Smith v Smith [2020] NZHC 2288 (3 September 2020)

Last Updated: 9 September 2020

IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY I TE KŌTI MATUA O AOTEAROA KIRIKIRIROA ROHE

CIV-2020-419-000155 [2020] NZHC 2288

UNDER	The Land Transfer Act 2017, s 143
BETWEEN	SHARON JEAN SMITH Applicant
AND	ALLAN RAYMOND SMITH and NEIL WILLIAM WELCH, as trustees of the SMITH FAMILY TRUST Respondents

Hearing:	25 August 2020
Appearances:	M Brady for Applicant P J Morgan QC for Respondents
Judgment:	3 September 2020

REASONS JUDGMENT OF ASSOCIATE JUDGE P J ANDREW

This judgment was delivered by Associate Judge Andrew on 3 September 2020 at 4.00 pm

pursuant to r 11.5 of the High Court Rules Registrar / Deputy Registrar

Date ............................

SMITH v SMITH [2020] NZHC 2288 [3 September 2020]

• [1] In my minute of 27 August 2020, I recorded the result of my decision to order that the caveat lapse but on condition that the proceeds of sale be held in the respondents’ solicitor’s trust account pending determination of Sharon Smith’s substantive claim.

• [2] This judgment contains the reasons for my findings and orders.

Introduction

• [3] Sharon Smith and Allan Smith were married in 2012 and separated in early 2019. For the last year of their relationship they lived in the property at 2 Durham Heights, Flagstaff, Hamilton (the Property).

• [4] The registered proprietors of the Property are the respondent trustees, Allan Smith and Neil Welch as trustees of the Smith Family Trust.

• [5] The applicant, Sharon Smith, is a discretionary beneficiary of the Trust in her capacity as wife of the settlor, Allan Smith.

• [6] Sharon Smith lodged a caveat against the Property on 12 March 2020. The Property is the subject of a sale and purchase agreement which is due to settle on 2 September 2020.

• [7] In these proceedings, under s 143 of the Land Transfer Act 2017, Sharon Smith seeks an order that the caveat not lapse. The critical issues I must determine are:

(a) Whether there is an arguable case that Sharon Smith has an institutional constructive trust claim against the Property based on contributions she is said to have made; and

(b) If so, whether I should, as a matter of discretion, order that the caveat lapse on condition that a portion of the proceeds of the sale be held in a solicitor’s trust account pending determination of Sharon Smith’s substantive claims.

Factual background

• [8] In 1996, Allan Smith settled a family trust, the Smith Family Trust.

• [9] In 2006, Allan Smith settled a trust called the Allan Smith Smart Trade Trust, which owns the shares in a business he had developed called Smart Loyalty NZ Ltd.

• [10] The Smith Family Trust and the Allan Smith Smart Trade Trust have the same trustees, namely Allan Smith and Neil Welch.

• [11] In 2008, the Smith Family Trust purchased a beach property at Whangamata. The Smith Family Trust also owns a residential property at 88 Braid Road, Hamilton, where Allan Smith lived.

• [12] Following their marriage in 2012, Allan Smith and Sharon Smith lived in the Braid Road property. They continued living there until December 2017.

• [13] The Property was purchased in 2017 for the sum of $1.12 million. Mortgage funds of $660,000 were borrowed from the ANZ bank for the purchase, with the balance, so Allan Smith says, being a loan of $460,000 advanced by the Allan Smith Smart Trade Trust. Those funds had become available following the sale by the Allan Smith Smart Trade Trust of its shares in Smart Loyalty NZ Ltd. The purchaser was R & A Projects Ltd. The sole shareholder of R & A Projects Ltd is the Allan Smith Smart Trade Trust. R & A Projects Ltd was a trading company that the Allan Smith Smart Trade Trust owned.

• [14] Allan Smith and Sharon Smith moved into the Property in December 2017 and lived there until they separated at the end of 2018/early 2019. It was their principal family home. At that time, they continued to make considerable use of the beach- house at Whangamata.

• [15] On 30 July 2018, the Property was transferred to the Smith Family Trust. Allan Smith says that the transfer occurred following the advice of his accountant.

• [16] By letter dated 21 January 2019, the solicitors for Allan Smith wrote to Sharon Smith proposing a settlement of any relationship property claims by Allan Smith paying Sharon Smith the sum of $1 million in cash, with $500,000 to be paid on the

signing of a settlement agreement and $500,000 to be paid when Sharon Smith left the Property.

• [17] Allan Smith subsequently withdrew the offer.

• [18] By letter dated 7 March 2019, Allan Smith’s lawyers wrote to Sharon Smith advising that the trustees of the Smith Family Trust had revoked her right to occupy the property. A resolution of the trustees dated 6 March 2019 was enclosed.

• [19] After Sharon Smith moved out of the property in March 2019, Allan Smith lived there for the remainder of the 2019 year.

• [20] The Property was put on the market in March 2020. In May 2020, the trustees signed an unconditional agreement for sale and purchase of the Property for the sum of $1.22 million. The settlement date is 2 September 2020.

• [21] The Smith Family Trust has retained ownership of both the Whangamata and Braid Road properties. Extensive renovations on the Braid Road property, which commenced during the Smiths’ marriage are said to be nearly complete.

Relevant legal principles

• [22] Section 143 of the Land Transfer Act 2017 (the Act) reads:

143 Lapse of caveat against dealings

(1) The following persons may apply to the Registrar for the lapse of a caveat against dealings affecting an estate or interest in land:

(a) a person who wishes to register an instrument affecting the estate or interest protected by the caveat; or

(b) the registered owner or a person acting for or on behalf of the registered owner of the estate or interest affected by the caveat.

(2) The Registrar must give notice of an application under subsection (1) to the caveator.

(3) A caveat to which an application relates lapses unless, –

(a) within 10 working days after the date on which the Registrar gives notice of an application under subsection (1) to the caveator, the caveator gives notice to the Registrar that an

application has been made to the court for an order that the caveat not lapse; and

(b) within 20 working days after the date on which the caveator gives a notice to the Registrar under paragraph (a) (the relevant period), an order of the kind referred to in subsection (4) is served on the Registrar.

(4) The orders are –

(a) an order that the caveat not lapse:

(b) an interim order that the caveat not lapse:

(c) an order adjourning the application.

(5) The caveat lapses if the court makes an order to that effect before the close of the relevant period.

(6) If the court makes an order under subsection (4)(b) or (c), the caveat will not lapse if, after the close of the relevant period, –

(a) the court makes a final order that the caveat not lapse; and

(b) the order is served on the Registrar.

(7) If the court makes an order under subsection (4)(b) or (c), the caveat will lapse if, after the close of the relevant period, –

(a) the court makes a final order that the caveat lapse; and

(b) the order is served on the Registrar.

...

• [23] In Philpott v Noble Investments Ltd, the Court of Appeal set out the basic legal principles.¹ Although that case was dealing with the Land Transfer Act 1952, the same approach applies in relation to the 2017 Act and in relation to an application that a caveat not lapse. The principles are:²

(a) The onus is on the applicants to demonstrate that they hold an interest in the land that is sufficient to support the caveat, but they need not establish that definitively.

(b) It is enough if the applicants put forward a reasonably arguable case to support the interest they claim.³

¹ Philpott v Noble Investments Ltd [2015] NZCA 342.

² At [26].

³ Sims v Lowe [1988] NZCA 253; [1988] 1 NZLR 656 (CA) at 660.

(c) The summary procedures involved in applications of this nature are not suited to the determination of disputed questions of fact. An order for the removal of a caveat will only be made if it is patently clear that the caveat cannot be maintained, either because there is no valid ground for lodging it in the first place or, because such a ground no longer exists.

(d) Where an applicant has discharged the burden upon it, the Court retains discretion to remove the caveat which it exercises on a cautious basis. Before it does so, the Court must be satisfied that removal would not prejudice the caveator’s legitimate interest.⁴

Analysis and decision

Issue 1: Has the applicant put forward a reasonably arguable case to establish a beneficial interest in the land?

• [24] This is the critical threshold issue. The respondent trustees submit that, at best, the applicant’s evidence establishes some broad-ranging personal claims against the Smith Family Trust assets generally but falls short of establishing an arguable beneficial interest in the Property (the subject of the caveat). A reasonably arguable case must be established in relation to an interest in the land at 2 Durham Heights.

• [25] Sharon Smith contends for an institutional constructive trust in the Property.

• [26] In a recent judgment, Batusov v Batusova, van Bohemen J set out the general principles relating to constructive trusts sufficient to sustain a caveat:⁵

• [37] In accordance with s 138(1)(b) of the Land Transfer Act 2017, a person may lodge a caveat on the basis that the person has an interest in the land under an express, implied, resulting, or constructive trust.

• [38] To sustain a caveat, however, the constructive trust must be an institutional constructive trust arising by operation of the principles of equity as distinct from a remedial constructive trust imposed by the court in circumstances where, without court intervention, no trust would arise: Fortex

⁴ Stewart v Kaipara Consultants Ltd [2000] NZCA 92; [2000] 3 NZLR 55 (CA) at [23].

⁵ Batusov v Batusova [2020] NZHC 1272 at [37]–[41]. See also Daisley v Ark Contractors Ltd

[2020] NZHC 793.

Group Ltd (in rec and liq) v MacIntosh⁶ and Boat Harbour Holdings Ltd v Steve Mowatt Building and Construction Ltd.⁷

• [39] In Almond v Read, the Court of Appeal clarified that what is sometimes referred to as a “common intention constructive trust” simply describes one type of situation in which a reasonable expectation will be found to exist.⁸ Following that decision, it is clear that there is no conceptual distinction between a constructive trust based on common intention and one based on reasonable expectation. However, proof of a common intention can be sufficient to establish a reasonable expectation.

• [40] In Almond v Read, the Court of Appeal noted that:⁹

(a) As described by the authors of Equity and Trust in New Zealand,¹⁰ the common factor in institutional constructive trusts would appear to be the unconscionability of the defendant in denying the plaintiff an equitable interest in the relevant property because of a previous understanding, whether subjectively agreed upon between the parties or more commonly deemed by the law to have been appropriate in the circumstances.

(b) One common category of constructive trust is where contribution has been made to the acquisition, improvement or maintenance of property, or its value, by a party other than the registered proprietor.

(c) Following Lankow v Rose,¹¹ the essential requirements of that kind of constructive trust are that the plaintiff contributed in more than a minor way to the acquisition, preservation or enhancement of the defendant’s assets, whether directly or indirectly, and that in all the circumstances the parties must be taken reasonably to have expected that plaintiff would share in them as a result;

(d) As set out by Tipping J in Lankow v Rose,¹² in order to establish that equity should regard a defendant’s denial of a claimant’s interest to be unconscionable, a claimant needs to prove:

(i) Contributions, direct or indirect to the property in question;

(ii) The expectation of an interest therein;

(iii) Such an expectation is a reasonable one; and

⁶ Fortex Group Ltd (in rec and liq) v McIntosh [1998] 3 NZLR 171 (CA) at 172–173.

7. Boat Harbour Holdings Ltd v Steve Mowatt Building & Construction Ltd [2012] NZCA 305, (2012) 13 NZCPR 489 at [45].

⁸ Almond v Read [2019] NZCA 26 at [71].

⁹ At [66]–[69].

¹⁰ Jessica Palmer “Constructive Trusts” in Andrew Butler (ed) Equity and Trusts in New Zealand

(2nd ed, Thomson Reuters, Wellington, 2013) at [13.2.1].

¹¹ Lankow v Rose [1995] 1 NZLR 277 (CA) at 282.

¹² At 294.

(iv) The defendant should reasonably expect to yield the claim and interest; and

(e) There will be no difficulty in establishing a reasonable expectation where a contribution is made on the basis of a pre- existing common intention that the contribution will result in a proprietary interest.

• [27] In applying these principles to this case, the critical question is whether Sharon Smith has established that the contributions she made to the Property were more than minor.

• [28] I accept the submissions of Mr Morgan QC, for the respondents, that Sharon Smith’s contributions are to be assessed in the context of the Smiths living at the Property for only 12 months of their six-year relationship and their intention that they would live there and retain ownership of the Property pending completion of the renovations on the Braid Road property, their principal residence.

• [29] Sharon Smith contends for both financial and non-financial contributions to the Property. Ms Brady, for the applicant, however, acknowledged that her claim is based largely on the non-financial contributions which she has detailed in her affidavit. Sharon Smith says that she was the one who located the Property, saw its potential for cosmetic renovation and the opportunity to turn the Property around for a profit. She further says that Allan Smith did not see the Property prior to the purchase and that she researched and gathered quotes and lined up work for the execution of some 27 different renovation and maintenance activities. This included organising landscaping, double-glazing the windows, painting, engaging plumbers and electricians, water-blasting and cleaning of the roof.

• [30] In response, Allan Smith says that Sharon Smith has exaggerated the extent of “work” she has detailed in her affidavit and describes it as largely “routine maintenance and the commencement of efforts to renovate”. Mr Morgan, on his behalf, submitted that some degree of thought and organising had been undertaken by Sharon Smith but her contributions in the round could only properly be described as minor.

• [31] There is a conflict in the evidence and to some extent there are issues of credibility which I cannot obviously resolve in summary matters of this kind.

Ultimately, it may be that Allan Smith’s claims of exaggeration prove to be correct, but those are issues for trial. In applying the threshold test, I find that Sharon Smith has established an arguable case that the contributions she made, and which she has detailed, were more than minor and that such contributions extended to the acquisition, preservation and enhancement of the Property. It is not patently clear that the caveat cannot be maintained. It may be that the Property, having taken into account expenses incurred in renovations, was not sold for a profit (or a very minimal one) but that cannot be decisive of the question of whether there is an arguable case that Sharon Smith made contributions of more than a minor kind.

• [32] Whether the contributions exceed any benefits that Sharon Smith derived is, in my view, a matter for trial.¹³

• [33] As Ms Brady submitted, the evidence establishes that it was Sharon Smith’s role in the marriage to organise, plan and to project manage the renovations on their various properties. In circumstances where it was the clear intention to renovate the Property and sell it for a profit in a relatively short period of time, it is entirely plausible that Sharon Smith would have played an active and significant role. I agree with Ms Brady’s submission that it is reasonably arguable that the contributions made by Sharon Smith are analogous to the non-financial contributions that gave rise to a caveatable interest in Cerny v Cerny.¹⁴ In that case, the Court held that the applicant had adduced sufficient evidence to demonstrate an arguable claim to an interest under a constructive trust, having undertaken significant work on a property owned by his parents (such as clearing gorse, barberry and weeds from a large area, maintaining a garden, installing an irrigation system and generally improving the aesthetic of the land) in reliance upon an agreement that he would receive a half-share in the increased value of the property when it was sold.
• [34] I agree with the submission of Mr Morgan that the evidence of direct financial contributions to the Property is thin and uncertain. Sharon Smith says that in October 2015, she gave Allan Smith funds (her own money) of $54,000 which she believes were applied to the purchase or improvement of all three properties, namely Durham

13. Wakenshaw v Wakenshaw [2017] NZCA 252, [2018] NZAR 532. See also Daisley v Ark Contractors Ltd, above n 5, at [180].

¹⁴ Cerny v Cerny [2015] NZHC 2256.

Heights, Braid Road and the beach-house at Whangamata. As Mr Morgan submitted, these funds were given to Allan Smith some two years before the purchase of the Property and it is far from clear on the evidence how the funds were applied. Allan Smith (who was in charge of their finances) says that none of those funds were applied to the purchase or renovation of the Property. Allan Smith referred to an email from Sharon Smith dated February 2019, acknowledging that the amount outstanding (of the $54,000) was $44,523.42 and claims that the email suggests that these funds were viewed by Sharon Smith as an investment which should be returned to her.

• [35] However, as I have noted above, Sharon Smith’s claim to a constructive trust is based rather more on non-financial contributions than financial ones. Had Sharon Smith’s claim been based solely on financial contributions, she would not have met the reasonably arguable threshold. Having said that, and in the context of my finding that there is a reasonably arguable claim based on non-financial contributions, I acknowledge that there are legitimate questions as to whether the funds provided in 2015 did go into the purchase of the Property. That is an issue which will need to be determined at trial.

• [36] I now turn to address the remaining two elements of an institutional constructive trust, namely (1) whether the applicant had a reasonable expectation that she would gain an interest in the property and (2) whether the respondent trustees should reasonably expect to yield Sharon Smith an interest.

• [37] As recognised by the Court of Appeal in Murrell v Hamilton, there is no reason, in principle, why a constructive trust claim should not succeed in respect of a property owned by a trust .¹⁵ In that case the Court found that the independent trustee essentially abjured his trustee responsibilities to the settlor trustees. The Court treated the de facto husband’s actions as the actions of both trustees and held that it would be unconscionable for the trustees to deny the constructive trust claim based on the expectation stimulated by him.¹⁶
• [38] In this case, there is evidence that Mr Welch, one of the respondents, left all arrangements pertaining to the Trust to Mr Smith. Mr Welch is a personal friend of

¹⁵ Murrell v Hamilton [2014] NZCA 377 at [22].

¹⁶ Murrell v Hamilton, above n 15.

Allan Smith’s and there are no trust accounts relating to the Smith Family Trust. I find it is reasonably arguable to treat Allan Smith’s actions as the actions of both trustees.

• [39] As to the question of whether there was a reasonable expectation of an interest in the Property, Sharon Smith says that she relied on assurances from Allan Smith that they would always be financially secure and that she did not need to work. She says that her husband told her that they had more money than they would ever need and that she could do whatever she wanted. She says that Allan Smith gave her an expectation of sharing in the assets of the Smith Family Trust and that his initial offer to settle any relationship property claims she might have, namely the offer of January 2019 for $1 million, is an indication of that expectation.

• [40] Mr Morgan submitted that the letter offering to settle at $1 million does not provide any evidence of the reasonable expectation of an interest in the Property and that general assurances of financial security did not focus on the Property.

• [41] I accept that, on its own, the letter of offer does not provide sufficient evidence of an arguable case of a reasonable expectation. However, the offer is to be considered in the context of the assurances that Sharon Smith relies upon and, importantly, in the context where Sharon Smith is a discretionary beneficiary of the Trust (in her capacity as wife of the settlor, Allan Smith), which owns the Property. Furthermore, as Sharon Smith says, she and Allan Smith treated the properties owned by the Trust as their own and Allan Smith always referred to them as “ours”. There is evidence that relates to the Property.

• [42] In all the circumstances, I find that Sharon Smith has also established an arguable case to a reasonable expectation of an interest in the Property and that the respondent trustees should reasonably expect to yield to that claim in interest.

• [43] I therefore conclude that Sharon Smith has established a reasonably arguable case for an institutional constructive trust in the Property. On that basis she has met the onus that she holds an interest in the land sufficient to support the caveat.

• [44] I now turn to address the second main issue, namely the exercise of my discretion.

Issue 2: Should the caveat lapse but on condition that the proceeds of sale of the property (after allowing for deductions of the mortgage and standard costs of sale) be held in the respondent trustees’ solicitor’s trust account pending determination of Sharon Smith’s substantive claims?

• [45] Mr Morgan submitted that there is no point in maintaining the caveat over the Property and, similarly, no utility in requiring the balance of the proceeds of sale to be held in trust pending determination of the substantive claims. He contended that Sharon Smith would not be prejudiced by an absence of such an order given that she has potential claims against significant Trust assets of value, including the Braid Road property (worth $2.7 million) and the Whangamata beach-house (said to be worth

$1.5 million). There is no evidence that either of those properties will be sold and, despite the parties having separated in early 2019, to date, Sharon Smith has not brought any relationship property and/or constructive trust proceedings. Even if such proceedings were now pursued, any hearing, Mr Morgan submitted, would likely not take place until 2022.

• [46] I do not accept the submission that there is no point or purpose in requiring the balance of the proceeds of sale to be held on trust. It is clear from Sharon Smith’s evidence that her claims in relation to the Property are the strongest of the constructive trust claims that she might potentially have against the assets of the Trust. She says that her contributions to the Property were greater, and, in my view, it is entirely understandable why she would wish to secure funds for a potential remedy in relation to the Property. I also accept that there is evidence to support Sharon Smith’s concern that an attempt is being made by Allan Smith to reduce the value of the overall assets of the Trust by contending for inter-trust liabilities. The assets of the Trust may well be substantial, but that does not necessarily address her concerns about inter-trust liabilities. I also note that the $1 million offer has been withdrawn and Sharon Smith has been forced (so it appears) to have to resort to litigation.

• [47] Whether, if the proceeds of sale are held in a trust account, they will need to remain there for an indeterminate period of time will depend largely on the decisions of the parties. They will be free to agree on other arrangements as part of a mutually acceptable property relationship settlement. Allan Smith is in control of all the assets in dispute and has provided no evidence that the proceeds of sale are immediately required by any of the trusts for any other purpose. The sensible and just approach, in

my view, is to order the caveat lapse but on condition that the proceeds of sale be held in the respondent trustees’ solicitor’s trust account.

• [48] I record that Sharon Smith agrees to that approach and says that she had attempted to resolve these proceedings on the basis of the respondent trustees providing a similar kind of undertaking. No such agreement was reached, and the respondent trustees responded by insisting that there was a loan owed by the Smith Family Trust to the Trade Trust, which is to be repaid from sale proceeds. I am in no position to resolve that issue except to note that, apart from a reference in the 2019 Trust accounts to that loan, there is no other documentation to prove its existence (there is no loan document itself or any trustee resolution minutes recording it).

• [49] For all these reasons, I conclude that the caveat should lapse but on condition that the proceeds of sale, following repayment of the ANZ mortgage and deduction of standard costs of sale (such as solicitor’s conveyancing fees and real estate agent’s fees), should be held in the respondent trustees’ solicitor’s trust account.

Result

• [50] The results of my judgment were recorded in my minute of 27 August 2020, which was issued in advance of this reasons judgment. I repeat them as follows.

• [51] I find that the applicant, Sharon Smith, has established a reasonably arguable claim that she holds a beneficial interest in the Property, the subject of the caveat (2 Durham Heights, Flagstaff, Hamilton).

• [52] I further find, in the exercise of my discretion, that the caveat should lapse, but on the conditions set out below. These conditional orders will not prejudice Sharon Smith (she accepts that is the case) and will allow the settlement of the sale of the Property, due to occur on 2 September 2020, to proceed.

• [53] I accordingly order, pursuant to s 143 of the Land Transfer Act 2017, that Caveat No. 11l713229.1 under Certificate of Title SA277365 lapses, but on the following conditions:

(a) That the proceeds of the sale of the Property, after repayment of the ANZ mortgage and other standard costs of sale (including solicitor’s

conveyancing costs and real estate agent’s fees), are to be held in the trust account of the solicitor for the respondents pending determination of the applicant’s claims to an institutional constructive trust in the Property;

(b) The applicant is to file and serve proceedings claiming a constructive trust by 2 October 2020 and to take all reasonable steps diligently to prosecute those proceedings;

(c) In the event that the settlement of the Property does not proceed, then the caveat is to remain in place; and

(d) Leave is reserved to the parties to apply for further directions.

• [54] As to costs, I am of the preliminary view that having succeeded, the applicant, Sharon Smith, is entitled to costs on a 2B basis plus disbursements. In the event that the parties cannot agree on costs, memoranda (no more than three pages) are to be filed and served within 14 days.

Associate Judge P J Andrew