Technix Group Ltd v Fitzroy Engineering Group Ltd
[2011] NZCA 17
•17 February 2011
| IN THE COURT OF APPEAL OF NEW ZEALAND |
| CA337/2010 [2011] NZCA 17 |
| BETWEEN TECHNIX GROUP LIMITED |
| AND FITZROY ENGINEERING GROUP LIMITED |
| Hearing: 16 November 2010 |
| Court: Chambers, MacKenzie and Simon France JJ |
| Counsel: J B M Smith and J L W Wass for Appellant |
| Judgment: 17 February 2011 at 2 pm |
JUDGMENT OF THE COURT
A The appeal is dismissed.
BThe appellant must pay the respondent costs for a standard appeal on a band A basis, plus usual disbursements. We certify for second counsel.
REASONS OF THE COURT
(Given by Chambers J)
Option to purchase land
Fitzroy Engineering Group Ltd, the respondent, operates an industrial manufacturing and boat building business in New Plymouth. Fitzroy leases the property on which it operates its business from Technix Group Ltd, the appellant, which also owns surrounding land. This arrangement arose out of Fitzroy’s purchase of the business from Technix in 1992. Fitzroy could not afford at that time to purchase the land on which the business operated. In order to give Fitzroy some security, the parties agreed to include an option to purchase clause in the lease so that Fitzroy could purchase the property (and some plant and machinery) in the future. The lease also gave Fitzroy a right of pre-emption if Technix wanted to sell the land in the future or received an offer for it which it was minded to accept.
Fitzroy now wants to buy the property and has triggered the option to purchase process under the lease by giving written notice to Technix. That process requires Technix to investigate the cost and procedure involved in subdividing the land. If after this investigation Fitzroy wishes to proceed, Fitzroy must formally exercise its option to purchase. After this process was instigated by Fitzroy, but before Fitzroy had given notice of its desire to exercise its option to purchase, Technix received an offer from “a third party” to purchase the property. This “third party” was a charitable trust associated with Technix’s director, John Matthews. Technix advised Fitzroy of this offer and purported to trigger the pre-emptive right subclause under the lease, which would require Fitzroy to agree to match the third party’s offer within fourteen days if it wished to purchase the property.
This appeal turns on whether Technix can invoke the pre-emption subclause, despite the option to purchase process having already been triggered by Fitzroy. Venning J held Technix could not do so and granted an injunction preventing it from selling the property pending completion of the option to purchase process instigated by Fitzroy.[1]
[1]Fitzroy Engineering Group Ltd v Technix Group Ltd HC New Plymouth CIV-2010-443-102, 20 May 2010.
The dispute has some significance for the parties. Under the option to purchase provisions, Fitzroy has to purchase only the land and premises it actually uses. Under the right of pre-emption process, Fitzroy would be required to purchase additional land. Further, and more importantly, it seems the parties expect the purchase price calculated under the option to purchase valuation provisions will be significantly less than the price which the charitable trust has offered. Accordingly, Fitzroy would have to pay more for the land if, as Technix submits, the pre-emption provisions trump the option to purchase provisions.
A second issue was argued before us, relating to the effect of a previous subdivision of the property. Because of our answer to the first issue we do not need to address it.
Can Technix trigger the pre-emption process if Fitzroy has already triggered the option to purchase process?
The “option to purchase” clause in the lease contains three subclauses: the first sets out the option to purchase right and process; the second gives Fitzroy a right of pre-emption if Technix decides it wants to sell to a third party; the third gives Fitzroy a right of pre-emption if Technix receives an offer from a third party. Because of its centrality to the appeal, we set out the clause in full:
3.25 OPTION TO PURCHASE
(a) The Tenant will have the option to purchase the area as outlined in blue on the attached plan (“the land”) and the plant listed in the Third Schedule hereto at any time during the term of the lease while [Technix] is the owner of the land. The option shall operate as follows:
(i) The Tenant shall give the Landlord notice in writing of its desire to investigate such option.
(ii) Immediately upon receiving the notice from the Tenant the Landlord shall arrange an investigation into the cost and procedure for subdividing the land from the whole of the land described in the First Schedule hereto for the purpose of sale to the Tenant. ... The extent of such investigation shall be by agreement between the Landlord and the Tenant. The cost of such investigation shall be shared equally by the landlord and the Tenant.
(iii) Provided that the result of the investigation does not show a requirement for local body conditions which will materially affect any other land owned by the Landlord then the Landlord shall have no right to object to the said subdivision proceeding.
(iv) If after the investigation referred to above the Tenant wishes to continue with the option procedure then the Tenant shall advise in writing the Landlord of his desire to exercise such option and then the Landlord and the Tenant shall each appoint an independent Registered Valuer with experience in the valuation of commercial properties. Each valuer shall value the land and buildings without consultation with the other. The basis of valuation shall be:
The current market value of the land and buildings shall be assessed based on the terms of the existing lease (but if within the first two years thereof at a current market rental) and at an adjusted rental assuming the incorporation of the extra land referred to in paragraph (a) hereof was included in the lease and on the basis the lease has ten (10) years to run and on the basis the land and buildings are suitable for their ongoing use.
(v) The Landlord and Tenant shall also each appoint an independent member of the Institute of Plant and Machinery Valuers with experience in the valuation of engineering machinery and chattels for the valuation of the plant listed in the Third Schedule hereto. Each valuer shall value the plant without consultation with the other. The basis of valuation shall be:
The existing use/current value to the business assuming that the plant and machinery will continue in its present existing use for the balance of its working life in the business of the Tenant. Specific reference shall be taken of clauses 2, 3 and 4 of the Guidance Note Number 10 New Zealand Institute of Valuers Asset Valuation Standard as attached hereto and referred to as Schedule Four.
(vi) The valuations referred to in (iv) and (v) above shall be exchanged by the Landlord and Tenant at the same time.
(vii) If the difference between the valuations of each of the valuers for the land or the plant is greater than 20% then the Valuers who provided the relevant valuation shall appoint an arbitrator who shall determine the valuation within the values set by the valuations and in accordance with the Arbitration Act 1908. The valuation so determined will be the price which the Tenant will pay to the Landlord (“the purchase price”)
(viii) If the difference between the valuations of each of the valuers for the land or the plant is less than 20% then the purchase price shall be the average of such valuations.
(ix) The purchase price for the land and the plant shall be paid by the Tenant to the Landlord within one (1) month from the date of determination of the purchase price or within seven (7) days from the availability of a new certificate of title whichever shall be the later. The Tenant must purchase both the land and the plant. Subject to clause (iii) herein the Landlord and the Tenant shall take all steps and sign all documents necessary to complete such subdivision as soon as possible.
(x) The Tenant and the Landlord will share equally in all costs relating to the subdivision which may be required pursuant to the exercise of this Option to Purchase.
(b) In the event of the Landlord wishing to sell the land referred to in the First Schedule hereto or the land during the term of the lease the Landlord shall first offer a right of purchase to the Tenant at a price nominated by the Landlord and if the Tenant does not accept such offered price in writing within fourteen (14) days then subject to the following the landlord shall be entitled to sell the land to a third party.
(c) If the Landlord receives any acceptable offer to purchase the land referred to in the First Schedule hereto or the land at any time during the term of the lease the Landlord shall not accept the offer without first offering same to the Tenant for sale in writing on identical terms. The Tenant may elect to purchase the said land on those terms by entering into a written agreement to purchase same and by paying ten per cent (10%) of the purchase price as a deposit within fourteen (14) days of the date that the Tenant receives the Landlord’s written notice. The balance shall be payable within one (1) month from receipt of the Landlord’s written notice.
The essence of Mr Smith’s argument for Technix is that subclause (c) is clear that the right of pre-emption it contains may be triggered “at any time during the term of the lease”. The phrase “any time” includes periods when the option to purchase process is underway, as in this case. There is no justification, Mr Smith submits, for going beyond the plain and ordinary meaning of these words.
Mr Miles QC, for Fitzroy, submits, however, that the phrase, when seen in the context of the rest of the clause and the background circumstances that led to the agreement, must be interpreted as meaning “at any time during the term of the lease other than when subclause (a) or subclause (b) has been engaged”. Venning J agreed with Fitzroy.[2]
[2] At [63].
We agree with Venning J, for the reasons he gave.[3] We accept that the plain and ordinary meaning of subclause (c) is that it may be invoked “at any time”. But as this Court recently noted:[4]
... there is no presumption in favour of ordinary meaning. A meaning that may appear, when devoid of external context, to be plain and unambiguous, may not ultimately be what the parties intended when considered against all the relevant circumstances.
[3] At [56]‑[70].
[4]Trustees Executors Ltd v QBE Insurance (International) Ltd [2010] NZCA 608 [Trustees Executors] at [33], explaining Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5, [2010] 2 NZLR 444 [Vector].
When considered in the context of the rest of clause 3.25 and the circumstances that led to the agreement, we think the meaning of subclause (c) becomes clear.
Read literally, subclause (c) would allow Technix, if it concluded during the option to purchase process described in subclause (a) that it could get a better price elsewhere or that it did not want to subdivide the land, to simply invoke subclause (c), which would then free it to sell the property to a third party if Fitzroy could not or would not pay the higher price demanded of it within fourteen days. In short, Technix could easily render valueless the right granted to Fitzroy under subclause (a) and make redundant the complex investigation and valuation procedures described therein. We think it impossible that the parties could have intended such a result.
It is no answer for Technix to say that, if Fitzroy acted expeditiously through the option to purchase process, it could exercise its option to purchase and effect settlement before Technix could invoke subclauses (c) or (b) or before the fourteen-day time limit in those subclauses expired. This is because the option to purchase process was always going to take considerably longer than fourteen days, and the parties must have known this when they signed the lease. In order to explain why, we need examine subclause (a) in more detail.
Subclause (a) has two parts. The first is the investigation process into subdivision required to give effect to the option to purchase. The option to purchase relates only to the land “outlined in blue” on a plan attached to the lease, which was only part of the land on Technix’s title. (The rights of pre-emption under the other subclauses applied to more land.) So, as Venning J noted, the parties would have understood that if Fitzroy exercised its option to purchase, a subdivision was always going to be required.[5] And, importantly, they “must also have understood and accepted both the investigation and any subsequent subdivision process contemplated by subclause 3.25(a) was always going to take considerably longer than 14 days”.[6]
[5] At [61].
[6] At [61].
The second part of subclause (a) sets out how Fitzroy is to exercise its option to purchase, how the purchase price is determined, and how settlement is to be effected. It will be apparent from clause 3.25(a)(iv)-(viii) that the valuation process is complex and potentially lengthy. It requires the involvement of both parties. It requires the appointment of valuers to value both the land and engineering and plant machinery, by reference to certain prescribed formulas. If the difference in the resulting valuations is greater than 20 per cent, the valuers have to appoint an arbitrator to determine the final price to be paid.
In short, the entire option to purchase process could easily take quite some time to complete: certainly more than 14 days. The parties must have understood this when they made the agreement.
As Tipping J said in Vector, “the ultimate objective in a contract interpretation dispute is to establish the meaning the parties intended their words to bear”.[7] The parties could not have intended to grant Fitzroy a right that could be so easily rendered valueless by Technix. This is therefore one of those occasions when the plain and ordinary meaning of a contract could not have been what the parties intended, flouts business common sense and so must yield to the interpretation which does not do so.[8]
[7] Vector at [19].
[8]See Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191 (HL) at 201, aff’d in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 (HL) at 913.
Mr Smith submitted that it was Fitzroy’s interpretation which flouted business common sense and led to impracticable outcomes. That interpretation would allow Fitzroy to “oppressively exploit the ‘suspension’ of sub-clause (c)” and to “indefinitely retard and delay the process, just to retain the benefit of preventing Technix selling the land”. We do not accept that Fitzroy (or Technix) could unreasonably draw out the option to purchase process. Where no time is specified for the completion of a contractual obligation (as is the case with most of the obligations set out in subclause (a)), that obligation will need to be completed within a reasonable time.[9] So each party in this case would have a remedy in the event of unreasonable delay on the part of the other.
[9] Parsotv Greig Developments Ltd [2009] NZCA 241, (2009) 10 NZCPR 308 at [8].
In addition, it will be apparent that the two other subclauses within clause 3.25 may also, if read literally, be triggered at any time during the term of the lease.[10] As Venning J said:[11]
[I]f Technix had decided to sell and had offered the land to Fitzroy under cl 3.25(b) as required, but then, during the 14 day period when Fitzroy was considering the matter, Technix received a better offer from another party for the land, it would plainly not be entitled to invoke cl 3.25(c) and require a response from Fitzroy under that clause until the 14 day period provided in cl 3.25(b) had expired. To that extent at least, the reference to “at any time during the time of the lease” in cl 3.25(c) would not have any practical effect and would be read down. Similarly, once cl 3.25(a)(i) to (iii) is invoked, there is a process (as opposed to in the 14 day time period) to be undertaken by both parties which Technix cannot unilaterally frustrate.
[10] Subclause (b), while not using the words “any time”, is to the same effect.
[11] At [63].
We agree. The fact the parties could not have intended the words “at any time during the term of the lease” in subclause (c) to bear their literal meaning in a situation where subclause (b) has been triggered bolsters our interpretation of the same words in a situation where subclause (a) has been triggered.
This is enough, in our view, to dispose of the interpretation issue, but we think the background circumstances that led to the agreement reinforce our conclusion. This Court recently confirmed that “the wider background and circumstances should always be considered, even if there is no ambiguity or other interpretive difficulty with the words used by the parties”.[12]
[12]Trustees Executors at [32], citing: Vector at [4] per Blanchard J (with whom Gault J agreed); at [23] per Tipping J; and at [64] per McGrath J.
We gratefully adopt Venning J’s description of that wider background:
[56] The context of the circumstances in which the lease came to be completed in 1992 is important. Mr White-Robinson, Fitzroy’s managing director, says that he was directly involved in the negotiations with Mr Matthews of Technix for the purchase of the business assets of Fitzroy Engineering Ltd which, at the time was a subsidiary of Technix. It was effectively a management buy-out. The negotiations ran from 1991 until July 1992. Fitzroy ultimately purchased the business assets of Fitzroy Engineering Ltd from Technix under an agreement concluded in July 1992. As part of the negotiations the parties agreed to enter the lease so that Fitzroy could continue to operate the engineering business from the existing premises. Mr White-Robinson’s unchallenged evidence is that at the time of agreeing to purchase the business neither he nor Fitzroy could afford to purchase the land as well as the business.
[57] To provide security to Fitzroy, but still provide for a lease for a period of less than 20 years, (which the parties understood would trigger an automatic subdivision), the parties agreed to an initial ten year term with a right of renewal for ten years less one day. The parties clearly contemplated that Fitzroy would likely want to purchase the land if it became in a financial position to do so during the course of the lease. The engineering business conducted from the site was a large scale operation. To shift the base of operations would cause significant disruption to the business.
[58] It was against that background that cl 3.25 was incorporated into the lease.
The importance attached to clause 3.25 by the parties when it was inserted and the mutual expectation that it would probably be invoked strengthens our conclusion that the parties could not have intended to give Fitzroy a right that could so easily be frustrated by Technix.
For completeness, we also record that we reject Mr Smith’s submission that, to achieve the interpretation contended for by Fitzroy, the Court needs to imply a term into the contract. For the reasons given above, the parties’ intention that the subclause (a) process, once triggered, must prevail over subclauses (b) and (c) is obvious when reference is made to the clause as a whole and the background circumstances of the agreement. We are interpreting a particular contractual provision by reference to the parties’ intention, not implying a new provision into the contract to deal with an issue not foreseen by the parties.
Further, if (contrary to our view) Fitzroy’s interpretation involves implying a term, so too it could be said does the Technix interpretation. It would involve “implying” into subclause (a) a provision that, if notice were given under subclause (c) after the subclause (a) process has been triggered, the uncompleted steps under subclause (a) would no longer apply.
Conclusion
The ordinary meaning of the phrase “any time during the term of the lease” in clause 3.25(c) must be modified to accord with the meaning the parties intended their words to bear and to result in an interpretation which does not flout commercial common sense. The words “at any time during the term of the lease” in subclause (c) mean, in context, “at any time during the term of the lease other than when subclause (a) or subclause (b) has been engaged”. We accordingly dismiss the appeal.
Solicitors:
Greenwood Roche Chisnall, Wellington, for Appellant
Dennis King Law, New Plymouth, for Respondent
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