24 Mansfield Avenue Ltd v Glass HC Auckland CIV 2008-409-87, [2010] NZHC 2272; (2011) 12 NZCPR 319 (16 December 2010)

Last Updated: 30 December 2010

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

_{CIV 2008-409-000087}

BETWEEN 24 MANSFIELD AVENUE LIMITED Plaintiff

AND SALLY ELISABETH GLASS AND WILLIAM DENVER GLASS Defendants

Hearing: 13 December 2010

Counsel: BRD Burke for Plaintiff

M J Wallace for Defendants

Judgment: 16 December 2010

_{JUDGMENT OF FOGARTY J}

Introduction

[1] On 17 January 2008 the defendants made an application for caveat No. A454936.1 registered against L.T. 31K/125, to lapse. The plaintiff applied for an order that a caveat not lapse. By consent the application was adjourned for several years.

[2] The defendant owns one of 14 residential units in the Fitzroy Gardens complex in Christchurch. It is bound by a lease and an occupation agreement to the plaintiff. Both the lease and the occupation agreement limit the ability to sell the unit on the open market. Under the occupation agreement, the purchaser has to be approved by the owner (such approval not to be unreasonably withheld). A portion of the purchase price, $11,200, is to be paid to the plaintiff and the purchaser must

_{agree to enter into the contract on the same terms as the defendant has with the}

24 MANSFIELD AVENUE LIMITED V GLASS AND GLASS HC CHCH CIV 2008-409-000087 16

December 2010

plaintiff, including the plaintiff’s option to purchase the unit upon termination of that contract.

[3] The reason for both the lease and the occupation agreement is explained by the context of the original contract. Fitzroy Gardens was a retirement community village. The predecessor of the plaintiff had developed the complex of 14 units and had a long term interest in ensuring that if any units were sold they were sold to persons who were acceptable as residents, and when the successor persons in due course passed on or sold the plaintiff had a continuing interest in ensuring that the replacement occupier would fit into the community.

[4] The option to purchase is addressed in two clauses of the occupation agreement:

4.10.1 Upon the termination of this agreement the Owner shall have the option to purchase the said unit from the Resident, or from personal representatives of the Resident in the event of the death of the Resident, at the price as specified in clause 4.11 and in accordance with the terms and conditions set out herein.

4.10.2 If the Owner has not exercised its option to purchase within three weeks of the date of termination then the Resident shall be at liberty to sell the said Unit on the open market to a purchaser approved of in writing by the Owner (such approval to be not unreasonably withheld but it being acknowledged by the Resident that any such approval may be withheld should the Owner consider that the proposed purchaser be not suitable for admission into the complex or would be likely to be not compatible with the other residents of the complex) subject to the payment of 4% of $280,000 to the Owner upon settlement of the sale of the Unit provided however that where the Resident sells the said Unit on the open market any agreement for sale and purchase entered into by the Resident shall bind the Purchaser to accept and execute the Owner’s Admission Agreement and Occupation Agreement and accept the Owner’s option to purchase the said Unit upon termination of the Purchaser’s agreement with the Owner at an option exercise price calculate din the same manner as is referred to in this Agreement.

[5] Clause 4.10.4 provides for a caveat:

4.10.4 The Owners shall have the right to lodge a caveat against the composite certificate of title held by the Resident to protect the Owner’s option to purchase and other rights arising upon termination of this agreement and to further restrict the Resident’s borrowing on mortgage secured against the composite title to an amount not exceeding 50% of the market value of the said unit, such value, if

required by the Owner, to be determined by way of a registered valuer’s valuation at the time of borrowing by the Resident and such valuation to be made available to the Owner prior to the mortgage advance to the Resident being made. Any borrowing by the Resident in excess of 50% of the market value of the Unit upon security of the composite certificate of title shall require the owner’s prior written consent.

[6] The occupancy agreement, with these terms, sits alongside the terms of the cross lease which is the basis of the land tenure title of the defendants. It is registered under the Land Transfer Act. The lease provides in clause 16 (c) an option to purchase and a right to caveat:

(c) Upon the termination of the rights of occupancy created by this Lease Mansfield Gardens Limited shall have the option to purchase the said Flat from the Lessee, or from the personal representative of the Lessee in the event of the Lessee’s death, at the price as specified in clause 16(d) herein and in accordance with the terms and conditions set out herein. If Mansfield Gardens Limited has not exercised its option to purchase within three weeks of the date of termination then the Lessee shall be at liberty to sell the said Flat on the open market PROVIDED HOWEVER that where the Lessee sells the said Flat on the open market any agreement for sale and purchase entered into by the Lessee shall bind the Purchaser to accept and execute the Mansfield Gardens’ Admission Agreement, Occupation Agreement and Medical Life-Care Plan, and also to accept Mansfield Gardens Limited’s option to purchase the said Flat upon termination of the Purchaser’s Agreement with Mansfield Gardens Limited.

Mansfield Gardens Limited shall have the right to lodge a caveat against the composite Certificate of Title held by the Lessee to protect its option to p0urchase upon termination of occupancy and to further restrict the Lessee’s borrowing on mortgage secured against the composite title to an amount not exceeding 50% of the market value of the said Flat, such value, if required by the Mansfield Gardens Limited, to be determined by way of a registered valuer’s valuation at the time of borrowing by the Lessee and such valuation to be made available to Mansfield Gardens Limited prior to the mortgage advance to the Lessee being made. Any borrowing by the Lessee in excess of 50% of the market value of the Flat upon security of the composite Certificate of title shall require the prior written consent of Mansfield Gardens Limited.

(d) In the event of termination and in the event of Mansfield Gardens Limited exercising the option to purchase the Flat then the price to repurchase shall be calculated as the sum of (i) the purchase price set out in 2(a) of the Admission Agreement; and (ii) the Medical Life Care Plan contribution set out in 2(b) of that Agreement less a sum equal to 4.2% for each completed month from the date on which occupation was available to the Lessee. Mansfield Gardens Limited shall within two (2) calendar months from the date on which

termination takes effect or the date of the Lessee’s vacation of the Flat, whichever is the later, pay to the Lessee the amount so calculated less any ascertained sum unpaid in terms of the Occupation Agreement. Mansfield Gardens Limited shall not thereafter be liable for any further costs, expenses, charges or interest.

In the event of Mansfield Gardens Limited not exercising their option to repurchase then Mansfield Gardens Limited shall purchase from the Lessee all and any improvements effected by the Lessee at the minimum price of the sum calculated pursuant to (ii) of the preceding paragraph less any ascertained sum unpaid in terms of the Occupation Agreement within two (2) calendar months from the date on which termination takes effect. Mansfield Gardens Limited shall not thereafter be liable to the Lessee for any further costs, expenses, charges or interest.

[7] The occupation agreement is dated 27 March 2008. A week later a caveat was lodged dated 5 April 2000 and under the heading “Estate or Interests Claimed” it reads:

Interest in an option to purchase granted by the Registered Proprietor Violet

Amy Elsom in favour of the Caveator pursuant to an agreement dated

27 March 2000 [the occupation agreement] between the Caveator and the

Registered Proprietor provided that this caveat shall not prevent the registration of a transmission of the Registered Proprietor’s interest.

[8] In 2003 all the owners of the 14 units entered into another contract. The contract is between the owners of 13 of those units and the owners of Unit 10 and with a limited liability company being the manager of the property. All the parties agreed to subdivide the land changing the existing titles to all the units except Unit

10 to unit titles pursuant to the Unit Titles Act 1972. Unit 10 would become a fee simple title. This contract takes advantage of a change of policy on the part of the Council.

[9] As part of this 2003 contract there was an agreement that upon the issue of the new titles everyone would be released from their mutual obligations incurred under the previous agreements, including the provisions in the occupation agreement set out above. The ownership of Unit 10 passed to 24 Banksfield Avenue Limited, the plaintiff. Until the new titles are obtained the plaintiff, by clause 10 of the 2003 contract, has an obligation to ensure the lease and occupation agreements are upheld.

[10] As noted, in 2008 the defendant’s solicitor made an application for the caveat to lapse. This step appears to have been precipitated by the fact that the defendant objects to some part of a subdivision plan approved by the Christchurch City Council. The subdivision remains unimplemented and titles cannot issue. An application was lodged in February 2008 for an order that the caveat not lapse. The parties then adjourned this application for over two years. Finally, the defendant would not agree to further adjournments and the matter has come on for hearing.

Public law setting

[11] A caveat is a statutory instrument that operates as a clog on the ability to deal in land. It is enabled by s 137 of the Land Transfer Act 1952 which provides:

137 Caveat against dealings with land under Act

(1) Any person may lodge with the Registrar a caveat in the prescribed form against dealings in any land or estate or interest under this Act if the person -

(a) claims to be entitled to, or to be beneficially interested in, the land or estate or interest by virtue of any unregistered agreement or other instrument or transmission, or of any trust expressed or implied, or otherwise; or

(b) is transferring the land or estate or interest to any other person to be held in trust.

(2) A caveat under this section must contain the following information: (a) the name of the caveator; and

(b) the nature of the land or estate or interest claimed by the caveator, which must be stated with sufficient certainty; and

(c) how the land or estate or interest claimed is derived from the registered proprietor; and

(d) whether or not it is intended to forbid the making of all entries that would be prevented by section 141 or a specified subset of them; and

(e) the land subject to the claim, which must be stated with sufficient certainty; and

(f) an address for service for the caveator.

(3) Caveats under this section must be executed by the caveator or the caveator's attorney or agent.

(4) Caveats under this section must be entered on the register as of the day and hour of their receipt by the Registrar.

[12] The fact that the parties agreed clause 4.10.4 does not mean that the threshold requirements of subs (1) of s 137 have been met. As the learned authors of G Hinde and others, Hinde McMorland & Sim Land Law in New Zealand (LexisNexis, 2003) vol 1 at

10.009 (y) say:

... the clause granting the right to caveat may occur in a contract in which no caveatable interest of any sort is conferred by the registered proprietor. In such a case the other person has no caveatable interest, and therefore has no right to lodge a caveat under section 137 of the Land Transfer Act 1952. ...

[13] This application is made in reliance on s 143:

143 Procedure for removal of caveat

(1) Any such applicant or registered proprietor, or any other person having any registered estate or interest in the estate or interest protected by the caveat, may, if he thinks fit, apply to the [High Court] for an order that the caveat be removed.

(2) The Court, upon proof that notice of the application has been served on the caveator or the person on whose behalf the caveat has been lodged, may make such order in the premises, either ex parte or otherwise, as to the Court seems meet.

(Emphasis added)

Analysis

[14] Essentially Mr Burke argued for a liberal interpretation of the statutory criteria in s 137. He relied principally on the case of Bevin v Smith [1994] 3 NZLR

648. He argued that this decision established that the law in New Zealand was that the grantee of an option to purchase acquired an immediate equitable interest capable of supporting a caveat. After argument Mr Burke advised the Court of the decision Motor Works v Westminster Auto Services Limited [1997] 1 NZLR 762.

[15] Mr Bevin had agreed to sell his farm to Mr and Mrs Smith. The purchaser had to obtain consent under the Land Settlement Promotion and Land Acquisition

Act 1952. They did not obtain consent within time which made the contract technically illegal. Relief was granted by the High Court under the Illegal Contracts Act 1970 validating the contract by extending the statutory date to three months. An appeal failed.

[16] One of the issues on appeal was the consequence of the acquisition by the vendor of a paper road after the contract of sale of the farm. He bought it for $1,500 but was not prepared to sell it to the Smiths. The issue then arose as to whether or not the land was held by Mr Bevin, the vendor, on trust for the purchasers. That in turn raised an ultimate issue as to whether or not Mr Bevin as vendor under a conditional contract owed fiduciary obligations to the Smiths, or to put it another way, whether a purchaser under a contract has an equitable interest in the property pending fulfilment or waiver of the condition.

[17] It was in this context that the Court of Appeal discussed caveats. At 664-665

664 Gault J for the Court of Appeal said:

The view that a purchaser under a conditional contract has no equitable interest in the property pending fulfilment or waiver of the condition, is unsatisfactory in a number of respects. Both Blanchard, A Handbook on Agreements for Sale and Purchase of Land, (4th ed, 1988), para 526 and McMorland, Sale of Land (1944) para 10.03, argue convincingly that the law in New Zealand should recognise that an equitable interest may be acquired under a conditional contract.

This case provides a compelling example. Many contracts in New Zealand are made conditional upon the consent of a statutory board, consent which is ordinarily given as a matter of course. It would be a peculiar situation if pending that consent the vendor was free to treat the land on his own, and to retain the benefit of the sale of the paper road which he only received by virtue of his position as owner of the adjoining land. We consider that purchasers in the position of the Smiths should in equity have sufficient interest in the land to support a caveat and to impose fiduciary obligations on the vendor continuing in possession.

First, while some Judges have expressed reservations about the principle (see eg Callan J in Re Rudge; Curtain v Rudge), the law in New Zealand is firmly established that the grantee of an option to purchase acquires an immediate equitable interest capable of supporting a caveat: Morland v Hales (1910)

30 NZLR 201. It seems anomalous that no equitable interest is acquired by a purchaser under a conditional contract, at least when the contract is

analogous to an option, ie where the condition is for the sole benefit of the purchaser.

Secondly, if a purchaser under a conditional contract has no equitable interest in the property, the purchaser will be unable to protect his or her interest by means of a caveat, and will be forced to take the more expensive and difficult course of seeking an injunction if alerted in time. The purchaser under a conditional contract should be in a position to prevent those who acquire later interests from securing priority by registering those interests, in the absence of fraud.

[18] The facts in Morland v Hales (1911) NZLR 201 are much simpler. Mr Morland had obtained a valid option to purchase Birch Hill Estate on

8 November 1909, available for ten days. On 17 November the vendors had sold to a Mr Somerville. There was then a contest between Mr Morland and Mr Somerville for the land. To decide the issue the Court of Appeal assumed that Mr Morland did not decline to exercise the option and that he properly exercised it. What then was the position between the parties? The Court held that Mr Morland had, with consideration, given an option to purchase the land at a price named the authorities gave him an interest in land. On this basis he had the right to call for conveyance of the land. The Court followed London and South-western Westland Railway Company v Gomm 20 ChD 562.

[19] It may be noted that Mr Morland had a present option to purchase. It did not depend on any contingency. It was up to him whether or not to exercise it within the ten day period. By contrast, clause 4.10.1 and clause 4.10.2 require the vendor to decide to sell the land before the option to purchase arises. I note it is not a conditional contract as in Bevin v Smith. It is rather more in the nature of a right of pre-emption.

[20] In Motor Works Westminster Auto was the landlord of Motor Works. The terms of the lease provided that if Westminster Auto wanted to sell the premises it should first offer them to Motor Works at a price which the landlord was prepared to accept from any third party. It was called a right of first refusal. Motor Works registered a caveat against the title to the leased premises claiming an interest by virtue the option to purchase contained in the deed of lease. The caveat was registered because Westminster Auto was understood to have entered into a contract for the sale of the premises to a third party. The Court made interim orders. The caveat was lodged in 1994. On 3 May 1996 Westminster Auto made a formal offer to sell both the premises and the business to Motor Works on stated terms. That

offer was declined but with the statement that Motor Works expected a first right of refusal to purchase the premises if sold separately from the business. That is how the matter stood when the Court heard argument.

[21] Tipping J analysed the issue as follows:

The first issue, as stated at the outset, is whether Motor Works has any interest in Westminster Auto's land so as to justify its caveat remaining in force. When considering whether a right of first refusal creates an interest in land, it is convenient to analyse the general point in four stages. Stage one is where all that exists is a bare right of pre-emption. Stage two is reached when a triggering event occurs requiring an offer to be made to the person with the right of pre-emption. Stage three relates to the time after an offer has been made pursuant to the right of pre-emption and stage four, for completeness, relates to the stage, if reached, when a contract results from the acceptance of such offer.

At stage one the position is clear. A bare right of pre-emption, before there is any suggestion of an event triggering the right, does not create any interest in land: see Mackay v Wilson (1947) 47 SR (NSW) 315, Re Rutherford [1977]

1 NZLR 504, Pritchard v Briggs [1980] 1 All ER 294, Anderson v Te

Wharau Investments Ltd [1989] NZHC 854; (1990) ANZ ConvR 156 and Gainford v Stinson

(1993) 2 NZ ConvC 191,768 (CA).

At the other end of the spectrum it is perfectly plain that once a contract exists between the parties for the sale and purchase of land an interest in land is created in the purchaser. The fact that the contract may still be conditional will not of itself necessarily prevent an interest in land from arising: see Bevin v Smith [1994] 3 NZLR 648; and McDonald v Isaac Construction Co Ltd [1995] 3 NZLR 612, 619.

Working backwards we come to stage three. This is where, pursuant to the right of pre-emption, the vendor has actually made an offer to the holder of the right, which offer is normally open for acceptance for a stipulated period of time. The offer will be couched on the basis of the terms which the vendor is prepared to offer elsewhere. This situation cannot be materially distinguished from an option in the conventional sense and thus creates an interest in land: see Morland v Hales (1910) 30 NZLR 201 (CA) and Bevin v Smith (supra) at p 665.

(at 765)

[22] It is plain from this dictum that Tipping J considered the law was quite settled, that a bare right of pre-emption, before there is any event triggering the right, does not create any interest in land.

[23] These decisions hold to the traditional view that caveats can only protect interests capable of being enforced by registration. They read the two criteria in s 137(1)(a) and (b) as confining caveats to protect claims at common law or under equity which enable an interest in land to be perfected by registration.

[24] There is no doubt that the law is settled that a right of first refusal, of itself, does not create an interest in land. Speaking for the Court of Appeal in Gainford v Stinson McKay J said:

... It is a contractual right only. It imposes on the other party a negative obligation, namely not to sell the property without first offering it to the party having the right of first refusal.

McKay J cited Street J in Mackay v Wilson saying:

... The right is merely contractual and no equitable interest in the land is created by the agreement.

[25] It would appear that a bare right to an option to purchase before any triggering event occurs does not “on the present state of authorities”, Hinde op cit

10.009 (k), support a caveat. It is another question as to whether or not it is arguable that it might. If a party with an obligation to offer the property to another, before selling to any third party, seeks to avoid that obligation, that would be, at the very least, breach of contract and potentially a fraud. Equity might well intervene by way of injunction to stop that event. A view could be taken that s 137 should be interpreted so that the caveat operates to pre-empt such a breach or fraud. Mr Burke has been arguing that there is room for development of the jurisprudence. In this context see the discussion by Lindsay in ‘Caveats Against Dealings in Australia and New Zealand’ The Federation Press 1994 at 69 arguing that recent developments in the concept of specific performance enable the right to restrain a dealing in land to be an interest in land, citing Troncone v Aliperti (1994) NSW ConvR 55-703 at

60,020.

[26] It is not necessary for me to consider whether or not the caveat was in any event confined to protecting Miss Violet Elsom’s ability to sell. This caveat was lodged on 5 May to constrain Miss Violet Elsom’s ability to sell. She died on

12 May. On 25 May the solicitors for her estate sought confirmation that the option

would not be exercised. This was confirmed by writing on 1 June. On the same day as confirmation was received the unit was transferred to the executors of her estate. One of the arguments before me was whether the option preserved in 4.10.2 is captured by the original caveat.

[27] Nor do I think I need to consider whether it is a breach of contract to challenge the caveat, because of 4.10.4. See Hinde at 10.009 (y). I doubt it is, as I regard the entitlement to a caveat to be an issue of statute law, not a matter of private contract. If there is no interest recognised by statute as supporting a caveat, I do not understand how it can be a breach of contract to rely on the statute. But it is not necessary to decide the point. It was not argued.

[28] I do not think that this is a case where the Court should express any opinion as to whether there is room for going past the “present state of the authorities”. This is for two practical reasons. The first is that clauses 16 c) and d) of the cross lease, registered on the title, contain a similar option to purchase save only for the specific financial provision in clause 4.10.2. It follows it is not possible for the vendor to sell to a third party without notice on the title of the presence of an option to purchase. The lease also refers to the agreement occupation, eg, in clause 16 (c). Second, it is not realistic that the trustees would attempt to sell under the present terms of tenure, for when the unit titles are acquired pursuant to the 2003 contract the trustees will have a more valuable property. Therefore, I regard this case as being an artificial dispute. I infer on the probabilities that it is generated by the parties being at loggerheads over the subdivision plan implementing the 2003 agreement. Disputes of no real consequence to the parties are not a good setting for testing the law. Decisions are best made by a Judge who knows what the adverse consequences will be for one or more of the parties.

[29] I read s 143(2) as giving the Court a degree of discretion as to how to deal with this application. I do not think that the plaintiff needs the caveat. However, there is emphatic dicta in Sims v Lowe [1988] 1 NZLR 656 of the need for “patent clarity that the caveat cannot be maintained” (659). Because the learned authors of Hinde McMorland and Sim, and Lindsay clearly recognise scope for movement past the present authorities, and because this and other arguments of Mr Burke, I cannot

be brought to that state of mind. Therefore, the caveat No. A454936.1 shall not lapse.

Costs

[30] The plaintiff sought costs in any event on two grounds: firstly, by arguing that the application to set aside the caveat was first lodged without the direct instructions of the defendant. I am satisfied that application fails on the facts. It is likely the application was first filed by the defendants’ solicitors without express authority. But whatever the initial reservations of the defendants they are plainly behind the opposition to the continuance of the caveat at the present time.

[31] The second argument was that these proceedings are only because of the breakdown of agreement in the 2003 agreement, being brought as a means of putting pressure on the plaintiff. That may be so, but it is not an abuse of process.

[32] The plaintiff has succeeded. For that reason it is entitled to costs on a 2B

basis. There is leave to apply to the Court to fix the sum if it cannot be agreed.

Solicitors:

Harmans Lawyers, Christchurch, for Plaintiff

Dallison Stone, Christchurch, for Defendants