Smith v Aird

[2018] NZHC 2852

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

I TE KŌTI MATUA O AOTEAROA TE WHANGANUI-A-TARA ROHE

CIV-2018-485-445

[2018] NZHC 2852

BETWEEN

MALCOLM ROY SMITH

Applicant

AND

DAVID AIRD

Respondent

Hearing:	11 October 2018
Appearances:	Mr John Gwilliam for applicant Mr Andrew Bell for respondent
Judgment:	5 November 2018

JUDGMENT OF ASSOCIATE JUDGE JOHNSTON

[1]    The respondent, Mr David Aird, is a boat builder. He owns a property in Upper Hutt.   The applicant, Mr Malcolm Smith, works in the building industry.    Mr Aird and Mr Smith are acquaintances, if not friends. They share an interest in boating. Up until the events I am about to describe, they would get together occasionally and talk about boats.

[2]    At some point during 2012, Mr Aird left the country to take up a position abroad. He left his property unoccupied. By mid-2017 it had become dilapidated. Around this time, Mr Aird and Mr Smith had a telephone discussion. There are differences between their accounts as to who initiated this. But they reached an arrangement concerning the property.

[3]    It was agreed that Mr Aird would engage Mr Smith to renovate the property. Mr Aird obviously wished to rent it and he seems to have accepted that before he could

SMITH v AIRD [2018] NZHC 2852 [5 November 2018]

realistically expect to do so it would have to be tidied up. Various options for funding the work were discussed. In the end, it was agreed that Mr Smith would incur the costs involved, which both men appear to have accepted would be substantial, in consideration of being allowed to rent the property for a period to recoup those costs.

[4]I pause here to mention two areas of conflict in the affidavit evidence:

(a)Mr Smith’s evidence is that the arrangement was that he would have a free hand in renting the property out so as to enable him to recover the cost of the renovations. Mr Aird says that he agreed to Mr Smith renting the property out to a Ms Lily Meyrick and her partner (whose role in the narrative is expanded on below), on the basis of Mr Smith’s assurances that he knew them and that they would be responsible tenants, and that he was not otherwise authorised to lease the property out. I prefer Mr Smith’s evidence. It would have made no commercial sense for Mr Smith to agree to incur the costs of renovating the property had he not been able to see his way clear to recovering those costs by leasing it, and I do not accept that he would have assumed that level of risk without having a substantial level of control over the leasing.

(b)There is a difference between the parties as to the period over which this arrangement would extend.  Mr  Smith  refers  to  three  years.  Mr Aird talks of one. I am not sure that anything turns on this, but I am inclined to prefer Mr Smith’s evidence simply on the basis that a right to recover rent for one year, during which time the renovation work would have to take place, would not seem to be sufficient to recover the costs involved (let alone compensate Mr Smith for the risk involved).

[5]    Mr Aird facilitated Mr Smith obtaining access to the property. The renovation work was commenced. I infer that Mr Smith anticipated that any roofing work would be done by another tradesman, a Mr Darren Meyrick, a roofing contractor and the father of Ms Lily Meyrick to whom Mr Smith agreed to rent the property. The renovation work proceeded. Ms Meyrick and her partner moved in straight away, but on the basis they would only start paying rent when the renovations were complete.

[6]    In early December 2017 Mr Aird arrived back in the country for a short time. He made an unannounced visit to his property. Plainly he did not like what he saw. He was unimpressed with  the  renovations.  He  did  not  like  the  way  in  which Ms Meyrick and her partner were looking after the property. Both parties make what appear to me to be extravagant allegations about what happened over the next 24 hours or so. I do not need to canvass this. There was an altercation. The police became involved. In due course Mr Aird left.

[7]    By this stage — towards the end of 2017 — Mr Smith’s evidence is that the bulk of the renovation work had been completed. He says that there was still work to be done, including some exterior painting. His evidence is that the value of the work completed was $45,641. He has provided a schedule of the costs involved (prepared for this application as I understand it). Obviously, I can have no view in relation to this. In any event, Mr Aird’s visit brought the parties’ arrangements to an end.

[8]    Mr Smith then contacted his solicitor and the caveat which is the subject matter of this proceeding was lodged. That occurred on 22 December 2017. The caveat is in the usual form identifying the parties and the property. In the section which identifies the basis for Mr Smith’s claim and the lodging of the caveat the following appears:

Pursuant to an agreement for services between Malcolm Smith the caveator and David Aird the registered proprietor to make improvements to the land, the registered proprietor granting to the caveator in consideration of financial contribution made by the caveator, an equitable charge over the registered proprietor’s interest in the said land.

[9]    Mr Aird applied to have the Caveat lapse and Mr Smith now seeks an order sustaining his caveat pursuant to ss 145 and 145A of the Land Transfer Act 1952. The essential issue for determination is whether Mr Smith can establish an arguable case to the effect that he has a caveatable interest in the property that falls within s 137 of the Act.

[10]Materially, s 137 of the Act refers to claims by a caveator:

… to be entitled to, or to be beneficially interested in, the land or estate or interest by virtue of any unregistered agreement or other instrument or transmission, or of any trust expressed or implied, or otherwise …

[11]   Mr Smith’s case is essentially that, it having been agreed that he would carry out work on the property and incur the costs involved, it was a component of the agreement that he would be entitled to rent out the property in order to recover those costs. He relied on that agreement in incurring costs and carrying out renovation work. He says that by doing so he contributed materially to the value to the property. On that basis, Mr Gwilliam for Mr Smith contends that he has a viable argument that he has a beneficial interest in the property by reason of constructive trust and he should be entitled to pursue that claim.

[12]   Mr Gwilliam’s submission was that the arrangement between the parties was not the conventional sort where a property owner engages a tradesman to carry out work on a property and then fails to pay the contractor. He said that the arrangement here was much more closely associated with the property itself. He emphasised that the parties had agreed that Mr Smith would incur all costs associated with the renovations and would only recover his costs if he were able to then rent out the property. Thus, Mr Gwilliam submitted, Mr Smith assumed a significant degree of risk, as on day one the renovation costs were unknown and he might not have been able to secure a tenant or tenants for the property. The arrangements also necessarily involved Mr Smith acquiring some sort of possessory entitlement in the nature of a lease or a licence so as to enable him to take control of the property to carry out the renovations and then lease it.

[13]   On those bases, Mr Gwilliam submitted that the agreement involved Mr Smith acquiring proprietary interests of one sort or another in the property. He contended these are interests of a nature which are likely to enable him to succeed in an argument for the imposition of an institutional constructive trust.

[14]   Mr Gwilliam referred to the historical evolution of the approach that the courts have taken to the interpretation of s 137 of the Act. It does not seem to me to be necessary to go into this. First, I did not understand Mr Bell to argue for a narrow interpretation of the provision. In any event, the position appears now to be settled. In Waitakere Links Ltd v Windsor Golf Club a full bench of the Court of Appeal

preferred a more expansive interpretation of s 137 which would enable caveators to rely on equitable rights over property.1

[15]   Mr Gwilliam referred me to a number of cases which he argued were comparable and where the courts have upheld arguments based on constructive trusts.

[16]   Most particularly Mr Gwilliam relied on Whitehead v Whitehead.2 In that case, the plaintiff’s late father and he built two dwellings on the father’s land. They had agreed that the father would subdivide the property and give one of the cottages to the plaintiff in recognition of his involvement in the building, which included labour and costs. The father died without doing so. The plaintiff sued the executors and trustees of his father’s estate, seeking a declaration that he had become an equitable owner of the land.

[17]The Court of Appeal dealt with the issue in the following terms:3

The conclusion arrived at by the learned Judge is that, neither by reason of the words and conduct of the testator nor by reason of work done or money expended did the appellant acquire an equitable estate or interest in the cottage on the land. We are unable to agree with this. There was something which he might acquire which, on the facts, we think he did acquire – namely, an equitable charge or lien to be reimbursed the value of the labour and materials expended on the building and property. His Honour appears to have thought that nothing short of the acquisition of a transferrable estate or interest in the land would give the applicant any claim. The authorities, in our opinion, are clear that he is entitled to reimbursement where the owner of the land with full knowledge had not only stood by, as we find he did, but encouraged the appellant to make expenditure in the expectation that the cottage on the land available was his.

[18]   As Mr Gwilliam submits, the only material difference between the circumstances in that case and those in the present case is that whereas the agreement in Whitehead involved the ownership of one of the two cottages, here the arrangement involved a possessory entitlement in the nature of a lease or licence for a period of time enabling Mr Smith to recover rent from the property (in other words, the precise nature of the estate involved).

1      Waitakere Links Ltd v Windsor Golf Club Inc CA132/95, 25 June 1998.

2      Whitehead v Whitehead [1948] NZLR 1066.

3      At 1072.

[19]   Thus, Mr Gwilliam’s argument continued, Mr Smith, having expended time and money on the property, is entitled to say that he has an “… equitable charge or lien to be reimbursed the value of the labour and materials expended on the building and property”.4

[20]   On Mr Aird’s behalf, Mr Bell made a series of submissions in opposition to the contention that Mr Smith is able to establish an arguable case that he has a caveatable interest.

[21]   His first submission was that Mr Smith should be denied any remedy because he has delayed pursuing a claim. He pointed out that the caveat was registered against the title to Mr Aird’s land on 22 December 2017, immediately following the degeneration in the relationship between the parties. Mr Smith is yet to commence a substantive claim.

[22]   Ultimately, what Mr Bell sought to draw from this point is that Mr Smith was using the caveat procedure as a means of bringing pressure on Mr Aird to pay him or, as he put it, “to leverage settlement”. I accept, of course, as Mr Bell submitted by reference to cases such as Best of Luck Ltd v Ratapu, that where there is any suggestion of an abuse of process, that is a proper basis for the Court to discharge a caveat.5 But, in my experience, it is far from unusual for a claimant with a proper foundation for lodging a caveat to do so without necessarily then going to the additional expense of commencing a proceeding, in the hope that there will be a resolution of the claim. That is, at least until such time as forced to do so. This does not appear to me to be a fair criticism of a party who has utilised the caveat procedure, where it is available, to protect his or her position, but been reluctant to embark upon expensive litigation when there may be a prospect of settlement. In short, if the basis for Mr Smith’s caveat is found to have substance then, in my view, it would be inequitable to deprive him of the benefit of that right merely because he has not commenced proceedings since lodging the caveat on 22 December 2017. On the other hand, if it is appropriate to do so, I am inclined to think that a condition should be imposed requiring such a plaintiff to commence proceedings forthwith in order to dispose of the matter.

4      At 1072.

5      Best of Luck Ltd v Ratapu (2011)11 NZCPR 717 (HC).

[23]   Second, Mr Bell focused on the terms of the caveat itself. He submits that the terms of Mr Smith’s caveat are inconsistent with the case that he brings to the Court. In this regard he referred to s 137(2)(b) and (c) of the Act which require that a caveat clearly state the interest claimed, and that the courts have no discretion to amend the same.

[24]   Mr Bell emphasised that, in this case, Mr Smith’s caveat refers to the arrangements between the parties giving rise to “an equitable charge” over the land. He draws a distinction between charges, on the one hand, and liens on the other. He says that, whereas the caveat itself refers to the arrangements between the parties giving rise to a charge, the case for Mr Smith is presented on the basis that he has a lien over the property. Mr Bell submits that at law there is a distinction between a charge and a lien – the first arises by reason of an agreement to provide security, and the second arises as a result of dealings between the parties and is imposed by the Court.

[25]   I accept, of course, that, at law, charges and liens are different things. Having said that, it seems to me that, in the common parlance of lawyers and laymen alike, the term “charge” is habitually used to include any form of security right over real or personal property. This can include anything from a formal registered mortgage over land to a workman’s possessory lien over movable property. Moreover, if, as Mr Bell submits, it is erroneous to use the term “charge” so as to include a lien, then that is an error into which the Court of Appeal fell in the Whitehead case referred to earlier. In that decision O’Leary CJ, in delivering the Court’s judgment, referred to the claimant there having, in the Court’s view, acquired “… an equitable charge or lien to be reimbursed the value of the labour and materials expended on the building and property”.6

[26]   I am satisfied that Mr Smith’s caveat adequately describes the basis for his claim; that is to say that the parties had entered into an arrangement on the terms described earlier and that ultimately resulted in him becoming entitled to some form

6      Whitehead v Whitehead, above n 2, at 1072.

of “charge” over the property. In my view, that description is wide enough to refer to a lien.

[27]   Third, and addressing the substance of  the  matter,  Mr  Bell  submits  that Mr Smith is unable to show an arguable case that he has a charge or lien. He referred me to the Australian case of Hewett v Court which, as he submits, has been applied consistently in New Zealand.7 He summarised the test in Hewett in these terms:8

29.Hewett sets out a three-limb test in the judgment of Deane J that he considered were determined sufficient circumstances for implying an equitable lien between the parties in a contractual relationship:

a.That there be an actual or potential indebtedness on the part of the party who is the owner of the property to the other party arising from a payment or promise of payment either of consideration in relation to the acquisition of the property or of an expense incurred in relation to it.

b.That that property (or arguably property including that property …) be specifically identified and appropriated to the performance of the contract.

c.That the relationship between the actual or potential indebtedness and the identified and appropriated property be such that the owner would be acting unconscientiously or unfairly if he were to dispose of the property (or, if it be appropriate, more than a particular portion of it) to a stranger without the consent of the other party or without the actual or potential liability having been discharged.

[28]   Mr Bell accepts that Mr Smith can meet the first and last of those limbs. But he contends that he is unable to meet the remaining limb. That is to say, he argues that the property was not identified and appropriated to the performance of the contract.

[29]Here is how Mr Bell put the point:

Given the precondition that the interest must relate to land for a caveat to be arguable, the lien must concern land and that land must be appropriated by the contract. That is not so. The land in this matter cannot be seen to be appropriated pursuant to the oral agreement between the parties that is evidenced in the parties’ respective affidavits. In fact, it is submitted it is plain that the applicant acted as agent for the respondent, facilitating repair to the

7      Hewett v Court (1983) 149 CLR 639; Bradley v Bradley [2016] NZHC 2460; Emmott v Michael Wilson & Partners Ltd [2016] NZHC 3155.

8      In reference to Hewett v Court, above n 7, at 668.

property without ever considering that the property might be appropriated to him.

[30]I have difficulty following that submission.

[31]   There would appear to be no doubt that, at one level or another, the parties agreed that, if Mr Smith were to carry out the renovation work and incur the costs associated with that, he would be entitled to sufficient possessory rights to enable him to take rent from the property in order to recoup those costs. I can think of no clearer case of the property – or a set of rights and interests in the property – being appropriated to the contract.

[32]   Mr Bell went on in relation to this issue to refer me to Bradley v Bradley, the relevant facts of which he said were:9

a.There was a written agreement that the loan was to be repaid if the property was sold.

b.The mother sold the property to another family member who was a third party to the arrangement but did not repay the loan.

c.It was argued an equitable lien arose because of the agreement to repay the loan on the sale of the property.

[33]Mr Bell’s submissions continued:

35.The High Court considered the test in Hewett and found that the contract did not provide for the appropriation of property for the purpose of the contract despite the requirement to repay the loan on sale. The Court held that it was not contractually necessary for funds from the sale to be used, as the loan could have been settled from other funds. The contract did not require the use of the land to settle the debt, and therefore no equitable lien arose.

36.In light of the position in Bradley, there can be no prospect of deeming appropriate of property for the purpose of the contract in the current matter. At least in Bradley there was a term of contract that was proximate to an appropriation, being that sale triggered repayment of a loan.

[34]   Mr Bell also referred me to Structured Finance (NZ) Ltd v McKenna.10 His submission in relation to this case was in these terms:

9      Bradley v Bradley, above n 7.

10     Structured Finance (NZ) Ltd v McKenna [2012] NZHC 3093.

We note that the High Court in this case clearly stated that there was no case sufficient to support an equitable lien over the land because “…any appropriation of the registered proprietor’s land “towards” Mr McKenna’s performance would have to be supported by clear evidence that the registered proprietors agreed to give security over the land for Mr McKenna’s obligation.

There is no such evidence.”¹¹

[35]   The obvious distinction between the circumstances in Bradley and Structured Finance (NZ) Ltd on the one hand, and the present case on the other, is that, here, it is common ground that the proprietor agreed, in consideration of Mr Smith carrying out the renovation work and incurring the associated costs, to confer on him a possessory entitlement by way of lease or licence to the land to take rent from the property in order to reimburse himself for those costs. As I say, this appears to me to be the clearest possible case of the appropriation of the land – or a set of rights over the land

– for the purposes of the contract and the recovery of the amount which would, in the normal course of events, be payable by the proprietor to Mr Smith. In my view, the Hewett criteria are met.

[36]   In my judgment, Mr Smith has made out an arguable case to an equitable interest in the property capable of supporting his caveat.

[37]Accordingly, I made the order he seeks sustaining his caveat.

[38]   That order will lapse if Mr Smith does not commence substantive proceedings for the recovery of the amount he claims against Mr Aird, and any other orders he may seek, within 15 working days of the date of this judgment.

[39]   I did not hear argument as to costs and therefore reserve these. To assist the parties, I signal that my preliminary view, without the benefit of hearing counsel, is that the applicant has been successful and is entitled to his costs on a 2B basis. I see no grounds for decreased or increased costs orders. If counsel are unable to resolve costs, as I would expect them to do, they may file and serve memoranda and I will deal with them on the papers.

Associate Judge Johnston

Solicitors:

Main Street Legal Ltd, Upper Hutt for applicant Bell & Co, Wellington for respondent

11 At [38].