Porter-Riley v Coe [2012] NZHC 2485 (24 September 2012)

Last Updated: 16 October 2012

IN THE HIGH COURT OF NEW ZEALAND WHANGAREI REGISTRY

CIV-2012-488-583 [2012] NZHC 2485

UNDER Section 145 of the Land Transfer Act 1952

IN THE MATTER OF an application that a Caveat over

19 Bonnett Road, Kaitaia, not lapse

BETWEEN OWEN NICHOLAS PORTER-RILEY AND TUHI MOANA PORTER-RILEY Applicants

AND SERENA COE AND SAMUEL TUPOU Respondents

Hearing: 24 September 2012

Appearances: W D McKean/R L Smith for Applicants

R S Pidgeon for Respondents

Judgment: 24 September 2012

_{ORAL JUDGMENT OF ASSOCIATE JUDGE R M BELL}

Solicitors:

Webb Ross (R L Smith) Private Bag 9012 Whangarei 0148, for Applicants

Email: [e-mail] / [e-mail]

Pidgeon Law, P O Box 6535 Auckland 1141 for Respondents

_Email: [e-mail]

Case Officer(s):

_Email: [e-mail] / [e-mail]

PORTER-RILEY V COE AND TUPOU HC WHA CIV-2012-488-583 [24 September 2012]

[1] This is an application under s 145A of the Land Transfer Act 1952 to sustain a caveat. The property in question is at 19 Bonnett Road, Kaitaia. The title reference is NA138C/129.

[2] The respondents, Serene Coe and Samuel Tupou, are the registered proprietors. The caveators, Owen Nicholas Porter-Riley and Tuhi Moana Porter- Riley live at the property. They have lodged caveat 8254356.1 against the title. The interest claimed under the caveat is

...pursuant to an agreement to mortgage bearing date 10 August 2009 between Samuel Tupou and Serena Anne Coe, the registered proprietors, and Owen Nicholas Porter-Riley and Tuhi Moana Porter-Riley.

[3] Mr Porter-Riley and Ms Coe are brother and sister. Ms Coe and Mr Tupou live in Auckland. Mr and Mrs Porter-Riley and their large family are based in the Far North. Mr Porter-Riley is unemployed. In 2008 they were looking for accommodation in Kaitaia and became interested in buying the property at

19 Bonnett Road. They approached the ASB Bank but were unable to obtain finance. Instead, they made an arrangement with the respondents.

[4] Serena Coe and her partner, Sam Tupou, agreed to buy the property in their names and raise finance from the ASB Bank on terms that would allow Mr and Mrs Porter-Riley to pay the outgoings on the house, including the mortgage payments. It is clear from the evidence that the intention was that while Serena Coe and Sam Tupou would be the registered proprietors, it was intended that in the long term the Porter-Rileys, or a trust associated with them, would become the ultimate owners.

[5] At the time, the parties entered into a tenancy agreement under the Residential Tenancies Act 1986. There are proceedings on foot in the Tenancy Tribunal at the moment but I do wonder whether a tenancy agreement was the proper way of documenting the arrangement, given that the arrangements the parties had in

mind was a long-term agreement for sale and purchase rather than a tenancy.[1] The weekly payment was initially fixed at $400 per week. Later it was increased on account of rises in the floating rate by the ASB.

[6] The purchase price of the property was approximately $340,000. Ms Coe and Mr Tupou borrowed $250,000 from the ASB Bank. The Porter-Rileys financed the rest with direct payments themselves. They paid approximately $86,290 of their own funds into the purchase of the property. In addition, at the same time, the Porter-Rileys also paid a sum of about $2000 to meet a debt of Serena Coe’s. That was required to clear her credit rating so that the ASB Bank would approve the application for finance.

[7] In 2009 the parties went to a Kaitaia lawyer and entered into written agreements. Four documents have been put in evidence:

(a) A deed of acknowledgement of debt and agreement to transfer property upon demand dated 8 August 2009. That recorded that Serena Coe and Samuel Tupou had borrowed the initial capital contribution put in by the Porter-Rileys, and in addition the sum of

$2000, making a total indebtedness of $88,710.80. Ms Coe and Mr Tupou undertook to repay that sum on demand. They also agreed not to apply for further loans from the ASB Bank without prior knowledge of the Porter-Rileys. They agreed not to use the property at 19 Bonnett Road as security for further borrowings as security. They also agreed if called upon to execute a mortgage in favour of the Porter-Rileys. The final provision in that deed was an acknowledgement by Ms Coe and Mr Tupou that the Porter-Rileys would meet all the mortgage payments, rates and insurance on the property and when called upon they would transfer the property to the Porter-Rileys in their joint names.

(b) An agreement relating to purchase and re-sale of the property also dated 8 August 2009. That provided that in consideration of financial

contributions made by the Porter-Rileys to the purchase and that the Porter-Rileys had maintained all mortgage payments, land rates and insurance premiums on the property, Ms Coe and Mr Tupou now agreed to transfer all their interest in the property to the Porter-Rileys with no financial compensation. The Porter-Rileys would immediately seek the consent of the ASB Bank to have Ms Coe and Mr Tupou released from the mortgage and to obtain a transfer of the mortgage into their names. If the ASB did not consent to the transfer, the Porter-Rileys would do all things possible to obtain re-financing funds to re-finance the ASB mortgage. The Porter-Rileys also agreed that they would be responsible for the payment of all legal fees.

(c) A mortgage signed by Ms Coe and Mr Tupou in favour of the Porter- Rileys. The mortgage was in registerable form. It is security for the principal sum of $88,710.80. The date has been recorded as 6 August

2008. Ms Coe and Mr Tupou have signed it.

(d) An authority and instruction form to allow for the transfer of the property from their names to the Porter-Rileys.

[8] The effect of the second document was to make the Porter-Rileys the beneficial owners of the property subject to the prior interest of the ASB bank. Ms Coe and Mr Tupou remained the legal owners of the property, again subject to the mortgage in favour of the ASB bank. It does not appear that the Porter-Rileys themselves were personally liable under the mortgage to the ASB.

[9] As the Porter-Rileys obtained a beneficial freehold interest as well as any interest they had under the tenancy agreement, there is a question whether there has been a merger to allow the tenancy to survive the agreement of August 2009. That may be a question for the referee in the Tenancy Tribunal to consider.

[10] The first document, the deed of acknowledgement of debt, is the document that gives the Porter Rileys the interest they have claimed in their caveat. Mr Pidgeon submitted that Ms Coe and Mr Tupou did not accept the validity of these

documents. Mr Pidgeon suggested that they would be able to argue that the agreement was void for non est factum. There is a complaint in the correspondence that the lawyer whom the parties consulted acted for both sides and that Ms Coe and Mr Tupou did not have the benefit of independent legal advice. I can understand that Ms Coe and Mr Tupou would be upset at the personal covenant to repay the sum of

$88,710.80 when the whole intention of the arrangement was that they were to be bare trustees at most for the Porter-Rileys. I accept also that there might be arguments in terms of the Contractual Mistakes Act 1977 and under equitable doctrines that they might invoke. However, those are matters to be decided at a final hearing when the merits come to be argued.

[11] For present purposes, the deed of acknowledgement of debt does constitute an agreement to mortgage and is sufficient to support a caveat. On an application under s 145A, a caveator has to show an arguable case for the interest claimed. It is not necessary for the court to make a final determination of the merits. There is certainly not enough evidence before the court today to make any determination on the kind of arguments that Mr Pidgeon says might be raised at a substantive hearing. I find that the Porter-Rileys do have a caveatable interest in terms of s 137(1) of the Land Transfer Act.

[12] But that does not conclude the matters for today though. The real “meat” of

the case is the exercise of the residual discretion.

[13] The Porter-Rileys have not managed to keep up the payments and the mortgage has fallen into default. The evidence is that the Porter-Rileys have not made any payments under the mortgage since March 2012. The ASB Bank has issued a notice under s 119 of the Property Law Act, and that has been served on Ms Coe and Mr Tupou. The default identified under the notice is the sum of

$7226.20. The date of the notice is 9 July 2012. The date fixed for compliance is

9 August 2012. It is undisputed evidence that that default has not been remedied.

[14] Ms Coe and Mr Tupou are in an invidious position. They had bought this property on the basis that the Porter-Rileys would meet the outgoings on the property and that was with the long-term aim of seeing that the Porter-Rileys could achieve

ownership of the property. The Porter-Rileys have not managed to keep up their payments. That exposes Ms Coe and Mr Tupou to a liability to the ASB bank under their personal covenants under the mortgage. On the other hand, although they may be in financial difficulties, the Porter-Rileys are faced, at worst, with a claim from Ms Coe and Mr Tupou for some indemnity under the arrangements they had entered into. It may be easier for the bank to enforce its rights against Ms Coe and Mr Tupou than it will be for them to be paid back by the Porter-Rileys.

[15] Ms Coe and Mr Tupou have put in evidence a copy of a market valuation by a Kaitaia registered valuer. The valuation is dated 28 August 2012. It is addressed to the ASB Bank. I infer that the ASB Bank has in turn passed it on to the lawyers for Ms Coe and Mr Tupou. The report identifies the property as 16 Bonnett Road. The address I have been given is 19 Bonnett Road. It is clear from reading the report, and in particular the title reference, that it does deal with the property in question in this case. Parts of the report have been blacked out. I assume that those matters might be advice to the ASB bank as to what it might obtain on a forced sale of the property. However, the report does make it clear that the valuer has assessed the current market value of the property as at August 2012 as $160,000 inclusive of GST.

[16] It is apparent from the report that its author has inspected the property. In assessing the value he has considered comparable sales in the Kaitaia area including properties nearby. He remarks that the market in Kaitaia for residential housing is soft, and demand is limited. I see no reason not to accept the evidence of the valuer as giving an indication of the current market value of the property. The amount required to meet the ASB’s debt is said to be about $247,000. The ASB has advised the lawyers for Ms Coe and Mr Tupou that the bank will hold its hand for a month to allow for attempts to be made to sell the property privately. I can understand that the bank would be tolerant of efforts by the owners to sell the property. A forced sale is likely to realise less than a voluntary sale by the owners - something I have noted myself from having heard cases in Northland involving sales of property by mortgagees. In particular I refer to the decision of Austin v Southland Building

Society[2] which involved the sale of a coastal property not too far away from Kaitaia where there was a drastic loss in value both for the owners and for the mortgagee.

[17] The Porter-Rileys put to me that for the court to exercise its discretion in favour of the Ms Coe and Mr Tupou would not be justified. Both parties are agreed that the approach in this case is to follow the decision of the Court of Appeal in Pacific Homes Ltd (In Rec) v Consolidated Joineries Ltd:[3]

We are of the view that in the dictum in Sims v Lowe[4] Somers and Gallen JJ were concerned with the situation which was then before the Court and were not putting their minds to a situation in which there is no practical advantage in maintaining a caveat lodged by someone who could properly claim a caveatable interest. In such circumstances the Court retains a discretion to make an order removing the caveat, though it will be exercised cautiously. An order will be made for removal only where the Court is completely satisfied that the legitimate interests of the caveator will not thereby be prejudiced. If, on the facts of a case, it can be seen that the caveator can have no reasonable expectation of obtaining benefit from continuance of the caveat in the form of the recovery of money secured over the land or specific performance of an agreement or if the caveator's interests can be reasonably accommodated in some other way, such as by substituting a fund of money under the control of the Court, then it may be appropriate for the caveat to be removed notwithstanding that the right to the claimed interest is undoubted.

[18] The Porter-Rileys submitted against the exercise of the discretion. They say that moving the caveat would only be to the advantage of Ms Coe and Mr Tupou because it would enable them to market the property privately and discharge their obligations to the bank without taking into account their own interests. They say that the aim of Ms Coe and Mr Tupou is to get a sale price which covers as much as possible their obligations to the bank, whereas they say that their own objectives are to get the best price.

[19] That submission lacks realism. Quite frankly, the Porter-Rileys are dreaming if they think that the property could sell for more than $247,000. The only valuation evidence available is that the property has a valuation of about $160,000. It would be remarkable if the valuer has got his valuation of the property so wrong that he has

_{under-estimated the value of the property by $80,000, that is one-third of the sale}

price of the property, or alternatively that the property is one-and-a-half times the value that he has given. The Porter-Rileys’ objective of getting the best price means that their plan to make a surplus on the side is quite unrealistic.

[20] The Porter-Rileys also allege that they have not been satisfied that all the money they have paid to Ms Coe and Mr Tupou has gone towards paying outgoings on the property. They point to the initial payment of the Baycorp debt of $2000. That seems to have been done consensually and on notice. Beyond that, they do not point to any evidence that suggests that the money has not gone towards payment of outgoings. Ms Coe denies that she has done anything with the money other than apply it towards the outgoings on the property. The evidence is not enough for me to make a finding one way or the other. On a caveat application where the financial situation of the parties generally has gone downhill drastically, it is not appropriate to defer a decision on a caveat or to defer decisions about sale while accounting enquiries are carried out. That may be something that can be sorted out later. It is not a relevant factor in the circumstances of this case.

[21] Next, it was submitted that in this case the parties are family and they are deeply divided, so that it is preferable to leave the intended sale to an independent third party such as a bank. I make again the point that a sale by an outside party such as a bank is likely to realise less than a willing sale by the registered proprietors. There is little disadvantage to the Porter-Rileys in the bank undertaking a sale, because they are in a poor financial position and would not be good for any claim for a shortfall after a mortgagee’s sale. On the other hand, I see Ms Coe and Mr Tupou as having a vital interest in wanting to at least reduce their potential liability to the bank.

[22] Leaving the matter of a sale to the bank would be a retrograde step. It is not a matter that should count in favour of leaving the caveat in place. The Porter-Rileys say that they agreed to remove the caveat if the property is sold by private sale prior to the mortgagee sale but only if the surplus proceeds are paid to them. They say that Ms Coe and Mr Tupou have not agreed to that. In his submissions, Mr Pidgeon made it clear that if there was a sale and there was a surplus, the surplus would be held in a solicitor’s trust account for later determination.

[23] In these circumstances, it is clear that it is unrealistic for the Porter-Rileys to occupy the property indefinitely. They have defaulted in making payments. The invariable consequence is that when mortgage payments are not met mortgagees start to exercise their powers. It is unwise to await the inevitable consequences of default. Steps must be taken in advance to at least reduce the impact of those defaults. A sale is inevitable. Allowing the caveat to remain on the property on some indefinite basis in the hope that something might turn up for the better is unrealistic.

[24] The present situation does come within the Court of Appeal’s decision in Pacific Homes (In Liq) v Consolidated Joineries Ltd. It is something like the David Henderson[5] case to which Mr Pidgeon has referred in his written submissions, while the sums in issue are much smaller than in that case.

[25] I order that caveat 8254356.1 shall not lapse, but this order is subject to these terms:

(a) The caveat will be removed upon the property being transferred to a third party either by Ms Coe and Mr Tupou or by the ASB bank in exercising its power of sale under its mortgage.

(b) If there is any surplus after payment of the ASB bank’s mortgage, including any costs of sale, real estate agent’s commission and any conveyancing fees on the sale, that surplus is to be held in a solicitor’s trust account until further order or any agreement of the parties.

(c) Leave is reserved to apply for further directions, if required.

Costs

[26] Mr Pidgeon seeks costs. The respondents will have costs on a 2B basis. Today’s hearing has taken quarter of a day.

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

_{Associate Judge R M Bell}

---

[1] See Residential Tenancies Act 1986, s 5(1)(o).

[2] See Southland Building Society v Austin [2012] NZHC 497 and the appeal Austin v Southland

_{Building Society [2012] NZCA 337.}

[3] Pacific Homes Ltd (In Rec) v Consolidated Joineries Ltd [1996] 2 NZLR 652 per Blanchard J

_{at 656.}

[4] Sims v Lowe [1988] 1 NZLR 656 at 659-660.

[5] 200 Victoria St Ltd v Henderson HC Auckland CIV 2010-404-3894, 30 June 2010.