Southbourne Holdings Limited v Broadway Investments (No. 2) Limited

[2013] NZHC 2163

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2012-404-7158 [2013] NZHC 2163

BETWEEN

SOUTHBOURNE HOLDINGS LIMITED

Plaintiff

AND

BROADWAY INVESTMENTS (No. 2) LIMITED

Defendant

Hearing:

4 June 2013

Appearances:

J Foley for Plaintiff

A Johnson for Defendant

Judgment:

23 August 2013

RESERVED JUDGMENT OF ASSOCIATE JUDGE SARGISSON

(Summary Judgment Application)

This judgment was delivered by me on Thursday 23 August 2013 at 4.30 pm pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar Date:………………………….

Counsel:

J Foley, Barrister, Auckland

A W Johnson, Martelli McKegg, Auckland

SOUTHBOURNE HOLDINGS LIMITED v BROADWAY INVESTMENTS (No. 2) LIMITED [2013] NZHC 2163 [23 August 2013]

Introduction

[1] Both parties to this proceeding claim summary judgment. The defendant, Broadway Investments (No. 2) Limited contends there is no arguable basis upon which any of the causes of action in the plaintiff’s amended statement of claim can succeed and claims judgment dismissing the plaintiff’s claim. The plaintiff, Southbourne Holdings Limited, contends that Broadway has no arguable defence to

its causes of action and claims judgment on liability. It also seeks a partial award of damages.1

Background

[2] The parties entered into an agreement for sale and purchase on 11 November 2011 in which Southbourne agreed to purchase Broadway’s commercial property at 8 Fisher Crescent, Mt Wellington, with vacant possession, for $3.925 million plus GST. The agreement provided for settlement on 31 October 2012 and became unconditional on 21 November 2011 when Southbourne completed due diligence and advised that it would proceed with the purchase.

[3] At the time of sale a written lease existed between Broadway and its tenant, Tyco Control Pacific Pty Limited.2 Broadway and Tyco terminated the lease by agreement in April 2012 on terms that:

(i)Tyco vacate the property on 9 May 2012.

(ii)Settled all outstanding obligations of both sides under the lease.

(iii)Permitted Tyco to leave some of its fixtures and fittings in the property and otherwise released Tyco from its make good covenants under the lease.

1       Southbourne’s statement of claim does particularise what damages are claimed. Its application for summary judgment is silent on the issue and I treat it as an application for judgment on liability.

2       The term of the lease was from 10 July 2002 to 9 July 2010, but the lease was held over by agreement between Broadway and Tyco until 9 May 2012.

(iv)Bound Tyco to pay Broadway $300,000 plus GST together with one month’s additional rent as the agreed means of “balancing the respective rights and obligations of the parties” under the lease.

[4]      Southbourne’s claim arises out of these terms of settlement.

[5]     Southbourne claims that Broadway was bound by a duty to hold the benefit of Tyco’s “make good” covenants under the lease for its benefit and that Broadway is liable for releasing Tyco and must account for the sum it obtained from Tyco by way of the settlement. Additionally it claims for losses, yet to be quantified, that it says it has suffered because the opportunity to require Tyco to restore the property to good condition has been lost.

[6] Southbourne relies on three causes of action. In essence these are  that Broadway:

(a)Breached the duty imposed on it as vendor to hold the property as a constructive trustee for the purchaser, as that duty obligated Broadway not to release Tyco from any obligations and to hold the rights to enforce the make good covenants for Southbourne; and/ or

(b)Breached an implied term of the agreement for sale and purchase not to release Tyco from any obligations under the lease and to hold the rights to enforce the make good covenants for Southbourne; and/or

(c)Breached its covenant in cl 6.3(1) of the agreement for sale and purchase that since the date of the sale and purchase agreement it “has not given any consent or waiver which directly or indirectly affects the property”.

Essence of the dispute

[7] At the heart of the first cause of action is the duty the law imposes on a vendor as constructive trustee for the purchaser pending settlement and the contention that but for Broadway’s agreement to release Tyco from its make good obligations, Southbourne would have acquired the rights to enforce those obligations

as at the date of settlement and beyond if unfulfilled. Southbourne claims it could have enforced the rights pursuant to s 233(1) Property Law Act 2007 or as the permitted assignee of the lease.

[8] Underlying the second and alternative cause of action is the contention that Broadway has the same obligations as above pursuant to an implied term of the agreement for sale and purchase and by implication Southbourne acquired the same rights as in the first cause of action.

[9]   The third cause of action claims a simple breach of a term in the agreement for sale and purchase in that Broadway gave a waiver of its right to require compliance with Tyco’s obligations and that such waiver ‘affects’ the property.

[10] Central to all causes of action is the assumption that Southbourne acquired the benefit of the make good obligations as part of what it acquired as purchaser of the property.

[11] For reasons that I turn to presently I am not satisfied that either side is entitled to summary judgment. I pause momentarily to set out the issues that the parties have raised for determination and to set out the law surrounding summary judgment.

Issues for Determination

[12] Whether or not summary judgment is appropriate, either for the plaintiff or the defendant, turns on whether certain issues can be decided by simple interpretation of the agreement for sale and purchase and the application of the relevant law or whether further evidential material is required to reach a safe result. Those issues are:

(a)Firstly, as a constructive trustee was Broadway obligated to hold the enforcement of the lease covenants on trust for Southbourne?

(i)More particularly, what did Broadway sell and Southbourne purchase?

(ii)Did it include the reversionary interest expectant on the lease allowing enforcement of the covenants under s 233(1)?

(iii)Did the sale operate as an assignment of the vendor’s rights under the lease so as to make Southbourne a permitted assign under the lease thereby enabling it to enforce the covenants under s 4 Contracts (Privity) Act)?

(iv)If the answer is affirmative to (ii) or (iii), is Broadway obligated pursuant to its duty as constructive trustee not to release Tyco from its obligations but to hold Tyco to its make good obligation for the benefit of Southbourne and to hold the property inviolate, including all of the attendant rights and obligations that would accrue to and vest absolutely in Southbourne on settlement?

(b)Alternatively, is there a clear implied term that Broadway would not release the lessee from any of its obligations between the unconditional and settlement date?

(c)Did Broadway breach the obligation not to give any consent or waiver which affects the property in accordance with cl 6.3(1) of the agreement for sale and purchase?

Summary judgment -Relevant Legal Principles

[13]     Southbourne applies for summary judgment under rr 12.2(1) and 12.3 of the High Court Rules.  Relevantly, r 12.2(1) provides:

12.2      Judgment when there is no defence or when no cause of action can succeed

(1)The court may give judgment against a defendant if the plaintiff satisfies the court that the defendant has no defence to a cause of action in the statement of claim or to a particular part of any such cause of action.

…

[14]     Rule 12.3 provides:

12.3Summary judgment on liability

The court may give judgment on the issue of liability, and direct a trial of the issue of amount (at the time and place it thinks just), if the party applying for summary judgment satisfies the court that the only issue to be tried is one about the amount claimed.

[15]     The legal principles applying to applications for summary judgment were succinctly expressed by the Court of Appeal in Krukziener v Hanover Finance Ltd:3

The principles are well settled. The question on a summary judgment application is whether the defendant has no defence to the claim; that is, that there is no real question to be tried: Pemberton v Chappell [1987] 1 NZLR 1 at 3 (CA). The Court must be left without any real doubt or uncertainty. The onus is on the plaintiff, but where its evidence is sufficient to show there is no defence, the defendant will have to respond if the application is to be defeated: MacLean v Stewart (1997) 11 PRNZ 66 (CA). The Court will not normally resolve material conflicts of evidence or assess the credibility of deponents. But it need not accept uncritically evidence that is inherently lacking in credibility, as for example where the evidence is inconsistent with undisputed contemporary documents or other statements by the same deponent, or is inherently improbable: Eng Mee Yong v Letchumanan [1980] AC 331 at 341 (PC). In the end the Court’s assessment of the evidence is a matter of judgment. The Court may take a robust and realistic approach where the facts warrant it: Bilbie Dymock Corp Ltd v Patel (1987) 1 PRNZ 84 (CA).

[16]     Broadway relies on r 12.2(2).  It provides:

12.2 Judgment … where no cause of action can succeed

(2)The court may give judgment against a plaintiff if the defendant satisfies the court that none of the causes of action in the plaintiff's statement of claim can succeed.

[17] The principles applicable to a summary judgment application by a defendant were conveniently stated by Elias CJ in Westpac Banking Corporation v M M Kembla New Zealand Ltd,4  as approved by the Privy Council in Jones v Attorney-

General.5   The discussion relates to the former rule, r 136(2).  It is however equally

applicable to the new rule, r 12.2(2):

3       Krukziener v Hanover Finance Ltd [2008] NZCA 187, (2008) 19 PRNZ 162 at [26].

4       Westpac Banking Corporation v M M Kembla New Zealand Ltd [2001] 2 NZLR 298, 313-314 (CA).

5       Jones v Attorney-General [2004] 1 NZLR 433 at [5].

[60] … R 136(2) permits a defendant who has a clear answer to the plaintiff which cannot be contradicted to put up the evidence which constitutes the answer so that the proceedings can be summarily dismissed.

[61] The defendant has the onus of proving, on the balance of probabilities, that the plaintiff cannot succeed. Usually summary judgment for a defendant will arise where the defendant can offer evidence which is a complete defence to the plaintiff’s claim. Examples, cited in McGechan on Procedure at HR 136.09A, are where the wrong party has proceeded or where the claim is clearly met by qualified privilege.

[62] Application for summary judgment will be inappropriate where there are disputed issues of material fact, or where material facts need to be ascertained by the Court, and cannot confidently be concluded from affidavits. It may also be inappropriate where ultimate determination turns on a judgment only able to be properly arrived at after a full hearing of the evidence. Summary judgment is suitable for cases where abbreviated procedure and affidavit evidence will sufficiently expose the facts and the legal issues.

[63] Except in clear cases, such as a claim upon a simply debt where it is reasonable to expect proof to be immediately available, it will not be appropriate to decide by summary procedure the sufficiency of the proof of the plaintiff’s claim …

[64]     It is not necessary for the plaintiff to put up evidence at all although, if the defendant supplies evidence which would satisfy the Court that the claim cannot succeed, a plaintiff will usually have to respond with credible evidence of its own. Even then, it is perhaps unhelpful to describe the effect as one where an onus is transferred. At the end of the day, the Courts must be satisfied that none of the claims can succeed. It is not enough that they are shown to have weaknesses. The assessment made by the Court on interlocutory application is not one to be arrived at on a fine balance of the available evidence, such as is appropriate at trial.

[Emphasis added]

[18] If there is a “theoretical possibility” on the evidence that Southbourne’s claim could succeed then summary judgment will be unsuccessful.6

Counsel’s Submissions

[19] Broadway acknowledges as a matter of law it was under an obligation as vendor to hold the property as constructive trustee for Southbourne pending settlement of the agreement for sale and purchase, and that it had an obligation to take care of the property up until settlement. However, Broadway says that in the

6       Jones v Attorney-General [2004] 1 NZLR 433 at [10]. It further states; “The appellant may, or may not, succeed in establishing his version of events at trial. It cannot, however, be said at this stage that he cannot do so, and if the outcome of the action is potentially dependent on the facts found it is inappropriate to give summary judgment for the defendant.”

circumstances of this case such duty does not extend to the covenants in the lease as the sale and purchase agreement is clear that what it sold was not the property subject to and with the benefit of the lease but the property with vacant possession. It says there is nothing in the agreement for sale and purchase that is suggestive of any contrary contractual intention. It contends the result is that the rights and obligations of the parties to the lease were matters for itself and Tyco. On the same basis it denies the existence of the implied term and any breach of any relevant obligations that it was fixed with under cl 6.3(1) of the agreement for sale and purchase.

Discussion

As a constructive trustee was Broadway obligated to hold the enforcement of the lease covenants on trust for Southbourne?

[20] The concept of a constructive trustee is used by the courts to “define the vendor’s obligation of care and management of the property between the date of contract and the settlement of the sale”.7  As a constructive trustee the vendor’s

obligations include:8

(a)Not to damage the property wilfully;

(b)To take reasonable care to preserve the property in its condition at the date of contract;

(c)To take reasonable care to prevent loss or damage to property by:

(i)The vendor (including the vendor’s agents or servants).

(ii)Tenants of the property,

(iii)Others, including trespassers.

[21] Despite the use of the concept of constructive trustee,  the  relationship between vendor and purchaser is a contractual one: 9

... if by such a description [as trustee] it is sought to transpose into the law of vendor and purchaser the law governing the rights and duties of trustees, statutory or otherwise, considerable difficulties arise... Where there are rights outstanding on both sides, the description of the vendor as a trustee tends to conceal the essentially contractual relationship which, rather than the relationship of trustee and beneficiary, governs the rights and duties of the respective parties.

7       New Zealand Conveyancing Law and Practice (looseleaf ed, CCH) at [7-450].

8       At [7-450].

9       Chang v The Registrar of Titles (1976) 50 ALJR 404 and 409.

[22] Therefore it is crucial to consider the nature of the contract between the parties, as it is the contractual intention of the parties that will determine the obligations on the vendor as constructive trustee.

(i)What was purchased?

[23] A key component of understanding the contract is to consider what was purchased. It is necessary to determine if it was the contractual intention of the parties that the rights to enforce the make good covenant were included in the property that was sold. The agreement of sale and purchase does not address this issue specifically; however Broadway submits that the nature of the agreement for sale and purchase does not extend to the right to enforce the lease. It contends the elements of the agreement that support this are:

(a)The providing of vacant possession was an absolute obligation upon the defendant required under the agreement.

(b)The parties were both aware the lease was to come to an end and that the property would be vacant 6 months prior to settlement.

(c)The agreement reflected this by providing some compensation during the period when no rent would be received.

(d)The agreement contained no requirement on the defendant to ensure any lessee covenant obligations would be enforceable by plaintiff.

(e)No mention of this was made during the due diligence period. There does not appear to have been any conversation about what steps would be required to ‘make good’.

[24] The English Court of Appeal’s decision in Re  Lyne-Stephens  and  Scott- Millers Contract is apposite.10  It involved a contract for sale and purchase for a

10 Re Lyne-Stephens and Scott-Millers Contract [1920] 1 Ch. 472. This case was not cited by either side. I considered inviting submissions on that decision. On reflection, I have decided not to do so given the conclusions I have reached and the fact that this is an application for summary judgment.

property with vacant possession and the issue whether the purchaser could sue for breaches of covenant. It was held that:11

What was sold was not the house subject to and with the benefit of the lease which was existing at the date of the contract, but the house with [vacant] possession, altogether apart from and independent of the lease, the obligations and the rights under which were only a matter between the vendor and the lessee, and that the purchaser was therefore not entitled to the sums paid by the lessee as compensation for his breaches of covenant.

[25]     Relevantly the court also states:12

The vendor does not deny that he became trustee for the purchaser of anything that the purchaser bought, but he says that he did not become trustee for him of anything that he did not buy, and that neither directly nor by implication did he in any way buy this remedy which the vendor had against the lessee... Now what was it that was sold?... I think that the result of that is simply what the particulars say—namely, that the purchaser bought the house with [vacant] possession on September 29, and that he did not buy anything connected with the lease at all.

[26] The case indicates that in agreements for vacant possession, the ‘property’ does not ordinarily include rights to enforce lease covenants. However whether such rights form part of what is sold in the individual case, must to be determined as a matter of contract.

[27] In the current situation the question whether the right to enforce the covenants was included in the ‘property’ that was sold cannot be determined safely simply on the face of the agreement..

[28] The usefulness of the inclusion of evidence outside of the contract in interpretation matters has been established by the Supreme Court in Vector Gas Ltd v Bay of Plenty Energy Ltd where Tipping J stated:13

As a matter of policy, our law has always required interpretation issues to be addressed on an objective basis. The necessary inquiry therefore concerns what a reasonable and properly informed third party would consider the parties intended the words of their contract to mean. The court embodies that person. To be properly informed the court must be aware of the commercial or other context in which the contract was made and of all the facts and circumstances known to and likely to be operating on the parties minds.

11      At 472.

12      At 485.

13      Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] 2 NZLR 444 (SC).

[29] However the nature of the contract and the surrounding circumstances have not been fully argued or discussed by the parties or counsel in this proceeding. That is a reason necessitating a cautious approach to summary judgment. Issues of contractual intention about what was sold and the resulting liability needs to be considered with the benefit of a full factual context.

(ii)Property Law Act 2007

[30] Southbourne argues that but for the release of Tyco, it would have had the right to enforce Tyco’s lease covenants under s 233 Property Law Act 2007 which relevantly sets out:

233     Benefit of lessee’s covenants to run with reversion

(1)If the reversion expectant on the lease ceases to be held by the lessor (whether by transfer, assignment, grant, operation of law, or otherwise), the rights to which this section applies—

(a)run with the reversion; and

(b)may be exercised by the person who is from time to time entitled to the income of the land, whether or not the lessee has acknowledged that person as lessor (that is, with or without attornment by the lessee).

(2)Subsection (1) applies unless a contrary intention appears from the lease or from another circumstance.

[31] Southbourne relies on the case of Ballance which held that the purchaser had the right to enforce the lessee’s unperformed covenants to support its first cause of action.14 However Ballance is instantly distinguishable on the basis that in the current situation there was no intention to take over the lease, as was present in Ballance.

[32] In light of Lyne-Stephens, in the instant case it is arguable that the parties’ contractual intention was that the reversionary interest was retained by the vendor. In that situation the reversion expectant on the lease would not have ceased to be held by the lessor and therefore s 233 would not apply.

14  Ballance Agri-Nutrients (Kapuni) Ltd v The Gama Foundation [2006] 2 NZLR 319. This case was decided under the Property Law Act 1952, however the Court of Appeal in Laidlaw v Parsonage [2009] NZCA 291 confirmed that this is the correct approach.

[33]  Furthermore any rights under s 233(1) are subject to 233(2) which states that the rights in 233(1) are subject to any contrary intention. In this situation the sale and purchase agreement and the facts surrounding the sale arguably indicate a contrary intention which would override any right to the benefit of the lessee’s covenants. As aforementioned, determination on this issue is not appropriate for summary judgment.

(iii)Permitted assign

[34] I turn to Southbourne’s alternative submission that it could have enforced such rights if not for Broadway’s actions, as it is the permitted assign and entitled to enforce the tenant’s covenants in the lease.

[35] In the Tyco lease the definition of landlord includes a permitted assign. Southbourne argues it is the permitted assign of Broadway and thus has the right to enforce lessee covenants. Southbourne would be able to enforce such rights under s 4 of the Contracts (Privity) Act.

[36]   This submission is conclusory. Southbourne proceeds on the presumption that as purchaser the property it acquired includes the benefits of the covenants of the lease. This comes back to a determination as to what was sold, something that cannot be determined safely in this proceeding.

(iv)Role of the constructive trustee

[37] It is Southbourne’s claim that Broadway was obligated as a constructive trustee not to release Tyco from its obligations so that such right would accrue to Southbourne on settlement. This obligation is based on the arguments  outlined above, that Southbourne would have had the right to enforce the make-good covenant.

[38] Given my findings above I do not find it necessary to consider whether such rights created an obligation on Broadway as a constructive trustee.

Is there an implied term and if so, is the vendor in breach of the term?

[39] It is Southbourne’s assertion that but for the release, Southbourne would have had the right following settlement to enforce the lease covenants under s 233(1) of the Property Law Act, or under s 4 Contracts (Privity) Act and as a permitted assign and successor of Broadway. Therefore as a result of the above it is a clear implied term that Broadway would not release the lessee from its make good obligations between the unconditional and settlement date.

[40] It is not in dispute that, as set out by counsel for Southbourne, for a term to be implied into a sale agreement it must be:15

(a)Reasonable and equitable,

(b)Necessary for the business efficacy of the agreement,

(c)So obvious it goes without saying,

(d)Capable of clear expression, and

(e)In terms that do not contradict an express term of the agreement.

[41] A difficulty for Southbourne is that counsel did not really attempt to show how each of these requirements are met. Rather he relies on the argued rights under s 233(1), as a permitted assign, and under cl 6.3(1), stating that as a result of the existence of these rights and implied term exists in the agreement. He also relies on Southbourne’s expectation of the right to enforce the lease.

[42] On the other hand, without wishing to be determinative it is arguable that as Southbourne bought the property freehold with vacant possession, it is not so obvious that it goes without saying that the purchaser would obtain rights under the lease. The agreement is still effective without such an implied term.

[43] Even if Southbourne did have an expectation, after receiving legal advice, that it would obtain obligations under the lease, in accordance with Cuddon v Tite this incorrect assumption does not amount to the right to enforce obligations. A one sided expectation does not result in an implied term.16

Is there a breach of an express term?

[44]   Southbourne contends that Broadway’s actions amount to a breach of s 6.3(1) of the settlement agreement. This clause states that Broadway warranted and undertook that since the date of the sale agreement the “vendor has not given any consent or waiver which directly or indirectly affects the property”.

[45]   Southbourne submits the right to enforce the make good obligations was part of the property it purchased, and thus the release of the obligations ‘affected the property’.

[46] To make a determinative finding on this issue it would again be necessary to determine what property was purchased. It would also be necessary to have evidence, rather more fulsome than the evidence presently before the court, to establish whether or not there has been a breach that sounds in a material loss. The fact there has been a $300,000 payment to adjust the obligations of landlord and tenant does not necessarily mean there has been a breach causative of loss to the purchaser that would sound in damages for breach of a term of the agreement for sale and purchase.

Conclusion

[47] I am not satisfied that summary judgment for the plaintiff is appropriate. It has not shown that the defendant has no defence to its claims.

[48] Summary judgment for the defendant cannot succeed as there is a theoretical possibility that at least one of the causes of action may succeed.

Result

[49]     The applications of both sides are dismissed.

[50]     The registrar is to allocate an initial case management conference.

[51]     In accordance with the Court of Appeal’s decision in NZI v Philpott17  costs are reserved.

H Sargisson Associate Judge