Terry Schwass Company Ltd v Marsh
[2017] NZHC 1382
•22 June 2017
IN THE HIGH COURT OF NEW ZEALAND BLENHEIM REGISTRY
CIV-2014-406-52 [2017] NZHC 1382
BETWEEN TERRY SCHWASS COMPANY LTD
AND JILL SCHWASS COMPANY LTD Plaintiffs
AND
DONNA LEE MARSH AND ANDREW TERENCE SCHWASS
First Defendants
AND
DONNA LEE MARSH AND ANDREW TERENCE SCHWASS AS TRUSTEES OF THE DEER PARK TRUST
Second Defendants
AND
DONNA LEE MARSH Counterclaim Plaintiff
AND
MICHAEL HARDY-JONES, CHRISTOPHER CLARK, ANDREW FINCH AND STEPHANIE GINDERS Third Parties
Hearing: 3 and 4 April 2017 Appearances:
D M Lester for Plaintiffs
S J Zindel and A Goodison for Defendants
J M Morrison for Third PartiesJudgment:
22 June 2017
JUDGMENT OF CULL J
TERRY SCHWASS COMPANY LTD AND JILL SCHWASS COMPANY LTD v DONNA LEE MARSH AND ANDREW TERENCE SCHWASS [2017] NZHC 1382 [22 June 2017]
Table of contents
The Issues ........................................................................................................................................... [5] The parties and their positions ......................................................................................................... [6] The plaintiffs................................................................................................................................... [6] The defendants................................................................................................................................ [8]
1. Was the advance a loan or a gift? ............................................................................................. [12] Gifts .............................................................................................................................................. [13] Presumption of Advancement ....................................................................................................... [16] The parties’ positions on the loan/gift issue ................................................................................. [22] Plaintiffs ....................................................................................................................................... [22] Donna’s defence ........................................................................................................................... [23] The evidence of the transaction .................................................................................................... [27] Chronology of events .................................................................................................................... [28] Allegations of a gift ...................................................................................................................... [43] The documentary evidence ........................................................................................................... [47] The Accountant’s evidence............................................................................................................ [48] Analysis ........................................................................................................................................ [67] Lawyer as agent............................................................................................................................ [76]
2. Enforceability of the loan .......................................................................................................... [81] Are the plaintiffs estopped from asserting their entitlement to repayment of the loan?................ [83] Is the oral loan agreement enforceable? ...................................................................................... [89] Property Law Act provisions ........................................................................................................ [92] Part performance of the agreement .............................................................................................. [95] Analysis ...................................................................................................................................... [102] Is interest payable and enforceable in this case? ....................................................................... [107]
Conclusion 1....................................................................................................................................... 1.1
Conclusion 2....................................................................................................................................... 2.1
Result ...............................................................................................................................................[117]
[1] The plaintiffs’ parents advanced money to their son and his partner to purchase a property. They seek a determination on whether the advance by the Schwass Family Trust of $910,000, made six years ago, was a gift or a loan.
[2] The monies were advanced by the Schwass Family Trust to enable the first defendants, Andrew Schwass (Andrew), and Donna Marsh (Donna), Andrew’s partner, to purchase a property (the Koromiko property). Andrew and Donna were in a de facto relationship of approximately 11 years and had one child during that relationship. Following Andrew and Donna’s separation on 17 October 2013, Relationship Property proceedings were issued and await determination in the Family Court.
[3] The plaintiffs issued these proceedings to resolve whether the Schwass Family Trust’s advance is a loan or a gift, as a separate and discrete issue for determination by this Court. All parties were in agreement that the High Court should determine the loan/gift issue to assist resolution of the outstanding property relationship issues.
[4] I propose to identify the issues and describe the legal status of each of the parties. Under each of the substantive issues, I will set out the relevant legal principles, detail the facts applicable, and reach conclusions following the analysis of the facts and law.
The Issues
[5] The following are the issues for determination:
(a) Was the $910,000 advance a loan or a gift? (b) If the advance is a loan:
(i)are the plaintiffs estopped from asserting their entitlement to repayment of the loan?
(ii) is the oral loan agreement enforceable?
(iii) is interest payable and enforceable in this case?
The parties and their positions
The plaintiffs
[6] The plaintiffs are a partnership of two corporate trustees: Terry Schwass Company Ltd and Jill Schwass Company Ltd (the Companies). The plaintiffs are trustees of both the Terence Schwass Family Trust and the Jill Schwass Family Trust. These two trusts trade in a partnership known as the Schwass Family Trust Partnership, (which in this decision will be referred to as the plaintiffs). Terence Schwass and Jillian Schwass are Andrew’s parents.
[7] They say that the statement relied on by Donna for a “subsequent gift” did
not occur and in any event, Donna’s claims do not establish an estoppel.
The defendants
[8] The first defendants are Donna and Andrew in their personal capacities. Andrew and Donna were living together in a de facto relationship but have since separated. A relationship property dispute is ongoing between Andrew and Donna.
[9] The second defendants are Donna and Andrew in their capacity as trustees of the Deer Park Trust. The Deer Park Trust was the purchaser of the Koromiko property.
[10] This proceeding concerns the claim between the plaintiffs and Donna only, in her capacities as first and second defendant. Andrew Schwass did not take part in the hearing, as the Statement of Defence filed on his behalf admits the plaintiffs’ claims against him.
[11] Donna issued third party proceedings against Hardie-Jones Clark, Solicitors of Blenheim, who acted for Donna and Andrew on the purchase of the Koromiko property, as well as acting for the plaintiffs. That claim is on hold pending the outcome of this proceeding.
1. Was the advance a loan or a gift?
[12] Before canvassing the facts surrounding the advance from the plaintiffs to Donna and Andrew, I turn to consider the legal principles applicable to distinguishing a gift from a loan, the presumption of advancement and the imputed knowledge of solicitors acting on clients’ transactions.
Gifts
[13] At common law, a gift inter vivos is a gratuitous transfer of property of any kind to another by a living donor that is not made in contemplation of, nor
conditional upon, the donor’s death.1 A gift is a voluntary transfer from the owner to another, made with the intention that the subject matter of the gift is not to revert to the donor. In contrast, a loan is something lent for the borrower’s temporary use, such as a sum of money lent at interest.2
[14] Whether funds have been advanced as a loan or a gift is a question of fact to ascertain the intention of the party making the advance. In Young v Young, Judge Somerville considered the factors relevant to establishing an intention to create a loan in that case included that the advances were meticulously recorded in a notebook and that there was no dispute between the parties as to the amounts, dates
or purposes of these advances.3
[15] One other factor for consideration is the presumption of advancement.
Presumption of Advancement
[16] In the context of funds advanced to family members, there has long been a presumption that the transfer of property from a parent to their child is a gift.4 This is known as the presumption of advancement.
[17] This presumption was considered recently in N v N,5 where Wylie J held that there was direct written evidence that established Mr and Mrs N had an intention to create a loan and not a gift. Wylie J considered as decisive that the parents had written an “irrevocable document” to record that they had given $100,000 as a loan to their son and his wife to buy a property. The document had been drafted by Mrs N and signed in the presence of a legal secretary who witnessed its execution. Both the mother and son signed the document. Thus, the presumption of
advancement was rebutted and an intention to create a loan was upheld.
1 Laws of New Zealand Gifts Inter Vivos (online ed) at [1].
2 Black’s Law Dictionary (9th ed, Thomson Reuters, 2009) at 1019 as cited in N v N [Relationship property: loan] [2010] NZFLR 161 (HC) at [42].
3 Young v Young [2000] NZFLR 128 (FC) at 130.
4 Laws of New Zealand Gifts Inter Vivos (online ed) at [45].
5 N v N, above n 2, at [46].
[18] In discussing how the presumption of advancement can be rebutted, Wylie J
in N v N stated:6
The presumption of advancement can be rebutted by evidence showing that there was no intention to benefit the alleged done by way of gift. A contemporaneous act or declaration by the alleged donor will suffice. Acts or declarations by the donor subsequent to the purchase or transfer, unless so connected with it as to be reasonably contemporaneous, are not admissible in favour of the donor to rebut the presumption…
[19] Wylie J cited Warren v Gurney, where Morton LJ held that oral declarations made by the donor at the time when the property was brought were sufficient to rebut the presumption of gift or advancement. Morton LJ stated:7
It is well established that when a parent buys a property and has it conveyed into the name of his child, there arises a presumption that the parent intended to make a gift or advancement to the child of that property. Of course, that is a presumption which can be rebutted by evidence that that was not the [parent’s] intention.
[20] In the earlier authority of Knight v Biss, a distinction was drawn between payments made to children, as opposed to their spouses. Turner J confirmed the principles applying to the presumption as follows:
(a) There is a presumption that a gift was intended for payments of money or delivery of goods between father and daughter. In that case, the onus is on the donor father to rebut the presumption.
(b)There is no presumption of such a gift between a father and son-in- law. The onus is then upon the son-in-law to prove that the transaction is a gift.8
[21] The parties accept the presumption of advancement does not apply here. Andrew has admitted it was a loan agreement and Donna accepts the presumption
does not apply to her.
6 At [47] (emphasis added).
7 Warren v Gurney [1944] 2 All ER 472 (CA) at 473 (emphasis added).
8 Knight v Biss [1954] NZLR 55 (SC).
The parties’ positions on the loan/gift issue
Plaintiffs
[22] The plaintiffs claim the advance was a loan to Donna and Andrew personally, with the Deer Park Trust guaranteeing the loan to the plaintiffs. The funds were not subsequently gifted to Donna and Andrew. They point to the documentary record saying it is inconsistent with Donna’s position that there was a gift, as it clearly establishes the advance was always intended by the plaintiffs to be a loan.
Donna’s defence
[23] Donna defends the plaintiffs’ claim, saying the funds were provided by way of a gift. In her Statement of Defence, Donna says that prior to purchasing the Koromiko property, she was told by Jill Schwass that the $910,000 advance “would be made available as a gift”.9 This statement, she says, makes the advance a gift made prior to the purchase of the property.
[24] Donna further states that nothing was discussed at any meeting, in any telephone conference, or by way of any other communications between her lawyers at the time and herself involving a loan or other form of liability, the existence of the Schwass Trust Partnership, or any request of a guarantee in relation to any liability.10
[25] Donna’s alternative argument is that even if funds were initially provided by way of a loan, they were then subsequently gifted. In support of this, she states that subsequent to the purchase of the Koromiko property the amount of $910,000 was entered as a liability in the financial statements of the Deer Park Trust. Donna states that when she queried this liability the accountant advised her that it was for accounting and tax purposes only and did not require repayment.
[26] Donna further points to being asked by Terry to work long hours at low wages in a variety of different industries, including being the on-site manager for the eggs business. She states that Terry represented to her that she should not be
concerned about the work she was undertaking because the Koromiko property
9 Statement of Defence at [19(a)].
10 At [19(d)].
belonged to her and Andrew on an unencumbered basis and that the eggs business would eventually belong to her and Andrew.
The evidence of the transaction
[27] To determine whether the monies advanced were a loan or a gift, it is necessary to examine the oral evidence and the contemporaneous documentation. Both Terry and Jill gave evidence of the discussions with Donna and Andrew, following Andrew’s signing of the sale and purchase agreement for the Koromiko property. The following is a chronology of the events leading to the purchase of the Koromiko property.
Chronology of events
[28] At some point during 2001 and 2002, Donna and Andrew commenced a de facto relationship. Donna says that it commenced in 2001, while Andrew’s parents contend that it was in 2003. Andrew was not available to give evidence and did not attend the hearing. The relationship is likely to have started prior to 2003.
[29] On 3 July 2003, Andrew purchased a family home at Anakiwa (the Anakiwa property).
[30] On 3 September 2003, their child Johannah was born. [31] In 2009, Donna and Andrew became engaged.
[32] In January 2010, Andrew and Donna wished to purchase the Koromiko property. Terry was supportive of the acquisition.
[33] On 16 January 2010, Andrew signed an agreement for sale and purchase for the property at Koromiko. The purchase price was $850,000 plus GST (if any). The required deposit was $80,000. The ultimate purchase price (including the deposit) was $910,000, with GST adjusted for the residential part of the property.
[34] On 16 January 2010, the same day that Andrew signed the purchase agreement, there were discussions about how the purchase of the property would be
funded. Both Terry and Jill confirmed that they would support the Koromiko property purchase. The purchase would be funded firstly with the sale proceeds of the Anakiwa property once it sold and Andrew and Donna would then see what further funds they could raise from the bank. The Schwass Family Trust was a potential “back stop” in respect of any further funding that may be required to complete the purchase.
[35] On 15 February 2010, before the Koromiko property was due to be confirmed, the Anakiwa property had not sold. The parties all met at Terry and Jill’s home in Picton, where Jill confirmed that the Schwass Family Trust could cover the purchase short-term. Both Jill and Terry said it was clear that this was a short-term advance only and the basis of the advance would be sorted out once settlement had occurred and all parties knew what funding was actually required from the Schwass Family Trust.
[36] On 15 February 2010, the Schwass Family Trust paid the deposit of $80,000 direct to the real estate agent. As the cheque was drawn on the Schwass Family Trust bank account. This was treated as a loan in the Schwass Family Trust accounting system. The balance of the funds, being $830,000, was transferred from Schwass Family Trust to Andrew and Donna’s lawyer, Mr Finch at Hardy-Jones Clark, immediately prior to settlement on 30 March 2010. This was also treated in Schwass Family Trust’s accounting system as a loan.
[37] In late March 2010, Mr Finch sent an email to Andrew, asking which entity, if any, would complete the purchase. He wished to complete the settlement statement tax invoice. On the solicitor’s advice, the Deer Park Trust was created to complete the purchase.
[38] On 22 March 2010, Andrew and Donna then settled the Deer Park Trust, of which they were both trustees, for the purpose of owning the Koromiko property. Mr Finch acted for the purchaser, being named as the purchaser’s solicitor on the last page of the agreement for sale and purchase.
[39] On 31 March 2010, the purchase was then settled using the remainder of the advance of $910,000 from the plaintiffs. The solicitors firm of Hardy-Jones Clark acted for Andrew and Donna on the purchase of the Koromiko property. The same firm also acted for the plaintiffs.
[40] On 10 January 2011, Koromiko Free Range Eggs Ltd (KFREL) was incorporated and operations began. Following the purchase of the Koromiko property, Donna had suggested that she operate a free range egg-farming business on the property to generate income. Jill and Terry gave financial assistance to establish the business and Donna managed the operational side of it.
[41] On 17 October 2013, Donna and Andrew separated. A temporary protection order was granted against Andrew on 18 October 2013.
[42] On 8 November 2013, the Anakiwa property was sold for $430,000.
Allegations of a gift
[43] Donna says that prior to purchasing the Koromiko property, she was told by Jill that the $910,000 “would be made available as a gift”. The plaintiffs contend that the documentary record, including email correspondence from the solicitors to Andrew, shows that the purchase monies were advanced to Donna and Andrew as a loan not a gift. The documentary record shows the subject of an applicable interest rate being considered. A caveat was registered over the Koromiko property in respect of “An Agreement to Mortgage”. Loan agreements and a deed of guarantee were drawn up by the solicitors, but were not signed, either before or after the Koromiko property purchase.
[44] Donna refutes that the monies were a loan. First, she says that Jill came to see Andrew and Donna after inspecting the Koromiko property and told them both to “go ahead and sign up because she had some money set aside.” She maintains that Jill said it was “all family and there was also talk of a gift but also as an advance on our inheritance”. There was some later talk of perhaps giving Jill the money from the Anakiwa house when it sold. This would be much less of course. It was all quite vague and loose. Donna contends that Jill said “don’t worry, I have got the money”.
[45] Donna maintains that there was no mention of any loan agreement at any time from Jill, Terry, Andrew or the solicitors who acted for Andrew and Donna in the purchase. Donna said that some time later, when she asked Jill if Donna and Andrew needed to repay the money, Jill replied “no, it is yours and Andrew’s inheritance that I have given to you … no, it is my gift to you and Andrew”.
[46] The second aspect of Donna’s evidence is that Mr Finch never spoke to her of a loan agreement nor copied her into the communications between the solicitors, who were both from the same firm. The communications were through Andrew, and concerned the need to record the extent of the advance from the plaintiffs and addressing the need for security. Donna protests that neither Andrew nor Mr Finch had the authority to bind her to a loan agreement. Donna acknowledges, however, that there was an “initial agreement” at the beginning of 2010 that the Anakiwa sale proceeds would be given to Jill. Donna acknowledged that she felt “morally” that the sale proceeds should be given to Jill, because Jill provided the money in the first place.
[47] Because the documentary evidence assumes significance in resolving the gift/loan issue, the details of the documents and the correspondence exchange between the solicitors and the parties, both before and after the settlement of the Koromiko property, are summarised in the table below. The references to security and loan documentation are highlighted in bold.
The documentary evidence
Date 20 March 2010 Mr Finch writes to Terry and Andrew: “I recall a discussion where the
purchase price is to be advanced from Terry and Jill’s Trust to the Deer Park Trust … We should look to prepare documents to record the extent of this advance. If that is correct, Terry, can you advise the interest (if any) payable and what security (if any) is required.”
22 March 2010 Andrew replies to his solicitor, asking him to prepare the documents to record
the advance but said “as for interest, that is a DIRTY WORD, please do not mention it again!!” He then asks his solicitor to ask Jill that question, as “she is the chancellor”. Andrew concludes by saying “security is your call, but I guess it’s over the land”.
22 March 2010 A client authority form (an A & I) was executed for the transfer of the
property. The loan documents, although prepared, were never signed. The A & I form for the mortgage that had been prepared was never signed. The unsigned Term Loan Agreement was drafted on the basis that the borrowers are Andrew and Donna personally, with guarantees from Andrew and Donna as trustees of the Deer Park Trust.
Date 29 March 2010 An email is sent to Andrew and Donna from their solicitors firm, addressed
“Hi Andrew and Donna” forwarding a settlement statement and tax invoice received from the vendors solicitor, confirming the need for $830,000 to complete settlement on 31 March 2010.
30 March 2010 Terry emails Mr Finch, acting in his capacity as solicitor for the purchasers,
and copies in Andrew. The email is as follows:
Hi Andrew(s). Regarding the funding for the purchase of
the [Koromiko] property…
Jill and I are prepared to advance the settlement money interest free for a period (say four months) while Andrew and Donna get their house sold.
As an interim measure to protect the interests of Jill and Terry’s respective Trusts, we think it prudent to hold a caveat over the property until such time as the final financing of the property is put in place.
We are making arrangements for the balance of $830,000.00 to be deposited in HJC Trust a/c today … this will take the total advance to 910k (I think) …
30 March 2010 Mr Finch’s PA sends an email to another partner at Hardy-Jones Clark,
entitled “Re: Advance to Andrew and Donna’s Trust (Deer Park Trust)” with
a request to phone Terry “to discuss security for the loan advance of
$910,000.00 to Andrew and Donna’s Trust”.
30 March 2010 Mr Finch’s PA records that she had spoken to Andrew to let him know that
there will be further documents for signing in respect of the Loan Agreement between the Deer Park Trust and his parents’ Trusts and that she had tried to make an appointment for Andrew and Donna to come in at midday, but Andrew had asked if it could be later in the day.
31 March 2010 Settlement was completed and the trust account receipt issued by the vendor’s
solicitor records the receipt of $830,000, the amount required to complete the purchase. On the same day, 31 March, an email from the Hardy-Jones Clark partner acting for the Schwass Family Trust to Mr Finch records that funds had been journaled on Terry’s instructions:
This is on the basis of the agreement to grant mortgage made between our respective clients. Terry and Jill will lodge a caveat to protect his interest until loan and security documents can be finalised next week.
Please let me know the borrower. If it is Andrew and Donna personally, then a guarantee will be required from the Trust. Terry and Jill will also take a registered first mortgage against the Title for the property being purchased.
12 April 2010 A memorandum from the Schwass Family Trust partner to Mr Finch asks:
(1) Could [sic] please advise if the loan agreement is to be prepared in the name of Andrew and Donna personally or the trustees of the Deer Park Trust.
(2) As discussed, if the loan is to be made to Andrew and Donna personally then a guarantee will be required to be given by the trustees of the Deer Park Trust.
22 April 2010 A further internal memorandum between the Hardy-Jones Clark partners,
attaches a Term Loan Agreement and a Deed of Guarantee, with a request to Mr Finch to arrange for the documentation to be signed by Andrew and Donna, along with a client authority to register the mortgage. It also asks for a copy of the insurance policy showing the Schwass Family Partnership as mortgagee.
Date 6 May 2010 A caveat over the Koromiko property was lodged to protect what was called
“an Agreement to Mortgage”. The caveat was not challenged.
12 May 2010 A memorandum to Mr Finch from the Schwass Family Trust solicitor
provides a note of costs payable by Andrew and Donna for costs incurred by the plaintiffs for preparation of the loan documentation.
10 June 2010 Mr Finch sends a reporting letter to Andrew and Donna, referring to the fee
incurred for the preparation of the loan documents. Initially, the fee was stated as being payable by AT Schwass and DL Marsh, but an amended account in respect of the fee for the loan document was addressed to the Deer Park Trust.
14 July 2010 Mr Finch wrote to Andrew, recording that there were a couple of matters
requiring completion, which included Wills, Memorandum of Wishes for the Deer Park Trust and “the loan and security documents for your parents’ Trusts.”
The Accountant’s evidence
[48] Mr Lock was the external Chartered Accountant for Terry’s and Jill’s business interests and has remained involved with their business interests in an advisory/commercial role. He was not actively involved at the time of purchasing the Koromiko property, but he prepared and sent the Deer Park Trust accounts to Donna and Andrew on 19 August 2011 and 13 August 2012 for the respective tax years. The $910,000 advance from the plaintiffs was recorded as a term liability in the financial statements of the Deer Park Trust for both of the financial years.
[49] Mr Lock gave evidence about two meetings concerning Donna and Andrew. Those meetings were on 15 August 2012 and 13 September 2013 respectively.
[50] At the first meeting, Mr Lock says that Terry, Andrew and he were present. The purpose of the meeting was to “undo the plaintiffs’ investment in the Koromiko operation”. In a memorandum he prepared for that meeting, entitled “Letter of Understanding”, Mr Lock sets out the three components of the operation of KFREL. He described them as:
(a) The parties have collectively acquired land, built the necessary sheds and facilities for egg production and established an egg sales/distribution business.
(b) KFREL owns the eggs production and sales business, including the
“flock of birds”. The parties jointly own shares in KFREL.
(c) The land and buildings are owned by the Deer Park Trust.
[51] The document sets out a series of propositions for the parties’ potential agreement, “to facilitate the exit of Terry and Jill and the Schwass Family Trust from the joint activities”.
[52] Of relevance to the loan/gift issue, Mr Lock’s memorandum refers to the
$910,000 contributed to the Deer Park Trust by the plaintiffs. The memorandum proposes that a loan agreement should be prepared and signed by the parties, allowing for interest to be paid on the outstanding loan balance at an agreed rate, and the loan repayments to be made at agreed intervals.
[53] Mr Lock confirmed in his evidence that the only money contributed by the plaintiffs to the Deer Park Trust was the $910,000 for the purchase of the Koromiko property. He did not recall any suggestion at the meeting that anyone believed or understood that Terry and Jill or the Schwass Family Trust had either gifted the
$910,000 prior to the purchase of the Koromiko property or had subsequently agreed to write off that debt. Donna was not present at that August 2012 meeting.
[54] The remainder of the memorandum refers to the separate amounts paid by the plaintiffs to KFREL, with further proposals to be agreed between the parties. Those further proposals included a loan agreement with interest and repayments in respect of the egg business.
[55] Following the meeting, Mr Lock sent an email to Andrew and Donna respectively, stating that he thought “yesterday went well”. He invited feedback on the memorandum, asking if an agreement could be finalised and signed early the following week. He advised that he deliberately kept away from the fine detail, like interest rates, but he wanted to get the agreement “sorted as a starting point” and spell out all the things that need resolving. No further action was taken by any of the parties.
[56] A year later, in September 2013, Mr Lock prepared a further preparatory note for the second meeting. This focused on the best option for investing the net
proceeds of sale of Donna and Andrew’s Anakiwa property, which was to be settled on 7 November 2013. Mr Lock recorded in the preparatory note his understanding about the eventual application of the Anakiwa sale proceeds. He wrote:11
At the time of buying Koromiko, I believe the understanding was that any eventual Anakiwa sale proceeds would be used to repay “a portion of” SFT advances (used in buying Koromiko).
[57] The discussion paper also included an option of the Schwass Family Trust holding the title for the Koromiko property, which would enable it to utilise the title as security for funding other Schwass Family Trust projects. Amongst the details accompanying the option, the paper recorded that if the Schwass Family Trust was to take over the title as proposed, that would mean Andrew and Donna would have no interest in the land or buildings at Koromiko. This would result in a separation of business and land interests, with the plaintiffs owning the land and buildings and Andrew and Donna owning the business and the poultry. There would be “some form of lease” from the plaintiffs to Andrew and Donna.
[58] This option was mooted to factor in the level of Schwass Family Trust funding that has gone into the “Koromiko operation”. As part of the explanation for the potential option, the preparatory note recorded that “these changes would clarify ownership and responsibility for both the Koromiko property and the Koromiko business interests”. Terry noted that:
He is also keen to ring fence the current advances and while not seeking their immediate repayment, he was keen to ensure they be capped after the above rearrangements have been completed … and as funds become available they be repaid in some manner acceptable to all.
[59] The preparatory note concludes by stating that once the changes had been actioned, the Schwass Family Trust would own the Koromiko land and buildings, KFREL would own the business and would have a lease to protect “its occupancy”, and Andrew and Donna would be granted the use/occupancy of the residence-related
land with a right of purchase at some pre-agreed price if they so chose.
11 The former wording of “any” was changed to “a portion of” during Mr Lock’s cross- examination.
[60] The second meeting of 13 September 2013 was held at Picton and was attended by Donna, Andrew, Terry and Mr Lock. Mr Lock explained to the Court that the meeting was 2–2½ hours duration. The option of the plaintiffs owning the land, with Donna and Andrew leasing it and/or repurchasing it, was discussed in Donna and Andrew’s presence, including the reference to the advances made by the plaintiffs both for the business and for the purchase of the Koromiko property.
[61] Mr Lock told the Court that when these issues regarding the advances were made, there was no negative reaction or any suggestion the advances were not debts or loans. Terry also asserted that at no time during the September meeting did Donna suggest the money for the Koromiko property was a gift. Nor did she question the original funding arrangements.
[62] One month later, Andrew and Donna had separated and an interim protection
order was granted on 18 October 2013 against Andrew on Donna’s application.
[63] Donna gave evidence that the first time she recalled the word “mortgage” in
respect of the $910,000 advance was at the access Family Court hearing in February
2014, when she had made application for an occupation order of the Koromiko residence and a permanent protection order. Andrew told the Family Court Judge that his parents had a mortgage on the property. This was “news” to Donna. She acknowledged there had been mention of advances at the September 2013 meeting with Mr Lock. She also acknowledged that the funds were advanced from the plaintiffs to Andrew and her personally, and at their solicitor’s suggestion, they advanced the funds to the Deer Park Trust.
[64] Donna also referred to a Trust minute of the Deer Park Trust, which records that if called upon by Andrew and herself, the Trust will grant a mortgage to them in their personal capacities, to secure the indebtedness to the Trust. They prepared immediate gift statements in the 2010–2011 financial year to the Deer Park Trust, such gifting acknowledging that the advances to them personally were then advanced to the Trust. It is important to note there were no gift statements made by the plaintiffs in respect of the advance to the plaintiffs.
[65] Donna also referred to statements that Terry had made, both to her and in her presence, that Andrew and she had the Koromiko farm so they did not have anything to worry about for the future. In addition, they received intimations from Terry and Jill that the Koromiko farm was part of their inheritance, which they had received in advance. Donna denies there was mention of a short term advance by Terry and Jill, prior to the confirmation of the sale of the Koromiko property.
[66] In relation to the loan being recorded in the company accounts for the plaintiffs and the Deer Park Trust accounts, Donna says the accounts were prepared by the “common family accountant” and she was reassured that the debt was recorded as such for accounting and tax purposes, but did not require repayment. The debt from the Deer Park Trust was owed to Andrew and her, Donna says, not to Andrew’s parents’ trusts. Donna maintains she was not told about the loan documents being prepared, nor was she asked to sign anything.
Analysis
[67] Applying the legal principles to the facts, the plaintiffs must establish that there was no intention to create a gift, and there was an express intention to create a loan.
[68] On a review of the evidence, the relevant facts evincing the intention by the plaintiffs are as follows:
(a) the significant sum of money involved, namely $910,000;
(b)because the Anakiwa property had not sold, the plaintiffs’ advance was provided as a stop gap measure to fund the purchase of the Koromiko property;
(c) Donna accepts that the sale proceeds from Anakiwa were repayable
“morally” to Jill;
(d)prior to the Koromiko property settlement, Mr Finch sought the preparation of documents to record the extent of the advance from the
plaintiffs, the interest that was payable (if any) and what security (if any) is required;
(e) Andrew suggested security be taken over the land, but rejected the suggestion of interest being payable;
(f) Terry responded that he and Jill were prepared to advance the settlement money interest-free for a period of “say four months” while Anakiwa was sold and suggested that a caveat be placed over the property until the final financing of the property was put in place;
(g)Mr Finch advised the plaintiffs’ solicitor that a caveat could be registered to protect Terry and Jill’s interests until the loan and security documents were finalised. The caveat was to be on the basis of the agreement to grant a mortgage between the respective parties;
(h)the plaintiffs’ solicitor sought a guarantee from the Deer Park Trust, if the borrower is to be the Deer Park Trust;
(i)Mr Finch corresponded with Donna and Andrew directly, referring to the fee incurred for the preparation of “loan documents” and the need to complete loan and security documentation for Andrew’s parents’ trusts;
(j)the documentary evidence corroborates the evidence of Terry and Jill that at the 15 February 2010 meeting, prior to confirmation of the Koromiko property purchase, the Schwass Family Trust was to advance the funds for a short term only. The terms and interest rates were to be sorted out once the settlement had occurred and the precise amount of funding was known, after the sale of Anakiwa;
(k)Andrew admitted in his Statement of Defence that the advance from the plaintiffs was a loan;
(l)the plaintiffs did not complete any gift duty statements in respect of the advance to Donna and Andrew. In 2010, gift duty was payable.
(m)Mr Lock’s memoranda for the two meetings in 2012 and 2013 highlighted the advance as a loan and, at the second meeting, potential future structuring of the advance was discussed in the presence of all parties, without demur.
[69] The evidence overwhelmingly points to a clear intention on the part of the plaintiffs to advance $910,000 to Donna and Andrew as a loan. The evidence comprises the oral discussions and statements prior to the confirmation of the Koromiko property purchase agreement, as well as the documentary record of correspondence and draft agreements evidencing the plaintiffs’ intention that their advance was secured and was recorded as a loan.
[70] The absence of gift statements from the plaintiffs, when gift duty would have been payable, is also telling. For such a significant sum, the omission to enter into gifting arrangements was not only remiss, but serious. Instead, the plaintiffs’ company accounts and the Deer Park Trust accounts respectively record the advance as a loan from the Schwass Family Trust and as a term liability for the Deer Park Trust to the Schwass Family Trust.
[71] I am left in no doubt that the plaintiffs advanced the funds to Donna and
Andrew as a loan.
[72] For completeness, I will deal briefly with Donna’s second affirmative defence, namely if the funds were initially provided by way of loan, they were subsequently gifted.
[73] The meetings with the accountant, Mr Lock, and the documentation which he prepared for both of the meetings, make it clear that the $910,000 funds were advanced as a loan and options were being explored to have the parties agree to be bound by a term loan agreement, potentially with interest payable. If Donna had understood that the $910,000 advance was subsequently gifted, she did not raise any
concern at the September 2013 meeting with the accountant and did not object to the proposals that were being discussed at that meeting. It was plain that the plaintiffs were seeking to resolve the outstanding loan liability with Donna and Andrew. In addition, Donna accepts that the Anakiwa proceeds of sale should be repaid, in recognition of Jill’s actions, in making the funds available to Donna and Andrew for the purchase.
[74] For the reasons set out above, I cannot uphold Donna’s defence that the funds were subsequently gifted.
[75] I turn now to deal with Donna’s defence that she had no knowledge of the relevant documentation, because her solicitor never told her about the advance being a debt either owed by Andrew and Donna personally or from the Deer Park Trust.
Lawyer as agent
[76] Mr Finch was the solicitor acting on the completion of the purchase of the Koromiko property for the Deer Park Trust trustees. He was involved in the exchange of email correspondence in respect of the advance of monies from the plaintiffs. The issue is whether Donna had knowledge of the relevant documentation regarding the loan obligations, either personally or as a trustee.
[77] The documentary evidence table sets out the relevant correspondence between Donna, Andrew and Mr Finch, their solicitor. On the documentation, it is plain that Mr Finch was acting for Donna and Andrew and was seeking instructions on the terms of the loan, including the interest and security required. It is plain that Mr Finch understood the advance was to be treated as a loan. Donna’s awareness of the loan documentation at the relevant time is irrelevant to the issue of the plaintiffs’ intentions. The critical question, as Warren v Gurney made plain, is the donors’
intention at the time of advancing funds.12
12 Warren v Gurney, above n 7.
[78] The authorities reinforce that the lawyer–client relationship is one of agency.13 In GE Dal Pont’s Lawyers’ Professional Responsibilities, the author opines that:14
… the hallmarks of a lawyer–client relationship mark it as one of agency, whether to create legal rights and obligations for the client, affect those rights and obligations, or as only an authority to represent the client. Most of the lawyer’s functions fall within the latter form of authority, but more generally the lawyer has been described as “the alter ego of the client”, such that “[t]he lawyer’s rights when acting for a client are not his or her own but are derivative rights”.
[79] Mr Finch was named as the solicitor acting for Andrew in the agreement for sale and purchase of the Koromiko property; he witnessed the signatures on the Deer Park Trust deed, including Donna’s; he is recorded as the solicitor acting on the deed of nomination under which Andrew nominated that the trustees of the Deer Park Trust would complete the purchase; he corresponded with the plaintiffs’ solicitors (albeit in the same firm) on behalf of Donna and Andrew and he wrote the reporting letter on the completion of the purchase on 10 June 2010 to both Andrew and Donna.
[80] Andrew and Donna, in both their personal and trust capacities, are fixed with the knowledge of Mr Finch gained in the course of the transaction for which he was acting for the respective parties. Donna is imputed to have that knowledge. However, as stated above, this becomes irrelevant in determining whether the plaintiffs’ advance was intended to be a gift or a loan. Although Donna is imputed with the knowledge of the transaction through Mr Finch of the transactions finalised on her behalf, this does not derogate from my finding that the plaintiffs intended the advance to be a loan.
2. Enforceability of the loan
[81] I turn then to consider the enforceability issues, which are three fold.
[82] If the advance is a loan:
13 Sargent v ASL Developments Ltd (1974) 131 CLR 364 (HCA) at 659 per Mason J.
14 GE Dal Pont Lawyers’ Professional Responsibility (6th ed, Thomson Reuters, 2017) at [3.80] (citation omitted).
2.1are the plaintiffs estopped from asserting their entitlement to repayment of the loan?
2.2 is the oral loan agreement enforceable?
2.3 is interest payable and enforceable in this case?
Are the plaintiffs estopped from asserting their entitlement to repayment of the loan?
[83] As an alternative defence, Donna has pleaded an estoppel defence. She claims that the Deer Park Trust contains a clause which states that if she and Andrew separated, the Trust assets must be divided equally between them. Donna claims that she believed that she and Andrew, through the Deer Park Trust, owned the Koromiko property. Donna claims that in reliance on that belief, she worked on the property, Jill and Terry were aware of her belief, and it would be unconscionable therefore to allow the plaintiffs to assert their entitlement to the alleged loan.
[84] In support of the estoppel defence, Counsel for Donna, Mr Zindel addressed two aspects of the affirmative defence as it was pleaded. First, he submits that there was an estoppel by representation, upon which Donna relied in carrying out her work at KFREL, believing that the Koromiko property was to be hers and Andrews.
[85] Secondly, he submits there should be a constructive trust imposed upon Terry and Jill, as their assets were maintained and enhanced by the work of Donna. Mr Zindel relies on the Court of Appeal decisions of Murrell v Hamilton15 and
Hawkes Bay Trustee Company v Judd.16 As part of this submission, Mr Zindel said
there were direct or indirect contributions and a reasonable expectation of an interest in the Koromiko property, such that the plaintiffs should reasonably expect to yield an interest to Donna. On both grounds, Donna’s claim rests on unconscionability if the plaintiffs are permitted to assert their entitlement to the loan of $910,000.
[86] I am unable to uphold Donna’s affirmative defence of estoppel, as pleaded and argued, for three reasons. They are:
15 Murrell v Hamilton [2014] NZCA 377.
16 Hawkes Bay Trustee Company v Judd [2016] NZCA 397 at [43]–[49]
(1)Donna’s belief that the Koromiko property was owned by the Deer Park Trust on an unencumbered basis, as pleaded, cannot be upheld on the evidence and in light of my finding that the plaintiffs’ advance was a loan not a gift. Nor do I uphold the pleading or submissions that the funds, if initially provided by way of a loan, were subsequently gifted. The evidence does not support this defence.
(2)Donna worked for wages at KFREL, which was a separate entity and received separate advances from the plaintiffs for its operation. The details of KFREL’s business, including the financial statements, are not before the Court but form part of the Family Court proceedings in relation to the division of relationship property between Donna and Andrew. This Court is seized of the loan advance for the Koromiko property purchase only. The unconscionability or detriment to Donna cannot be assessed without all of the financial details of KFREL and the valuations of the property and improvements.
(3)Donna’s contributions, direct or indirect and the expectation of an interest in the Koromiko property, fall to be considered under the Property (Relationships) Act 1976, and/or a constructive trust claim. There is no constructive trust pleading before this Court and the evidence in this Court was directed to whether the advance was a loan or a gift only.
[87] In making my finding that the plaintiffs are not estopped from asserting their entitlement to repayment of the loan, I am not making any findings as to how the loan is to be repaid, or whether the repayment should be made, in full or part, or by whom, or in what proportions amongst the parties. Those issues are alive in the Family Court proceedings under the provision of the Property (Relationships) Act
1976.
[88] I find the plaintiffs are not estopped from asserting their entitlement to repayment of the loan.
Is the oral loan agreement enforceable?
[89] Although the plaintiffs’ caveat was registered on the basis of “an agreement to mortgage”, no such agreement was signed. At the time that the $910,000 funds were provided by the plaintiffs to settle the Koromiko property purchase, the legal identity of the borrower was unknown. On 31 March 2010, the plaintiffs’ solicitor wrote to Mr Finch, acting for Andrew and Donna, recording that funds had been journalled on Terry’s instructions, on the basis of the agreement to grant a mortgage made between the respective parties. The plaintiffs’ solicitor is asking for the name of the borrower, stating that if it is Andrew and Donna personally, then a guarantee will be required from the Deer Park Trust. It was envisaged that the plaintiffs would take a registered first mortgage against the Koromiko property in due course.
[90] As the evidence reveals, the funds were advanced to complete the Koromiko property purchase on 31 March 2010. On 22 April 2010, the respective solicitors record that the funds are advanced to Andrew and Donna personally, to be guaranteed by them as trustees of the Deer Park Trust. The term loan agreement and the deed of guarantee were never signed. It follows that the intended first mortgage to the plaintiffs was never registered.
[91] The issue to be determined is whether the oral loan agreement is enforceable as a mortgage over the Koromiko property.
Property Law Act provisions
[92] The relevant legislation is the Property Law Act 2007 (PLA). Section 24(1) specifies that any contracts for the disposition of land are not enforceable unless they are in writing and are signed by the party against whom the contract is sought to be enforced.
[93] Section 25 specifies that dispositions of interests in land must be created in writing and signed by the settlor for the following dispositions:
(a) an existing interest in land acquired by taking possession of the land;
(b) an existing legal or equitable interest in land; and
(c) an existing equitable interest in a mixed fund consisting partly of land and partly of other property.
[94] Section 26 however, provides that ss 24 and 25 do not affect the doctrine of part performance.
Part performance of the agreement
[95] The equitable doctrine of part performance is preserved by s 26 of the PLA. The doctrine was developed to mitigate the harshness of the rules relating to written evidence of contracts and, on occasion, the enforcement of an oral contract.17
[96] The doctrine was considered by the High Court in TA Dellaca Ltd v PDL Industries Ltd.18 There, the High Court considered whether acts performed in reliance on an oral contract were sufficient or whether the necessary acts had to be in part performance of the oral contract. Tipping J held that there were three requirements for the doctrine to be satisfied:19
(a) there must be an oral agreement which would otherwise be enforceable as a contract;
(b)the party seeking to enforce the oral agreement must have done one or more acts of part performance of the contract; and
(c) the circumstances in which that part performance took place make it unconscionable for the defendant to rely on the Contracts
Enforcement Act 1956.20
17 Laws of New Zealand Contract (online ed) at [167].
18 TA Dellaca Ltd v PDL Industries Ltd [1992] 3 NZLR 88 (HC).
19 At 109.
20 The Contracts Enforcement Act 1956 was repealed by s 366(a) of the Property Law Act 2007.
The Property Law Act can be substituted into this requirement as it contains similar requirements of written and signed agreements for a disposition of land to be enforceable.
[97] In relation to the second requirement, Tipping J stated that a sufficient act of part performance is one which:21
… clearly amounts to a step in the performance of a contractual obligation
… when viewed independently of the oral contract [the act] was, on the
probabilities, done on the footing that a contract relating to the land and such as that alleged was in existence.
[98] In that case, Tipping J held that several acts undertaken were insufficient to satisfy the doctrine of part performance. These acts included the taking of possession of the property, work on the premises, obtaining insurance for the property, inquiring into solicitors to act for the vendor, and the voluntary surrender of the lease of the plaintiff ’s other property. These acts might have been undertaken in reliance on the understanding of an enforceable oral contract, but were not acts of part performance.
[99] The Court of Appeal in Fleming v Beevers affirmed the continued existence of the doctrine in New Zealand.22 Mr Beevers had promised to leave Ms Fleming (his de facto partner) in his will his half interest in a property that the parties had jointly acquired, plus his grand piano. There was no written agreement and this was not entered into Mr Beevers’ will before he died. The Court of Appeal affirmed the requirements of the doctrine as stated in TA Dellaca. In relation to the second requirement, the Court stated:23
It is the composite contract of which part performance must be demonstrated not that aspect alone which relates to land. For this reason part performance of the other aspects of a composite transaction are capable of being regarded as acts of part performance of the transaction as a whole and thus of the land aspect.
[100] The Court held that Ms Fleming had fulfilled two sufficient actions of part performance in relation to the property in question: signing the agreement to buy the property and carrying it into effect; and raising the money which constituted her half share of the purchase price. These actions were found to be consistent with the
whole oral contract for Ms Fleming to obtain Mr Beevers’ half share of the property
21 TA Dellaca Ltd, above n 18, at 109.
22 Fleming v Beevers [1994] 1 NZLR 385 (CA).
23 At 392, applying the case of Steadman v Steadman [1976] AC 536 (HC).
upon his death. In its determination, the Court held that an important concept behind the doctrine of part performance was:24
The acts of part performance are treated for probative purposes as a satisfactory substitute for the statutory requirement of writing. It is the concept of substitute proof which led to the need for the acts of part performance, of themselves, without reference to the evidence of the oral contract, to point to the probability of a contract relating to the land and consistent with that alleged.
[101] The courts have identified a wide range of sufficient acts that amount to part performance, including:25
(a) acceptance of rents and failure to solicit new tenants; (b) arrangement for a new valuation of the property; and (c) preparation and forwarding of a draft formal contract.
Analysis
[102] The plaintiffs rely on the doctrine of part performance, which they say are met in three ways:
(a) The funds were advanced on the basis of the agreement to grant a mortgage made between the respective parties, which is evidenced by the email of Wednesday 31 March 2010, from the plaintiffs’ solicitor to Mr Finch.
(b)The monies were advanced to complete the Koromiko property purchase for Donna and Andrew’s benefit.
(c) Documentation was drafted in the form of a term loan agreement, a guarantee and the private individual client authority for an electronic transaction, in respect of the purchase (signed) and the registration of
the term loan (unsigned).
24 At 393–394.
25 Laws of New Zealand Contract (online ed) at [167].
[103] The finding that the plaintiffs advanced the funds to Donna and Andrew as a loan meets the first requirement that there was an oral agreement to advance the funds as a loan, (at the meeting prior to confirmation of the Koromiko property contract), followed by the acceptance that there was a need for loan documentation and security.
[104] The draft documents were prepared by the agreement and consent of Donna and Andrew, through their solicitor. Following correspondence between the respective parties’ solicitors to confirm the transaction as an agreement to mortgage, all documentation was structured so that Andrew and Donna received the funds personally. The draft documentation is further evidence of the parties’ part performance of the agreement to mortgage.
[105] The agreement to advance the funds was performed for the purpose agreed, namely, the acquisition of the Koromiko property. This was done so on the agreed basis that there was an agreement to mortgage, as evidenced by the plaintiffs’ solicitors email of 31 March 2010.
[106] I find therefore, the loan agreement, being the agreement to mortgage, identified in the correspondence of 31 March 2010 is enforceable by virtue of s 26 of the PLA and the equitable doctrine of part performance.
Is interest payable and enforceable in this case?
[107] The last issue is whether the plaintiffs can claim interest in respect of the loan advance of $910,000. If so, from what date does it become payable and at what interest rate?
[108] Section 27 of the PLA stipulates that a contract of guarantee must be in writing and must be signed by the guarantor:
27 Contracts of guarantee must be in writing
…
(2) A contract of guarantee must be—
(a) in writing; and
(b) signed by the guarantor.
(3) Subsection (2) does not require the consideration for a contract of guarantee to be in writing or to appear by necessary implication from a writing.
(4) In this section, contract of guarantee means a contract under which a person agrees to answer to another person for the debt, default, or liability of a third person.
[109] It is plain, that although there was a draft guarantee document prepared for execution by Donna and Andrew, this documentation was not signed by either the plaintiffs or Donna and Andrew personally or in their capacity as trustees. By virtue of s 27 of the PLA, there cannot be an enforceable contract of guarantee.
[110] Mr Lester accepts that the form of the guarantee was not prepared or drafted at 31 March 2010 when the funds were provided for the settlement of the Koromiko purchase. He submits, however, that the agreement to mortgage, evidenced by the correspondence of 31 March 2010, constitutes a mortgage under the PLA and includes the covenants implied in mortgages under sch 2 of the PLA.
[111] Under sch 2 pt 1, the mortgagor must pay to the mortgagee the principal amount secured by the mortgage and interest on the principal amount from the date of the advances by the mortgagee until the date of their payment:
(a) at the agreed rate (if any) specified in the mortgage or any other instrument; and
(b) at the times and in the manner specified in the mortgage or any other instrument.
[112] In this case, there was no agreement on the interest payable or the dates at which such sums became payable. Indeed, the reverse was the case. At the suggestion of interest, Andrew eschewed the notion in his reply of 22 March 2010.26
No interest rate was settled by the plaintiffs and certainly no agreement with Donna and Andrew was reached on the rate or the dates of payment.
[113] Even at the 13 September 2013 meeting with Mr Lock the interest on the
$910,000 advance, proposed in the previous years’ letter of understanding, had not
been resolved or agreed.27
[114] In the absence of any agreed rate of interest or agreed timing and manner for repayment, I do not uphold the plaintiffs’ submission that interest is payable under the implied covenants in mortgages in sch 2 pt 1 of the PLA.
[115] In the event that I found the interest is not payable pursuant to the agreement to mortgage under the PLA schedule, Mr Lester seeks an interest rate under the Judicature Act 1908, payable from the date of the plaintiffs’ statement of claim.
[116] As the parties never concluded any agreements on: (a) whether interest should be payable;
(b) the applicable interest rate; or
(c) the basis of repayment,
I conclude that interest is not payable or enforceable on the plaintiffs’ loan advance.
Conclusion 1
1.1The $910,000 advanced by the Schwass Family Trust to Donna and Andrew was a loan, not a gift. The evidence evinces a clear intention on the part of the plaintiffs to provide the funds as a loan, for the purposes of Andrew and Donna acquiring the Koromiko property and by agreement with Donna and Andrew’s solicitor, a caveat was registered over the title, as security for the plaintiffs’ loan.
1.2The $910,000 advance was not subsequently gifted. It was, and remained, a loan from the plaintiffs to Donna and Andrew.
Conclusion 2
2.1The plaintiffs are not estopped, by words or conduct, from asserting their entitlement to repayment of the loan.
2.2The loan agreement, being the agreement to mortgage identified in the correspondence of 31 March 2010 is enforceable, by virtue of s 26 of the PLA and the equitable doctrine of part performance.
2.3In the absence of a signed guarantee or any agreement to pay interest or the interest rate to be applied on the basis of repayment, interest is not payable or enforceable.
Result
[117] The plaintiffs claim succeeds in part, namely, that the $910,000 advance from the plaintiffs to the defendants is a loan, not a gift. No interest on the loan is payable or enforceable.
[118] Counsel are to confer on costs. If no agreement can be reached, Counsel are to file memoranda.
Solicitors
McFadden McMeeken Phillips, NelsonZindels, Nelson
Lambton Chambers, Wellington, John Morrison
Cull J
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