Property Ventures Investments Ltd v Regalwood Holdings Ltd

[2008] NZCA 422

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IN THE COURT OF APPEAL OF NEW ZEALAND

CA43/2008
[2008] NZCA 422

BETWEENPROPERTY VENTURES INVESTMENTS LTD

Appellant

ANDREGALWOOD HOLDINGS LTD

Respondent

Hearing:21 August 2008

Court:Glazebrook, Fogarty and MacKenzie JJ

Counsel:A J Forbes QC for Appellant

R A Osborne and B J McCashin for Respondent

Judgment:16 October 2008 at 10.00 am

JUDGMENT OF THE COURT

A        The appeal is dismissed.

BThe appellant must pay the respondent costs for a standard appeal on a band A basis and usual disbursements.

____________________________________________________________________

REASONS OF THE COURT

(Given by Glazebrook J)

Table of Contents

Para No

Introduction  [1]
The agreement  [4]

Was Property Ventures obliged to settle the agreement without
an abatement of the purchase price?  [8]

Summary of the submissions of the parties  [8]
Which clause applies?  [10]
Conclusion  [20]

Was there affirmation or waiver?  [23]

Correspondence between the parties  [24]
Effect of the correspondence  [29]

Result and costs  [33]

Introduction

[1]       Regalwood Holdings Ltd agreed to sell a property in Christchurch to Property Ventures Ltd for $1.5m.  Settlement was to occur on 25 January 2005.  On 17 May 2005, Regalwood served a settlement notice on Property Ventures.  Settlement did not take place and, on 22 May 2006, Regalwood issued a notice of cancellation of the agreement.

[2]       Regalwood brought a summary judgment application seeking a declaration that its cancellation was valid and orders that Property Ventures’ caveat be removed and that the deposit of $100,000 be forfeited to it. Associate Judge Christiansen granted Regalwood’s application for summary judgment on 19 December 2007 (HC AK CIV 2007-409-001069) and the declaration and orders sought by Regalwood were made. 

[3]       Property Ventures appeals against that decision.  It contends that:

(a)It was not obliged to settle the agreement without an abatement of the purchase price; and

(b)There was affirmation of the agreement by Regalwood after it had issued its settlement notice, precluding its ability to cancel the agreement.

The agreement

[4]       The agreement was in the standard ADLS/REINZ form, seventh edition (July 1999).  Clause 6 of that agreement relates to vendors’ warranties and undertakings.  In relevant part, cl 6.2 provides:

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

…

(5)Where the vendor has done or caused or permitted to be done on the property any works for which a permit or building consent was required by law:

(a)The required permit or consent was obtained; and

(b)The works were completed in compliance with that permit or consent; and

(c)Where appropriate, a code compliance certificate was issued for those works; and

(d)All obligations imposed under the Building Act 1991 were fully complied with.

(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.

[5]       Regalwood accepts that this appeal must proceed on the assumption that it was in breach of its warranties to comply with the Building Act 1991 and to obtain a building warrant of fitness and code of compliance certificate for works done on the property (although this is disputed).

[6]       Other relevant clauses include cl 6.5, which provides:

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.

[7]       Clause 5 deals with title, boundaries and requisitions.  Clause 5.4 provides:

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.

Was Property Ventures obliged to settle the agreement without an abatement of the purchase price?

Summary of the submissions of the parties

[8]       Mr Forbes QC, for Property Ventures, submits that Regalwood’s breach of the warranties under cl 6.2 constituted a “misdescription of the property” under cl 5.4 of the agreement.  He relies for this proposition on this Court’s decision in Lingens v Martin (1994) 2 NZ ConvC 191,940.  He says (contrary to what was held by the Associate Judge) that a valid claim for compensation was made by Property Ventures before settlement.  Mr Forbes accepts that the claim was not quantified but submits that it was impossible to do so before settlement.  In his submission, Regalwood could not compel Property Ventures to settle until the parties had agreed on the amount of compensation or some other arrangement to allow settlement to proceed.  Alternatively, Mr Forbes submits that, even if the position is governed by cl 6.5 of the agreement, Property Ventures was not obliged to settle in full because of the doctrine of equitable abatement, which is preserved by cl 6.5.

[9]       Mr Osborne, for Regalwood, submits that a breach of a warranty or undertaking can amount to a misdescription in terms of cl 5.4 only if it is a misdescription at the time of entering into the agreement.  In this case, the cl 6.2 warranties operate at the possession date.  The clause at issue in Lingens v Martin did not refer to the possession date and thus the warranties must be taken to have operated at the time of entering into agreement.  Further, the form of the agreement used in Lingens v Martin did not have an equivalent of cl 6.5.  In Mr Osborne’s submission, under cl 6.5, a purchaser is obliged to settle in full and later sue for consequential damages – see Tapp v Galway (2007) 8 NZCPR 684 (HC) and Lifestyle Group v Maxwell [2007] NZCA 290. Even if cl 5 was engaged, Mr Osborne submits that no written demand for compensation was made by Property Ventures prior to settlement, as required under cl 5.4.

Which clause applies?

[10]     Mr Forbes’ submission relies on the case of Lingens v Martin.  That case concerned a property which, after the execution of the contract, became subject to a demolition order as a result of work done on the property without a permit.  This was in breach of a warranty under the agreement that all necessary permits had been obtained.  The purchaser wanted to settle but at a reduced price.  The vendor issued a settlement notice for the full purchase price and then purported to cancel the agreement.

[11]     This Court held that the breach of warranty was a misdescription of the property, which came with the ambit of what is now cl 5.4 of the agreement.  In accordance with that clause, a vendor is not entitled to require payment of the full amount of the purchase price in such circumstances.  A settlement notice purporting to require this is invalid.  The Court went on to say (at 191,946) that, if the parties are unable to agree before the settlement date on the accurate amount of the compensation, they should come to “some sensible arrangement to protect their respective interests so that settlement can proceed”. 

[12]     Mr Osborne’s first submission is that Lingens v Martin is inapplicable as it relates only to warranties that apply as at the date of entry into the agreement.  The seventh edition of the ADLS/REINZ agreement differs from its predecessors by dividing the vendor’s warranties in cl 6.0 into those which apply at each of four separate times: as at the entry into the contract, on the possession date, on settlement and on or immediately after possession – see McMorland Sale of Land (2ed 2000) at [8.17] ‑ [8.21].  Under the seventh edition, the warranties at issue in this case apply from possession, unlike the form of the agreement at issue in Lingens v Martin.

[13]     The equivalent of cl 5 of the agreement has been construed to apply only to misdescriptions relating to the state or quality of the property as at the time the contract was made – see Hansen v Boocock HC AK CP 2078/88 13 June 1991 and McMorland at [8.10].  We agree that, to the extent that cl 5.4 may potentially apply in the case of a breach of warranty under cl 6, it does so only for those warranties which apply at the date of the agreement.  This is because the requirement in cl 5.4 that compensation must be demanded in writing before settlement precludes the application of the clause to a warranty which is not required to be performed until settlement.  Until the time for performance of the warranty, there is no breach for which compensation could be demanded.  We accordingly accept Mr Osborne’s submission that Lingens v Martin does not apply to the warranty in issue in this case.  Clause 5.4 will not govern this case because the warranties in question relate to the possession date, which in this case coincides with the settlement date.

[14] In fact, we consider that there may be more fundamental difficulties for Property Ventures. We doubt whether a misdescription in the context of cl 5, which is headed “Title, boundaries and requisitions”, extends beyond matters relating to title or boundaries. There are likely to be more differences between the parties as to the extent (if any) of any breach and major issues of quantum if cl 5.4 is extended past this narrow compass, as illustrated by the difficulties in this case. These difficulties risk subverting the settlement notice procedure set out in cl 9 of the agreement in circumstances where agreement on the extent of any breach and/or valuation cannot be reached before settlement and the parties cannot come to “some sensible arrangement to protect their respective interests so that settlement can proceed” (see at [11] above). We thus doubt whether Lingens v Martin was correctly decided even in relation to misrepresentations that operate as at the date of the agreement, where they relate to matters other than titles or boundaries.  The fact that cl 5.4 is in a separate clause relating to titles or boundaries can be seen as necessarily limiting the application of the whole of that provision to matters involving titles and boundaries

[15]     Even if Lingens v Martin was correctly decided on the misdescription point, however, there is, as pointed out by Mr Osborne, a further reason why Lingens v Martin does not apply: the addition of cl 6.5 in the seventh edition of the standard agreement.  There was no equivalent to cl 6.5 in the form of agreement at issue in Lingens v Martin.  Under cl 6.5, where there is a breach of warranty or an understanding, a purchaser is obliged to settle in full but without prejudice to any rights or remedies available at law or in equity. 

[16]     As McMorland says, at [8.22], a purchaser faced with a breach of warranty by a vendor does not have a right to delay settlement until the matter is “sorted” or until the vendor has agreed to a variation of the contract by a reduction of the purchase price.  We refer also to the Auckland District Law Society seminar by the drafters of the seventh edition, Agreements for Sale and Purchase of Real Estate Form 7^th Edition (September/October 1999), where it was stated, at 9, that:

A remedy clause has been included to make it clear breach of the warranties in clause 6 do not of themselves entitle a party to refuse to settle.

[17]     If a breach of the warranties in cl 6 is established, there is a range of possible remedies, depending on the nature of the warranty and the circumstances of the breach.  Possible remedies include cancellation, which may be exercised before settlement.  The wording of cl 6.5 would suggest that a right to cancel may even be retained after settlement.  This would presumably apply only with regard to matters not known as at settlement or (possibly) where it is made plain that any settlement is without prejudice to a later cancellation right being exercised.  In this case, however, Property Ventures did not seek to cancel the agreement as a result of the alleged breach of warranties.

[18]     Other remedies potentially available to a purchaser in the position of Property Ventures include damages, compensation pursuant to Lingens v Martin (assuming that case was correctly decided) or retention, where there is a construction contract with an express provision allowing for retention of a sum to cover unfinished work – see McMorland at [8.22].  In our view, in accordance with cl 6.5, these remedies must, however, be exercised after settlement has occurred at the full purchase price (where the purchaser decides not to cancel the agreement).  It is cl 6.5, rather than cl 5.4 (which is purposely situated in a different clause), that should govern the situation where a warranty or undertaking covered by cl 6 is at issue.

[19]     This was also the conclusion (correctly) reached by Venning J in Tapp v Galway at [51] ‑ [53] and by this Court in Lifestyle Group Ltd v Maxwell at [25] ‑ [27].  To the extent that it is suggested otherwise in McMorland at [8.22(c)], McMorland “The New Edition of the Agreement for Sale and Purchase” (1999) 8 BCB 181 at 185 and by Thomas "Lingens v Martin and the standard form" [2008] NZLJ 389, we respectfully disagree. For the reasons set out above at [18], cl 6.5 governs the situation and not clause 5.4. Further, cl 5.4 has no application to a breach of a warranty applying as at the date of settlement – see at [13] above.

Conclusion

[20]     For the above reasons, Property Ventures was obliged to settle in full in terms of cl 6.5 (unless it had a right to cancellation and had exercised that before settlement, which it did not).  It had no right to defer settlement until compensation had been agreed.

[21]     Clause 5.4 did not apply.  It is thus not necessary for us to consider if a valid demand in writing for compensation in terms of cl 5.4 had been made before settlement. 

[22]     This ground of appeal fails.

Was there affirmation or waiver?

[23]     Mr Forbes’ second argument on behalf of Property Ventures is that Regalwood expressly elected to affirm the contract and therefore lost its right to cancel the agreement on the basis of failure to settle in full.  Alternatively, he submitted that Regalwood waived the essentiality of time and, because of this, could not rely on its 17 May 2005 settlement notice a year later in order to cancel the contract.  Mr Forbes relies for this submission on two letters.  We set out a summary of those letters and other relevant correspondence below. 

Correspondence between the parties

[24]     The first letter relied on by Mr Forbes is a letter sent on 21 June 2005, a short time after the settlement notice.  This was sent by Regalwood’s solicitors to the solicitors acting for Property Ventures.  The letter said that they were writing “as a courtesy” to advise that Regalwood’s engineers were investigating the work required “to finalise the extent of the upgrade works and to provide more detailed costings”.  It then said that a meeting should be set up as soon as possible after that work was finished (anticipated to be in the next fortnight) “to begin negotiations”.  The parties did negotiate directly through 2005 and in early 2006.

[25]     The second letter relied on by Mr Forbes was one sent on 30 March 2006, again by Regalwood’s solicitors.  This letter referred to previous correspondence and to the settlement notice.  It said that their clients had always maintained that Property Ventures was obliged to settle the agreement.  The letter stated that there had been a failure to comply with the settlement notice and that Property Ventures was in default under that notice.  It then said that the “remedies set out in clause 9.4 of the General Conditions of Contract apply”.  The letter went on to say that Property Ventures had maintained incorrectly in their view that it was not obliged to settle because of issues related to the building’s warrant of fitness, which had now been obtained and was enclosed.  It finished by saying:

Our client requires that your client settles [sic] the purchase of this contract by 5.00pm on Friday, 7 April 2005. [sic]  We are instructed to commence proceedings for specific performance should settlement not occur by this date.

[26]     The solicitors acting for Property Ventures replied on 4 April 2006, saying that they did not accept that their client was under any obligation to settle on Friday (having obviously taken the reference to 7 April 2005 as meaning 7 April 2006).  They stated their understanding that the clients were still discussing matters directly and that they would receive further instructions in due course.

[27]     Mr Osborne points to a further letter from Regalwood’s solicitors dated 12 May 2006.  In that letter, the solicitors said that Regalwood had instructed them that, “unless your client completes their [sic] settlement obligations by Friday 19^th May 2006 our clients will exercise their clear entitlement to cancel the agreement.”  This seems to be in response to a letter sent on 7 April 2006 by Property Ventures’ solicitors where it was stated that Property Ventures still considered that Regalwood was in breach of its warranties and that “the only way to progress matters is for the parties to be able to assess the costs of that non-compliance.”

[28]     In answer to the letter of 12 May 2006, Property Ventures’ solicitors wrote on 18 May 2006 to say that they did not accept that Regalwood was entitled to issue a settlement notice and that it had no right of cancellation.  Regalwood’s solicitors countered by letter of 22 May 2006, rejecting this contention and enclosing a notice of cancellation.

Effect of the correspondence

[29]     We do not accept the submission that the two letters relied on by Mr Forbes constituted an election to affirm the agreement such that Regalwood was not entitled to cancel the contract.  It might have been arguable that the letter of 21 June 2005, together with the subsequent negotiations, may have precluded Regalwood from requiring settlement in full if those negotiations had been successful.  We do not accept that the letter of 21 June 2005 precluded Regalwood from cancelling the agreement, even if the negotiations failed.  The 21 June 2005 letter and the subsequent negotiations did not constitute a waiver of the clear position taken in the settlement notice: that Property Ventures was obliged to settle in full.  An alternative explanation of the letter and the subsequent negotiations is that they may have constituted an attempt to settle any claim for compensation or damages that might follow settlement.

[30]     With regard to the letter of 30 March 2006, we do not accept that it constituted an election to affirm the agreement so as to preclude cancellation.  While it referred to having instructions to issue proceedings for specific performance, this cannot be taken as an indication that those instructions would not change in the face of a continued refusal to settle.  In Johnson v Agnew [1980] AC 367 at 398 (HL), Lord Wilberforce, for the Court, stated that seeking specific performance “is not eternal and unconditional affirmation, but a continuance of the contract under the control of the court which control involves the power, in certain events, to terminate it”. Lord Wilberforce went on to say that, if persons seeking specific performance make an election at all, they do so when they decide not to proceed under the order for specific performance but ask the court to terminate the contract. The reasoning in Johnson v Agnew necessarily means that mere notification of an intention to pursue specific performance will not be an election.  Further, the letter sent to Property Ventures referred to the remedies under cl 9.4 of the agreement being available.  Those remedies include cancellation.  Regalwood was therefore clearly keeping its options open.

[31]     We do, however, accept Mr Forbes’ submission that there had been a waiver of the requirement that time was of the essence, as set out in the settlement notice.  This occurred by virtue of a combination of the 21 June 2005 letter, the subsequent negotiations and the lapse of time.  However, a new date for settlement (7 April 2006) was set in the letter of 30 March 2006 and a further settlement date (19 May 2006) in the letter of 12 May 2006.  The 12 May 2006 letter also made it absolutely clear that cancellation would follow any failure to settle on that new date.  It was also absolutely clear from the correspondence on 30 March 2006 and the prior dealings that Regalwood required settlement of the purchase price in full.

[32]     This ground of appeal also fails.

Result and costs

[33]     The appeal is dismissed.

[34]     The appellant must pay the respondent costs for a standard appeal on a band A basis and usual disbursements.

Solicitors:
Cousins & Associates, Christchurch for Appellant
Duncan Cotterill, Christchurch for Respondent