Roke Realty Limited v Malones Limited
[2013] NZHC 2520
•26 September 2013
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2012-404-2501 [2013] NZHC 2520
BETWEEN ROKE REALTY LIMITED Plaintiff
ANDMALONES LIMITED First Defendant
ITA MALONE LIMITED Second Defendant
ITA MALONE Third Defendant
Hearing: 29-30 August 2013
Appearances: A Holgate for the Plaintiff
P L Rice for the Defendants
Judgment: 26 September 2013
JUDGMENT OF BROWN J
This judgment was delivered by me on 26 September 2013 at 4.45 pm, pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Solicitors: Conveyancing Shop, Auckland
Tompkins Wake, Auckland
Counsel: A Holgate, Whangarei
P L Rice, Auckland
ROKE REALTY LTD v MALONES LTD [2013] NZHC 2520 [26 September 2013]
Introduction
[1] For several years an Irish Tavern called Malones has operated at rented premises on Waiheke Island. When the registered proprietor of the property (being the lessor to Malones) defaulted on its mortgage payments the property was sold by mortgagee sale. The issue in this litigation is whether, and if so to what extent, the purchaser on the mortgagee sale is bound by an unregistered varied lease of the tavern premises to Malones.
Material facts
[2] In August 2000 Ms Ita Malone (“Ms Malone”) established Malone’s Irish Tavern at the premises at 6 Miami Avenue, Surfdale, Waiheke Island (“the premises”). The tavern was run by Malones Ltd (“Malones”). The premises were leased by Ms Malone from Geoffrey and Elizabeth Mitchell for an annual rental of approximately $28,000 plus GST.
[3] In 2006 the Miami Avenue property was purchased from the Mitchells by ItaMalones Ltd (“IML”) and the lease was assigned by the Mitchells to IML. The purchase was financed in material part by a loan to IML from ANZ National Bank Ltd (“ANZ”) secured by a first mortgage. Malones and Ms Malone guaranteed the obligations of IML to ANZ.
[4] A new lease was entered into between IML and Malones dated 14 May 2009 (“the Lease”) for a term of three years with two rights of renewal each of three years and a final expiry date of 30 March 2018. Clause 2.1(d) provided that the annual rent payable as from a relevant review date should not be less than the annual rental payable at the commencement date of the then current term. The permitted business use of the premises was as a tavern.
[5] The Lease provided for an annual rental of $52,991.39 plus GST, payable by monthly rental payments of $4,415.95 plus GST, together with 100 per cent of the specified outgoings. That level of rent did not reflect market rates. As Ms Malone observed in cross-examination it was impossible to have that kind of rent at Surfdale. In fact the mode of computation of the amount of the annual rent was derived from
the sum of the mortgage payments payable by IML under the mortgage to ANZ. Indeed the default interest rate clause specified for a rate of five per cent per annum “above the Landlord’s bankers first mortgage interest rate at time of default”.
[6] Holding over was provided for in clause 37.1 as follows:
If the Landlord permits the Tenant to remain in occupation of the premises after the expiration or sooner determination of the term, such occupation shall be a periodic tenancy only terminable by 20 working days notice at the rent then payable and otherwise on the same covenants and agreements (so far as applicable to a periodic tenancy) as herein expressed or implied.
[7] On the issue of the mortgagee’s consent to any lease, the Lease provided in clause 42.1:
THE Landlord shall not be required to do any act or thing to enable this lease to be registered or be required to obtain the consent of any mortgagee of the property and the Tenant will not register a caveat in respect of the Tenant’s interest hereunder.
[8] The consent of ANZ to the Lease was not sought or obtained.
[9] In due course Malones encountered financial difficulties with the consequence that it was unable to pay the rent instalments and as a result IML in turn defaulted on its payments under the mortgage. Eventually on 20 April 2011 ANZ served a Property Law Act notice. The property was advertised for sale by tender by Waiheke First National Ltd, a real estate agent instructed by ANZ.
[10] ANZ obtained a valuation report for the Miami Avenue property from Darroch Ltd dated 14 July 2001. The valuation, which recorded that it was prepared for finance purposes, valued the property at $465,000 (plus GST if any) on the basis of the market value subject to vacant possession. It ignored the contracted rental figure provided for in the Lease noting that the Lease was between related parties. It assessed the potential net market income of the premises as $37,000.
[11] Early in November 2011 Mrs Louise Roke, who was a real estate agent, considered making an offer on behalf of Roke Realty Ltd (“RRL”) to purchase the Miami Road property from ANZ. It appears that about this time a draft agreement for sale and purchase was prepared. Although the document was not put in evidence
it apparently provided for vacant possession upon settlement of the purchase of the
Miami Avenue property.
[12] However on 9 November 2011 Ms Sarah Williams of Waiheke First National Ltd sent an email to Mrs Roke advising that that afternoon she had received the Lease from ANZ. In those circumstances Ms Williams suggested that Mrs Roke would need to revisit RRL’s offer and probably seek further advice. She also noted that she had received another written offer to purchase which she was obliged to forward to ANZ.
[13] After a series of offers and counter-offers a conditional agreement for sale and purchase between RRL and ANZ was entered into on 9 December 2011 for the purchase of the Miami Road property for $385,000. The agreement for sale and purchase incorporated further terms of sale inserted by ANZ and additional terms of sale inserted by RRL. The agreement was conditional upon a number of conditions for RRL’s benefit. It also contained the following acknowledgement as clause 37:
37 Acknowledgment
The purchaser acknowledges they have received a copy of the Deed of Lease dated 14 May 2009 between Itamalone Limited and Malones Limited relating to the property.
[14] Over a period of time Ms Malone had endeavoured to negotiate with ANZ. She had also sought to find a purchaser of or an investor in the business. Her own residential property was sold in August 2011 and the proceeds were used to repay some of the indebtedness to ANZ. Nevertheless Ms Malone recognised the real likelihood that the property would be sold by mortgagee sale.
[15] Consequently on 11 November 2011 Ms Malone, representing both the landlord, IML, and the tenant, Malones, signed a Deed of Variation of Lease which she had drafted herself (“the Variation of Lease”). The Variation of Lease made several significant changes to the Lease.
[16] First the amount of annual rent was reduced to $37,020 plus GST. The new figure appears to have been derived from the Darroch Ltd valuation which was referred to in the Variation of Lease although no explanation could be provided in
evidence as to the reason for the $20 difference. The new rent was said to commence from 20 December (presumably 20 December 2011) with monthly payments exclusive of GST specified as follows:
August, September, October, November, December, January, February, March and April $3,200 May, June and July $2,740.
[17] A second major change was to the term of the Lease. The Variation of Lease is confusing in this respect, referring as it does to “3 further terms of 5 years each” with review dates of “20th December 2017, 2022, 2027” and a final expiry date of
20 December 2028. The defendants’ position was clarified in the second amended
statement of defence (noted below) which stated in paragraph 2:
(a) The lease was not extended to 20 December 2017 but terminates on
31 March 2012 as per the original lease;
(b) The three rights of renewal each of 5 years commence on 1 April
2012, 1 April 2017 and 1 April 2022;
(c) The final expiry date (if all rights of renewal are exercised) is
31 March 2027 (not 20 December 2028 as shown in the variation agreement which is an error).
[18] Thirdly the permitted business use of the premises was extended to “tavern, offlicence, sportsbar, and restaurant”. There was also a clause stating that no charges would be made for the use of car parks although the Lease itself did not appear to provide for any separate rental in respect of car parks. Finally various specific terms were inserted as to the tenant’s and landlord’s responsibilities for maintenance and other matters.
[19] Again the consent of ANZ to the Variation of Lease was neither sought nor obtained.
[20] On 14 December 2011 Ms Malone wrote to Malcolm Croawell, the Manager of Waiheke First National Ltd, and to ANZ providing a list of details of work required to be done to the premises and enclosing a copy of the Variation of Lease. On receipt of that letter Ms Williams sought instructions from ANZ. Mr Grant Donaldson of ANZ instructed Ms Williams to disclose the Variation of
Lease to RRL and to all other interested persons. Mr Donaldson’s email to
Ms Williams dated 16 December 2011 stated:
Hi Sarah
The variation of lease will need to be disclosed to all prospective purchasers including the party referred to in the conditional agreement.
The Bank confirms as mortgagee that the Bank did not consent to lease of the property, has not consented to the variation of lease and therefore the lease and variation of lease are not binding on the Bank. Please also convey the Bank’s position to all parties expressing an interest in the property including the party referred to in the conditional agreement.
The party referred to in the conditional agreement was RRL.
[21] In accordance with that instruction Ms Williams sent a copy of
Mr Donaldson’s email to Mrs Roke who forwarded it to RRL’s legal advisor.
[22] The conditional agreement did not proceed. However RRL continued to negotiate with ANZ. It obtained a copy of ANZ’s terms and conditions and sought advice about the Lease and the Variation of Lease. On 22 December 2011 RRL and ANZ entered into a further agreement for sale and purchase of the Miami Avenue property for a purchase price of $380,000. Many of the further terms of sale in the
22 December 2011 agreement were the same as those in the conditional 9 December
2011 agreement. However the acknowledgement clause 37 did not appear in the
22 December 2011 Agreement. The possession date was 18 January 2012 although it appears that the transaction actually settled on 17 January 2012.
[23] On 2 February 2012 RRL served on Malones a statutory demand under s 289 of the Companies Act 1993. Relevantly it stated:
TAKE NOTICE that as at 2nd February 2012 you owe ROKE REALTY LIMITED (“the Creditor”) the sum of $4,415.95 plus GST being rent due to the Creditor for the month of February in terms of the lease agreement that you have with the creditor for the property at 6 Miami Avenue, Waiheke Island.
[24] No payment was forthcoming.
[25] Then on 15 March 2012 RRL served another statutory demand on Malones. Relevantly it stated:
TAKE NOTICE that as at 15th March 2012 you owe ROKE REALTY LIMITED (“the Creditor”) the sum of $4,415.95 plus GST being rent due to the Creditor for the month of March in terms of the lease agreement that you have with the creditor for renting the property at 6 Miami Avenue, Waiheke Island.
[26] At the same time a notice under s 245 of the Property Law Act 2007 was served by RRL on Malones requiring Malones to remedy the breach of the Lease. It was in the following terms:
TAKE NOTICE that:
1.As at 1st March 2012 you were to pay ROKE REALTY LIMITED (“the Lessor”) the sum of $4,415.95 plus GST being rent for the month of March 2012.
2.As at 15th March 2012 this sum has now been in arrears for 10 working days, placing you in breach of the lease agreement.
3.The Lessor requires you to remedy this breach of the lease agreement and pay the sum above, owing as rent by 29th March 2012 (10 working days after serving this notice).
4.If you fail to comply with this notice, the Lessor will cancel this lease agreement and without prejudice to any other rights it may have:
4.1 Apply to a Court for an order for possession of the land; or;
4.2 Re-enter the premises.
5.You have the right to apply to a Court in terms of section 253 of the Property Law Act 2007 for relief (a Court order giving redress) against the cancellation of the lease agreement.
6.While you are not obliged to do so, it is in your best interests to seek professional legal advice on your right to apply to a Court in terms of section 253 as notified above.
[27] It appears that pending the resolution of the current dispute a holding arrangement was then negotiated between the parties which provided for rent to be paid on a without prejudice basis.
The pleadings
[28] The statement of claim dated 21 August 2012 alleged that the Variation of Lease was invalid by reason of ANZ having not consented to it and alternatively on the grounds of equitable fraud and unconscionable advantage taking by the defendants. Various orders were sought including the following:
(a) An order declaring that the Variation of Lease was invalid and should be set aside;
(b)An order declaring that Malones was liable to RRL for rent in the sum of $4,415.95 plus GST per month from 17 January 2012;
(c) An order declaring that the Lease between RRL and Malones terminated on 31 March 2012; and
(d) An order declaring that Malones had occupied the property since
31 March 2012 on a periodic tenancy in terms of clause 37.1 of the
Lease.
[29] A statement of defence was filed on behalf of all three defendants dated
17 December 2012. Subsequently on 22 April 2013 an amended statement of defence was filed by the first defendant.
[30] The proceeding originally had a fixture on 12 and 13 August 2013 but on
12 August 2013, when her then barrister sought leave to withdraw, Ms Malone requested an adjournment of the fixture. I granted an adjournment of the matter to a new fixture on 29-30 August.
[31] At the commencement of the hearing Mr Holgate tendered a first amended statement of claim and Mr Rice tendered a second amended statement of defence. I granted leave for the filing of both amended pleadings.
[32] The amendment introduced by the plaintiff was the insertion of the following paragraphs:
16.5 The requirement of the mortgagee’s consent was a reiteration of the
requirements of s. 119 of the Land Transfer Act 1952.
16.6The failure of the Bank to consent to the lease agreement or the variation meant that RRL took the property free of this agreement by virtue of s. 105 of the Land Transfer Act 1952.
[33] The amendment introduced by the defendants was an alternative defence as follows:
6. Prior to entering into the Sale and Purchase Agreement on 22
December 2011 the Plaintiff knew:
a) that the first defendant operated a tavern and restaurant from the premises;
b) that the ANZ Bank would not sell the property to her with vacant possession because there was an existing lease in place between the first and second defendants;
c) that the ANZ Bank had instructed its agent to disclose to her the lease and Variation Agreement;
d) of the terms of the lease and Variation Agreement.
7. The P (sic) therefore intended either:
a) to take the property subject to the 2nd defendant’s rights as set
out in the Variation Agreement; or
b) to defeat the 2nd defendant’s rights under the Variation
Agreement by becoming registered proprietor.
8.In either case, a claim to hold the property after registration discharged from those rights would be fraudulent and dishonest within the meaning of the Land Transfer Act.
The plaintiff ’s case
[34] Mr Holgate argued that s 119 is unequivocal and that a lease of mortgaged premises will only enjoy protection if registered or if the mortgagee consents to it. While not a prohibition on leasing the premises he submitted that the section does have the effect that a lessee risks a future buyer taking the property clear of the lease in the event of a mortgagee sale. In his submission ANZ did not consent and indeed went so far as to wash its hands of the lease altogether (citing the ANZ email quoted at [20] above) and that IML and Malones took that risk with their eyes open.
[35] Consequently it was submitted that the conclusion was inescapable that RRL took title to the property clear of the Lease let alone the Variation of Lease. The closing submission contained the following contentions:
9.In the present instance, the validity of the Variation Agreement has always been challenged while the Lease agreement itself has been treated with less certainty. As it happens, and as a matter of Law, RRL took the property clear of any lease obligations.
10. Consequently, if the property was acquired free of the lease it follows
a fortiori that the Variation Agreement has no validity anymore.
[36] On the issue of fraud, citing the judgment of Baragwanath J in Son v Ko,1
RRL submitted that the allegation of fraud was a long bow to draw where ANZ had conducted a valid mortgagee sale and RRL had purchased the property pursuant to that sale. It relied on the judgment of Wild CJ (in the majority) in Sutton v O’Kane.2
[37] On the issue of unconscionability reliance was placed on the evidence of Mr Bower, a licensed real estate agent and registered valuer, as to the significant benefit derived by Malones from extending its concession to operate the tavern on the property. The absence of an exchange of value for that benefit was advanced to support the submission that Malones had sought to gain an advantage for itself against the future purchaser of the property.
[38] The affidavit of Mr Bower was filed after Ms Malone’s evidence and purportedly in reply to it. In a memorandum filed shortly before the original trial date, objection was taken to the evidence of Mr Bower on the ground that it was not an affidavit in reply and that, if RRL had intended to call evidence of an expert, then the time to do that was when it filed its evidence in support of its claim. The issue was noted in my Minute of 12 August 2013 adjourning the trial.
[39] While various parts of the Bower affidavit are structured in response to the evidence in Ms Malone’s affidavit, I consider that evidence of an expert should have been served as part of the plaintiff’s principal evidence. While in the circumstances
of the hearing I received the evidence on a de bene esse basis, I do not place
1 Son v Ko (2006) 7 NZCPR 649.
2 Sutton v O’Kane [1973] 2 NZLR 304 (CA).
significant weight on it in the particular circumstances in which it came before the
Court.
The defendants’ case
[40] The defendants’ submissions focussed primarily on the issue of fraud in the context of the Land Transfer Act 1952. While recognising that fraud in that context means actual fraud3 Mr Rice cited Salmond J’s proposed test for fraud of the “duty of an honest man” in Waimiha Sawmilling Co Ltd (In Liq) v Waione Timber Co Ltd4
and referred to the observations of Richmond J in Locher v Howlett5 in support of
the proposition that a failure to make a full inquiry where the circumstances demand it is dishonest.
[41] He argued that the present case is stronger than cases where the registered proprietor merely has a suspicion that an unregistered interest exists. It was not disputed that RRL had full knowledge of the first defendant’s rights under the Lease and Variation of Lease but the uncertainty in the present case was said to relate not to the existence of the unregistered interest but whether it was legally binding. Furthermore RRL had full knowledge of the unregistered interest prior to entry into the sale and purchase agreement on 22 December 2011.
[42] Reliance was placed on the following passages from the cross-examination: first to demonstrate Mrs Roke’s understanding of the bank’s position by reference to the ANZ email of 16 December:
A: Yeah. Confirming that the bank did not consent to lease of the property and has not consented to the variation of lease and therefore the lease and variation of the lease are not binding on the bank.
[43] Secondly, in response to a question as to why there was a rush to enter the
22 December 2011 agreement:
A: The rush was that it was nearly Christmas and most people were going on breaks and things and at one stage there was another party interested in the property, Sarah told me.
3 Dishonesty of some sort as opposed to constructive or equitable fraud.
4 Waimiha Sawmilling Co Ltd (In Liq) v Waione Timber Co Ltd [1923] NZLR 1137 (CA).
5 Locher v Howlett (1894) 13 NZLR 584 (SC).
[44] Thirdly, in response to the proposition that Mrs Roke had not received any written advice as to how to proceed:
A: That was all that at that point in time could really be, as I said, could be concluded at that time of the year and that was a decision that I had to make, that the lease was disclosed, that the bank did not approve it and I decided to proceed on that.
Q: At that time did you intend to observe the variation agreement?
A: I didn’t think that variation agreement would stand up in Court and that’s why we are here today.
[45] That section of the cross-examination concluded with the following exchange:
Q: So is your evidence that I’m under pressure, there’s a possibility of another purchaser waiting in the wings, we’re coming up to Christmas, I’m just going to proceed with concluding a contract with the mortgagee and we’ll find out later in Court whether this variation agreement stands up or not, is that a fair summary?
A: First of all, I did not think that the rent probably would have been paid. Secondly, that, yes, I did think that that wouldn’t stand up from the information that I had, which was little information, yes, but that was all that was available to me at the time and I made the decision they buy it.
Q: Is it fair to say, Ms Roke, you took the risk that you might be wrong? A: All mortgagee sales are risky. And yes, that is a risk that I took.
[46] Subsequently in the cross-examination Mrs Roke indicated greater confidence as to the position concerning the Variation of Lease. When it was suggested to her that most people would not have touched the proposed agreement with a barge pole until they determined whether they were bound by the terms or not she said:
A: Well, looking at those terms and looking that the bank did not grant that variation I was certain that that wouldn’t stand up.
[47] The defendants contended that Mrs Roke’s conduct fell squarely within the dictum of Richmond in Locher v Howlett, in particular that Mrs Roke knew of the defendants’ rights under the Variation of Lease and, although she made some perfunctory inquiries which established that ANZ had not consented to the Variation
of Lease, she was aware that this did not conclude the matter. Mr Rice submitted that the facts of this case were indistinguishable from those in Merrie v McKay.6
[48] So far as the protection provided by ss 105 and 119 is concerned, reliance was placed upon New Zealand Meat Nominees Ltd v Sim7 where Tipping J observed:
What the Plaintiff is seeking to do is to enforce its unregistered lease against the purchaser from Westpac, namely Rantarin, on the basis that it would be fraudulent for Rantarin not to acknowledge its interest. I am satisfied overall that the plaintiff has an arguable case that Rantarin cannot claim protection from the combined effect of sec 119 and 105.
[49] On the issue of unconscionability, in addition to pointing to the difficulty which the plaintiff had in seeking to set aside an agreement which the parties to the agreement wished to uphold, it was submitted that in order for a bargain to be characterised as unconscionable there must be serious disadvantage on the part of the weaker party, known to the stronger party and exploitation of that advantage by the stronger party. None of those elements were said to be present.
[50] Finally, albeit in the context of a submission about an in personam claim, the defendants submitted:
24.The plaintiff must elect whether the whole of the agreement is set aside or not at all. It cannot pick and choose which parts it will accept and which it will reject. By issuing statutory demands for rent due “in terms of the lease agreement” the plaintiff has accepted it is bound by the lease as a whole (including any amendments) for it would be inequitable for the plaintiff to hold that the lease is still on foot and therefore binds the defendant but only at the old, artificially inflated amount.
My conclusions in summary
[51] The course of events which unfolded in this matter was somewhat unusual. That may account in material part for the legal positions taken by the opposing parties and the submissions which were then made as a consequence. In this judgment I address all the various submissions made even though I do not consider,
for example, that this is a case where fraud arises for consideration.
6 Merrie v McKay [1897] 16 NZLR 124 (SC).
7 New Zealand Meat Nominees Ltd v Sim (1990) 1 NZ ConvC 190, 478.
[52] In summary my conclusions are as follows:
(a) Because ANZ had not consented to the Lease or to the Variation of Lease, RRL would have been entitled to take a transfer of the Miami Avenue property free of the Lease (and the Variation of Lease).
(b)If RRL had elected to take a transfer of the Miami Avenue property free of the Lease (and the Variation of Lease) RRL would not have been vulnerable to an allegation of fraud by declining to recognise the unregistered leasehold interest even with its knowledge of the Lease.
(c) RRL elected to take the Miami Avenue property subject to the Lease and sought to enforce the terms of the Lease by the issue of statutory demands for rent which it asserted was due to it under the Lease.
(d)It was not open to RRL to purport to adopt the Lease in its form prior to the Variation of Lease.
(e) Having elected to adopt the Lease it is not open to RRL to endeavour to challenge the Variation of Lease by resort to the equitable doctrine of unconscionable bargain.
(f) Consequently RRL’s election voluntarily to adopt the Lease had the
consequence that RRL became bound by the Lease as varied.
[53] I proceed to record my reasoning for all the propositions set out in [52] above notwithstanding that the actual ratio of my judgment is concerned with the fact and consequences of the adoption of the Lease by RRL.
Implications of the absence of consent by ANZ to the Lease and Variation of
Lease
[54] Section 119 of the Land Transfer Act 1952 states:
119 Lease not binding on mortgagee without consent
No lease of mortgaged or encumbered land shall be binding upon the mortgagee except so far as the mortgagee has consented thereto.
[55] Section 105 of the Land Transfer Act 1952 states:
105 Transfer by mortgagee
Upon the registration of any transfer executed by a mortgagee for the purpose of exercising a power of sale over any land, the estate or interest of the mortgagor therein expressed to be transferred shall pass to and vest in the purchaser, freed and discharged from all liability on account of the mortgage, or of any estate or interest except an estate or interest created by any instrument which has priority over the mortgage or which by reason of the consent of the mortgagee is binding on him.
[56] In discussing those sections in Cashmere Ltd v Carroll8 the Supreme Court said:
[72] Section 62 of the Land Transfer Act states the general principle of indefeasibility under that Act. The registered proprietor of land holds the estate subject to interests notified on the register, but absolutely free from all other interests except as the Act specifies. Section 105 applies on registration of a transfer by a mortgagee exercising a power of sale. It states the effect of the principle of indefeasibility in relation to the unencumbered title received by the purchaser. But s 105 also incorporates its own exceptions, one of which is “an estate or interest created by any instrument which … by reason of the consent of the mortgagee is binding on him”. Section 119 mirrors s 105 and is addressed directly to leases.
[57] It being common ground that ANZ did not consent to either the Lease or the Variation of Lease it follows that I agree with the tenor of RRL’s argument in [34] above. Had RRL adopted and adhered to that position then, subject to any issue of fraud, Malones as lessee would have been required to vacate the premises.
[58] However RRL did not give notice to Malones requiring it to vacate the premises. Instead it issued notices of demand for the rent payable under the Lease. The implications of RRL so doing are discussed below. However before addressing that issue I briefly discuss the issue of fraud having regard to the alternative defence which was the subject of the amendment at trial referred to at [33] above, the
defendants’ submissions and in particular NZ Meat Nominees Ltd v Sim.
8 Cashmere Ltd v Carroll [2009] NZSC 123; [2010] 1 NZLR 577 at [72].
Fraud
[59] A useful distillation of the New Zealand approach to fraud in the context of the Land Transfer Act 1952 is contained in the paper “Indefeasibility under the Torrens System in New Zealand” by the Right Honourable Justice Blanchard in the volume of essays Torrens in the Twenty-First Century.9 In exploring the difference between the Australian and New Zealand case law the paper states:
Section 182 famously directs that knowledge that a trust or unregistered interest is in existence shall not of itself be imputed as fraud. It draws a contrast between notice, “direct or constructive”, and “knowledge”. That strongly suggests that “knowledge” must mean actual knowledge, which itself includes wilful blindness.
The divergence between Australian and New Zealand case law relates to what extra factor must be present beyond mere knowledge before a registered proprietor’s conduct can be regarded as fraudulent. The first question one would ask is, - knowledge of what? The section speaks of knowledge of the existence of the trust or unregistered interest. One could well know of its existence but know little or nothing of its terms. The view long taken in Australia is that “existence” includes the existence of particular terms of the trust or unregistered interest and, in this respect, I do not understand the New Zealand authorities to be any different. But what about a person who proceeds to register knowing that the transferor is acting in breach of those terms, whether deliberately or inadvertently? The point of divergence in the New Zealand cases concerns whether that additional factor
– knowledge that a breach is occurring of those terms – is sufficient to justify characterising the purchaser’s conduct as dishonest. As already
noted, the Australian view is that it is not, presumably on the basis that the
vendor’s conduct, of which the purchaser has knowledge, is not itself fraudulent, in the sense that the vendor did not act with fraudulent intent. So, for the purchaser to take advantage of that vendor’s conduct is not regarded as fraudulent. Much would seem to turn on how the Court characterises the vendor’s conduct. For example, if a vendor, to the purchaser’s knowledge, is acting, say, in breach of trust, is that breach an act of dishonesty on the part of the vendor, or is the vendor merely mistaken about the terms of the trust?
(citations omitted)
[60] The paper goes on to note the finding in Locher v Howlett that, while a person is not affected by knowledge of the mere existence of a trust or interest, he or she can be affected by knowledge that the trust is being broken or that the owner of
the unregistered interest is being improperly deprived of it. Similarly in Merrie v
9 Right Honourable Justice Blanchard “Indefeasibility under the Torrens System in New Zealand”
in David Grinlinton (ed) Torrens in the Twenty-First Century (LexisNexis, Wellington, 2003) at
29.
McKay it was the deprivation of the plaintiff’s rights under the agreement with the original registered proprietor that constituted the fraud in the defendant’s repudiation of the agreement.
[61] The question then becomes what “rights” would the defendants have been deprived of when an unregistered lease, which had been disavowed by the mortgagee, was not adopted by a purchaser acquiring the property at a mortgagee sale? Certainly RRL, like ANZ, had notice of the unregistered Lease (and also the Variation of Lease).
[62] The authority relied upon by RRL, Son v Ko, concerned a very similar factual scenario to the present case. There Baragwanath J said:
[39] While it is trite that fraud unravels all, there is simply no suggestion that the plaintiffs were in any way involved in the events that led to the mortgagee sale of Mr and Mrs Ko’s property.
[40] I do not doubt that where fraudulent purchasers could be said to be party to sale by an innocent mortgagee relief could be available against them. But that is not asserted. In the absence of any suggestion of fraud on the part of the mortgagee I am unable to see how the plaintiffs’ Land Transfer title acquired from the mortgagee could be impeached. Mrs Ko was not deprived of her land by fraud. The plaintiffs did not become registered as proprietors through fraud but through exercise by the mortgagee of its power of sale under a mortgage that preceded Mr and Mrs Ko’s purchase of the land and which was superior to their title. The plaintiffs’ title was not derived from or through a person registered through fraud but from and through the mortgagee.
[41] For an allegation of fraud to be made out the facts would have to be radically different. For example, presumably New World would have been “deprived by fraud” of its land (viz. its leasehold interest) had Mr and Mrs Ko sold their shares in New World to third parties and then sold the property to fourth parties who knew of the lease. But the interests of New World and Mrs Ko were never opposed. All that happened was that payments under the mortgage were not maintained and the mortgagee proceeded to sale.
[42] In the absence both of joinder of the mortgagee as a party and of evidence that the mortgagee knew of the lease at any time, let alone before it made its advances, it cannot be treated as implicated in any fraud. Its title cannot be challenged and I cannot see how the plaintiffs’ title acquired from it can be challenged.
[63] One point of distinction between the present case and Son v Ko is that ANZ
knew of the Lease and of the Variation of Lease at the time when it executed the
22 December 2011 agreement. However I do not consider that ANZ can be
considered to be guilty of or implicated in any fraud when it does no more than invoke the statutory protection in s 119. When a mortgagee makes clear that it is invoking s 119 then, if there is no additional impugning conduct on the part of a purchaser at a mortgagee sale, nor do I consider that the purchaser can be said to be fraudulent simply by reason of the fact that the purchaser also had notice of the unregistered lease to which the mortgagee had not consented.
[64] That conclusion finds support in an article by Mr R P Thomas in “Land Transfer Fraud and Unregistered Interests”.10 Mr Thomas analyses a number of situations which are either hypothetical or taken from existing case-law in order to identify what may constitute fraud in land transactions. His examples are presented on a perceived scale of decreasing moral obloquy. Two examples which he concludes would not amount to fraud in New Zealand are:
(g)A party who has knowledge but honestly believes the unregistered interest will not be binding and takes title with that belief;
(h)A party put on notice of an unregistered interest who receives legal advice that the interest will not be binding once registration is achieved.
[65] Bunt v Hallinan11 is cited as authority for the category (g) example. Assuming for the purposes of discussion that a lease which had not been consented to by a mortgagee qualified as an unregistered interest, then I would view the present case as falling within category (g).
[66] On the face of it Tipping J’s conclusion in NZ Meat Nominees Ltd v Sim referred to at [48] above is an obstacle to that conclusion. However it needs to be borne in mind that that was an interim injunction case and the conclusion on the substance of the claim was only as to the threshold requirement of a serious question
to be tried.12
10 R P Thomas “Land Transfer Fraud and Unregistered Interests” (1994) NZRLR 218 at 220.
11 Bunt v Hallinan [1985] 1 NZLR 450 (CA).
12 As noted in Blanchard J’s paper at n 9 above the Court was obviously very conscious that the decision was made on an interim basis.
[67] Furthermore the finding of the existence of a serious question needs to be read in the context of His Honour’s earlier observations about the requirements for fraud. He said:13
This is not the place for any detailed discussion of the authorities. It is sufficient for present purposes to deal with the law in summary. All the cases demonstrate that fraud for the purposes of the Land Transfer Act requires dishonesty of some sort: Assets Co Ltd v Mere Roihi [1905] AC 176 at p 210; (1905) NZPCC 275 at p 298. Dishonesty must not be found solely by reason of knowledge of an unregistered interest. Fraud or not is a question of fact and all the circumstances bearing on the point must be closely considered. It is certainly fraud if the object of a transaction is to deprive someone of a known existing unregistered interest.
[68] I do not consider that it can be said that in the present case the object of the transaction was to deprive someone of a known existing unregistered interest. The object of the transaction from the perspective of RRL was to acquire the Miami Avenue property which was being sold by mortgagee sale. Furthermore as discussed below, at least so far as the Lease was concerned, this was not a case where it transpired that the purchaser sought to deprive the tenant of an existing unregistered interest.
[69] Consequently it is my conclusion that had RRL elected to take the transfer of the property free of the Lease (and the Variation of Lease) as recognised in paragraph
16.6 of the first amended statement of claim then RRL would not have been vulnerable to an allegation of fraud by reason of declining to recognise the unregistered interest of the tenant.
RRL’s adoption of the lease
[70] Notwithstanding ANZ’s statement of its position in the email of
16 December 2011 and the stance recorded in paragraph 16.6 of the first amended statement of claim, namely that the absence of consent by ANZ meant that RRL took the property free of the Lease, in fact RRL did not proceed on that basis.
[71] On the contrary, RRL chose to proceed on the basis that it was the lessor under the Lease. Indeed it served two statutory demands in relation to the non-
13 At 190,481.
payment of sums which it described as rent due to it in terms of a lease agreement between Malones and RRL.
[72] However as those statutory demands reflect, the sum which was required to be paid was the monthly instalment under the Lease prior to the making of the Variation of Lease, namely $4,415.95. From that it appeared that RRL was purporting to adopt the Lease but without the changes made by the Variation of Lease.
[73] Furthermore that intention seems to have been formed prior to the entry into the 22 December 2011 agreement. In her evidence Mrs Roke had referred to the fact that she had seen the property placed on and off the market several times and she thought that it would make a good investment property for RRL. When asked in cross-examination why she thought that, the following evidence was given:
A: Long term investment. Long term investment because it’s a growing
population over there.
Q: Did you intend to develop it? A: Possibly.
Q: Did you intend that Molly Malone should stay in there? A: As in the pub side of it?
Q: Yes. A: Yeah.
Q: But at the old rent of $52,000 – odd? A: Hopefully.
[74] While RRL could have proceeded on the basis that it took the property free of the Lease, it was certainly open to RRL to elect to adopt the Lease. I view that course as being an instance of the common law doctrine of election. While that doctrine most commonly arises in situations where a party to a contract has breached the contract and the other party then has an election as to the course he or she will
follow, the doctrine is not limited to circumstances of breach.14
[75] Consequently RRL could elect to adopt the Lease and require Malones to continue paying rent. However the issue is whether it was open to RRL to purport to adopt the Lease in its form prior to the Variation of Lease.
[76] In my view if RRL voluntarily elected to assume the role of lessor in respect of a Lease which it knew the mortgagee had not consented to, then it is not open to RRL to pick and choose so far as the provisions of the Lease are concerned. RRL entered into the agreement for sale and purchase on 22 December 2011 knowing of both the Lease and the Variation of Lease and the terms of both. RRL then elected to assume the role of lessor and to press for payment of rent for the premises. In my judgment RRL cannot elect to take the benefit of the Lease divorced from the terms of the Variation of Lease.
Unconscionable bargain
[77] In its first amended statement of claim RRL challenges the Variation of Lease on the grounds of “equitable fraud and unconscionable advantage taking”. Two alternative bases of challenge are advanced. It is first alleged that the Variation of Lease was completely at odds with commercial reality in that no commercial agreement in the ordinary course of business would provide for a lease period of the length of the Variation of Lease, for free use of the carparks or for an expansion of business activities, while at the same time reducing the rent payable. It alleged that the defendants knew that IML was at a material disadvantage because Ms Malone was not acting in terms of her fiduciary duty to its interests but specifically in the
interests of Malones which were adverse to it. Consequently IML was forced to
14 Motor Oil Hellas (Corinth) Refineries SA v Shipping Corporation of India [1990] 1 Lloyd’s Rep
391 at 398 (HL); Jansen v Whangamata Homes Ltd [2006] 2 NZLR 300 (CA) at [19].
accept a very disadvantageous Variation of Lease and RRL was similarly disadvantaged as the successor in title to IML.
[78] The alternative challenge alleged that the defendants knew that IML’s ownership of the property would cease in the foreseeable future, that the purchaser of the property would succeed IML as the lessor and any successor would be materially disadvantaged by the Variation of Lease.
[79] The only authority cited by either party (in fact by the defendants) was Attorney General for England and Wales v R.15 Strictly speaking that case addresses English law. While the differences may not be substantial nevertheless, as Tipping J there recognised, the English approach to unconscionable bargains may not have developed to the same extent or in exactly the same way as its New Zealand counterpart.16 A more pertinent and recent review for New Zealand purposes is the decision of the Supreme Court in Gustav & Co Ltd v Macfield Ltd where it was said:17
[6] It is not necessary, for present purposes, to do more than summarise the basis upon which unconscionable transactions are subject to equitable intervention. The Court of Appeal dealt fully and accurately with the authorities which discuss the relevant general principles and no issue was raised in this Court regarding those principles. Equity will intervene when one party in entering into a transaction, unconscientiously takes advantage of the other. That will be so when the stronger party knows or ought to be aware, that the weaker party is unable adequately to look after his own interests and is acting to his detriment. Equity will not allow the stronger party to procure or accept a transaction in these circumstances. The remedy is conscience-based and, in qualifying cases, the Court intervenes and says that the stronger party may not take advantage of the rights acquired under the transaction because it would be contrary to good conscience to do so. The conscience of the stronger party must be so affected that equity will restrain that party from exercising its rights at law. All necessary consequential orders may be made in aid of the primary remedy.
[80] It is also convenient to note the Court of Appeal’s full summary referred to by the Supreme Court.18
15 Attorney General for England and Wales v R [2002] 2 NZLR 91 (CA).
16 At [84].
17 Gustav & Co Ltd v Macfield Ltd [2008] NZSC 47, [2008] 2 NZLR 735 at [6].
18 Gustav & Co Ltd v Macfield Ltd [2007] NZCA 205 at [30].
[30] We do not propose to analyse these authorities in detail. Rather, we derive the following principles from them. The principles stated are not exhaustive, but are sufficient for the purposes of this case.
1Equity will intervene to relieve a party from the rigours of the common law in respect of an unconscionable bargain.
2This equitable jurisdiction is not intended to relieve parties from “hard” bargains or to save the foolish from their foolishness. Rather, the jurisdiction operates to protect those who enter into bargains when they are under a significant disability or disadvantage from exploitation.
3A qualifying disability or disadvantage does not arise simply from an inequality of bargaining power. Rather, it is a condition or characteristic which significantly diminishes a party’s ability to assess his or her best interests. It is an open-ended concept. Characteristics that are likely to constitute a qualifying disability or disadvantage are ignorance, lack of education, illness, age, mental or physical infirmity, stress or anxiety, but other characteristics may also qualify depending upon the circumstances of the case.
4If one party is under a qualifying disability or disadvantage (the weaker party), the focus shifts to the conduct of the other party (the stronger party). The essential question is whether in the particular circumstances it is unconscionable to permit the stronger party to take the benefit of the bargain.
5Before a finding of unconscionability will be made, the stronger party must know of the weaker party’s disability or disadvantage and must “take advantage of” that disability or disadvantage.
6The requisite knowledge may be that of the principal or an agent, and may be actual or constructive. Factors associated with the substance of a transaction (for example, a marked imbalance in consideration) or the way in which a transaction was concluded (for example, the failure of one party to receive independent advice in relation to a significant transaction) may lead to a finding that the stronger party had constructive knowledge. So, in the particular circumstances the stronger party may be put on enquiry, and in the absence of such enquiry, may be treated as if he or she knew of the disability or disadvantage.
7“Taking advantage of” (or victimisation) in this context encompasses both the active extraction and the passive acceptance of a benefit. Accordingly, as Tipping J said in Bowkett at 457, an unconscionable victimisation will occur where there are:
… circumstances which are either known or which ought to be known to the stronger party in which he has an obligation in equity to say to the weaker
party: no, I cannot in all good conscience accept the benefit of this transaction in these circumstances either at all or unless you have full independent advice.
8If these conditions are met, the burden falls on the stronger party to show that the transaction was a fair and reasonable one and should therefore be upheld.
[81] As that summary reflects, challenge on the basis of unconscionable bargain will not arise merely because an agreement is viewed as uncommercial or not in the ordinary course of business. Rather the analysis focuses on the relative positions of the parties to the bargain with the essential question being whether, in the particular circumstances, it is unconscionable to permit a stronger party to take the benefit of the bargain.
[82] In the present case where the parties to the Lease and to the Variation of Lease were related parties and where both operated through the persona of Ms Malone it is difficult to cast the transaction involving the Variation of Lease as one in which a stronger party has taken advantage of a weaker party. The fact is that Ms Malone acted for both IML and Malones in preparing and executing the Variation of Lease dated 11 November 2011.
[83] A somewhat similar scenario was considered by Woolford J in Body Corporate 396711 v Sentinel Management Ltd as the following paragraphs demonstrate:19
[207] The plaintiffs accept that Mr Martin effectively controlled the Body Corporate. Personally he was under no disability yet the plaintiffs say the Body Corporate was because Mr Martin favoured his interests in SML over those of the Body Corporate.
[208] I do not consider that the Body Corporate was under a disability because of decisions taken by Mr Martin about various aspects of the agreement. The disability or disadvantage which is at the heart of the unconscionable bargain doctrine must relate to the capacity of the affected party to reach proper reasoned decisions. Here, Mr Martin was clearly able to reach proper reasoned decisions both for the Body Corporate and for SML.
[209] The plaintiffs submit that Mr Martin’s interest in the development
was inherently at odds with the Body Corporate’s interest citing Arrow Asset
Management. The fact that Mr Martin may have had fiduciary duties to the Body Corporate does not of itself mean that the unconscionable bargain doctrine is engaged. Mr Martin’s bargaining abilities are to be attributed to both SML and the Body Corporate for the purposes of assessing whether the Body Corporate was acting under a disability. Here there was an equality of bargaining power. Mr Martin was acting for both parties.
[84] I consider that Ms Malone’s situation and relationship with IML and Malones
is essentially similar to that of Mr Martin in Sentinel Management.
[85] From the perspective of RRL Ms Malone is perceived to have acted more in the interests of Malones than IML. It is noteworthy however that Ms Malone did not see it that way. When it was put to her that the addition of the three further review dates was quite an advantage for Malones, she replied:
A: Well, actually, you know, that could be an advantage for both landlady or tenant ... The landlady is getting a tenant which is going to be there for 15 years and a good security. It’s advantage for both people really.
[86] Although it was not pleaded or explicitly argued, the theme of RRL’s contention appeared to involve an implicit allegation of an absence of consideration for the Variation of Lease moving from Malones to IML. If that contention had been in play, then in the circumstances of this case and in the light of the evidence of Ms Malone referred to above I would have considered that consideration would be
found in the non-monetary benefit to IML of securing a tenant for a longer period.20
[87] In my view the perception of RRL that Ms Malone had favoured the interests of Malones more than IML when executing the Variation of Lease on their respective parts does not engage the doctrine of unconscionable bargain.
[88] Still a further consideration is whether RRL would in fact have had standing to raise a challenge to the Variation of Lease whether by reliance upon the doctrine of unconscionable bargain or alleged lack of valuable consideration. RRL is not a party to the Variation of Lease. Nor did it succeed by operation of law to the role of IML as lessor. As discussed above RRL could have taken a transfer of the property free of the Lease. It does not follow from the fact that RRL elected for its own reasons to adopt the Lease that it thereby became entitled to challenge the Variation
of Lease previously executed either for lack of valuable consideration or unconscionable bargain.
[89] If RRL wished to avoid any obligations under the Lease its remedy at law was to take a transfer of the property from ANZ free of the Lease. In my view this case invites the application of the equitable maxim that a party seeking to resort to equity must normally first have resort to his or her legal remedies, for equity supplements the law.21
[90] I do not consider that it is open to RRL to forgo its remedy at law (whereby the Lease in its varied form would have been avoided) but then by recourse to an equitable remedy to seek to secure the benefits of the Lease free of the changes effected by the Variation of Lease.
[91] Having elected not to take a transfer of the property free of the Lease RRL cannot seek to deploy equitable principles in order to secure for itself the benefit of the Lease unaffected by the Variation of Lease of which at all material times RRL was aware.
Disposition
[92] RRL having failed in its various causes of action there will be judgment for the defendants. The defendants are entitled to one set of costs on a category 2B
basis.
Brown J
4
1