Douglas v Morgan [2012] NZHC 3375 (18 December 2012)

Last Updated: 30 January 2013

IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY

CIV-2012-419-1061 [2012] NZHC 3375

UNDER Part 18 of the High Court Rules

IN THE MATTER OF an application under section 3 of the

Declaratory Judgments Act 1908

BETWEEN GRANT FREDERICK DOUGLAS, JENNIFER CAROL DOUGLAS AND JOHN LINDSAY MILLAR (AS TRUSTEES OF THE MAINLAND TRUST)

Plaintiffs

AND HENRY JOSEPH MORGAN, BRIDGET JANE MORGAN AND BAILEY INGHAM TRUSTEES LTD (AS TRUSTEES OF THE HERACLE TRUST) First Defendants

AND HENRY JOSEPH MORGAN, BRIDGET JANE MORGAN AND BAILEY INGHAM TRUSTEES LTD (AS TRUSTEES OF THE MORGAN FAMILY TRUST)

Second Defendants

Hearing: 15 October 2012

Counsel: C T Gudsell QC for Plaintiffs

D Shore for Defendants

Judgment: 18 December 2012

_{JUDGMENT OF KATZ J}

In accordance with r 11.5 High Court Rules

I direct the Registrar to endorse this judgment with a delivery time of 4 p.m. on 18 December 2012.

DOUGLAS V MORGAN HC HAM CIV-2012-419-1061 [18 December 2012]

Solicitors: Dix, Koretz & Millar, Otorohanga – [e-mail]

McCaw Lewis, Hamilton – [e-mail]

Copy to: C T Gudsell QC, Hamilton – [e-mail]

Introduction

[1] The parties to this proceeding are the trustees of three family trusts. Each trust owns one or more lots in a rural residential subdivision near Otorohanga known as “Meadow Park Heights”:

(a) the plaintiffs own Lot 3 and Lot 4 in the subdivision; (b) the first defendants own Lot 5 in the subdivision;

(c) the second defendants own Lot 2 in the subdivision.

[2] For ease of reference I will refer to the plaintiffs as the Douglases. I will refer to the first and second defendants as the Morgans, although two separate family trusts (both associated with the Morgan family) are involved.[1]

[3] The properties in the Meadow Park Heights subdivision are subject to a number of restrictive covenants. A dispute has arisen between the parties as to the correct interpretation of those covenants. This has given rise to the two causes of action before the Court.

[4] Firstly, the Morgans have obtained resource consent from the Otorohanga District Council (“Council”) to subdivide Lot 5 into seven additional lots and an additional right of way lot. In their first cause of action the Douglases claim that further subdivision of the lots in the Meadow Park Heights subdivision is not permitted, as:

(a) the true meaning and effect of the restrictive covenants is to restrict the owners of each lot in the subdivision to one dwellinghouse and

_{one ancillary building per lot; and/or}

(b) the Morgans’ proposed subdivision of Lot 5 is a “commercial activity”

prohibited by the restrictive covenants.

[5] The second cause of action relates to the operation of Henry Morgan Builders Limited (“Henry Morgan Builders”), a company associated with the Morgans, from Lot 2. The Douglases contend that Henry Morgan Builders has been operating from Lot 2 in such a way that it amounts to a “commercial activity” prohibited by the restrictive covenants. They further allege that the Morgans have, in breach of the restrictive covenants, stored building materials on Lot 2, and brought rubbish on to Lot 2 and allowed it to be accumulated there.

[6] The Douglases dispute such claims. They say that, correctly interpreted, the restrictive covenants do not prohibit further subdivision. Nor is undertaking a subdivision of Lot 5 the type of “commercial activity” which the restrictive covenants were intended to address. Finally, the way in which the business of Henry Morgan Builders is operated does not breach the covenants.

[7] The key issues I must determine are:

(a) Do the covenants restrict the number of buildings on Lot 5 to one dwellinghouse and one ancillary building?

(b) Is the proposed subdivision of Lot 5 a “commercial activity”

prohibited by covenant 1.5?

(c) Are the Morgans undertaking commercial activity on Lot 2, in breach of the covenants?

(d) Have the covenants been breached by rubbish being accumulated on

Lot 2, or building materials being stored on Lot 2?

Factual background

[8] Mr and Mrs Roberts owned land near Otorohanga. They decided to subdivide their land into nine “rural residential” lots to be known as the Meadow Park Heights subdivision. They commenced marketing lots in the proposed subdivision in 2001. The lots were marketed as “Quality Lifestyle Blocks” with a “Range of Block Sizes from 7,900m2 to 16 Hectares”.

[9] On 27 May 2002 the Morgans entered into an agreement for sale and purchase in respect of Lot 2 in the proposed subdivision. The sale settled in February 2003. Clause 24 of the agreement for sale and purchase for Lot 2 set out the restrictive covenants which were to apply to the land, preceded by the following introductory wording:

24.1 It is agreed that the title to issue for each of the allotments on the proposed plan of subdivision will be subject to restrictive covenants in the following terms (except in relation to the dimensions of any ancillary buildings to be erected on the various allotments, which may differ). The overriding intention of these covenants is to demonstrate that the subdivision will provide not only an enviable lifestyle opportunity but also a secure investment for the future. To ensure this happens covenants must be put in place.

24.2 The parties acknowledge and agree that the property is part of a development which is intended to be established as a modern and well designed subdivision and that it is desirable that supervision and control be exercised by the vendors for the protection and in the interests of the owners of all allotments in relation to land use and the type of construction to be carried out in the subdivision and, in recognition of these objects, the purchasers, for the benefit of all other residential allotments in the said subdivision, hereby agree with the vendors and will covenant with the vendors ... as follows ...

[10] Various restrictive covenants were then set out. The covenants were substantially identical to those which were subsequently formally created in Schedule B to an Instrument of Transfer (“Transfer”). The title for each of the nine lots was (and is) subject to that Transfer.

[11] On 13 June 2002, the Douglases entered into an agreement for sale and purchase in relation to the purchase of Lots 3 and 4 in the proposed subdivision.

[12] Certificates of title to the nine lots in the Meadow Park Heights subdivision were issued in August 2002, subject to the restrictive covenants in the Transfer. A subsequent variation to the covenants on 12 November 2003 reduced the permitted floor area of the ancillary buildings which could be erected on Lots 5, 6, 7, 8 and 9. In respect of Lot 5, the permitted floor area of the ancillary building was reduced to

100m2.

[13] The Morgans purchased Lot 5 in October 2005. In January 2006, the Morgans were granted a subdivision consent by the Council in relation to Lot 5, for the purpose of creating eight additional Certificates of Title. The Morgans’ solicitor wrote to the Douglases’ solicitor in August 2006, informing them that the Morgans intended to further subdivide Lot 5 but stating that:

We are concerned that the original covenants registered in respect of all these

Lots are a little ambiguous as to whether further subdivision is permitted.

The letter went on to suggest “that we clarify the position by registering an Easement Variation Instrument”. Protracted correspondence between the parties ensued, but ultimately agreement could not be reached regarding the Morgans’ proposed subdivision of Lot 5.

[14] In January 2011, the Morgans’ original subdivision consent from the Council for Lot 5 lapsed. In April 2011, the Douglases became aware that the Morgans were making a further application to the Council for a subdivision consent for Lot 5.

[15] The Douglases responded by raising their concerns directly with the Council that subdivision was prohibited by the restrictive covenants. The Council took legal advice and responded to the Douglases to the effect that the restrictive covenants between the owners of the various lots in the Meadow Park Heights subdivision were not relevant in a resource consent context. Rather, the covenants were a contractual arrangement between the respective owners. If an activity was considered to breach the terms of the covenants, it was up to the particular land owners to enforce the covenants between themselves.

[16] Accordingly on 7 June 2011, the Council granted the Morgans a further subdivision consent in relation to Lot 5 permitting them (from a resource consent perspective) to divide it into seven additional lots plus an additional right-of-way lot.

[17] Physical work on the new subdivision commenced on 7 February 2012. The Douglases responded by lodging caveats against the titles for Lots 2 and 5 and, subsequently, issuing these proceedings.

Interpretation of covenants – legal principles

[18] It was common ground that the legal principles applicable to the interpretation of covenants are as summarised in the Laws of New Zealand, Easements, Profits and Covenants, at paragraph 134:

134 Interpretation of easements and covenants

An easement is to be determined by reference to the instrument creating the easement, and weight is to be given to plain wording where possible. Where necessary, the circumstances of its creation, including contemporary documents indicating intention, and the factual matrix at the time of creation, may be taken into account; it is not the case that registration means extrinsic material must be ignored. Similarly, restrictive covenants have been interpreted by reference to the circumstances relating to the background of the relevant covenant. The purpose of a covenant will often be determinative of its meaning.

[Footnotes omitted]

Do the covenants restrict the number of buildings on Lot 5 to one dwellinghouse and one ancillary building?

[19] The Douglases submitted that the true meaning and effect of the covenants (in particular covenants 1.1 and 1.9) was to restrict the total number of buildings on Lot 5 (including any subdivision of Lot 5) to one dwellinghouse and one ancillary building. The Morgans’ proposed subdivision of Lot 5 would, however, result in the construction of more than one dwellinghouse and one ancillary building on Lot 5.

[20] The Morgans’ response was (in summary) that if subdivision was prohibited, there would have been an express covenant to that effect. Given a full and fair interpretation, the purpose of the covenants as a whole is to protect the overall

quality of the subdivision in terms of land use and buildings, not to limit further subdivision.

The Transfer

[21] The covenants are set out in Schedule B of the Transfer. They must be interpreted in the context of that document as a whole. The Transfer relates to all nine lots. Mr and Mrs Roberts (the original land owners) are named as both transferors and transferees. The Transfer records that:

The Transferor and the Transferee have subdivided the land comprised in Certificates of Title 70D/526 and 70D/527 into rural residential lots in the manner shown and defined on Deposited Plan 309861 (“the plan”) AND it is the intention of the Transferor and the Transferee to create for the benefit of the land comprised in the certificates of title listed in Schedule A (“the Dominant Lots”) the restrictive covenant set out in Schedule B over the land in Certificates of Title 38985 and 38993 inclusive (“the Servient Lots”) TO THE INTENT that the Servient Lots shall be bound by the stipulations and restrictions set out in Schedule B and that the owners and occupiers for the time being of the Dominant Lots may enforce the observance of such stipulations and restrictions against the owners for the time being of the Servient Lots AND as incidental to the transfer of the fee simple so as to bind the Servient Lots and for the benefit of all of the Dominant Lots the Transferee HEREBY COVENANTS AND AGREES with the Transferor in the manner set out in Schedule B so that the covenants run with the Servient Lots and for the benefit of the Dominant Lots, however none of the Servient Lots shall have the benefit of the Land Covenants in favour of the corresponding Lots in Schedule A.

1.1 The Transferee will at all times observe and perform all the covenants contained in Schedule B to the intent that each of the covenants will forever enure for the benefit of and be appurtenant to each and all of the Dominant Lots and each and all of the registered proprietors of the Dominant Lots provided that the Transferee will be liable only for breaches of the covenants contained in this transfer which occur whilst the Transferee is the registered proprietor of any one of the Servient Lots ...

[Emphasis added]

[22] The certificates of title listed in Schedule A (the Dominant Lots) are Certificates of Title 38985 to 38993 inclusive. The same titles also comprise the Servient Lots. The net effect of these provisions therefore is that each of the nine newly created lots (each of which had its own Certificate of Title) is a “Dominant Lot” in respect of the other eight newly created lots. Each lot is, however, also a “Servient Lot” in relation to the other eight newly created lots. The registered

proprietor of each Dominant Lot is entitled to enforce the restrictive covenants against the registered proprietor of the other eight lots (in their “Servient Lot” capacity). The corollary is of course that the registered proprietor of each Servient Lot must comply with the restrictive covenants, for the benefit of the registered proprietors of the Dominant Lots.[2]

[23] The restrictive covenants are therefore drafted with specific reference to the nine newly created lots, being the nine lots of land comprised in Certificates of Title

38985 to 38993 inclusive.

The relevant covenants

[24] The Douglases’ claim that the number of buildings on Lot 5 is restricted to one dwellinghouse and one ancillary building is based on covenants 1.1, 1.9 and

1.12. Those covenants provide as follows:

The Transferee Covenants with the Transferor as follows:

1.1 Not to erect construct or place on the property nor allow to be erected or constructed or placed on the property any dwellinghouse which is not a new residential dwellinghouse. The dwellinghouse shall have a minimum ground floor area of 110 square metres, excluding any garage, carport and accessory buildings, decking, verandahs and roof overhangs, and shall be constructed other than in the shape of a simple rectangle. Such dwellinghouse shall be constructed at a cost of not less than $120,000 (exclusive of GST).

...

1.9 Notwithstanding paragraph 1.1 above the Transferees have the right to erect one ancillary building:

1.9.1 On Lots 1, 2, 5, 6, 7, 8 and 9 with a floor area of not greater than 200m2.

1.9.2 On Lot 3 with a floor area of not greater than 100m2.

1.9.3 On Lot 4 with a floor area of not greater than 100m2 provided that no such ancillary building shall be erected on Lot 4 until the existing woolshed has been demolished.

Any such building will be sheathed on at least three sides in the materials specified in paragraph 1.2 above, or in colour steel, and the height of such building shall not exceed 4.5 metres. Any such building may be used for the storage of materials relating to the Transferee’s business and may at times be used as a workshop, provided that such use does not exceed two (2) days per week, in which case the use will be deemed to have become a commercial activity and contravened the provisions of paragraph 1.5 hereof. The Transferee warrants that all materials will be stored within the building and the use of the building will not result in any accumulation of rubbish which could detract from the general appearance of the subdivision.

...

1.12 Notwithstanding the requirements of the above covenants (including but not limited to paragraphs 1.1 and 1.9 hereof), in consideration of the large size of Lot 3 in relation to the other Lots in the subdivision, the Transferors shall allow the registered proprietor for the time being of Lot 3 to erect on Lot 3 a standard round haybarn having a floor area of not greater than 100m2 PROVIDED THAT the haybarn shall not be visible from the access way and shall not lessen in any way the value or appeal of the subdivision.

[Emphasis added]

[25] The first construction issue is what the phrase “the property” in covenant 1.1 refers to. “The property” is not a defined term.

[26] The Morgans submitted that there is nothing in the Transfer which would suggest that the covenants would only apply to the nine lots within the subdivision in their original form (i.e. at the time of creation of the subdivision). They drew an analogy to the case of Zhang v Liu[3] in which the definition of “property” was taken from the Property Law Act 2007. The consequence of this was that on the creation of new lots (as defined by the Act) the covenants would apply to each of those lots as a new “property”.

[27] This case is quite different however. The reference to the “property” must be interpreted in the context of the Transfer document as a whole. The Transfer relates to nine distinct lots, each of which is both a Dominant Lot and a Servient Lot. Each of the nine lots corresponds with the land described in one of the nine newly issued certificates of title. In this context the phrase “the property” in covenant 1.1 can only

_{refer to one of the nine Servient Lots. On that particular Servient Lot, the relevant}

registered proprietor can only erect or construct a residential dwellinghouse which meets the requirements of covenant 1.1. The burden of that restrictive covenant cannot be defeated simply by dividing one of the nine original lots into a number of further lots, thereby enabling multiple dwellinghouses to be built on the original “property”.

[28] Covenant 1.1 further provides that “the dwellinghouse” shall have a minimum ground floor area of 110m2 and meet the other criteria set out. The reference to “the dwellinghouse” supports the interpretation that covenant 1.1 envisages that there only be one dwellinghouse on each Servient Lot, as does the subsequent phrase “such dwellinghouse”.

[29] This interpretation is further supported by covenant 1.9, which expressly allows only one ancillary building on each lot, save for Lot 3 (which is subject to the exception in covenant 1.12). This is consistent with only one house being allowed on each original lot. It would be surprising if an unlimited number of houses were allowed on each lot, but only one ancillary building. It would not make sense for the covenants to limit the number of “ancillary buildings” if the number of dwellinghouses was not limited.

[30] This interpretation is also consistent with the use of the phrase “other allotments” in covenant 1.5 as well as the reference to specific lots in covenants 1.9 and 1.12 and the phrase “other Lots in the subdivision” in covenant 1.12. Such references all support the view that the restrictive covenants relate to each of the nine original allotments.

[31] I therefore find that the plain wording of the restrictive covenants, interpreted in the context of the Transfer document as a whole, limits the maximum number of buildings on Lot 5 (including any further subdivision of Lot 5) to one dwellinghouse and one ancillary building.

Extrinsic evidence

[32] As the interpretation of the restrictive covenants is clear from the plain wording of the Transfer, it is not strictly necessary to refer to any extrinsic evidence to aid the interpretation process. I note, however, that the extrinsic evidence tends to support the view that the covenants were intended to limit the total number of buildings on each lot to one dwellinghouse and one ancillary building.

[33] Firstly, the agreement for sale and purchase of Lot 5 noted that it was agreed the title to issue for each of the allotments on the proposed plan of subdivision “will be subject to restrictive covenants in the following terms”. It also referred to the restrictive covenants as being “for the protection and in the interests of the owners of all allotments”. Such references are all consistent with the view that the restrictive covenants were intended to relate to each of the original nine allotments.

[34] In addition, the advertising material for the Meadow Park Heights subdivision indicates that what was being marketed was quality “lifestyle blocks” which ranged in size from 7,900m2 to 16 hectares.

Relevance of the views of other owners of land in the subdivision

[35] The Morgans filed affidavits from the other lot owners in the subdivision which confirmed, in essence, that they did not object to the Morgans’ proposed subdivision. It was submitted that such evidence demonstrated that a “reasonable person” would not consider the proposed subdivision offended the purpose of the covenants.

[36] Such evidence is not relevant, however, to the interpretation issue before the Court. If, on the correct interpretation of the covenants, only one dwellinghouse and one ancillary building is permitted on Lot 5, then the fact that other lot owners take no objection to a breach of the relevant covenants is irrelevant. The Douglases are entitled to seek to enforce the restrictive covenants, even if none of the other lot owners wish to.

Previous subdivision of Lot 1

[37] The owners of Lot 1 have previously subdivided their lot into two separate lots. Mr Douglas’s evidence was that he was not aware of this at the time it occurred. Further, he deposed that this (much smaller scale) subdivision did not directly impact on the Douglases. Unlike the Morgans, the owners of Lot 1 do not share a right-of-way with the Douglases. Nor is their property in the direct line of sight from the Douglases’ property.

[38] The fact that the Douglases did not object to one of the other lot owners subdividing their lot does not preclude the Douglases from now asserting their legal rights in relation to a different lot owner.

Conclusion

[39] I find that the true meaning and effect of the covenants, including in particular covenants 1.1 and 1.9, is to restrict the total number of buildings on Lot 5 (including any subdivision of Lot 5) to one dwellinghouse and one ancillary building.

[40] The preliminary subdivision work undertaken to date has not, however, breached covenants 1.1 and 1.9 as it has not (yet) resulted in more than one dwellinghouse or more than one ancillary building on Lot 5. Accordingly the issue of liquidated damages does not arise on this limb of the plaintiffs’ claim against the first defendants.

Is the proposed subdivision of Lot 5 a “commercial activity” prohibited by

covenant 1.5?

[41] The Douglases submitted that the Morgans’ proposed subdivision of Lot 5 is a “commercial activity” prohibited by cl 1.5 of the covenants, for which consent had not been obtained. Clause 1.5 provides as follows:

The Transferee Covenants with the Transferor as follows:

1.5 Not to enter into any commercial activity (including pig or poultry farming) other than pastoral farming, cropping or orcharding, without first obtaining written approval from the owners of all other allotments (including the vendors) in the subdivision.

[42] The Morgans submitted that, while subdivision can have a commercial activity flavour to it, covenant 1.5 needs to be viewed in the context of the overall covenants. For example, the extent of commercial activity could range from telemarketing from home through to operating a noisy, smelly and disruptive poultry farm. The Morgans submitted that the intention of covenant 1.5 was to prevent activities at the latter end of this scale. This is evidenced by the explicit inclusion of “pig and poultry farming” which clearly have the characteristics of continuing and ongoing offence to other neighbours. The Morgans argued that subdivision activity does not fall into a category where there will be prolonged noise, smell or nuisance to neighbours. Any disruption will be temporary only.

[43] The Morgans further submitted that a “degree of commonsense” needs to be read into the covenant. On the strictest interpretation, a resident renting out their house would be required to obtain the consent of all neighbours. Similarly, the fact the Morgans leased land (that being the commercial activity) to the Douglases for grazing, would again be a commercial activity.

[44] The Douglases denied that covenant 1.5 is limited to commercial activities of an extent and nature (such as pig or poultry farming) that would cause nuisance or loss of enjoyment to other owners within the subdivision. Pig and poultry farming have been expressly excluded because “pastoral farming” is allowed under covenant

1.5. The Douglases submitted that covenant 1.5 extends to cover any commercial activity that would impact upon the value of other lots in the subdivision and change the nature of the subdivision.

[45] In my view the issue of whether undertaking a subdivision of Lot 5 is in itself a “commercial activity” prohibited by covenant 1.5 is fairly finely balanced. It is certainly arguable that it is. If, however, the restrictive covenants had been consistent with further subdivision of the nine original lots being permissible, I

would not have found that such a subdivision would be in breach of covenant solely on the basis of covenant 1.5.

[46] A subdivision is not in essence an ongoing commercial activity undertaken on a particular lot. Rather, it is a division of that lot into further lots (albeit admittedly for the purpose of making a profit). Interpreted purposively (and viewed in the context of the Transfer as a whole, including covenant 1.9) covenant 1.5 appears to be primarily directed at activities in the nature of running an ongoing business or commercial operation on a lot which might disrupt neighbouring lot owners’ enjoyment of their rural lifestyle properties (i.e. activities inconsistent with the “rural residential” character of the subdivision).

[47] While undertaking a further subdivision would be temporarily disruptive, I

doubt it was the kind of “commercial activity” intended to be captured by covenant

1.5, taking into account the relevant factual matrix. The work undertaken to date, while no doubt disruptive to some extent, is probably no more disruptive than undertaking other development of the land, for example constructing a new driveway, ancillary building or dwellinghouse (in place of the existing buildings) or undertaking earthworks.

[48] Taking all of these factors into account, I find that the subdivision work which has been undertaken to date does not in itself constitute a “commercial activity” in breach of covenant 1.5.

Second cause of action – are the Morgans undertaking “commercial activity” on

Lot 2 in breach of the covenants?

[49] The Douglases allege that the Morgans have operated (and are continuing to operate) the business of Henry Morgan Builders from Lot 2. It is submitted that such operation of the business from Lot 2 is in contravention of covenants 1.5, 1.7 and

1.9.

Relevant covenants

[50] As with the first cause of action, the starting point in interpreting the covenants must be their plain wording. Covenants 1.5, 1.7 and 1.9 provide as follows:

The Transferee Covenants with the Transferor as follows:

1.5 Not to enter into any commercial activity (including pig or poultry farming) other than pastoral farming, cropping or orcharding, without first obtaining written approval from the owners of all other allotments (including the vendors) in the subdivision.

1.7 Not to permit or cause any rubbish to accumulate or be placed upon the land and not to permit any excessive growth of grass or vegetation so that the same becomes long or unsightly.

1.9 Notwithstanding paragraph 1.1 above the Transferees have the right to erect one ancillary building:

1.9.1 On Lots 1, 2, 5, 6, 7, 8 and 9 with a floor area of not greater than 200m2.

1.9.2 On Lot 3 with a floor area of not greater than 100m2.

1.9.3 On Lot 4 with a floor area of not greater than 100m2 provided that no such ancillary building shall be erected on Lot 4 until the existing woolshed has been demolished.

Any such building will be sheathed on at least three sides in the materials specified in paragraph 1.2 above, or in colour steel, and the height of such building shall not exceed 4.5 metres. Any such building may be used for the storage of materials relating to the Transferee’s business and may at times be used as a workshop, provided that such use does not exceed two (2) days per week, in which case the use will be deemed to have become a commercial activity and contravened the provisions of paragraph 1.5 hereof. The Transferee warrants that all materials will be stored within the building and the use of the building will not result in any accumulation of rubbish which could detract from the general appearance of the subdivision.

The Morgans’ submissions

[51] The Morgans did not deny that the business of Henry Morgan Builders is being operated from Lot 2. However, the Morgans submitted that the Court should take a broad and “purposive” interpretation of covenant 1.5. It clearly cannot have been intended to capture all commercial activity. For example leasing land for

grazing is a commercial activity as is a resident renting out their home or undertaking some telemarketing from home.

[52] The Morgans submitted that, taking a purposive approach, the covenant is clearly directed to activities which are likely to impact on neighbours. It was argued that operation of the business of Henry Morgan Builders from Lot 2 does not have any significant detrimental impact on neighbours.

[53] The Morgans further submitted that the manner in which the business is being operated does not breach the covenants for the following reasons:

(a) Some degree of commercial activity is specifically provided for by the covenants, including in particular covenant 1.9 which allows each lot owner to erect one ancillary building and to:

(i) use such building for the storage of materials relating to the relevant transferee’s business (all materials to be stored within the building); and

(ii) “at times” to use such building as a workshop, provided that such use does not exceed two days per week, in which case the use will be deemed to have become a commercial activity in contravention of covenant 1.5.

(b) The scale of any commercial activity on Lot 2 is relatively modest.

Although Lot 2 may be the effective headquarters or base of the business of Henry Morgan Builders, actual building work takes place on job sites located elsewhere.

(c) The volume of traffic associated with the business is no more than would be generated by a busy family.

(d) No more than four workers on average visit the site at the beginning and end of each work day, in order to receive instructions and (possibly) collect a company vehicle for work purposes.

(e) Signage was removed once an issue was raised.

(f) Internet advertising was limited to Yellow Pages only which did not list the physical address of the property.

Analysis

[54] The issue I must determine is whether the evidence establishes, on the balance of probabilities, that the Morgans are undertaking “commercial activity” on Lot 2 in terms of covenant 1.5, by operating the business of Henry Morgan Builders from that site.

[55] I accept the submission that it is necessary to take a purposive and “commonsense” approach to the interpretation of covenant 1.5. Not all commercial activity, regardless of how minor, will necessarily be in breach of the covenant. The purpose of the covenant is to protect the “rural residential” nature of the subdivision. Against this background the commercial activity must have at least some detrimental impact on the “rural residential” nature of the subdivision, albeit such impact may be modest.

[56] There was extensive evidence before the Court on this issue, both from Mr Douglas (who kept detailed diary entries and photographic records) and also from Mr Morgan. It was not in dispute that the business of Henry Morgan Builders is operated from Lot 2. Rather, the dispute focused primarily on the nature and scale of the operations undertaken on the site and the degree to which the Douglases are detrimentally impacted.

[57] I am satisfied that a breach of covenant 1.5 has been established. It is clear from the evidence before the Court that a commercial undertaking is being operated on Lot 2 on a not insignificant scale. The operation of Henry Morgan Builders from Lot 2 is in no way analogous to such “low impact” commercial activities as leasing land for grazing or telemarketing from home. In particular I note that:

(a) Mr Morgan’s evidence was that Henry Morgan Builders currently employs six staff. He acknowledged that “at most” four of them would come to the workshop (the ancillary building) on any given morning between 7.00 and 8.00 a.m. Those employees who came to the workshop usually left their cars there and would then take a work vehicle to job sites, returning to collect their vehicles at the end of the day.

(b) This is consistent with Mr Douglas’s evidence, based on his detailed observations since mid 2011, that Lot 2 appeared to be used as a “building depot”. The ancillary building is a meeting point for at least some of the company’s employees, at the beginning and end of each work day. Employee vehicles are parked, often on an “all day” basis on Lot 2, while employees are working at job sites.

(c) Mr Morgan’s evidence was that Henry Morgan Builders’ work vehicles comprised four vans plus a slightly larger truck. Two of the vans are taken home each night by staff members.

(d) The business generates a reasonable volume of traffic, with a number of vehicles (including employee vehicles and the company’s four vans and small truck) travelling up and down the right-of-way for the purposes of the building business at various times (with most traffic being concentrated at the beginning and end of each work day).

(e) The company is administered from an office located within the dwellinghouse on Lot 2. There was no evidence that Henry Morgan Builders had any other offices, building depot or workshop.

(f) Building materials and equipment are periodically left outside the shed on Lot 2, although Mr Morgan said that this only happened “on a few occasions and for short periods of time”. Based on the photographs annexed to Mr Douglas’s affidavit there is some force in his submission that (at least at the times when those photos were

taken) “Lot 2 looks like a builders’s yard and not a quality lifestyle block”.

(g) The photographs annexed to Mr Douglas’s affidavit also showed builders’ rubbish on Lot 2 and also rubbish being burned on Lot 2. Mr Morgan accepted that there had been occasions where he had brought some rubbish home “to sort for firewood and burn the rest”.

[58] The business of Henry Morgan Builders employs six staff (it is unclear whether Mr Morgan and the office assistant are included in this number). It also owns and operates five work vehicles, uses the ancillary building as a workshop/building depot and is administered from an office in the dwellinghouse on Lot 2. I note that covenant 1.5 does not expressly envisage the dwellinghouses being used for “commercial activity”, in contrast to covenant 1.9, which allows for the ancillary building on each lot to be used as a workshop for a maximum of two days per week.

[59] The restrictive covenants clearly do not envisage an entire business being run from one of the lots on a full-time basis. Rather, covenant 1.9 allows for some relatively modest activities, ancillary to a business, to be undertaken, including the storage of materials (albeit enclosed within an ancillary building) and the use of an ancillary building as a workshop for not more than two days per week.

[60] Taking all of these matters into account I find that a commercial activity is being undertaken on Lot 2, without the written approval of the owners of all other allotments, in breach of covenant 1.5.

Remedy for breach of covenant 1.5

[61] I now consider the appropriate remedy for the breach of covenant 1.5 that has been established.

[62] Clauses 1.2 and 1.3 of the Transfer provide as follows:

1.2 If there should be any breach of [or] non-observance on the Transferee’s part of any of the covenants contained in Schedule B and without prejudice to any other liability which the Transferee may have to the Transferor and any person or persons having the benefit of those covenants the Transferee will upon written demand being made by the Transferor or any registered proprietor of any of the Dominant Lots pay to the person making such demand the sum of $50,000.00 as liquidated damages AND shall permanently remove or cause to be permanently removed from the land any improvement or structure so erected or repaired and/or remedy any breach or non- observance of the covenants in Schedule B; and

1.3 In any instance of breach of [or] non-observance by the Transferee of any of the covenants contained in Schedule B, where the Transferee remedies the breach or non-observance within one month of receiving the written demand pursuant to paragraph 1.2 above AND pays all reasonable legal costs and other expenses incurred by the person making such demand, the Transferee shall not be liable to pay the liquidated damages referred to in paragraph 1.2 above ...

[63] By a notice of breach of land covenant dated 10 February 2012 (“Notice of Breach”) the second defendants were given notice in respect of the breach of covenant 1.5 (by operating the business of Henry Morgan Builders on Lot 2) and required to remedy that breach within one month. The notice also made demand that the second defendants pay the reasonable legal costs of the plaintiffs in making the demand, which were estimated at $1,000.

[64] The second defendants did not remedy the breach and pay the costs of the demand within one month. Accordingly the plaintiffs are entitled to liquidated damages in the sum of $50,000 in respect of the breach of covenant 1.5, together with the costs of the demand, which I set at $1,000 (in accordance with the estimate in the notice).

Covenant 1.7 - Rubbish

[65] A specific breach of covenant 1.7 has also been alleged. That covenant prohibits a lot owner from permitting or causing any rubbish to accumulate or be placed upon their lot. The photographic evidence demonstrates that there has been a breach of this covenant. Indeed Mr Morgan did not deny having brought rubbish onto the site. However, it appears probable that this breach of covenant was remedied within a month of it being brought to Mr Morgan’s attention.

[66] In any event, no separate remedy was sought in relation to this alleged breach of covenant, as (appropriately) demand was only made for one liquidated sum in relation to all the alleged breaches by the second defendants.

Covenant 1.9 – Storage of materials

[67] The final specific breach of covenant alleged was that materials were brought onto the site and stored outside the ancillary building instead of within it, in breach of covenant 1.9. There is photographic evidence to support this alleged breach. Mr Morgan acknowledged that building materials were sometimes placed outside the shed on Lot 2 but said that this only happened “on a few occasions and for short periods of time”.

[68] “Storage” has a medium to long term connotation. It is not clear from the evidence how long the relevant materials remained outside the ancillary building. Further, it appears that once a notice of breach was served on the Morgans, efforts were made to “tidy up” the yard and move the relevant materials inside the ancillary building.

[69] Although it is finely balanced, I do not find this breach to be proven, on the balance of probabilities. In any event, if a breach did occur, it appears that it was most probably remedied within the one month period allowed for in the notice of breach.

[70] In any event, I again note that no separate remedy was sought in relation to this alleged breach of covenant.

Counterclaim

[71] The defendants counterclaimed, seeking a declaration that the restrictive covenants do not prevent the first and second defendants’ lots from being subdivided into further lots. For the reasons outlined in [19] to [40] above, I decline to make that declaration.

Costs

[72] Clause 1.4 of the Transfer provides that:

1.4 The Transferee will at all times keep the Transferor indemnified from all losses, costs, claims and demands in respect of any breach or non-observance by the Transferee of the covenants contained in this Transfer.

[73] In relation to the cause of action against the first defendants I have made a declaration in favour of the plaintiffs. I have not, however, found that the restrictive covenants have yet been breached. Accordingly I find that the first defendants are not liable to indemnify the plaintiffs for their actual (solicitor-client) costs pursuant to clause 1.4 of the Transfer.

[74] The plaintiffs are, however, entitled to scale costs against the first defendants on a 2B basis.

[75] In relation to the cause of action against the second defendants I have found that there has been a breach of covenant 1.5. Pursuant to clause 1.4 of the Transfer the plaintiffs are therefore entitled to be indemnified by the second defendants for any losses or costs incurred in respect of that breach. This will include the reasonable solicitor-client costs and disbursements incurred in relation to the cause of action against the second defendants.

Result

[76] I declare that the true meaning and effect of the restrictive covenants in the Transfer, in particular covenants 1.1 and 1.9, is to restrict the total number of buildings on the first defendants’ property (Lot 5, including any subdivision of Lot 5) to one dwellinghouse and one ancillary building.

[77] I find that the second defendants have breached covenant 1.5 by undertaking

a “commercial activity” on Lot 2.

[78] I order that :

(a) The second defendants pay the plaintiffs liquidated damages in the sum of $50,000 in respect of the breach of covenant 1.5.

(b) The second defendants pay the plaintiffs the sum of $1,000, being the reasonable costs of preparation of the Notice of Breach.

(c) The second defendants indemnify the plaintiffs for their reasonable costs (including legal costs and disbursements) in respect of the second defendants’ breach of covenant 1.5, pursuant to clause 1.4 of the Transfer.

(d) The first defendants pay the plaintiffs’ scale costs, on a 2B basis, in

respect of the cause of action against them.

[79] Leave is reserved to file memoranda if the parties are unable to agree the quantum of either indemnity costs payable by the second defendants under clause 1.4 of the Transfer or the quantum of scale (2B) costs payable by the first defendants.

[80] The interim orders made by Associate Judge Faire on 20 August 2012, by consent, are discharged. If any costs issues arise in relation to the interim injunction

_{application, leave is reserved to file memoranda.}

Katz J

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[1] The first cause of action is against the trustees of the Heracle Trust, who own Lot 5. The second cause of action is against the trustees of the Morgan Family Trust, who own Lot 2.

[2] The qualification that “none of the Servient Lots shall have the benefit of the land covenants in favour of the corresponding lots in Schedule A” simply means that, in effect, no lot owner can sue themselves for breach of the covenant.

[3] Zhang v Liu (2010) 11 NZCPR 403 (HC).