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K P Malcolm Limited v Malcolm [2012] NZCA 230 (6 June 2012)

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K P Malcolm Limited v Malcolm [2012] NZCA 230 (6 June 2012)

Last Updated: 14 June 2012


IN THE COURT OF APPEAL OF NEW ZEALAND
CA148/2011
[2012] NZCA 230

BETWEEN K P MALCOLM LIMITED
First Appellant

AND KENNETH PETRIE MALCOLM AND SYLVIA JANE MALCOLM
Second Appellants

AND LINDA MARGARET MALCOLM
First Respondent

AND CLIVE STUART MALCOLM
Second Respondent

Hearing: 3 May 2012

Court: Arnold, Ellen France and Randerson JJ

Counsel: C R Carruthers QC and E J Hudson for Appellants
M S McKechnie for First Respondent

Judgment: 6 June 2012 at 3 pm

JUDGMENT OF THE COURT


A The appeal is allowed in part.


  1. The interest of the appellants in the Ferndale property is increased from $663,317.50 to $752,955.00 being 42 per cent of $1,792,750.00, the agreed market value at the date of the High Court hearing.
  1. The appellants’ 42 per cent share of Ferndale in terms of this judgment is subject to the condition that they accept sole responsibility for repayment of the $900,000 partially secured over the Ferndale property and indemnify the respondents in respect of that sum and any other liabilities relating to Ferndale.
  1. The costs of this appeal are to lie where they fall.

___________________________________________________________________


REASONS OF THE COURT


(Given by Randerson J)


Table of Contents
Para No
Introduction
The appellants’ contributions
The acquisition of Ferndale
Deduction of the notional lease rental
Other capital contributions claimed by the Malcolm interests
The Judge’s assessment of the direct contributions made by the Malcolm interests
Claims to further contributions by the Malcolm interests
Contributions by Clive and Linda
The Judge’s approach to the overall assessment of contributions
First ground of appeal – failing to weigh the relative contributions to Ferndale by the Malcolm interests and by Clive and Linda
Second ground of appeal – the Judge erred in the method of calculating a notional rental for the use made of Ferndale by the Malcolm interests
Third ground of appeal – the treatment of fertiliser as a non-capital item
Conclusions

Introduction

[1] The first appellant, K P Malcolm Limited, has owned farmland in the King Country for many years. The company is substantially owned by the second respondents, Mr Kenneth Malcolm and Mrs Sylvia Malcolm, through a family trust. Mr and Mrs Malcolm personally own the stock and farm the land as a partnership.
[2] Mr and Mrs Malcolm had three sons and two daughters. The oldest is the second respondent, Clive Malcolm. He left school in 1975 at the age of 15 and began working on the family farm which then comprised two blocks known as Mangaorakei and Ranganui. In 1983, Clive married the second respondent, Linda Malcolm. Both worked on the family farm. Their two children were born in 1988 and 1991 respectively.
[3] A farm known as Ferndale adjoined the Ranganui block. It was purchased in 1993 for $500,000, the entire purchase price being borrowed from the Rural Bank.[1] Title to the property was registered in the names of Clive and Linda Malcolm who took possession on 1 July 1993.
[4] Clive was primarily responsible for the day to day management of farming operations on Ferndale as well as on the existing blocks. All three blocks were managed as a single farming operation with the combined income being received and expenses paid from the farming partnership operated by Mr and Mrs Kenneth Malcolm. Clive received a modest wage for his work, together with standard industry allowances.
[5] In about July 1997 Clive and his father had a serious disagreement about the running of Ferndale Farm. Clive immediately stopped working on the farm and by October that year he and Linda had left the farm and moved elsewhere. They separated shortly afterwards. From that time, Clive and Linda have had no further connection with the farm which has continued to be farmed by Mr and Mrs Kenneth Malcolm.
[6] Ferndale has remained registered in the names of Clive and Linda. Efforts to resolve the issue of ownership of the subject land have been unsuccessful. In 2008, the company and Mr and Mrs Kenneth Malcolm (to whom we shall refer collectively as “the Malcolm interests”) issued proceedings in the High Court. They sought a declaration that Clive and Linda held the subject land in trust for them and an order vesting the subject land in the Malcolm interests. Four causes of action were relied upon: constructive trust; express common intention; a resulting trust and equitable estoppel. By the time the proceedings were heard, the only remaining cause of action was that of constructive trust.
[7] The proceedings were defended solely by Linda. Clive took no steps and gave evidence for the Malcolm interests. Linda accepted that the Malcolm interests were entitled to a beneficial interest in Ferndale on the basis of a constructive trust so that the sole issue for the court to determine was the quantification of the share in Ferndale to which the Malcolm interests were entitled.
[8] The claim by the Malcolm interests proceeded on the basis that they had contributed, both directly and indirectly, to the acquisition, preservation and enhancement of Ferndale. It was common ground that the principles to be applied were those stated by this Court in Lankow v Rose.[2] The claim was carefully particularised and had two main components. The first was that the Malcolm interests had provided the entire purchase price for Ferndale and had made the company land available as collateral security. The second component comprised expenditure which was said to be of a capital nature such as fertiliser, fencing, scrub clearing and provision of a water supply. Each side engaged accountants to provide expert evidence. A large measure of agreement was reached between them.
[9] Woodhouse J delivered judgment on 18 February 2011.[3] He determined (subject to final accounting adjustments) that the Malcolm interests were entitled to a share of 38 per cent of the market value of Ferndale at September 2010 which was agreed to be $1,792,750.00 (excluding GST). When the final adjustments were made, it was agreed that the Malcolm interests’ share in Ferndale should be assessed at 37 per cent of the agreed market value. This resulted in a figure of $663,317.50. The Judge made a declaration to that effect but the judgment did not determine how that finding is to be implemented.
[10] The Malcolm interests have now appealed submitting that the Judge erred in the quantification of the share of the Malcolm interests in Ferndale. They say that a proper quantification of the share of the Malcolm interests should have been 71.6 per cent which would result in the value of their interest in Ferndale being assessed as $1,283,609. Although a number of points were raised, the essential issues are whether the Judge erred:

The appellants’ contributions

[11] The claim for the Malcolm interests relied largely on the direct contributions alleged in the pleadings in relation to the initial acquisition of Ferndale and subsequent capital expenditure. The amounts paid were adopted as a starting point and then adjusted upwards to establish a present value at the date of hearing in September 2010. The present value was based on the opportunity cost to the Malcolm interests of providing the purchase price of $500,000 which was reflected in their actual borrowing costs (after tax) during the period from the date the expenditure was incurred up to the date of hearing.
[12] From the total of these sums, a deduction was made to reflect a notional rental payable by the Malcolm farming partnership for the use of the Ferndale property for farming purposes. As ultimately presented to the High Court, the accountant giving expert evidence for the Malcolm interests (Mr Dobson) calculated the direct contributions as follows:

Purchase price of Ferndale at present value $1,333,000.00

Plus capital expenditure (after tax) at present value $271,000.00

Less notional lease rental $(885,000.00)


Net value of financial inputs $720,000.00

[13] We now deal with each of these items:

The acquisition of Ferndale

[14] Ferndale was in a relatively run-down state in 1993. It was understood that the then owner was struggling financially. The property had a government valuation of $292,000 at that time. After discussion between Mr Kenneth Malcolm, Clive and another son (Graham), it was decided to make an offer of $500,000 for the property. This was acknowledged to include a premium to reflect the value of the land to the Malcolm interests as the adjoining owners. Clive conveyed the offer to the existing owner and it was accepted in early 1993.
[15] An approach was made to the Rural Bank for finance. A loan of some $900,000 was approved comprising:

Ferndale purchase price $500,000
Purchase of stock $130,000
Working capital $ 62,000
Refinancing existing loan to the Malcolm
interests $207,000
Loan fee $ 1,000


Total $900,000

[16] The Rural Bank required by way of security a first mortgage over Ferndale as well as the other two farm blocks. Personal covenants were required from Mr and Mrs Kenneth Malcolm as well as from Clive and Linda in respect of the total borrowing of $900,000. Mr and Mrs Kenneth Malcolm also provided an instrument by way of security over livestock belonging to their farming partnership.
[17] Mr Kenneth Malcolm’s evidence was that the title to Ferndale was put in the names of Clive and Linda on the basis of accounting advice that stamp duty on the transaction would thereby be saved. Clive said this was his understanding as well. It is evident, however, that other factors were in play. An internal Rural Bank memorandum dated 18 March 1993 recorded these comments:

1. [The borrowers were] Paying a premium for the adjoining property which fits in well to the existing operations and further justifies having 2 son’s employed and will assist their eventual land settlement.

...

4. Overall a generally sound proposal enhanced by the additional land with a proven established family to operate the enlarged enterprise.

[18] In a letter dated 10 July 1995 explaining his intentions with regard to settling his sons on the farm, Mr Kenneth Malcolm said:

The Purchase of Ferndale was done with the definite intention of belonging to Clive and Linda, with the Debt repayment of the Loan being undertaken by the overall Farming operation. With the value of the amount owing at $500,000.

In the long term my intention does not expect that money to be repayed (sic).

[19] Mr Kenneth Malcolm’s letter then went on to explain his intentions with regard to other family members. He referred to recognising the contribution made to the “existing enterprise” by both Clive, his brother Graham and their respective wives. He added that, in the “not too distant future”, he hoped to allow all three sons the opportunity to farm their individual pieces of land, with the ownership of their own stock.
[20] Much later, the accountant for the Malcolm interests, Mr K B Stephenson, wrote to Linda’s solicitors on 13 April 2000 stating, amongst other things:

On the question of ownership of Ferndale, the farm belongs to Clive and Linda, and Ken is happy to stop farming the property on the basis that Clive and Linda take over servicing the debt incurred to purchase the farm. It is probable that they would have a negative equity on the property.

[21] We agree with the conclusions reached by Woodhouse J that the purchase of Ferndale had immediate advantages for the Malcolm interests in expanding their total farming operation. As well, we are satisfied the Judge was correct to find that the longer term intention of Mr and Mrs Kenneth Malcolm was that Clive and Linda would take over Ferndale entirely. While it may be that stamp duty was saved by putting the property in the names of Clive and Linda, it cannot be doubted that Clive and Linda were the legal and beneficial owners of the property from the outset. As the Judge noted, any suggestion that Clive and Linda were merely nominal purchasers could not be sustained after the resulting trust argument was abandoned by the Malcolm interests.
[22] The Malcolm interests claimed that they had fully funded the purchase price for Ferndale of $500,000. Adjusted for present value at the date of hearing, the accountants giving expert evidence agreed that this sum amounted to $1,333,000.
[23] As we later discuss, it transpired that no capital repayments were made in respect of the borrowing from the Rural Bank. Rather, the interest commitments were met from Mr and Mrs Kenneth Malcolm’s farming partnership out of income derived from the combined farming operations on all three properties. Thus, at the time of trial, the assertion that the Malcolm interests had paid the entire purchase price for the Ferndale land was not supportable. The true position was that the entire purchase price was borrowed and that Linda and Clive were jointly and severally liable on their personal covenants along with Mr and Mrs Kenneth Malcolm.

Deduction of the notional lease rental

[24] Mr Dobson’s calculation of the notional rental was based on actual market rental assessed by a valuer for each of the years from 1993 to 2009. Mr Dobson assessed the amount of the notional lease rental (after taking into account the tax benefits that would have been received by the Malcolm interests if they had paid the notional rental) to be $885,000.
[25] In an agreement dated 24 September 2010 which the experts presented to the High Court, it is recorded that Linda’s expert Mr Read considered this notional rental ought to be deducted from the assessed amount of the financial contributions made by the Malcolm interests. The agreement further recorded that Mr Dobson “does not express any opinion on this and believes the appropriate approach (gross inputs or net inputs) should be assessed by the Court”.
[26] However, we were informed that, during the hearing in the High Court, it was conceded that a deduction for notional rental should be made. Later in this judgment we deal with the contention of the Malcolm interests that the amount of the deduction for notional rental was too high despite the apparent agreement by the experts on the calculation of the amount.

Other capital contributions claimed by the Malcolm interests

[27] The Malcolm interests claimed that they had expended funds on Ferndale in the nature of capital improvements between the time of the acquisition of the property in 1993 and 2009. Mr Dobson calculated that, adjusted for present value at the date of hearing, the contributions by the Malcolm interests under this category amounted to $271,000. Linda’s expert, Mr Read, accepted that some of the items could be regarded as capital expenditure, but his opinion was that others were best described as maintenance payments which did not contribute to any improvement in capital value. The disputed items were payments made for fertiliser, fencing and establishing a water supply for Ferndale.
[28] The Judge concluded that the claims made in respect of fencing and water supply were partially justified but disallowed the claim for fertiliser as a capital payment. The amount claimed for fertiliser was $66,128 relating to expenditure in 1995 and 1996. On a “rough and ready” assessment (subject to detailed calculation by the accountants), the Judge reduced the claim for contribution arising from capital expenditure from $271,000 to $146,340. We deal later with the claim for fertiliser expenditure which is the only item in dispute under this category.

The Judge’s assessment of the direct contributions made by the Malcolm interests

[29] Taking into account the reduced figure for capital expenditure, the Judge assessed the net value of the direct financial inputs to Ferndale by the Malcolm interests at $594,000. Based on the agreed valuation of $1,792,750 for Ferndale at the date of hearing, the Judge concluded that this would result in the Malcolm interests being entitled to a 33 per cent share of the total value of Ferndale. Clive and Linda would therefore have between them the remaining 67 per cent share.

Claims to further contributions by the Malcolm interests

[30] The Judge recorded a submission made by counsel for the Malcolm interests that they had made an indirect contribution by exposing themselves to the risk of substantial borrowing at the time Ferndale was purchased. It was submitted that the purchase could not have been achieved without the security provided by the company farm and the stock and plant owned by the farming partnership.
[31] The Judge accepted that the Malcolm interests were exposed to risks and that Ferndale could not have been purchased without the additional mortgage security of the company farm. However, he was not persuaded that this warranted a significant increase in the share of the Malcolm interests beyond the proportion resulting from the direct contributions calculated by the accountants. The Judge noted that, from the total advances of $900,000 made by the Rural Bank, a significant proportion ($207,000) was used to repay existing borrowing by the Malcolm interests. The total borrowing of $900,000 was against land, stock and plant (including Ferndale at $500,000) of some $2.3 million.
[32] The interest payments met by the farming partnership increased substantially, but the Judge pointed out that the Malcolm interests controlled the farming business on the combined farms. The addition of Ferndale gave the Malcolm interests the capacity to generate substantially increased income. Importantly, Mr Dobson’s calculations of the direct contributions by the Malcolm interests took into account the servicing of the debt relating to the purchase of Ferndale.
[33] The Judge did not agree with counsel’s description of the risk assumed by Clive and Linda as “minimal”. We agree with that conclusion given that, by their personal covenants, Clive and Linda were jointly and severally liable with Mr and Mrs Kenneth Malcolm for the total borrowing of $900,000.

Contributions by Clive and Linda

[34] By the time Ferndale was acquired in 1993, Clive had been working on the family farm for some 18 years. The Judge accepted that he worked long hours for which he received a modest wage together with the benefit of accommodation in a farm cottage, the provision of meat and other allowances common in the industry. The Judge also accepted that Linda worked hard on the farm after her marriage to Clive in 1983. She assisted the day-to-day farming operations including fencing, drafting, shearing and docking. The Judge’s overall conclusion as to their contributions during the period up to 1993 was expressed in these terms:[4]

I am satisfied that both Clive and Linda Malcolm contributed in a reasonably substantial way to the plaintiffs’ farming operation, to the overall financial benefit of the plaintiffs, making due allowance for the wages and other benefits received by Clive Malcolm. Linda Malcolm was not separately paid by the plaintiffs.

[35] We accept that the work undertaken by both Clive and Linda during the period up to 1993 could not be regarded as a direct contribution to Ferndale, but their contribution during this period cannot be ignored in the overall assessment since it is relevant in two ways. First, their work contributed in a reasonably substantial way to the success of the combined farming operation which then continued for the benefit of the Malcolm interests on the expanded farmlands after the acquisition of Ferndale. Secondly, their willingness to work hard on the family farm over such a long period for only modest rewards justified their expectations that, in due course, they could expect to have land settled upon them by Mr and Mrs Kenneth Malcolm. It is evident from Mr Kenneth Malcolm’s comments recorded in the Rural Bank memorandum at the time of the purchase and, two years later, by his letter of 10 July 1995 that he intended Ferndale to belong to Clive and Linda. This no doubt reflected their contributions to the farming enterprise prior to 1993 and the common expectation that they would continue to do so after Ferndale was acquired.
[36] After the acquisition of Ferndale, the property was incorporated into the existing farming business. Most of the stock was existing stock belonging to Mr and Mrs Kenneth Malcolm although additional stock was purchased for $130,000 using the Rural Bank loan. Linda and Clive also borrowed $40,000 from the National Bank which was used to buy 100 stock units. They personally retained the income from those animals but all other farming income generated from Ferndale was treated as the income of Mr and Mrs Kenneth Malcolm’s farming partnership.
[37] Between 1993 and 1997, Clive continued to work on the (now enlarged) family farm. The Judge found that Clive made a major contribution to the farming business as farm manager, but he was paid (including allowances) at, or not much above, the rate of a farm-hand. Linda also worked on the farm one day per week on average during this period but without payment to her.
[38] The Judge accepted that Linda and Clive had substantially improved the grounds around the house after they moved into Ferndale. He found that, in addition to his abilities as a farm manager, Clive was mechanically skilled and attended to much of the maintenance and repairs for machinery on the farm both before and after Ferndale was acquired.
[39] There was disputed evidence about the wages and related benefits received by Clive. Woodhouse J found that Mr Kenneth Malcolm had overstated the wages and related benefits Clive received and had also understated Clive’s role in the overall farming operation. The Judge referred to a Rural Bank note made at the time the loan was made in 1993 which records Mr Kenneth Malcolm’s advice to the Bank’s area manager that he (Kenneth) retained full financial control and oversaw the general running of the operation but Clive undertook the majority of the day-to-day management. We accept that Clive’s brother Graham also worked on the farm but the third brother appears to have had a much lesser role.
[40] The Judge had expert evidence from farm consultants which enabled a broad calculation to be made of the difference between Clive’s actual income (including allowances) and the level at which he should have been paid as a farm manager with his level of responsibility. The Judge found that Clive ought to have been paid at least 75 per cent more than the remuneration he received. The Judge observed that the difference became greater when regard was had to the fact that Linda was not paid for her work.
[41] The Judge did not calculate the amount of the shortfall in wages paid to Clive. However, for the purposes of this appeal, the Malcolm interests have submitted, without challenge, that the shortfall for the period 1993 to 1997 was $90,180 after tax. Adjusted for present value, the Malcolm interests assess the direct financial contribution by Clive as amounting to $225,000.

The Judge’s approach to the overall assessment of contributions

[42] The Judge could find no principled basis for a submission made on behalf of the Malcolm interests that their share should be assessed at 90 per cent of a figure of $1.13 million (said to be the equity in Ferndale). The Judge made two observations in that respect. The first related to the acknowledgement by the Malcolm interests that they did not have a resulting trust claim. The Judge considered that important because:[5]

... It means that the plaintiffs acknowledge that they are not entitled to the entire beneficial interest in Ferndale notwithstanding the fact that, in substance, they provided the entire purchase price. The plaintiffs abandoned the resulting trust claim because to maintain it would have required them to assert that title was taken in the name of Linda and Clive Malcolm to secure a benefit for the plaintiffs by fraudulent means – evasion of stamp duty. To go back to the assertion of a claim to close to 100% comes close to reasserting what was solemnly disavowed. Having withdrawn the resulting trust claim, the plaintiffs cannot come back to essentially the same position by moving without any principled foundation from the position established on the basis of the careful analysis by the experts of their actual contributions, and using a methodology which provides full compensation at present value.

[Footnotes omitted]

[43] The second point made by the Judge was that the Malcolm interests did not start from a presumptive share in the property (such as might apply in the case of the division of relationship property). Rather, they started from nothing, citing the views expressed by Tipping J in Lankow v Rose.[6]
[44] The Judge went on to find that the Malcolm interests had received further benefits from uncompensated contributions from Clive and Linda. There were reasonably substantial contributions from them which provided net benefits to the Malcolm interests. These had not been brought into account in the calculations by the expert accounting witnesses.
[45] Finally, the Judge considered there were two matters which justified an additional allowance of five per cent of the value of Ferndale in favour of the Malcolm interests. The first was that Clive’s abrupt actions in leaving the property required Kenneth and Graham Malcolm effectively and promptly to take control of the farm operations. If considered on an arms-length business basis between employer and employee, Clive’s actions would justify a degree of compensation to the Malcolm interests. However, account should also be taken of the reasons which led to Clive’s departure from the property. It was not in dispute that Clive left because his father would not allow him full control of Ferndale and to farm it on his own account.
[46] The second factor to be taken into account was that since they left Ferndale in October 1997, Clive and Linda were relieved of the responsibility that an owner of a farm would generally have when the farm was (notionally) leased.
[47] The end result was that the Judge estimated the total share of the Malcolm interests in Ferndale at 38 per cent, subject to final adjustments to the calculations being agreed between the accountants.
[48] Woodhouse J concluded his judgment in the following terms:[7]

Counsel agreed that there should be no further orders at this stage following determination of the shares of the plaintiffs on the one hand and the defendants on the other. That will allow the parties an opportunity to consider alternatives in relation to implementation. In addition there is the need for the accountants to do the recalculation.

Accordingly, I will at this stage make general orders as follows:

(a) The plaintiffs are entitled to a beneficial interest in Ferndale in a percentage calculated in accordance with this judgment.

(b) As between the plaintiffs and the defendants, the plaintiffs have sole liability for any debts secured over or relating to Ferndale and the plaintiffs shall indemnify the defendants in that regard.

(c) If the parties are unable to agree on the percentage of the plaintiffs’ share, or on any other matter arising from this judgment, leave is reserved to make further application for determination of the outstanding issues, and either party may file a memorandum requesting a telephone conference to determine the further steps required to be taken.

(d) Leave is also reserved to apply for formal orders to give effect to the allocation of beneficial interests in Ferndale.

(e) If there is any issue as to costs the party seeking costs shall file and serve a memorandum and the other party shall respond within 20 working days.

First ground of appeal – failing to weigh the relative contributions to Ferndale by the Malcolm interests and by Clive and Linda

[49] Mr Carruthers QC submitted for the Malcolm interests that the Judge had erred by failing to quantify the direct contributions to Ferndale made by Clive and Linda and then to compare those contributions with the contributions made by the Malcolm interests. The Judge had recorded the agreement of the expert witnesses that the Court was being asked to quantify the respective interests in the property having regard to and balancing their respective direct and indirect contributions to Ferndale. Counsel submitted that the failure to make this comparison meant that Clive and Linda were rewarded with 100 per cent of the growth in value of the property at the expense of the Malcolm interests.
[50] On a strict arithmetical basis, it was submitted that the direct financial contributions by the Malcolm interests amounted to $568,000 (taking into account the Judge’s findings which reduced their claims for capital expenditure). In contrast, the present value of the contributions made by Clive and Linda by way of shortfall of wages and a small sum to reflect the value of the work undertaken to improve the grounds of the farmhouse on Ferndale, was $225,000. On this basis, the share attributable to the Malcolm interests was 71.6 per cent of the total financial contributions. It was said that the Malcolm interests would therefore be entitled to an award of $1,283,609 (before adjustments on the basis of the remaining grounds of appeal).
[51] Before addressing this ground of appeal, we set out the principles applicable to constructive trusts in cases of this kind as enunciated by this Court in Lankow. Although the case arose in the context of a de facto relationship, the principles are of general application where the claimant asserts a beneficial interest in a property the legal title of which is registered to another party. Hardie Boys J summarised them in these terms:[8]

The essential requirements I see to be twofold: that the plaintiff contributed in more than a minor way to the acquisition, preservation or enhancement of the defendant's assets, whether directly or indirectly; and that in all the circumstances the parties must be taken reasonably to have expected that the plaintiff would share in them as a result. Both statements need some amplification. In the first place, by contributions to assets one is not referring to those contributions to a common household that are adequately compensated by the benefits the relationship itself confers. The contribution must manifestly exceed the benefits. Putting it in conventional estoppel terms, the plaintiff's contributions must have been to his or her detriment; or in Canadian terms they must have resulted by the end of the relationship in the enrichment of one to the juristically unjustified deprivation of the other. Further, the contributions need not be in money; they may be in services or in any other respect. But there must be a causal relationship between the contributions and the acquisition, preservation or enhancement of the defendant's assets for, as a claim to a constructive trust is a proprietary claim, a claim to an interest in property, the contributions must have been made to assets; not necessarily to particular assets, but certainly to the defendant's assets in general. The contributions may then be recognised by the imposition of a trust over a particular asset or particular assets, which may in turn be quantified or satisfied by a monetary award.

[52] The judgment of Tipping J also provides helpful insights into the relevant principles. He held that the de facto complainant in that case must show: [9]
[53] If the claimant is able to demonstrate each of these four points, equity would regard as unconscionable the defendant’s denial of the claimant’s interest and a constructive trust would be imposed accordingly. Tipping J added that he would allow as a contribution any payment or service made by the claimant which either:[10]
[54] Tipping J also added these observations:[11]

In the case of a de facto union, the claimant does not start from a presumptive half-share but rather from nothing. A de facto claimant must demonstrate first a case for an interest and then what that interest should be. The interest must broadly reflect the contributions. Arithmetical precision will generally be unattainable and is in any event not necessary. The Court must, however, do its best to reflect in the assessed shares the value of the claimant's contributions. That value will represent, if uncompensated, the amount of the unjust enrichment accruing to the defendant which in turn is the amount of the claimant's sacrifice.


[55] Of particular relevance for present purposes are these points:
[56] Applying the relevant principles to the present case, we do not consider that the award should have been made in the way contended for by the Malcolm interests. The task of the judge in cases of this kind is to determine the extent of any unjust enrichment accruing to Clive and Linda as a result of the contributions made by the Malcolm interests. It follows that the contributions by the latter were always going to be the primary focus of the Malcolm interests. But the Judge nevertheless considered the contributions made by Clive and Linda and found them to be considerable.
[57] We accept that the Judge did not specifically quantify the extent of the contributions made by Clive and Linda but, in the broad sense we have outlined, the Judge weighed the respective contributions of the parties and determined the outcome which he considered appropriate to recognise the direct and indirect contributions by the Malcolm interests in all the circumstances of the case.
[58] The Judge recognised that a strictly arithmetical approach of the type now contended for was not appropriate. Indeed, neither of the accounting experts approached the case by comparing the respective contributions of the parties in arithmetical terms. Their focus was entirely on the contributions made by the Malcolm interests. The Judge was entitled to place weight on the contributions Clive made to the Malcolm farming partnership over many years prior to the acquisition of Ferndale; the assistance provided to him by Linda in that respect; the deliberate decision by the Malcolm interests to put the title in the names of Clive and Linda; the intention clearly expressed by Mr Kenneth Malcolm that Ferndale would belong to Clive and Linda; the further substantial contributions Clive and Linda made to the Malcolm farming partnership over the four year period after Ferndale was acquired; and the risk Clive and Linda assumed by the granting of the mortgage over Ferndale as well by the giving of their personal covenants in respect of the whole of the borrowing from the Rural Bank.
[59] The contributions made by the Malcolm interests must also be put in perspective. We accept they were parties to the borrowing in 1993 and provided the existing blocks and their stock as additional security. Mr and Mrs Kenneth Malcolm also gave personal covenants and their farming partnership paid all the interest on the borrowings. On the other hand, the partnership received the benefit of a significant part of the advances made by the Rural Bank and received all the income from the combined farming operations throughout the period. They did not pay any rent for the use of Ferndale or otherwise compensate Clive and Linda for that use. Their direct contributions to the acquisition of the land and to subsequent capital expenditure on the property have been fully recognised by the present value calculations agreed upon by the accounting experts. The amounts assessed in that respect also take account of the interest burden assumed by the Malcolm interests up to the time of the hearing in the High Court. This has been achieved through the present value calculation based on the actual cost of borrowing over the whole of the period from 1993 to 2010.
[60] We also note that the increase in the value of Ferndale between the date of acquisition and the hearing in the High Court is attributable in substantial measure to the effect of market forces long after the date of acquisition. At the time Clive and Linda left Ferndale in 1997, the market value was assessed at $575,000. By 2005, the Roll Valuation was still only $830,000. However, by 2008, the Roll Valuation had increased by nearly $1 million to $1,825,000. It follows from this that, while the contributions made on both sides in the early years were important, by far the greatest contributor to the current value of Ferndale was the influence of market forces. Both the Malcolm interests and Clive and Linda have benefitted from that increase.
[61] Of course, the Malcolm interests can rightly point to the fact that they have preserved Ferndale by continuing to farm the land since 1997 and to service the borrowings without assistance from Clive and Linda. As we later discuss, they are entitled in our view to some recognition for these contributions beyond the strictly arithmetical allowance they have received in the present value assessment of their direct financial contributions.

Second ground of appeal – the Judge erred in the method of calculating a notional rental for the use made of Ferndale by the Malcolm interests

[62] As earlier mentioned, by the time of the hearing in the High Court, it was common ground between the accounting experts that the assessment of the direct financial contributions made by the Malcolm interests should be subject to a deduction to reflect a notional rental payable by the Malcolm farming partnership for the use of the Ferndale property. This was entirely appropriate as a means of assessing the benefit the farming partnership received from the use of Ferndale and the income derived from it. Of course, other means of assessing that benefit might also have been employed. For example, if it had been possible to isolate the income earned from the use of the Ferndale property, the benefits to the Malcolm interests could have been assessed by that means. However, there were obvious practical difficulties in undertaking this suggested approach.
[63] We note that, in the annual accounts prepared for the farming partnership, a rental payable to K P Malcolm Limited as the owner of the two existing blocks is shown as an expense. No similar expense is recorded as being payable to Clive and Linda for the use of Ferndale.
[64] It was not suggested on behalf of the Malcolm interests that a notional rental should not have been applied. Rather, it was submitted that the method adopted by the accounting experts was flawed because it did not give any recognition to the fact that, by virtue of the beneficial interest found by the Judge, the Malcolm interests were part-owners of the property.
[65] Mr Carruthers pointed out that it was not possible to make an allowance for this fact until the Judge assessed the extent of the ownership the Malcolm interests had in the land. He produced an elaborate schedule of calculations showing an iterative process by which he said the share of the Malcolm interests should have been assessed at 63 per cent rather than 37 per cent. This, it was said, was the result of reducing the offset for notional lease rental to take account of the part-ownership of Ferndale by the Malcolm interests. On this basis, the deduction for notional lease rental agreed by the accountants of $885,000 should, it was submitted, be reduced to $331,000. The result would be that the share of the Malcolm interests in Ferndale should have been assessed at $1,129,433.
[66] Mr McKechnie submitted on Linda’s behalf that there had been no suggestion in the High Court that an adjustment of this kind should have been made. It was not open for the issue to be raised on appeal since the method of calculation now advanced, and the rationale for it, had not been put before the High Court. There had been no opportunity for Mr Read to consider and comment upon it.
[67] In response to these concerns, Mr Carruthers made available the closing submissions presented to the High Court by Mr Hudson, counsel representing the Malcolm interests. Referring to the rental issue, the submissions stated, without elaboration, that the Malcolm interests had met the shortfall between rental and the cost of borrowing and that “This is without considering their credit against rental or their interest in the property”.
[68] This passing reference was most unlikely to alert the Judge to an issue of the magnitude now said to arise. We are prepared to accept counsel’s assurance that the issue was mentioned in oral submissions, but we are satisfied that it could not have been pressed or quantified at any stage for the following reasons. First, the issue is not mentioned in the evidence of either of the expert witnesses or any other witness. Secondly, Mr Read was not cross-examined on the issue or, indeed, on any issue. Thirdly, despite the assertion now made that this issue would have altered the outcome in favour of the Malcolm interests by some $550,000, it was not mentioned by the Judge in his decision. Nor was it raised with the Judge after the judgment was issued, even though leave was reserved to apply further if the parties were unable to agree on the percentage share due to the Malcolm interests “or on any other matter arising from this judgment”. In the circumstances, it is hardly surprising that Mr McKechnie has no recollection of the issue being raised or that its significance was drawn to his attention or that of the Court.
[69] We are satisfied that Linda is prejudiced by the late raising of this issue without any opportunity for Mr Read to consider and comment upon it. The issue is not merely a matter of submission based on undisputed evidence. As Mr McKechnie submitted, if an adjustment of this type were made, there would need to be, for example, an adjustment to the amount allowed to the Malcolm interests for the cost of borrowing. We accept Mr McKechnie’s submission that the time to have raised this matter was at the trial.
[70] It must also be recognised that the rental deduction was purely notional. It was effectively a proxy for the benefit received from the Malcolm interests for the use of Ferndale for farming purposes. The fact that the Malcolm interests were ultimately found to have a beneficial interest in the land need not be reflected in another notional adjustment to the rental calculation. That is particularly so if some recognition can be given to Mr Carruthers’ argument in another way, a matter to which we will return after dealing with the final ground of appeal

Third ground of appeal – the treatment of fertiliser as a non-capital item

[71] Mr Dobson’s evidence was that the Malcolm interests spent $66,128 on the application of fertiliser to Ferndale in 1995 and 1996. The Judge found this was not an item of capital expenditure, relying on the evidence of Mr Doyle, a registered valuer specialising in rural valuations. Mr Doyle’s evidence was that the level of fertiliser applied was only slightly above maintenance levels. The Judge accepted that evidence adding that all experts agreed that responsibility for a maintenance item of this type should be borne by the [notional] lessee.
[72] Mr Carruthers’ submission was the Judge misunderstood the evidence. He pointed to evidence that Ferndale had a carrying capacity in 1993 of 2,000 stock units, but by 1997 this had increased to 3,435 stock units. By applying fertiliser in 1995 and 1996 at levels slightly above that required to maintain 3,435 stock units, the carrying capacity was increased. On that footing, the cost of the fertiliser applied in those years should have been treated as a capital item.
[73] We are satisfied that the Judge was right to conclude that the fertiliser expenditure should be treated as a non-capital item. He was entitled to accept Mr Doyle’s evidence. And as Mr McKechnie submitted, the farm consultant, Mr Whyte, and another registered valuer, Mr Tizard, both said the application of fertiliser and lime was expected by a lessee and that the resulting gains in production were benefits received by the Malcolm interests.
[74] There was also evidence that other factors were likely to have contributed to the increased stocking levels including additional fencing, the clearing of scrub, and pasture improvements.

Conclusions

[75] We are not persuaded that any of the three specific grounds of appeal are made out in the way contended for by the Malcolm interests. But it is necessary to stand back and review the overall equities in the final analysis. As signalled earlier, we consider some upwards adjustment of the percentage share awarded to the Malcolm interests is warranted to reflect two factors not sufficiently recognised in the Judge’s assessment.
[76] First, we accept that some recognition should be given to Mr Carruthers’ point that the Malcolm interests have been found to have an ownership interest in Ferndale which ought to have moderated to some degree the deduction made for notional rental.
[77] Secondly, we do not consider the Judge gave sufficient recognition to the preservation of Ferndale by the Malcolm interests over the 13 year period from 1997 to 2010. Although they have been compensated for the cost of borrowing and have received the benefits from the continued farming operations during this period, their contribution in this respect, unaided by Clive and Linda, should not be under-estimated.
[78] To recognise these factors, we would increase the award by an additional five per cent. The effect of this is to increase the beneficial share of the Malcolm interests in Ferndale from 37 per cent to 42 per cent. This would increase the share of the Malcolm interests from $663,317.50 to $752,955.00 being 42 per cent of $1,792,750.00, the agreed market value at the date of the High Court hearing.
[79] Since the conclusion of the hearing, we have received advice from counsel for the Malcolm interests that the mortgage (which includes security over Ferndale) continues to secure the principal sum of $900,000. The Malcolm interests accept that they are responsible for repayment of the $500,000 used to acquire Ferndale and for repayment of the $400,000 balance of the principal sum attributable to the other two farms.
[80] The Malcolm interests’ 42 per cent share of Ferndale in terms of this judgment is subject to the condition that they accept sole responsibility for repayment of the $900,000 partially secured over the Ferndale property and indemnify the respondents in respect of that sum and any other liabilities relating to Ferndale. That is proper since the quantification of the contribution made by the Malcolm interests was made on the basis that they had provided the funds to acquire Ferndale ($500,000) and because it was accepted that the remaining $400,000 was borrowed for their benefit, namely to refinance an existing loan, to purchase more stock and to have more working capital for the farming operation.
[81] Consistently with the High Court costs decision, the costs of this appeal will also lie where they fall.

Solicitors:
M McGhie, Whakatane for Appellants
Jensen Waymouth, Taupo for First Respondent


[1] Later, the National Bank.
[2] Lankow v Rose [1995] 1 NZLR 277.
[3] Malcolm v Malcolm HC Rotorua CIV-2008-463-403, 18 February 2011.
[4] At [17].
[5] At [64].
[6] Lankow v Rose above n 1 at 295.
[7] At [71] and [72].
[8] At 282.
[9] At 294.
[10] At 295.
[11] At 295.
[12] At 282.

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