Kim v Lee [2014] NZHC 1032 (23 May 2014)

Last Updated: 24 July 2014

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV 2014-404-000577 [2014] NZHC 1032

UNDER	Section 145 of the Land Transfer Act 1952
IN THE MATTER	of sustaining a caveat
BETWEEN	SUNG HYUK KIM Applicant
AND	HYUNG SOO LEE Respondent

Hearing:	16 May 2014
Appearances:	J Strauss for the Applicant D Watson for the Respondent
Judgment:	23 May 2014

_{JUDGMENT OF ASSOCIATE JUDGE CHRISTIANSEN}

This judgment was delivered by me on

23.05.14 at 3:00pm, pursuant to

Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

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

S H KIM v H S LEE [2014] NZHC 1032 [23 May 2014]

[1] Mr Kim has applied to sustain the caveat he has registered over Mr Lee’s

home property. Mr Lee owns that property with his wife.

[2] Mr Kim and Mr Lee are businessmen. Both are members of the Korean Society of Auckland. Their dispute arises in connection with the purchase by the Korean Society of a building in November 2012, to be used for cultural and general community purposes.

[3] The Korean Society did not have enough money to fund the purchase. It proposed to collect, over time, the funds needed to acquire the building from member donations.

[4] An agreement for sale and purchase was entered into on 16 November 2012. The purchase price was $1,500,000 and settlement was due on 29 March 2013.

[5] Mr Lee deposes there was much discussion around who would own the building. He says it was agreed that a board of directors elected by members of the Korean Society, would operate the building, at least in the short term. Mr Lee says he was to have been one of those board directors.

[6] Shortly prior to the settlement of the purchase it was clear there were insufficient funds to complete. A loan had been obtained from Kookmin Bank, but there was still a shortfall of about $423,000. Mr Lee says that Mr Kim had already agreed to advance the shortfall.

[7] Mr Kim deposes that at about that time he and Mr Lee and a Mr David Hong concluded an agreement which noted that whilst Mr Kim would cover the shortfall temporarily, all three agreed to share that responsibility and indeed that Mr Hong and Mr Lee would, after two months, pay interest at bank rates, if their share had not been paid.

[8] Their agreement (the March document) contains Korean script. It is dated 27

March 2013, just two days before purchase settlement. It is signed by the three parties concerned. It is the third paragraph of that agreement which provides the

focus of the dispute in this case. For Mr Kim it is argued that the third clause contains an agreement to mortgage. For Mr Lee it is contended clause 3 does not contain all the essential characteristics of an equitable mortgage.

[9] Each party has provided an interpretation of clause 3. That provided by Mr

Kim’s interpreter states:

If the shortage of the total amount remains after 2 months donation, it is to be shared by three of us Young Pyo Hong, Hyung Soo Lee and Sung Hyuk Kim. And each of us has proportioned liability of 1/n to pay for the amount in short and Mr Sung Hyuk Kim can any time put mortgage on the properties of both Young Pyo Hong and Hyung Soo Lee.

[10] Mr Lee’s interpreter provides the following translation of the third paragraph:

After 2 months, all fund-raising amount shall be calculated exactly. A debt on the shortage shall be a joint debt of David Hong, Henry Soo Lee and Sung Hyuk Kim. And each of them shall have a responsibility to pay back the debt of 1/n. Sung Hyuk Kim can establish the fixed collateral on the property of David Hong and Henry Soo Lee.

[11] Counsel agree that the reference to ‘1/n’ means ‘equally’.

[12] It is the case for Mr Kim that the parties agreed he could put a mortgage on the properties of Mr Hong and Mr Lee at any time two months after settlement date if their contribution share was not paid. Mr Lee says he understood the clause to refer to Mr Kim’s intention to approach him for security which he was not obliged to provide. Mr Lee states that whilst he is familiar with the concept of a mortgage, he did not agree to give a mortgage over his property.

[13] Mr Kim’s account of the parties’ agreement records the purpose of his initial advance being to enable the purchase to settle; that Mr Lee and Mr Hong had agreed to share that responsibility; that Mr Lee and Mr Hong owed him $110,000 each and agreed to secure that commitment by granting Mr Kim mortgage security over their properties if their contribution share was unpaid after two months.

[14] Mr Lee claims his agreement did not provide a right to mortgage his property. Also he says it ignores the significance of other events within the Korean Society taking place at that time. Mr Lee says Mr Kim had already decided to lend the

shortfall to the Korean Society in connection with his desire to secure election as president of that Society. Mr Lee says Mr Kim would have still lent the money anyway, regardless of whether Mr Hong or Mr Lee signed the March document.

[15] Mr Lee deposes he only agreed to sign the March document on the basis the agreed ownership structure was put in place by which the board of directors would be established to operate the building in the short term, and that the building would be owned by a charitable trust. He says the proposed ownership structure has not eventuated and that he and Mr Hong have been “cast out from any involvement in the operation of the building”.

Principles

[16] There is no dispute about these. They include:

(a) The onus is on the caveator to show he has an arguable case that he has an interest in the land which is sufficient to support the caveat.

(b) Extensions of the caveat will be refused only where it is plain the caveator has no prospect of supporting the interest claimed.

(c) Caveat proceedings are unsuitable for the determination of disputed questions of fact.

(d) If an arguable case for the caveat is shown then in the absence of any special considerations the caveat will remain until proceedings to enforce the interest of the claim are tried.

(e) An equitable mortgage conferring an interest that will support a caveat may be created by an agreement to mortgage but a security agreement in which a debtor merely agrees to grant a mortgage if requested to do so by the creditor does not by itself create an equitable mortgage; that in order for an equitable mortgage to come into

existence, an effective request to grant a mortgage over the property must be made by the creditor.¹

Considerations

[17] If Mr Kim can demonstrate there is an arguable case he has an equitable mortgage then he will succeed in his application. Mr Lee contends the March document creates a set of personal obligations only and which do not give rise to an equitable mortgage.

[18] Ms Watson submits there are four necessary elements of an equitable mortgage:

(a) The right being granted must possess the essential characteristics of a mortgage.

(b) There must be valuable consideration.

(c) There must be a sufficient memorandum or note in writing to satisfy s 24 of the Property Law Act or a sufficient act of part performance.

(d) The availability of specific performance.

Essential characteristics of an equitable mortgage

[19] It is to be inferred from what Mr Lee has said that if there was to be any mortgage then a request for same would have to have been made because a security agreement in which a party purports to agree to grant a mortgage is not an equitable mortgage prior to any such requests being made.

[20] In support of this position Ms Watson for Mr Lee has referred the Court to several case authorities in which the distinction between an equitable mortgage and

_{the creation of purely personal rights was considered. Ms Watson referred to the}

¹ NZI Bank Ltd v Philpott (1989) 1 NZ ConvC 190, 246 (CA).

decisions of the Court of Appeal in Philpott v NZI Bank (supra) and of Associate

Judge Faire (as he then was) in Cantab Management Ltd v Greagh Investments Ltd².

[21] The essence of those is that there must be property which has been identified by the parties which could be subject to the mortgage and further that it is acknowledged by the parties that what they are contemplating is the giving of some security over the subject property.

[22] In the Philpott case the Court declined to recognise the existence of an equitable charge because the claim of an interest referred to the mere potential for a beneficial interest which had not ripened into interests in any property.

[23] In the Cantab Management Ltd case a written agreement between a service provider and a developer recorded that the developer would if called upon grant to the applicant a valid registrable mortgage secured over specifically identified property. His Honour said the parties’ agreement did that because the document preamble had acknowledged that purpose.

[24] In Personal Finance Ltd v Valu³ Master Faire (as he then was) commented on indications to support claims of an equitable mortgage. These included:

(a) The particular property charged in the caveat was identified in the agreement as the property to be charged.

(b) The borrower, in executing the agreement, acknowledged that the property was to be charged and as a result consented to the lodging of the caveat.

(c) The intention of the documents seemed to be that the borrower acknowledged that the property was to be charged either by a caveat in the first instance or by a registrable mortgage if a request to execute

_{one was made.}

² _{HC Hamilton M95/02, 20 November 2002.}

³ HC Auckland CIV 2003-404-675, 11 July 2003.

(d) The part of the document containing these provisions expressly referred to those provisions as an agreement to mortgage.

[25] Ms Watson submits that the document for consideration in this case does not describe itself as an agreement to mortgage but rather as “an agreement among three key members of the committee of Korean House of Auckland”. Counsel submits its function was to create a form of creditor/debtor relationship in that it purports to record agreement of payment to Mr Kim; that it provided an amount was to be paid by donations following settlement and also referred to Mr Kim being able to purchase the building himself.

[26] Ms Watson submits therefore that this document fails to satisfy the Court’s

requirements of an agreement to mortgage because:

(a) The intention of the document was to obtain the agreement of Mr Lee and Mr Hong regarding repayment to Mr Kim of the shortfall.

(b) There is no description of the properties to be charged.

(c) The document referred to Mr Kim being able to put a mortgage on “the properties of” both Mr Hong and Mr Lee, rather than on their particular interests in any properties they may own in conjunction with any other registered proprietor.

[27] Ms Watson submits that had the parties intended to create an agreement to mortgage, that any document would have specifically made it clear:

(a) The interest being charged.

(b) The description of the property.

(c) The circumstances in which the caveat could be lodged, i.e. before default or only after default.

(d) The amount being charged.

(e) Other matters such as the release of the mortgage in the event of the mortgagor discharging their obligations.

Valuable consideration

[28] Ms Watson submits there is no valuable consideration flowing to Mr Lee in relation to the advance because it is an advance to a third party because Mr Lee received nothing of value, in executing the March document.

Whether the agreement provided a sufficient memorandum to satisfy Section 24 of the Property Law Act 2007

[29] Section 24 provides that a contract for the disposition of land is not enforceable unless:

(a) The contract is in writing or its terms are recorded in writing.

(b) The contract or written record is signed by the party against whom the contract is sought.

[30] Ms Watson submits that there is insufficient compliance with s 24 because the document does not record the interest of Mr Lee in a specific property that he owns which is to be charged, nor does it clearly state the period of loan, the rate of interest or amount to be repaid.

The availability of specific performance

[31] Ms Watson submits specific performance would not be available because damages are arguably an adequate remedy.

[32] In conclusion it is submitted on behalf of Mr Lee that the necessary elements of an equitable mortgage are missing in this case and therefore because the claim of a mortgageable interest in Mr Lee’s land has not been adequately satisfied, Mr Kim’s claim of a caveatable interest must fail.

Assessment

[33] In the Court’s view the third paragraph of the parties’ agreement provides Mr Lim’s acknowledgement of Mr Kim’s equitable mortgage interest. Mr Lee does not say what he understand by the words “fixed collateral on the property” as it is contained in the transcription provided on his behalf, except that he says it referred to Mr Kim’s intention to approach Mr Lee for security that Mr Lee was free to refuse.

[34] In the Court’s view and on any account there is no indication that access to security was conditional upon Mr Lee’s consent being obtained. Also, that claim overlooks the document which records the loan of a substantial amount for which all three shared the responsibility for repayment. It also dealt with the payment of interest and the giving of security.

[35] Also for consideration is Mr Lee’s letter dated 8 November 2013 sent to Mr

Kim by which he purports to declare as invalid the ‘Guarantee letter’.

[36] Mr Kim’s position is, and the Court agrees, the purported cancellation of the agreement threatened Mr Kim’s security and that he was entitled to protect that interest by mortgage or injunction.

[37] As to claims there was no consideration provided for Mr Lee’s agreement, Mr Kim asserts he would not have made the loan except on the terms he did and because the responsibility for payment of it was to be shared by Mr Hong and Mr Lee. Both interpretations of the third clause support that contention.

[38] Mr Kim denies that he ever intended to forgive the loan or that he intended to donate the funds. Also, Mr Lee’s letter of 11 November 2013 does not support those claims, for it notes:

At the time of the agreement, Kim Sung Hyuk/Chief of the Centre of Korean Community House had enough cash and he agreed to pay the amount including those additionally agreed amount for us, then would agree to share for his payment on behalf of us at the ratio of 1/n.

[39] Mr Strauss submits and the Court agrees that Mr Lee’s main complaint related to the management structure of the Korean Society as providing him with grounds for cancellation. Mr Strauss submits there is no link between the agreement and the governant structure of the Society and the use/or administration of the building. These obligations for part repayment of the loan for which he agreed could be secured by a mortgage are not changed by the management structure of the Society or how the property is administered. Therefore claims of breach or misrepresentation cannot satisfy the materiality requirement in s 7(4) of the Contractual Remedies Act 1979.

[40] Mr Lee claims Mr Kim was unable to call for security because no one had accounted to Mr Lee for funds collected during the two months following settlement. Against this claim is the fact that it was eight months after the conclusion of the agreement when Mr Lee purported to cancel it because of a complaint about the management structure of the Society; further that Mr Lee’s letter of November 2013 does not support claims of concern about the accounting to him.

[41] The Court accepts the submission of Mr Strauss that the agreement to mortgage provided Mr Kim could “at any time put a mortgage on the property”, and therefore that this was not a case when Mr Lee had agreed to provide a mortgage when called upon to do so.

Conclusion

[42] The promise to pay a third share of funds advanced to enable the purchase of the Korean Society’s property was not subject to a condition to provide mortgage security if that was requested. Rather, the promise permitted Mr Kim to register a mortgage at any time after two months if Mr Lee’s third share was not paid. That element of unpaid payment apart there was no condition inhibiting Mr Kim’s right to register it.

[43] But, even if there was a condition requiring a request to be made before the

caveat could be lodged, Mr Lee’s letter of 11 November 2013 purporting to cancel

the parties’ arrangement provides that the very basis of Mr Kim’s right of intervention in support of a claim of a registrable mortgage.

[44] For Mr Lee it is submitted that no valuable consideration was provided for the promise he made. That cannot be so because he promised to meet payment to Mr Kim of his share of an advance to the Society. There is no doubt that the parties’ agreement recorded this. Ms Watson submits the promise was made before the funds were advanced. It is clear that the promise was made before the funds in question were utilised by the Society for the settlement of their purchase.

[45] Ms Watson submits that there is insufficient reference to identify the property or that part of which was owned by Mr Lee, for it to have provided the security that Mr Kim claims.

[46] To the contrary the Court accepts that Mr Lee’s promise relates to the property in which he lived and which he held a registrable interest because there is no evidence at all that his promise may have related to any other property.

Summary

[47] The Court accepts Mr Kim’s claim of a registrable interest over the property

partly owned by Mr Lee.

[48] The Court retains a discretion nevertheless to remove Mr Lee’s caveat if special considerations dictate it should be removed.

[49] In this case Mr Kim’s caveat supports his claim of a contribution towards the funding of the purchase of a property by the Korean Society. It is incumbent upon Mr Kim to pursue expeditiously the recovery of the contribution he says is due from Mr Lee.

[50] Therefore whilst the Court recognises Mr Lee’s right to caveat Mr Lee’s property, that right must be subject to certain terms, which indeed Mr Kim acknowledges. Accordingly the Court’s order sustaining Mr Kim’s caveat shall be subject to the following conditions:

(a) Proceedings to enforce Mr Kim’s rights are to be filed and served within 15 working days of the issue of this judgment.

(b) Mr Kim is to progress the proceedings expeditiously.

(c) Leave shall be granted to Mr Lee to request the Court on 48 hours notice, to recall the order in the event the proceeding was not being progressed expeditiously.

Judgment

[51] The application for an order that a caveat not lapse is granted.

[52] Costs upon this application are reserved for determination upon application but not before 30 June 2014.

Associate Judge Christiansen