Hodge v Apple Fields Ltd [1999] NZCA 150; (1999) 4 NZ ConvC 193,084 (19 August 1999)

Last Updated: 1 December 2011

IN THE COURT OF APPEAL OF NEW ZEALAND

CA158/98

	BETWEEN	PETER AND KAY HODGE
		Appellants

	AND	APPLE FIELDS LIMITED
		Respondent

Hearing:	23 June 1999
Coram:	Elias CJ Keith J Gallen J
Appearances:	DJ White QC and VL Heine for Appellant SP Rennie and AL Rapley for Respondents
Judgment:	19 August 1999

JUDGMENT OF THE COURT DELIVERED BY ELIAS CJ

[1] Under an agreement of 30 September 1993, Apple Fields Limited agreed to transfer to Mr and Mrs Hodge unencumbered title to 1.8 hectares of land in an industrial park of 38 hectares developed by Apple Fields. No purchase price was provided for. The consideration for the transfer was the withdrawal by Mr and Mrs Hodge of litigation opposing Apple Fields' application for re-zoning of the land, to enable the development to proceed. The value of the land was accepted by the parties to have been approximately $900,000 at the contractual date of settlement on 30 March 1995.
[2] The agreement of 30 September was a variation of the original agreement entered into in 1991. It followed compromise of a further planning objection taken by Mr and Mrs Hodge to development of part of the site intended by Rattrays Properties Limited.
[3] Under the September 1993 agreement, settlement of the transaction by transfer from Apple Fields was required by 30 March 1995. Settlement was however conditional upon a necessary change to the District Scheme becoming operative and upon Apple Fields obtaining resource consent to the subdivision. The subdivision was delayed for reasons no longer relevant. But when 11 certificates of title to the 1.8 hectares were issued, on completion of the subdivision in September 1995, they carried memorials in respect of two compensation certificates and a land covenant.
[4] The compensation certificates were ones imposed pursuant to s19 of the Public Works Act. They recorded the compensation paid under an acquisition agreement in 1987 for a portion of land compulsorily acquired from an earlier owner. It is not clear why, by 1995, the certificates had not been discharged under s.19(7) of the Public Works Act.
[5] The land covenant recorded on the title was in favour of the Apple and Pear Marketing Board. It provided that no road could be formed within 50 metres of a boundary with the Board's land. The covenant was carried down from the earlier certificate of title. It is common ground, however, that the restriction imposed affected one lot only of the 11 to be transferred to Mr and Mrs Hodge.
[6] These memorials became an impediment to settlement. Mr and Mrs Hodge took the view that they were encumbrances on the title which prevented Apple Fields transferring to them "an unencumbered title in fee simple" as required by clause 2.3 of the 30 September agreement. Apple Fields considered that the memorials did not materially affect the interest being transferred and that their removal was not therefore a matter Mr and Mrs Hodge could insist on before settlement. The dispute was not resolved and Mr and Mrs Hodge sought, in addition to an unencumbered title, interest from Apple Fields for late settlement.
[7] Mr and Mrs Hodge brought a claim for summary judgment against Apple Fields in April 1996 seeking specific performance, subject to removal of the encumbrances, as well as interest for late settlement. Hansen J found, contrary to the argument of Apple Fields, that the memorials were encumbrances in breach of clause 2.3 of the agreement. He did not make an order for specific performance, on the basis that, until removal of the encumbrances, any order of the Court might not be capable of implementation. Hansen J declined summary judgment on the claim for interest, on the grounds that there was no explicit contractual agreement to pay interest and there was an arguable case that a term requiring payment of such interest need not be implied into the contract. The Judge directed that the matter proceed by way of ordinary action.
[8] Apple Fields appealed the judgment on the single point whether the Judge was correct in holding that the memorials were encumbrances. This Court upheld the decision of Hansen J on 22 September 1997 (CA.304/96).
[9] The claim for specific performance and damages was heard in the High Court at Christchurch in April and May 1998. On 11 May 1998, in an interim judgment, Panckhurst J granted an order of specific performance by consent. The titles were transferred to the appellants on 10 June 1998.
[10] At the time of the interim decision, it seems to have been accepted by the parties that the compensation certificates had been discharged, although the exact position was apparently not clear. It is now known that the compensation certificates were discharged on 21 May 1996. No issue as to their removal or compensation for their continued existence after the date stipulated for completion remains. Their impediment to the transfer before 11 May was originally an issue in the appeal. Senior counsel for the appellants, recently instructed on the appeal, acknowledged at the hearing however that, given the date of discharge of the certificates, they are not material to the delay in settlement.
[11] The land covenant remained on the titles transferred to Mr and Mrs Hodge on 10 June 1998. The appellants continued to claim damages for diminution of value by reason of the encumbrance on the titles constituted by the land covenant. In addition, they claimed for losses arising out of the delay in settlement. At the time of the interim judgment, these claims were left for further determination by the Judge. So too was a counterclaim by Apple Fields for relief for alleged abuse of process on the part of Mr and Mrs Hodge in opposing further Resource consents sought by Apple Fields in respect of other land owned by the company.
[12] The final judgment of Panckhurst J was delivered on 5 June 1998. The present appeal by Mr and Mrs Hodge and the cross-appeal by Apple Fields is brought from it.
[13] The Judge found that the compensation certificates, on the unchallenged evidence of the valuer who gave evidence for Applefields, were of historical significance only and did not diminish the value of the interest in the land acquired by Mr and Mrs Hodge. The appeal against this finding has now been abandoned. As the compensation certificates were removed in 1996, it is clear they were not significant in the delay in settlement, as is now conceded. They need not be further considered.
[14] The Judge found, again accepting the evidence on this point of Mr Cummings, the Applefields’ valuer, that the land covenant did not affect the value of the land since there was no prospect, given zoning restrictions, that the area of land affected (comprised in one only of the ten titles to the land acquired) could be developed in a manner inconsistent with the covenant. The valuer called by Mr and Mrs Hodge, Mr Sellars, did not give evidence as to any diminution in value as a result of the encumbrance. The appellants in the appeal no longer seek to recover damages for diminution in the value of the land by reason of the land covenant.
[15] Instead, the claim for damages arising out of the encumbrance is now limited on the appeal to damages which would enable recovery of the appellants' "actual costs (if any) in having that encumbrance removed". It is acknowledged that there is no present quantification of such costs.
[16] The question of the costs of removal was not directly addressed by evidence at the hearing, although it is covered by the claim. The costs are not likely to be substantial. Mr Rennie advised the Court that the Apple and Pear Marketing Board has agreed to removal of the covenant, although its consent is not yet in registrable form. The respondents do not resist responsibility for securing removal of the covenant. They are taking the necessary steps. It is acknowledged that any direct costs reasonably incurred by the appellants should be met. Counsel suggest that the matter be remitted to the High Court for determination of any such costs, should the parties be unable to agree on the amount.
[17] Mr and Mrs Hodge were unsuccessful in their claim for damages for delayed settlement in the High Court. In their statement of claim they had claimed damages of $12,000 per month over the period of delay of approximately 37 months. This amount was claimed on the basis of interest of 16% on the value of the property.
[18] Evidence for the appellants on the question of loss was given by Mr Hodge and by the valuer, Mr Sellars. Mr Hodge said that the land was intended for industrial development and gave evidence of the development he would have undertaken, if title had passed. Counsel for the appellants in the High Court disavowed reliance upon Mr Hodge’s intended development, which could have permitted damages to be assessed upon the loss of opportunity to realise its benefits. The approach urged upon the Judge at trial was that the best measure of damages was to assess "holding costs", rather than undertaking what counsel described as the alternative "complex notional business exercise".
[19] Evidence as to such holding costs was given by Mr Sellars. He assessed the notional holding costs of a developer who, unexpectedly, was prevented from carrying out an intended development, at 13-14% of capital value. This, he said, was "closer to reality" than an assessment of bare land rental, which he put at 10% of the capital value. The approach based upon bare land rental was acknowledged by Mr Sellars to be artificial, because bare land would not be leased to lie idle for three years.
[20] Panckhurst J did not accept Mr Sellar's approach. He was of the view that it was not only entirely theoretical, but one divorced from the facts of the case:

In terms of the agreement between the parties, the consideration provided by the Hodges for the land was their withdrawal of Court proceedings and of opposition to the development of the Park by Apple Fields and others. The benefit of that consideration accrued to Apple Fields upon the signing of the amending agreement in September 1993, at latest. By contrast the Hodges were not to receive their 1.8 hectares for 18 months. In fact, the wait proved to be longer, by a further 37 months consequent upon Apple Fields' inability to provide clear title and the Hodges' refusal to accept anything less. During that additional period of delay the Hodges did not incur holding costs, as would a developer who was let into possession but was prevented from proceeding with his development plans. Outgoings and maintenance costs in respect of the land, continued to be paid by Apple Fields. Given the unusual nature of the consideration supplied by the Hodges, nor did the Hodges incur an interest cost upon funds expended to acquire the land. Accordingly, it follows, in my view, that an assessment of damages based on holding costs is misconceived.

[21] The Judge considered that the appropriate method to assess any loss was “to calculate the economic consequences of industrial development of the land commencing from the contractual settlement date of 30 March 1995”. Such approach, the Judge considered, would have reflected the evidence of Mr Hodge as to his intended use of the land. The Judge accepted that the exercise would be theoretical and difficult, in that numerous assumptions and probabilities would have required assessment by a valuer. Such assessment of probabilities, he noted, is not uncommon in such cases. If Mr Hodge’s evidence had been that he intended to sell the land immediately, a claim for loss arising out of loss of that opportunity would also have required assessment of probabilities as to the timing and likely success of any attempted sale.

[22] Panckhurst J considered that, on Mr Hodge’s evidence, the effect of the delay in settlement was to delay the intended development. He found, however, that there was no evidence that the delay in undertaking the development had caused any loss:

In the absence of proper valuation evidence it would be quite inappropriate, to my mind, for the Court to endeavour any sort of assessment of the probable economic loss incurred by the Hodges had they been able to develop the land as they intended. Indeed, such evidence as is before me strongly suggested that the Hodges' intended industrial development would have encountered significant problems had it proceeded three years ago. Apple Fields' valuer Mr Cummings gave evidence of what he described as the "restrictive" zoning of the Park. . . . The witness considered the permitted activities as restricted by comparison to those allowed in more conventional industrial zones. It was suggested that the best evidence of the impact of the restrictive zoning was the experience of Apple Fields itself, which has had limited success in marketing sites within the Park. Aside from the early major agreements with the Apple and Pear Marketing Board and Rattrays, Apple Fields has attracted only three or four other businesses into the Park. Despite full development of roading and associated services required for an industrial subdivision most of the Park remains unoccupied.

Mr Cummings also drew attention to the market competition afforded by nearby industrial subdivisions in Waterloo Road and to a lesser extent in a development known as Klondyke Estate. These, he considered, had a zoning advantage and had developed apace as compared to the Apple Field’s Park. A further factor he identified was a softening in the market for industrial property from about mid 1996 through to the present time. These various factors, in combination, led the witness to express the opinion that a developer, like the Hodges, would probably have achieved limited sales and/or long term industrial leases during the relevant period, and would on the other hand have incurred substantial holding costs from rates, maintenance, and interest upon capital. There was no evidence adduced by the plaintiffs to counter this considered assessment.

To summarise, I do not consider that the methodology adopted to assess the alleged loss of the plaintiffs through delayed settlement, was in the circumstances appropriate. Moreover, the evidence does not permit the Court to assess damages on an alternative basis. To the contrary evidence adduced on behalf of Apple Fields indicated that the probabilities were that the Hodges had, if anything, been saved from liability for holding costs as a result of the delay in settlement.

[23] From this determination the appellants appeal. They claim that the Judge failed to assess the loss suffered by them when they were unable, during the period of delay, to obtain any value from the land. They contend that there was sufficient evidence before the Court to support an assessment of damages based on the rental value of the land. On a short term lease for purposes requiring little development (such as a farm machinery sales lot, or timber yard), it is said that the evidence of Mr Sellars would have permitted damages to be assessed at a rental of at least 10% of the capital value of the land per annum.

[24] If there was insufficient evidence before the Court as to rental value lost, Mr White submits that the appellants should have been given an opportunity to seek an order under R384 of the High Court Rules for the making of an inquiry to assess the damages. He submits that the issue should be remitted to the High Court with a direction that an order for inquiry should be made.

[25] In argument on the appeal, Mr White disclaimed reliance upon the "holding costs" approach urged by counsel for Mr and Mrs Hodge in the High Court. That was in apparent acceptance of the Judge's conclusion that, in circumstances where Mr and Mrs Hodge had no outgoings or maintenance costs in respect of the land and had incurred no finance costs, an assessment of damages based on holding costs was "misconceived". But Mr White submitted that there was clearly loss to the appellant in the period of the delay. During it, the appellants were unable to obtain economic benefit from a substantial asset.

[26] Mr Sellars put forward two bases for measuring loss. The first was on a rental value of 10% of the capital value of the land. He acknowledged that this measurement of “occupation benefit” lost was “artificial”, because “no one would willingly lease bare industrial land and leave it idle for three years”:

In fact a developer would either sell it at a profit as quickly as possible or develop it and sell it or lease it for a lengthy term in developed condition at a higher rental. A bare land component of such a lease would in my view be at least 10% at that time, but that is really an artificial assessment for the reasons I have described.

[27] The alternative measure put forward by Mr Sellars entailed an assessment of “holding costs”, Mr Sellars explained his approach as being

To assess what the "holding costs" to a developer of such land would be on the footing that having acquired the land at its full market price, he was unexpectedly prevented for approximately 3 years from carrying out the intended development for some reason.

Those costs, for bare land, would effectively be mortgage lending rates on the security of the land plus rates and other outgoings. I do not know the position regarding outgoings and whether they are to Apple Fields account or to the Hodges' account on settlement. However the solicitor's first mortgage lending rate at the relevant time was 12% p.a.. (BNZ Finance 11.5, Harmans 12%) and that is probably a conservative figure. A developer could not expect to borrow the whole market value of the land at first mortgage rate. Second mortgage rates would be at least 2% higher and overdraft rates probably higher still. The realistic holding cost could therefore be of the order of 13% or 14% plus other outgoings (if any).......

. . . .

The Court may consider that the "holding costs" approach is closer to reality. In the first place it approximates what has actually happened in that land has been left undeveloped during the period of delay in settlement. In the second place no developer deliberately accepts less than the market value of an asset for very long and the "holding costs" approach gives a useful check of the market value of what is lost in that it represents approximately what the investor would receive if he sold the land and invested the proceeds in safe interest bearing investments.

[28] It is clear that Mr Sellars put forward these two measures in an attempt to quantify the “opportunity cost” to the appellants in not being able to realise income from the asset contracted for. They were alternatives to a calculation of the additional net worth able to be achieved by the developer if he had not been delayed in undertaking the intended development. That calculation, Mr Sellars considered, “introduced too many variables” and was “too hard to quantify”.

[29] The Judge held that Mr Sellar’s approach was misconceived, on the basis that no “holding costs” were incurred by Mr and Mrs Hodge because they did not expend funds to acquire the land. But an examination of the evidence given by Mr Sellars suggests that he did not intend his reference to "holding costs" to be construed as a reference to out of pocket costs. Instead, it was a reference to the economic cost (in the sense of value forgone) to a developer who was unable to proceed as he intended.

[30] The general rule in assessing damages for breach of contract is that the plaintiff is entitled to be put in the same position as if the contract had been performed. Whether the plaintiff has suffered loss through the breach of contract for which he is entitled to compensation, is a question of fact. The particular damage claimed must be linked to the breach of obligation, and of a type which was reasonably to be forseen: McElroy Milne v Commercial Electronics [1993] 1 NZLR 39.

[31] Where breach of contract causes delay in settlement of land obtained for development, potential losses reasonably forseeable may include: deprivation of net benefits able to be earned from the proposed development during the period of delay; finance and other costs, if incurred, during the period of delay (such as might be the case if part-payment had been made); loss of opportunity to sell the land at transfer value because of adverse movements in the value of the land during the period of the delay, if such sale was reasonably within the contemplation of the parties; and loss of any income able to be obtained from the asset during the period of the delay if it was forseeable that such income would be obtained before the development was undertaken. A proper evidential basis will need to be laid for each.

[32] The intention of the parties will be an important consideration, but whether loss flows naturally and should be taken to have been reasonably in contemplation is to be assessed in a common sense way. In the case of land intended for development, it is to be expected that a purchaser who, after settlement, is delayed in or prevented from undertaking the development, will attempt to extract value from the investment either by selling it or by obtaining such income as is realistically achieveable. In principle, therefore, we accept that it is not a complete answer to the claim that the intended development would not have resulted in net value to the appellants, if other net value was able to be obtained by alternative use reasonably within contemplation.

[33] The loss is net of the costs of the purchaser in obtaining value from the alternative use. Such costs might include any development costs of preparing the bare land for rental for such uses as were suggested in his evidence by Mr Hodge such as for timber storeage or for a used machinery lot. If the loss claimed arose out of the inability to revinvest the capital value of the land, it would be net of the costs of sale and any holding costs pending sale. The costs would also include any outgoings for which the purchaser assumed responsibility upon transfer, such as for payment of rates.

[34] We agree with the submission on behalf of the appellants that they were not precluded from establishing loss in the delayed settlement because they supplied no monetary consideration for the land. It is not clear that the Judge meant to suggest that the approach taken by Mr Sellars was misconceived for that reason. In our view the appellants were able to recover any net value shown to have been lost during the period of the delay.

[35] The loss could have been measured in any one of the three ways referred to by Mr Sellars, if a proper factual basis had been established for each. It could have been measured by the difference between the net position actually achieved and the position which would have been achieved had the development proceeded at the date of breach. It could have been measured by the net return achievable on sale and reinvestment during the period of the delay. It could have been measured by the rental able to be achieved during the period of delay, net of all holding costs and outgoings. The difficulty for the appellants in the present case is that no evidential foundation for any of these losses was laid. No chance of value is shown on the balance of probabilities to have been lost.

[36] It is acknowledged that there was no evidence upon which loss in the proposed development attributable to the delay could be measured. The Judge properly accepted that the appellants would have been able to recover loss of that type, if proved. The exercise was not undertaken by Mr Sellars, because of its complexity. Indeed, irrespective of the difficulties in assessing probabilities in such a case, we doubt whether proper platform for assessing the chance lost by delay existed in a case where the development has still not been undertaken (and, on Mr Hodge’s evidence, has been postponed for “two or more years”), because the market is considered too weak. In any event, the appellants do not contend on the appeal that the Judge was wrong to conclude that he had insufficient evidence of loss of development profits. Rather, they say that there was evidence before the Court to support an assessment of rental value lost during the period of delay.

[37] Even if it is accepted that sale of the property was reasonably in contemplation, so that the appellants might be said to have lost the income able to be achieved from reinvestment of the proceeds, there was no evidence that a sale could have been accomplished. The evidence of Mr Cummings, accepted by the Judge and referred to in the passages in the judgment set out above, was that Applefields had little success in marketing its subdivision, despite full development of its sites. He referred to the competition from nearby subdivisions. As the Judge noted, there was no evidence from the appellants to counter the opinion of Mr Cummings that Mr and Mrs Hodge would have achieved limited sales while, on the other hand, incurring substantial holding costs. No attempt was made to calculate the costs of the appellants in realising their asset or their holding costs in the period between transfer and any sale.

[38] If the appellants had established on the balance of probabilities loss of the opportunity to sell the property and invest the proceeds, then the approach adopted by Mr Sellars to measure a safe rate of return may not have been inappropriate (although, in the absence of evidence of specific investment opportunities lost, a risk free return would seem preferable to mortgage lending rates and even then the actual loss would be net of costs). But no such opportunity is shown to have been a realistic prospect. Mr White did not seek to argue otherwise on the appeal.

[39] Similarly, the approach to quantify loss through rental forgone, is not an inappropriate one. This is the basis upon which, on the appeal, the appellants contend that damages should have been awarded. Counsel for the appellants submit that “ordinary common sense” suggests that a land developer kept out of an asset valued at $900,000, suffers loss. But such loss is by no means inevitable. It is necessary for the Court to conclude on the evidence and on the balance of probabilities that, through the delay, the appellants lost the chance to obtain rental.

[40] There is no evidence upon which the Judge could have found such loss to be established. Mr Sellars regarded a rental value as “artificial” because leasing the bare land would not be an attractive option to a developer. Mr Hodge himself, as the Judge found, intended to develop the land. The suggestion made by Mr Sellars that 10% of capital value was a realistic rental was based upon the rental value attributable to developed land. That was confirmed by Mr Hodge himself who acknowledged in evidence that the calculation of rental was “on a ‘bare land’ basis, probably as a component of a developed lot lease rental”. There was no expert evidence of any rental market for undeveloped land. Mr Cummings was unaware of any such bare land rentals, and considered that there was no market evidence to support a land rent for lots of the type in issue. That evidence was borne out by the lack of success Applefields had in leasing its developed lots in the subdivision. It is for the plaintiff to prove loss. We agree with the conclusion of the Judge that no loss was established.

[41] Mr White submits, that if the Court was unable to make an assessment of loss on the evidence, the appellants should have been given an opportunity to seek an order under R384 of the High Court Rules for the making of an inquiry to assess the damages.

[42] Rule 384 permits the Court before, at or after trial to order an inquiry, whether or not it was claimed as relief in the pleadings. The Rule may be invoked to make a supplemental order for an inquiry into additional damages after a decree for specific performance. It is however available only where relief is justified on the basis of facts occurring or discovered after the decree of specific performance: Neylon v Dickens [1987] 1 NZLR 402 at 409. That is not the position here. The interim judgment of 11 May 1998 records that it was common ground between the parties that the issues of damages for delayed settlement would be dealt with in the substantive judgment on the basis of the evidence already heard. It is not suggested that the question whether the appellants suffered loss turns on any facts not known before the decree of specific performance was made. Nor are the appellants seeking to quantify established loss. They seek further opportunity to establish by evidence that they lost the chance to earn rental from the land. That was an issue which was squarely before the Court at the hearing. We agree with the submission on behalf of the respondent that Rule 384 cannot be used to relitigate a matter finally disposed of by the Court.

[43] Because we agree with the Judge’s conclusions that the appellants failed to establish loss, it is not necessary to consider his further conclusion that the appellants had failed to mitigate their loss.

[44] Applefields counterclaimed in the High Court. They sought relief against the appellants for abuse of process in respect of planning objections taken Mr and Mrs Hodge in relation to other land owned by Applefields. The Judge considered that the tort of abuse of process had not been made out and declined relief. Applefields appealed that decision. At the hearing of the appeal Mr White advised the Court that the appellants undertook not to refer their opposition to the Environment Court or to take any other step to oppose Appelfield’s current application for the rezoning of its land at Halswell Mashan Park and Styx Mill. Upon that indication, the respondents did not proceed with their cross appeal.

[45] The appeals as to damages for diminution in the value of the appellants land by reason of the encumbrances and for delay in settlement are dismissed. So too is the cross appeal. The appeal as to damages for the appellants’ costs in having the land encumbrance removed is allowed by consent and the matter remitted to the High Court for determination of any such costs, should the parties be unable to agree on the amount.

[46] The respondents are entitled to costs. They are fixed at $5,000 together with reasonable disbursements, including the travel and accommodation costs of one counsel to be fixed by the Registrar if necessary.

Solicitors
Ralph Thompson Shaw and Thompson, Christchurch, for appellants
Rhodes and Co., Christchurch, for respondents