Wiltshire Developments Limited v Blake

[2013] NZHC 761

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

CIV 2012-409-863 [2013] NZHC 761

BETWEEN  WILTSHIRE DEVELOPMENTS LIMITED

First Plaintiff

ANDFOWLER DEVELOPMENTS LIMITED Second Plaintiff

ANDETHEL CYNTHIA BLAKE First Defendant

ANDWENDY ANN B URGESS AND WILLIAM LESLIE BROWN Second Defendants

ANDMINA ANNETTA BURGESS Third Defendant

ANDELSIE CHURCHILL, BARRY SPENCER CHURCHILL AND WILLIAM LESLIE BROWN

Fourth Defendants

ANDMURRAY DOUGLAS FORSYTH AND EILEEN MARGARET FORSYTH

Fifth Defendants

ANDRONA JANET HENDERSON Sixth Defendant

Hearing:         27 March 2013

Counsel:         J E Bayley for Plaintiffs

D M Lester for Defendants

Judgment:      15 April 2013

JUDGMENT OF PANCKHURST J

Introduction

WILTSHIRE DEVELOPMENTS LIMITED V BLAKE AND ORS HC CHCH CIV 2012-409-863 [15 April

2013]

[1]      Wiltshire Developments Limited (Wiltshire) acquired land in Rangiora and developed a retirement village comprising approximately 20 residential units. Between February 1995 and June 1998, six of the units were sold to retired couples or individuals who are now defendants in this proceeding (either personally or via their personal representatives). At the time of each sale the unit purchasers signed an option to purchase in favour of Wiltshire, enabling the company to buy back the units at a fixed price.  Dispute has arisen concerning the interpretation and effect of the options.

[2]      Wiltshire seeks declarations amending the terms upon which the options may be exercised since it considers that the present terms are unworkable and do not reflect the intentions of the parties.   The defendants opposed this relief, and also counter-claim that the options are so drafted that:

(a)       during their lifetimes the defendants are not bound to sell their units to

Wiltshire, but rather are at liberty to sell on the open market, and

(b)      in the event of their doing so, the defendants are not bound to secure from new purchasers a like option in favour of Wiltshire.

The defendants seek declarations to this effect.

[3]      Alternatively, if during their lifetimes the defendants are bound to first invite Wiltshire to purchase the units before selling to others, then they seek an order that the option is void as an unlawful restraint on alienation.

[4]      It  is  convenient  to  first  consider  the  construction  issue  raised  by  the defendants, then their unlawful restraint on alienation contention, followed by Wiltshire’s claim to modify the machinery terms upon which the option is to be exercised.

[5]      Mr John Fowler is the director of and main shareholder in Wiltshire.   In December 2010 Wiltshire’s rights under the options were assigned to Fowler Developments Limited, another company controlled by Mr Fowler.  In light of this

assignment  Fowler Developments  Limited  is  joined  as  a second  plaintiff in  the proceeding.  However, for convenience I shall continue to refer to Wiltshire as the grantee of the option.

During their lifetimes must the grantors first offer their units to Wiltshire if they decide to sell?

The option

[6]      The options signed by the defendants are in a common form.  The relevant clauses provide:

1.In  consideration  of  the  sum  of  One  Dollar  ($1.00)  paid  by  the Grantee to the Grantor (the receipt of which the Grantor acknowledges) the Grantor grants to the Grantee (or the Grantee’s nominee) an option to purchase the property and improvements as described in the form of contract contained in the schedule to this Deed (called “the contract”) at the price and on the conditions specified in the contract.

2.        (i)       This option is binding on the Grantor and in the event of the

Grantor’s death on her estate.

(ii)      [omitted] (iii)      [omitted]

3.        This option may be exercised at:

(A)     Any time after the death of the Grantor and before 4.00 pm on the 90th day after the death of the Grantors:

(a)       By delivery of written notice of exercise of option and  a  bank  cheque  for  [$x]  by  way  of  deposit payable under the Contract.

(b)       The notice and cheque shall be delivered personally to the Grantor or to the trustees for the estate of the Grantor.

(c)       Where  the  option  is  exercised  on  behalf  of  a nominee, it may be exercised either by the Grantee or by the nominee or nominees, as specified in paragraph (a) and (b) of this clause.  There shall also be delivered at the time of the exercise of the option a form of nomination signed by the Grantee (or by the person entitled to make the nomination at that date).

(B)      At any time after being invited to do so by the Grantor in writing and before 4.00 pm on the 90th day after the date of the giving of the notice by the Grantor.

4.On completion of the sale, which shall be 30 days after the option is exercised the sum of One Dollar ($1.00) paid in consideration of the grant of this option shall be credited towards and deducted from the balance of the purchase price payable on completion.

5.        On delivery of the notice of exercise of this option pursuant to clause

3, the party bound by the option at that date and the party in whose favour is has been exercised become immediately bound as vendor

and as purchaser respectively under a contract for the sale of land in

accordance with the terms contained in the contract.

Procedure

[7]      Wiltshire sought summary judgment in relation to its claim to modify the machinery terms of the option.  The defendants’ counterclaim seeking a declaration upholding their interpretation of the option is likewise framed as an application for summary judgment, supported by an affidavit from Mr William Brown, a solicitor, who deposes that the issue being solely one of interpretation he believes there is no defence available to Wiltshire.

[8]      Although a counterclaim, the relief sought by the defendants is quite separate and distinct from that sought by Wiltshire.  The company seeks to fine tune the so- called machinery provisions which define how the option is to be exercised.   The defendants challenge the very substance of the option, in particular whether during their lifetimes they are free to sell to third parties in preference to Wiltshire.  In the circumstances  I view  the  defendants’ claim  as  a  standalone  summary  judgment application to be decided under r 12.2(1) on the basis whether there is any arguable defence to it.

The contentions

[9]      Mr Lester, on behalf of the defendants, submitted that:

•    The wording of the option is determinative.

•    Clause 3(B) is clear and unambiguous.

•It contemplates grantors having a right to sell during their lifetimes, so that only if the grantor invites Wiltshire to exercise the option may it do so.

Hence, if a grantor elected not to invite Wiltshire to exercise its option, a sale to a third party is permissible.  Counsel accepted that the position would be otherwise if clause 3 said ‘This option may be exercised at: .... (B) Any time the grantor wishes to sell during their lifetime after written notice from the grantor ...’.

[10]     Mr Lester also submitted that a construction which permitted grantors to sell to third parties was commercially realistic, given that the consideration paid for each option was $1.00, the purchase price payable by Wiltshire was a fixed sum and there was nothing to suggest that the price originally paid for the units by the grantors was discounted to take account of the option.

[11]     Mr Bayley, on behalf of Wiltshire, submitted:

•Clauses 1 and 2(i) give rise to a binding option in favour of the grantee for the lifetime of the grantors, and beyond for the period of 90 days.

•The construction propounded by the grantors would defeat the very substance of the option.

•Clause 3(B) only defines when the option may be exercised, and confers upon the grantors a discretion to trigger the option during their lifetimes.

Mr  Bayley  placed  reliance  on  the  decision  of  the  English  Court  of Appeal  in

Pritchard v Briggs1, where an option exercisable upon the death of the survivor of two grantors was held to preclude a sale to third parties during the grantors lifetimes.

Analysis

[12]     I am in general agreement with the submissions advanced on behalf of the

grantee, Wiltshire.

1      Pritchard v Briggs [1980] 1 All ER 294.

[13]     In my view the substance of the option is defined in clauses 1 and 2(i). Although inelegantly worded, clause 2(i) creates an option for the lifetimes of the grantors, and also binds their estates for a period of 90 days.

[14]     Pritchard v Briggs is in point.  The case involved a contest between a right of first refusal (sometimes called a right of pre-emption) and an option to purchase. Major Lockwood and his wife gave a right of first refusal in relation to certain land to Mr Riddett for so long as one of them was alive.  Subsequently, the defendants acquired the benefit of the right.  Some years later the Major and his wife gave an option to purchase over the same land to Mr Pritchard, exercisable upon the death of the last of them.  While the Major was still alive a contract was concluded with the defendants for the sale and purchase of the land.  The sale was settled soon after the Major’s death.  Mr Pritchard, however, exercised the option to purchase within three months of the Major’s death, being the stipulated period.  He then sought specific performance and appealed when his claim failed at trial.

[15]     The Court of Appeal decision cites with approval a passage from Street J in

Mackay v Wilson,2 as follows:

Speaking generally, the giving of an option to purchase land prima facie implies that the giver of the option is to be taken as making a continuing offer to sell the land, which may at any moment be converted into a contract by the optionee notifying his acceptance of that offer. The agreement to give the option imposes a positive obligation on the prospective vendor to keep the offer open during the agreed period so that it remains available for acceptance by the optionee at any moment within that period.  It has more than a mere contractual operation and confers upon the optionee an equitable interest in the land, the subject of the agreement:   see, for example per Williams J. in Sharp v The Union Trustee Co. of Australia Ltd.3

By contrast, a right of first refusal initially confers no immediate right upon the grantee.  It is not an offer, and imposes no obligation on the owner to sell his land. Only if the owner decides to sell does the right of first refusal spring into life. Hence, such right is merely contractual and creates no equitable interest in the land.

[16]     As to the exercise of the option the defendants, in seeking to uphold their purchase of the land, argued that the Lockwoods’ promise to sell to Mr Pritchard was

2      Mackay v Wilson (1947) 47 SR (NSW) 315 at 325.

subject to an implied term, namely that the option only applied if the land was still retained in Lockwood ownership at the death of the survivor.  The Court of Appeal rejected this contention.  Stephenson LJ characterised the option as ‘an irrevocable offer [which] gave [Mr Pritchard] a right eventually to call for a conveyance of the land whether the Lockwoods or their personal representatives wished to convey or

not’.4    He also found it not necessary, indeed impossible to imply any term of the

kind suggested by the defendants because ‘it must be implicit in any promise to sell something to A that you will not sell it to B’.5

[17]     In my view Mr Bayley was correct in saying that the reasoning in Pritchard v Briggs applies equally to this case.  Clauses 1 and 2(i) of the option plainly grant an option to Wiltshire to purchase the grantors’ units at the price and on the conditions specified in the contract.  The option is expressed to be binding on the grantor and after death on his/her estate.   This must mean the option applies throughout the grantors’ lifetimes.

[18]     Clause 3(A) governs the exercise of the option and fixes 90 days as the cut- off after death within which Wiltshire must take up the option by giving notice and making payment of the deposit.   Clause 3(B) entitles a grantor who wants to sell his/her unit during their lifetime to do so.   The grantor may trigger the option by invitation to Wiltshire.   If Wiltshire does not take up the option, in the manner specified and within 90 days, the grantor is then at liberty to sell to third parties – but not otherwise.  This is evident upon reading the option as a whole.  The first two clauses  are  predominant  and  define  the  substance  of  the  option  while  clause  3 controls the exercise of ‘this option’.  The relegation of the entitlement to sell during the grantors lifetime to  clause 3 identifies its  standing; that it is subservient to clauses 1 and 2.

[19]     There was of course no mechanism comparable to clause 3(B) available to Mr Pritchard in the English case.  But I am satisfied this is a distinction without a difference. As Stephenson LJ said in relation to a lifetime option, ‘it must be implicit

to any promise to sell [the land] to A that you will not sell it to B’.  Here clauses 1

4      Pritchard v Briggs, above n 1, at 332.

and  2(i) constitute the lifetime promise,  and  clause 3(B) merely establishes  the entitlement to invite Wiltshire to purchase the land during the grantors lifetimes. Just as a right of first refusal did not derogate from the lifetime option in Pritchard v Briggs, nor does the clause 3(B) mechanism in this case.

[20]    For these reasons the defendants’ application for summary judgment is dismissed.

Are the options an unlawful restraint upon alienation of the units?

The doctrine

[21]     A number  of Australian  cases  have  recognised  a  common  law  doctrine whereby a restraint on the alienation of land, whether created by a right of first refusal,   an   option   to   purchase   or   a   contract,   may   be   declared   unlawful.

D W McMorland mentions the doctrine in his text Sale of Land, observing that ‘the

boundaries of the doctrine are not clear’.6

precedents.

Counsel could find no New Zealand

[22]     Mr Lester relied upon John Nitschke Nominees Pty Limited v Hahndorf Golf Club Inc and Another.7    This decision of a full court identifies the rationale for the doctrine as ‘... the public policy consideration that private property should be fully alienable’,8  but also notes ‘there are many restrictions on the full alienability of private property which are upheld by the Courts’ because of ‘an important countervailing public policy consideration, namely ‘that parties who freely negotiate an agreement should be bound by the terms of the agreement’.9

[23]     Besanko J then said:

... it would appear to be established by the authorities that a right of first refusal will attract the operation of the doctrine in certain circumstances. Relevant factors will be the scope of the initial prohibition, whether the right exists for a limited period or indefinitely, whether the grantor of the right

6      D W McMorland Sale of Land (Cathcart Trust, Auckland, 2011) at 116.

7      John Nitschke Nominees Pty Limited v Hahndorf Golf Club Inc and Another [2004] SASC 128; (2004) 88 SASR 334.

8 Ibid at [121].

must extract a similar promise from subsequent purchasers and whether the right is to be exercised by reference to a fixed price.10

These aspects are to be judged as at the time the parties entered into the relevant agreement.

The contentions

[24]     Mr Lester submitted that the options in this case had all the hallmarks of an unlawful restraint, because:

•  The option bound the grantors ‘indefinitely’.

• Only a peppercorn consideration was paid for the option, and there was no adjustment to the original purchase price of the units to reflect the option.

•  The option was exercisable at a fixed price well below market value.

Mr Lester drew attention to the original purchase prices and the buyback figures, which showed the latter to be at a discount of 10% or 15%, save in one case where the discount was 36%.  Counsel also relied upon affidavit evidence from a real estate agent who considered that the units had roughly doubled in value since the time of their purchase in the mid to late 1990’s.  Hence, under the options Wiltshire could purchase the units at something under half their present day indicative market values.

[25]     Mr Bayley responded as follows:

•The option does not bind the grantors indefinitely, particularly as they may accelerate the exercise of the option by invitation to Wiltshire.

•The options were voluntarily entered into by the grantors and there is no suggestion of duress or unconscionability.

•There is no evidence to substantiate that the original purchase prices of the units were not adjusted to reflect the option.

•The fixed prices at which Wiltshire may purchase the units is to be judged at the time the options were executed, not by reference to indicative current market values.

Counsel relied on Bondi Beach Astra Retirement Village Pty Limited v Gora,11 a case in which an option in favour of a retirement village operator was upheld on appeal. The judgments contain observations concerning the social utility of retirement villages, which factor may dictate that restraints imposed by buyback options not be

struck down.

[26]     Mr Bayley also sought to rely upon an affidavit sworn by Mr Fowler with reference to the unit having a buyback discount of 36%.   He maintained that this discount reflected a significant reduction in the purchase price negotiated at the request of the grantors in 1995.  Mr Lester objected to the receipt of this affidavit because of the lateness of its being filed.  For reasons which will become apparent I

need not resolve this disputed issue.

[27]     In response to the Bondi Beach Retirement Village case Mr Lester submitted that the Wiltshire village is a village of independent units in close proximity, rather than a true retirement village with communal facilities for the enjoyment and care of the residents.   Hence, the argument continued, this case is distinguishable from Bondi Beach Retirement Village.

Analysis

[28]     It is not possible to consider this alternative claim in a summary judgment context.  The affidavit evidence is insufficient to enable the competing public policy considerations to be sensibly considered.  This, in my view, is self evident from a mere recitation of the competing contentions advanced by counsel.   Accordingly, whether the options give rise to an unlawful restraint upon alienation must await a substantive hearing. The application for summary judgment is dismissed.

Are modifications to the machinery provisions of the option appropriate?

The test

[29]     Mr Bayley approached this aspect on the basis that ‘machinery provisions’ of a contract may be modified by the Court where this is necessary to give business efficacy to the agreement of the parties.   He relied upon Sudbrook Trading Estate Limited v Eggleton and Others12  in which the House of Lords held that where the substance of an agreement is clearly defined, but its implementation breaks down because machinery provisions are imperfect, the Court will substitute its own machinery to secure due performance of the contract.  In that instance an option to purchase under a lease required each party to appoint a valuer to determine a fair

price.   The lessors contended the option was unenforceable because the purchase price was undefined, and declined to appoint a valuer.  Their Lordships ordered an

inquiry to determine a fair price.

[30]     In Money v Ven-Lu-Ree Limited13 Cooke P said:

In modern times the Courts have tended in the main to seek to give business efficacy to agreements apparently reached, providing that some standard or machinery  can  properly  be  found  for  supplying  what  is  lacking  in  the express terms.14

These observations were made in the context that there must be ‘sufficient certainty in what has been expressly agreed’ before the Court will imply a term required to make the agreement workable.15

[31]     To similar effect are observations of Baragwanath J in MacMillan v Covic:16

The law’s task is to give effect to freely accepted mutual obligations; it is therefore the Courts’ responsibility to identify and find means of giving practical and just effect to those obligations even if they have not been expressed  meticulously.     To  get  out  of  phase  with  what  reasonable commercial parties would make of the transaction would turn the process upside down:  the law exists to give effect to such obligations; not to defeat them.

12     Sudbrook Trading Estate Limited v Eggleton and Others [1982] 3 All ER at page 1.

13     Money v Ven-Lu-Ree Limited [1988] 2 NZLR 414 (CA).

14     Ibid at 417.

15     Ibid.

16     MacMillan v Covic [2004] 2 NZLR 106 (HC) at [23].

Again these observations assume the existence of defined primary obligations between the parties, but imprecise or defective machinery terms intended to give effect to those obligations.

[32]     Against this background I shall consider each of the modifications sought by

Wiltshire.

Clause 3(A)

[33]     Wiltshire seeks to amend the opening words of this clause to read:

Any time after the death of the last living grantor ... (emphasis added).

This is to clarify that where there are two grantors it is only upon the death of the survivor that the option may be exercised by Wiltshire.

[34]     Mr Lester opposed this modification on the basis that it was unnecessary because the obligations of joint grantors are joint and several: s 276 of the Property Law Act 2007.   This, however, misses the point as it is the right of Wiltshire to exercise the option that is at issue, and the company seeks to postpone the exercise of its right until the death of the last living grantor.  This is a matter of clarification and is obviously to the advantage of the grantors. The modification is appropriate.

[35]     Secondly, Wiltshire seeks to modify the balance of clause 3(A) and also

3(A)(a) to read:

... and before 4.00 pm on the 90th day after the later of:

(i)       notice  of  the  death  of  the  said  Grantor  is  published  in  the

Christchurch Press; or

(ii)      probate or letters of administration is granted in respect of the estate of the said Grantor

(emphasis added)

Previously, the 90 day time limit ran from the death of the grantors; not from the date of a death notice, much less the date of the grant of probate or letters of administration. (See [6]).

[36]     Mr Fowler explained in an affidavit that these modifications were sought because Wiltshire does not have any guarantee that the death of a grantor will be discovered in a timely manner as it is reliant upon ‘word of mouth’.  He referred to an instance where Wiltshire did not exercise an option within time, because of complications in ascertaining the fact and date of a grantor’s death.

[37]     Mr Lester opposed the modifications on the basis that they were unnecessary, and that Wiltshire was seeking a ‘de facto extension’ of the term of the option since time would not run until the later of the date of a death notice, or from the grant of probate or letters of administration.

[38]     He submitted service could be effected on the Crown before the grant of letters of administration and on the intended legal personal representatives before a

grant of probate, citing the commentary in New Zealand Conveyancing Law and

Practice17

in support of these propositions.  However, the commentary applies only

where there are no express provisions in the option concerning how it is to be exercised.  Here there are, in that within 90 days of the exercise of the option the deposit must be delivered personally ‘to the trustees for the estate of the grantor’:

clause 3(A)(b).

[39]     However, I accept counsel’s other contention.   The proposed modification would potentially extend the option exercise period to a significant degree – depending  on  how  quickly  probate  or  letters  of  administration  are  granted. Postponing commencement of the 90 day period until then would frequently add months to the exercise period.   The modification sought is not a subordinate, or machinery, change.   If granted it would modify the substance of the option with regard to the time allowed for its exercise.  Wiltshire framed the terms of the option

and it cannot expect the Court to intervene to meet its convenience.

Clause 3(A)(b)

[40]     The  modification  sought  is  the  addition  of  reference  to  executors  and administrators, so that the clause would read:

17      New Zealand Conveyancing Law and Practice (looseleaf ed, CCH New Zealand) at [4-700].

(b)       The notice and cheque shall be delivered personally to the Grantor or to  the  executors,  administrators  or  trustees for  the estate  of  the Grantor.

This is a machinery modification that simply extends the description of legal representatives in conventional terms, whereas the previous reference to trustees alone was defective terminology.   This modification is appropriate, and therefore approved.

Mina Annetta Burgess

[41]     This modification relates to only one of the options.   Mrs Burgess is the occupier of a unit which is owned by the trustees of a family trust (second defendants).  The trustees are the grantors, but to make the option workable clause

3(A) should refer to the death of Mina Annetta Burgess and clause 3(A)(b) to the estate of Mina Annetta Burgess. This is approved.

[42]     Accordingly I make declarations approving the modifications described in paragraphs 34, 40 and 41.

Costs

[43]   Wiltshire has successfully resisted the defendants’ application and also succeeded in large measure with reference to its application for summary judgment. Costs on a 2(B) basis for a half day hearing are appropriate.

Solicitors:

J E Bayley:   [email protected]

D M Lester:  [email protected]