Lifestyle Group Ltd v Maxwell [2007] NZCA 290; (2007) 8 NZCPR 648 (13 July 2007)

Last Updated: 1 January 2012

IN THE COURT OF APPEAL OF NEW ZEALAND

CA146/06

[2007] NZCA 290

BETWEEN LIFESTYLE GROUP LTD
Appellant

AND GEORGE MAXWELL AND HELEN KIRSTEN MAXWELL
Respondents

Hearing: 15 May 2007

Court: Arnold, Gendall and Harrison JJ

Counsel: G J Praat for Appellant
N Burley and J L Bagrie for Respondents

Judgment: 13 July 2007 at 11 am

JUDGMENT OF THE COURT

1. The appeal is dismissed.
2. The appellant must pay to the respondents costs in the sum of $6,000 plus usual disbursements. We certify for second counsel.

____________________________________________________________________

REASONS OF THE COURT

(Given by Harrison J)

Introduction

[1] Lifestyle Group Ltd appeals with leave from a decision of Goddard J delivered in the High Court at Nelson on 21 April 2006 upholding an arbitrator’s decision that it was liable to pay contractual interest for a period of delay of more than 18 months in settling its obligations under an agreement to purchase a campground property from George and Helen Maxwell: CIV 2004-442-395.
[2] The agreement resulted from Lifestyle’s election to exercise an option to purchase contained in a deed of lease. A separate provision of the deed, cl 47, obliged the Maxwells to install a new professionally designed sewerage/wastewater disposal system at the campground. Goddard J, reversing the arbitrator, found that the Maxwells had breached cl 47 by installing a defective system. However, she upheld the arbitrator’s decision that the provision was not a term of the agreement for sale and purchase and that the Maxwells’ breach did not justify Lifestyle’s refusal to settle on the due date.

Arbitration

[3] On 29 September 2001 the parties entered into a deed whereby the Maxwells agreed to lease the Pakawau Beach motor camp in Golden Bay to Lifestyle for a term of three years at an annual rental of $90,000 plus GST, escalating by $5,000 annual increments to $100,000 plus GST in the third year.
[4] Clause 47 of the deed provided:

New Wastewater Disposal System

The Landlord shall at their [sic] expense install and make operational by 1 November 2001 a new sewerage/wastewater disposal system. The system shall be professionally designed and the Landlord shall obtain a Producer Statement from the business which supplies and installs the system. Forthwith after completion of the system the Landlord shall obtain and provide to the Tenant both a Tasman Council Code Compliance Certificate and a guarantee from the installing contractor.

[5] The Maxwells engaged a specialist engineer and contractor to design and build the sewerage/wastewater disposal system, which was commissioned in January 2002. However, within a year the plant manifested operating deficiencies. It was producing unacceptable odours and causing ponding of effluent on the irrigation field. Also Lifestyle learned that the Maxwells had failed to obtain a building consent and code of compliance certificate. The parties were unable to resolve their differences over liability for rectifying the deficiencies.
[6] The parties referred this dispute to arbitration in accordance with the deed. Following a hearing in Nelson in April 2005 the arbitrator found that the Maxwells had fulfilled their obligations by engaging a qualified professional to design the plant. The Maxwells have not appealed Goddard J’s decision that the arbitrator’s finding was wrong in law.
[7] Clause 48 of the deed provided:

Tenant’s Purchase Option

In consideration of the Tenant entering into this Lease the Landlord grants to the Tenant an option to purchase the premises, all plant and equipment leased under this Lease and all the Landlord’s other assets relating to the camping ground/shop business upon the following terms:

48.1 The purchase price shall be $1,015,000.00 (plus GST if any) allocated as follows:

(a) land $450,000.00

(b) buildings $405,000.00

(c) shop, plant and equipment $40,000.00

(d) balance plant, goodwill and other business

assets $120,000.00

48.2 The option shall remain open until 4pm on the 24th August 2004 and shall be exercised by the Tenant giving written notice to that effect by leaving such written notice at the offices of the Landlord’s solicitors Hunter Ralfe, 279 Hardy Street, Nelson (attention Ross McKechnie).

48.3 The interest rate for late settlement shall be 18% per annum.

48.4 If the option is validly exercised then:

• 48.4.1 the Tenant shall pay an immediate deposit in part payment of the purchase price of $100,000.00
• 48.4.2 settlement shall take place 20 working days after the date on which the option is exercised on which date the balance of the purchase price shall be paid in cash and normal outgoings shall be apportioned
• 48.4.3 the remaining purchase terms shall be those in the standard property and business sale and purchase forms as commonly completed by solicitors in the Nelson region at the date the option is exercised (and if there is any dispute as to such terms the dispute shall be settled by an expert appointed by the President for the time being of the Nelson District Law Society which expert’s decision shall be final).

48.5 ...
[8] Lifestyle exercised its option on 3 June 2003 in a letter from its solicitors to the Maxwells’ solicitors. It read:

We now enclose a copy of the report prepared by Waste Solutions Limited on the wastewater treatment system at the Motor Camp [this report, prepared by an independent expert, concluded that the system was inadequate and provided an estimated cost of upgrading to meet compliance requirements].

Our client has instructed us to give formal notice of [its] wish to exercise the tenant’s “purchase option”....

However, our client expects that the Camp’s wastewater treatment system will be fully operational and comply in all respects with the Tasman District Council requirements which clearly is currently not the case...

[9] The Maxwells’ solicitors responded with a request for payment of the deposit of $100,000 and nominated 1 July 2003 as the date for settlement of the agreement. The Maxwells rejected a subsequent proposal by Lifestyle’s solicitors for a deduction of $155,000 from the agreed sale price of $1.015 million to meet the cost of rectifying defects in the sewerage system. Further and inconclusive exchanges of correspondence followed.
[10] The Maxwells’ solicitors gave notice on 9 October 2003 that the agreement would be cancelled unless the deposit was paid within three days. Lifestyle complied the next day but failed to pay the balance of the purchase price, less an agreed retention of $100,000 (pending the outcome of arbitration), until 20 January 2005. It remained in possession throughout this period with the right to receive income from the camping ground business but paying neither rental nor interest to the Maxwells.
[11] Lifestyle refused the Maxwells’ demand to pay interest on the balance of the purchase price at the contractual rate of 18%. The parties also referred this dispute for arbitration. It was heard contemporaneously with the dispute about liability for breach of cl 47. In reliance on legal advice, the arbitrator found that the Maxwells’ breach of cl 47 did not relieve Lifestyle of its obligation to settle on 1 July 2003. He awarded the Maxwells contractual interest on the late payment of the deposit and late payment of the balance of the purchase price in the sums of $6,509.59 and $325,160.27 respectively.

High Court

[12] Goddard J dismissed Lifestyle’s appeal against the arbitrator’s finding of liability for contractual interest. She was satisfied that the agreement for sale and purchase was constituted by cl 48 together with a document entitled REI-ADLS 7th Ed (2) July 1999, the standard terms of the property and business sale and purchase form commonly completed by solicitors in the Nelson region. She found (at [43]) that cl 47 was not incorporated by reference or otherwise into the agreement.
[13] Clause 6.5 of the standard form agreement for sale and purchase provided:

Breach of any warranty or undertaking contained in this clause does not defer the obligation to settle. Settlement shall be without prejudice to any rights or remedies available to the parties at law or in equity, including but not limited to the right to cancel this agreement under the Contractual Remedies Act 1979.

[14] The Judge held (at [44]):

The arbitrator found as a fact that the [Maxwells] had failed to procure a building consent, a code compliance certificate and a guarantee. Those failures were all breaches of the warranties required of the [Maxwells] under clause 6.2(5). The [Maxwells’] failure to obtain these necessary warranties was not however a breach that entitled [Lifestyle] to defer settlement, as clause 6.5 clearly stated. The obligation therefore remained on [Lifestyle] as purchaser to settle in the absence of [Lifestyle] electing to cancel the contract. When [Lifestyle] did not settle on due date the applicable default clause was clause 3.9 of the agreement for sale and purchase, not clause 3.10.

[15] Goddard J held (at [44]) that, as a result of Lifestyle’s failure to settle, the Maxwells were entitled to contractual interest calculated in accordance with cl 3.9. The Judge concluded (at [47]):

The only relevant issue is whether [the Maxwells] were able to give clear legal title on settlement. The still deficient state of the wastewater system did not preclude their ability to do so. Settlement was not conditional on the functionality of the wastewater system and [counsel for Lifestyle’s] submission that it was a condition of sale that [the Maxwells] install and make operational a new system ‘by settlement date’ was not accurate. [Lifestyle] chose to exercise its option to purchase at the particular time and having done so it was its obligation to then comply with the terms upon which that option was exercised.

Discussion

[16] Mr Praat for Lifestyle challenges Goddard J’s conclusions on two grounds: first, that the Judge erred in concluding that cl 47 was not incorporated by reference or otherwise as a term of the agreement for sale and purchase and, second, that the Maxwells’ breach of cl 47 constituted a failure to provide vacant possession, with the result that they were in default and unable to claim interest for late settlement (cl 3.9 and cl 3.10).

(a) Incorporation of Clause 47

[17] In support of his first submission, Mr Praat notes that the option was to purchase more than title to the property, extending to a right to purchase the premises, all plant and equipment leased by the Maxwells and all the other assets relating to the camping ground and shop business. He submits that the campground, licensed for a maximum of 230 occupants, would be unable to function without an adequate sewerage/wastewater disposal system and that the value of the business would be diminished. He says the Maxwells’ default was a significant breach of their obligations as vendors.
[18] The relevant legal principles can be summarised shortly. An option to purchase, while a term of a deed of lease, is in law a collateral or independent bargain to be exercised according to its express terms and conditions. Such an option has been described as an irrevocable offer which is enforceable by a decree for specific performance: Mountford v Scott [1975] Ch 258 (CA) per Russell LJ at 264-265. An option does not give rise to any obligations unless and until the lessee gives written notice to the lessor: Sudbrook Trading Estate Ltd v Eggleton [1983] 1 AC 444 (HL) per Lord Diplock at 477. The lessee’s decision to exercise the option places the parties in the relationship of vendor and purchaser, thereby terminating the existing lease: see Batchelor v Murphy [1925] Ch 220 (CA), affirmed [1926] AC 63; Griffith v Pelton [1957] 3 All ER 75 (CA).
[19] Clause 48 was an unconditional grant by the Maxwells of an option to Lifestyle to purchase the camping ground and business “upon the following terms”. The primary terms were those specifying the purchase price of $1.015 million (plus GST) and the interest rate for late settlement of 18%. Further express terms provided that, if the option were validly exercised, Lifestyle would pay a deposit of $100,000 and settle by paying the balance of the purchase price within 20 working days. The remaining purchase terms were agreed to be “those in the standard property and business sale and purchase forms as commonly completed by solicitors in the Nelson region ...”. That document was REI-ADLS 7th Ed. (2) July 1999. The agreement was to be a composite of the express terms of the option, once exercised, and the REI-ADLS document, but nothing else.
[20] Clause 48 referred to the lease only to recite its existence as consideration for the option and to describe the property being purchased. The sewerage/wastewater disposal system, as Mr Praat accepts, fell within the description either of part of the “shop, plant and equipment” or “balance of plant, goodwill and other business assets” which Lifestyle agreed to buy. The option omitted reference to cl 47 or any other provision of the lease.
[21] Clause 47 fulfilled an unrelated contractual purpose. The lease, on execution, imposed a duty on the Maxwells to install and make operational a sewerage/wastewater disposal system by 1 November 2001. That was the nature and extent of the obligation, which enured for Lifestyle’s benefit irrespective of whether or not Lifestyle later exercised the option. It was an agreed term of the relationship of lessor and lessee. All questions of performance fell for determination according to the lease. In the event of a breach, the Maxwells were exposed to liability to Lifestyle for damages for loss of profit and, possibly, rectification costs.
[22] The agreement for sale and purchase was constituted by Lifestyle exercising its option on 3 June 2003. The lease came to an end shortly afterwards, as Mr Praat acknowledges, on 1 July 2003, the due date for settlement. On that date the parties’ relationship changed to one of vendor and purchaser of all assets. Lifestyle agreed to buy the camping ground, including the sewerage/wastewater disposal system, for $1.015 million plus GST. It would assume future responsibility for its ownership, maintenance and operation. As Mr Burley submits, it was not a condition of sale that the Maxwells install and make operational a disposal system by the due date. That obligation had arisen for performance well before the agreement came into being.
[23] Clause 48 was an option to purchase to be exercised according to its express terms, which made no reference to cl 47 or an obligation relating to the disposal system, and Mr Praat has failed to advance a structured contractual analysis which might persuade us otherwise.
[24] In any event, Lifestyle’s obligation to settle by paying the full purchase price on due date would remain unchanged even if cl 47 was incorporated into the agreement by reference. We agree with Goddard J that, at best for Lifestyle, the Maxwells’ breaches of cl 47 (failing to obtain a building consent, to provide a code compliance certificate for the system, or to install a professionally designed system) amounted to a default of the vendor’s warranties and undertakings: see cl 6.2 of the REI-ADLS agreement. The agreement expressly provided that “breach of any warranty or undertaking contained in this clause does not defer the obligation to settle”. Instead it reserved Lifestyle’s common law or statutory rights or remedies, including an entitlement to damages: see cl 6.5.
[25] On this point Mr Praat relies principally on this Court’s decision in Lingens v Martin (1994) 2 NZ Conv C 191,940. The vendors in that case warranted, in accordance with the then standard form REI-NZLS agreement for sale and purchase, that a dwellinghouse on the land was erected in accordance with a building permit. However, a permit was never obtained, and the local authority issued a demolition order after the agreement was signed but well before a plan was deposited and the agreement became unconditional. Nevertheless, the vendor demanded settlement in full.
[26] In Lingens the Court held that the vendor’s breach of a warranty arose from the property’s failure to comply with its description. It was thus a case of misdescription, entitling the purchaser to compensation in accordance with cl 5.3 (which is replicated in cl 5.3 of this agreement). The Court held (at 191-946):

It follows that a vendor is unable to compel settlement where the parties do not agree on the amount of compensation, or on some sensible arrangement to protect their respective interests so that settlement can proceed...

[27] Lingens is distinguishable on a number of grounds. It was concerned with rights under the compensation provision for misdescription where the vendor demanded settlement in full. But Lifestyle did not allege misdescription or seek to rely on that compensation provision. At best, its case was for breach of warranty, which by cl 6.5 “does not defer the obligation to settle”, reserving instead a contractual right to claim damages. The Lingens contract, which incorporated an earlier edition of the standard form agreement for sale and purchase, did not contain an equivalent of cl 6.5.
[28] Furthermore, even if Lingens applied, and the Maxwells were bound to allow an adjustment against the purchase price for the cost of rectifying the disposal system, the arbitrator expressly found that their offer on 8 September 2003 for a retention of $90,000 pending resolution of the dispute, which Lifestyle rejected, was reasonable.
[29] Arguably, the Maxwells were not liable at all to Lifestyle for the costs of rectifying the sewerage/wastewater disposal system once the option was exercised. As Goddard J observed, Lifestyle elected to give notice on 3 June 2003, exercising the option in accordance with its terms, with knowledge of the system’s deficient state of repair. Lifestyle knew the Maxwells were in default. In these circumstances Lifestyle may have waived any right to claim damages, although it did state when exercising the option its expectation that the Maxwells would meet their obligations relating to the wastewater system.

(b) Vacant Possession

[30] We can deal briefly with Mr Praat’s second submission. The question of whether or not a vendor has given vacant possession is of an intensely factual nature. Thus, the English Court of Appeal has held that a vendor who rendered cellars under a warehouse unusable by leaving behind rubbish, including many sacks of cement which had hardened, deprived the purchaser of its right to actual unimpeded physical enjoyment of the land: Cumberland Consolidated Holdings Ltd v Ireland [1946] KB 264.
[31] However, the parties did not refer a question about vacant possession to the arbitrator for determination. In the absence of factual findings by him directed at that issue, which might provide the basis for an arguable question of law, we are not prepared to consider the argument further. We note, though, that there are considerable difficulties with it in the present case.

Result

[32] It follows that Lifestyle was in default of its contractual obligations in failing to settle the agreement for sale and purchase on or about 1 July 2003 and is liable for interest on the unpaid portion of the purchase money at the agreed rate of 18%. There is nothing unfair or unreasonable in this result. Lifestyle was in possession as a purchaser, not as a lessee, throughout the relevant period, and retained all income and profit without paying rental. It cannot expect the benefit of possession of a commercial property without the burden of payment of the purchase price or interest at the agreed rate in lieu.
[33] Lifestyle’s appeal against the Goddard J’s decision is accordingly dismissed. The Maxwells are entitled to costs, which we fix at $6,000 together with usual disbursements. We certify for second counsel.

Solicitors:
Knapps Lawyers, Nelson, for Appellant
Hunter Ralfe, Nelson, for Respondent