Ridges Rd Limited v Highland Springs No 2 Limited HC Dunedin CIV 2010-412-517

[2010] NZHC 2310

IN THE HIGH COURT OF NEW ZEALAND DUNEDIN REGISTRY

CIV-2010-412-000517

IN THE MATTER OF     Section 145A of the Land Transfer Act

1952

BETWEEN  RIDGES RD LIMITED Applicant

ANDHIGHLAND SPRINGS NO 2 LIMITED First Respondent

ANDHIGHLAND SPRINGS LIMITED Second Respondent

Hearing:         30 November 2010

Counsel:         L P Mulinder and G P Dwyer for Applicant

K E Tohill for Respondents

Judgment:      22 December 2010

RESERVED JUDGMENT OF PANCKHURST J

Introduction

[1]      In  August  2010  Ridges  Rd  Limited  (Ridges)  applied  by  originating application  for  orders  that  a  caveat  not  lapse.    An  interim  order  was  made on

6 August 2010.  Despite a part hearing of the case, and subsequent negotiations, the matter was not resolved between the parties.

[2]      This decision follows a substantive hearing in which Ridges sought an order pursuant to s145A of the Land Transfer Act 1952 that a caveat affecting land owned by each of the respondent companies not lapse.

Some background

[3]      The first respondent (Highland Springs No. 2) and the second respondent

(Highland  Springs)  are  owned  and  controlled  by  brothers  Gregor  and  Shaun

RIDGES RD LIMITED V HIGHLAND SPRINGS NO 2 LIMITED AND ANOR HC DUN CIV-2010-412-

000517  22 December 2010

McLellan.  In 1995 they purchased a merino farm comprising about 286 hectares on

McArthur Road near Alexandra.

[4]      Some years later the brothers wished to subdivide part of the farmland into four hectare lifestyle blocks.  To this end Highland Springs No. 2 was formed as a development company.  It owns 72 hectares which border McAthur Road and from which to date 17 lifestyle blocks have been subdivided for sale.   This land is contained in certificate of title 352033 in the Otago Land Registration District.  The balance of the original farm, about 194 hectares, is owned by Highland Springs and is still utilised as farmland.  This is certificate of title 374072.

[5]      A distance to the north of the Highland Springs land is another lifestyle block subdivision promoted by Paul and Stephanie Martin through their company Big Sky Developments  Limited  (Big  Sky).    The  Big  Sky  land  lacks  water.    However, Mr Martin  owned  and  controlled  the  Central  Otago  Water  Company  Limited (Central Otago Water) which had land situated about nine kilometres to the south of the Big Sky’s subdivision.  This land has a well from which water could be taken in quantities sufficient to service the Big Sky subdivision.

[6]      In order to deliver water to the Big Sky subdivision an easement across the Highland Springs No. 2/Highland Springs’ land was required.   Once across the Highland Springs’ land the water pipe could be laid alongside a public road to bridge the further distance to the subdivision.

[7]      The parties negotiated the terms of agreement to create an easement in gross in 2005.  On 6 August 2005 an agreement was signed between the McLellan brothers as grantor, and Big Sky as grantee.  The agreement defined the terms upon which a pipeline could be laid, including the route, size and depth of the line.  A pipeline was duly installed and an easement registered against the Highland Springs’ certificates of title.   However, issues arose concerning the siting of the pipeline, and related matters.  The terms of the agreement had not been followed.  It is not necessary to detail the issues of dispute which emerged at this time.

[8]      The parties continued negotiations in an endeavour to settle their differences. This process culminated in an exchange of letters in September 2008 by which new easement terms were confirmed.  Clark Boyce on behalf of Central Otago Water and an associated irrigation company (the Manuherikia  Irrigation Company Limited) wrote to Bodkins, the Highland Springs’ solicitors, on 18 September and received a confirming letter the following day.  The new terms included:

(a)that the easement in gross was in favour of both Central Otago Water and the irrigation company;

(b)that Central Otago Water was to provide 2500 litres per day in summer and 1000 litres per day in winter for the usage of each of the lots comprising the Highland Springs No. 2 subdivision, and

(c)     that  partial  withdrawals  of  caveat  would  be  provided  to  Highland Springs No. 2 to facilitate the settlement of sales within the subdivision as required.

Bodkins’ letter of 19 September 2008 included in paragraph 4:

We confirm that this exchange of correspondence constitutes an agreement between our two company clients ...

[9]      On 27 February 2009 Bodkins wrote a further letter to Clark Boyce.   The letter stated that Messrs Martin and Shaun McLellan had negotiated and agreed upon certain variations to the terms of the easement arrangement, including that the total water supply of 45,000 litres per day in the summer months was to be taken at three metered takeoff points installed by Central Otago Water and that Highland Springs No. 2 would pay $1,500 plus GST per annum for the water.  The letter also included a statement that “all conditions of this agreement must be accepted and undertaken within one month from the date of this correspondence”.  I shall return to the status of the terms of variation shortly.

[10]     On 15 July 2009 Central Otago Water entered into an agreement for the sale and purchase of its business to Ridges.   That is its “water reticulation and management” business was sold.  The purchase price was $100.  As the terms of this

agreement are directly relevant to one of the grounds of opposition, I shall return to them shortly.

[11]     Some months later, but on a date which is not identified in the affidavits, Central Otago Water was placed in liquidation.

[12]     On 23 March 2010 Ridges registered a caveat against the Highland Springs

No. 2 and Highland Springs land under the registration numbers 8453392.1 and

8453392.2,  respectively.     The  caveat  was  based  on  the  easement  agreement concluded in September 2008, the rights to which Ridges considered it had acquired from Central Otago Water in July 2009.

[13]     On 22 July 2010 Ridges received notice that the Highland Springs companies had applied to lapse the caveat.  On 6 August 2010 an interim order was made that the caveat against the Highland Springs’ titles not lapse pending further order of this Court.

Grounds of opposition

[14]     As finally formulated in argument the respondents relied upon three grounds of opposition:

(a)     that the agreement constituted by an exchange of letters dated 18-19

September 2008 to create easements in gross between the Highland Springs’ companies as grantor and Central Otago Water and its associated irrigation company as grantee, was renegotiated and the “previous   agreement”   was   “replaced”   by   a   new   agreement   on

27 February 2010, which in turn lapsed for want of confirmation within one month by Central Otago Water;

(b)that if the September 2008 agreement remains in place, Central Otago Water was the grantee of the easement rights and such rights were not validly assigned to Ridges and were not otherwise enforceable by that company;

(c)     that the July 2009 sale and purchase agreement whereby Central Otago

Water purported to sell its business undertaking to Ridges was a sham.

I trust that these propositions capture the substance of Mr Tohill’s argument.  The grounds contained in the notice of opposition were developed in a different manner in the course of argument and I have not found reconciliation of the two aspects altogether easy.

The relevant legal principles

[15]     The principles applicable in the present context are both well-settled and well-known.  Section 143(2) of the Land Transfer Act provides that in the context of an application for removal of a caveat a Judge may make such order “as to the Court seems meet”.   No guidance is given as to when a caveat should be removed, or sustained.   However, the authorities demonstrate that there is an onus upon the caveator to demonstrate the existence of a reasonably arguable case in support of the interest claimed under the caveat.   The interest must be of a kind recognised in s137(1) of the Act, that is an entitlement or beneficial interest in the land, or an interest by virtue of an unregistered agreement, instrument transmission or trust. Here, of course, the caveator asserts an interest pursuant to an agreement to create an easement.

[16]     Even where the caveator does establish an arguable case for an interest in the relevant land, the Court retains a discretion to make an order removing the caveat. Such discretion will be exercised cautiously, and typically only where no useful purpose would be served by maintaining the caveat.  Importantly, the procedure for removal of the caveat is summary in nature and wholly unsuitable for the determination of disputed questions of fact.  This consideration means that removal is only appropriate where it is patently clear that no valid ground exists for maintaining  the  caveat.    These  principles  are  set  out  in  Pacific  Homes  Ltd  v

Consolidated Joineries Ltd 1 and in earlier decisions of the Court of Appeal.

1      Pacific Homes Ltd v Consolidated Joineries Ltd [1996] 2 NZLR 652 (CA).

Was the September 2008 agreement varied/cancelled in February 2009?

[17]     It is common ground that an agreement to grant an easement in gross was concluded by virtue of the exchange of letters dated 18-19 September 2008. Paragraph 4 of Bodkins’ letter confirmed as much.  And, Mr Shaun McLellan in his affidavit dated 17 August 2010 said at para 18:

The final easement agreement is recorded in correspondence between our respective lawyers dated 18th and 19th September 2008 respectively ...

[18]     However, Mr McLellan in that affidavit went on to assert that Central Otago Water did not comply with the terms of the easement agreement.  He stated that there was a failure to release caveats to enable the sale of lots within Highland Springs No. 2 subdivision; the non-supply of “45,000 litres of water to our blocks of land” and, moreover, the grantee could not achieve this quantity of supply (it was “not sustainable”);  nor  was  the  “infrastructure  put  in  place”  to  enable supply to  the subdivision to occur.

[19]     On the basis of this evidence Mr Tohill submitted that the agreement was “not put into effect”, but rather “repudiated”.   Mr Mulinder, on the other hand, submitted that no steps had been taken by the Highland Springs’ companies to cancel the agreement pursuant to s7 of the Contractual Remedies Act 1979.  In short, there was no evidence of an act of cancellation.  Counsel also pointed out that Highland Springs No. 2 subsequently took the benefit of releases of caveat provided by Ridges to facilitate land sale settlements in the former’s subdivision.  Further, an affidavit in reply from Mr Martin disputed that the agreed supply of water to the subdivision was unsustainable.

[20]     It  follows  in  my  view  that  the  question  of  cancellation  is  eminently contestable.  It cannot be said that the applicant does not have a reasonably arguable case for the interest by way of an easement which it claims.   In short, the factual circumstances are in dispute, and such dispute is not susceptible of resolution in the present summary context.

[21]     In my view a similar situation obtains in relation to the related argument that the agreement was varied as advised in Bodkins’ letter of 27 February 2009 and that the easement agreement lapsed one month later when Central Otago Water failed to accept the terms of variation.  Mr Martin’s reply affidavit asserts that neither Central Otago Water, nor he, “ever agreed to a variation of the agreement”.  Again, it is clear that a factual dispute exists which cannot be resolved at this point.   Moreover, Mr McLellan’s affidavit includes the statement at para 25:

If  we  could  get  the  45,000  litres  promised  then  we  would  register  the

Easement which has always been our position since 2007.

Hence, in the course of his affidavit Mr McLellan blows hot and cold.  On the one hand he asserts that the agreement lapsed in March 2009, but on the other hand he appears to say later in the affidavit that provided the water supply to the Highland Springs No. 2 subdivision is sustainable objection to the registration of an easement would fall away.

[22]     For these reasons, this first ground of opposition fails.

Were the easement rights validly assigned from Central Otago Water to Ridges?

[23]     This, as I apprehended it, was the respondents’ major ground of opposition. [24]     Whether there has been a valid assignment of the easement rights to Ridges is

to be determined by reference to s50 of the Property Law Act 2007.   The section relevantly provides:

How thing in action assigned

(1)   The absolute assignment in writing of a legal or equitable thing in action, signed by the assignor, passes to the assignee –

(a)     all the rights of the assignor in relation to the thing in action; and

(b)     all the remedies of the assignor in relation to the thing in action;

and

(c)     the power to give a good discharge to the debtor.

[25]     There is no dispute that the September 2008 agreement between Central Otago Water and the Highland Springs’ companies is a thing in action.   Hence, whether the thing in action has been validly assigned to Ridges depends on the terms

of the agreement for sale and purchase of a business dated 15 July 2009.  Does that agreement comprise:

(a)     an absolute assignment in writing,

(b)     of a legal or equitable thing in action,

(c)     signed by Central Otago Water as the assignor, and

(d)which passes to Ridges as assignee all the rights, remedies and powers in relation to the easement previous held by Central Otago Water.

[26]     Mr Mulinder submitted that each of these requirements was met.  Hence, his submission continued, Ridges was in a position to obtain an order that the caveat not lapse without the need for the joinder of Central Otago Water in this proceeding.

[27]     Mr Tohill, however, relied upon s52(4) which provides:

The assignor must be joined in any proceeding brought by the assignee against the debtor if –

(a)   only part of a thing in action has been assigned in accordance with

section 50(1); or

(b)   there has been an assignment only in equity of all or part of a thing in action. (emphasis added)

He submitted that the joinder of Central Otago Water in this proceeding was required because “only part of [the] thing in action [had] been assigned” to Ridges and, further, that the assignment of the easement rights was “only in equity”, not a legal assignment.  I shall examine each proposition in turn.

[28]     Does the sale and purchase agreement assign only part of the thing in action? The agreement comprises a standard form document for the sale and purchase of a business.  The description of the business is “water reticulation and management”, being the business known as the Central Otago Water Company.  The purchase price is shown as:

Tangible assets  $100.00

Intangible assets  $- Stock in trade  $-

Total purchase price  $100.00

[29]     Clause  1  of  the  general  terms  of  sale  provides  a  number  of  relevant definitions.  Clause 1.1(4) defines “business” as “the business described on the front page of this agreement, including the assets”.  And, cl 1.1(3) defines “assets” as “the tangible assets and the intangible assets including those listed in schedule 1 of this agreement”.  Schedule 1 lists the assets as “all pumps, water pipes, treatment plant and equipment used in the vendor’s water reticulation system including the bore situated at Waikerikeri Valley Road, Central Otago”.   Finally, cl 1.1(8) defines tangible assets as “the tangible rights, licences and benefits owned or used by the vendor in respect of the business”, including rights under all contracts, licence agreements, intellectual property rights and interests and goodwill.

[30]     Mr  Mulinder  submitted  that  not  only  was  the  agreement  to  create  an easement over the Highland Springs’ land an obvious asset of Central Otago Water’s business, but it was  also an intangible asset sold to Ridges  under the sale and purchase agreement.   In particular the easement rights were plainly within the definition of intangible assets as per cl 1.1(8) of the agreement.  I accept this analysis or, at the very least, that it is a seriously arguable interpretation of the agreement. Nor, in my view, is there any scope for the suggestion that only part of the thing in action was assigned.  Either the benefit of the Highland Springs/Central Otago Water agreement was assigned in whole, or not at all; but there is no apparent scope for part of the easement rights to have been assigned.

[31]     However, does s52(4)(b) apply because the assignment to Ridges was “only in equity ...”.   Mr Tohill sought to develop an argument based on s130 of the Property Law Act 1952 and the then requirements for the assignment of a thing in action.    In  particular,  Mr  Tohill  cited  Lowther  v  Kim,2   in  which  Randerson  J observed that it is settled law that an agreement for the sale and purchase of an interest in land gives rise to an equitable interest only, with transfer of the legal

interest occurring only at the point of settlement – see [21]-[25].

[32]     I do not, however, see the relevance of this.  Under the present s50 both legal and equitable things in action may be assigned if the terms of subs (1) are met.  On the face of it the agreement for sale and purchase is signed by a director of Central

Otago  Water  company.    Plainly  the  agreement  is  in  writing.    I  have  already concluded that it is distinctly arguable the agreement extends to and includes the intangible asset comprised by the September 2008 agreement to create an easement. And, for an assignment to be “absolute” s48 of the Act requires that it not be conditional,  or  by way  of  a  charge  only.    The  present  agreement  for  sale  and purchase is unconditional and certainly assigns the business assets to Ridges, as opposed to merely charging such assets.

[33]     For these reasons I find that the second ground of opposition also fails.  I note that Mr Mulinder raised an alternative argument under ss 90A and 90F of the Land Transfer Act 1952 and the Land Transfer Regulations 2002, based in particular upon the definition in the regulations of a “grantee” in relation to an easement.  A grantee is defined to include the registered proprietor of the dominant land (Central Otago Water Company), but also anyone having “the benefit of an easement in gross”, as well as agents and the like of the grantee.  In light of the conclusion I have already reached, I find it unnecessary to consider this alternative argument.

Is this agreement for sale and purchase a sham?

[34]     Although the notice of opposition referred to the agreement for sale and purchase as giving rise to an “ostensible transfer” of assets to Ridges, and also as being a “sham”, these contentions were not seriously pursued in argument.

[35]     The  circumstances  in  which  a  document  or  a  transaction  is  a  sham  are discussed by Richardson J in NZI Bank v Euro-National.3   The Judge said:

A document may be brushed aside if and to the extent that it is a sham in two situations.    The  first  is  where  the  document  does  not  reflect  the  true agreement between the parties in which case the cloak is removed and recognition is given to their common intentions.  The second is where the document was bona fide in inception but the parties have departed from their initial   agreement   while   leaving   the   original   documentation   to   stand unaltered.   Once it is established that a transaction is not a sham its legal effect will be respected.

Then followed reference to previous discussions of the Court in a number of cases where sham transactions were considered, often in an income tax setting.

[36]     As can be seen, the conclusion that a legal agreement was not in fact intended by the parties to create the legal rights and obligations to which it refers, is not lightly reached.   All the surrounding circumstances will require evaluation.   Here, there is nothing more than an assertion that the parties to the agreement did not intend to sell the business assets to Ridges.  Mr Tohill referred in this regard to the inadequacy of the purchase price, $100, as a significant pointer.

[37]     I do not think that the price can be accorded such significance.  Moreover, the fact is that Ridges has acted upon the agreement.   Its registration of the present caveat, for example, indicates that the company considered and acted as if it had acquired the easement rights.  In these circumstances, and in this summary context, I cannot contemplate a finding that the agreement is a sham.

Result

[38]     I make  an  order  that  caveat  8453392.1  and  caveat  8453392.2  not  lapse. There will be a directions conference on Monday, 7 February 2011 at 9.30 am to prescribe a timetable for the substantive hearing of the proceeding.

[39]     I note and record Mr Mulinder’s concession that the making of an order maintaining the caveat does not indicate that Ridges will no longer cooperate in relation to the sale of lots in the Highland Springs No. 2 subdivision, or even to a refinancing exercise undertaken by the company.

[40]     Costs must follow the event and are awarded on a 2B basis.

Solicitors:

Clark Boyce, PO Box 25433, Christchurch 8144 for Applicant

Bodkins, PO Box 268, Alexandra for Respondents