Johnstone v Macassey [2004] NZCA 87; (2004) 5 NZ ConvC 194,005; (2004) 6 NZCPR 118 (10 June 2004)

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Johnstone v Macassey [2004] NZCA 87 (10 June 2004); (2004) 5 NZ ConvC 194,005; (2004) 6 NZCPR 118

Last Updated: 18 December 2011

IN THE COURT OF APPEAL OF NEW ZEALAND

CA145/03

BETWEEN JAMES VICTOR JOHNSTONE AND HEATHER MARY JOHNSTONE
Appellants

AND ROGER NORMAN MACASSEY OF DUNEDIN, SOLICITOR, LESLIE JAMES WILLIAM STEWART OF DUNEDIN, ACCOUNTANT AND STANLEY JAMES MILLER
Respondents

Hearing: 17 May 2004

Coram: Glazebrook J Chisholm J Gendall J

Appearances: T J Shiels and JCD Guest for Appellants
N Till for Respondents

Judgment: 10 June 2004

JUDGMENT OF THE COURT DELIVERED BY CHISHOLM J

[1] This appeal arises from a decision of the High Court cancelling an agreement pursuant to the Contractual Mistakes Act 1977 on the ground of common mistake. The agreement, which concerned farmland owned by the respondents and leased to the appellants, provided for the sale of the land to the appellants who sought specific performance of it. It is alleged by the appellants that the Judge erroneously concluded that there had been a common mistake and that such mistake had influenced the parties.

Background

[2] The farm belonging to the respondents (“the Miller Trust”) was divided into three Certificates of Title - 9B/1304, 9B/1305 and 14B/807. One of those titles, 14B/807, was leased to the appellants (“Mr and Mrs Johnstone”) for a term of five years commencing on 31 July 1998 and expiring on 20 March 2002. The lease provided for a right of renewal for a further term expiring on 1 October 2004 so long as the lessees had not breached the lease and gave at least one year’s notice prior to the expiry of the initial term.
[3] Included in the lease was the following clause:

3.09 Right of First Refusal to Purchase Fee Simple

If at any time before the expiration of the term of this lease (including any term under any right to renew), the Lessors shall receive an offer to purchase the fee simple of the leased property and wish to accept that offer then:

The Lessors will forthwith notify the Lessees in writing of the receipt of the offer and deliver a copy of the offer to the Lessees.

The Lessees may within fourteen days of the delivery of the copy of the offer give notice in writing to the Lessors of the Lessees’ intention to purchase the fee simple of the leased property at the price and upon the terms contained in the offer save that the Lessees will not be bound to complete the purchase earlier than sixty days from the date of giving notice of intention to purchase.

Upon the Lessees giving notice of the Lessees’ intention to purchase the parties will be deemed to have entered into a contract for the sale and purchase of the leased property in the terms of the agreement at the date of this lease published by the New Zealand Law Society.

If the Lessees shall not give notice in terms of subclause 2, then the Lessors will be at liberty to accept the offer and complete the sale of the leased property to the offeror, but only at the price and on the terms contained in the offer. If the offeror shall (with the consent of the Lessors) vary the terms of the offer the Lessors shall not be at liberty to accept the varied offer without first giving notice of the varied offer to the Lessees in terms of subclause 1, whereupon all the terms of this clause shall apply to the varied offer.

This clause is central to the appeal before this Court.

[4] By agreement dated 18 July 2000 the Miller Trust agreed to sell all three titles to Beecroft Holdings Limited for $1,225,000. It was common ground at trial that of that sum $400,000 was attributable to the land and buildings in title 14B/807. The agreement gave the Miller Trust 20 working days to confirm that Mr and Mrs Johnstone were not renewing their lease or exercising their option to purchase under clause 3.09. As required by that clause, notice of the agreement was given to Mr and Mrs Johnstone. Unfortunately (but for understandable reasons) the notice offered title 14B/870 to Mr and Mrs Johnstone at $227,500 which was, of course, well below its true value. Ultimately all parties accepted that there had been a genuine mistake and the agreement of 18 July 2000 was effectively abandoned.
[5] Despite these events the Miller Trust and Beecroft Holdings Limited were still keen to conclude a sale. On 3 October 2000 they entered into a new agreement which provided for the sale of titles 9B/1304 and 9B/1305. The agreement included the following special condition in relation to title 14B/807:

12. Provided the Lessees (JV & HM Johnstone) do not exercise the right to purchase the land in Certificate of Title 14B/807 pursuant to Clause 3.09 Deed of Lease dated 5th June 1998, or renew their Lease pursuant to Clause 3.01 Deed of Lease dated 5th June 1998 Beecroft Holdings Limited shall have first right of refusal to purchase the land and buildings in Certificate of Title 14B/807 at the agreed price of four hundred thousand dollars ($400,000) plus G.S.T. with settlement to take place on 28th March 2002. The vendor shall ensure that prior to settlement all the requirements of the Lessee pursuant to the said Deed of Lease have been satisfied.

One of the issues raised by this appeal is whether special condition 12 triggered clause 3.09 of the lease.

[6] It did not occur to the solicitors acting for the Miller Trust that they should give Mr and Mrs Johnstone notice of the agreement and no notice was given. Beecroft Holdings Limited caveated the three titles and the purchase of titles 9B/1304 and 9B/1305 was settled on 1 June 2001. In the meantime Mr and Mrs Johnstone had renewed their lease without realising that the agreement of 3 October 2000 existed.
[7] On 25 August 2001 the Miller Trust entered into an agreement to sell the land in title 14B/807 to another trust for $625,000 and its solicitors gave notice of the proposed sale to Mr and Mrs Johnstone pursuant to clause 3.09 of the lease. When Mr and Mrs Johnstone’s solicitors searched title 14B/807 they discovered the Beecroft Holdings Limited caveat and wrote to the Miller Trust solicitors confirming that Mr and Mrs Johnstone were interested in purchasing the property but noting that there was a caveat relating to an agreement in respect of which they had not received notice. A copy of the agreement was requested.
[8] This prompted the solicitors acting for the Miller Trust to write directly to Mr and Mrs Johnstone on 21 September 2001. Their letter enclosed a copy of the 3 October 2000 agreement and advised:

Pursuant to Clause 3.09 of the lease dated 5th June 1998 between the J S J Miller Family partnership and yourselves, we hereby offer you the right of first refusal in relation to the land you lease for $400,000 plus G.S.T.

In accordance with clause 3.09 of the lease you have 14 days upon which to give notice in writing of your intention to purchase the property.

Through their solicitors Mr and Mrs Johnstone confirmed on 3 October 2001 that they were exercising their option to purchase the land. A settlement statement as at 28 March 2002 was requested. It was in this way that the agreement ultimately cancelled by the High Court (“the 2001 agreement”) came into existence.

[9] When Beecroft Holdings Limited was informed that Mr and Mrs Johnstone had exercised their right to purchase title 14B/807 and that withdrawal of its caveat was sought, the company took the view that it was the legitimate purchaser by virtue of special condition 12. Ultimately the company issued proceedings against the Miller Trust seeking performance of its agreement of 3 October 2000. The Miller Trust joined Mr and Mrs Johnstone as a third party but abandoned its claim against them. In the meantime, however, Mr and Mrs Johnstone had issued a counterclaim for specific performance of the 2001 agreement against the Miller Trust. It is the outcome of this counterclaim that has given rise to this appeal. Until shortly before the High Court hearing commenced the Miller Trust’s position, in relation to the Beecroft Holdings Limited claim, was that title 14B/807 had been sold to Mr and Mrs Johnstone. At trial the Trust denied that there had been such a sale.

High Court decisions

[10] Having heard the matter on 21 – 25 October 2002 Salmon J dismissed the Beecroft Holdings Limited claim in a judgment delivered on 19 December 2002. With reference to Mr and Mrs Johnstone’s counterclaim against the Miller Trust the Judge found:

[73] I have concluded that the solicitors were wrong in their view that special condition 12 triggered the third parties’ right of first refusal. It will be recalled that special condition 12 amounted to (at best) an option to purchase. The obligation under the lease arises when an offer to purchase is received by the lessor. There could be no offer until the holder of the option expressed its desire to exercise it. Up until that point there was no offer capable of acceptance. Indeed, the option holder had no obligations whatsoever in relation to the land. In this case there is no doubt that the lessors were prepared to accept an offer at $400,000, however, that offer was not made until the option was exercised. At that point the defendants were obliged to accept the offer subject to their obligation to give first right of refusal to the third parties. The triggering event under the lease is an offer to purchase which the lessors wished to accept. I have held that the option was never exercised. Indeed, it was never capable of exercise because the third parties renewed their lease. I hold, therefore, that there was no obligation to offer the land to the third parties at the time that the agreement of 3 October 2000 was signed.

His preliminary view was that both parties had been influenced in their decision to enter into the 2001 agreement by a common mistake as to the effect of special condition 12. Because neither party had argued the matter on that basis he adjourned the proceeding so that the parties could make further submissions.

[11] In due course the Miller Trust was granted leave to amend its defence to the counterclaim by including a defence based on mistake. After considering further submissions the Judge issued a further judgment on 16 April 2003 in which he decided that there had been a common mistake as to the interpretation of special condition 12, that such mistake had influenced the parties in entering into the 2001 agreement and that this had resulted in a substantial inequality of value. Having concluded that the Miller Trust should be granted relief under the Contractual Mistakes Act, Salmon J cancelled the 2001 agreement. An order was made requiring the Miller Trust to sell to Mr and Mrs Johnstone for $625,000 (on the basis that the proposed sale from the Miller Trust to the other trust had triggered the operation of clause 3.09 at that figure).
[12] Subsequently the Miller Trust completed the sale of the land to Mr and Mrs Johnstone at $625,000 on the agreed basis that if this appeal succeeds the appropriate adjustments will be made.

Grounds of appeal

[13] It is alleged by the appellant the Judge erred:

• (a) In holding that the agreement dated 3 October 2001 did not trigger the right of first refusal in clause 3.09.
• (b) Even if clause 3.09 was not triggered, in not holding the respondents to the 2001 agreement.
• (c) In holding that the parties were influenced by mistake.

Grounds (a) and (c) are the primary grounds. If the appellant succeeds on ground (a) it will be unnecessary to consider the remaining grounds.

First ground of appeal

[14] Mr Shiels’ underlying argument was that by granting Beecroft Holdings Limited an “option” to purchase on 3 October 2000 in terms of special condition 12 the Miller Trust triggered Mr and Mrs Johnstone’s right of first refusal under clause 3.09. The fact that exercise of the option was conditional on the lessees not exercising their right of first refusal under clause 3.09 or renewing their lease did not prevent the option being triggered because by placing title 14B/807 outside its control the Miller Trust was unable to deprive Beecroft Holdings Limited of its option under special condition 12. An absurdity would arise if the condition relating to the lessees’ exercise of their right of first refusal was construed as a condition precedent because the resulting “chicken and egg” situation would prevent both the special condition and clause 3.09 operating. A commercially sensible interpretation was required. An analogy could be drawn between the situation under consideration and the granting of an option which immediately creates an equitable interest in land in favour of the grantee of the option.
[15] Mr Till responded that it is not a simple question of whether the grant of an option triggers a right of first refusal. Rather the question is whether the arrangement in special condition 12 (whatever called) triggered Mr and Mrs Johnstone’s rights under clause 3.09. The answer depends on the construction of the two clauses and does not raise any issues of principle relating to options and rights of first refusal. On a proper construction of special condition 12 the requirement that the lease not be renewed should be construed as a condition precedent. There was no obligation to sell to Beecroft Holdings Limited unless (and until) Mr and Mrs Johnstone had been given their right to purchase under clause 3.09. That could only happen when the Miller Trust received “an offer to purchase” which it wished to accept. There could be no such offer to purchase until Beecroft Holdings Limited expressed a wish to exercise its right to purchase under special condition 12 and it had not done so.
[16] Counsel on both sides struggled to arrive at an interpretation of special condition 12 that was compatible with the wording contained in the condition. They agreed that notwithstanding the indication in the special condition that “Beecroft Holdings Limited shall have a right of first refusal to purchase ... title 14B/807” the Judge’s conclusion that the special condition was more akin to an option to purchase than a right of first refusal was justified. Special condition 12 is certainly an unusual clause. We agree with Mr Till that the proper approach is to construe the two clauses and then determine whether the special condition triggered Mr and Mrs Johnstone’s rights under clause 3.09.
[17] We begin by making some observations about clause 3.09. It is triggered when “the lessors shall receive an offer to purchase the fee simple of the leased property and wish to accept that offer”. Taken literally these words suggest that clause 3.09 can only be triggered by “an offer to purchase”. But Mr Till conceded that this could not have been intended because such an interpretation would mean that the clause could be easily circumvented by the lessors making an offer to sell. That was a sensible concession. Our interpretation is that clause 3.09 can be triggered by either an offer to purchase or an offer to sell provided, of course, a binding contract is genuinely in prospect.
[18] This leads to the next point about clause 3.09. Formation of a binding contract between the lessors (the Miller Trust) and the prospective purchaser (Beecroft Holdings Limited) is not a prerequisite. The rights of the lessees are triggered at a point in time before a binding contract comes into existence. In the present context this is a particularly important factor. We should also add that it matters not whether the contract in prospect is conditional or unconditional. In Lomac Holdings Limited v Prijatelj & Ors (1982) 38 BCLR 258 McLachlin J rejected the proposition that only an unconditional offer can trigger a right of first refusal. She approached the matter on the basis that there was nothing in the right of first refusal before her that indicated the offer had to be unconditional and she saw no reason to infer that the parties so intended. Likewise we cannot find anything in clause 3.09 or the surrounding circumstances that suggests an unconditional offer was required in this case. We are satisfied that a conditional offer qualifies as “an offer” for the purposes of clause 3.09, especially when the conditions to be fulfilled are within the control of third parties. Indeed, unless the lessees had earlier waived their rights under clause 3.09, it would seem that any contract entered into pursuant to clause 12 would have to be conditional on the lessees not exercising their rights under clause 3.09..
[19] With the benefit of those observations about clause 3.09 we now turn to special condition 12. We agree with the Judge and counsel that despite its wording special condition 12 cannot amount to a right of first refusal. A useful discussion about rights of first refusal can be found in Macmillan v Covic [2004] 2 NZLR 106. For present purposes we are content to adopt Professor McMoreland’s succinct statement in his Sale of Land in New Zealand (2nd edition, 2000) at p85:

3.16 ... A ... right of ... first refusal, gives the grantor the initial choice whether or not to sell before the grantee has the choice whether or not to buy.

[20] Under special condition 12 the Miller Trust had no choice about selling. The two conditions were set as were the purchase price and date of settlement. Provided the lessees did not exercise their right to purchase and did not renew their lease the trust was obliged to sell to Beecroft Holdings Limited. The existence of the two conditions within special condition 12 could not alter that reality because the fulfilment or otherwise of those conditions was beyond the control of the Miller Trust. Any suggestion that the Miller Trust could decide not to sell if the conditions were fulfilled seems unrealistic and this appears to have been accepted by the parties. There was a faint suggestion that the Miller Trust had some control over the renewal because the lessees had been in breach of the lease. However, if there had been a refusal to renew the decision about whether there should be relief against forfeiture would have rested with the Court. We conclude therefore that the reference in the special condition to Beecroft Holdings Limited having a right of first refusal is misleading.
[21] Special condition 12 certainly has the appearances of an option. But determination of this appeal does not turn on whether it can be positively categorised as such. Rather it is a matter of construing the special condition as it stands and then determining whether it triggered the lessees’ right under clause 3.09 as already construed.
[22] Mr Till submitted that the condition relating to the renewal of lease amounted to a condition precedent. If that is right it must logically follow that the twin condition requiring the lessees not to exercise their right to purchase under clause 3.09 also amounted to a condition precedent, but understandably Mr Till did not advance that proposition because it would give rise to the “chicken and egg” situation described by Mr Shiels. Apart from relying on pragmatism Mr Till was unable to suggest any reason for drawing a distinction between the two conditions. In our view Mr Till’s argument is fatally flawed. Neither condition amounted to a condition precedent.
[23] The Judge considered that special condition 12 could only trigger clause 3.09 if and when Beecroft Holdings Limited expressed its desire to exercise its rights under the special condition. To combat that conclusion Mr Shiels cited two United States authorities in support of the proposition that the granting of an option is sufficient to trigger a lessee’s right of first refusal under a lease. In Rollins v Stokes (1981) 123 Cal. App. 3d 701; 176 Cal. Rptr. 835 the Court of Appeal of California decided that even though an option to purchase was not exercisable during the currency of the lease, the granting of the option had triggered a pre-emption provision in the lease which gave the lessee the right to purchase. On different facts a similar result was reached by the Supreme Court of Georgia in Hasty & Ors v Health Service Centers Inc (1988) 258 Ga.625; 737S.E.2d 356 (Ga.1988). Mercury Geotherm Ltd (In receivership) v McLachlan & Ors (High Court, Auckland Registry, M129-IM00, M1569-AS00, 14 June 2003, Potter J) appears to be the only New Zealand authority on this point. In that case Potter J concluded that the granting of an option to purchase did not trigger a right of first refusal under a lease because the option did not put the land out of the control of the owner of the land. This reflected that the option to purchase in that case left the owner of the land free to dispose of the land during the unexpired portion of the lease. On appeal this reasoning was upheld in Stuart & Ors v McLachlan & Ors [2003] NZCA 212. Mr Shiels also noted that it is well established in this country that the granting of an option over land has more than a mere contractual operation and confers upon the grantee an equitable interest in the land: see Gainford v Stinson (1994) 2 NZConvC 191,768 (CA). While the granting of an option will generally trigger a right of first refusal in a lease, this will not always be so. Each case will depend on the construction of the relevant documentation within its own factual matrix. However, if the granting of an option effectively puts the land beyond the control of the owner it would generally follow that entry into the option would be enough to trigger a right of first refusal. .
[24] When the Miller Trust and Beecroft Holdings Limited entered into the agreement of 3 October 2000 they did so against the background of the earlier agreement which the parties had abandoned. They were still keen to conclude a sale of all three titles. The underlying purpose of special condition 12 was to enable title 14B/807 to be sold to the company so long as the lessees did not exercise their rights under clause 3.09 and the lease was not renewed. There is no suggestion that Beecroft Holdings Limited was equivocal about purchasing title 14B/807. Indeed, it caveated the title on the strength of the agreement. Moreover, as discussed earlier, by entering into the agreement of 3 October the Miller Trust put title 14B/807 beyond its control. In other words, the agreement of 3 October gave rise to a situation which brought clause 3.09 into operation and the lessees were entitled to receive notice of that agreement.
[25] In our view the Judge’s approach was flawed. A technical exercise of the special condition 12 “option” was not necessary to trigger clause 3.09 because it had already been triggered. Even if an exercise of the option by Beecroft Holdings Limited had been required the lodging of the caveat would have provided the necessary trigger for clause 3.09. Our conclusion means that it is irrelevant that the lease was renewed.
[26] Because the solicitors for the Miller Trust and for Mr and Mrs Johnstone were not mistaken the Contractual Mistakes Act 1977 did not come into play. Relief in the form of an order for specific performance of the alternative agreement at a purchase price of $625,000 was inappropriate. Specific performance of the 2001 agreement at the price of $400,000 was required.
[27] Given the conclusion that we have reached it is unnecessary for us to consider the remaining grounds of appeal.

Result

[28] The appeal is allowed. The appellants are entitled to specific performance of the 2001 agreement which is reinstated. Given the arrangements already made between the parties it should be possible for them to make the necessary adjustments to reflect the outcome of this appeal. However, should any residual issues arise they are to be resolved by the High Court. The appellants are entitled to costs in the sum of $6,000 together with counsels’ reasonable travel and accommodation expenses.

Solicitors:
Downie Stewart, Dunedin for Appellants
Raymond Donnelly, Christchurch for Respondents