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Court of Appeal of New Zealand |
Last Updated: 5 January 2011
IN THE COURT OF APPEAL OF NEW ZEALAND
CA785/2009 [2010] NZCA 627BETWEEN ROY JAY HARLOW AND NANCY JEAN HARLOW
Appellants
Hearing: 7 October 2010
Court: Chambers, Harrison and Wild JJ
Counsel: G J Kohler and A M Cook for the
Appellants
D J Taylor and J C G Cochrane for the
Respondent
Judgment: 20 December 2010 at 4 pm
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JUDGMENT OF THE COURT
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REASONS OF THE COURT
(Given by Wild J)
Table of Contents
Factual background [5]
Issue 1: Was Sherman entitled
to register the three covenants? [21]
Did Rodney Hansen J find an
oral collateral agreement? [22]
Does the evidence
nevertheless indicate there was an oral collateral
agreement? [24]
Issue 2: Did the
Harlow’s failure to requisition for the removal of the three covenants
mean that they were deemed to have accepted
them? [31]
Issue 3: Was Sherman entitled
to cancel the agreement? [37]
The consequences of our
findings [46]
[1] In a judgment he delivered on 19 November 2009, Rodney Hansen J held the respondent company (Sherman) had lawfully cancelled an agreement to sell the appellants (the Harlows) a block of land near Hamilton.[1] Following the judgment the Harlows vacated possession of the land, but brought this appeal.
[2] The parties’ dispute was about three covenants Sherman created and registered against the title to the land after agreeing to sell it to the Harlows (the three covenants).
[3] Three principal issues arise on this appeal:
- Agreement: Was Sherman entitled to register the three covenants? The answer to this first issue depends on whether the Harlows agreed to the three covenants.
- Requisition: Did the Harlows’ failure to requisition for the removal of the three covenants mean that they were deemed to have accepted them?
- Cancellation: Was Sherman entitled to cancel the agreement?
[4] If we answer those questions in favour of the Harlows, as we do, then the parties were agreed as to how the appeal should be resolved.
[5] On 3 August 2007 Sherman obtained consent from the Waipa District Council to sub-divide into three lots a block of just under nine hectares of land it owned on Raynes Road on the outskirts of Hamilton. The consent was subject to various conditions and to the creation of various easements, including for electricity, telephone and rights of way. There were also conditions relating to effluent and storm water disposal.
[6] On 6 November 2007 the parties entered into an agreement for sale and purchase of Lot 2 on this new subdivision, a “lifestyle” block of 6,668 square metres. The agreement was on the familiar Eighth Edition 2006 of the form approved by the Real Estate Institute of New Zealand and the Auckland District Law Society. The property was described by reference to two preliminary plans of the subdivision attached to the agreement, the second one marked “Later Changes”, showing a more rectangular boundary referred to in clause 18.0 of the agreement. The price was $622,300, the deposit $45,000. Possession and settlement were to be on 10 April 2008. This agreement replaced a first agreement which the parties had signed a few days earlier. Sherman entered into these agreements as trustee of the Sherburn Family Trust. Mr and Mrs Sherburn were the principal beneficiaries of that trust. Mr Sherburn was a real estate agent at Ray White Real Estate, which was the vendor’s agent for the sale. Mr Sherburn was the sales person at Ray White identified in the agreement.
[7] The agreement made no mention of, nor provision for, the creation of the three covenants.
[8] The following day, 7 November, two things occurred. First, the parties entered into an occupation agreement which gave the Harlows possession pending settlement. Second, Sherman executed an easement certificate creating the easements required by the Council’s subdivisional consent, but also creating the three covenants. These were restrictive covenants, pursuant to which the owner of the land undertook not to:
(a) Shoot any wildlife other than for the eradication of pests such as rabbits, possums and suchlike;
(b) Permit or allow motorcycling or go-cart recreation or other noisome activity on the land, but this covenant shall not extend to the use of motor bikes, mowers, weed eaters or suchlike for the use in farming or gardening operations;
(c) Keep or permit to be kept on the land more than two dogs of a greater age than 3 months but this does not preclude the ownership of additional dogs for working purposes.
This easement was lodged with LINZ on 6 December, and registered (that is, “issued”) on 7 December.
[9] Correspondence, discussion and negotiation between the parties’ solicitors on several points over the period 6-8 November resulted in agreement on several variations to the agreement and culminated with the Harlows’ solicitor, Mr Till, confirming the agreement as unconditional on 8 November. The three covenants were not part of this inter-solicitor exchange; Mr Till did not know of them. There had, however, earlier been some discussion between the parties themselves about the subject matter of the three covenants. We revert to that in [24]-[26].
[10] On 20 December Sherman’s solicitor, Mr Cochrane, wrote to Mr Till advising that the title to the property had issued and enclosing a search copy of it. He did not enclose a copy of the easement or refer to it.
[11] In March 2008 disagreement and difficulty arose between the parties on a number of matters. As the nature of these is irrelevant to this appeal, it suffices to give two examples. One is the Harlows’ claim that they had been misled about the proximity of the property to the proposed Southern Links roading network, the other is problems with access-ways and gates.
[12] In the course of this disagreement and difficulty, on 26 March 2008, the Harlows first learnt of the three covenants. They maintained they had never agreed to these. In a letter dated 4 April 2008 to Mr Cochrane, Mr Till complained that the Harlows had now found out that Sherman had altered the conditions of the covenant “by adding three new clauses after (the) Harlows were shown and had initialled the original form ...”.
[13] Mr Till ended this 4 April letter by advising that the Harlows wanted “to renegotiate a new agreement” and sought Mr Cochrane’s confirmation by midday on 8 April that Sherman agreed to that request. Mr Till enclosed with that letter a copy of a caveat the Harlows had lodged on 3 April claiming an interest in the land pursuant to the 6 November 2007 agreement for sale and purchase. He stated that that caveat was “not intended to be taken as reaffirming the agreement as to its current terms between the parties”, and stated that it was without prejudice to the Harlows’ complaints in respect of the three covenants and other matters relating to the agreement.
[14] Sherman’s position was that it was entitled to call for settlement of the agreement without deduction from the purchase price. Under cover of a letter dated 8 April, Mr Cochrane enclosed a settlement statement for settlement on 10 April (the date stipulated in the agreement).
[15] The agreement was not settled on 10 April. Following further correspondence between the parties’ solicitors, Mr Till wrote on 22 April seeking withdrawal of the settlement notice and confirmation that Sherman was prepared to renegotiate the price and terms of the agreement.
[16] Mr Cochrane replied on 12 May rejecting this proposal and enclosing a fresh settlement notice.
[17] Mr Till replied on 21 May reiterating the Harlows’ objection to the three covenants as being created and registered without their knowledge, let alone their agreement. He advised that the Harlows would probably settle the following day, 22 May, the “last day” in terms of the latest settlement notice, but he added that settlement would be:
... on a totally without prejudice basis to all of the issues that have been raised in correspondence to date. Our client still seeks redress for everything that has gone on and will continue to pursue all remedies available.
He ended the letter by asking again whether there was any chance of settlement discussions to resolve all the issues.
[18] The agreement did not settle on 22 May. Shortly after 5pm on that day Mr Cochrane advised that Sherman had cancelled the agreement and would seek possession of the property unless the Harlows voluntarily vacated it.
[19] The Harlows refused to vacate the property. Sherman sought an order for vacant possession of the land, a declaration that the agreement was cancelled and either damages for wrongful possession or mesne profits.[2]
[20] As already mentioned, after receiving Rodney Hansen J’s judgment of 19 November 2009, the Harlows vacated possession of the property.
Issue 1: Was Sherman entitled to register the three covenants?
[21] Sherman made two submissions on this issue: first, that Rodney Hansen J had found there was an oral collateral agreement permitting the registration of the new covenants; and secondly, that even if the Judge had not found such an agreement, the evidence was “sufficient to show” that there was such an agreement.
Did Rodney Hansen J find an oral collateral agreement?
[22] Mr Taylor on this first argument pointed to the first sentence of [18] of Rodney Hansen J’s judgment. We set out all of [18] and [19] to give the context, and because we revert to them in [31] and following:
[18] I am satisfied the proposal to create the three new covenants was raised by Mr Sherburn, although I acknowledge the possibility that the Harlows may not have fully understood the implications of what was being proposed. However, the extent of their understanding is academic. Clause 5.2(2) of the agreement provides:
If a plan has been or is to be submitted to LINZ for deposit in respect of the property, then in respect of objections or requisitions arising out of the plan, the purchaser is deemed to have accepted the title except as to such objections or requisitions which the purchaser is entitled to make and notice of which the purchaser serves on the vendor on or before the fifth working day following the date the vendor has given the purchaser:
(a) notice that the plan has been deposited; or
(b) notice that (where a new title is to issue for the property) the title has issued and a search copy of it as defined in section 172A of the Land Transfer Act is obtainable.
[19] The title issued on 7 December 2007. A copy was sent to the Harlows’ solicitor on 20 December. No objections or requisitions were notified in accordance with cl 5.2(2). The Harlows are deemed to have accepted the title, including the new covenants.
[23] In the first sentence of his [18], the Judge does not find that there was an oral collateral contract covering the three covenants. Indeed, we accept Mr Kohler’s submission that the Judge’s language is the antithesis of a finding of an oral collateral contract. He did not need to make a finding because of his view that the Harlows’ failure to requisition under clause 5.2(2) was fatal to their position.
Does the evidence nevertheless indicate there was an oral collateral agreement?
[24] Mr Taylor’s second submission was that, even if the Judge had not made a finding, the evidence – which he accepted was not analysed by the Judge – was “sufficient to show an oral collateral agreement”. In his evidence-in-chief Mr Sherburn deposed that he had told the Harlows he wanted to introduce three new covenants and described what they were about. He said the Harlows did not have any problem with those covenants, and Mrs Harlow had even said “we wouldn’t want any shooting anyway”. He explained that he did not show the covenants to the Harlows because he did not have them in writing. Under cross-examination (by Mr Harlow) Mr Sherburn reiterated that he had discussed the covenants with the Harlows and he reiterated Mrs Harlow’s response about shooting. The cross-examination continued and these exchanges give the flavour of it:
- Why did you put these over the title? Why do you feel that these are of significance that they warranted covenants over our land?
- The covenants were there to – well I mean I discussed them with you. I talked about them and I did –
- We discussed these issues but you never discussed making covenants out of them?
- Well okay, okay. I’m saying that I did and I, I remember standing – it was, I was actually standing on the section, lot 1, when I talked about those covenants but anyway –
...
[25] In her evidence-in-chief (led by Mr Harlow), Mrs Harlow deposed that the subject of shooting had been discussed with Mr Sherburn and they agreed they did not want shooting on the ponds. Mrs Harlow was cross-examined at length about the three covenants. She reiterated that shooting had been discussed and said Mr Sherburn had also ascertained that the Harlows had a motorbike which they would be using for gardening purposes. She said there was no discussion that those matters would ever become covenants, and that the subject of the number of dogs and the use of noisy recreational vehicles was never discussed. She repeated that again:
... there was a discussion on using motorbikes for gardening, we said yes we have a motorbike then we discussed shooting because we were very concerned about that, there was never ever, ever a mention of anything else to do with dogs or go-karts or anything like that, which is totally absurd because my husband is an experienced go-kart racer and for us to agree to something like that would be totally ridiculous.
She added:
The point, can I just please say, the point of our concern was that these covenants were put over the title without our signature, without our knowledge, without telling us that they had become covenants, after we signed the original agreement. That is our concern. That is our complaint.
[26] Mr Harlow confirmed that he and his wife had discussed shooting on the lakes with Mr Sherburn. Mr Harlow said that Mr Sherburn was going to make a covenant to that effect. He said that his wife had not confirmed that, but he did remember it. He said Mr Sherburn also asked them whether they had a motorbike and whether they were going to use it for gardening work. He said:
And there was never discussion of (go-karting) and there was never discussion of dogs.
He explained that Mrs Harlow had a registered Ridgeback bitch.
[27] No finding that there was a collateral oral agreement on the three covenants can be spelt out of that evidence. It would require strong credibility findings against both Mrs Harlow and Mr Harlow. There seems to be no reason, at least in relation to the three covenants, for rejecting the truthfulness of their recollections. Although Mr Sherburn does, at one point, suggest the Harlows agreed to the three covenants, the thrust of his evidence is captured in this response by Mr Sherburn when Mr Harlow was questioning him:
The thing is you don’t have an issue with the covenants themselves anyway.
[28] That response is significant because it is consistent with the tone of Mr Cochrane’s letters to Mr Till, in particular in his letter of 12 May 2008:
Land Covenants
[29] There is a further point. If Mr Sherburn was confident he had the Harlows’ agreement to the three covenants, we think it likely Sherman would have asked its solicitor to record that in a letter. But what occurred was this:
- The covenants were created by the easement certificate executed by Sherman on 7 November, the day after the agreement was signed. A copy of that easement certificate was not sent to the Harlows or their solicitor that day or later.
- Nor was a copy of the easement certificate sent to the Harlows following its lodgement for registration on 6 December, or its registration on 7 December.
- Similarly, no copy was sent to Mr Till by Mr Cochrane on 20 December, when he advised that the title to the land the Harlows were purchasing had issued and enclosed a copy of it. Nor at that stage did Mr Cochrane mention the fact that the new covenants were amongst those in the easement registered against the new title.
- Nor did Mr Cochrane make any reference to the three covenants at any stage of his correspondence with Mr Till in March 2008. Mr Till was simply unaware of the three covenants until the Harlows discovered them on 26 March.
This sequence leaves us with an uneasy impression of subterfuge and deliberate non-disclosure of the three covenants by Sherman. What occurred really cannot be reconciled with Sherman being confident it had the Harlows’ agreement to the three covenants.
[30] We hold that Sherman was not entitled to register the three covenants. The Judge did not find it necessary to determine whether agreement had been reached as to the three covenants, because of the view he took as to the effect of cl 5.2(2). Having analysed the evidence, we conclude that Sherman and the Harlows did not agree on the inclusion of the three covenants. Because of our view on that, we do not need to deal with counsel’s submissions on s 2(2) of the Contracts Enforcement Act 1956, s 49A of the Property Law Act 1952, or the oral collateral contract exception to the parole evidence rule referred to by Asher J in McKay v Collins Paper Haulage Ltd.[3]
Issue 2: Did the Harlows’ failure to requisition for the removal of the three covenants mean that they were deemed to have accepted them?
[31] The Judge dealt with this issue in [18] and [20] of his judgment, which we have set out at [22] above. We consider the Judge erred because clause 5.2(2) did not apply here. Indeed, none of clause 5.2 applied. Clause 5.2(1) covered defects of title which were on the title (if there was one) at the date of the agreement or, in the case of land being subdivided, which were on the head title at the date of the agreement and which would be carried over to the new title. Clause 5.2(2) covered defects “arising out of the plan”; that is, amendments which the Registrar-General of Land or the local authority had required. Defects falling within these clauses could be the subject of requisitions, if made in a timely way. The vendor would then have a choice as to whether he or she would remove the defects. If the vendor chose not to and the purchaser refused to waive the requisition, then either party had the right to cancel and both could walk away from the agreement, neither party having any claim against the other.
[32] The three covenants were not in existence at the date of the agreement. They did not “arise out of the plan”. They were created voluntarily by Sherman and without the knowledge or agreement of the Harlows. In purporting to create these new burdens on the land which was the subject of the agreement, Sherman was acting in breach of its duty as constructive trustee.[4]
[33] This was not, therefore, a case involving the requisitions clause.
[34] Mr Taylor next submitted that, if the requisitions clause did not apply, the Harlows nevertheless should have formally requisitioned for the removal of the new covenants, and that because they failed to do so, they should be deemed to have accepted them.
[35] In making this argument Mr Taylor principally relied on some comments made by Dr McMorland in Sale of Land.[5] In that text, the learned author discusses “defects in title not discoverable from the Land Transfer register within the requisitions period”.[6] (Clearly the three covenants would not have been discoverable from the register within the requisitions period, as they did not then exist.) Dr McMorland suggests, as one of a number of possibilities, that such defects may
be able to be requisitioned, and that if a purchaser fails to so requisition within a “reasonable time” of discovering the defect, that purchaser could be deemed to have accepted it.
[36] We think it most unlikely Dr McMorland is addressing the present situation, where a vendor has registered covenants to which the purchaser never agreed, after the date of the agreement. In any event, in this case we do not have to examine the general position regarding defects which come into existence after the date of the agreement, or defects that are not “discoverable from the register”. This is because we consider it clear that a defect of title created by the vendor, in breach of its duty as constructive trustee, cannot be foisted upon a purchaser unless that purchaser actually waives his or her rights or agrees to a variation of the contract. The Harlows did neither of these things. We do not accept that merely failing to object within a “reasonable time”, or any other period, of itself means that a purchaser has accepted such a defect. No authority to which we have been referred suggests otherwise.
Issue 3: Was Sherman entitled to cancel the agreement?
[37] We have held that the three covenants formed no part of the parties’ agreement of 6 November 2007, and that the Harlows did not orally, collaterally agree to them. At least by the time of Mr Till’s letter of 4 April 2008 to Mr Cochrane, the Harlows had advised of their objection to the three covenants (which they had only learnt of on 26 March).
[38] Mr Taylor’s main remaining argument was that even if the Harlows had never agreed to the three covenants, on learning of them they had “affirmed” the contract, which meant, he said, that Sherman was later entitled to cancel on the Harlows’ failure to settle.
[39] Mr Taylor pointed to three things in particular which he said evidenced the Harlows’ affirmation of the contract. The first was the Harlows’ reliance on the covenant relating to dogs. This aspect of the covenants was first noted by Mr Till in his 27 March 2008 letter to Mr Cochrane, although that letter was mainly concerned with a difficulty that had arisen about aviaries the Harlows intended locating on the land. The covenant about dogs was directly raised by Mr Till in a letter he sent Mr Cochrane on 4 April in these terms:
Dogs
We are instructed that your client either owns and keeps or permits his land to be used for the housing (possibly training) of police dogs. This could well be a breach of (c) of the latest covenants your client has registered in respect of the subdivision under easement instrument 7647001.3 as your client could not possibly argue the dogs were for his “working purposes” which is clearly the intent of the covenant.
Could we have a full explanation of the position regarding these dogs as we would assume that having made allegations against our client about breaches of land covenants he would not be wanting to open himself up to counter allegations in this regard.
...
[40] The second thing Mr Taylor pointed to was that the Harlows remained in possession after the date of settlement. Thirdly, Mr Taylor pointed to registration by the Harlows of a caveat against the title on 3 April, in the terms we outlined in [13].
[41] A party will be said to have affirmed a contract only if they make their position in that respect clear and unequivocal.[7]
[42] We are satisfied that the actions Mr Taylor points to did not amount to a clear affirmation of the contract. As to Mr Till’s two letters seeking to rely on the covenant relating to dogs, we do not consider much can be read into them: the Harlows were simply pointing out that Sherman was breaching its own (wrongly registered) covenant. As to the Harlows remaining in possession and their registration of a caveat, both actions must been seen in light of the correspondence between the parties, detailed above, which makes clear the Harlows’ strong objection to the covenants and equivocal position as to the contract generally. This is manifest from Mr Till’s letters, for example his letter of 4 April 2008 in which he stated:
...They also advise that they are unhappy about other matters which they believed they had agreements on with Mr Sherburn; but now find out by his actions (such as his alteration of the conditions of the covenant by adding three new clauses after Harlows were shown and had initialled the original form) and words (demanding through his solicitor the right to pre-approve the gate to our property) that this may not be the case.
When Mr Till sent Mr Cochrane a copy of the caveat under cover of his letter of 4 April, he specifically stated that the caveat was “not intended to be taken as reaffirming the agreement”. We reject this submission.
[43] We resume the narrative. Notwithstanding the Harlows’ clear objections to the three covenants, Mr Cochrane sent Mr Till on 8 April a settlement statement for 10 April. In successive settlement notices dated 18 April and 6 May Sherman asserted that the Harlows had failed to settle and that Sherman:
... was and remains in all material respects ready, able and willing to proceed to settle and has been unable to settle by reason only of the Purchaser’s default
and required the Harlows to remedy their breach, namely their failure to settle, by payment of the full purchase price under the agreement.
[44] However, we are satisfied that Sherman was never “ready, able and willing” to settle in terms of the agreement and was therefore not entitled to serve the settlement notices: clause 9.1(2) of the agreement; Property Ventures Investments Ltd v Regalwood Holdings Ltd.[8]
[45] It follows that Sherman was not entitled to cancel the agreement, as it purported to do by its solicitor’s letter of 22 May.
The consequences of our findings
[46] In the event that the Harlows were successful in this appeal, as they have been, the parties were agreed as to what we should do: we should order Sherman to refund the deposit ($45,000), plus interest pursuant to s 87 of the Judicature Act 1908 from 1 December 2009 to the date of this judgment. (The prescribed rate for the whole of that period is 8.4 per cent per annum.) We so order.
[47] Sherman must pay the Harlows costs in the High Court. In the absence of agreement, these costs must be fixed in the High Court in light of this judgment.
[48] The Harlows are also entitled to costs in this court. Costs are to be calculated as for a standard appeal on a band A basis, together with usual disbursements.
Solicitors:
O’Sheas, Hamilton, for
Appellants
McBreens, Hamilton, for Respondent
[1] Sherman Ltd v
Harlow [2009] NZHC 2134; (2009) 11 NZCPR 387 (HC).
[2] Sherman Ltd
v Harlow at [4].
[3] McKay v
Collins Paper Haulage Ltd (2006) 7 NZCPR 954 (HC) at
[7].
[4] See Donald
McMorland Sale of Land (2nd ed, Cathcart Trust,
Auckland, 2000) at
[10.06].
[5] At
[9.16].
[6] Ibid.
[7] Cullinane v McGuigan CA172/99, 21 September 1999 at [17]; Oxborough v North Harbour Builders Ltd [2002] 1 NZLR 145 (CA) at [8]-[10].
[8] Property Ventures Investments Ltd v Regalwood Holdings Ltd [2010] NZSC 47, [2010] 3 NZLR 231 at [80]- [83] per Blanchard, McGrath and Wilson JJ.
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