The first respondents in CA203/05 must apply to the High Court for the convening of a case management conference so that directions as to the future conduct of the proceeding may be given.

The appellants and second respondent in CA203/05 are entitled to costs in the High Court from the first respondents in CA203/05. If the parties cannot agree, quantum will be determined by the High Court.
With respect to costs in this court, the first respondents in CA203/05 must pay:
- (a) $4,000 plus usual disbursements incurred in respect of both appeals to the appellants in CA203/05; and
- (b) $6,000 plus usual disbursements incurred in respect of both appeals to the second respondent in CA203/05.

REASONS OF THE COURT

(Given by Chambers J)

Table of Contents

Para No
Competing equitable interests [1]
Issues on the appeals [10]
Is it reasonably arguable that Sentiero acquired an
equitable interest in the property on entering into
the May agreement? [22]
Has Sentiero shown that Mr Young did not have actual or
constructive notice of Farmers’ option before entering
into the May agreement? [35]
Does this case fall within the exceptions to the final
sentence proposition? [48]
What was the effect of the non-fulfilment of clause 14? [51]
Conclusion [55]

Competing equitable interests

[1] This case is all about competing equitable interests in a commercial property in Rotorua.
[2] In 2001, The Farmers Trading Company Limited agreed to take a lease of the property. One clause of the lease gave Farmers an option to purchase the property if the lessor wished to sell the premises during the term of the lease.
[3] On or about 18 May 2004, the O’Leary trusts, who by that time owned the property, entered into an agreement whereby they conditionally agreed to sell the property to Sentiero Properties Limited. (We shall call that agreement “the May agreement”.) The trusts did not, prior to entering into the May agreement, check with Farmers as to whether it was interested in buying. Nor was the May agreement made conditional on Farmers not exercising its option. The May agreement was conditional, however, on Sentiero’s being satisfied within 40 working days that the property was suitable for it.
[4] Farmers found out about the sale to Sentiero, but the Farmers’ personnel dealing with the matter were not aware of the option in the lease. The Sentiero people were aware of it, but said nothing.
[5] The 40 working days passed without Sentiero’s declaring itself satisfied that the property was suitable for it. But then, on or about 30 July 2004, the O’Leary trusts and Sentiero signed a variation of the May agreement. We shall call that variation “the July agreement”. The July agreement, after varying the terms of the May agreement, declared it unconditional. Following the signing of the July agreement, Sentiero paid a deposit. Settlement was to take place on 1 June 2005. Sentiero later nominated Makatiti Ltd to take title. (Both companies are parties to the present appeals: we shall refer to them jointly as “Sentiero”.)
[6] Later in 2004 the Farmers’ personnel dealing with this property stumbled upon the fact that the lease gave Farmers an option to buy. Farmers immediately notified the trusts that it wanted to exercise the option. This put the trusts in a difficult position. Eventually the trusts decided that they would sell the premises to Farmers, notwithstanding the fact that they had already sold the property to Sentiero. The trusts told Sentiero that they would not be settling with them and they refunded Sentiero’s deposit.
[7] There is no dispute that the trusts have managed to sell the property twice. It is axiomatic that only one of the purchasers can actually get the property; the other will have to settle for damages. The problem is both purchasers want the property. The essential issue in this proceeding is: who gets the property - Sentiero or Farmers?
[8] After the trusts told Sentiero that they would not be settling with them, Sentiero applied for an interlocutory injunction to restrain the trusts from settling with Farmers and for an order sustaining the caveat Sentiero had lodged against the title. Simon France J heard the application. He granted the injunction and sustained the caveat: Sentiero Properties Limited & Anor v O’Leary & Ors HC ROT CIV 2005-463-399 1 September 2005.
[9] From that decision the trusts (CA203/05) and Farmers (CA204/05) appeal. For the sake of the record, we should explain that “the trusts” are two family trusts, the Les O’Leary Trust and the Elayne O’Leary Trust. Both trusts have the same trustees, Les O’Leary, Elayne O’Leary, and their family solicitor, John Henderson.

Issues on the appeals

[10] In circumstances where two people both claim the right to get a property, the normal rule is that the property goes to the person who acquired an equitable interest in the property first. That rule is subject to exceptions, to which we shall come, but that is the normal rule: Butler v Fairclough (1917) CLR 78 at 91; Abigail v Lapin [1934] AC 491 at 504 (PC).
[11] In this case, there is no dispute as to who was “first”. Mr O’Neill, who appeared for both Sentiero Properties Limited and Makatiti Limited, the first respondents on both appeals, advised that Sentiero accepted that Simon France J was right to hold that Farmers’ equitable interest “arose first in time”: at [16]. That equitable interest arose from the option to purchase contained within Farmers’ 2001 lease.
[12] Counsel were also agreed on the principles to be applied in determining priorities between competing equitable interests. The principles were set out in the following passage in Hinde & Ors Hinde McMorland and Sim Land Law in New Zealand (looseleaf ed) at [9.005(b)]:

Principles to be applied

The Courts have worked out a number of principles to assist in the application of the basic rule for the determination of priorities between competing equitable interests:

(1) The burden of proof lies on the person seeking to reverse the order of temporal priority.
(2) The conduct of both the first equity holder and the second equity holder must be considered. “The whole conduct of each party” is to be looked at.
(3) The Court can have regard to the conduct of the parties subsequent to the creation of the second equitable interest.
(4) In New Zealand the postponement of the first to the second equitable interest is not based exclusively on the doctrine of estoppel, but on a more general and flexible principle that reference should be given to what is the better equity in an examination of the relevant circumstances. The question involves general considerations of fairness and justice.
(5) Authorities from other jurisdictions must be treated carefully.

Subject to certain exceptions an equitable interest acquired with notice of an earlier equitable interest cannot prevail over that earlier interest.

[13] Mr O’Neill’s essential submission in the High Court, was that it was reasonably arguable that Bryce Young, a director of Sentiero and the person who has dealt with this matter throughout on Sentiero’s behalf, did not know about Farmers’ option at the time he entered into the May agreement. Further, he submitted that it was reasonably arguable that this case fell within the criteria under which courts will reverse the order of temporal priority between competing equitable interests. In particular in that regard, Mr O’Neill relied on Farmers’ conduct at a meeting which took place between Farmers’ representatives and Mr Young in June 2004.
[14] Mr Davies, for Farmers, submitted that Sentiero had not established an arguable case on either issue. He submitted that Mr Young must have known about the Farmers’ option before entering into the May agreement. Even if there were doubt about that, Mr Davies submitted that Farmers’ conduct had not been disentitling so as arguably to justify reversal of the order of temporal priority.
[15] Simon France J held that there was “sufficient doubt...as to exactly what knowledge was actually held, and what can be imputed, to make it inappropriate to hold against [Sentiero] at this interlocutory stage”: at [27]. He also considered that it was arguable that the criteria for reversal of the order of temporal priority might be made out at trial: ibid. Simon France J considered that “where the overall justice lies” was a matter to be determined at trial, “after full exploration of the evidence”: at [35].
[16] At the hearing before us, the arguments proceeded along similar lines to those presented in the High Court. After the hearing, however, it occurred to us that the parties may have proceeded on a false assumption. That was that Sentiero had acquired its equitable interest when the May agreement was entered into. But did it acquire an equitable interest at that stage? It seemed to us arguable that it may not have acquired its equitable interest until the July agreement was entered into. If that is right, then Sentiero’s claim to jump the queue was doomed, because there is no dispute that Mr Young knew about Farmers’ option prior to signing the July agreement. The proposition set out in the final sentence of the Hinde quote set out at [12] above – the “final sentence proposition” - would dictate that Sentiero’s interest could not prevail over Farmers’ earlier interest if Mr Young knew about Farmers’ option before his company acquired its interest. We sent out a minute requesting further submissions. We are grateful for the submissions counsel later filed.
[17] So the first issue on these appeals becomes whether Sentiero did acquire an equitable interest in the property on signing the May agreement. More accurately, Sentiero has to demonstrate only that it is reasonably arguable that it acquired an equitable interest at that time in order to jump the first hurdle on the course to obtaining and sustaining its interlocutory injunction and caveat.
[18] For reasons we shall give, we have concluded that it is at least reasonably arguable that Sentiero did acquire an equitable interest in the property on signing the May agreement. The next question is, therefore, whether Sentiero has shown that Mr Young did not have actual or constructive notice of Farmers’ option before entering into the May agreement. Simon France J held that it was reasonably arguable that Mr Young did not have such notice. Mr Davies and Mr Stapleton, for the trusts, disputed that. So the second issue is whether Simon France J was right in finding that reasonably arguable.
[19] Our conclusion on that is that, with respect, he was not right. Our finding on that means that this case falls within the final sentence proposition, namely that, subject to certain exceptions, an equitable interest acquired with notice of an earlier equitable interest cannot prevail over that earlier interest. The only matter which would prevent Farmers’ success would be if this case came within the “exceptions” to that proposition. That is issue 3. Our conclusion on that issue is that this case does not come within the exceptions, which means that Sentiero has not established an arguable case that its later equitable interest should prevail.
[20] Although that is sufficient to dispose of the case, we shall mention a fourth issue. The “suitability” condition on which the May agreement was conditional was not fulfilled within the 40 working day period specified. What was the effect of that non-fulfilment? This was a matter on which we had the benefit of further submissions. In the end, however, we have decided not to reach a firm view on this interesting question.
[21] We shall now explain our reasoning on each of these issues.

Is it reasonably arguable that Sentiero acquired an equitable interest in the property on entering into the May agreement?

[22] The relevant terms of the May agreement are as follows.
[23] First, the purchase price was $2,950,000, plus GST (if any).
[24] Secondly, clause 2.1 provided:

The purchaser shall pay the deposit to the vendor or the vendor’s agent immediately upon execution of this agreement by both parties and/or at such other time as is specified in this agreement time being of the essence as to each such time.

[25] The agreement did specify another time. The front page of the agreement specified that the deposit of $140,000 was not to be payable until the agreement became unconditional. We shall come to what the condition was shortly.
[26] Thirdly, the possession date was to be 30 August 2004 “or such earlier date as the parties agree upon”.
[27] Fourthly, the property was sold subject to the existing tenancy to Farmers. On the front page of the agreement, under “Tenancies”, the following was recorded:

Name of tenant: As Per Attached Lease

[28] Whether a lease document was in fact attached is currently unclear.
[29] Fifthly, the general terms of sale were those contained in the Auckland District Law Society form, Seventh Edition (2) July 1999. The parties had agreed three “Further Terms of Sale”, particular to this agreement. By clause 1.3(3) of the general terms of sale, “where any inserted term (including any Further Terms of Sale) conflicts with the General Terms of Sale the inserted terms shall prevail.” The only relevant inserted term was clause 14.0:

This agreement is conditional upon the purchaser being satisfied after taking such advice as the purchaser may wish that the property is in all respects suitable for the purchaser. The purchaser shall notify the vendor’s solicitor not later than 4.00 pm 40 working days from the signing of this agreement by both parties.

[30] Forty working days from the signing of the agreement was 14 July 2004.
[31] Sixthly, clause 8.7 of the general terms of sale provided as follows:

If this agreement is expressed to be subject either to the above or to any other condition(s), then in relation to each such condition the following shall apply unless otherwise expressly provided:

(1) The condition shall be a condition subsequent.
(2) The party or parties for whose benefit the condition has been inserted must do all things which may reasonably be necessary to enable the condition to be fulfilled by the date for fulfilment.
(3) Time for fulfilment of any condition and any extended time for fulfilment to a fixed date shall be of the essence.
(4) The condition shall be deemed to be not fulfilled until notice of fulfilment has been served by one party on the other party.
(5) If the condition is not fulfilled by the date for fulfilment, either party may at any time before the condition is fulfilled or waived avoid this agreement by giving notice to the other. Upon avoidance of this agreement the purchaser shall be entitled to the return of the deposit and any other moneys paid by the purchaser and neither party shall have any right to a claim against the other.
(6) At any time before this agreement is avoided the purchaser may waive any financial condition and either party may waive any condition inserted for the sole benefit of that party.
[32] At the hearing before us, all parties had assumed that under that agreement Sentiero acquired an equitable interest in the property. We cast some doubt about the parties’ assumption in this regard in the post-hearing minute referred to at [16] above. On further reflection, however, we have concluded that it is at least reasonably arguable that Sentiero did acquire an equitable interest in the property on signing the May agreement. We go no further than finding it “reasonably arguable” as that was the standard Sentiero had to reach on an application for an interlocutory injunction and to sustain a caveat. This court held in Bevin v Smith [1994] 3 NZLR 648 at 665 that “whether the equitable interest has passed must always depend on the terms of the contract itself”. The court went on: “There will be some conditional contracts, particularly those subject to true conditions precedent, where the parties cannot be regarded as intending that equitable title will pass to the purchaser until the condition is waived or fulfilled.”
[33] Features of the May agreement which point against an intention to pass equitable title are the fact that the deposit was not payable until the agreement became unconditional and the open-ended nature of clause 14.0. That clause effectively allowed Sentiero to pull out of the contract for any reason prior to 14 July 2004. In those circumstances, there is an argument that the parties cannot have intended an equitable interest to pass until Sentiero had declared the condition unconditional and had paid the deposit.
[34] But there are arguments the other way – and for current purposes we hold that they are reasonably arguable. We say no more about this issue as it is not determinative of these appeals.

Has Sentiero shown that Mr Young did not have actual or constructive notice of Farmers’ option before entering into the May agreement?

[35] As we have said, Simon France J held it was reasonably arguable that Mr Young did not have actual or constructive notice of Farmers’ option before entering into the May agreement. Messrs Davies and Stapleton submitted His Honour had been wrong so to hold.
[36] Mr Davies first emphasised that the onus of proof at trial would fall on Sentiero to show that it (Mr Young) probably did not have notice of Farmers’ option before entering into the May agreement. It is, after all, Sentiero which seeks to upset the normal rule of temporal priority; in order to do that, one of the things it must show is that it was not aware of the prior equitable interest. Mr O’Neill did not dispute Mr Davies’s proposition. We are satisfied it is right: see Hinde at [9.005(b)], principle (1). Of course, at interlocutory injunction stage, Sentiero need prove only that it is reasonably arguable it did not know of Farmers’ option.
[37] Mr Davies submitted the evidence, far from showing that Mr Young did not know of the option, pointed overwhelmingly to the contrary.
[38] First, he said the May agreement referred to the lease being attached. He pointed out that Mr Young had not, in any of his three affidavits, said the lease was not attached. If it was attached, then Mr Young had, if not actual notice of the option, at the very least constructive notice of it: he had merely to read the document. (We should add that Mr O’Neill accepted that constructive notice would suffice to defeat Sentiero's claim. Such concession was correctly made: see Barclays Bank PLC v O’Brien [1994] 1 AC 180 at 195-196 and Doubtless Bay Water Supply Company Limited v Robinson (1997) 3 NZConvC 192,579 at 192,587-192,588.)
[39] Mr Davies noted that Ahmed Essop, Farmers’ National Property Manager, had in his affidavit specifically made reference to the May agreement’s having recorded that the lease was attached. He had said in his affidavit: “As such, I assume that Sentiero was aware of clause 21 of the [lease] prior to the execution of the agreement.” Mr Davies noted Mr Young had then filed a further affidavit “in reply to” Mr Essop’s affidavit. He did not challenge Mr Essop’s reference to the lease being attached or Mr Essop’s “assumption”. He did not say, as one would have expected him to do had the agreement been wrong in saying the lease was attached, that the lease was not in fact attached.
[40] Indeed, Mr Davies went further. He noted that, despite the issue of when Mr Young first found out about the lease and the option being squarely on the table, Mr Young had been vague throughout as to when he first learned of these things. Mr Davies said, given the onus was on Sentiero, one would have expected Mr Young to state precisely when he first saw the lease and when he found out about the option and how those things came about. Instead, all Mr Young had said on this topic was:

I became aware of the provisions contained in the Deed of Lease between the first and second defendants and in particular the provisions in clause 21 and had consulted my lawyer about it when I received a copy of the lease agreement as part of due diligence.

[41] But when was that? The May agreement on its face would suggest that the lease had been provided (and attached) prior to that agreement being signed. Mr Young says nothing to dispel that assumption. “Due diligence” is an imprecise term. Before parties decide to enter into commercial agreements, they normally carefully check out what it is they are buying. That could be and often is described as “due diligence”. Mr O’Neill submitted Mr Young must have been referring to “due diligence” undertaken after the May agreement was signed. We would be prepared to hold that interpretation was arguable at this stage had Mr Young said clearly, in light of Mr Essop’s “challenge”, that the lease had not been attached to the May agreement, but Mr Young has said no such thing.
[42] We also consider it highly unlikely that Mr Young would not have wanted to look at the lease before deciding whether to buy the property and what to pay for it. When one is buying a leased property, the terms of the lease are, after all, fundamental, particularly on price. Who is the tenant? What rent is it paying? Who has obligations for repairs? How long has the lease to run? Are there rights of renewal? Are there guarantors? Are there any unusual provisions in the lease? We accept that a rash purchaser of a multi-million dollar property may enter into an agreement to buy based solely on a summary of the lease provisions, but there is no evidence Mr Young was given such a summary or relied only on that. Mr Young, despite three affidavits, remains silent as to what information he had about the lease and its terms prior to entering into the May agreement.
[43] Mr Davies also pointed to undisputed evidence that the real estate agents involved, Hoyles Realty Limited, part of the Ray White Real Estate franchise, knew about Farmers’ option. (Indeed, there is an unresolved dispute between the trusts and the agents as to who was to tell Farmers of the trusts’ intention to sell.) Mr Davies submitted Alf Hoyle of Hoyles Realty was Sentiero's agent, with the consequence that the agent’s knowledge should be imputed to the principal. We do not accept, on the basis of the evidence currently available, that Hoyles was necessarily Sentiero’s agent, although we think that distinctly arguable. What is certainly clear on the evidence before us is that there was much contact between Mr Young and Hoyles prior to entry into the May agreement. What we can also say on this matter is that Mr Young has not dispelled a possible inference that Mr Hoyle, given his knowledge of the option, would have told him about it. Instead, Mr Young has chosen to say nothing about what he learned from the agents, save for the paragraph we have quoted above at [40].
[44] Mr O’Neill submitted there was no evidence that anyone from Hoyles had told Mr Young about the option prior to entry into the May agreement. While that is so, it misplaces the onus: it was for Mr Young to show he had, arguably, not known about the option. After Farmers had produced documentary evidence showing Hoyles did know about the option, it was for Sentiero to dispel the possible inference that the information was not passed on. We are mindful of the fact that Farmers does not have knowledge itself of what passed between Mr Young and Hoyles’ personnel. Nor presumably was it possible on an interlocutory application for Farmers to obtain an affidavit from Hoyles, given that Hoyles is, so we were told, on notice that it will be joined as a third party to these proceedings once our decision is delivered.
[45] We are satisfied Mr Davies’s submissions on this aspect are sound. In our view, Sentiero has not established a reasonably arguable case that Mr Young did not have at the very least constructive notice of Farmers’ option. His vague answers as to what he knew, in light of specific challenges from Farmers in its notice of opposition and affidavits, were, we can only conclude, deliberately vague. We think it highly likely he was aware of the option prior to entering into the May agreement; his failure to say explicitly he was not aware of it is highly significant. Even if he did not actually know of the option, he had constructive notice of it. On the evidence we have, he almost certainly had the lease; but even if he did not, he could and should have called for it and read it. He was under a duty to make enquiry and to take such other steps as are reasonable to verify whether the earlier right did or did not exist.
[46] If, as a matter of fact, we are wrong in what we have concluded as to Mr Young’s state of knowledge prior to the May agreement, he has only himself to blame. He was put on notice as to Farmers’ challenge on what he knew and his answer to that challenge was vague and unhelpful. No reason was given as to why the answer was so unspecific.
[47] Unlike Simon France J, and with respect to him, we do not think it reasonably arguable that Sentiero did not have actual or constructive notice of the option. That must mean that Farmers’ interest must prevail over Sentiero’s, unless this case comes within the “exceptions” to the final sentence proposition.

Does this case fall within the exceptions to the final sentence proposition?

[48] The scope of the exceptions to the final sentence proposition is not settled. In this regard, we have considered Doubtless Bay at 192,587-192,588, Platzer v Commonwealth Bank of Australia [1997] 1 Qd R 266 at 273 (CA), and Moffett v Dillon [1999] 2 VR 480 at 491-493 (CA). The last of those cases has been the subject of much academic commentary: see, in particular, Rodrick “Resolving Property Disputes between Competing Equitable Interests in Torrens System Land – Which Test?” (2001) 9 APLJ 172 at 191-193, Butt “Priority between unregistered Torrens Title Interests” (1999) 73 ALJ 538, and McConvill “Equity in the Torrens System” (2001) 8 APLJ 191. Among the exceptions are cases:

(a) Where the holder of the later interest knows of the existence of the earlier interest, but at the time of acquiring the later interest is led to believe that the earlier interest no longer exists or will not be enforced;

(b) Where the holder of the prior interest has agreed to postpone the earlier interest or has waived priority.

[49] Neither of those exceptions applies here. Mr O’Neill was critical of Farmers’ conduct, but that criticism related to Farmers’ failure to notify Sentiero of its option to purchase at the June 2004 meeting. That “conduct” was after Sentiero acquired its interest, not before it. Mr O’Neill accepted that, if we did not think it reasonably arguable that Sentiero did not have actual or constructive notice of the option prior to entering into the May agreement, Sentiero did not have an arguable case and must lose on this appeal.
[50] We make a final comment on this issue. We are aware that the approach we have adopted treats the final sentence proposition as distinct from the general principles for determining priorities between competing equitable interests, as set out in the quote from Hinde at [12] above. There is strong authority supporting the distinction between cases where the later equitable interest-holder did not have notice of the earlier equitable interest, where the general principles apply, and cases where the later equitable interest-holder did have notice at the time of acquisition, where the final sentence proposition applies. Even if we are wrong in that, however, we do not consider Sentiero has shown an arguable case for reversing priorities under the general principles. The Farmers’ personnel at the June 2004 meeting did not know about the option to purchase. It is inconceivable that by that time Mr Young did not know of it. He did not raise it with them. His silence in that regard must have been intentional. The only inference that can sensibly be drawn is that he purposefully did not want Farmers to twig to the fact it had this interest. That is not conduct which reflects adversely on Farmers. If it reflects adversely on anyone, that person is Mr Young. “The whole conduct of each party”, therefore, even if relevant, tends to confirm the order of temporal priority, not to support its reversal.

What was the effect of the non-fulfilment of clause 14?

[51] There is no dispute that Sentiero did not notify the trusts’ solicitors of its satisfaction with the property within the stipulated period. By clause 8.7(3), time was of the essence. By clause 8.7(4), the failure to notify meant that clause 14 was not fulfilled.
[52] There is an argument that, as soon as the stipulated period passed, Sentiero lost its equitable estate in the property. That is because the trusts could at any time thereafter have brought the contract to an end. The vendor could have legally prevented any further steps being taken on the contract and clearly could have prevented Sentiero seeking specific performance: McMorland Sale of Land (2ed 2000) at [10.02]-[10.03]. Although, even after the deadline passed, it would have been possible for Sentiero to waive this condition, provided it did so prior to the agreement being avoided by the trusts, it did not here, as a matter of fact, so waive. Rather, it insisted on changed terms before it agreed to continue.
[53] It may be Sentiero’s equitable interest in the property lapsed on the non-fulfilment of condition 14 and it did not reacquire an equitable interest in the property until it entered into the July agreement. There is no dispute that, by that time, Mr Young knew about Farmers’ option. A conclusion to that effect would be broadly consistent with Panckhurst J’s holding in Strack v Hatchi Sydney Corporation Pty Ltd HC CHCH CP77/98 8 July 1998.
[54] In the end, we have decided to express no firm conclusion on this argument. We choose to rest our decision on the fact that, as at the date of the May agreement, Sentiero had either actual or constructive notice of Farmers’ earlier interest and has not established an arguable case for reversing the order of temporal priority.

Conclusion

[55] It follows that the trusts’ and Farmers’ appeals must be allowed. Farmers are entitled to the property. Sentiero’s claim against the trusts will be limited to damages.

Solicitors:
Evans Henderson Woodbridge, Marton, for Appellants in CA203/05 and Second Respondents in CA204/05
Lewis’, Cambridge, for First Respondents in CA203/05 and CA204/05
Meredith Connell, Auckland, for Second Respondent in CA203/05 and Appellant in CA204/05

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