Watson v Masterton Investments Limited
[2023] NZCA 507
•20 October 2023 at 9.30 am
| IN THE COURT OF APPEAL OF NEW ZEALAND I TE KŌTI PĪRA O AOTEAROA |
| CA706/2022 [2023] NZCA 507 |
| BETWEEN | DENIS ERIC WATSON |
| AND | MASTERTON INVESTMENTS LIMITED |
| Hearing: | 26 September 2023 |
Court: | Gilbert, Peters and Hinton JJ |
Counsel: | K P Sullivan for Appellant |
Judgment: | 20 October 2023 at 9.30 am |
JUDGMENT OF THE COURT
AThe appeal is dismissed.
BThe appellant must pay costs to the respondent for a standard appeal on a band A basis and usual disbursements.
____________________________________________________________________
REASONS OF THE COURT
(Given by Gilbert J)
This is an appeal against a judgment of the High Court awarding damages against a defaulting purchaser following the re-sale of a commercial property for a price significantly below the original contract price.[1]
[1]Masterton Investments Ltd v Watson [2022] NZHC 3113, (2022) 23 NZCCPR 856 [High Court judgment].
The purchaser resisted the vendor’s claim on four alternative grounds:
(a)Following the purchaser’s default, the parties allegedly entered into a 12-month “lease to buy” agreement.
(b)By entering into the lease to buy negotiations, the vendor made a clear and unequivocal representation that it waived its rights to cancel the agreement in reliance on the settlement notice.
(c)By entering into the lease to buy negotiations, the vendor made a clear and unequivocal representation that it would not rely on its rights under the settlement notice to cancel the agreement. The purchaser relied on this representation by not taking any steps to raise the funds or settle the agreement and the vendor was accordingly estopped from relying on the settlement notice and claiming any losses from the purchaser.
(d)The vendor failed to mitigate its loss.
Ellis J rejected each of these defences and entered judgment in favour of the vendor for the losses calculated in accordance with the terms of the agreement. The purchaser now appeals and raises the same defences.
The facts
Masterton Investments Ltd, owned by brothers Simon and Rohan Salisbury, wished to sell a commercial building it owned in Masterton (the property). In June 2019, they engaged a local real estate agent, Mr Christopher Gollins of Gollins Commercial Ltd, to market the property for sale. Mr Gollins has more than 30 years’ experience as a real estate agent working in commercial property in the Wellington and Masterton areas. He is a former president of the Wellington branch of the Property Council of New Zealand.
Mr Gollins advertised the property for sale by tender. However, no tenders were submitted by the tender closing date of 27 November 2019.
On 29 November 2019, Mr Watson made an unconditional offer to purchase the property for $1.7 million. The purchase price was payable by way of a reduced deposit of $50,000 on 13 December 2019 with the balance to be paid on the settlement date of 31 March 2020. The offer was made on the standard form approved by the Real Estate Institute of New Zealand and the Auckland District Law Society (ADLS) (4th edition, version 7). Masterton Investments accepted the offer on 3 December 2019 (the agreement).
The property is adjacent to premises from which Mr Watson operates ManukaMed, a business specialising in the production of mānuka honey-based wound care products. Mr Watson intended to use the extra space to expand his business to include a new product made from mānuka honey mixed with royal jelly to treat high cholesterol and related cardiovascular issues. Unfortunately, a few days after the agreement was entered into, the Ministry for Primary Industries | Manatū Ahu Matua notified Mr Watson that it would not permit the importation of royal jelly into New Zealand. Mr Watson tried unsuccessfully over the next few months to persuade the Ministry to revise its decision. The result was that the intended product could not be made, scuppering Mr Watson’s plans for the property.
Mr Watson did not pay the $50,000 deposit due on 13 December 2019.
On 21 February 2020, Mr Watson advised Mr Gollins that he was experiencing a cashflow crisis. He said he was happy for Masterton Investments to put the property back on the market and “take what comes”. The property was accordingly re-listed for sale. Mr Gollins approached a number of parties he thought might be interested in the property. There were a few expressions of interest, but no offers were forthcoming. On 25 March 2020, New Zealand entered the first alert level 4 lockdown in response to the COVID-19 pandemic.
As expected, Mr Watson failed to settle the purchase on the settlement date, 31 March 2020. On 3 April 2020, Masterton Investments served a settlement notice in terms of cl 13 of the agreement requiring settlement within 12 working days of the date of service of the notice, time being of the essence. Mr Watson failed to comply with this notice.
At the same time as Mr Gollins was endeavouring to re-sell the property, the parties corresponded through their respective solicitors concerning the possibility of Mr Watson leasing the property for 12 months and settling the purchase at the expiry of that period. The correspondence between the solicitors is relied on as founding three of Mr Watson’s affirmative defences (lease to buy agreement, waiver and estoppel). It is therefore necessary to review this correspondence in some detail.
The correspondence commenced with an email sent on 1 April 2020 by Mr Lloyd Davies, Mr Watson’s solicitor, to Mr Jason Carruthers, the solicitor acting for Masterton Investments. The email was marked “without prejudice”, as were all subsequent emails. Mr Davies advanced a proposal that the settlement date be extended to 31 March 2021 on the basis that Mr Watson would lease the property in the interim at a market rental and on standard ADLS terms. Mr Davies asked whether this would be acceptable in principle, in which case he would prepare “something more formal” for Masterton Investments to consider.
As noted, the settlement notice was served two days later, on 3 April 2020.
Mr Carruthers responded to Mr Davies’ email on 7 April 2020 advising that Masterton Investments was still considering its position. He sought further details of the proposal, including the identity of the tenant, the amount of the bond to be paid immediately, the amount of rent to be paid in advance, and whether it was proposed that Masterton Investments would be entitled to enforce its rights under the agreement in the event of a breach of any of the covenants in the lease. Mr Carruthers concluded by saying, for the sake of clarity, that his email should not be construed as any form of agreement.
Mr Davies replied on 14 April 2020 advising that Mr Watson proposed that the tenant would be Manuka Toa Ltd, market rent would be payable one month in advance, the lease would be for a term of one year with settlement to occur at the end of that time and the lease would be on standard ADLS terms. Mr Davies suggested that the agreement would be implemented as follows:
This would likely take the form of an amendment to [the agreement] to extend the settlement date, and an agreement to enter into a lease. We would acknowledge that your rights are reserved under [the agreement] by way of a lease default – i.e. a lease default would bring settlement … date forward to the date that the lease is terminated.
Mr Davies prepared a file note of a discussion he had with Mr Carruthers on 16 April 2020 indicating that Masterton Investments wanted Mr Watson to put some “skin in the game” by paying a substantial deposit on the purchase and at least one but preferably two or three months’ rent in advance. The possibility of a personal guarantee was also discussed. Mr Carruthers indicated that this would be considered but there would need to be disclosure of Mr Watson’s personal assets. The matter was left on the basis that Mr Davies would take instructions from Mr Watson and respond.
Mr Davies responded to Mr Carruthers by email on 20 April 2020 advising that payment of a deposit was not likely to be an option because of Mr Watson’s cash constraints, but he was willing to “stretch” to provide two months’ rent in advance. Mr Carruthers replied on 22 April 2020 advising that unless a substantial deposit was paid, his client had little faith that Mr Watson would meet his obligations based on past experience.
Mr Davies did not respond until 19 May 2020. He advised that Mr Watson would “like to lease the premises and buy those premises in a year”. He repeated the proposal to pay two months’ rent in advance.
Having taken instructions, Mr Carruthers wrote on 26 May 2020 stating, “if this was to proceed, we are instructed to propose an annual rental of $120,000 p.a. plus GST” and operating expenses. He advised that Masterton Investments would require a bond equivalent to two months’ rent.
Mr Davies responded on 4 June 2020 asking what the likely operating expenses would be.
We note in passing that on 11 June 2020 Masterton Investments entered into a conditional agreement to sell the property to a third party for $1.3 million (the resale agreement). A deposit of $100,000 was payable immediately on signing and the balance was to be paid five working days after the agreement became unconditional. The resale agreement was conditional on satisfactory completion of due diligence within 10 working days of the date of the agreement. There was also a cash out clause. This sale was arranged by Mr Gollins and had the effect of cancelling the earlier agreement in terms of cl 13.4(2):
13.4 If the purchaser does not comply with the terms of the settlement notice served by the vendor then, subject to subclause 13.1(3):
…
(2)Where the vendor is entitled to cancel this agreement, the entry by the vendor into a conditional or unconditional agreement for the resale of the property or any part thereof shall take effect as a cancellation of this agreement by the vendor if this agreement has not previously been cancelled and such resale shall be deemed to have occurred after cancellation.
On 11 June 2020, Mr Carruthers sent Mr Davies a breakdown of the likely operating costs totalling approximately $25,000 per annum.
Mr Davies replied on 19 June 2020 advising that Mr Watson was agreeable to the operating costs. He summarised the proposed lease terms and asked whether he should prepare the lease. Mr Watson did not agree to a bond equivalent to two months’ rent. He proposed instead to pay two months’ rent on signing and then pay rent monthly in advance after two months:
Thanks for this. [Mr Watson] is ok with the OPEX.
So to summarise we will need to vary the Agreement to provide for a 12 month lease before completing purchase in 12 months. [Mr Watson] agrees to pay 2 months rental on signing, then will pay monthly in advance after 2 months, and OPEX monthly in arrears.
Would you like us to prepare the lease?
Mr Carruthers replied on 22 June 2020 saying:
No that is not correct nor agreeable. It is proposed that the 2-months’ rent is to be payable as a bond (not a payment in advance).
Mr Davies wrote back the next day, 23 June 2020. This is the last email in the chain relied on as evidencing the alleged agreement to lease and variation of the agreement:
Can I confirm you are envisaging that the bond will be returnable at the end of the lease (most likely applied to the purchase price).
The resale agreement was declared unconditional on 24 June 2020. Mr Carruthers notified Mr Davies of this on 25 June 2020 and stated that the agreement was cancelled by operation of cl 13.4(2) of the agreement. Mr Carruthers advised that the property had been sold for $1.3 million and that proceedings would be commenced to recover the losses following Mr Watson’s default.
Mr Davies wrote to Mr Carruthers the following day asserting that the parties had reached an agreement to lease the property for a period of 12 months on the basis that the purchase would proceed at the expiry of that period such that no loss had been suffered. Mr Davies summarised Mr Watson’s position as follows:
1.By way of correspondence exchanged over a number of months your client and our client have reached an agreement pursuant to which our client has agreed to lease [the property] for a period of 12 months from your client on the basis of a two months rental paid as a bond in advance. Our client agreed to pay an annual rental of $120,000 plus GST, as well as OPEX which you have provided details of and which have been agreed.
2.At the end of the 12 month lease period our client is to settle the existing sale and purchase of the building on the existing terms and conditions, albeit that the lease agreement replaces any late payment interest and costs.
3.We offered on 19 June 2020 to prepare the lease. The only issue was the categorisation of the two months rent in advance as a bond.
4.You responded on 22 June 2020 to record that your client insisted that the two months rent was a bond, not a payment of rent in advance.
5.We responded simply to check that as a bond (which was agreed) it would be returnable at the end of the lease.
6.All aspects of the negotiated settlement were agreed. The outcome for your client is, self-evidently, that it receives a full rental for the building for a period of 12 months and receives the purchase price it negotiated in full, without deduction. The outcome of the negotiation is that your client has not suffered any loss.
The resale to the third party settled on 1 July 2020.
Was the High Court correct to find that no legally binding lease to buy agreement was concluded?
The pleading
Mr Watson pleaded that a legally binding lease to buy agreement was concluded in the course of the negotiations conducted from 1 April 2020 to 23 June 2020. The terms of this alleged agreement were:
(a)Lease of the property to be backdated to commencement date of 1 April 2020 and to be for 12 months until 31 March 2021.
(b)The lessee would be Mr Watson’s company, Manuka Toa Ltd.
(c)The rental would be $120,000 per annum, paid monthly.
(d)Two months’ rent, being $20,000, would be paid as a bond.
(e)The lessee would pay operating expenses in the sum of approximately $25,000 per annum.
(f)The lease would be on standard ADLS terms.
(g)Settlement of the agreement would be deferred until 31 March 2021.
(h)The rights under the settlement notice would be deferred until 1 April 2021 but Masterton Investments could enforce its rights under the agreement in the event of default under the lease.
High Court judgment
The Judge noted that it was apparently intended that the agreement would be amended to incorporate the lease. However, because Mr Watson was the purchaser and the proposed lessee was Manuka Toa Ltd, it was not clear how this would have worked. The Judge considered that while this disjunct was not fatal, it pointed to an overall lack of certainty about quite important matters. This indicated there was no concluded and enforceable agreement.[2]
[2]At [65].
The Judge also considered the term of the lease was problematic. While it was proposed early on that the term would commence from 31 March 2020, by the time the negotiations were said to have concluded on 23 June 2020 almost three months had elapsed. If the lease was to be backdated to 31 March 2020, Mr Watson or his company would already have owed three months’ rent in arrears as well as having arguably agreed to pay a two-month bond. The email exchange did not evidence Mr Watson agreeing to this, nor, given his cashflow difficulties, was it likely he did so. The Judge noted that the final exchange of emails suggested that the issue of whether the two months advance payment was to be treated as rent in advance or as a bond remained at large. The Judge also observed that it was difficult to reconcile negotiations over a payment of two months’ rent in advance when, on Mr Watson’s case, rent was already three months in arrears.[3]
[3]At [67].
Finally, the Judge considered the payment of the bond (as opposed to rent in advance) to protect Masterton Investments in the event of another default was an essential term. She did not consider the emails indicated that agreement had been reached about this. That the parties were still at odds over this essential term indicated that the negotiations were ongoing rather than concluded.[4] For these reasons, the Judge considered that the parties were not in agreement on all essential terms and accordingly there was no concluded lease agreement at the time the agreement was cancelled.[5]
[4]At [70].
[5]At [71].
In any event, the Judge noted the usual presumption that parties to an agreement such as this involving the lease and sale of land do not intend to be bound until a written agreement is formalised. The correspondence indicated an intention consistent with the presumption.[6] The usual presumption was not displaced.[7]
Submissions
[6]At [72]
[7]At [73].
Mr Sullivan, for Mr Watson, submits it was surprising the Judge considered there was any issue about the identity of the parties. He says the evidence shows that Manuka Toa Ltd was to be the nominated purchaser. He argues there was no doubt about the lease term which was to commence on 1 April 2020 and be for a period of 12 months. He contends that these terms were not up for debate by Mr Watson and the rental owed was purely a matter of arithmetic. He says Manuka Toa Ltd would have to pay the monies owed on signing. As to the bond, he says “Mr Davies, looking for clarification perhaps in favour of his client, suggested that Mr Watson would also pay the [two] months rent in advance”. Mr Sullivan contends that the final email on 23 June 2020 agreed to the bond and simply raised a drafting query. The outstanding deposit under the agreement was not due under the lease to buy agreement. He says that if Mr Watson or his company defaulted on any lease payment, Masterton Investments could enforce its remedies under the settlement notice and the agreement.
In summary, Mr Sullivan contends that all essential terms were agreed and the points raised on behalf of Masterton Investments are no more than hypothetical technicalities. Although Mr Davies considered that a variation deed would be desirable, this did not mean that the parties needed to formalise the agreement in writing and sign it before they were bound.
Mr St John, for Masterton Investments, supports the Judge’s analysis and conclusion.
Assessment
We agree with the Judge that no binding lease to buy agreement was reached. As the Judge said, the usual presumption in New Zealand with agreements of this nature is that parties do not intend to be legally bound until a written agreement is signed.[8] It is clear from the correspondence that this is what both parties intended. They both envisaged that a formal agreement would be prepared and signed once they had concluded their negotiations and reached agreement on the essential terms. That never occurred.
[8]Carruthers v Whitaker [1975] 2 NZLR 667 (CA) at 671–674.
Given that the agreement was automatically cancelled on 11 June 2020 when the conditional agreement for resale was entered into with the third party, Masterton Investments was not able to make a legally binding commitment to the proposed arrangement with Mr Watson unless and until that agreement came to an end due to non-satisfaction of the due diligence condition. While Mr Watson was not aware of this, Masterton Investments’ continued negotiations from 10 June 2020 can only have been for the purpose of securing a backup option if that agreement did not proceed. It cannot be taken to have intended to commit itself to a legally binding arrangement with Mr Watson while the agreement with the third party remained on foot.
It is also clear that the negotiations had not concluded by 23 June 2020, contrary to Mr Sullivan’s contention. Mr Davies sought clarification in an email on that day as to when the proposed bond would be refunded. His email cannot be read as constituting an acceptance, creating an immediately binding agreement requiring Mr Watson to pay forthwith a bond equivalent to two months’ rent, rent backdated to 1 April 2020 as well as the first advance rental payment.
At no stage did Mr Watson agree to pay a bond (or a deposit) in addition to advance rent to satisfy Masterton Investments’ requirement for him to put “skin in the game” as protection against any future default. On the contrary, the only emails from Mr Davies on this topic indicated that Mr Watson could not afford to make such a payment in addition to paying rent in advance. On 20 April 2020, Mr Davies advised that a deposit was “[not] likely to be an option” because of Mr Watson’s cashflow position. He indicated that it would be a “stretch” to pay two months’ rent in advance. Mr Davies’ email on 19 June 2020 setting out the proposed lease terms contained no reference to the payment of any bond. Mr Carruthers’ response on 22 June 2020 made it clear that a bond equivalent to two months’ rent would be required. Mr Davies’ email the following day did not confirm Mr Watson’s agreement to this, rather he simply sought clarification of what this would entail— “[c]an I confirm you are envisaging that the bond will be returnable at the end of the lease (most likely applied to the purchase price)”.
We also agree with the Judge that the term of the proposed lease was not finally agreed. While the initial proposal was for a 12 month term from the settlement date, the email sent on 19 June 2020 said that Mr Watson “agrees to pay 2 months rental on signing, then will pay monthly in advance after 2 months”.[9] This cannot be reconciled with Mr Watson’s current contention that he agreed to pay rent from 1 April 2020. Assuming the signing took place 1 July 2020, Mr Watson would have been required to pay four months’ rent (not two), monthly rent thereafter (rather than wait another two months before paying any further rent) and also pay two months’ rent as a bond.
[9]Emphasis added.
In conclusion, the email exchange does not support Mr Watson’s claim that all essential terms of the alleged lease to buy agreement were agreed. In any event, the parties cannot be taken to have intended to enter into legally binding commitments of such significance until a formal agreement was drawn up and signed. It is clear that this is what they both intended. The usual presumption is not displaced that parties do not intend to be bound to contracts of this nature before executing formal documentation.
Was the High Court correct to reject the waiver and estoppel defences?
The pleading
Mr Watson pleaded a defence of waiver as follows:
40By entering into, and/or by negotiating the terms of, the Lease to Buy Arrangement the plaintiff provided a clear and unequivocal representation that it waives its rights under the Settlement Notice to cancel the Agreement.
41In reliance on the waiver by representation, [Mr Watson] took no further steps to raise funds or to otherwise settle the Agreement to his detriment.
42[Masterton Investments] deliberately neglected to inform [Mr Watson] that it was negotiating the Re-sale Agreement on vastly inferior terms such that Mr Watson should have been given notice of the option to continue efforts to raise funds for settlement or to pay $1,300,000 and the balance over time, as vendor finance.
43It is unconscionable that [Masterton Investments] could now rely on the Settlement Notice and its purported right to enter into the Re‑sale Agreement for $1,300,000 when it was apparently negotiating with [Mr Watson] and representing that it was committing to the Lease to Buy Arrangement.
44Mr Watson has relied on the waiver to his detriment if [Masterton Investments] is allowed to enter into the Re-sale Agreement and to recover any losses on the shortfall in resale from Mr Watson.
The estoppel pleading was almost identical and was founded on the same alleged clear and unequivocal representation.
High Court judgment
The Judge found that Masterton Investments did not waive its rights under the settlement agreement. Mr Watson had advised he was happy for Masterton Investments to put the property back on the market and take what comes. The property was being actively marketed for sale. There was no express statement to the effect that Masterton Investments waived any of its rights under the agreement. On the contrary, Mr Carruthers’ first email stated that all his client’s rights are reserved. All subsequent emails on both sides were marked “without prejudice”.[10]
[10]High Court judgment, above n1, at [77]–[78].
A second difficulty was that there was no evidence of reliance or detriment. In particular, there was no evidence that Mr Watson altered his position in the belief that Masterton Investments had agreed not to enforce its rights under the settlement statement.[11]
Submissions
[11]At [79].
Mr Sullivan revised his waiver argument on appeal. He submits that as soon as the parties reached an agreement on “the high level terms” of the lease to buy arrangement, this amounted to a clear and unequivocal representation that Masterton Investments would not be cancelling the agreement or relying on the settlement notice. He argues that this position was reached by 19 May 2020, or 26 May 2020 at the latest. He says by that stage the parties had “made clear progress down the path of agreeing the terms of the lease to buy arrangement on the basis that the strict legal rights in the settlement notice would not be enforced”.
Mr Sullivan argues that the emails led Mr Watson to believe that Masterton Investments was not acting on the settlement notice and it was objectively reasonable for him to believe that to be the case even though the “for sale” sign remained on the property. He submits that this was a “typical commercial dealing where lawyers embark on a negotiation where other strict legal remedies are available”. He says that once the “framework for an alternative resolution has been set out, creating the belief that the legal rights will not be enforced, those rights can only be enforced after reasonable notice is given”.
As for estoppel, Mr Sullivan submits that if Mr Watson had been given a few weeks’ warning of Masterton Investments’ intention to sell “at a sum like $1.3 million and with the balance paid off over time or at risk, there were readily available finance options at that time as business life returned to normal”.
Assessment
As can be seen, the same alleged clear and unequivocal representations are relied on as founding the pleaded alternative defences of waiver and estoppel. The first alleged representation is that by entering into the lease to buy agreement, Masterton Investments waived its rights (or would not rely on its rights for the purposes of the estoppel pleading) under the settlement notice to cancel the agreement. We have already concluded that Masterton Investments did not enter into the lease to buy agreement and accordingly this representation is not made out.
The alternative alleged representation is that by negotiating the terms of the lease to buy agreement, Masterton Investments waived its rights under the settlement notice to cancel the agreement or represented that it would not rely on those rights. The fundamental difficulty is that at no stage in the course of the negotiations or otherwise did Masterton Investments ever suggest that it would not rely on its rights to resell the property if an acceptable offer was presented by a third party. All negotiations were expressly made without prejudice. Masterton Investments expressly reserved its rights, and its negotiations were without prejudice to those rights. The observations of Neuberger J in Hodgkinson & Corby Ltd v Wards Mobility Services Ltd are apposite:[12]
I find it difficult to see how the plaintiffs could base a case on estoppel when the representation relied on is part and parcel of proposals made on behalf of the defendant, never accepted by the plaintiffs, and which proposals are themselves expressly without prejudice to the defendant’s contention that there is no breach ...
[12]Hodgkinson & Corby Ltd v Wards Mobility Services Ltd [1997] FSR 178 (Ch) at 192.
Mr Watson knew that the property was being marketed for sale. He himself had suggested that this be done. Offers were being actively solicited in the market for the purpose of securing a resale of the property. The waiver and estoppel defences sit awkwardly with Mr Watson’s claim that more should have been done in this respect and there was a failure to mitigate the loss. In our view, Mr Watson could not reasonably have thought that Masterton Investments would not exercise its rights to enter into a resale and thereby cancel the agreement even if, for example, a substantial purchaser offered to pay $1.7 million or more for the property. If Mr Watson’s waiver or estoppel arguments were correct, the consequence would be that Masterton Investments could not accept such an offer without first obtaining his agreement. We do not consider that can be right. Masterton Investments did not at any stage suggest that it was prepared to stay its hand while negotiations were in train, and it seems clear that Mr Watson did not want this either given his complaint that greater attempts should have been made to sell the property to someone else. His real complaint is that the resale price was too low, and he should have been given the opportunity to match it and pay the balance off over time. This requires examination of his only defence with any real promise, that there was a failure to mitigate.
For these reasons, we consider the Judge was undoubtedly correct to dismiss the waiver and estoppel defences. These defences fail at the first hurdle because there was no clear or unequivocal representation that Masterton Investments waived or would not rely on its rights.
Was the High Court correct to find that Masterton Investments did not fail to mitigate its loss?
The pleading
Mr Watson pleaded that Masterton Investments failed to mitigate its loss. The pleaded particulars of this defence can be summarised as follows:
(a)The lease to buy agreement would have resulted in no loss being suffered. Masterton Investments made a commercial decision to resell the property to the third party and must bear the consequent losses.
(b)Mr Gollins acted negligently and for improper purposes. He pressured Masterton Investments to sell under dire predictions of market collapse and economic depression which were without foundation. This resulted in the sale to the third party at a price well below the market value.
(c)The marketing of the property was inadequate. In particular, the marketing campaign occurred during the COVID-19 lockdown with the result that prospective purchasers could not view the property, the property was not presented in a tidy manner, a tenant remained in occupation but was not able to tidy the property because it was not an essential business, and there was limited advertising of the property.
(d)If the property had been marketed adequately once the effects of COVID-19 were reduced, the property would have been worth at least $1.57 million.
(e)Masterton Investments had an obligation to market the property for longer and in accordance with best practice.
(f)If a sale was to be considered at $1.3 million, then reasonable notice ought to have been given to Mr Watson. Masterton Investments was required to give Mr Watson an opportunity to buy the property at $1.3 million and pay the balance off over time, in which case no loss would have been suffered.
(g)Masterton Investments acted unconscionably and misled Mr Watson into believing that it was not marketing the property or intending to sell it at a discount. In the circumstances, the sale to the third party was not a bona fide and proper sale.
High Court judgment
The Judge was not persuaded that Masterton Investments failed to mitigate its loss. She found that there was only a limited market for the property, noting that even when Mr Watson agreed to purchase the property in November 2019, he was the only tenderer.[13] The Judge did not consider there was any undue delay in putting the property back on the market. Masterton Investments had wanted to re-market the property in January 2020, but Mr Watson was raising the possibility of selling shares in his company and saying he would be able to settle the purchase on 31 March 2020. In the meantime, Mr Gollins took steps to advertise the property and identify potential purchasers.[14] Mr Gollins found a prospective purchaser (Mr Jonathan Burling) who was prepared to pay $1.5 million but that deal did not proceed through no fault of Mr Gollins or Masterton Investments.[15]
[13]High Court judgment, above n 1, at [89].
[14]At [90].
[15]At [92].
The Judge considered the criticism of Mr Gollins’ negative assessment of the likely impact of the pandemic on the potential for resale had an air of unreality to it. Although the lockdown had been lifted just prior to the sale to the third party, the pandemic was not over, and the future of the relevant market was uncertain. Mr Gollins could not reasonably be expected to see the future.[16]
[16]At [91].
The Judge rejected the proposition that Masterton Investments should have offered to sell the property to Mr Watson for the price paid by the third party. Mr Watson had already let Masterton Investments down badly, he clearly had cashflow problems, and there was no reason to think that he would have been able to come up with the lesser price or been able to settle within the same timeframe as the third party.[17]
[17]At [93].
Finally, the Judge considered the evidence about market value had little relevance. Expressions of opinion about market value are meaningless in the absence of potential buyers. Masterton Investments had no obligation to wait until a better price could be obtained. The relevant question was whether, in all the circumstances as they were at the time, its decision to accept the offer from the third party was unreasonable. The Judge was of the clear view that it was not. The company had been trying for almost a year to sell the property and there were few interested parties and fewer offers. The Judge was satisfied that the price achieved of $1.3 million was not wholly outside the acceptable range.[18]
Submissions
[18]At [94].
Mr Sullivan notes that the parties’ respective valuers agreed that the market value of the property at the time of the resale was $1.57 million. While Mr Sullivan accepts that a market valuation will not always set the reasonable price that must be obtained, he says the evidence is relevant to whether “the power of resale” was exercised in a reasonable manner.
Mr Sullivan submits that Masterton Investments ought to have re-listed the property earlier than it did, which was on 21 February 2020. While he acknowledges Mr Gollins could not predict the impact of COVID-19, he said valuable weeks were lost when buyers like Mr Burling could have done due diligence and presented an “orthodox offer” prior to the level 4 lockdown on 25 March 2020.
Despite the challenges caused by the pandemic, Mr Burling gave evidence that he was keen to buy the property for $1.5 million. However, his father, Mr Burling snr, was a shareholder in the family business (Burling Transport Ltd) at that time and he did not agree to the proposed purchase. Mr Sullivan says this was only a temporary obstacle because Mr Burling took over his father’s shares on 16 July 2020. Mr Burling said he was astounded when he found out that the property had been sold for $1.3 million. He said Mr Gollins did not approach him again prior to that offer being accepted.
Assessment
Clause 13.4 of the standard form agreement sets out the remedies available to the vendor if a defaulting purchaser does not comply with the terms of a settlement notice. These remedies include the right to cancel agreement and sue the purchaser for damages pursuant to cl 13.4(1)(b)(ii). As noted, the entry by the vendor into a conditional or unconditional agreement for the resale of the property takes effect as a cancellation of the agreement in terms of cl 13.4(2). The damages claimable under cl 13.4(1)(b)(ii) include any loss incurred by the vendor on any bona fide resale contracted within one year from the date by which the purchaser should have settled in compliance with the settlement notice. The sale by Masterton Investments to the third party occurred during the relevant period and accordingly the losses suffered are recoverable in terms of the agreement unless it was not a bona fide resale.
As the Judge observed,[19] the leading authority on the interpretation of this provision is this Court’s decision in Sullivan v Darkin where it was held that a vendor is required to do no more than act reasonably in the circumstances, offer the property for resale at a proper price having regard to the state of the market, take adequate steps to advertise and promote the sale, and keep the property in reasonable condition so as to encourage a sale.[20] The vendor’s conduct is not to be assessed with the benefit of hindsight or weighed finely in the balance.[21] It is for the purchaser to establish that the vendor failed to mitigate its loss.
[19]At [84].
[20]Sullivan v Darkin [1986] 1 NZLR 214 (CA) at 217–218 per Davison CJ and 222–223 per Somers J.
[21]At 223 per Somers J.
Mr Watson’s first pleaded allegation is that Masterton Investments ought to have accepted his lease to buy proposal because it would have avoided any loss being suffered. He contends that Masterton Investments must bear the losses consequent upon its own commercial decision to resell the property. However, this is not correct. Masterton Investments wanted to realise its investment in the property. When Mr Watson defaulted, it was entitled to return to the market and resell. It had no obligation to defer reselling for another year for Mr Watson’s benefit. He was the defaulting party and Masterton Investments was entitled to be restored as far as possible to the position it would have been in if Mr Watson had performed. This includes realising its investment as soon as reasonably practicable following a proper marketing process. Contrary to Mr Watson’s contention, it is he who must bear the losses consequent upon his default. Masterton Investments had an immediate right to elect to resell the property in an attempt to recover its position.
We also reject the contention that Masterton Investments ought to have relisted the property earlier. As the Judge noted, Masterton Investments had wanted to remarket the property in January 2020, but Mr Watson was at that time considering selling shares in his company so that he could settle on the due date of 31 March 2020. It was not until 21 February 2020 that he conceded that he would not be able to settle and suggested that the property be relisted. His email to Mr Gollins on that date advised:
I am happy for [Masterton Investments] to put [the property] back on the market and take what comes -
Can’t change the current cashflow crisis and the priority is getting my product to market
Apologies probably don’t cut it right now - but it is what it is
I have a number of investors queuing up and may have to go down that route anyway
Basically I have had a Perfect storm -
My sales dropped 500k and I won’t pick it up for 3 months – the current cashflow just keeps the wolf from the door
Masterton Investments relisted the property with Mr Gollins immediately on receipt of this email. We do not see how it can fairly be criticised for not doing so earlier.
The second pleaded allegation, that Mr Gollins acted for improper purposes, was not pursued in submissions, and appears to be entirely without foundation. There was no evidence that Mr Gollins or the Salisburys were in cahoots with the third party or obtained any benefit from reselling the property for less than the best price they could procure from the market at that time. Masterton Investments acted in what it perceived to be its best interests in accepting this offer. It still faced the risk that it might not be able to recover the shortfall from Mr Watson.
Mr Watson’s next allegation in his statement of defence is that Mr Gollins made dire predictions of market collapse and economic depression that were without foundation. He contends this resulted in the property being sold at a price well below market value. The contemporaneous evidence shows that Mr Gollins was indeed concerned about the prospect of a significant fall in the value of commercial properties due to the likely adverse implications for businesses of the global pandemic. However, these concerns were hardly without foundation at that time. The onset of the global pandemic caused major disruption for businesses, and many did not survive. This was a period of considerable uncertainty. In any event, there does not appear to be any causal link between Mr Gollins’ concerns about the market and the price offered by the third party, which was the only offer received after some three months of further marketing.
Mr Gollins recommended that Masterton Investments accept the offer because he was concerned that the property market could decline further. Masterton Investments was entitled to accept the offer rather than hold out in the hope that a better offer might come along. It had been trying to sell the property for approximately 12 months and this was only the second offer received in all that time. The property had been exposed to the market for a considerable period. Mr Watson was the sole tenderer following the earlier marketing campaign in the second half of 2019. Mr Gollins canvassed the parties he thought might be interested but the only offer received was the one that was accepted. This offer had the advantage of a substantial deposit being paid immediately and a short settlement timeframe. Had that offer been rejected and Mr Gollins’ fears about market decline been realised, Mr Watson would no doubt complain that Masterton Investments failed to mitigate its loss by not accepting this offer. We do not consider Masterton Investments was required to further test the market by leaving the property on the market for longer. Mr Watson pleads that the property could and should have been marketed more effectively once the effects of COVID-19 reduced. However, at the time, no one could foresee when this would be.
Next, Mr Watson’s complains that the marketing was inadequate. We agree with the Judge that this complaint is not made out. As soon as Mr Watson advised on 21 February 2020 that he was happy for the property to be put back on the market and “take what comes”, Masterton Investments relisted the property with Mr Gollins. Within days, he identified three prospective purchasers who he thought might be interested. One of these had expressed interest during the earlier tender. Mr Gollins arranged for new for sale signs to be erected at the property on 6 March 2020 and he relisted the property on various websites, including Trademe.
The refreshed marketing drew interest from three parties. Nothing came of these prospects. The one that showed interest at the time of the 2019 marketing campaign still needed to sell another property first. Another proposed an agreement conditional on obtaining a tenant and being allowed a period of up to 12 months to find one. This was not acceptable. The only other prospect was Mr Burling. Because of the emphasis Mr Watson places on this prospective sale, we set out the relevant sequence of events.
Mr Gollins reported to the Salisburys on 26 March 2020 (the day after the commencement of the first lockdown) that Mr Burling and his family were the number one prospect, but Mr Burling snr needed to agree and this might be problematic:
The Burlings are our #1. [Mr Burling] is determined to make an offer asap, but needs [his father] onboard. Yesterday [Mr Burling] told [Mr Gollins’ associate] he hopes to take [Mr Burling snr] for a drive within the next fortnight, if possible (remember we’re now in total lockdown for four weeks at least) and drive into the building so [Mr Burling snr] can see it.
But - that raises an issue. [Mr Burling snr] is meticulous in all he does. [Mr Gollins’ associate] pointed out today that he may just say “Let’s go” if he sees the building in its present state. It’s incredibly untidy. There’s also some structural damage (see photo) There’s stuff everywhere - empty and half‑empty boxes - pallets - rubbish. Outside is worse - see photos. Someone cutdown [gum trees] on the boundary weeks ago and they’re still lying on the vacant land which is now a jungle. We’ve been hoping [the tenant] would see to all this but his 31/3 deadline is approaching with no sign of improvement.
Unfortunately [the tenant’s business] is not an essential activity so his staff will not be at work. Even getting the building cleaned-up will be very challenging during the present restrictions. The only manual work permitted is in situations of emergency - roof off - fallen tree etc.
We believe we’ll have to put [Mr Burling] off until [Mr Burling snr’s] first impression is positive.
Mr Burling snr was eventually able to view the property on 18 April 2020. Mr Gollins sent an email to the Salisburys that day reporting that this went well:
[Mr Burling snr] viewed the property finally, today.
[Mr Burling] put his father on an office chair and pushed him around … [Mr Burling snr] was impressed. He said it’s a better building than he realised. That’s promising.
Up to [Mr Burling] now to persuade [his father] to sign the offer. Stand by.
Unfortunately, Mr Burling snr was not prepared to sign the proposed offer which was for $1.5 million. Mr Gollins reported the position in an email to the Salisburys on 28 April 2020:
Unfortunately we’ve lost any chance of [Mr Burling snr’s] agreement.
A great pity. His lawyer rang him (despite being warned about the danger) to say he didn’t see anything wrong with the Agreement as we’d prepared it. [Mr Burling snr] saw that as [Mr Burling] scheming behind his back and ‘threw his toys’ big-time.
No chance of a recovery now sadly.
But we are chasing another party already who we’ve identified as a great fit for the property. Fortunately the step down to Covid level 3 makes working a little easier.
It is not clear to us what else Mr Gollins ought to have done to procure Mr Burling snr’s agreement to purchase at the proposed price of $1.5 million. The inability to sell the property to the Burlings was not due to any inadequacy in Mr Gollins’ marketing or any failure by Masterton Investments to mitigate its losses.
We conclude, in agreement with the Judge, that Masterton Investments did not fail to mitigate its loss. An appropriate marketing campaign was conducted. The property was exposed to the market for a reasonable period after it was relisted following Mr Watson’s default. The offer from the third party was the only offer obtained. In our view, Masterton Investments was clearly entitled to accept this offer rather than to continue negotiating with Mr Watson for a lease to buy arrangement which would have delayed realisation of the property until the following year. It is unfortunate that the default occurred just before the global pandemic. This no doubt contributed to a lesser price being paid. However, that risk rested with Mr Watson as the defaulting party.
Result
The appeal is dismissed.
The appellant must pay costs to the respondent for a standard appeal on a band A basis and usual disbursements.
Solicitors:
Avid Legal, Wellington for Appellant
Upper Hutt Law Ltd, Wellington for Respondent
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