McCabe v Maori Trustee [2012] NZHC 2131 (22 August 2012)

Last Updated: 27 September 2012

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV 2011-404-005428 [2012] NZHC 2131

BETWEEN D A MCCABE Applicant

AND MAORI TRUSTEE Respondent

_{/...Continued over}

Hearing: 9 February 2012

Counsel: R B Hucker & D L Lang Sui for applicants

B Arapere for respondent

Judgment: 22 August 2012

_{JUDGMENT OF ASSOCIATE JUDGE ABBOTT}

This judgment was delivered by me on 22 August 2012 at 2.30pm, pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

_{Date...............}

Solicitors:

R B Hucker, Hucker & Associates Auckland, PO Box 3843, Shortland Street, Auckland

B Arapere/T Williams, Wackrow Williams & Davies Ltd, PO Box 461, Shortland Street, Auckland

MCCABE V MAORI TRUSTEE HC AK CIV 2011-404-005428 [22 August 2012]

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV 2011-404-005429 [2012] NZHC 2131

BETWEEN P J MCCABE Applicant

AND MAORI TRUSTEE Respondent

[1] The Maori Trustee is the owner of several lots of land on Constitution Hill, in central Auckland. At material times the Maori Trustee leased two of the lots to David Allen McCabe and Pamela June McCabe (a husband and wife), under powers granted by the Maori Reserved Land Act 1955.

[2] Mr and Mrs McCabe failed to pay rent and rates due under the leases. The Maori Trustee obtained an order for cancellation of the leases and possession of the land, and judgment for the unpaid rent and rates.

[3] The Maori Trustee issued bankruptcy notices demanding payment of the judgment sum.

[4] The McCabes have applied to set aside the bankruptcy notices. They say that they have cross-claims against the Maori Trustee, arising out of improvements that they made to the dwellings and which exceed the amount of the judgment debt.

[5] The Maori Trustee says that the McCabes do not have a genuine triable cross- claim which they could not have raised in the underlying proceedings, and there is no other basis for the Court to set the notices aside.

Background

[6] The Maori Trustee is the legal owner of properties at 6 and 10 Constitution

Hill, Auckland. Both lots are Maori freehold land.

[7] At material times, both properties were subject to leases issued under the Maori Reserved Land Act (which superseded the Maori Reserved Land Act 1935, under which the land was first leased). The leases were issued for a 21 year term, but with a perpetual right of renewal subject to compliance with the terms of the lease. Residential buildings had been constructed on the land before the leases now in question were issued.

[8] The McCabes purchased both leases in 1993. Subsequent to purchase, with the knowledge of and without opposition from the Maori Trustee, they substantially

renovated the building on 10 Constitution Hill and used it as their home, and undertook alterations to the building on 6 Constitution Hill to allow it to be used as a backpackers’ lodge. In 2002 the leases were extended for a further term of 21 years from 1 July 2001.

[9] The leases provided for a review of rent every seven years. The annual rental for the seven year period commencing 1 July 2008 was determined (by arbitration) in 2009. The McCabes had a history of being late in payment of rental, but until

2009 eventually brought payments up to date. However, after the new rent was determined by arbitration they failed to pay the new rent, as well as rates payable under the leases.

[10] The Maori Trustee applied to this Court for an order cancelling the leases, for possession of the land, and for judgment for the outstanding rent and rates. The McCabes initially opposed the Maori Trustee’s application and cross-applied for relief on the basis that they had made improvements to the buildings on both properties and were entitled to set-off the cost against the outstanding rent and rates.

[11] At the hearing the McCabes withdrew their opposition and orders were made, by consent, for termination of the leases. After allowing the parties time to confer on the amount of the outstanding rent, the Court entered judgment on 15 July 2011 for the Maori Trustee against both Mr and Mrs McCabe for the sum of $237,273.04 (inclusive of costs). They have not satisfied that judgment. The Maori Trustee claims this amount in the bankruptcy notices.

[12] The McCabes accept that they are indebted to the Maori Trustee for the judgment sum, but contend that they are entitled to be reimbursed for the improvements that they undertook to the properties in a sum greater than the judgment debt.

The principles to be applied

[13] The applications are brought under s 17(1)(d) of the Insolvency Act 2006 which requires a debtor to satisfy the Court that he or she has a cross-claim against

the creditor issuing the bankruptcy notice, which cross-claim has to be equal to or greater than the judgment debt, and not available for use as a defence in the proceeding in which the judgment was obtained:

17 Failure to comply with bankruptcy notice

(1) A debtor commits an act of bankruptcy if—

(a) a creditor has obtained a final judgment or a final order against the debtor for any amount; and

(b) execution of the judgment or order has not been halted by a court; and

(c) the debtor has been served with a bankruptcy notice; and

(d) the debtor has not, within the time limit specified in subsection (4),—

(i) complied with the requirements of the notice; or

(ii) satisfied the court that he or she has a cross claim against the creditor.

....

(7) In subsection (1)(d)(ii), cross claim means a counterclaim, set-off, or cross demand that—

(a) is equal to, or greater than, the judgment debt or the amount that the debtor has been ordered to pay; and

(b) the debtor could not use as a defence in the action or proceedings in which the judgment or the order, as the case may be, was obtained.

[14] A debtor seeking to raise a cross-claim in answer to the bankruptcy notice must demonstrate that he or she has a prima facie case with a fair chance of success, or a “genuine triable demand”.1 In addition, the debtor must be able to demonstrate an inability to have raised that claim in the underlying proceeding. This inability has been described as “primarily a legal inability”, and a debtor wishing to rely on a factual inability must show “some cogent circumstance”:2

In Clark v UDC Finance Ltd [1985] 2 NZLR 636 Casey J held that an applicant under r 41 must show: (1) that he has a genuine triable counterclaim, set-off or cross-demand; and (2) that it is such that he could

not have set it up in the action in which the relevant judgment was given. His Honour referred to the following passage from the decision of Lockhart J in Re Brink, ex parte Commercial Banking Co of Sydney Ltd (1980) 30 ALR at p 437:

"The words 'that he could not have set up in the action or proceeding in which the judgment or order was obtained' mean 'which he could not by law set up in the action': see Re Jocumsen [(1929) 1 ABC 82] at p 85; Re a Debtor [1914] 3 KB 726, per Avory J, at 730; Re Stokvis (1934) 7 ABC 53, especially per Lukin J at 57, where His Honour said: 'I take a counter-claim, set-off, or cross demand which could not be set up as one which, from point of time or from its nature, or from absence of empowering provisions, or from positive inhibition so to do, could not be set up in the particular case in which judgment was obtained . . . Mere failure to take advantage of the opportunity can hardly be said to be inability.'"

The inability of which r 41(3) speaks is primarily a legal inability. Factual inability is also available but that requires some cogent circumstance. To take a looser view would be to frustrate the purpose of the rule which is obviously designed to ensure that all issues between the parties both ways be tried at once and that a bankruptcy notice only be set aside if the debtor has a cross-claim which either legally or factually could not be set up in the same proceedings. As Casey J said in Clark's case the primary emphasis is on the legal nature of the impediment and therefore any factual grounds for the suggestion that the cross-claim could not be set up must be carefully scrutinised.

[15] Failure to take advantage of an opportunity is not an inability in terms of the test.3

The opposing arguments

[16] Counsel for the McCabes submitted that they had satisfied the first of the requirements under s 17 (showing an arguable cross claim) on three alternative bases:

(a) An entitlement to compensation for improvements effected to the properties, arising under clause 14 of the lease and ss 38 and 39 of the Maori Reserved Land Act;

(b) A claim at common law for loss of opportunity to obtain value for the

improvements (based on the improvements being tenants’ fixtures or

_{chattels) following cancellation of the lease; and}

3 Clark v UDC, above n 1, at 640.

(c) A claim that the Maori Trustee had benefited from the improvements undertaken by the McCabes, and was unjustly enriched by re-letting the improved properties without compensating the McCabes, giving rise to an entitlement to equitable compensation and a remedial constructive trust.

[17] Counsel further submitted that the McCabes were unable to pursue these claims in the earlier proceeding as the entitlement to compensation or claim for lost opportunity only arose on termination, and it could not be said that the Maori Trustee was unjustly enriched until the Court ordered cancellation rather than allowing the McCabes relief.

[18] As to the first of these bases of claim, clause 14 of the lease provides a mechanism for determining the rights of a lessee with respect to improvements (by reference to Part III of the Maori Reserved Land Act) in the event that the lease is not renewed, thereby importing the compensation provisions in ss 38 and 39. Counsel submitted that although both clause 14 and ss 38 and 39 were expressed as applying where the lease is not renewed, a broad interpretation should be given to those provisions to extend their application to any termination of a lease of Maori freehold land. He argued that this wider interpretation should be adopted in light of the general presumption in statutory interpretation that Parliament does not intend to affect established common law rights (no expropriation without compensation) or interfere with established property rights, and as it was consistent with the provisions for compensation for improvements under leases of Maori freehold land granted

under Te Ture Whenua Maori Act 1993.4

[19] In the alternative, and as the McCabes’ second basis of claim, counsel submitted that the improvements undertaken comprised tenants’ fixtures and chattels to which they retained ownership and for which they had an arguable claim. Counsel characterised this claim as a loss of opportunity to dispose of these fixtures and

chattels as a consequence of cancellation of the lease.5

[20] Thirdly, counsel submitted that the improvements were needed in light of the poor condition of the buildings to bring them up to a habitable and rentable standard, and the Maori Trustee would have had to engage someone to do the work had the McCabes not done so. He referred to the McCabes’ evidence that they had spent in the order of $710,000 on improvements and said that the improvements had increased the value of the properties substantially (by more than the amount of the outstanding rent). He argued that the Maori Trustee had accepted the benefit of that work without disabusing the McCabes of their belief that they would ultimately be reimbursed, and the Maori Trustee’s expropriation of the improvements without compensation unjustly enriched it, warranting the imposition of a remedial constructive trust.

[21] Counsel submitted that all three claims arose out of the leases under which the claim for rent had been made, there was no restriction on set-off in the lease, and accordingly there was a sufficiently close nexus for an equitable set-off to be available.6

[22] Lastly, counsel argued that the McCabes’ rights arose only after the lease was cancelled, and the Maori Trustee declined to compensate them, and they were unable to raise them in the proceeding in which the Maori Trustee obtained judgment for unpaid rent and rates.

[23] Counsel for the Maori Trustee submitted that none of these claims were arguable, but in addition that the McCabes had not established that they were unable to raise them in the underlying proceeding in opposition to the claim for unpaid rent and rates.

[24] As to the contention that the McCabes had a contractual and statutory right to compensation, counsel submitted that both clause 14 and ss 38 and 39 expressly applied only at the time of renewal of the leases, and there was no reason to interpret ss 38 and 39 to apply in the event of a termination for breach. Counsel submitted further that there was no reason to read the compensation provisions in ss 206 and

207 of Te Ture Whenua Maori Act into ss 38 and 39 of the Maori Reserve Land Act.

It had been open to Parliament to amend the Maori Reserve Land Act at the same time as passing Te Ture Whenua Maori Act. Parliament did not do so, and the provisions in Te Ture Whenua Maori Act were said to apply only to leases granted under that Act.

[25] Counsel also argued that even if the McCabes’ claims could be said to be arguable, they had not produced any evidence to show that the improvements had increased the value of the property.

[26] In relation to the claim for loss of opportunity to dispose of the improvements, counsel submitted that the improvements had become part of the land and there was no evidence of any tenants’ fixtures or chattels to which that claim could attach. She argued that even if some improvements could have been regarded as tenants’ fixtures, they remained part of the buildings or otherwise fixed to them at the time of termination of the leases, and ownership passed to the Maori Trustee on

termination by operation of law.7

[27] In relation to the claim for unjust enrichment, counsel submitted that the McCabes have failed to establish an evidential basis for the argument that it would be unjust to allow the Maori Trustee to retain the benefit of the improvements. She pointed out that the McCabes had the obligation under the leases to maintain the buildings, and it was their choice to effect the level of improvements that they did. They knew of the provisions of the lease, including the right to seek compensation for improvements on renewal, yet chose not to pay rent to keep the leases “on foot”. She also referred to the evidence of the Maori Trustee that it had afforded the McCabes opportunity to obtain value (whether by sale or by assignment) but the McCabes were not prepared to agree to the conditions for the Maori Trustee’s consent, including a requirement to bring the rent up to date.

[28] Lastly, counsel for the Maori Trustee argued that the McCabes had not shown that they were unable to raise their arguments on the underlying proceeding: to the contrary, they had done so in pleadings, evidence and submissions, before electing not to pursue those arguments.

Discussion

The contractual and statutory claim for compensation

[29] Clause 14 of the leases (which for the purposes of these applications are in identical form) gives the lessee a right to compensation for improvements in the event that the lessee does not renew the lease, and the Maori Trustee grants a new lease (all in accordance with the Maori Reserved Land Act). It is to be read in conjunction with clause 13 which gives the lease the right to renewal:

13. That upon the expiry by effluxion of time of the term hereby created the lessee shall if she has complied with all the terms covenants and conditions of this lease have the right to obtain in accordance with the provisions of Part III of the Act a renewal of HER lease at a rent to be determined in accordance with the provisions of the said Part III for a term of twenty-one years computed from the expiry of the term hereby created and subject to the same terms covenants and provisions of this lease, including this present provision for renewal and all provisions ancillary or related thereto.

14. That if the lessee elects not to accept a renewed lease or fails to execute a renewed lease within one month after the same is tendered to HER for the purpose, the right to a new lease of the land shall as soon as practicable be put up to public competition by public tender in accordance with the provisions of Part III of the Act, and the rights of the lessee with respect to the improvements shall be determined by reference to the provisions of Part III of the Act, and not otherwise.

[30] Sections 38 and 39 of the Maori Reserved Land Act (under which the leases were granted) provide the procedure for the Maori Trustee to grant a new lease when a lessee does not renew its lease:

38 Procedure when lessee does not accept renewal of a lease

Where the lessee elects not to accept a renewed term of a lease which is renewable in perpetuity, whether or not that lease is a prescribed lease, or fails to execute a memorandum of lease or a memorandum of extension of lease within one month after the same is tendered to him for the purpose, the right to a new lease of the land shall, as soon as practicable, be submitted to public competition by public tender, subject to the following terms and conditions....

39 Procedure where right to new lease not purchased

(1) If the right to a new lease is not purchased under section 38 of this Act, or if the purchaser, not being the outgoing lessee, fails to pay to the Maori Trustee within the time limited in that behalf the amount of the value

of improvements, or if the purchaser fails to execute the memorandum of lease within one month after the memorandum is tendered to him for the purpose, the Maori Trustee may at any time thereafter, and from time to time as often as he thinks it necessary so to do, or until a tender has been accepted, submit to public competition by public tender a right to a new lease of the land at such rent, and subject to the payment of such sum for the value of improvements, as the Maori Trustee may determine, but otherwise on the terms and conditions prescribed in section 38 of this Act....

[31] The sections also include provision for payment by the new lessee to the Maori Trustee for improvements to the land (the value of which is fixed by a special valuation or in accordance with the lease), and payment by the Maori Trustee to the outgoing lessee (or other person entitled to receive payment) of the amount received by the Maori Trustee “in respect of improvements for which the outgoing lessee is entitled to be paid”.8

[32] I consider that clause 14 applies only at the time of renewal, and the right to compensation for improvements is available when the lease has run its course rather than when it is terminated for breach as in the present case. That is the natural and ordinary meaning of the language of the clause, particularly when read in conjunction with the preceding clause 13 which gives the right of renewal. There is no reason to extend that natural and ordinary meaning to a termination for any cause, particularly a cause brought about by the lessees’ default under the lease.

[33] The importation of ss 38 and 39 does not, in my view, change that interpretation. Those sections again specifically apply at the time of renewal. I do not accept the submission of counsel for the McCabes that this is a matter of expropriation of property or unnecessary interference with established property rights. The McCabes must be taken to have known of the terms of the lease when they purchased it and the steps that they needed to take to have an entitlement to the value of improvements. The lease does not deny them those rights, save where they breach an essential term and choose not to remedy the breach, resulting in cancellation (as in this case).

[34] I am not persuaded by the argument that a wider interpretation should be given for consistency with Te Ture Whenua Maori Act. These leases were granted in

respect of, and are administered by the Maori Trustee, under their own statutory regime, the Maori Reserved Land Act. Parliament could have amended that Act to provide the rights afforded to lessees of Maori freehold land under ss 206 and 207 of Te Ture Whenua Maori Act, but did not do so. Sections 206 and 207 provide a mechanism for calculating compensation payable for improvements, where a lease makes provision for compensation. They do not determine when compensation is payable – that is dependent on the terms of the lease. Further, Te Ture Whenua Maori Act applies only to leases granted under it. I do not accept that Parliament intended, by the general language in which ss 206 and 207 are expressed, that these sections were intended to alter rights and obligations under the Maori Reserve Land Act.

The claim for loss of opportunity

[35] The second basis of claim depends on a finding that the improvements are either tenants’ fixtures or chattels, still owned by the McCabes at the time of cancellation. I am not persuaded that this claim is arguable. Additions to buildings are fixtures which run with the land. There is no evidence of the specific improvements (valuations refer generally to excavation below the building and addition of bedrooms to 6 Constitution Hill, and a rebuild of 10 Constitution Hill). The McCabes have not referred to any improvements that have not become part of the structure of the buildings or otherwise integral to the land and which could possibly qualify as a lessee’s fixtures with a right to remove pursuant to s 266 of the Property Law Act 2007.

[36] Counsel for the McCabes sought to support this claim by reference to a decision of this Court in Short v Kirkpatrick9 where the Court expressed the view that a stack of removable partitions remained the property of the tenant, notwithstanding that the tenant had left them in the property (and it might be difficult for the tenant to recover them). However, that case can be distinguished as the partitions were clearly tenant’s fixtures. It is also worth noting that the question was before the Court because the tenants had made it known that it intended to remove

them, and the landlord was not intending to exercise any property over them. The

Court commented:10

Had the tenants’ fixtures remained in place, that is to say, affixed to the building on the expiration of the lease, it is clear they would have become the property of the landlord...

[37] Lastly on this point, there is no evidence that the McCabes made any claim after the leases were cancelled on the basis of a right to fixtures or chattels. Further, even if that claim was available, it is difficult to see how it could have been for a sum approaching the judgment debt, let alone exceeding it.

Unjust enrichment

[38] The third basis of claim is the claim for restitution on the grounds of unjust enrichment. The legal elements that the McCabes would need to show for such a claim are: first, enrichment of the Maori Trustee by receipt of a benefit; secondly, enrichment at the expense of the McCabes; and thirdly, that retention of the enrichment is unjust.11

[39] Counsel for the McCabes submitted that even if the Maori Trustee had no legal obligation under the lease to compensate the McCabes for the improvements, there was nonetheless authority for a claim for unjust enrichment based on necessity to restore the properties to a rentable condition (contending that if the McCabes had not effected the improvements, the Maori Trustee would have had to pay someone

else to do so) and the Maori Trustee’s acceptance of the work without demur.12

[40] I accept that it is potentially arguable that the Maori Trustee has been enriched by the improvements at the expense of the McCabes. I note that there is no evidence of the increase in value of improvements on the land as a result of the work undertaken by the McCabes and, in light of the substantially higher rent payable in

_{2006 compared to that payable in 1996 when the McCabes undertook their work,}

10 _{At 363.}

11 National Bank of New Zealand Ltd v Waitaki International Processing (NI) Ltd (1997) 1 NZLR 724 (HC) at 728.

12 See Peter Birks An Introduction to the Law of Restitution (Clarendon Press, Oxford, 1989) at 117 and following.

there may not have been any significant increase in the value of the improvements. Further, the evidence of expenditure is vague and not supported by any documentation. Nevertheless, there is no dispute that bedrooms were added to the basement of 6 Constitution Hill, and that 10 Constitution Hill was rebuilt and modernised. If that was the only issue, I would have accepted this as sufficient evidence for an argument of benefit. However, I consider that there are two obstacles to the McCabes’ claim.

[41] The first obstacle is that the McCabes undertook their work voluntarily – it was not done at the Maori Trustee’s request, nor was it work that the Maori Trustee was obliged to do. The leases provided for the lessee to effect any repairs to buildings and any other improvements on the land, and to renew them as they

became decayed or unserviceable.13 Counsel for the McCabes submitted that a

distinction should be drawn between maintenance and capital expenditure. In my view there is nothing in that distinction – the Maori Trustee did not have an obligation to expend any capital. Further, once the work was undertaken the Maori Trustee did not have a realistic choice whether to accept or reject it: free acceptance of the benefit is a requisite of the cause of action.14 Whilst the Maori Trustee knew of the work being undertaken, and did not object to it, I consider that that falls short of a free acceptance of the benefit. It has to be recalled that the work was undertaken at a point when the lease was current, and whilst it remained in force either the McCabes or a subsequent lessee gained the benefit from it and the previous

improvements (the Maori Trustee’s interest under the perpetually renewable lease was in the ground rent payable from time to time).

[42] The second obstacle to the McCabes’ claim is an extension of the latter point: namely that acceptance of any increased value of the improvements (such as it might be) cannot be considered unjust where it follows cancellation of the lease for failure to pay rent. The McCabes chose not to pay the rent due under the leases once it was increased following the 2008 review. Although there is no evidence from the McCabes as to the reason for this, it is a reasonable inference that the increased rent

_{affected the commercial viability of 6 Constitution Hill (the backpackers’ lodge), and}

13 _{Clause 6 of the leases.}

14 Birks, above n 12, at 275-276.

made it too expensive for the McCabes to continue to use 10 Constitution Hill as their residence. It was open to them, nonetheless, to retain the leases and the right to get value for the improvements from an assignee/purchaser, by paying the rent. They chose not to do that, and must be taken to have known that the decision not to pay the rent brought with it the likelihood of cancellation of the leases and loss of the opportunity to gain anything from their improvements. The Maori Trustee informed them that it would consent to assignment of the leases if rent was brought up to date (and related conditions were met). The McCabes chose not to comply with what were entirely reasonable conditions.

[43] In these circumstances I do not regard it as unjust that the McCabes should lose their right to obtain value from the improvements.

Equitable set-off

[44] In light of my findings above I do not need to address the arguments as to whether the McCabes can claim an equitable set-off, but I will comment on them briefly. Although both the judgment for rent and the McCabes’ claims arise out of the leases, I have doubts as to whether any of the claims can be said to be interdependent with the claim for rent, in terms of calling the Maori Trustee’s

entitlement to rent into question.15 As I see it, the claims have only arisen because

the McCabes failed to pay the rent, but that failure is not attributable the Maori Trustee’s approach to the compensation issue. In other words, the claims do not impeach the right to rent. The claims can be brought independently.

Ability to raise in defence in earlier proceeding

[45] Lastly, I turn to consider whether the McCabes could have raised their claims in defence of the Maori Trustee’s claims in the earlier proceeding. There is no question that they were able, in fact, to do so: the claim for unjust enrichment was pleaded as a ground of opposition to the Maori Trustee’s claim for possession and

_{the claims for compensation were advanced in support of their application for relief}

15 Grant v NZ Motor Corporation Ltd, above n 6.

from the demand for rent. The claims were also advanced in the McCabes’ evidence, and in counsel’s written submissions.

[46] In this application counsel for the McCabes submitted that the claims could not be advanced (in law) until the leases were cancelled. I do not accept that submission. The claim for rent was not included in the Maori Trustee’s application when first filed but was added in an amended application filed four months before the hearing. The McCabes filed an amended opposition in which they raised the claims in opposition to the claim for rent, contingent on whichever way the Court determined the application for possession. The case was adjourned after the order for possession was granted (by consent) for the parties to confer on the claim for rent. Even if the claims were dependent upon the order for cancellation (and I do not have to determine that point) the McCabes had an opportunity to raise them before the judgment for rent was given. They did not reserve their position, and have not explained that decision in their evidence for the present application.

Decision

[47] For the reasons I have given I am not satisfied that the McCabes have a genuine, triable cross-claim which they could not have raised in defence in the proceeding in which the Maori Trustee obtained the judgment on which the bankruptcy notices have been issued. Their applications to set aside the bankruptcy notices are dismissed.

[48] The Maori Trustee is entitled to one set of costs for the two applications (as the defence was common to both applications). Costs are to be fixed on a 2B basis.

_{The Maori Trustee is also entitled to any disbursements as fixed by the Registrar.}

Associate Judge Abbott