Zhang v Zhai

[2015] NZHC 836

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2012-404-6491 [2015] NZHC 836

BETWEEN

SHAOHE ZHANG

Plaintiff

AND

XIAOJUN ZHAI AND AIDONG ZHONG Defendants

Hearing:	24 April 2015
Appearances:	E St John and D Liu for Plaintiff CS Henry for Defendants
Judgment:	24 April 2015

JUDGMENT (NO. 3) OF TOOGOOD J [Plaintiff's application to lift stay of execution]

This judgment was delivered by me on 24 April 2015 at 4:45 pm

Pursuant to Rule 11.5 High Court Rules

Registrar/Deputy Registrar

ZHANG v ZHAI [2015] NZHC 836 [24 April 2015]

Introduction

[1]      On 16 May 2014, I delivered a judgment in this proceeding (“the principal judgment”) in which I granted the plaintiff’s application for specific performance of a sale and purchase agreement for a property at 24A Margan Avenue, New Lynn Auckland (“the New Lynn property”).1    I reserved leave to the parties to apply for any further orders that were necessary or desirable to give effect to the order for specific performance.2

[2]      The parties were unable to agree on precisely what the order for specific performance required the defendants to do and, on 8 September 2014, I issued a further judgment (“the second judgment”) directing the defendants to transfer the New Lynn property to the plaintiff according to the terms of the sale and purchase

agreement, including the parties’ respective liabilities for interest under clause 3.10.3

I also ordered that the agreement should be modified to accommodate a settlement many years after the date originally contemplated, adopting terms from the plaintiff’s pleadings.  The orders required the defendants, within seven days of the judgment, to settle the transfer of title to the property to the plaintiff whom I had held to have equitable title.

Appeal and stay

[3]      In the second judgment, I held that it was appropriate to grant a stay of execution of the orders requiring settlement of the transaction on the condition that the defendants would maintain the momentum in prosecution of an appeal against the principal judgment which had been commenced in the Court of Appeal in June

2014.  The conditions of the stay were that the case on appeal should be filed within one month of the date of the second judgment and that the defendants would seek a hearing of the appeal at the earliest date available.

[4]      Counsel have informed me that the appeal is due to be heard on 9 July 2015. Although the respondent has objected to the form of the case on appeal proposed by

1      Zhang v Zhai [2014] NZHC 1026, [2014] 3 NZLR 69.

2 At [71].

3      Zhang v Zhai [2014] NZHC 2156.

the defendants, Mr Henry has indicated to me that a supplementary case on appeal meeting the plaintiff’s requirements will be filed in due time.

Plaintiff ’s application to lift the stay

[5]      The plaintiff has now applied for an order setting aside the stay, principally on the ground that the defendants are in serious default of their obligations to the ANZ Bank New Zealand Limited (“the Bank”) which holds a registered mortgage security over the New Lynn property; namely, Mortgage No. 5265546.4 registered against Certificate of Title 78277, North Auckland registry (“the mortgage”).   On

19 March 2015, the Bank has issued notices to the defendants under s 119 of the Property Law Act 2007 describing the defendants’ default under the mortgage in respect of overdue instalments of interest and principal under three separate loans secured by the mortgage which, at the date of the notice totalled $11,953.91.  The notice provided that if each default had not been, or could not be, remedied on or before 8 May 2015, all amounts secured by the mortgage would become payable; namely, the sum of $478,901.42 plus accruing interest and fees and costs. The notice indicated that the Bank’s power of sale would be exercisable if each default was not remedied in time.

[6]      The plaintiff’s equitable interest in the New Lynn property is protected, in part at least, by a caveat which has been lodged against the title.

The Bank’s rights v. the plaintiff ’s interests

[7]      Where the owner of the property has encumbered its estate by mortgage, its rights are subject to the mortgagee’s prior rights.  In that situation, the mortgagee’s title is paramount, including its right to exercise its power of sale.4   This is because the Land Transfer Act ensures that a mortgagee’s registered interest is indefeasible and not affected by notice of unregistered claims, except in the case of fraud.5

[8]      In  the  present  situation,  the  Bank  is  the  mortgagee  in  a  mortgage  duly

registered  against  the title to  the New  Lynn  property.   Accordingly,  the Bank’s

4      Vegar-Fitzgerald v Aorangi Forests Ltd [2014] NZCA 200 at [13].

5      Land Transfer Act 1952, s 182.

interest in the land trumps the plaintiff’s equitable interest unless the plaintiff can show that the Bank sought to prejudice his equitable interest when the Bank took its security in the land. That is not the case here.  Mere notice of the plaintiff ’s equitable interest is not enough to make the Bank’s interest defeasible.

[9]      If the Bank exercises its power of sale, the Bank as mortgagee must apply under s 143 of the Land Transfer Act 1952 to remove Mr Zhang’s caveat lodged against  the  title  before  the  transfer  can  be  registered  in  the  name  of  the  new proprietor.  In most cases, such an application is successful, even if the caveator has a sustainable claim, and the purchaser will achieve registration of a clear title.  That

will defeat all other equitable interests in relation to the land,6 including the rights of

the plaintiff conferred by the agreement for sale and purchase, and render the Court’s

orders for specific performance unenforceable.

The plaintiff ’s position

[10]     Mr St John argues that it is clear that the plaintiff’s equitable interest in the property may well be diminishing, notwithstanding that the property may have appreciated in value since the sale and purchase agreement was entered into and, moreover, since the Court’s judgments in 2014.  He says further that the ability of the plaintiff to secure the fruits of the judgments is seriously threatened by the prospect of a mortgagee sale.  In the circumstances, the plaintiff seeks a lifting of the stay so that he may receive legal title pursuant to a settlement carried out in accordance with the Court’s orders, notwithstanding the appeal.

The defendants’ position

[11]     It was clear from the submissions made by Mr Henry today in opposition to the lifting of the stay that he is not adequately instructed as to the defendants’ intentions regarding the their apparent default under the loan arrangements with the Bank.  The evidence provided by the defendants did not include any undertaking that

the defaults would be remedied within a time which would prevent the Bank from

6      Tom  Bennion,  David  Brown,  Robert  Muir  and  Kenneth  Palmer  New  Zealand  Land  Law

(Brookers Ltd, Wellington, 2009) at [4.5.01].

exercising  its  rights  as  mortgagee  after  8 May 2015.    Furthermore,  I  was  not persuaded by Mr Henry that the Bank had given an adequate assurance that it would not pursue the remedies available to it under the mortgage and referred to in the Property Law Act notice.

[12]     In a letter to Mr Henry dated 15 April 2015, the Recoveries Manager of the

Bank said:

We have been advised that Mr Xiao Jun Zhai and Ms Ai Dong Zhang [the defendants] have engaged you to file an appeal for the Judgment against them from matters arising from the contract  on the property situated at

23A Margan Avenue, New Lynn, Auckland.

Given that there is an appeal pending, the Bank will review the situation on an on-going.  At this point in time, The Bank has not made the decision to proceed to mortgagee sale.

[13]     While it might be inferred from those observations that the Bank, as a major and responsible financial institution, would act with some circumspection in light of its knowledge of the plaintiff’s interest in the property, the Bank’s letter falls well short of giving any assurance or undertaking that the Bank would not exercise its rights under the mortgage to recover all sums owing to it, including by way of mortgagee sale if necessary, if the defendants’ default is not remedied by 8 May

2015.

[14]     As I have observed, that would render the orders for specific performance useless.   I am not prepared to countenance that outcome as a consequence of the defendants’ default.

Result

[15]     Accordingly, I indicated to counsel at the telephone conference that I would allow the defendants an opportunity to remedy their default under the mortgage so as to ensure that the Bank would not be in a position to exercise its power of sale.  That would require the defendants not only to remedy the present defaults but to give an appropriate undertaking to the Court that they will not default on any obligations pending the disposition of the appeal.

[16]     However, I consider it appropriate to make orders which set aside the stay unless the plaintiff’s position is protected prior to 8 May 2015.

[17]     I  have  assumed  for  present  purposes,  although  I  require  the  plaintiff  to confirm, that in the event the stay is lifted the plaintiff will renew his undertakings that he would not “sell, convey, transfer, mortgage, pledge, exchange or otherwise dispose of the property” until the appeal is determined and that he will transfer the property back to the defendants immediately should their appeal succeed.

Orders

[18]     Accordingly I order:

(a)       If the plaintiff undertakes to the Court by affidavit sworn and filed on or before 29 April 2015, that, in the event the stay is set aside, the plaintiff will not sell, convey, transfer, mortgage, pledge, exchange or otherwise dispose of the property at 24A Margan Avenue, New Lynn, Auckland until the defendants’ appeal is determined, and that he will transfer the property back to the defendants immediately should their appeal succeed,

the stay of execution on the principal judgment and the second judgment ordered at [34] of the second judgment7 is set aside,  unless the defendants:

(i)before 5pm on  30 April  2015,  file and  serve  an  affidavit containing an undertaking to the Court that they will pay all arrears of interest  and  other sums  due to ANZ  Bank  New Zealand Limited under Mortgage No. 5265546.4 registered against Certificate of Title 78277, North Auckland registry by

5pm on 5 May 2015; and

7      Zhang v Zhai above, n 3.

(ii)on or before 5pm on 5 May 2015, pay all arrears of interest and other sums due to ANZ Bank New Zealand Limited under Mortgage No. 5265546.4 registered against Certificate of Title

78277, North Auckland registry up to and including that date;

and

(iii)by 5pm on 6 May 2015, file and serve an affidavit confirming that the payment in sub-paragraph [ii] has been made to and received by ANZ Bank New Zealand Limited as directed, and undertaking that the defendants will comply fully with their obligations under the mortgage pending disposition of their appeal.

(b)If the stay of execution on the principal judgment and the second judgment is set aside because of the failure of the defendants to take the steps in [18][a][i], [ii] and [iii] above, the plaintiff has leave to apply to the Court on an urgent basis, on notice to the defendants and ANZ Bank New Zealand Limited, for orders restraining the Bank from  pursuing  its  power  of  sale  of  the  property  at  23A Margan Avenue, New Lynn, Auckland under Mortgage No. 5265546.4 registered against Certificate of Title 78277, North Auckland registry. The  Registrar  is  directed  to  refer  any  such  application  to  me forthwith upon filing for consideration in the first instance.

Stay of the order for costs in the second judgment

[19] Counsel could not agree whether the effect of the stay at [34] of the second judgment was to stay the defendants’ obligation to pay the costs ordered at [36] in respect of the hearing. It is not clear to me whether I have jurisdiction to recall that part of the second judgment to clarify the position. In any event, I consider it appropriate, for the avoidance of doubt, to extend the stay, in case it should be necessary to do so, to include the order for costs at [36]. I so order. The orders made at [18] shall apply with equal force and effect to this order for a stay of the costs awarded in the second judgment.

Costs on the application to set aside the stay

[20]     Costs on the application to set aside the stay are reserved.

.............................................

Toogood J