 overlap in the case of breaches of warranty which amount to misdescriptions, but the two clauses are not coextensive.   In the case of a breach of warranty which does not amount to a misdescription and which does not come within the principle in Flight v Booth (so that the vendor is entitled to insist on settlement), I consider that clause 6.5 is effective to enable the vendor to require settlement in accordance with the contract and leaves the purchaser to obtain his remedy after settlement.

[17]     The principle in Flight v Booth is raised where the breach of warranty is such that it may be inferred that the purchaser would not have entered into the agreement if not assured of the vendor’s performance of the warranty as to the nature and quality of the property which is the subject of the contract.  In such circumstances, it seems to me that the breach of warranty equally amounts to a misdescription of the property which is the subject of the contract, so that clause 5.4 applies, as Lingens v Martin treated it.  But even if not so characterised, I consider that the principle in Flight v Booth applies to such material breach of warranty despite the terms of clause 6.5 so that the purchaser is not under an obligation to settle unless willing to accept the property with the defect.  That willingness will usually require abatement of the purchase price either arrived at by agreement between the parties or through the court in the exercise of its equitable jurisdiction to grant specific performance with conditions.  Again, that is the outcome looked to by Lingens v Martin.  I would apply it in the present case.

Application of clause 5.4

[18]     Clause 5.4 deals with defects in the property or title.  Any such defect, trivial as well as serious, at common law conferred a right of cancellation on the purchaser, who was accordingly obliged to elect between affirming the contract or cancelling it.  Clause 5.4 meets this strictness, to the benefit of the vendor, by providing that errors and misdescriptions in the property or title do not annul the sale. 

[19]     It was in respect of this clause that Lingens v Martin held in respect of a breach of warranty which also amounted to a misdescription that in circumstances where the contract provided for compensation, “the vendors are ... not entitled to give something less than they promised, while insisting on payment of the full price without adjustment”:

It follows that a vendor is unable to compel settlement where the parties do not agree on the amount of compensation, or on some sensible arrangement to protect their respective interests so that settlement can proceed.  This is not an injustice to the vendor, who ex hypothesi is unable to provide what he promised.  His remedy is to sue for specific performance, and ask the Court to resolve any question of compensation.  In the present case, instead of issuing their settlement notice, the respondents could have brought on for hearing the proceedings already commenced by Ms Lingens.

In the present case, too, the vendor “asked for more than [it was] entitled to demand”.  The notice was invalid because the vendor was not “ready, willing and able to perform the contract according to its terms”.

[20]     I consider the present case is within the scope of clause 5.4.  In agreement with Blanchard J, I consider that the Court of Appeal was wrong to suggest that clause 5.4 is restricted to misdescription of title and does not extend to defects of quality.  The Court of Appeal was influenced in coming to its view by the heading to clause 5 (“Title, boundaries, and requisitions”).  The heading is not determinative.  And clauses equivalent to clause 5.4 have long been understood to include misdescriptions in the quality of the property or its improvements.  Indeed, the equivalent of clause 5.4 was amended in 1987 to include reference to misdescriptions in title (perhaps in response to the view expressed in Travinto Nominees Pty Ltd v Vlattas that the omission of any reference to title confined the relevant misdescription to matters of quality), an inclusion which would not have been necessary had the clause been thought to exclude matters of quality.

[21]     Overlap between breaches of warranty and misdescription of property was recognised by the Court of Appeal in Lingens v Martin.  It is a matter of construction of the contract whether a breach of warranty amounts to an “error, omission or misdescription of the property” within the meaning of clause 5.4.  The error or misdescription may be in relation to the description of the land or the improvements on it.  Where the subject of the agreement is a tenanted commercial building, a warranty of compliance with the Building Act is in my view a description of the quality of the property.  As in Lingens v Martin, “breach of the warranty arises from the failure of the property to comply with the description”.

[22]     In the High Court, Associate Judge Christiansen considered that something more than an assertion of an entitlement to compensation was necessary to invoke clause 5.4.  He distinguished Lingens v Martin because in that case the purchaser had already instituted proceedings for specific performance before the vendor cancelled.  This is not a point that can be resolved before trial of the facts.  Holmes v Booth illustrates that a vendor otherwise able to insist on specific performance with compensation cannot do so if the purchaser has been deprived of the information on which reasonably to determine his course of action (whether to cancel or to proceed with compensation).  It will be a matter for determination at trial whether Property Ventures had got to that point.  The correspondence set out by Blanchard J at [42] suggests that Property Ventures was still trying to ascertain whether Regalwood would comply with the warranty and what the costs of its achieving compliance itself (and the measure of the abatement it could claim) would be.  The circumstances that Property Ventures was denied access to the reports obtained by Regalwood and was not permitted access to carry out its own assessment are likely to be important. 

[23]     The Court of Appeal decided that clause 5.4 applied only to misdescriptions existing at the date of the agreement.  In this Court, Blanchard and Tipping JJ agree with the reasoning of the Court of Appeal on the point.  I do not.  If right, clause 5.4 would have no application to breaches of clauses 6.2 and 6.3 of the agreement because they are warranties as to the quality of the property at the date of settlement.  I do not accept that there is practical difficulty if it is not known until settlement whether the warranty is fulfilled and whether there is in fact a misdescription.  In such circumstances, the approach adopted in Holmes v Booth, and approved in Lingens v Martin, recognises that the purchaser is not in a position to decide whether to cancel or seek compensation.  The vendor may however bring matters to a head by seeking specific performance.

[24]     Quite apart from practical considerations, I do not think it is sound to suggest that misdescriptions (including breaches of warranty amounting to misdescriptions) must be representations of present fact at the time of the contract.  That is contrary to authorities which recognise as misdescriptions, within the scope of compensation clauses equivalent to clause 5.4, failure to give vacant possession, or waste between the date of the contract and settlement in breach of contract.  Questions of title are often not resolved until settlement.  Given the history of provisions such as clause 5.4, which arose out of the strictness of the common law in relation to title defects, it would be strange if clause 5.4 were held ineffective to deal with any such deficiencies arising after the date of the contract.  Little authority is cited in support of this rather startling proposition.  The Court of Appeal referred to Hansen v Boocock, an unreported decision of the High Court.  Wylie J in that case seems to have been concerned that the vendor should not be able to “shelter behind” the clause 5.4 equivalent in respect of a warranty as to the gradient of the land in a subdivision in which the earthworks were not completed at the date of the contract.  His interpretation, confining the operation of clause 5.4 to warranties as to existing fact, allowed him to hold that it did not confine the remedy of the purchaser to compensation. 

[25]     But the interpretation of clause 5.4 to achieve that effect was unnecessary on the view I have expressed as to application of the principle in Flight v Booth.  If the discrepancy in the representation as to the condition of the property at settlement was material, the purchaser would not have been confined to compensation after settlement but would have been entitled to elect to cancel or to seek specific performance with abatement of the purchase price.  The principle in Flight v Booth does not seem to have been considered.  I would not treat Hansen v Boocock as authoritative on this point.  In my view it is enough if the description (that the building would be complying) is in error at the date that matters – completion.  If it is, the vendor cannot supply what he has contracted to deliver.

Conclusion

[26]     In summary, I agree with the Court of Appeal that “settlement” in clause 6.5 means “settlement in full” and disagree with other members of this Court on the point of interpretation.  But I consider that clause 6.5, like clause 5.4 (which in my view also applies), does not oblige a purchaser to settle where the vendor is in material breach, within the principle in Flight v Booth.  If the vendor was in such material breach of contract (a matter that cannot be resolved on summary application) it was not “ready able and willing” to perform the contract and Property Ventures was not obliged to settle on its statement.  Regalwood’s cancellation was not shown on summary application to have been valid.  The declaration obtained in the High Court should have been declined leaving the action between the parties to continue.  In addition to defending the claim for declaratory judgment and associated relief, Property Ventures may well seek to counterclaim for cancellation itself and associated relief or may seek specific performance with abatement of purchase price (if that course is still open on an equitable basis). 

Result

[27]     The Court being unanimous in the result, the appeal is allowed and the orders made in the High Court on the summary judgment application set aside.  The case is remitted to the High Court.  The respondent is ordered to pay the appellant’s costs in this Court of $15,000 and reasonable disbursements to be fixed by the Registrar.  The costs order made in the Court of Appeal is reversed.

BLANCHARD, McGRATH AND WILSON JJ

(Given by Blanchard J)

Introduction

[28]     On 18 October 2004 Regalwood Holdings Ltd agreed to sell a commercial building at 78 Lichfield Street, Christchurch to Property Ventures Investments Ltd for $1,500,000.  It warranted in the agreement that at the giving and taking of possession, which was to occur on settlement, all obligations imposed on it under the Building Act 1991 would be fully complied with.  The case has been argued for the purposes of summary judgment on the assumption that at all relevant times the building did not have a current building warrant of fitness required under s 45 of that Act and so there was a breach of the contractual warranty.

[29]     Although several issues have been argued in this Court, the principal matter which must be determined is whether Property Ventures was obliged to settle in full with Regalwood Holdings and separately pursue its claim for breach of warranty or whether it could decline to settle unless permitted to deduct an amount representing damages for that breach.  If Regalwood could insist on settlement in full, there is a further question concerning the validity of its cancellation of the contract almost exactly a year after it had served a settlement notice on Property Ventures.

Facts

[30]     The contract was on the Seventh Edition (2) of the form approved by the Real Estate Institute of New Zealand and the Auckland District Law Society (the REI/ADLS form).  It provided for a deposit of $100,000 with the balance to be paid “when a clear and registrable title shall be given and taken”, that is, on settlement.  The possession date was stipulated to be 30 working days “after confirmation”.  That was a reference to the fact that the contract was conditional upon confirmation by Property Ventures of its satisfaction with various matters, including its ability to obtain finance “in respects satisfactory to itself to enable the due completion of the purchase” and the “compliance of the property with all relevant legislation and by‑laws”.  That confirmation was given on 1 December 2004 and the deposit was paid.  In accordance with cl 1.1(3) of the General Terms of Sale set out in the form the settlement date was to be the possession date.  Allowing for the exclusion of the period 24 December to 5 January from the working days, that meant that settlement was due on 25 January 2005.

[31]     Property Ventures entered into an agreement on 18 January 2005 to on-sell the property to the Christchurch City Council at a slightly enhanced price.  The REI/ADLS form was used for that contract also.

[32]     The solicitors for Regalwood Holdings and Property Ventures took steps to get ready for settlement but on 25 January the solicitors for Property Ventures demanded a copy of the current building warrant of fitness for 78 Lichfield Street “in terms of the requirements in cl 6.2(6)(b) of the General Terms of Sale”.  That clause read:

6.2The vendor warrants and undertakes that at the giving and taking of possession:

…

(6)Where, under section 44 of the Building Act 1991 (“the Act”), any building on the property sold requires a compliance schedule (“the building”), all obligations imposed on the vendor under the Act are fully complied with.  Without limiting the generality of the foregoing, the vendor further warrants and undertakes that:

(a)The vendor has fully complied with any requirements specified in any compliance schedule issued by a territorial authority under section 44 of the Act in respect of the building; and

(b)The building has a current building warrant of fitness supplied under section 45 of the Act; and

(c)The vendor is not aware of any reason, that the vendor has not disclosed in writing to the purchaser, which would prevent a building warrant of fitness complying with section 45 of the Act from being supplied to the territorial authority when the building warrant of fitness is next due; and

(d)The territorial authority has not issued any notice under section 45(4) of the Act to the vendor or to any agent of the vendor which has not been remedied by the vendor, and the vendor is not aware of any reason, that the vendor has not disclosed in writing to the purchaser, which could entitle the territorial authority to issue such a notice.

[33]     In a further letter the same day Property Ventures’ solicitors said that they had been advised by the Christchurch City Council that there was no current warrant of fitness.  They required that situation to be rectified forthwith.  It emerged that there was a complicating factor.  The use of the building had been changed when in 2003 Regalwood had entered into a tenancy of part of the building.  The Council advised that, as a result, Regalwood would have to obtain “appropriate engineering reports (fire, structural, etc)” for the purpose of determining whether work would have to be carried out on the building to meet the requirements of the Building Code.  The Council issued Regalwood with a notice under s 45(4) of the Building Act (a notice to rectify) on 31 January.

[34]     During February Regalwood applied for a building consent to do alterations to the building but the Council took the position that earthquake strengthening of part of the building would be necessary.  It seems that this might have been avoided if the tenancy in question, to a company called Battle Link Ltd, could have been terminated but that was never achieved.

[35]     On 15 March the Council cancelled its agreement with Property Ventures because a condition of that agreement had not been satisfied.  The Council commented:

Unfortunately, the difficulties with regard to the Warrant of Fitness for the building are such that the Council does not wish to proceed whilst there is no significant change of position by the current owner.

[36]     By 17 May Regalwood had changed solicitors.  Its new solicitors, Goodman Steven Tavendale and Reid, wrote to Property Ventures’ solicitors, Cousins & Associates, drawing attention to cl 6.5 of the General Terms of Sale and asserting that the alleged breach of the warranty in cl 6.2 did not defer Property Ventures’ obligation to settle.  Clause 6.5 reads:

Breach of any warranty or undertaking contained in this clause does not defer the obligation to settle.  Settlement shall be without prejudice to any rights or remedies available to the parties at law or in equity, including but not limited to the right to cancel this agreement under the Contractual Remedies Act 1979.

[37]     On the same day Regalwood served a settlement notice on Property Ventures giving it 12 working days in which to settle.  Clause 9.0 of the General Terms of Sale form provides in relevant part:

9.0Notice to complete and remedies on default

9.1(1)     If the sale is not settled on the settlement date either party may at any time thereafter serve on the other party notice (“a settlement notice”) to settle in accordance with this clause; but

(2)The notice shall be effective only if the party serving it is at the time of service either in all material respects ready able and willing to proceed to settle in accordance with the notice or is not so ready able and willing to settle only by reason of the default or omission of the other party.

…

9.2Upon service of the settlement notice the party on whom the notice is served shall settle:

(i)on or before the twelfth working day after the date of service of the notice; or

…

time being of the essence, but without prejudice to any intermediate right of cancellation by either party.

…

9.4If the purchaser does not comply with the terms of the settlement notice served by the vendor then:

(1)Without prejudice to any other rights or remedies available to the vendor at law or in equity the vendor may;

(a)sue the purchaser for specific performance; or

(b)cancel this agreement by notice and pursue either or both of the following remedies namely:

(i)forfeit and retain for the vendor’s own benefit the deposit paid by the purchaser, but not exceeding in all 10% of the purchase price; and/or

(ii)sue the purchaser for damages.

…

9.6The party serving a settlement notice may extend the term of the notice for one or more specifically stated periods of time and thereupon the term of the settlement notice shall be deemed to expire on the last day of the extended period or periods and it shall operate as though this clause stipulated the extended period(s) of notice in lieu of the period otherwise applicable; and time shall be of the essence accordingly.  An extension may be given either before or after the expiry of the period of the notice.

9.7Nothing in this clause shall preclude a party from suing for specific performance without giving a settlement notice.

…

[38]     The service of the settlement notice drew the following response on 20 May from the solicitors for Property Ventures:

We refer to your letter of 17 May 2005.  We note that we have also received a copy of the settlement notice served on our client.

With respect to the matters you have raised we advise as follows:

1.The fact that our client confirmed condition 14.1 does not in any way release your client from its obligations under the agreement.  Indeed, our client was entitled to and did rely on the various vendor warranties in conducting its due diligence investigations.

2.Notwithstanding the provisions of clause 6.5 Lingens v Martin makes it clear that a warranty breach of this nature comes within the category of a mis-description under clause 5.4 and our client is entitled to claim compensation.  Neither your client’s settlement notice nor your letter makes any mention of compensation or suggests that your client has complied with its contractual obligations.  As such, we consider your client’s settlement notice is invalid.

3.We understand that the cost of bringing the property up to a condition whereby the building warrant of fitness would be issued is likely to be several hundred thousand dollars.  Therefore, as an alternative to the above option, our client would be entitled to cancel the contract and sue your client for damages together with refund of the deposit.

With respect, your client has been aware of the problem with the warrant of fitness for many months now and has failed to make realistic attempts to resolve it.  Without prejudice, we strongly suggest that your client enter into realistic negotiations with either our client and Battle Link with respect to the termination of its tenancy or with our client so that settlement can proceed with an appropriate deduction from the purchase price for your client’s breach of warranty.  In this regard we assume your client has obtained a costing of the work required to obtain a building warrant of fitness and we suggest you forward that to us for our client’s consideration.

If your client is not prepared to adopt a sensible approach to resolve a problem that is entirely of its own making and for which it is fully contractually responsible then our client will be filing proceedings for specific performance seeking settlement of the agreement with a substantial reduction in the purchase which would include:

(a)the costs of attending to all the work required to obtain the building warrant of fitness

(b)estimated compensation payments require to be paid to any tenants who are disturbed as a result of those works

(c)rent from 14 March 2005

(d)costs and interest.

If we do not receive your confirmation that the settlement notice is withdrawn and that your client agrees to enter into good faith negotiations from 5 pm Wednesday 25 May 2005 then our client will issue such proceedings without further notice.

[39]     Clause 5.4 reads:

Except as otherwise expressly set forth in this agreement, no error, omission or misdescription of the property or the title shall annul the sale but compensation, if demanded in writing before settlement but not otherwise, shall be made or given as the case may require.

[40]     Regalwood did not give notice of cancellation when the 12 working days expired, nor did Property Ventures issue the proceedings for specific performance threatened in its letter of 20 May.  For many months Regalwood appears to have endeavoured to reach an accommodation with the Council over the necessary building works.  It does not appear that any physical work was done on the building.  In the meantime Property Ventures had no access to the building.

[41]     In affidavits on behalf of Property Ventures, which have not been contradicted, it is deposed that Property Ventures obtained its own estimate of the cost of the necessary upgrading works from a firm of quantity surveyors.  These were based on actual costs for a nearby property owned by it, with an adjustment pro rata for the building area of 78 Lichfield Street.  A costing in an amount of $565,000 was given to a representative of Regalwood at one of a number of meetings between the parties.  Property Ventures required an abatement of the purchase price to the extent of the cost of the work unless a valid building warrant of fitness and code compliance certificate were obtained prior to settlement.

[42]     Little or no progress was made between the parties.  Then on 30 March 2006 Regalwood’s solicitors wrote to Cousins & Associates saying that Property Ventures had failed to comply with the settlement notice served on 17 May 2005 and was in default of that notice.  It referred to the remedies in cl 9.4.  Claiming that a building warrant of fitness had now been obtained, the letter required settlement by 5pm on 7 April 2005 [sic], saying that the solicitors had been instructed to commence proceedings for specific performance should settlement not occur by this date.  The period given was five working days.

[43]     The solicitors for Property Ventures replied on 7 April 2006 saying that they understood that a code compliance certificate for the building had not yet been issued, that there was no evidence that the s 45(4) notice had been remedied and that Property Ventures was not satisfied that the building warrant of fitness complied with the requirements of the Building Act.  They advised that a new LIM Report had been requested from the Council.  The letter went on:

We understand that the major impediment to your client complying with the warranties referred to above is the obligation to undertake seismic strengthening in accordance with the Council’s letter to your client of 1 June 2005.  In order to progress a possible negotiated resolution of these matters, our client has advised your client of its consultant’s estimate of the costs for complying with this requirement (we note this was obtained last year and will probably need to be updated).  Our client advises it was discussed and agreed at an earlier meeting that the report your client was obtaining from Holmes Consulting Group would be supplied to our client.  We are aware that that report is now completed but your client is now no longer willing to provide our client with a copy.

In light of the above, we are not satisfied that your client is in a position to comply with all its warranties under the agreement.  If it is not able to do so then the only way to progress matters is for the parties to be able to assess the costs of that non-compliance.  We therefore suggest that you take further instructions from your client and either provide us with satisfactory evidence that your client is in a position to comply with its warranties or that it is willing to realistically discuss the costs of non-compliance.

[44]     On 12 May the solicitors for Regalwood wrote again referring to the agreement and “the settlement notice previously issued to your client”.  They said that Regalwood had instructed them that “unless your client completes their settlement obligations by Friday 19 May 2006 our client will exercise their clear entitlement to cancel the agreement”.  They sought confirmation of Property Ventures’ position.

[45]     The solicitors for Property Ventures replied on 18 May saying that they did not accept that Regalwood was entitled to issue a settlement notice and therefore that it had any right of cancellation.  They said that as Regalwood had refused to release the report obtained from Holmes Consulting Group their client was obtaining its own report and undertaking a detailed assessment of all losses caused by Regalwood’s breach, prior to commencing action against Regalwood.

[46]     On 22 May 2006 Regalwood served a notice of cancellation referring to the failure to remedy the default stipulated in the notice given on 17 May of the previous year.  By a statement of claim dated 10 May 2007 Regalwood sought from the High Court in Christchurch a declaration that its settlement notice and cancellation of the agreement were valid and orders that a caveat lodged by Property Ventures be removed and the deposit forfeited.  It applied for summary judgment.

High Court

[47]     In the High Court the argument for Property Ventures in opposition to summary judgment concentrated on whether it had been entitled to equitable compensation under cl 5.4 of the General Terms of Sale for the consequences of Regalwood’s breach of warranty.  Counsel for Property Ventures relied upon the decision of the Court of Appeal in Lingens v Martin where, it was argued, a breach of warranty had been held to amount to a misdescription of the property.  But Christiansen AJ said that:

... something more than a bare claim to a right for compensation should be signalled before a vendor is without recourse to require settlement to be paid in full … even if a purchaser is presented with difficulties in calculating a compensation claim amount.

It must be demanded in writing before settlement and the purchaser must commit to settlement.  The Associate Judge cited from McMorland, Sale of Land:

If a breach of warranty or undertaking is established, the purchaser will have certain remedies and must decide which of those to exercise … There is no right to refuse to settle while threatening to cancel if the vendor will not reduce the price, a tactic sometimes employed.  It is the purpose of cl 6.5 to make this situation, which is the law in any event, a clear and express term of the contract.  A breach of warranty does not defer the obligation to settle on the due date as required by the contract.

[48]     The Judge distinguished Lingens on the basis that there, before the vendors issued their settlement notice, the purchaser had issued a proceeding seeking specific performance subject to an allowance of compensation which had been quantified.  In the present case, the Judge said, Property Ventures did not follow that process.  It could not rely on “alleged informal awareness of disputes”.  No claim for compensation had been demanded in Property Ventures’ letter of 20 May 2005.  In the face of the notice to settle it did not elect either to affirm the contract or to bring it to an end.  At no point did it make a commitment to settle.  The Judge therefore granted Regalwood’s application for summary judgment.

Court of Appeal

[49]     In the Court of Appeal the argument again revolved around whether the breach of warranty amounted to a misdescription within cl 5.4.  Glazebrook J, giving the reasons of the Court, said that such a clause applied only to misdescriptions relating to the state or quality of the property at the time the contract was made.  The requirement that compensation must be demanded in writing before settlement precluded the application of the clause to a warranty not required to be performed until settlement.  Until the time of its performance, there was no breach for which compensation could be demanded.

[50]     The Court of Appeal also doubted whether Lingens was correctly decided, even in relation to misrepresentations operating at the date of the agreement where they related to matters other than title or boundaries.  It observed that the heading to cl 5.0 was “Title, boundaries and requisitions”.  The Court also considered that cl 6.5 governed the situation where a warranty or undertaking covered by cl 6.0 was in issue and required remedies including damages or compensation (assuming Lingens was correctly decided) to be exercised after settlement had occurred at the full purchase price.  Property Ventures was therefore obliged to settle in full.

[51]     The Court also rejected an argument, not advanced in this Court, that Regalwood had elected to affirm the contract and for that reason could not cancel.  It did accept a submission that Regalwood had waived the essentiality of time but it concluded that a new settlement date had been validly set in Regalwood’s letter of 30 March 2006 and a further date in the letter of 12 May, which made it absolutely clear that cancellation would follow any failure to settle in full on the new date.

[52]     The Court dismissed Property Ventures’ appeal.

Submissions

[53]     Although Mr Forbes QC, for Property Ventures, continued to support the view that there had been a misdescription of the property falling within cl 5.4, on the basis of which equitable compensation could be deducted, in this Court he placed much greater reliance on the argument that the (assumed) breach of the warranty in cl 6.2(6) gave rise to a cross-claim by Property Ventures which it was entitled to set off against the settlement moneys.  Thus, counsel submitted, because Regalwood was improperly insisting on receiving the full balance of the price on settlement, it was not entitled to issue a settlement notice.  For that reason, and also because neither of the letters from its solicitors in March and May 2006 gave 12 working days’ notice, he submitted that the cancellation had been invalid.

[54]     For his part, Mr Davidson QC submitted for Regalwood that cl 5.4 was of no application, essentially for the reasons given by the Court of Appeal, and that cl 6.5 prevented Property Ventures from exercising any right of set-off otherwise available to it.  He also submitted that adequate notice of cancellation had been given in the particular circumstances.

Equitable compensation

[55]     A court will generally order a land sale contract to be performed notwithstanding some deficiency in the property as compared with the way it was described in the contract, for example when the area able to be conveyed is less than stated in the contract.  That is subject to two important qualifications.  First, such an order will not be made against an unwilling purchaser if the deficiency in the description of the property is so substantial that the purchaser will receive a property entirely different from that contracted for.  Secondly, the purchaser is entitled to be compensated by the vendor for the deficiency by way of an abatement of the price otherwise due on settlement.  Specific performance with compensation to the purchaser may also be ordered where the vendor has acted in breach of its duty as constructive trustee of the property for the purchaser between contract and settlement, such as by letting buildings go to ruin or overgrazing a rural property or by removing items which were included in the subject matter of the contract.

[56]     In this case there was no change in the physical condition of the property after the contract was signed but it is said that there was a misdescription of the property.  If there was, Property Ventures was able on settlement to deduct equitable compensation provided its claim was sufficiently put forward prior to settlement as required by cl 5.4.

[57]     A “misdescription” of the property is an incorrect statement of fact about it appearing in the contract or in documents sufficiently linked to it, such as an over-statement of the area.  Clause 5.4, unlike some older forms of compensation clause, also extends to questions of title.  However, lack of a building warrant of fitness or non-compliance with the building code is not a title defect.  It is a defect in the quality of the property.  A vendor usually has no duty to disclose defects of quality unless they have been concealed, nor to remedy them if it has not given a warranty about the relevant quality of the property.

[58]     In the Privy Council’s decision in Rutherford v Acton-Adams, Viscount Haldane, delivering the advice of the Board, said that a purchaser’s right to an abatement from the purchase money applied only to a deficiency in the subject-matter described in the contract.  It did not apply to a claim to make good a representation about that subject-matter made not in the contract but collaterally to it.  It follows that a warranty made in the contract concerning the existing condition of the property is capable of being a misdescription of the property.  But that will very much depend upon the manner in which the warranty is expressed: whether it is implicit in what is said in the warranty that the state of affairs to which the warranty is directed does presently exist at the date of the contract.  Thus, a warranty that works done on the property have been carried out in compliance with a building permit may well amount to an implicit representation that, at the time of the contract, the building on the property complies with the requirements of the local authority, thereby describing a compliant building.  On the other hand, a limitation on the scope or coverage of the warranty may have the consequence that it does not expressly or by implication describe the subject-matter of the contract at the date of the contract.  In Lingens v Martin, where the Court of Appeal appears to have found a misdescription inherent in a warranty, the scope of the warranty was actually restricted to compliance of any works done or permitted by the vendor, so the existence of an unspoken representation concerning the state of the building generally seems problematical.  The conclusion expressed in the Court of Appeal in the present case concerning Lingens v Martin may therefore be correct in so far as it rested on the non-existence of any misdescription.

[59]     The warranty in cl 6.2(6) in the present case was not confined to works done by the vendor.  But there is a real difficulty for the purchaser in claiming compensation under cl 5.4 because the warranty is directed to a future state of affairs, namely that to prevail on the future date when possession will be given and taken.  It therefore cannot fairly be read as an implied statement about the condition of the property at the date of the contract.  Accordingly, it does not misdescribe the property.  Rather, it is making a promise about what the condition of the property will be in the future, on the possession date.  In pointing this out, the Court of Appeal rightly observed that cl 5.4 cannot have been intended to encompass a promise of this kind since no breach can occur until that date, yet a claim for compensation must be made before settlement, which under cl 1.1(3) of the General Terms of Sale is to be the possession date unless another date is specified.

[60]     Property Ventures has therefore not shown that it had any entitlement to claim compensation by way of abatement of the price for misdescription because of the non-compliance with the Building Act.

Equitable set-off

[61]     Property Ventures says that, at the time specified for settlement in Regalwood’s settlement notice demanding payment of the price in full, Property Ventures had the right to claim an abatement for the outstanding breach of the warranty in cl 6.2(6), in respect of which it was entitled to an equitable set-off against the price.  It says that if a party calls for performance by the other party to which it is actually not entitled, and does not then demonstrate a willingness to have matters in dispute resolved by the court or by other available means, that party cannot claim to have been willing to perform the contract according to its terms.  It is therefore unable validly to issue a settlement notice under cl 9.1.  It is submitted that by insisting on receiving settlement in full Regalwood was not, as required by cl 9.1(2), “at the time of service [of the notice] in all material respects ready, able and willing to proceed to settlement”. 

[62]     Before any impact of cl 6.5 on this argument is considered, it is first necessary to determine whether, as Property Ventures asserts, a purchaser of land can raise a set-off in respect of unliquidated damages for a breach of a warranty in the sale contract as a means of defending a vendor’s claim for the price (or when the purchaser seeks to enforce the contract by means of specific performance).  We are not here concerned with a common law set-off under the Statutes of Set-off 1728 and 1734, which applies only when both claims are for liquidated sums.  Nor are we concerned with a form of abatement paralleling that available at common law to a purchaser of goods and recognised in s 54(1)(a) of the Sale of Goods Act 1908.  A vendor of land cannot simply treat the price due on settlement as a liquidated debt and sue for it as such, for the purchaser’s obligation to pay it is only to be performed concurrently with the vendor’s obligation to deliver a transfer of title.  It does not become payable as a debt until the conveyance has taken place.  If wanting to receive the price the vendor must invoke the court’s equitable jurisdiction and seek an order for specific performance by the purchaser whereby the purchaser will be required to pay what is owing concurrently with performance by the vendor of its settlement obligations.  Alternatively, the vendor may have the right to cancel and then sue for damages for the loss of its bargain.  However, unless time is already essential, the vendor cannot proceed to cancel without having first called upon the purchaser to settle by a notice making time of the essence or, under the REI/ADLS form, by a settlement notice.  It is to be noted also that an award of damages after cancellation will not equate the unpaid portion of the price, for the vendor, having cancelled, will retain the land and any forfeited deposit, for which credit must be given.

Duncan Cotterill, Christchurch for Respondent