Verano Properties Limited v Severs HC Auckland CIV 2009-404-8487 [2010] NZHC 817 (21 April 2010)

Last Updated: 6 June 2010

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

_{CIV-2009-404-8487}

BETWEEN VERANO PROPERTIES LIMITED Plaintiff

AND ANA AND IVICA SEVERS Defendants

AND CRAIG JOHN WATTS Counterclaim Defendant

Hearing: 12 April 2010

Counsel: Greg Blanchard for plaintiff and counterclaim defendant

Richard Thompson for defendants

Judgment: 21 April 2010 at 3:00pm

_{RESERVED JUDGMENT OF HUGH WILLIAMS J.}

This judgment was delivered by The Hon. Justice Hugh Williams on

21 April 2010 at 3:00pm

pursuant to Rule 11.5 of the High Court Rules

.....................................................

_{Registrar/Deputy Registrar}

A To gain the benefit of the exemptions for which Reg 3 of the Securities Act (Residential Property Developments) Exemption Notice 1999 provides the documents required to be supplied by the developer to any subscriber for specified securities must include the rules of a society actually incorporated under the Incorporated Societies Act 1908 not those of a society proposed to be incorporated under that Act.

_{B Consequential costs and timetabling orders as per paras [50] and [51].}

VERANO PROPERTIES LIMITED V ANA AND IVICA SEVERS HC AK CIV-2009-404-8487 21 April 2010

_{Table of Contents}

Paragraph

Introduction [1] Facts [3] The 1999 Notice [10] Submissions [11] Discussion and Decision [16] Result [47]

_{Orders [52]}

Introduction

[1] Developers of land into residential properties are exempt from important sections of the Securities Act 1978 (“the Act”) – including the extensive obligations to issue prospectuses – if the contracts into which they enter with prospective buyers have the communal facilities in their developments owned or leased by a society incorporated under the Incorporated Societies Act 1908. That exemption, at least since 1999, has been provided by the Securities Act (Residential Property

Developments) Exemption Notice 1999[1] (the “1999 Notice”).

[2] The question with which this judgment deals is whether, to gain the advantage of the exemption, such societies must be incorporated at the time

agreements for sale and purchase of land in the development are executed or whether later incorporation still qualifies for the exemption.

Facts

[3] The agreed statement of facts show:

a) That on 26 January 2007 the defendants, Mr and Ms Severs, entered into an agreement for sale and purchase with the plaintiff, Verano Properties, to buy Lot 52 in a subdivision known as “Vista Verano” at Mangawhai, north of Auckland, for $295,000. Attachments to the agreement for sale and purchase included extensive terms and conditions, a copy of the Constitution of the “Vista Verano Residents’ Society Inc” and copies of draft encumbrance instruments applying to the development. Additional details are discussed later.

b) Verano did not register a prospectus for “Vista Verano” because it considered it was entitled to the exemptions under the 1999 Notice.

c) The Vista Verano Residents’ Society Inc was incorporated on 22 May

2009.

d) The agreement became unconditional on 7 October 2009 and settlement date was 14 October 2009.

[4] Mr and Ms Severs later claimed the 1999 Notice did not apply to the “Vista Verano” development because the Residents’ Society was not incorporated at the time they entered into their agreement for sale and purchase. Accordingly Verano was required to issue a prospectus under the Act. They relied on what they submitted through counsel, Mr Thompson, is the plain wording of the 1999 Notice.

[5] Mr Blanchard, for Verano, submitted, however, that the 1999 Notice did not require incorporation of the Residents’ Society prior to execution of any agreements for sale and purchase. So long as the Society was incorporated – as it was – prior to settlement, the 1999 Notice applied to any such contract.

[6] It appears conveyancing practice is divided and reflects the opposing views of the parties to this litigation. An affidavit filed by Ms Quinn, a partner in Glaister Ennor, a firm of solicitors in Auckland, said it was that firm’s practice to incorporate the Residents’ Society prior to the preparation and execution of agreements for sale and purchase with partners and staff of the firm acting as the initial members of the Society to satisfy the requirements of s 4 (and, if appropriate, s 31) of the Incorporated Societies Act 1908.

[7] However, Mr England, a solicitor with Chapman Tripp, specialising in the Act, said that firm’s practice is not to incorporate the Society at the time agreements for sale and purchase are signed and deposits paid but to incorporate it in the run up to settlement.

[8] It was common ground:

a) That if Mr and Ms Severs are correct in their interpretation of the

1999 Notice the agreement for sale and purchase into which they entered is void under the Act.

b) If Mr and Ms Severs are correct in their interpretation of the 1999

Notice, an additional consequence is that a number of developments throughout the country will need to seek to regularize their positions by applying for relief under s 37ff of the Act.

c) The Securities Commission which administers the Notices does not have power to amend Notices retrospectively[2] so individual developer’s relief applications or retrospective legislation will be required.

[9] The Securities Commission was served with copies of the papers filed in this case, but opted to take a neutral position at this stage.

The 1999 Notice

[10] The salient points of the 1999 Notice are set out below. It was repealed as from 7 December 2007 by the 2007 Notice but it was common ground the issue in this case is determined by the 1999 Notice:

a) After defining “communal facilities” as land and buildings “designated by a developer or the Society” for use by all owners and “Rules” as meaning the “Rules of a Society”, Reg 2 continues:

“Society” means a society incorporated under the

Incorporated Societies Act 1908 that –

(a) Owns, or will own, the communal facilities in a development; or

(b) Leases, or will lease, the communal facilities in a development:

“Specified security” means a participatory security in the form of membership of a society that confers rights to participate in ownership and use of all or part of the communal facilities in a development.

b) Reg 3 provides the exemptions from statutory prospectus, advertisement, audit and similar requirements.

c) Reg 4 reads:

Conditions – The exemptions granted by clause 3 are subject to the conditions that –

(a) Subscribers for specified securities have, before subscription, been supplied by the developer with a copy of each of the following documents:

(i) The rules (including a copy of any agreement for the management of the society’s affairs):

(ii) A specimen of any deed or agreement providing for the transfer of communal facilities from the developer to the society:

(iii) A specimen of the sale agreement:

(iv) A specimen of any lease agreement for communal facilities; and

(b) The specified securities are subscribed for by entering into a sale agreement with the developer; and

(c) Deposit monies paid by a subscriber for specified securities are held in any of the following trust accounts until the sale agreement becomes unconditional [details of accounts omitted]:

(d) No settlement of a sale agreement is completed until, -

(i) If the developer represents or agrees that communal facilities will be held by a society, the communal facilities are owned or leased by the society; and

(ii) If land is included in the communal facilities, the society holds a certificate of title for an estate in fee simple, or a leasehold estate, under the Land Transfer Act 1952 or for a stratum estate under the Unit Titles Act 1972; and

(e) Where communal facilities are leased, or to be leased, by the society, -

(i) The communal facilities are owned or to be owned, by subscribers for specified securities; and

(ii) Interests in the communal facilities can only be purchased with a purchase of residential property; and

(f) The developer provides to a prospective purchaser of residential property, within 5 business days after receiving a request, a copy of the most recent financial statements of the society; and

(g) The financial statements of the society are audited annually and distributed to members of the society as soon as reasonably practicable after each audit is completed; and

(h) All monies paid to the society by its members under the rules are applied solely for the purposes of –

(i) Holding, administering, and maintaining the communal facilities (including issuing licences to members of the society that confer rights solely on those members to use the communal facilities and administering those licences in accordance with the rules); or

(ii) Administering and enforcing a scheme for the regulation and control of matters relating to the use and enjoyment, repair, decoration and landscaping of, and provision of services to, residential properties [detailed uses set out]; and

(i) The rules provide that –

(i) Members of the society have the right to use and enjoy the communal facilities in accordance with the rules, and have the right to vote at meetings of members of the society; and

(ii) Levies, fees, or subscriptions payable to the society by its members are determined by a committee of members of the society constituted [detailed requirements set out] or appointed under the rules; and

(j) The society does not have as objects –

(i) The carrying on of trading activities; or

_{(ii) The carrying on of business for profit.}

Submissions

[11] Mr Thompson said the defendants contend Verano failed to comply with the

1999 Notice by failing to have the Residents’ Society incorporated either at the date the contract was signed or when the deposit was paid. The latter, he submitted, was the latest possible date of subscription for the purposes of Reg 4(a).

[12] He referred to the analysis of the reasons for mandatory membership of an incorporated residents’ society described in Whisper Cove Limited v Wright,[3] but acknowledged that Lang J’s analysis in that case applied to a different point from that now in issue. He referred to the explanatory notes to the 1999 Notice as supporting the defendants’ position[4]. Those notes describe the effect of exemption from the statutory requirements.

[13] He suggested that the date on which the contract was executed was relevant as being the date on which buyers accrued substantial obligations. Those obligations included mandatory membership of the Residents’ Society and accordingly buyers had the right to be assured of their obligations by that time.

[14] Mr Blanchard submitted incorporation of the society at the date of the contract was unnecessary. The contract itself provided in cl 9.1 that the Residents’ Society would be established and the rules were attached as a schedule. He submitted strongly that there was nothing in the 1999 Notice that necessarily required the society to be incorporated at any particular time before the developer was able to comply with Reg 4(d). He submitted that too strict a reading would contradict the “general principle of statutory interpretation that strict grammatical

meaning must yield to sufficiently obvious purpose”[5] and suggested there was no

practical necessity for the Residents’ Society to be incorporated prior to executing the agreements for sale and purchase providing the rules were known to buyers.

[15] In reply Mr Thompson pointed to the distinction in the 1999 Notice between provision of the rules as required by Reg 4(a)(i) and provision of the specimen documents as required by the balance of Reg 4. It was noteworthy, he suggested,

that the actual rules were required to be provided “before subscription”. He also made the point that technical problems and difficulties in complying with statutory and regulatory requirements can only be considered in relief applications.[6]

Discussion and Decision

[16] Considering the question at issue first in terms of the 1999 Notice, it is clear from the prefatory words in Reg 4 that the exemptions listed in Reg 3 can only be obtained if developers fully comply with Reg 4.

[17] These exemptions are substantial. The underlying purpose of the Act is consumer protection achieved by ensuring those involved in commerce are, broadly put, fully informed of their potential obligations before they commit to them. The companion Securities Markets Act 1988 provides additional protection for shareholders and others.

[18] More specifically, unless developers fully comply with Reg 4, they need to issue prospectuses, investment statements, and otherwise comply with the Act in order to market their developments to the public.

[19] Thus the 1999 Notice – Reg 4 in particular – should be seen as a surrogate for the consumer protection aspects of the Act especially those in Part 2 and as a means alternative to the Act whereby persons engaged in residential property development are required to ensure prospective purchasers are as fully informed as should be the case before they become committed to their purchases. The information which purchasers should be given should – with the differences flowing from the different style of the proposed investment – be comparable to the information they would receive were their proposed vendor not acting under the 1999 Notice.

[20] That is particularly emphasised by the use of the phrase “before subscription”

in Reg 4(a) and the cumulative list of conditions imposed by Reg 4 generally.

[21] The “specified security” received by purchasers of residential property developments such as that marketed by Verano receive is “membership of a society”. In Verano’s case it is a big development: there are nearly 90 lots, and the communal facilities are not just a common area but include a communal sewage scheme. Membership brings with it the right to own and use the communal facilities, including the rights listed in Reg 4 (g)-(i) of the 1999 Notice.

[22] Further, subscription for such a “specified security” occurs when purchasers enter into an agreement for sale and purchase with a developer. It must follow that the subscription which occurs on the execution of such a contract is of an existing “specified security”, that is to say membership of an existing society conferring the rights set out in the 1999 Notice.

[23] Reg 4(a) makes the Reg 3 exemptions conditional on a substantial body of information being provided by developers to “subscribers for specified securities”, that is to say those who will be admitted to “membership of a society” on execution of an agreement for sale and purchase. That information is required to be provided by developers to those prospective purchasers “before subscription”.

[24] Whilst the information supplied “before subscription” may include specimens of the documents listed in Reg 4(a)(ii)-(iv) plus the rules of the society, there is no regulatory requirement for those documents to be appended to or incorporated in the agreement for sale and purchase itself (though there is no objection to that course, that being followed in this case). Thus it follows that, while the documents in Reg 4(a)(ii)-(iv) may be specimens and presumably open to amendment, the rules of the society required to be supplied by the developer to prospective “subscribers for specified securities ... before subscription” must be the “rules of a society”. That must be a reference to an existing society which either owns or leases the communal facilities at the time copies of its rules are furnished to prospective purchasers, or a society that will own or lease those communal facilities in due course.

[25] The qualification that the society “will own” or “will lease” the communal facilities merely acknowledges that transfer to the society of the registered proprietorship of those facilities may not have occurred by the time “subscribers for

specified securities” have subscribed by executing agreements for sale and purchase

– indeed, in a residential property development still being marketed by a developer, most societies will not be registered proprietors of the communal facilities at the time contracts are entered into – but the definitions of “rules”, “society” and the terms of Reg 4(a)(i) are to ensure that prospective “subscribers for specified securities” will be fully informed before committing themselves to purchase. Execution of the contract will give them membership of a society which owns or leases – or will ultimately own or lease – the communal facilities which are vital to the residential property development as a whole. They must be informed of the rules by which their society, if they enter into a contract, will own or lease or become the owner or lessor of those communal facilities and the way in which their society’s affairs will be managed.

[26] So it follows that the information they must receive before becoming committed to purchase will fulfil the consumer protection role of the Act and its subordinate and surrogate legislation, the 1999 Notice.

[27] From that, it follows that Residents’ Societies must be incorporated and the contractual arrangements concerning its internal management and its ownership for leasing of the central communal facilities be known before buyers commit to their purchases.

[28] That said, there is some force in Mr Blanchard’s submission that requiring incorporation of Residents’ Societies before any contracts are signed may well be both impractical and artificial. Until enough contracts have been signed to make the development financially viable for the developer, the development may not proceed; requiring incorporation of a society prior to the point of viability being reached would be needless in those circumstances. Providing information to prospective purchasers prior to that watershed point should be held to satisfy the public information requirement without actually incorporating the society whose rules are being given to prospective purchasers, particularly if the developer binds itself contractually not to alter the rules being handed out to possible buyers. However, against that, circumstances may arise which require amendment of the rules provided to successive prospective purchasers, and requiring incorporation prior to the rules in

a form which will be adopted by the society upon ultimate incorporation is therefore pointless.

[29] The answer to those submissions is that prospective purchasers must know before they execute their agreements for sale and purchase what their rights and obligations are and that, by executing the contract, they are acquiring “membership of a society” which has control over the communal facilities in the development and gives them, as members, a measure of control over those facilities through their society. Prospective purchasers cannot achieve that control if the society for whose membership they are subscribing is non-existent at the time they subscribe, particularly if it may amend its draft rules by the time it may ultimately be incorporated, if incorporation ever occurs.

[30] Another possible way of considering the interpretation of the 1999 Notice might arise if its requirements were construed in light of the “circumstances as they arise”[7] or as “always speaking”,[8] that is to say, whether the requirement for Residents’ Societies to be incorporated might be said to arise at the time when settlement of sale agreements are completed pursuant to Reg 4(d).

[31] There are, however, at least two reasons why the 1999 Notice cannot support such an interpretation, one general and one specific.

[32] The general point is that an ambulatory interpretation is permissible only if it comes within the purpose or ambit of the statute[9] and in this case the purpose of the Act and the 1999 Notice are to ensure prospective purchasers are fully informed of their rights and obligations before they commit to buying.

[33] The specific reason why such an interpretation cannot be adopted in this case is the use in the 1999 Notice of the phrase “before subscription” in Reg 4(a) and the effect of Reg 4(b) that subscription for the specified securities occurs when

agreements for sale and purchase are executed. That pegs to execution of the contract the time by which incorporation must occur.

[34] In combination, they demonstrate that it is not possible to interpret the terms of the 1999 Notice in a way which would permit incorporation of Residents’ Societies at any time after subscription occurs by the means defined in the 1999

Notice.

[35] Mr Blanchard also submitted that developers should not be required to bear the additional cost of incorporating the Residents’ Society in the development they are marketing at any earlier stage than when developments become financially viable. However, developers will have incurred all the cost of the preparation of the various documents including the rules of the society, and any additional cost in effecting incorporation itself would be trifling against the cost of acquiring the land, preparing it for sale and marketing the development. In addition, if incorporation of Residents’ Societies is required by the 1999 Notice before execution of any agreements for sale and purchase, then the additional cost of incorporation simply becomes another cost to the developers of getting the project to point of sale.

[36] Prospective purchasers are entitled to certainty and to knowledge of their rights and obligations before they subscribe for their “specified security” and they cannot have that degree of knowledge or control if the society and to the membership of which they are proposing to subscribe does not exist when they purport to subscribe for it. If they do not have that amount of knowledge and measure of control, they cannot be sure the vital communal facilities of the development and the terms on which they are entitled to use them will be available through the society.

[37] The conclusion must therefore be that, however impractical or needless developers may see the incorporation of Residents’ Societies in the developments they propose to market before actually beginning to sell the development, incorporation is the only means by which prospective purchasers or “subscribers for specified securities” can be assured they have all the information needed by them “before subscription” to decide whether to buy into the development.

[38] While that conclusion applies generally to residential property developments claiming to comply with the 1999 Notice, it applies with added force as far as the Vista Verano agreements and Residents’ Society rules are concerned.

[39] That is shown by the fact that cl 8.3 of the agreement for sale and purchase debars purchasers from calling for settlement before the Residents’ Society has been incorporated and the communal facilities transferred to that society. Clause 9 sets out lengthy provisions concerning the Residents’ Society but, of particular interest, cl 9.9 reads:

The Purchaser acknowledges that the Constitution and Rules may be subject to such changes as the Vendor may reasonably require to give effect to the provisions of this Agreement and the Vendor’s development proposals for the Land or any part of the Land and any requirements imposed by the Relevant Authority under the Consent.

[40] When the agreements for sale and purchase specifically empower Verano to amend the constitutional rules of the society it proposes to incorporate prior to settlement, it becomes clear that prospective purchasers can have little confidence that what they will actually get as members of the society in the future once the society is incorporated will reflect the information they were given “before subscription” by execution of their agreement for sale and purchase. Further, while it is understandable that the society’s constitution and rules may vary according to, say, the territorial local authority’s subdivisional requirements for the development, if the Residents’ Society is incorporated and prospective purchasers have become members, at least that gives them a measure of knowledge and control over the way in which their society’s rules will require to be amended to comply with subdivisional requirements.

[41] That view is fortified by the provisions of cl 50.3 which gives Verano the power to assign or dispose of the benefit of the agreement as it thinks fit. That can give prospective purchasers little comfort that the information they were given “before subscription” concerning the constitution of the Residents’ Society when incorporated will be acceptable to any substitute vendor.

[42] The approach so far taken also accords with the constitution of the Vista

Verano Residents’ Society Inc.

[43] The constitution is a twelve page document to which the rules of the society were appended as a schedule.

[44] Clause 4 of the constitution divides the society’s membership into “Initial Members” and “Members”, the former being persons “who have subscribed to this constitution” and whose signatures appear in the second schedule. They are to elect the first board of the society and “exercise all rights of members and board members” but are “deemed to have resigned without any act required on the Initial Member’s part at such time as all Lots” have been sold. Thereafter each owner is to be a member of the society with one vote at meetings (r 16.1).

[45] The rules in Schedule 1 are a short document dealing with more pedestrian matters such as conduct, noise, pets and use of the common facilities.

[46] That division indicates that it is the constitution of the Vista Verano

Residents’ Society Inc that is the “rules” of the society for the purposes of the 1999

Notice and not the “rules” so called, and that purchasing members will have little control over the management of their society until settlement.

Result

[47] In the result therefore the Court’s view is that when Reg 4(a) of the 1999

Notice requires the disclosure to prospective purchasers in a residential property development of the “rules” and other documents, those rules must be the “rules of a society” and the society must be a “society incorporated under the Incorporated Societies Act 1908”, not a society proposed to be incorporated under that Act. That approach both accords with the purpose of the exemptions from the substantial information required to be included in prospectuses granted by the 1999 Notice and also accords with s 3 of the Incorporated Societies Act 1908 which defines “society” as a “society incorporated under this Act”, not a society proposed to be incorporated.

[48] Had the 1999 Notice been intended to provide the exemptions in Reg 3 to societies proposed to be incorporated under the Incorporated Societies Act 1908, it would have been simplicity itself for the Securities Commission - which administers such Notices - to have ensured the Notice said as much. Omission of any reference to a society “to be incorporated” confirms the interpretation in this judgment.

[49] The plaintiff’s amended statement of claim filed on 4 March 2010 pleaded two causes of action, the first for specific performance against the defendants (or damages in lieu) and the second for relief under s 37AH of the Act.

[50] This judgment disposes of the first cause of action against the plaintiff and the proceeding is accordingly adjourned for mention in the Duty Judge’s list on

24 May 2010 for the parties – including, perhaps other purchasers in Vista Verano - to consider their positions and propose a timetable for disposal of the second cause of action.

[51] In those circumstances it would appear that all questions of costs should be postponed until after the proceeding is concluded.

Orders

[52] To gain the benefit of the exemptions for which Reg 3 of the Securities Act (Residential Property Developments) Exemption Notice 1999 provides, the documents required to be supplied by the developer to any subscriber for specified securities must include the rules of a society actually incorporated under the Incorporated Societies Act 1908 not those of a society proposed to be incorporated under that Act.

[53] Consequential costs and timetabling orders to be as per paras [50] and [51] of this judgment.

.................................................................

HUGH WILLIAMS J.

Solicitors:

Burton & Co (Nigel Burton) P O Box 8889 Symonds Street, Auckland 1150

Alexander Dorrington (Mark Hopkinson) P O Box 5246 Wellesley Street, Auckland 1141

Copy for:

Gregory Blanchard, P O Box 1235 Shortland Street, Auckland 1140

Richard J Thompson P O Box 3320 Shortland Street, Auckland 1140

Securities Commission (Natalie Muir), P O Box 1179 Wellington 6140

High Court Civil Registry Case Officer: [e-mail]

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[1] SR1999/105 The Securities Act (Residential Property Developments) Exemption Notice 1997 (SR1997/249), which was revoked by the 1999 Notice, and the Securities Act (Real Property Developments) Exemption Notice 2007 (SR2007/378), which revoked the 1999 Notice, are to similar effect.

[2] Westpac Financial Services Ltd v Securities Commission (1996) 7 NZCLC 261,106.

[3] Whisper Cove Limited v Wright HC Auckland CIV-2007-404-7931, 26 May 2008.

[4] Interpretation Act 1999 s 5(3); Securities Act 1978 s 5 (5A).

[5] McKenzie v Attorney-General [1992] 2 NZLR 14, 17 (CA).

[6] Re Perpetual Investment Management Limited (2006) 9 NZCLC 264,207.
[7] Interpretation Act 1999.
[8] Acts Interpretation Act 1924 s 5(d).
[9] Burrows and Carter Statute Law in New Zealand 4th ed 2009 p 399.