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High Court of New Zealand Decisions |
Last Updated: 13 September 2012
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2012-404-303 [2012] NZHC 701
BETWEEN SECURE FINANCIAL SERVICES LIMITED
Applicant
AND JUDITH ANN DAVIDSON AS TRUSTEE OF THE CLARKE DAVIDSON FAMILY TRUST
First Respondent
AND MACCLURES TIMBER LIMITED Second Respondent
Hearing: 29 February 2012
Appearances: Mr Daniel Grove for Applicant
Mr Michael Heard for Respondent
Judgment: 23 April 2012
JUDGMENT OF ASSOCIATE JUDGE DOOGUE
This judgment was delivered by me on
23.04.12 at 4.30 pm, pursuant to
Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date...............
Counsel:
Mr D Grove, Chancery Street Chambers, Auckland – danielgrove@45chancery.co.nz
Lee Salmon Long, P O Box 2026, Shortland Street, Auckland – Michael.heard@lsl.co.nz
SECURE FINANCIAL SERVICES LIMITED V DAVIDSON AS TRUSTEE OF THE CLARKE DAVIDSON FAMILY TRUST HC AK CIV-2012-404-303 [23 April 2012]
Background
[1] The applicant is the proprietor of two registered mortgages over a property at 2
Brighton Road, Parnell, Auckland. One of the mortgages was registered against the title to the property in February 2010. The registered proprietor of the property, Basta Trust Investment Ltd (“Basta”), has defaulted under both of the mortgages. The applicant, having served the appropriate notices of default under the Property Law Act 2007 on Basta, proceeded to mortgagee sale. The property was sold to an entity related to the applicant for the sum of $2,450,000. The applicant has taken possession of the property but is unable to complete the sale to the purchaser under the mortgagee’s power of sale because of the caveats, one of which supports the earlier agreement for sale and purchase.
[2] In 29 February 2010, the first respondent entered into an agreement for sale and purchase of the property, once development of the property had been completed. The purchase price agreed was $1,250,000. The deposit of $125,000 was to be satisfied by the giving of the bond. The first respondent is the purchaser under that agreement. The first respondent lodged a caveat to protect its position as purchaser on 14 November 2011. It still wishes to complete the agreement for sale and purchase. However, Basta does not have any funds to complete the development. The cost of taking the development to completion is estimated at $810,000.
[3] The applicant knew at all times about the agreement for sale and purchase between Basta and the first respondent. In fact, it required confirmation that the agreement for sale and purchase was unconditional before it would make advances on mortgage to Basta.
[4] In summary, the transactions occurred in this order:
a) The first respondent entered into an agreement for sale and purchase from Basta;
b) The applicant registers mortgages over Basta’s property, knowing that the agreement for sale and purchase between Basta and the first respondent was unconditional;
[5] As it 22 November 2011, the amount owing under the two mortgages to the applicant was $2,636,837.50.
[6] I shall deal with the agreement for sale and purchase issue first.
The caveat supporting the agreement for sale and purchase
[7] Basta was a property developer. It required a binding “pre-sale” in order to
obtain finance to complete the development of the property.
[8] While the applicant has no dispute as to knowing about the agreement for sale and purchase between Basta and the first respondent, it argues that the caveat protecting the position of the first respondent as purchaser under the agreement for sale and purchase ought to be removed. This is because Basta cannot complete the sale, as there is no prospect the first respondent could obtain an order for specific performance directing Basta to complete the agreement. The applicant therefore submits that there would not be any practical advantage to the first respondent if its caveat were to enure. The applicant says that an order ought to be made under s 143 of the Land Transfer Act 1952 to remove caveat numbers 8914562.1 and 8854345.1, registered respectively by the first and second respondents on the certificate of title.
[9] The applicant says that the purchaser’s caveat ought to be removed because it serves no purpose. The primary authority upon which Mr Grove for the applicant relied was Blanchard J’s comments in Pacific Homes Ltd (in receivership) v Consolidated Joineries Ltd, to the effect that the Court may exercise its discretion to remove a caveat where it is completely satisfied that the caveator can obtain no
practical advantage from the continuation of the caveat.1
1 Pacific Homes Ltd (in receivership) v Consolidated Joineries Ltd [1996] 2 NZLR 652 at 656 (CA) per
Blanchard J.
[10] The first respondent’s position was set out along the following lines in the
notice of opposition and is to the effect that:
a) The first respondent has an equitable interest in the property arising under the agreement for sale and purchase that preceded the interest of the applicant;
b) The applicant was aware of Basta entering into the agreement for sale and purchase, and so consented to the creation of the first respondent’s interest in the subject property; and
Issues
[11] The first areas of dispute arising out of the notice of opposition are relatively narrow. The applicant conceded that the first respondent was entitled to sustain its caveat as a matter of right, placing its case on the basis that because of the changes of events that had occurred, the caveat ought to be removed, not because the first respondent was not entitled to lodge the caveat, but on the basis that the caveat was of no practical advantage to it.
[12] It occurs to me that the basis upon which the first respondent sought to vindicate its caveat, and the corresponding concession on the part of the applicant that it was entitled to do so, might pose some difficulties. I therefore provided counsel with a section of a proposed draft judgment concerning the basis upon which the first respondent seeks to support its caveat, and made arrangements for them, if they wished, to make further submissions on the issues raised.
[13] The power to lodge a caveat is to be found in s 137 of the Land Transfer Act
1952:
137 Caveat against dealings with land under Act
(1) Any person may lodge with the Registrar a caveat [[in the prescribed form]] against dealings in any land or estate or interest
under this Act if the person—
(a) claims to be entitled to, or to be beneficially interested in, the land or estate or interest by virtue of any unregistered agreement or other instrument or transmission, or of any trust expressed or implied, or otherwise; or
(b) is transferring the land or estate or interest to any other person to be held in trust.
(2) A caveat under this section must contain the following information: (a) the name of the caveator; and
(b) the nature of the land or estate or interest claimed by the
caveator, which must be stated with sufficient certainty; and
(c) how the land or estate or interest claimed is derived from the registered proprietor; and
(d) whether or not it is intended to forbid the making of all entries that would be prevented by section 141 or a specified subset of them; and
(e) the land subject to the claim, which must be stated with sufficient certainty; and
(f) an address for service for the caveator.
(3) Caveats under this section must be executed by the caveator or the caveator's attorney or agent.
(4) Caveats under this section must be entered on the register as of the day and hour of their receipt by the Registrar.
[14] Such caveats must follow the statutory form, which is drafted as a notice to the
Registrar by which the caveator forbids:2
.... the registration of any instrument, having the effect of charging or transferring, or otherwise affecting the estate or interest protected by the caveat... until this caveat is withdrawn by the caveator, removed by order of the High Court, or until the same has lapsed under the provisions of section
145 or 145A of the Land Transfer Act 1952.
[15] As the authors of Land Law in New Zealand state:3
Caveat against dealings thus serve two purposes:
(1) the primary purpose of protecting the rights (if any) of the caveator by forbidding the registration of any memorandum of transfer or other instrument or affecting the estate or interest claimed by the caveator; and
2 Land Transfer Regulations 2002, Form 18 Sch 3.
(2) the secondary purpose of giving notice to all who search the title (and to the registered proprietor) that the caveator claims any estate or interest in the land...
[16] It is the first of the purposes set out above that are relevant to the present application.
[17] The caveat does not of itself affect the rights of the parties. Where there is a dispute concerning the existence of a right on the part of the caveator or the extent of that right, the lodging of a caveat has the function of preserving the position until such time as that question can be authoritatively determined.
[18] In the circumstances of this case, that leads to the question of what rights the first respondent claims against the applicant. The first respondent appears to be claiming that it has a right to entirely impeach the validity of the applicant’s mortgage, or that the mortgagee ought to be restrained from exercising the power of sale contained in the mortgage because the mortgagee had agreed not to do so. I will assume for the purposes of argument that however one describes the entitlement of the first respondent, it qualifies as the type of equity that will support a caveat.
[19] No doubt it would be possible for the applicant in certain circumstances to obtain an order preventing a mortgagee from exercising a power of sale, even though the mortgage is of undoubted validity as between the mortgagor and mortgagee (which is the case here).
[20] If the foregoing is correct, it is then necessary to identify the basis upon which the mortgagee, as owner of a legal interest in land and the charge associated with the mortgage, can be prevented from exercising its power of sale and thereby enforcing its charge.
[21] The estate or interest claimed in the caveat was expressed in the following terms:
[E]state or interest claimed by virtue of an Agreement for Sale and Purchase of the land contained in Identifier NA 49D/1066 bearing date the 25
February 2010 between the registered Proprietor as vendor and the Caveator as purchaser and trustee for [the trust].
[22] As described above, the first respondent’s justification for the continued existence of its caveat is that the applicant was aware of Basta entering into the agreement for sale and purchase, and so consented to the creation of the first respondent’s interest in the subject property.
[23] The background to the discussions between the applicant and the first respondent in this case made it clear that a change of registered proprietor would occur in the future when the first respondent and Basta settled the agreement for sale and purchase they had entered into.
[24] The first respondent states that its interest arose in the following terms, as described by Mr Heard, counsel for the first respondent, in his synopsis:
Mr Thompson has admitted it was aware of the first respondent’s interest in the property prior to advancing funds..., was aware of the terms of the sale and purchase agreement, and in fact required the sale and purchase agreement to be unconditional as a condition of it advancing funds to Basta (first Thompson 8, B309). Correspondence from the applicant’s solicitors to Basta’s solicitors on 17 March 2010 confirms this (B271).
[25] The applicant ascertained that an agreement for sale and purchase had indeed been executed and that it was unconditional. Once provided with that information, the applicant proceeded to advance funds on mortgage in the month following the agreement for sale and purchase, namely March 2011. The arrangement that the first respondent contends for is said to have arisen from the applicant seeking confirmation that the agreement for sale and purchase between Basta and the first respondent was unconditional. No other details of this exchange have been provided. This leads to the next issue of whether the Court could reasonably conclude that an arrangement having the effect of the one for which the first respondent contends could be spelt out of such scant factual material.
[26] The expectations of the applicant and first respondent must have been that their respective positions after the first respondent became the registered proprietor would be the conventional expectations arising as a matter of law. It is elementary that a mortgage has two components: a personal covenant by the mortgagor to repay money or perform certain obligations, and a charge over the land to secure the
performance of the personal covenant.4 As the charge over the land adheres only to the land, the property would remain subject to the applicant’s mortgage after the proposed transfer to the first respondent had taken place. The first respondent would also be personally liable to pay the amount due under the mortgage under s 203 of the Property Law Act 2007. It is difficult to see how it could be successfully argued that the applicant made a representation that now disables it from exercising the mortgagee’s power of sale. It is not claimed that the applicant expressly undertook that it was not going to register a mortgage, or that Basta would have to ensure that such a mortgage was cleared prior to the transfer to the purchaser, or that the purchaser would be able to take title to the property other than on terms that it was subject to the mortgage to the applicant.
[27] It is equally difficult to try and construct an implied agreement pursuant to which the applicant undertook not to take steps to enforce its mortgage —including when the mortgagee transferred the property onto a successful purchaser. For the first respondent’s interest to have arisen so, it must be established that the applicant impliedly agreed to forego its rights to institute a forced mortgagee sale, to not take a charge over the property to secure the funding that it had advanced to Basta, and to give a discharge of its mortgage. There is no other footing upon which the first respondent as purchaser could find its way onto the title unless, of course, it accepted that it would take a transfer subject to the applicant’s mortgage (which I assume is not contended). It is unlikely that the applicant would not be able to exercise its power of sale, as it would be left only with Basta’s personal covenant and any personal guarantees that it might have.
[28] The dispute in relation to which the caveat was meant to preserve the position of the parties concerned the first respondent’s claims that the applicant cannot exercise the power of sale conferred onto it by Basta when the mortgage was granted. In the absence of some personal arrangement between the parties, and given the provisions of s 141(1) of the Land Transfer Act 1952, it is clear that the caveat cannot prevent such a mortgagee sale from occurring. The caveat ought to be removed on this ground alone. However, there was an alternative argument that the
applicant put forward as justifying the removal of the caveat. I deal with that in the
4 Doyle v Doyle [1992] 3 NZLR 170 (HC) at 172.
next section of this judgment.
The ground that the caveat serves no practical purpose
[29] Mr Grove’s main proposition was that the caveat served no practical purpose and should be removed for that reason.
[30] Mr Grove referred to the judgment of Blanchard J in Pacific Homes Ltd (In
Receivership) v Consolidated Joineries Ltd:5
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 the 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 claim of interest is undoubted. (Emphasis added)
[31] Mr Grove submitted that the first respondent’s objective was to compel Basta to complete its agreement and complete the development and transfer to the first respondent that part which it had agreed to buy.
[32] He submitted that because Basta was insolvent, it would not be able to complete the development and therefore arrange the issue of title and transfer to the first respondent. Mr Grove said that a quantity surveyor had assessed that completion of the entire development would cost in excess of $900,000 –
$1,000,000. He pointed out that the amount that Basta owed the applicant had reached $2,636,837.50 by 22 November 2011.
[33] Mr Grove noted that notices of default pursuant to ss 119-127 of the Property Law Act 2007 served by the applicant had not been responded to. As a result of this, the applicant had proceeded with a mortgagee sale. He also noted that the second
respondent had served a statutory demand on Basta, although for a relatively small
5 Pacific Homes Ltd (In Receivership) v Consolidated Joineries Ltd, above n 1 at 656.
amount. He noted that the first respondent had to meet some of the tradesmens’ bills (in excess of $20,000) because Basta had not been able to. No work had been done to advance the project since November of 2011. Furthermore, the person who was behind the development (established from his communications with Auckland City Council over consent issues) was a Mr Steve Kelly (who was the subject of a reported decision of Asher J concerning bankrupts’ compositions in Kelly v Structured Finance [2009] 2 NZLR 785 (HC)). Therefore, further funding to finish the development was unlikely to be forthcoming. Mr Grove said he anticipated that if the caveat was not removed, the applicant was likely to serve the statutory demand seeking repayment of its debt, and that almost inevitably Basta’s liquidation would follow. On what basis, he asked, would a liquidator agree to raise more money and complete the development?
[34] In Lombard Finance and Investments Ltd, Keane J noted that when considering whether there is any practical advantage under a s 143 application, the onus shifts to the applicant to exclude any possible advantage to the caveator.6 I therefore approach matters on this basis.
[35] Mr Heard disputed that there was proper evidence that Basta was insolvent. He asserted that Mr Kelly, whom the applicant said was in charge of Basta, was neither a shareholder nor director on the public records of the company. He said that it was not clear that the completion of the project would take as much money as the applicant asserted. He submitted that it should be possible for the title to be issued for the front unit even before the development had been completed. He further submitted that even if it was the case that the second respondent had served a statutory demand on Basta, it did not establish that the company was insolvent.
Conclusion on whether caveat would serve a practical purpose
[36] I accept Mr Grove’s submissions that no practical purpose would be served by
the continuation of the caveat on the title.
6 Lombard Finance and Investments Ltd v Albert Street Ltd HC Auckland CIV-2004-404-2120, 14
October 2004 at [16].
[37] While there may have been no formal declaration that Basta is insolvent, for example, by the making of a liquidation order, there can be no real doubt that Basta has run out of funds to complete the development. The fact that the property was left in a partly completed state up until the time of the mortgagee sale on 23 November
2011 amounts to confirmation that the company has exhausted its resources. I also agree with the applicant that very substantial funding is going to be required before Basta will be able to complete the development. The applicant has provided what appeared to be credible calculations by a quantity surveyor to that effect. Given that there is no apparent source of additional funding open to Basta, it follows that the development is not going to be completed. In such circumstances, it is very unlikely that a Court would direct Basta to resume construction and bring the development to completion. That being so, even with the other arguments as to whether the Court would direct specific performance of Basta’s construction contract, the possibilities of the first respondent obtaining such an order are so remote that it cannot be fairly and reasonably viewed as a good foundation for blocking transactions on the title for further unknown periods of time.
Sale to a related party
[38] The first respondent asserts that there were irregularities with the mortgagee sale that the Court ought to take into account when determining the caveat issue. Those matters are, broadly, that the applicant, as mortgagee, has used its power of sale to bring about a sale of the property to a related party, and did so in breach of its obligations under s 176 of the Property Law Act 2007 — the obligation to take reasonable steps to obtain the best possible price at the time of the sale. Section
176(2) of the Property Law Act 2007 provides that a mortgagee may not become the purchaser except at a sale through the Registrar of the High Court (in accordance with s 196) or through a court order under s 200. However, the position is different where, as here, the property was sold not to the mortgagee, but to a related company, being a company that the mortgagee arranged the incorporation of, and would apparently provide financing for the purchase of the property.
[39] There is no absolute prohibition against a mortgagee selling the mortgaged property to a company in which the mortgagee is interested or which has common
shareholders to the mortgagee company. When this has happened, in light of the conflict of duty and interests to which the mortgagee is subject, the mortgagee carries the burden of proof that it has fulfilled the duty in s 176 of the Property Law Act
2007. The fact that Mr Thompson was the sole shareholder in both the mortgagee and the party purchasing at mortgagee sale means that the Court should scrutinise carefully the circumstances to ensure that the mortgagee actually complied with its obligations.
[40] However, I do not consider that the caveat mechanism provided for under the Land Transfer Act 1952 can be used as a remedy akin to injunctive relief where there has been an alleged breach of an obligation pursuant to s 176 of the Property Law Act 2007. The function of the caveat system, so far as relevant to this proceeding, is to preserve the right of a caveator with a claim against the proprietor to place a moratorium on the registration of any other transactions that would prejudice the caveator’s own right to register an interest. The caveat mechanism was not designed to provide a type of security for compensation that might arise from a successful claim against a mortgagee under s 176. I have further considered whether a sale to a related party for insufficient consideration could result in the transaction being set aside. It would seem that the courts have the necessary powers to set such a transaction aside. But the power to set aside the transaction is exercised in favour of
the borrower to whom the equity of redemption is restored.7 Whether the matter is
seen in terms of the Court’s power in equity to set aside the transaction or an application for compensation under s 176, I do not consider that the rights described are available to a party to a prior agreement to purchase the property, in contradistinction to a mortgagor.
Principles relating to s 176 of the Property Law Act 2007
[41] In case I am wrong in my conclusion that the caveat procedure was not designed to lend aid and support to a claimant under s 176, I will briefly consider whether it is arguable that s 176 has not been complied with.
[42] Section 176 of the Property Law Act 2007 provides:
176 Duty of mortgagee exercising power of sale
(1) A mortgagee who exercises a power to sell mortgaged property, including exercise of the power through the Registrar under section 187, or through a court under section
200, owes a duty of reasonable care to the following persons to obtain the best price reasonably obtainable as at the time
of sale:
(a) the current mortgagor:
...
[43] In Public Trust v Ottow, Asher J summarised the applicable principles as follows:8
a) A mortgagee has no duty at any time to exercise the powers of sale or possession. In default of any provision to the contrary in the mortgage, the power of sale is for the benefit of the mortgagee, who can sell at any time in accordance with the mortgagee’s convenience.
b) The mortgagee’s duty of care is to take reasonable care to obtain the best price reasonably obtainable at the time of sale.
c) It does not matter that the time may be unpropitious and that by waiting a higher price could be obtained.
d) A mortgagee is under no obligation to improve the property or increase its value.
e) A mortgagee sale for a price less than the current market value assessed by valuers does not, of itself, establish a breach of duty, although a large discrepancy may indicate a failure to take reasonable care.
f) A mortgagee does not have any general duty to maintain properties prior to sale.
g) Following the service of a Property Law Act notice there is no duty on a mortgagee to keep a guarantor informed of sales activities.
h) The mortgagee is not entitled to sell in a hasty way at a knock-down price sufficient to pay the debt, which because of the speed of sale leads to a lower price than could otherwise be obtained.
i) Proper care must be taken to expose the property to the market and to obtain the best price reasonably obtainable.
[44] These comments were supplemented by Associate Judge Faire in Westpac
New Zealand Ltd v Wiltshire.9 I have outlined the relevant ones:
a) The duty is a duty to take reasonable care. It does not necessarily follow that the best price reasonably obtainable will be achieved.
b) The duty has to be measured at the time of the sale. The duty arises at the time the decision to sell is made. There is thus a need to analyse the steps taken once the decision to sell is made, up to the time of sale.
c) When deciding for the purposes of s 176 whether reasonable care has been taken, the steps taken by the mortgagee and those acting with it must be looked at in the round. The issue is a commercial one, to be viewed in practical commercial terms.
[45] Assistance in determining the issue of whether reasonable care has been taken can be found by considering the following:10
a) Where the security is substantial, or specialised property is involved, it will usually be necessary for the mortgagee to obtain and act upon
specialised advice as to the method of sale.
9 Westpac New Zealand Ltd v Wiltshire HC Hamilton CIV-2010-419-1675, 22 November 2011 at [22].
10 Ibid, at [22] citing Harts Contributory Mortgages Nominee Co Ltd v Bryers HC Auckland CP
403IM00, 19 December 2001 at [43].
b) Appointing a competent agent to sell does not discharge the mortgagee’s duties, but since its duty is ultimately only one of reasonable care, putting the matter in the hands of a competent agent will usually go a long way towards discharging the mortgagee’s duties.
c) In the normal course the proposed sale will need to be advertised with an adequate description of the property’s attributes and, within reason, widely enough to attract all possible purchasers. In some cases this will need to extend to both general and specialist publications.
d) There is no obligation to break up the assets and sell in a piecemeal manner if this can only be carried out over a substantial period or at a risk of loss.
e) When assets are sold by tender or auction, a reasonable period must usually be allowed for purchasers to inspect the property and arrange finance before submitting bids.
[46] The following steps were taken by the Court in Ottow as constituting reasonable efforts to obtain the best reasonably obtainable price:11
a) The appointment of a reputable real estate agent to market the property.
b) Obtaining a valuation report from an experienced valuer as a guide to what could reasonably be expected for the property.
c) Marketing over a reasonably long period of time.
d) An extensive advertising and promotional campaign. e) A properly conducted auction.
11 Public Trust v Ottow, above n 8, at [31].
[47] The applicant agreed to pay $1,250,000 for that part of the property which she intended to buy in 2009. That price reflected the expected value that the finished unit would have. By the time the mortgagee sale took place, neither her proposed unit nor the other unit had been completed. The sale to the purchaser was of a partially completed development. The purchase price presumably reflected the judgment of the party purchasing from the mortgagee what the costs would be to complete construction and what the market value of the units would be once completed.
[48] The valuation on the file, which was part of the evidence the applicant adduced in the hearing before me, shows that the estimated value of the property (both the front and rear units) in a completed state would be approximately $3,210,000. The valuation for the specific unit the applicant agreed to purchase was estimated at
$1,410,000 once completed. As I noted in [2] above, the estimated cost of completion is a little over $800,000 dollars.
[49] Mr Thompson’s company purchased the uncompleted development at the mortgagee sale for an amount of $2,450,000.
[50] The applicant had engaged the firm of Barfoot & Thompson to sell the property. They undertook what was described as a standard four-week mortgagee sale marketing programme, which included advertisements in the New Zealand Herald, a sign on the property, and placements in the Barfoot & Thompson and TradeMe websites.
[51] The Court cannot make a judgment about whether a marketing campaign of a particular duration is or is not long enough in isolation from the overall facts. It is implicit in the submission made that if the property is not exposed for sale for a sufficiently long period, then the pool of potential purchasers may be unnecessarily restricted. If the agents reported low response rates to the publicity for the sale, then there might be grounds for being concerned. It is even possible to imagine a case
where the mortgagee may have to extend the selling period by postponing the sale date if there has been insufficient response from potential buyers. But if reasonable levels of buyer interest are reported, as they were in this case, the fact that the sales program is arguably at the shorter end of what is typical will have little significance. Nor is the period of four weeks so short that persons who might otherwise have been buyers would be disqualified from bidding because they were left with insufficient time to arrange their finance or obtain their advice about the value of the property.
[52] Given the price that was achieved at the mortgagee sale, and, in particular having regard to the fact that the property was in a semi-completed state, the circumstances of the sale — including the undisputed evidence about the attempts that were made to market the property ahead of sale — do not suggest that there has been a breach of the mortgagee’s duty.
[53] By way of conclusion, I note two additional matters. The first is that the evidence established that the mortgagee arranged for what was euphemistically referred to as “a rabbit” to start the bidding. That is to say, mock bids were submitted by an associate of the applicant with a view to starting the bidding at or near the reserve price for the auction. Mr Heard referred to this arrangement in his submissions. I make no comment about the ethical aspects or legality of the practice that was adopted here. Leaving those matters aside, it is likely that the bogus bid, if it had any effect, would have been positive so far as the sale price received is concerned.
[54] Furthermore, before the commencement of bidding the first respondent’s solicitors made a statement to those present to the effect that his client had an enforceable agreement for the sale and purchase over the property. This factor may have had a chilling effect on bids.
[55] I conclude that there is no basis upon which the Court could conclude that it is arguable that the s 176 duty has been breached.
Constructive trust
[56] A further area of dispute concerns the possible existence of a constructive trust.
This is stated in the following terms in the notice of opposition:
(d) Separately from the First Respondent’s interest under the sale and purchase agreement, the First Respondent has paid money to the owner of the property, and/or on its behalf, for improvements to the property, which money was to be credited to the purchase of the property by the First Respondent;
(e) The First Respondent therefore has a beneficial interest in the property, and the owner of the property holds it on constructive trust for the First Respondent...
General principles relating to a constructive trust
[57] I intend to be guided by Glazebrook J’s comments in Commonwealth Reserves
I v Chodar:12
[41] In Fortex at p 175 Tipping J stated that there needs to be some asset or assets in the defendant's hands upon which the Court considers it appropriate to impress a trust. He says that this must be on a principled basis vis-à-vis both the person owning the assets and any third party who has an interest in the assets. He went on to say:
“Equity intervenes to prevent those with rights at law from enforcing those rights when in the eyes of equity it would be unconscionable for them to do so.”
[42] The question that must be answered in this case is what that principled basis is. There appear to be two potential triggers for the exercise of the Court's discretion to grant a remedial constructive trust. One is unjust enrichment. The other is unconscionability.
...
[46] There is, however, a significant distinction between having jurisdiction to impose a remedial constructive trust, and choosing to exercise that discretion. It is apparent that a remedial constructive trust is potentially available as a remedy in cases of unconscionability and unjust enrichment. It is not inevitable that one will be awarded.
[47] Reliability and certainty are primary considerations of any system of property rights, and the unprovoked alteration of those rights is to be avoided where possible. This is all the more true in a commercial rather than a domestic context. The Court must carefully examine the reasons why other forms of relief are inadequate, the interests of any third parties and the other circumstances of the case, and consider whether proprietary relief can be justified.
12 Commonwealth Reserves I v Chodar [2001] 2 NZLR 374 at [41]-[42].
[58] Against that background, it is necessary for the Court to enquire into the circumstances or features of the case that may make it unconscionable for the mortgagee to transfer the property sold at mortgagee sale to the purchaser.
Unconscionability
[59] The basis for a claim of unconscionability must arise from some representation the applicant made to the first respondent prior to the first respondent entering into an agreement for sale and purchase over the property at 2 Brighton Road. In effect, the representation would have had to be roughly in the following terms:
a) If the first respondent entered into an agreement for sale and purchase with Basta, then the applicant would not, by exercise of the power of sale contained in the mortgage, seek to sell the property to a third party without first giving the first respondent the opportunity to complete its transaction with the vendor; and
b) That if the first respondent was able to complete the transaction with Basta, the applicant would discharge its mortgage on settlement subject only to being paid the consideration stipulated in the contract between first respondent and Basta.
[60] The first respondent submits that the terms of a constructive trust go further than that suggested above, and that the applicant holds the property in trust on terms that not only will it make the property available to the first respondent in due course, but it will take the necessary steps to complete the development.
[61] In the context of this case, any assumption of the wider responsibilities I have set out above would have arisen because of an explicit or implicit representation made by the applicant. The first respondent relies upon the implicit circumstances of the transaction as giving rise to the obligations alleged to exist on the part of the applicant. This is apparent from the evidence of Ms Davidson, who is a trustee of the first respondent. She recounts the circumstances in which the trust entered into an agreement for sale and purchase from Basta. She confirmed that the agreement for sale and purchase was entered into 25 February 2010. In March 2010, solicitors
acting for the applicant wrote to those acting for the first respondent asking for, inter alia, confirmation that the contract was unconditional. The fact that the contract was unconditional was confirmed by a letter from the solicitors for the first respondent dated 15 February 2011. The thrust of Ms Davidson’s evidence is that the applicant was concerned to know that the agreement for sale and purchase was unconditional before it would start providing funds to the developer for the work at 2 Brighton Road. She says that the property was transferred to Basta on 22 March 2010, some
22 days after the parties entered into the agreement for sale and purchase.
[62] Ms Davidson recorded that progress on construction of the proposed town house was very slow. To help, the first respondent even went to the stage of advancing funds to Basta against the purchase price under the agreement for sale and purchase. However, the building contractors were apparently not being paid. The applicant declined to advance further amounts. Eventually in November 2011, she discovered that the property was being offered for sale by the mortgagee. Ms Davidson gives evidence about the fairness, as she sees it, of the price that she offered for the property in 2009. She said that the applicant, as the lender, had made a proposal to complete the development and sell it to her for an increased price of
$1,550,000. She was critical of that offer. She then states:
By its stringent presale conditions the lender must be taken to have assumed the possibility that it might have to take over the development should the borrower failed to complete and I see no evidence that there is any prejudice to the lender and allowing me to complete my obligations and pay for the property, or to finish it myself and obtain a credit for the cost of so doing.
[63] Before I comment on the substance of this deposition, I observe that it is quite unacceptable for deponents to make what are in effect submissions or arguments in the course of affidavits. The type of matters which Ms Davidson raised in her affadavit should be restricted to submissions filed in the proceeding.
[64] Ms Davidson further states:
I confirm that the Trust is willing to commence proceedings against the vendor seeking specific performance of the sale and purchase agreement, and damages. If the Trust’s caveat is not upheld proceedings for specific performance will be pointless, and so have not been commenced pending the outcome of this proceeding.
Discussion
[65] The extract from Ms Davidson’s affidavit I have set out at [62] asserts that the applicant must have “assumed the possibility that it might have to take over the development should the borrower failed to complete”. Even if the comment is correct, it does not follow from the possibility that the developer might fail, that the developer is now required to complete the development and sell the property to the first respondent. In essence, the first respondent is arguing for an outcome that could only be reached if the applicant mortgagee has guaranteed the position of the purchaser by, in effect, representing to the purchaser that if the vendor did not complete, then the mortgagee would intervene to do so at its own expense, and would also stand in the place of Basta as promisor of the obligation to transfer the property to the first respondent once it was completed.
[66] This argument cannot be sustained. It is one thing for a lender to acknowledge that it faces risks, but quite another for that realisation to be read as an indemnity for any other person involved in the transaction against any risks that other person might face.
[67] Further, there is no evidence of an express or implied agreement by which the applicant might be compelled to complete the development for the benefit of the first respondent. In case the first respondent founds its case on an estoppel, it cannot be overlooked that the first respondent entered into the agreement without any knowledge of the applicant’s ultimate part in funding the arrangement. This rules out any possible argument that in entering into the contract, the first respondent did so in reliance upon any assurance arising from the participation of the applicant in the enterprise as mortgagee.
[68] I have considered whether it would be the most just outcome in this case for the first respondent to be given time to launch substantive proceedings in an effort to enforce any rights that she might have under her agreement for sale and purchase. However, given the manifest problems that her claim faces, and the delays that have occurred already, I have concluded that there would be little justification for taking such a course. The facts are that it is undesirable for the property to be left in a
partly completed state any longer. In the light of the delays that occurred already, such an outcome would be unfair to the applicant.
[69] The result is that the application is granted and it will be an order discharging the caveat. The parties should confer on the matter of costs and if they are not able to agree they may file memoranda not exceeding four pages on each side within 10
working days of the date of this judgment.
J.P. Doogue
Associate Judge
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URL: http://www.nzlii.org/nz/cases/NZHC/2012/701.html