Clearwater Cove Apartments Body Corporate 170989 v Auckland Council [2012] NZHC 1870 (30 July 2012)

Last Updated: 24 September 2012

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2011-404-5751 [2012] NZHC 1870

BETWEEN CLEARWATER COVE APARTMENTS BODY CORPORATE NO. 170989

First Appellant

AND NICHOLAS VAN DIJK AND NORMAN PALMER AS TRUSTEES OF THE LIVI TRUST

Second Appellants

AND AUCKLAND COUNCIL First Respondent

AND THE FLETCHER CONSTRUCTION COMPANY LIMITED

Second Respondent

Hearing: 3 July 2012

Counsel: D E Smyth for Appellants

G J Christie & MSC Harrison for Second Respondent

Judgment: 30 July 2012

_{RESERVED JUDGMENT OF ELLIS J}

This judgment was delivered by Justice Ellis on 30 July 2012 at 1.00, pursuant to

r 11.5 of the High Court Rules

Registrar/Deputy Registrar

Date:

Solicitors: Simpson Grierson, Private Bag 92518, Auckland

Counsel: D E Smyth, PO Box 105270, Auckland

CLEARWATER COVE APARTMENTS and ORS v AUCKLAND COUNCIL and ANOR HC AK CIV-2011-

404-5751 [30 July 2012]

[1] The appellants have appealed a decision of the Weathertight Homes Tribunal (WHT) dated 18 August 2011 relating to a development of 16 Clearwater Cove, Waitakere.

[2] The first appellant is the Body Corporate of the apartments at 15 Clearwater

Cove. The Body Corporate relevantly comprises the following owners:1

(a) West Harbour Holdings Ltd (WHHL), which owns seven units.

Brent Ivil is the sole director of WHHL;

(b) The Livi Trust (the trustees of which are the second appellants), which is the owner of WHHL, owns three units and is the second appellant;

(c) One of the trustees of the Livi Trust who owns one unit in his personal capacity; and

(d) Petil Holdings Ltd, which owns one unit.

[3] The Livi Trust or its trustees therefore own 11 of the 12 units involved in the WHT proceedings. For all practical intents and purposes, the Trust/WHHL controls the Body Corporate. The Trust’s affairs appear inextricably entwined with those of WHHL.

[4] The appeal had its first conference on 11 October 2011. An order was made by consent that the appellants pay security for costs calculated in the standard way, amounting to $3760. Security in that amount has since been paid. In the memorandum filed by the second respondent in advance of the conference, however, it specifically reserved “its rights under rule 14.6 to seek increased or indemnity costs at any stage of the proceeding.”

[5] The appeal was originally set down for a two day hearing on 10 and 11 April

_{2012. These dates were moved by agreement to 23 and 24 April 2012.}

1. There are also four further units in the complex but the WHT claim made by their owners did not, for various reasons, ultimately proceed.

[6] But the appellants did not comply with the various timetabling directions made on 11 October. In a memorandum dated 10 April 2012, counsel for the second respondent said:

It is ... unclear to the second respondent whether the appellants intend to pursue the appeal, or whether these proceedings were simply brought to halt the recovery action (CIV 2011-404-5801) Waipareira Investments Limited as brought against West Harbour Holdings Limited (the owner of most of the apartments), for funds lent against the property which is the subject of their appeal.

[7] The memorandum went on to refer to (the second respondent having signalled in its earlier memorandum and in correspondence) the possibility of applying for increased security and advised that in light of the appellants’ timetable defaults, it intended to revisit that issue.

[8] The 23 and 24 April fixture was vacated by Rodney Hansen J on 16 April. On 1 May Wylie J directed that the appeal would now be heard on 28 and 29 August. He ordered that the application for increased security that had been flagged by the second respondent was to be filed by 15 May.

The second respondent’s application and the basis upon which it was advanced

[9] On 18 May 2012 the second respondent filed a notice applying for increased security of $40,000, pending payment of which the appeal be stayed. The application is stated to be made pursuant to High Court Rule 20.13.

[10] The grounds specified in the application are that:

(a) The appeal has little or no merit and indemnity costs are likely to be sought. Relevantly, the second respondent says that new evidence has recently come to light which casts doubt on the fundamental validity of the appellants’ claim before the WHT. The second respondent says that this material should have been (but was not) discovered by the appellants at the WHT stage;

(b) There is reason to believe that the appellants will be unable to pay the

respondents’ costs if they do not succeed on the appeal.

[11] As far as the merits of the appeal are concerned, Mr Christie for the second respondent said that there were three independent, equally complete and compelling bases upon which the WHT had dismissed the appellants’ claim against the second respondent. These were that:

(a) The claim was brought more than 10 years after any relevant acts or omissions by the second respondent;

(b) A majority of the apartments had been bought (by Mr Ivil) with knowledge of the defects, which was reflected in a reduced purchase, and which broke the chain of causation between the alleged negligence and the losses claimed; and

(c) The Livi Trust and WHHL had settled their claim against the second respondent already.

[12] Only one of these findings needs to be upheld in order for the appeal as regards the second respondent to fail.

[13] The new information relied upon in support of the application was derived from material on the Court file relating to separate proceedings between WHHL and Waipareira Investments Ltd (WIL) referred to in the memorandum I have quoted at [6] above.2 Those proceedings involve a 2007 joint venture agreement entered into between WHHL and WIL whereby 13 of the Clearwater Cover units were sold to a company (Marine Resort Ltd (MRL)) established for the purposes of the joint

venture and with a view to developing them. The purchase price was $7.81 million. The parties also agreed not to settle the sale until after the conclusion of the WHT

_proceedings.

2 CIV-2011-404-5801.

[14] Although I will deal with that new material in more detail below, it can usefully be noted at this point that it is said by the second respondent to be relevant to the present application for three reasons.

[15] First, because the second respondent says that the agreement not to transfer title was an attempt by the owners to avoid the operation of s 55 of the Weathertight Homes Resolution Service Act 2008. That section relevantly provides:

(1) A change in the ownership of a dwellinghouse on or after the transition date terminates any claim made in respect of that dwellinghouse alone by its former owner.

(2) For the purposes of this section, a change in the ownership of a dwellinghouse arising out of an agreement for its sale and purchase occurs on the day on which the sale and purchase is settled.

[16] Had s 55 applied, WHHL’s claim would automatically have been terminated.

[17] Secondly, the second respondent says that the $7.81 million price agreed to be paid under the joint venture for the transfer of the apartments to MRL was a full value market price, which meant that the appellants had suffered no relevant loss as a result of the alleged leaky building issues.

[18] Thirdly, the substance of the proceedings themselves were said to be relevant to the likelihood of WHHL’s ability to pay any costs award in the present proceedings. That is because the proceedings have their origins in Property Law Act notices issued by WIL in relation to mortgages over some of the units presently in issue, together with three other townhouses owned by WHHL in Clearwater Cove. WHHL’s apparent inability to meet the mortgages was necessarily suggestive of impecuniosity.

The appellants’ opposition and the basis for it

[19] In formal terms, the application was opposed by the appellants on the grounds that:

(a) The first appellants’ assets exceed its liabilities;

(b) There is no evidence that the second appellants will be unable to meet an award of costs; and

(c) The alleged liabilities of the first appellant relied upon by the second respondent as warranting increased security (ie the mortgages) have been discharged.

[20] In an affidavit filed on behalf of the appellants, Mr Ivil deposed that: (a) WHHL is solvent;

(b) WHHL had applied in the WIL proceedings to have the mortgages over its Clearwater Cove properties discharged. When that application was granted it would leave WHHL owning townhouses worth $2 million outright.

(c) The $7.81 million price agreed to be paid for the transfer of the units to MRL was not a full market price. Mr Ivil produced a number of much higher valuations he had obtained and said:

Rather [the purchase price] was the aggregate of the value of the 13 apartments, a development site and air rights attaching to the apartment building. Those latter assets do not suffer from any value reducing defects such as those affecting the 13 apartments.

The WIL proceedings

[21] The events giving rise to the WIL proceedings commence with a $2 million loan made by WIL to WHHL in May 2007. The loan was secured by a mortgage over those townhouses owned by WHHL elsewhere in Clearwater Cove. Then, in May 2008, WHHL and WIL entered into the joint venture agreement I have referred to above. In terms of that agreement, and after agreeing to purchase the 13 apartments from WHHL, MRL was to attempt to purchase the remaining three units in the complex and then to redevelop the entire site as a hotel. As I have said, the agreed sale price for the 13 units was $7,810,000.

[22] Under the arrangement, MRL was to be partly capitalised by WIL releasing the $2 million mortgage debt owed to it by WHHL. This $2 million release was to be treated as WIL’s initial investment in MRL. In return for the release, WHHL gave MRL a credit of $2 million in relation to the eventual transfer of the 13 units to MRL. The $2 million was to constitute the deposit paid by MRL to WHHL on the sale and purchase.

[23] In late 2008 MRL appointed a property manager, entered into tenancy agreements with the 13 unit owners and began receiving rent from them. But as I have said, it was also orally agreed between the joint venture partners that the transfers of title to MRL would not be registered until June 2011, after the WHT adjudication was complete. That adjudication took place in March 2011. It seems that in November 2010 two of the existing mortgages over the units were refinanced by WHHL borrowing the required $640,000 sum from WIL, repaying the existing

mortgagee, and granting a new mortgage to WIL.3

[24] Notwithstanding the completion of the WHT adjudication, WIL’s mortgage over the townhouses has not been discharged. Nor have the titles to the units yet been transferred to MRL. Indeed, as I have said, Property Law Act notices were issued in relation to defaults by WHHL and WHHL then sought orders requiring WIL to discharge the mortgage.4 WIL’s position appears to be that the joint venture has been terminated and it sought the appointment of a receiver for either the joint venture or for MRL.

[25] At the time of the security hearing before me, WHHL’s application to have the mortgages discharged had been heard by Woodhouse J, but had not yet determined. It was accepted by the appellants and the second respondent that the outcome might be material to the matter before me and that, if reasonably possible, my decision on this application should await that judgment.

[26] On 11 July 2012 Woodhouse J issued a lengthy judgment in which he declined to make the orders sought by WHHL essentially on the basis that any

3 West Harbour Holdings Ltd v Waipareira Investments Ltd [2012] NZHC 1645; HC Auckland

_{CIV-2011-404-5801, 11 July 2012, (HC) at [39].}

4 CIV-2011-404-5801.

discharge was contingent on transfer to MRL of title to the Clearwater Cove units.5

This had not been effected and he could not on the evidence be satisfied that WHHL was ready willing and able to perform that or other relevant aspects of the joint venture agreement. In the course of reaching that conclusion, Woodhouse J made a number of relevant, albeit contingent, findings. In particular, he said:

[46] On the basis of the evidence presently available it appears that West Harbour is insolvent. I earlier recorded that some findings of fact are necessarily provisional. The conclusion about insolvency is in that category; I am not making a formal determination that West Harbour is insolvent. This provisional conclusion is based on a statement of West Harbour’s financial position as at 31 March 2011. This records an excess of liabilities over assets of $20,283. The statement does not record any liability for the sum of approximately $3.72 million which is still undoubtedly owed, as a matter of law, by West Harbour for the loan secured by the mortgages over the 13 units. And this includes the debt of some $830,000 owed to Waipareira under the apartments mortgage. One of the assets in the statement is a launch with a recorded value of $600,000. The Waipareira Trust accountant, Ms Christine Wu, gave evidence on West Harbour’s financial position. This included a statement that she understood that the launch had been sold but she did not know what had happened to the proceeds. Mr Ivil responded to this as follows:

Christine is in error in claiming that the motor launch in question has been sold. It continues to be owned by the Livi Trust.

This is an unusual statement about an asset that had been in the books of West Harbour. The Livi Trust, through its trustees, is a legal entity distinct from West Harbour. The trustees are Mr Nicolass Van Dijk and Mr Norman Palmer. On the basis of this evidence, the launch is not an asset of West Harbour and there is no evidence as to the consequential effect on West Harbour’s balance sheet.

[47] It is also at least reasonably arguable on the evidence that Marina Resort is insolvent. There is a balance sheet as at 30 June 2011 recording (using round figures) total assets of $7.2 million and total liabilities of $3.7 million. This suggests there are net assets of $3.5 million. However, the assets figure includes the 13 units at a value of $7 million. There are major conflicts of evidence as to the current value of the units, but on the evidence for Waipareira it is at the least reasonably arguable that the value of the units may be less than the total owing to mortgagees. There is one valuation in evidence of $2.86 million for the units. On that value there is a deficit of over $600,000.

[48] West Harbour has given security over two of the units to its solicitors for outstanding legal fees of around $110,000. This was done without the consent of Waipareira and Marina Resort. The solicitors have caveated the titles to the units.

5 West Harbour Holdings Ltd v Waipareira Investments Ltd [2012] NZHC 1645.

[49] There are rates owing on the units. Some of the arrears are said to pre- date the joint venture agreement.

[50] There is evidence that Waipareira has paid substantially more to Marina

Resort than West Harbour. Some evidence indicates a $500,000 difference.

[27] I will refer to other aspects of the judgment, in the discussion below.

Jurisdiction and approach

[28] Before turning to consider the merits of the second respondent’s increased security application, it is necessary briefly to address the question of the Court’s jurisdiction and approach in relation to such an order. Although jurisdiction was not raised in the appellants’ notice of opposition, the issue was addressed by both Mr Smyth and Mr Christie before me.

[29] As I understand it, Mr Smyth’s principal position was that the application could only be determined in the context of the Court’s discretion to award increased and indemnity costs under r 14.6. On that basis he said that the application was premature because any ground upon which such costs might be awarded was necessarily speculative. I will return to that point later.

[30] But in my view, the starting point must necessarily be r 20.13, which governs security for costs on an appeal. Rule 20.13 relevantly provides:

...

(2) The Judge must fix security for costs at the case management conference relating to the appeal, unless the Judge considers that in the interests of justice no security is required.

(3) The amount of security must be fixed in accordance with the following formula, unless the Judge otherwise directs:

a/2 x b where—

a is the daily recovery rate for the proceeding as classified by the

Judge under rule 14.4; and

2. is the number of half days estimated by the Judge as the time required for the hearing.

[31] While r 20.13 contemplates that an order for security will be made at the first conference and on the basis of the specified formula (as, indeed, it was here), I accept Mr Christie’s submission that the rules permit flexibility in both respects. The words in r 20.13(3) “unless the Judge otherwise directs” plainly indicate that the formula may be departed from and in my view there is nothing in r 20.13 to suggest

that any order made at the first conference cannot be revisited thereafter.6 Such

flexibility is inherent in the overarching objective of the rules set out in r 1.2 and in the directive in r 1.6(2) to dispose of matters not provided for “in the manner that the court thinks is best calculated to promote” that objective.7

[32] In terms of the matters that are relevant to the exercise of the r 20.13 discretion, it might reasonably be supposed that assistance would be derived from the matters traditionally regarded as relevant to determining applications for security in first instance matters under r 5.45.8 There, security may be ordered “if the judge thinks it just in all the circumstances”. An “interests of justice” touchstone is of course already reflected in r 20.13(2), which provides that security may be dispensed with if the “interests of justice” require it. Similarly, one of the overarching r 1.2 objectives is facilitating the “just” determination of (inter alia) interlocutory

applications.

[33] That said, however, the starting points under rr 5.45 and 20.13 are different. In first instance matters, the starting point is that security is not automatic, whereas on appeal security (set according to the statutorily prescribed formula) is the default position. This is reflected in the fact that the r 5.45 impecuniosity threshold (reason to believe that a plaintiff will be unable to pay the defendant’s costs) is not a prerequisite under r 20.13. No doubt the underlying policy reason for the difference is that it is one thing to impose a monetary hurdle on a litigant who has already had the benefit of an (unsuccessful) first instance hearing, and quite another potentially

_{to deny a plaintiff at first instance access to the Courts at all through the making of}

6 _{And see Newton v Newton (2004) 17 PRNZ 695 (HC).}

7 To the extent further support is required, reference could also be made to ss 13 and 16 of the

_{Interpretation Act 1999.}

8. See r 1.6(1). These would include the merits of the appeal, potential prejudice to either party and the overall balancing of respective interests.

an order for security. Equally, however, care must be taken not to undermine a

litigant’s right of first appeal by imposing onerous security obligations.

[34] And in the present case, of course, it is relevant that the standard security has in fact already been ordered and paid by the appellants.

[35] Bearing all those matters in mind, I turn now to consider the present application.

Discussion: should an order for increased security for costs be made here?

[36] As far as the potential application of s 55 is concerned, Mr Ivil has frankly admitted that the settlement date agreed for the units was, indeed, designed to avoid any difficulties that the transfer of title would cause for WHHL’s WHT claim.9 On a literal application of the wording of s 55, that aim has arguably been achieved. Settlement has not occurred and it is my (tentative) view that that section does not, strictly speaking apply.

[37] That said, however, the sale and future transfer to MRL nonetheless remains relevant to the present application.

[38] First, it is clear from the evidence referred to by Woodhouse J in his judgment that WIL (and MRL) had full knowledge of the leaks when they entered the joint venture and the sale and purchase agreement. For example, at [16] he refers to the clause in the joint venture agreement which recorded that MRL “has already carried out its due diligence investigation of the properties”. As Woodhouse J records,10 the relevant clause then provides:

(b) The due diligence investigation revealed certain issues with the cladding and window extrusions on the properties, however both cladding and windows will be removed as part of the Waipareira Hotel Development.

(c) West Harbour warrants to make good any issues with the harditex cladding or any leaky building issues (if any) as follows:

9 _{See West Harbour Holdings at [29].}

10 At [16](e) and (f).

(i) West Harbour’s obligation (if any) to make good any issues with the harditex cladding or any leaky building issues is limited to the extent that West Harbour shall be obliged to make good those defects which it is necessary to remedy in order for the third floor development to proceed in accordance with the elevations and layout plans supplied by Ian Kohler and the 2008 MSC Consulting Group Limited Report; and

(ii) West Harbour’s obligation (if any) to make good as set out herein shall be deferred until construction of the third floor development has commenced.

[39] This clause suggests that:

(a) The leaky building issues identified were regarded as relatively minor and (more importantly) as not necessarily impeding the proposed joint venture development;

(b) To the extent that they nonetheless became an issue, WHHL assumed the cost of making any necessary repairs.

[40] It is difficult to determine the extent to which the agreed $7.81 million purchase price for the 13 units reflected these matters. Woodhouse J noted at [47] of his judgment the significant divergence between the various valuations put forward by the parties. I record, however, that I have difficulty with Mr Ivil’s assertion that the agreed price was reduced for leak issues, but increased for the development potential and air rights. The sale and purchase agreement itself refers only to the 13 units, not to “air rights”. Moreover, and as is made clear in the (higher) valuations obtained by Mr Ivil well after the date on which the joint venture was entered, any

value attributed to the development potential is highly contingent.11 On the evidence

before me, my own tentative view is that the price agreed was, contrary to Mr Ivil’s

evidence, a full market price.

[41] Even putting to one side the issue about whether the sale to MRL was at full market value, the steps taken deliberately to avoid the operation of s 55 necessarily

_{creates a question mark over whether the appellants have pursued the WHT}

11 As things have transpired, none of the contingencies have eventuated. By way of example only, the development was predicated on MRL’s ability to purchase the remaining 3 units in the complex. It has been unable to do so.

proceedings in good faith. Any doubts in that respect are reinforced by the fact that WHHL failed to disclose the existence of the joint venture agreement in the WHT proceedings, notwithstanding that an order was made by the WHT requiring Mr Ivil to disclose all documents relating (inter alia) to the proposed redevelopment of the property.

[42] Secondly, and particularly in light of Woodhouse J’s judgment, there seems to be a real basis for concern about the appellants’ ability to meet any costs award. I have recorded Woodhouse J’s (provisional) conclusion that WHHL is effectively insolvent, and his reasons for it, above.

[43] Lastly, I am prepared generally to accept Mr Christie’s submission about the merits of the proposed appeal. I do not, however, place great weight on that factor by itself. Rather it serves to reinforces the weight to be given to the first and second matters above.

[44] Taking all these matters into account, I am satisfied that there are grounds for making an order for increased security here. I am not, however, inclined to do so on the basis of the possibility that significantly increased or indemnity costs may be sought and awarded. I agree, at least in part, with Mr Smyth that it would be unfair to prejudge that matter on the basis of the necessarily preliminary views I have formed.

[45] Based on a standard 2B calculation, the costs that would be payable by the appellants to the second respondent in the event that their appeal in relation to the second respondent fails, is approximately $8,200.12 While I accept that that amount would be doubled if the appeal in relation to the first respondent also fails, the first respondent has not taken steps in relation to this application and I have no sense (for example) of the merits of that aspect of the appeal that relates to the Council’s

_{alleged acts or omissions.}

12 This calculation has been undertaken by the second respondent’s solicitors.

[46] I therefore order that the appellants are to pay a further $5,000 by way of security to the registrar by 5.00 pm on Thursday, 9 August. Failure to do so will

_{result in the appeal being stayed, without the need for a further call.}

Rebecca Ellis J