Verano Properties Limited v Sever

[2010] NZCA 386

IN THE COURT OF APPEAL OF NEW ZEALAND

CA309/2010
[2010] NZCA 386

BETWEENVERANO PROPERTIES LIMITED

First Appellant

ANDCRAIG JOHN WATTS

Second Appellant

ANDANA AND IVICA SEVER

Respondents

Hearing:29 July 2010

Court:Randerson, Potter and Asher JJ

Counsel:G Blanchard for Appellants

R J Thompson for Respondents

Judgment:20 August 2010 at 10 a.m.

JUDGMENT OF THE COURT

A            The appeal is dismissed.

BThe appellants must pay the respondents’ costs for a standard appeal on a Band A basis together with usual disbursements as fixed by the Registrar.

____________________________________________________________________

REASONS OF THE COURT

(Given by Potter J)

Table of Contents

Para No
Issue	[1]
Background	[2]
The judgment appealed	[9]
Securities Act: purpose and relevant provisions	[11]
The Exemption Notice	[17]
Submissions for the appellants	[20]
Submissions for the respondents	[21]
Discussion	[26]
Result	[44]

Issue

[1]        The issue for determination on this appeal is:

Whether to gain the benefit of the exemptions for which reg 3 of the Securities Act (Residential Property Developments) Exemption Notice 1999 (“the Exemption Notice”) provides, the documents required to be supplied by the developer to any subscriber for specified securities must include the rules of a society actually incorporated under the Incorporated Societies Act 1908 rather than those of a society proposed to be incorporated under that Act.

Background

[2]        The first appellant Verano Properties Limited (“Verano”) as vendor entered into an agreement for sale and purchase with the respondents (“the Severs”) as purchasers of Lot 52 developed by Verano as part of a subdivision in Mangawhai known as Vista Verano.

[3]        The agreement for sale and purchase was dated 26 January 2007 and provided for a purchase price of $295,000 (“the Agreement”).  The purchasers paid a deposit of $29,500.

[4]        Under the Agreement it was acknowledged that the vendor intended to establish a residents’ society for the purpose of owning and maintaining common facilities in the development and that the vendor was intending to procure the incorporation of an incorporated society of which the owners of the lots in the subdivision would be required to become members.

[5]        The offer by the vendor to the purchaser was of a “participatory security” as defined in s 2 of the Securities Act 1978 (“the Act”).  However, Verano did not register a prospectus for the development as required by the Act in relation to participatory securities because it considered that it was exempted from so doing by the Exemption Notice. 

[6]        The Vista Verano Residents’ Society Incorporated (“the Society”) was incorporated under the Incorporated Societies Act 1908 on 22 May 2009.  The Society was not in existence at the date of the Agreement, nor when the deposit was paid.

[7]        Verano considered the Agreement became unconditional on 7 October 2009 and that settlement was due on 14 October 2009.

[8]        The Severs refused to settle.  They claimed the Agreement was void under s 37 of the Act because Verano had failed to provide a registered prospectus in terms of the Act.  They claimed that Verano could not rely on the Exemption Notice because the Society had not been incorporated at the time they entered into the Agreement.  This was said to be in breach of reg 4(a)(i) of the Exemption Notice. 

The judgment appealed

[9]        The issue on appeal is the same issue as was before the High Court.[1]   Hugh Williams J held that to gain the benefit of the exemptions provided by reg 3 of the Exemption Notice the documents required to be supplied by the developer to any subscriber for specified securities must include the rules of a society actually incorporated under the Incorporated Societies Act 1908, not those of a society proposed to be incorporated under that Act.  That is the determination appealed.

[1]      Verano Properties Limited v Severs HC Auckland CIV-2009-404-8487, 21 April 2010.

[10]       The Judge said[2] that this finding disposed of Verano’s first cause of action for specific performance against the Severs (or damages in lieu).  He adjourned the proceeding for a timetable to dispose of a second cause of action in which Verano seeks relief under s 37AH of the Act.  However, Mr Thompson who represented the respondents both in the High Court and on appeal, accepted that if Verano’s second cause of action seeking relief under s 37AH of the Act is successful then it remains open to it to pursue its first cause of action (subject to arguments that would be raised by the Severs as to which particular terms would be enforceable).

Securities Act 1978: purpose and relevant provisions

[2] At [50].

[11]       The Securities Commission explained in March 1980 in its Proposed Recommendations for Securities Regulations,[3] that a particular object of the law relating to public offerings is:

... to secure that the public is informed fairly and in good time both of the terms of the offer and of the information relevant to making decisions about it.

[3]Securities Commission Proposed Recommendations for Securities Regulations (March 1980) at [3.3.1].

The Securities Commission said that a person who solicits public investment should be obliged to inform the public of the material facts relevant to the investment proposal.

[12]       In the judgment Hugh Williams J described the purpose of the Act:[4]

The underlying purpose of the Act is consumer protection achieved by ensuring those involved in commerce are, broadly put, fully informed of their potential obligations before they commit to them.

[4] At [17].

[13]       “Security” is very broadly defined in the Act[5] as meaning “... any interest or right to participate in any capital, assets, earnings, royalties or other property of any person ...”

[5]      Securities Act 1978, s 2D.

[14]       A “participatory security” is a security which, in general terms, is not an equity security or a debt security as defined in the Act.[6]  It is common ground that the right to participate in membership of the Society is a participatory security within the meaning of the Act.

[6]      Securities Act 1978, s 2.

[15]       Part 2 of the Act places important restrictions on offers and allotments of securities to the public.  The offer of a security must be made in, or accompanied by, a registered prospectus that complies with the Act and regulations made under the Act.[7]  The prospectus must be registered with the Registrar of Companies.

[7]      Securities Act, 1978, s 33(1).

[16]       The issuer of a participatory security is also required to have appointed a statutory supervisor and to have entered into a deed of participation that has been registered with the Registrar of Companies.[8]

The Exemption Notice[9]

[8]      Securities Act 1978, s 33(3).

[9]The 1999 Exemption Notice (SR 1999/105) was preceded by an exemption notice in 1997 (SR 1997/249) and replaced by the Securities Act (Real Property Developments) Exemption Notice 2007 (SR 2007/378).  The 1997 and 2007 Exemption Notices are in similar terms to the 1999 Exemption Notice but the 2007 Exemption Notice extends the availability of the exemptions beyond residential properties, to real property developments and includes within a new definition of “specified entity” an incorporated society and a company incorporated under the Companies Act 1993.  “Specified security” has a corresponding extended meaning.

[17]       The explanatory note to the Exemption Notice states that it applies to participatory securities in the form of membership of an incorporated society that confers ownership rights and rights to use communal facilities in a residential development.  The effect of the Exemption Notice is that both the developer and the society are exempted from a number of the important disclosure provisions in Part 2 of the Act including those relating to a prospectus in s 33 and s 37 of the Act.  The exemptions are provided by reg 3.

[18]       The following pertinent definitions are provided in reg 2:

Rules means the rules of a society

Society means a society incorporated under the Incorporated Societies Act 1908 that –

(a)         Owns, or will own, the communal facilities in a development; or

(b)         Leases, or will lease, the communal facilities in a development:

Specified security means a participatory security in the form of membership of a society that confers rights to participate in ownership and use of all or part of the communal facilities in a development.

[19]       The conditions of the exemptions provided by reg 3 are set out in reg 4 which provides:

4.           Conditions

The exemptions granted by clause 3 are subject to the conditions that –

(a)Subscribers for specified securities have, before subscription, been supplied by the developer with a copy of each of the following documents:

(i)The rules (including a copy of any agreement for the management of the society’s affairs):

(ii)A specimen of any deed or agreement providing for the transfer of communal facilities from the developer to the society:

(iii)        A specimen of the sale agreement:

(iv)A specimen of any lease agreement for communal facilities; and

(b)The specified securities are subscribed for by entering into a sale agreement with the developer; and

(c)Deposit monies paid by a subscriber for specified securities are held in any of the following trust accounts until the sale agreement becomes unconditional:

(i)A trust account operated by a solicitor under the Law Practitioners Act 1982; or

(ii)A trust account operated by a real estate agent under the Real Estate Agents Act 1976; or

(iii)A trust account operated by a trustee company under the Trustee Companies Act 1967; and

(d)         No settlement of a sale agreement is completed until,‑

(i)If the developer represents or agrees that communal facilities will be held by a society, the communal facilities are owned or leased by the society; and

(ii)If land is included in the communal facilities, the society holds a certificate of title for an estate in fee simple, or a leasehold estate, under the Land Transfer Act 1952 or for a stratum estate under the Unit Titles Act 1972; and

(e)Where communal facilities are leased, or to be leased, by the society,‑

(i)The communal facilities are owned, or to be owned, by subscribers for specified securities; and

(ii)Interests in the communal facilities can only be purchased with a purchase of residential property; and

(f)The developer provides to a prospective purchaser of residential property, within 5 business days after receiving a request, a copy of the most recent financial statements of the society; and

(g)The financial statements of the society are audited annually and distributed to members of the society as soon as reasonably practicable after each audit is completed; and

(h)All monies paid to the society by its members under the rules are applied solely for the purposes of‑

(i)Holding, administering, and maintaining the communal facilities (including issuing licences to members of the society that confer rights solely to those members to use the communal facilities and administering those licences in accordance with the rules); or

(ii)Administering and enforcing a scheme for the regulation and control of matters relating to the use and enjoyment, repair, decoration, and landscaping of, and provision of services to, residential properties; and

(i)           The rules provide that‑

(i)Members of the society have the right to use and enjoy the communal facilities in accordance with the rules, and have the right to vote at meetings of members of the society; and

(ii)On a winding up of the society, any interest of the society in communal facilities vests in the members of the society as tenants in common; and

(iii)Levies, fees, or subscriptions payable to the society by its members are determined by a committee of members of the society constituted or appointed under the rules; and

(j)          The society does not have as objects‑

(i)          The carrying on of trading activities; or

(ii)         The carrying on of business for profit.

Submissions for the appellants

[20]       The appellants submit:

(a)The plain words of reg 4(a)(i) in the Exemption Notice do not require that the society had to be incorporated at the date of the Agreement.  While reg 4(a)(i) can be interpreted in that way, the words do not preclude the interpretation contended for by the appellants, that the society did not need to be incorporated until the time of settlement.

(b)Neither the 1999 notice (SR 1999/105) nor the 2007 notice (SR  2007/378) expressly states that the society must be incorporated at the date of the Agreement.

(c)From a practical point of view there is no reason to require incorporation until the time of settlement.  The practicalities are that the sale agreement may never become unconditional and the society may never be needed because the development does not proceed.  The most sensible interpretation is that the society is required to be incorporated by the time of settlement.

(d)The following matters were wrongly considered by the High Court in interpreting reg 4(a)(i):

(i)The purchaser becomes a member of the society on signing the agreement. 

It is clear that the purchaser does not become a member until settlement which is when the title to the land vests in the purchaser.  In terms of reg 4(b) the specified securities are subscribed for by entering into the agreement, i.e. when the subscriber agrees to purchase the securities.  Allotment occurs when the securities are in fact issued, assigned or conveyed to the subscriber.  In these circumstances that occurs when the agreement is settled which is consistent with the definition of “allot” in the Act.

The Society has to be in existence at the date of the agreement because the “specified security” must exist on subscription. 

(ii)The specified security need be in existence only at the time of the allotment, that is at the time of settlement of the agreement.

(iii)The society has to be incorporated at the date of the agreement so the purchaser can become a member and thereby have “control”. 

The purchaser is not required to have “control” of the society by virtue of becoming a member from the date of the agreement.  The underlying philosophy of the Act is disclosure not “control”.  The purchaser does not become a member until settlement.

(iv)The level of disclosure required by the Exemption Notice should be comparable to that under the Act.

While membership of the Society is a “security” by virtue of the very wide definition of “security” under the Act, it is not an investment “in the normal sense”.  It does not make sense to require disclosure equivalent to that required in a registered prospectus. 

(v)Verano’s powers under the agreement to amend the rules and assign the agreement support the High Court’s interpretation of reg 4(a)(i). 

These provisions are irrelevant to the proper interpretation of reg 4(a)(i).  Provided the purchaser is informed of the ability to amend the rules the requirement of adequate disclosure is met.  Assignment of the agreement would not take away the purchasers’ rights under the agreement or diminish the requirement for compliance with the Exemption Notice.

(vi)The requirement for only a “specimen” of each of the documents in reg 4(a)(ii)-(iv) to be provided, whereas reg 4(a)(i) requires “the rules” to be provided suggests that the society has to be incorporated as at the date of the agreement. 

In this context “specimen” is an example of a class or group of things.  That explains why reg 4(a)(i) does not refer to a “specimen” of the rules because there is only ever one set of rules.

Submissions for the respondents

[21]       The respondents do not disagree with the appellants that the specified security itself need not exist at the time of subscription.  Mr Thompson accepted that purchasers would not become members of the incorporated society until allotment occurred, which was probably on settlement.  But in his submission, this misses the point.  He said the focus of the Act and the Exemption Notice is to ensure that the mechanism by which the security is to be issued exists at the time of subscription.  Under reg 4(b) the time of subscription is defined as the point when purchasers enter into a sale agreement with the developer.  At that point the purchasers commit to the purchase and to becoming members of the society at a later date.  Thus, it is prior to that pivotal point that purchasers must have received full disclosure so they have both knowledge and certainty about the security to support that knowledge. 

[22]       In this context, Mr Thompson referred to the discussion by the Securities Commission in its Proposed Recommendations for Securities Regulations:[10]

Our conclusion upon the desirable basis of security laws for public issues in New Zealand is that their thrust should be directed towards attaining public disclosure of relevant information.  We are required to consider this question as at the time of formation of investment contracts (which, we should say, is not the only relevant time).  Our view is that at that time the potential investor should be told; it matters not that he does not understand ...

[10]      At [3.3.6].

[23]       Nor, Mr Thompson accepted, is it a question of purchasers being granted “control” over the Society.  He suggested that the interpretation concerning “control” placed on the High Court judgment by the appellants misconstrues the emphasis of the Court that the prospective purchaser must be provided with sufficient certainty and knowledge prior to committing to the purchase.  Control of the society will come on settlement when they become members. 

[24]       The respondents submit that the Exemption Notice ensures that the constitutional documents presented to the prospective purchaser at the pivotal point of subscription are in as final and certain a form as possible.  This ensures that the purchasers can have certainty, before they commit to the purchase, about the security they will acquire with their purchase.  The constitutional document in this case is the rules of the society of which the purchaser, by entering into the agreement, subscribes to become a member.  It follows that the rules ought to be fixed, being rules of a society which is already incorporated.  Accordingly reg 4(a) requires that subscribers before subscription have been supplied with the documents listed.  These include the rules, including a copy of any agreement for the management of the society’s affairs. 

[25]       The respondents submit that the Exemption Notice provides a precise definition of “society” – a society incorporated under the Incorporated Societies Act 1908 – which requires it to have existed at the date the Severs subscribed to become members of it, being the date they entered into the Agreement to purchase Lot 52 from Verano.

Discussion

[26]       The meaning of the Exemption Notice must be ascertained from its text and in the light of its purpose.[11]  We consider first the text.

[11]      Interpretation Act 1999, s 5(1).

[27]       The specified security to which the Exemption Notice applies is defined in the Exemption Notice as “a participatory security in the form of membership of a society that confers rights to participate in ownership and use of all or part of the communal facilities in a development”.

[28]       The issue on appeal does not concern whether the specified security itself needs to exist prior to subscription.  The parties agree that the specified security comes into existence at some point after subscription when the purchasers become members of the society, probably on settlement.  At that point the specified securities will be issued or “allotted”.  To the extent the High Court judgment says or infers that admission to membership of the society occurs on execution of the agreement, we disagree.  When a prospective purchaser executes an agreement for sale and purchase, the purchaser subscribes for and commits to take the specified security which will be subsequently allotted.  It is only on allotment that the purchaser will become a member and have some element of control in relation to the society.

[29]       The issue on appeal concerns whether the structure or mechanism by which the security is to be issued or allotted, namely the incorporated society, needs to exist when the specified securities are subscribed for.  By virtue of reg 4(b) this is when the purchaser enters into the agreement with the developer.

[30]       Regulation 4(a) requires that before subscription, subscribers have been supplied with copies of certain documents as one of the conditions of the exemptions in reg 3 from compliance with specified sections in Part 2 of the Act.  The documents include the “rules of a society” (including a copy of any agreement for the management of the society’s affairs).

[31]       On a straightforward grammatical reading the use of the past tense, “incorporated”, in the definition of “society” (see [18]), denotes a society that has been incorporated and has already come into existence.  A non-existent entity could not have rules.  There could be only proposed or draft rules for a society proposed or intended to be incorporated in future.  As Hugh Williams J observed, had the Exemption Notice been intended to provide the exemptions in reg 3 to societies proposed to be incorporated under the Incorporated Societies Act 1908 it would have been “simplicity itself”[12] for the Securities Commission to have ensured the Exemption Notice said as much.

[12]      Verano Properties Limited v Severs HC Auckland CIV-2009-404-8487, 21 April 2010 at [48].

[32]       The use of the past tense to define the required status of the society contrasts with the present and future tense used in paragraphs (a) and (b) of the definition.  These paragraphs define the functions of the incorporated society; one that owns, or will own, or leases, or will lease, communal facilities in a development.  They contemplate that while the society will own or lease the communal facilities in the development, that may not (and need not) be the situation at the time the agreement for sale and purchase is entered into.  The drafters appear to have turned their minds to the use of past, present and future tenses in the definition of “society”.

[33]       Likewise in reg 4 a precise distinction is made in requiring the rules to be provided to subscribers before subscription, while stipulating only for provision of a specimen of the other documents to be provided.  These documents are any deed or agreement for transfer of the communal facilities to the Society, the sale agreement and any lease agreement for the communal facilities.  The intention in the use of the definite article in relation to the rules is clear.  While some flexibility is contemplated in relation to the specimen documents which are “an example, instance or illustration of something, from which the character of the whole can be inferred”, a thing “typical of its class”,[13] there is no such flexibility in relation to the provision of the rules.  The rules to be provided are certain and definitive to the extent they can be.  They are the rules of a society in existence at the time the rules are to be provided.

[13]      The Oxford English Dictionary (2^nd ed, Clarendon Press, Oxford, 1989).

[34]       The rules may be changed before the specified security is issued and the purchasers become members of the society.  Clause 9.9 of the further particulars and conditions forming part of the agreement for sale and purchase includes an acknowledgment by the purchaser that the Constitution and Rules of the society may be subject to such changes as the vendor may reasonably require to give effect to the provisions of the Agreement and the vendor’s development proposals for the land and any requirements imposed by the Consent Authority.  But the purchasers have the protection of clause 22 of the Constitution which requires a seventy five per cent majority for alteration of “these Rules”, prior written notice to all owners and prior written consent of the Rodney District Council to any change regarding the private sewerage treatment plant.  (Reference to “these Rules” in the context must be to the constitutional rules of the Society rather than the rules attached as schedule 1.  This is a short document dealing with conduct matters such as noise, pets and use of common facilities).  If the society is incorporated, purchasers are better protected as any change of the rules must comply with the requirements of the Incorporated Societies Act 1908, culminating in the registration of the change with the Registrar of Incorporated Societies.

[35]       A descriptive rather than temporal interpretation of the definition of “society” might have some attraction if that definition were to be viewed in isolation from the rest of the Exemption Notice.  But it must be interpreted in the context of the Exemption Notice as a whole.

[36]       Condition (f) of reg 4 requires the developer, before subscription, to provide to “a prospective purchaser” of residential property, within five days of request, a copy of the most recent financial statements of “the society”.  Only an existing society can have financial statements.  The use of the term “prospective purchaser” in condition (f) puts beyond doubt that the requirement to provide financial statements on request applies in the pre-subscription period to all purchasers.  Of necessity the society must be incorporated to enable this condition to be met.  It is irrelevant that the society may not at this point have received or hold any moneys.  By contrast, the conditions in reg 4(g) and (h) relating to the provision of annual audited financial statements and application of moneys paid by members apply post-subscription and post-allotment to “members of the society”.  While these conditions could be met if the society were incorporated post-subscription but pre-settlement, condition (f) cannot.

[37]       Thus the overall context of the Exemption Notice supports the interpretation that the rules required to be provided before subscription by reg 4(a)(i) are the rules of a society which has already been incorporated.

[38]       We accept there is an aspect of artificiality about a society incorporated to own or lease communal facilities in a development when the development is in its early stages and there are not owners of individual lots who will ultimately become the members of the incorporated society.  But as Hugh Williams J observed[14] the incorporation of a society is a “trifling” concern in the context of the development overall.  It is inherent in every development that it may not proceed or may not proceed as planned.  The incorporation of a society which might ultimately prove to be of no utility, is likely to be a very minor consequence of a development that cannot be progressed to completion. 

[14] At [35].

[39]       In terms of ensuring that full and fair disclosure is made to prospective purchasers at the time of subscription when they accrue significant obligations, the incorporation of the society which will be the eventual vehicle for the communal facilities and the rights of members in those facilities, and disclosure of the rules of that society, are relevant and important.

[40]       We turn to consider the purpose of the Exemption Notice.  In the judgment Hugh Williams J said:[15]

Thus the 1999 Notice – Reg 4 in particular – should be seen as a surrogate for the consumer protection aspects of the Act especially those in Part 2 and as a means alternative to the Act whereby persons engaged in residential property development are required to ensure prospective purchasers are as fully informed as should be the case before they become committed to their purchases.  The information which purchasers should be given should – with the differences flowing from the different style of the proposed investment – be comparable to the information they would receive were their proposed vendor not acting under the 1999 Notice.

[15] At [19].

[41]       We agree with those observations.  The exemptions granted by the Exemption Notice are substantial.  They include exemptions from requirements under the Act both pre and post-subscription, particularly registering a prospectus and investment statement as required by s 33 and auditing of financial statements.  As the Act requires a prospectus to be registered before subscription, so the Exemption Notice requires a society to be incorporated before subscription.  Those requirements afford the maximum certainty reasonably available to prospective purchasers by ensuring the rights they are subscribing for are fixed prior to the time they commit to purchase.  It is thus important that the Exemption Notice be interpreted in a way that is consistent with the Act rather than, as the appellants suggest, in a manner that is consistent with the type of transaction it concerns. 

[42]       The Exemption Notice confers a privilege on residential property developers. It provides exemptions from the requirements under the Act to issue prospectuses, investment statements and otherwise comply with the Act.  The exemption is conditional on strict compliance with the terms and purpose of the Exemption Notice.

[43]       For these reasons we conclude that the issue for determination as set out in [1] must be answered in the affirmative.

Result

[44]       The appeal is dismissed.

[45]       The respondents are entitled to costs for a standard appeal on a Band A basis together with usual disbursements as fixed by the Registrar.

Solicitors:

Burton & Co, Auckland for Appellant

Alexander Dorrington, Auckland for Respondent