Lepionka & Company Investments Limited v Coltart [2015] NZHC 2849 (17 November 2015)

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UNDER	the Land Transfer Act 1952
BETWEEN	LEPIONKA & COMPANY INVESTMENTS LIMITED Applicant
AND	ANDREW WILLIAM CLYDE COLTART Respondent

Hearing: Further submissions:	14 August 2015 21 October 2015 and 28 October 2015
Counsel:	E Cox and D Wallace for the Applicant L Taylor QC and D Chan for the Respondent
_Judgment:	_{17 November 2015}

[1] The applicant (the Lepionka mortgagee) applies for the removal of two caveats registered by Mr Coltart on the title to a 24 hectare block of land not far from Havelock North, Hawke’s Bay (the land).

[2] The owner of the land is a company called GLW Group Ltd (GLW). GLW had borrowed approximately $2.6 million from Westpac Bank (the bank), and that borrowing was secured by a first registered mortgage over the land (the mortgage). GLW defaulted on its obligations under the mortgage, and in January 2015 the bank issued a notice under s 119 of the Property Law Act 2007 (the PLA) requiring the

LEPIONKA & COMPANY INVESTMENTS LIMITED v ANDREW WILLIAM CLYDE COLTART [2015] NZHC 2849 [17 November 2015]

[3] After the notice expired unremedied on 6 March 2015, the Lepionka mortgagee paid $2,681,345.43 to acquire the mortgage from the bank. It now wishes to proceed with the subdivision and sale of individual lots on the land, exercising the powers of sale contained in the mortgage.

[4] Mr Coltart opposes the application. He has been living in a homestead on the land since December 2010, pursuant to an agreement or agreements with GLW under which he would assist GLW with works necessary to complete a subdivision of the land. Disputes arose between GLW and Mr Coltart in the course of the subdivision work, but they were eventually settled by a written agreement under which Mr Coltart was given an option to purchase lot 2 on the land (the homestead lot), and a right to roam over the “common land” area of the intended subdivision. Mr Coltart registered a caveat to protect his interest under the option to purchase, in February 2013. He registered a second caveat, to protect the “right to roam” interest and various easements in favour of the homestead lot, in May 2013.

[5] Mr Coltart says that he has spent considerable sums of money on the land, including $150,000 towards the purchase of the homestead lot and $1,573,000 on renovation work on the old homestead. He stands to lose that investment if the Lepionka mortgagee proceeds to sell the homestead lot (or the land as a whole) to other parties: the effect of s 105 of the Land Transfer Act 1952 (the LTA) is that a sale by a mortgagee to a third party has the effect of extinguishing all prior interests in the land to which the mortgagee has not consented.

[6] GLW’s original plan was to develop the land by creating a rural subdivision, with residential sites, common land, fishing huts, and river access. Originally there were to be four lots. GLW arranged finance from the bank, and the bank registered the mortgage on 9 October 2009.

[7] At some point in 2009, Mr Coltart agreed with the director of GLW, Mr Paterson, to help Mr Paterson project manage the development. They agreed that Mr Coltart would buy one of the lots (the homestead lot), on which there was an old

homestead, for $800,000. It is not clear whether this agreement was oral or in writing (if there was a written agreement, it was not produced in evidence). Mr Coltart paid $150,000 towards the purchase price.

[8] Mr Coltart took possession of the homestead lot in October 2009 and moved in in December 2010. He and his wife have lived there since that time.

[9] The nature of the disputes which arose between Mr Coltart and GLW in the course of the subdivision work is not material here. The disputes were settled by an agreement made on 21 August 2012 (the Coltart agreement). The Coltart agreement gave Mr Coltart an option to purchase the homestead lot, and the right to roam over the common land and use of a fishing hut and caretaker’s shed. He paid $25,000 for the option. The Coltart agreement also permitted GLW to create a further two lots in the subdivision (proposed lots 5 and 6).

9314741.1 (Caveat 1)). On 22 May 2013 he lodged caveat 9406217.1 (Caveat 2). The easements in favour of the homestead lot which are referred to in Caveat 2 will, among other things, provide Mr Coltart with access through the completed subdivision.

[11] GLW obtained resource consent for an amended subdivision plan which included the proposed additional lots 5 and 6, but the plan also added a new lot (lot 8) and a fishing hut associated with lot 4. Mr Coltart says that he did not agree to the creation of the new lot 8 and the provision for the lot 4 fishing hut. Both are on the common land, and he says they will interfere with his “right to roam”.

[12] By two separate agreements entered into with GLW in January 2014, entities associated with Mr Stefan Lepionka agreed to purchase four of the lots into which the land would be subdivided. Lepionka & Company Limited (LCL) agreed to purchase intended lots 3, 5 and 8, and Mr Lepionka and another person, as trustees of a family trust, agreed to purchase the intended lot 4 and fishing hut. For convenience, I will refer in this judgment to the purchasers named in these two agreements for sale as “the Lepionka purchasers”.

[13] Deposits totalling $463,000 were paid to GLW. Neither agreement was for the homestead lot, which is lot 2 in the proposed subdivision.

29 January 2015, the bank served GLW with a default notice under s 119 of the PLA. Mr Coltart was also served with a copy of the notice, as were the Lepionka purchasers (they had registered their own caveats to protect their interests as purchasers). The notice expired without remedy on 6 March 2015.

[15] The Lepionka purchasers were then faced with a significant problem. If the bank elected to sell the land as an un-subdivided block to some third party, or to proceed with the proposed subdivision but sell lots 3, 4, 5 and 8 to other parties, the effect of the mortgagee sale or sales would be to extinguish the interests of the Lepionka purchasers under their agreements to buy those lots. In that eventuality they would lose their deposits, just as Mr Coltart would lose the money he had spent for his interests in the land if the land (or the homestead lot) were sold to another party or parties.

[16] To create a solution to the problem, Mr Lepionka decided to incorporate the Lepionka mortgagee as a vehicle to acquire the mortgage. The Lepionka mortgagee was incorporated on 25 March 2015, and on 31 March 2015 it paid the bank out and took an assignment of the mortgage. The Lepionka mortgagee is now the proprietor of the first registered mortgage over the land.

[17] On 1 April 2015, the Lepionka mortgagee formally adopted the agreements for sale and purchase which GLW had made with the Lepionka purchasers. Mr Lepionka states that his intention was that the Lepionka mortgagee would complete the subdivision as mortgagee, then settle the sales to the Lepionka purchasers. The Lepionka purchasers would thus preserve their interests in lots 3, 4,

5 and 8, and would become the registered proprietors of those lots when the subdivision was completed, new titles were issued, and they completed settlement under their agreements.

[18] By separate agreement also made on 1 April 2015, the Lepionka mortgagee agreed with the Lepionka purchasers to pay compensation to them in the event that the mortgage was redeemed or assigned, or the subdivision was not completed within six months: the $463,000 deposit would be repaid to the Lepionka purchasers (with interest), and the Lepionka purchasers would receive a further $750,000 by way of compensation for the non-completion of their agreements. (The $750,000 would be refunded to the holder of the mortgage if the subdivision was completed and the lots transferred to the Lepionka purchasers in accordance with their agreements, within 12 months.)

[19] On 9 April 2015 the Lepionka mortgagee gave notice to Mr Coltart purporting to cancel the Coltart agreement. Mr Coltart was given five working days to remove his caveats.

[20] On 16 April 2015 the Lepionka mortgagee gave a further notice to Mr Coltart, asserting that the Lepionka mortgagee had cancelled his agreement, and that he had no right to maintain the caveats.

[21] There are other caveats affecting the land, but Mr Lepionka is confident he can ensure they are removed.

[22] Mr Coltart has offered to buy the whole of the land several times in the course of 2015. His last offer, made on 1 May 2015, was $6,930,000 (plus GST if any). The Lepionka mortgagee sought consent to a sale at that figure from GLW and the holder of a second mortgage over the land, and it appears that those parties did provide consents, albeit subject to conditions, and not confirmed by their solicitors.

[23] The door was closed on the prospect of any sale of the land to Mr Coltart (at least at that stage) when the solicitors for the Lepionka mortgagee advised on 29

May 2015 that the Lepionka purchasers “have elected not to cancel the agreements for sale and purchase with our client mortgagee and wish to complete the contracts. On that basis our client is not in a position to entertain the offer from Mr Coltart.”

[24] Mr Lepionka states that he believes the homestead lot is worth three times the amount of the option figure agreed by GLW and Mr Coltart in the Coltart agreement. He contends that the Lepionka mortgagee cancelled Mr Coltart’s agreement in order to recover the proper value of the homestead lot, and to apply the proceeds of the sale of the homestead lot to the mortgage debt and the costs of completing the subdivision.

[25] Mr Coltart counters that he has already incurred costs of $3,404,000 on the land (including an amount of approximately $1.6 million he had invoiced GLW for subdivision works, which he agreed to forego in the August 2012 settlement with GLW), and that those costs will rise to $4,034,272 if the sale of the homestead lot to him is completed at the option price. He contends those figures are well above the appraisals for the homestead lot which the Lepionka mortgagee has obtained from Sotheby’s and Bayley’s (those figures range between a figure of $1.84 million on the basis of a mortgagee sale, and $2.7 million on the basis of a sale at full market value).

[26] Mr Coltart says he is ready, willing and able to complete the purchase of the homestead lot.

[27] New titles for the homestead lot and lots 3, 4, 5 and 8 have not been issued, but the Lepionka mortgagee says very little work is required for a new title to be issued for the homestead lot. Mr Lepionka’s evidence was that the Lepionka mortgagee would be proceeding with the subdivision, starting with the homestead lot, and that tenders for the sale of the homestead lot would close on

22 September 2015. Caveat 1 and Caveat 2 will have to be removed before a new title can be issued for the homestead lot.

[28] Section 143 of the LTA provides for the removal of caveats. The registered proprietor of the land or any other person having a registered estate or interest in the estate or interest protected by the caveat may apply to the High Court for an order

that the caveat be removed. The Court may make such an order in the premises as to the Court seems meet.¹

[29] A registered mortgagee can apply for such an order, as it has an interest in the land.²

[30] An order for the removal of a caveat will not be made unless it is patently clear that the caveat cannot be maintained either because there was no valid ground for lodging it, or that such valid ground as then existed no longer does so. The patent clarity referred to will not exist where the caveator has a reasonably arguable case in support of the interest claimed.³

[31] In National Bank of New Zealand v Radisich and Radisich Master Faire (as he then was) set out the principles of s 143:⁴

(a) S 143 of the Land Transfer Act 1952 gives no guide as to the circumstances in which the Court may make an order that a caveat be removed.

(b) If it is clear that there was no valid ground for lodging a caveat, or that the interest which in the first place justified the lodging of the caveat no longer exists, such a caveat should be removed.

(c) The onus under s 143 of the Land Transfer Act 1952 lies on the caveator to show that he has a reasonably arguable case for the interest he claims.

(d) The caveat, being a creature of statute, may be lodged only by a person upon whom a right to lodge it has been conferred by statute. It is not enough to show that the lodging and continued existence of the caveat would be in some way advantageous to the caveator.

(e) For the purpose of this application, the caveator therefore must show that it is entitled to, or to be beneficially interested in, the estate referred to in the caveat by virtue of

¹Land Transfer Act 1952, s 143, and Vegar-Fitzgerald v Aorangi Forests Ltd [2014] NZCA 200 at

²_{Bennion and others New Zealand Land Law
(2}^nd_{ed, Brookers, Wellington, 2009) at 304.}

⁴National Bank of New Zealand v Radisich HC Hamilton CIV-2003-419-928, 25 August 2003 at

an unregistered agreement or an instrument or transmission or of any trust expressed or implied...

(f) What the caveator must establish is an arguable case for claiming an interest of the kind in s 137 of the Land Transfer Act 1952.⁵

(g) Even if the caveator establishes an arguable case for the interest in the land claimed, the Court retains a discretion to make an order removing the caveat although it will be exercised cautiously.

(h) Delay is a relevant factor to be weighed in the exercise of the Court's wide discretion under s 143. Delay is more important where there is specific prejudice. What is required is a consideration of all the circumstances.

(i) The summary procedure for removal of a caveat against dealing is wholly unsuitable for the determination of disputed questions of fact.⁶

[32] In Vegar-Fitzgerald the Court of Appeal set out particular principles relating to the situation where the competing interests are those of a caveating purchaser and a mortgagee.⁷In the ordinary course of things, a purchaser acquires an equitable interest in the land, which is entitled to protection by a caveat.⁸However, where the property is the subject of a mortgage, the purchaser’s rights are always subject to those of the mortgagee.⁹The mortgagee’s title is paramount, including its power of

[33] If a mortgagee has not consented to the mortgagor selling to the purchaser, the purchaser’s equitable interest is extinguished by the mortgagee exercising its power of sale. The purchaser’s caveat is then not sustainable.¹¹

⁵_{Affirmed in the Court of Appeal in Vegar-Fitzgerald v
Aorangi Forests Ltd, above n 1, at [12].}

[34] What I must ultimately decide is whether there is a reasonably arguable case that Mr Coltart had, and continues to have, a caveatable interest in the land. If he does, but it appears that his caveats could not survive a sale of the homestead lot (or of the land) by the Lepionka mortgagee to a third party, the question will be whether my discretion under s 143 should be exercised in favour of removal notwithstanding Mr Coltart’s interest.

[35] It has been suggested in New Zealand Land Law that a mortgagee may not bring an application under s 143 until it has entered into a contract for sale and purchase of the relevant land.¹²As far as the Court is aware the Lepionka mortgagee has not yet entered into any such agreement for the homestead lot; its immediate concern is that it is unable to give clear title to a purchaser of the homestead lot while Mr Coltart’s caveats remain on the title to the land.

[36] This point was not taken by Mr Taylor, and in any event I note that Associate Judge Gendall (as he then was) held in Public Trust v Toussaint that the position suggested by the authors of New Zealand Land Law was contrary to the intent of s 143.¹³Under s 143, the Court has a broad discretion to make such order as to the Court seems meet, and I agree with the views of the judges in National Bank of New Zealand Ltd and Toussaint that (i) it is open to the Court in an

appropriate case to make an order that on presentation for registration of a memorandum of transfer for the transfer of the title for the purpose of completing the mortgagee sale the caveat shall lapse¹⁴, and (ii) there is no reason why a similar order cannot be made under s 143 before the mortgagee has entered into a sale contract.¹⁵

If it is necessary, I am content to adopt the reasoning of the Associate Judge in

¹³Public Trust v Toussaint (2004) 5 NZ Conv 194,304, cited with approval by Associate Judge

Sargisson in Dorchester Finance v Risk Management Services Ltd HC Auckland CIV-2008-404-

(1) Does Mr Coltart have a prima facie caveatable interest in the land under the Coltart agreement?

(2) In adopting the agreements made between the Lepionka purchasers and GLW, did the Lepionka mortgagee also adopt the Coltart agreement, or consent to be bound by Mr Coltart’s interest under the Coltart agreement?

(4) Are the interests claimed by Mr Coltart in Caveat 1 and Caveat 2 entitled to priority over the mortgage because of bad faith on the part of the Lepionka mortgagee in the exercise of its powers under the mortgage?

(5) Has the Lepionka mortgagee acted in a breach of a duty under s 176 of the PLA, by failing to take reasonable care to obtain the best price reasonably obtainable for the land? Will it breach such a duty if it proceeds with its proposal to sell the homestead lot by tender and/or continues to reject offers by Mr Coltart or other third parties to buy the land?

(6) In adopting the agreements with the Lepionka purchasers, and/or by cancelling the Coltart agreement and/or by rejecting offers from Mr Coltart or third parties to purchase the land, has the Lepionka mortgagee exercised its powers fraudulently or in bad faith, for the collateral purpose of protecting the Lepionka purchasers? If so, is that a sufficient reason to refuse the application?

(7) Is the Lepionka mortgagee seeking an equitable remedy when it applies to have the caveats removed? If so, should the application be refused because it has not “come to equity with clean hands”? Is the application an abuse of process?

(8) Should the Court, in the exercise of its discretion, decline the application? If so, what orders should be made in respect of the caveats (if any)?

Issue 1: Does Mr Coltart have a prima facie caveatable interest in the land under the Coltart agreement?

[38] Mr Cox did not suggest to the contrary, and I am in any event satisfied that an option to purchase land does give rise to a caveatable interest.¹⁶Likewise, the unregistered easements protected by Caveat 2 are in my view caveatable interests.¹⁷

[39] The case for the Lepionka mortgagee is either that Mr Coltart’s caveatable interest was extinguished by the cancellation notice given in April 2015, or (if that notice was ineffective for any reason) his interest will inevitably be extinguished when the Lepionka mortgagee sells the homestead lot or (to that extent) any part of the “common land” which was the subject of Mr Coltart’s right to roam and equitable easements.

Issue 2: In adopting the agreements made between the Lepionka purchasers and GLW, did the Lepionka mortgagee also adopt the Coltart agreement, or consent to be bound by Mr Coltart’s interest under the Coltart agreement?

[40] This issue arises out of the following clause in both of the January 2014 agreements between GLW and the Lepionka purchasers:

(a) [GLW] has (or will prior to settlement have) a settlement agreement with Coltart that contains an agreement for sale of [the homestead lot] to Coltart.

(b) Within that settlement agreement there is provision that Coltart will, if called upon by [GLW] within 5 years of 21 August 2012, provide

dwellings and their accessory buildings on the Land on the basis that Coltart has no liability whatsoever in respect of design, preparation of plans by an architect or draftsman or construction of the building.

¹⁷Bennion and others, above n 2, at 279; see for example Hart v Mitchell HC Palmerston North

[GLW] agrees to ensure that the arrangements with Coltart include this provision, and that the provision is enforceable by the purchaser.

(c) [GLW] will, on settlement of this agreement, assign the benefit of Coltart’s obligations in the settlement or other agreement in respect of such designs to [the Lepionka purchasers].

[41] It will be seen that cl 14(a) of GLW’s agreements with the Lepionka purchasers clearly referred to GLW having (or committing to have) an agreement to sell the homestead lot to Mr Coltart. Also, in the latter part of cl 14(b), GLW undertook to ensure that arrangements would be in place with Mr Coltart under which the Lepionka purchasers would have the right to call for dwelling and accessory building designs prepared by Mr Coltart. By cl 14(c), GLW undertook to assign to the Lepionka purchasers the benefit of Mr Coltart’s obligations in respect of the designs. Given that these agreements were adopted by the Lepionka mortgagee on 1 April 2015, the question arises whether the Lepionka mortgagee assumed GLW’s obligation under cl 14(b) and 14(c) to make the Coltart designs available to the Lepionka purchasers, and if so, whether the assumption of that obligation arguably entailed a recognition of Mr Coltart’s rights in respect of the homestead lot sufficient to amount to an adoption of the Coltart agreement, or a consent to Mr Coltart’s interest for the purposes of s 105 of the LTA.

[42] Clause 14 of the Lepionka purchasers’ agreements substantially followed the wording of cl 2.1.6 of the Coltart agreement. The Coltart agreement consisted of a single page agreement giving Mr Coltart an option to purchase the homestead lot, with an attached form of agreement providing for a number of matters, including the settlement of the disputes which had arisen between Mr Coltart and GLW. Attached as a first schedule to the agreement was a form of agreement for sale and purchase which would apply if Mr Coltart exercised the option to purchase.

[43] The option was to be exercised by Mr Coltart giving written notice within five working days of the date GLW’s solicitors advised that title had been issued for the homestead lot. If Mr Coltart exercised the option, the agreement (which dealt with other matters as well as the homestead lot) was to bind the parties from the date the option was exercised.

[44] Clause 2.1.6 formed part of the agreement which was annexed to the single page option agreement. It provided:

2.1.6 The Coltart Parties will if called upon by the Paterson Parties within 5 years of the date of this agreement provide one concept design, plus two revisions of each design, for two more dwellings and their accessory buildings and one additional fishing hut on Lot 2 DP 445140 on the basis that The Coltart Parties have no liability whatsoever in respect of the designs, the preparation of plans by an architect or draftsman or construction of the building. All parties agree that there will be no fee payable to The Coltart Parties for the designs/drawings to be drawn by an architect or draftsman.

[45] The effect of cl 14 of the Lepionka purchasers’ agreements was not canvassed by counsel at the hearing. By Minute dated 14 October 2015 I invited counsel to file supplementary submissions addressing the following questions:

(1) what is the effect of the specific acknowledgment in para 14(a) of the agreement for the sale of [the homestead lot] to Mr Coltart?

(2) what is the effect of [GLW’s] promise in para 14(b), which was presumably adopted by [the Lepionka mortgagee] along with the rest of the agreements, to ensure that the arrangements with Mr Coltart referred to in para 14(b) would be enforceable by [the Lepionka purchasers]? Was it possible for [GLW] (or the [Lepionka mortgagee] standing in [GLW’s] shoes) to discharge that contractual obligation while at the same time cancelling Mr Coltart’s agreement to purchase lot 2?

[46] Counsel filed supplementary written submissions in response to that invitation.

[47] Mr Taylor for Mr Coltart submits that when the Lepionka mortgagee adopted the agreements between GLW and the Lepionka purchasers under s 179 of the PLA, it became the vendor under those two agreements. By the adoption, it assumed responsibility for all of GLW’s warranties and obligations under the two agreements, including a warranty that GLW would have a settlement agreement with Mr Coltart that contained an agreement for the sale of the homestead lot to Mr Coltart (cl 14(a)), and an obligation to assign to the Lepionka purchasers the benefit of Mr Coltart’s obligation to provide the concept designs referred to in cl 14(b) and (c). Mr Taylor submits that, by adopting the warranties and obligations, the Lepionka mortgagee affirmed the Coltart agreement, and consented to be bound by the Coltart agreement for the purposes for s 105 of the LTA.

[48] Mr Taylor submits that when the Lepionka mortgagee adopted the agreements made between GLW and the Lepionka purchasers, the written adoption constituted an affirmative act of written acceptance of Mr Coltart’s estate and interest in the land. In the alternative, Mr Taylor submits that the specific reference to the Coltart agreement in the agreements between GLW and the Lepionka purchasers establishes that the Lepionka mortgagee was aware (through the knowledge of Mr Lepionka) of Mr Coltart’s interest in the homestead lot, and of the right to roam.

[49] Mr Cox for the Lepionka mortgagee submits that s 179(2)(a) of the PLA only gives the mortgagee “the rights and powers in relation to the purchaser”: there is no statutory transfer of the mortgagor’s obligations to the mortgagee. Mr Cox refers to s 179(4), which he submits expressly reserves the obligations and liabilities of the contract to the mortgagor. Adoption is a limited statutory right given to a non-party to enforce the agreement and divert the proceeds to itself without discharging the mortgagor. The Coltart agreement did not confer any privity on other purchasers from GLW, and the adoption of one contract cannot constitute consent to another contract referred to in the adopted contract.

[50] Generally, Mr Cox submits that reference to the Coltart agreement in the agreements between GLW and the Lepionka purchasers was only for the purpose of

providing for the delivery of the concept designs, not for the purpose of consenting to the grant of the option by GLW. He further submits that the consent of the mortgagee under s 105 of the LTA must be demonstrated by an unequivocal act, be it express or implied by conduct. Adopting the purchase contracts was for an altogether different purpose – it was not unequivocal in its intent toward the Coltart agreement, to which the option was only a schedule.

[51] Mr Cox emphasises that the Lepionka mortgagee derives its title from the bank by assignment, not from GLW. Neither the bank nor the Lepionka mortgagee consented (in their capacities as mortgagee) to Mr Coltart’s interests. In those circumstances Mr Coltart’s option could never be enforceable against the Lepionka mortgagee.

[52] Finally, Mr Cox submits that there is neither an express nor an implied term in the Coltart agreement that the exercise of a power of cancellation by a mortgagee would terminate, void or allow cancellation of the Coltart agreement. The obligation on Mr Coltart to provide the concept designs to GLW in accordance with cl 2.1.6 of the Coltart agreement continued accordingly.

[53] I do not think there is any question of the Lepionka mortgagee having adopted the Coltart agreement. Under s 179(1) of the PLA, a mortgagee who elects to adopt a sale contract entered into by the mortgagor must serve notice on the purchaser of the mortgagee’s election to adopt the sale agreement. No such notice has been given in this case; indeed, the only relevant communications from the Lepionka mortgagee to Mr Coltart appear to have been the communications in April

[54] The question of whether the adoption of the Lepionka purchaser agreements by the Lepionka mortgagee may have constituted a consent to Mr Coltart’s interest under s 105 of the LTA is more difficult.

Upon the registration of any transfer executed by a mortgagee for the purpose of exercising a power of sale over any land, the estate or interest of the mortgagor therein expressed to be transferred shall pass to and vest in the purchaser, freed and discharged from all liability on account of the mortgage, or of any estate or interest except an estate or interest created by any instrument which has priority over the mortgage or which by reason of the consent of the mortgagee is binding on him.

[56] For the purposes of s 105 of the LTA, “consent” requires a positive affirmative act such as written or oral acceptance or even an implied acceptance by conduct.¹⁸Mere acquiescence or standing by will not do – there must be proof of a

[57] On the face of it, the Lepionka mortgagee has adopted GLW’s obligations at cl 14(b) and (c) to ensure that Mr Coltart’s designs would be available to the Lepionka purchasers. And Mr Coltart’s obligation to provide the designs would only arise if he exercised his option to purchase – the agreement which contained cl 2.1.6 was only to become binding from the date the option was exercised. There was, then, some “linkage” between Mr Coltart’s obligations under cl 2.1.6 of the Coltart agreement to provide the designs, and his entitlement to become the owner of the homestead lot.

[58] The difficulty for Mr Coltart is that he was not party to the agreements between GLW and the Lepionka purchasers, or the adoption of the Lepionka purchase agreements by the Lepionka mortgagee on 1 April 2015. More importantly, no consent to Mr Coltart’s interest was communicated by the Lepionka mortgagee to Mr Coltart. In NZ Fisheries v The Napier City Council, the Court of Appeal accepted that there can be implied acceptance by conduct in an appropriate case,²⁰but the Court also said that “it must be borne in mind that the immediate parties, as

_{well as any purchaser from a mortgagee or assignee of a lease, will
expect to be able}

¹⁸Cashmere Capital Ltd v Carroll [2009] NZSC 123; [2010] 1 NZLR 577 (SC) at [77], and NZ Fisheries Ltd v Napier City Council (1990) 1 NZ CovC 190,342 at 190,344, and Vegar-Fitzgerald v Aorangi Forests Ltd, above n 1 at [13](5).

¹⁹Vegar-Fitzgerald v Aorangi Forests Ltd, above n 1 at [13], referring to Cashmere Capital Ltd v

to tell with reasonable certainty whether or not consent has been given. It should not be too readily assumed or spelt out from the course of dealings between them.”²¹

[59] In this case there has been nothing which might have signalled to Mr Coltart that either the bank or the Lepionka mortgagee consented to him having an interest in the land, and I think that is fatal to Mr Coltart’s argument that the adoption of the Lepionka purchase agreements constituted a sufficient positive and affirmative act by the Lepionka mortgagee to amount to a binding consent for the purposes of s 105 of the LTA.

[60] That conclusion is sufficient to answer the question posed by Issue 2. There was no adoption of the Coltart agreement by the Lepionka mortgagee, nor any consent by it under s 105 of the LTA.

[61] It is therefore not strictly necessary to address the other arguments made by counsel in their supplementary submissions. But in case the matter should go further, I record my view that I do not accept Mr Cox’s submission that a mortgagee adopting a mortgagor’s sale agreement under s 179 of the LTA adopts only the benefits of the sale agreement, and does not assume the burden of any warranties or undertakings the vendor/mortgagor might have given. Section 179(4) of the PLA appears only to address the position of the mortgagor – it does not in my view address the issue with which we are concerned here, namely whether or not the adopting mortgagee also assumes the vendor’s burdens under the sale agreement.

[62] The word “adopt” is not defined in the PLA, and it is at least arguable that, in the context of s 179 of the PLA, the word should be construed as making the mortgagee liable for the unperformed obligations of the mortgagor under the sale contract, as well as conferring on the mortgagee the benefits of the contract. That is the view expressed by the presenters of two New Zealand Law Society seminars,²²in

which the House of Lords decision in re Leyland DAF Ltd was cited in support.²³

_{The presenters’ commentary was later cited (with apparent
approval) in New Zealand}

²²New Zealand Law Society “The New Property Law Act 2007” (Seminar, November-December

2007) 11 at 33-34; Struan McOmish and Justin Toebes “Mortgagee Sales Update” (Seminar,

Land Law.²⁴In my view that interpretation seems more likely than Mr Cox’s interpretation, particularly as it is difficult to see why the purchaser would be required to pay the entire purchase price to the adopting mortgagee, notwithstanding the existence of unperformed vendor obligations which may have been interdependent with the purchaser’s obligation to settle.

[63] A contrary view appears to have been taken by Associate Judge Christiansen in Westminster Finance Ltd v Marac Finance Ltd,²⁵a judgment given in 2009 in which the Associate Judge noted that s 179 was new and yet to be considered by the Court. The learned Associate Judge stated that it was unclear whether a mortgagee adopting such an agreement assumed all the duties and obligations that the mortgagor would have had as vendor. He considered that if the mortgagee did adopt all of the vendor’s duties, the mortgagee could be put at risk for “all sorts of obligations over which it had no influence in the creation of them”. His Honour

considered that it would be asking too much of a mortgagee to assume those obligations.²⁶

[64] It seems to me that the answer to any concerns a mortgagee might have along those lines would simply be not to adopt the contract, or to negotiate with the purchaser, as suggested by the Law Society seminar presenters.²⁷If it were necessary, I would have respectfully disagreed with the view expressed by the Associate Judge in Westminster Finance.

Issue 3: Was Mr Coltart’s interest extinguished by a valid cancellation of the

[65] Subpart 7 of part 3 of the PLA deals with a mortgagee’s powers of sale. Section 178 outlines the powers conferred on mortgagees, incidental to the powers of

²⁵Westminster Finance Ltd v Marac Finance Ltd HC Auckland CIV-2009-404-3350,

(1) If, under a mortgage and subpart 5, a mortgagee or receiver becomes entitled to exercise a power to sell mortgaged property, the sale—

(b) may be subject to, or free of, any mortgage or other encumbrance having priority over the mortgagee’s mortgage:

(e) may, except in the case of a sale of land through the Registrar under section 187, be by public auction or by private contract:

(h) may be subject to any other conditions that the mortgagee or receiver thinks fit.

(2) The mortgagee or receiver may cancel a contract for the sale of the mortgaged property and resell the property without being liable for any loss on resale.

[66] For Mr Coltart, Mr Taylor submits that the power of cancellation in s 178(2) only applies to contracts of sale entered into by the mortgagee. It does not confer a power on the mortgagee to cancel a contract for sale and purchase entered into by the mortgagor.

[67] Mr Taylor was unable to refer me to any authority in support of this submission, but he submits that the statutory scheme and language points clearly to the interpretation for which he contends: it is unnecessary to construe s 178(2) as permitting the mortgagee to cancel a sale contract entered into by the mortgagor, as the mortgagee’s power of sale already overrides any contract of sale which may have

been entered into by the owner to which the mortgagee has not consented. That is the effect of s 105 of the Land Transfer Act.

[68] At the hearing, Mr Cox submitted that this issue is now of limited importance, as the sale of the homestead lot following the close of tenders will be a further exercise of the power of sale, and it will inevitably extinguish Mr Coltart’s interests.

[69] He submits in any event that cancellation of the Coltart agreement was part of the exercise by the Lepionka mortgagee of its power to sell as mortgagee. Section 178(2) allows for such a cancellation. Even if that were not the case, it is priority of interest that matters, and the interests of the Lepionka mortgagee under the mortgage existed well before Mr Coltart’s interests were created. Further, the Lepionka mortgagee has exercised its power of sale in other ways, such as adopting the mortgagor’s sale contracts and starting the process of subdivision.

[70] At the hearing, Mr Taylor accepted that whether or not the Lepionka mortgagee was entitled to cancel a sale contract which had been made by GLW, it will remain the case that the mortgage will have priority over Mr Coltart’s interests as purchaser. To that extent, then, a finding in Mr Coltart’s favour on the interpretation of s 178(2) will not provide a complete answer to the application for removal of the caveats: as and when there is a valid exercise of the power of sale by the mortgagee Mr Coltart’s interests will be defeated by the operation of s 105 of the

LTA,²⁸regardless of the validity or otherwise of the April 2015 cancellation notices.

[71] On that view, it is not strictly necessary to decide the pure interpretation question of whether a mortgagee’s cancellation power in s 178(2) is limited to sale contracts which the mortgagee has itself made with a purchaser. However, I will set

_{out my view on that issue out of deference to counsel’s arguments
on it, and in case I}

²⁸Both counsel referred to Trustees Executors Ltd v Stretchland Ltd HC Auckland CIV-2006-404-

4428, 2 October 2006, in which Associate Judge Gendall noted that it had “not been questioned that the plaintiff ’s interest as mortgagee over the property is clearly indefeasible” (at [42]), and that the plaintiff ’s power of sale under its mortgage was also indefeasible (at [43]).

am wrong in my view that the point cannot be determinative either way on the application.

[72] I am unable to accept Mr Taylor’s submission that s 178(2) applies only to

[73] First, s 178(2) itself contains no such limitation. I accept that s 178(1), which refers to “the sale”, is concerned with sale contracts entered into by a mortgagee or receiver under a mortgage and the statutory provisions of subpart 5 of the PLA. But s 178(2) does not refer to “the contract for sale” – it refers to “a contract for sale...”. The wording in s 178(2) is wider, and I think it is wide enough to include any contract for sale of the mortgaged property which may have been made by the mortgagor.

[74] Standing back from the statutory language, I think it would be an odd result if a mortgagee were given statutory power to cancel a sale contract that it had freely entered into with a bona fide third party (without any apparent responsibility to that third party), with no corresponding entitlement to cancel if the sale contract had been made by the mortgagor. The bona fide purchaser in that situation may well have reason to feel aggrieved by the cancellation of his or her contract, whereas persons who have purchased from an owner of mortgaged land must be taken to be aware of the relevant provisions of the PLA and the LTA, including s 105 of the LTA, under which their interests in the land may be extinguished if the owner defaults and the mortgagee proceeds with a mortgagee sale.

[75] I think that view is consistent with the provisions of s 179 of the PLA, under which the mortgagee may elect to adopt a sale agreement previously entered into by the mortgagor. Section 179(1) provides:

(1) If, at any time during which the mortgagee is entitled to exercise a power to sell mortgaged property, the whole or any part of the property is subject to an agreement for sale and purchase entered into by the current mortgagor or any former mortgagor, the mortgagee may elect, by notice served on the purchaser, to adopt the agreement for sale and purchase.

[76] On making an election under that section, the mortgagee is required by s 179(2)(c) to account for the proceeds of the sale as though it had sold the property. The obligation to account for the proceeds of the sale set out in s 179(2)(c) does not appear to be subject to any right of cancellation, so it appears that, once the mortgagee has elected to adopt the mortgagor’s sale contract, the cancellation right in s 178(2) was not intended to apply. It is difficult to see why the mortgagee should be in a different position as regards its entitlement to cancel, depending upon whether the contract to be cancelled was one made by the mortgagee itself, or was one made by the mortgagor which the mortgagee had adopted.

[77] It seems to me that s 178(2) and 179 of the PLA are complementary: s 178(2) gives the mortgagee the right to cancel an existing contract, whereas s 179 gives the right to adopt that contract.

[78] I do not think s 105 of the LTA is inconsistent with an interpretation of s

178(2) of the PLA which permits the mortgagee to cancel a sale contract entered into by the mortgagor. There may be perfectly good reasons for a mortgagee to cancel a sale agreement made by a mortgagor immediately, rather than wait for that result to be brought about on the eventual settlement of a sale by the mortgagee (and the subsequent presentation of a memorandum of transfer for registration).

[79] I accordingly find that the cancellation effected by the Lepionka mortgagee in April 2015 was not ineffective in terms of s 178(2) of the Act because it was a cancellation of a sale contract made by the mortgagor. It is therefore necessary to consider Mr Taylor’s alternative submission, namely that the exercise of the power of cancellation was part of an unlawful scheme devised by the Lepionka mortgagee, which involved a misuse of the mortgagee’s powers, and that that scheme should not be enforced by the Court. That submission will be considered under issue 5.

Issue 4: Are the interests claimed by Mr Coltart in Caveat 1 and Caveat 2 entitled to priority over the mortgage because of bad faith on the part of the Lepionka mortgagee in the exercise of its powers under the mortgage?

[80] In his written submissions, Mr Taylor submitted that “the misuse of the mortgagee’s powers constitutes fraud and the mortgage is not therefore entitled to

priority”.²⁹However, in the same submissions he concluded that the caveats should be permitted to remain “unless and until a valid sale of the land, by the proper use of mortgage powers for proper purposes, has been completed.”³⁰

[81] At the hearing, Mr Taylor appeared to accept that any fraudulent or improper exercise of the mortgagee’s powers of sale or cancellation by the Lepionka mortgagee could not affect its status as proprietor of a registered interest in the land (the mortgage) which has priority over Mr Coltart’s interests. I think that must be right, as the mortgage was registered by the bank in 2009 and it clearly had priority over Mr Coltart’s interests acquired under the Coltart agreement. It is not suggested that the Lepionka mortgagee’s acquisition from the bank was invalid – the bank was clearly entitled to assign its mortgage if it saw fit to do so, and any statutory, common law, or equitable duties applying to the exercise of the powers under the mortgage would not have applied to the simple acquisition of the mortgage.

[82] I conclude on this issue that any fraudulent or other improper conduct by the Lepionka mortgagee in the exercise of its powers under the mortgage and the PLA will not have the effect of conferring priority on Mr Coltart’s equitable interests over the Lepionka mortgagee’s registered interest under the mortgage if the Lepionka mortgagee goes on to exercise its powers validly and properly. That is not necessarily to say that Mr Coltart is unable to challenge the actions of the Lepionka mortgagee as being arguably invalid: that is a question to which I return in considering Issue 5.

Issue 5: Has the Lepionka mortgagee acted in a breach of a duty under s 176 of the PLA, by failing to take reasonable care to obtain the best price reasonably obtainable for the land? Will it breach such a duty if it proceeds with its proposal to sell the homestead lot by tender and/or continues to reject offers by Mr Coltart or other third parties to buy the land?

³⁰Respondent’s written submissions, para 46, citing Marac Finance Ltd v Baldock HC Auckland

(1) A mortgagee who exercises a power to sell mortgaged property...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:
	(b)	any former mortgagor:
	(c)	any covenantor:
	(d)	any mortgagee under a subsequent mortgage:
	(e)	any holder of any other subsequent encumbrance.
...

[84] This provision and its predecessor (s 103A of the Property Law Act 1952) are generally regarded as a legislative affirmation of the scope of the common law duty of care in negligence owed by a mortgagee who has decided to sell a property.³¹The importance of the duty is reflected in the fact that a mortgagee cannot contract out of it.³²

[85] This duty does not unreasonably limit a mortgagee’s ability to sell. For example, a mortgagee is entitled to make its own commercial decisions about whether to sell, and if so, at what time. There is no obligation on a mortgagee to delay a sale in order to get a higher price, and the best price reasonably possible does not necessarily equate with true market value.³³

[86] When assessing whether s 176 has been complied with, the Court will look at the issue in a broad and realistic way. A mortgagee will not be held to be in breach of the duty unless it is “plainly on the wrong side of the line”.³⁴

[87] There are steps that a mortgagee should take to obtain the best price reasonably obtainable, including appointing a reputable real estate agent, obtaining a

³²Bennion and others, above n 2, at [9.9.02]; Crown Money Corp Ltd v Pink-Martin HC Auckland

³³_{Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] EWCA Civ 9; [1971] 2
All ER 633 (CA).}

value report, marketing the property for a reasonable period of time, and accepting a sale price that can be reconciled with expert opinion as to value.³⁵

[88] In Trustees Executors Ltd, Associate Judge Gendall considered that the duty to obtain the best price under the now repealed s 103A of the PLA was owed only to the mortgagor, and not to a purchaser from the mortgagor.³⁶Following Bryers v Harts Contributory Mortgage Nominee Company Ltd,³⁷the Associate Judge concluded that the duty was owed only to a mortgagor or a party entitled to redeem

[89] What was in s 103A of the PLA was subsequently expanded to include within the ambit of the mortgagee’s duty the parties now listed at subparas (b)-(e) of s 176 of the PLA. But in a recent decision, Aston Investments Ltd v Kervus MC Ltd, Peters J confirmed that a mortgagee’s duty as to price is not owed to a purchaser from the mortgagor.³⁸

[90] Mr Taylor submits that the Lepionka mortgagee has breached its duty to obtain the best price reasonably obtainable. He submits that the Lepionka mortgagee took none of the steps outlined in para [87] above, because it was only interested in protecting the Lepionka purchasers. It only obtained appraisals of the value of the lots after it had already adopted the sale and purchase agreements.

[91] Mr Taylor further submits that Mr Coltart’s last offer would give the Lepionka mortgagee more than it would get under its own plan for subdivision and sale. He submits that a later offer of $6 million by Mr Johnston was also unjustifiably rejected by the Lepionka mortgagee.

[92] Mr Cox submits in reply that Mr Coltart cannot invoke the s 176 duty, as it is not owed to purchasers from the mortgagor. The duty (under both the previous

³⁵Public Trust v Ottow HC Auckland CIV-2009-404-3825, 4 November 2009, (2010) 10 NZCPR

³⁷_{Bryers v Harts Contributory Mortgage Nominee Company
Ltd [2002] 3 NZLR 343.}

³⁸Aston Investments v Kervus MC Ltd [2015] NZHC 92, (2015) 15 NZCPR 718 at [33].

s 103A and the current s 176) is only owed to the mortgagor or another listed party. The only creditors who may invoke the section are those holding an encumbrance over the relevant land, and Mr Coltart’s unregistered interests do not constitute an “encumbrance” as that expression is defined in s 2 of the PLA. At best, Mr Coltart is an unsecured creditor of the mortgagor, with a claim for damages for breach of contract. Mr Cox submits that the duty to obtain the best obtainable price is related to the redemption of the mortgage, and it would be wrong to attribute any s 176 rights to an unsecured purchaser from the mortgagor. He submits that the wider legislative scheme supports that position.

[93] As a second string to his bow, Mr Cox submits that the purchase price for the homestead lot payable under the Coltart agreement is less than what the Lepionka mortgagee can otherwise get: it is only around a third of the true value. To complete the sale under the Coltart agreement would deprive the Lepionka mortgagee of approximately $1.4 million.

[94] Mr Cox further submits that the Coltart offer and Mr Johnston’s offer both involved Mr Johnston, who is a US citizen, acquiring (or possibly acquiring) an interest in the land. Accepting those offers might have exposed the Lepionka mortgagee to liability under the Overseas Investment Act 2005, and it was entitled to reject the offers for that reason.

[95] Finally, Mr Cox points out that when the Lepionka mortgagee adopted the sale and purchase agreements with the Lepionka purchasers, there were no offers from other parties.

[96] I accept Mr Cox’s submissions on this issue – the statutory duty under s 176 is not owed to Mr Coltart. That was the view taken by Associate Judge Gendall in Trustees Executors Ltd, and the result is also consistent with the dictum of Peters J at [33] in Aston (although her Honour’s judgment was not principally concerned with the ambit of the s 176 duty).

[97] Mr Taylor submits that Mr Coltart is a “holder of any other subsequent encumbrance”, within s 176(1). An “encumbrance” is defined in s 4 of the PLA as including “a mortgage, a trust securing the payment of money, or a lien”. “Mortgage” is in turn defined in s 4 as “(a) any charge over property for securing the payment of amounts or the performance of obligations; and (b) any registered mortgage; and (c) any mortgage arising under a mortgage debenture.”

[98] Mr Taylor suggests that the Coltart agreement may qualify under the s 4 definition of “encumbrance” as a “mortgage”, or as a “trust securing the payment of a sum of money”.

[99] I reject those submissions. Mr Taylor did not point to any provision in the Coltart agreement that could be regarded as creating a charge over the land securing the performance of some obligation by GLW, so the Coltart agreement is not a “mortgage”. Nor did he identify any part of the Coltart agreement which could be regarded as having created a “lien”, or a “trust securing the payment of money”. I accept Mr Cox’s submission that the expression “subsequent encumbrance” where it is used in s 176 of the PLA refers to an interest akin to a mortgage or charge over the relevant land, which secures the payment by the mortgagor of a sum of money to some third party (the encumbrancer). That view is supported by s 185 of the PLA, which states how a mortgagee exercising its power of sale must apply the sale proceeds. One of the parties (occupying fifth place) in the statutory order of priority for participation in the sale proceeds is the holder of an unregistered “subsequent encumbrance” (at least if the mortgagee has actual notice of the subsequent encumbrance). The mortgagee is required to pay to that person the “amounts secured” by the subsequent encumbrance.

[100] Standing back from the detail of the wording of s 176 and the relevant definitions in s 4 of the PLA, s 176 is concerned with whether due care has been taken by the mortgagee to obtain the best price reasonably obtainable for the relevant land. Given that clear purpose, it is difficult to see why the duty created by the section would be owed to someone who was not owed any money by the mortgagor and had no entitlement to share in the proceeds of sale.

[101] I conclude that the Lepionka mortgagee did not owe a duty to Mr Coltart under s 176 of the PLA.

Issue 6: In adopting the agreements with the Lepionka purchasers, and/or by cancelling the Coltart agreement and/or by rejecting offers from Mr Coltart or third parties to purchase the land, has the Lepionka mortgagee exercised its powers fraudulently or in bad faith, for the collateral purpose of protecting the Lepionka purchasers? If so, is that a sufficient reason to refuse the application?

[102] The mortgagee’s duty under s 176 co-exists with a more general equitable duty to act in good faith.³⁹If a mortgagee acts in a way inconsistent with that duty, its overriding interest in the land may be deferred.⁴⁰In such circumstances the mortgagee’s actions may constitute fraud under the LTA, and the mortgagee will not be entitled to rely on the indefeasibility of title which its registered mortgage would otherwise confer on it.

[103] In Instant Funding Ltd, Venning J set out the principles to be applied in considering allegations of fraud under the LTA:⁴¹

[30] A Court will properly be cautious before finding fraud under the Land Transfer Act. Fraud under the Land Transfer Act is broader than the concepts of deceit and misrepresentation, but narrower than constructive or equitable fraud: Sutton v O’Kane. Mere knowledge of an existing right is insufficient: Waimiha Sawmilling Co Ltd (in liq) v Waione Timber Company Ltd. In Sutton v O’Kane the majority confirmed that the actions must be dishonest and dishonesty would not be assumed solely by reason of knowledge of an unregistered instrument.

[104] In Centillion Investments Ltd,⁴²Associate Judge Christiansen stated, on the facts of the case, that an arguable case for LTA fraud could be made where the charge-holder was aware of equitable interests of third parties under agreements for sale and purchase when it took its charge, and then acted inconsistently with that knowledge by setting out to extinguish the purchasers’ rights by the exercise of its

⁴¹_{Instant Funding Ltd v Greenwich
Property Holdings above n 40 (citations omitted).}

⁴²Centillion Investments Ltd v Hillpine Investments Ltd HC Auckland CIV-2006-404-00695,

[105] There is no absolute rule that prevents a mortgagee from selling to a company or entity in which it has an interest. However, in Tse Kwong Lam v Wong Chit Sen, the Privy Council noted, in light of the mortgagee’s potential conflict of interest, and the duties owed by it, that it was incumbent on the mortgagee to show that reasonable steps had been taken to obtain the best price reasonably possible.⁴³

...when there is a possible conflict between [the desire to obtain the best price for a property] and a desire that an associate should also obtain the best bargain the facts must show that the desire to obtain the best price was given absolute preference....Although conscious planning, deceptiveness or collusion to prefer the close associate would be conclusive of a lack of bona fides, it does not follow that a failure to conclude that any of these elements were present leads to a conclusion that the sale was bona fide unless it would be otherwise invalid even if no conflict of interest were present.

[107] Mr Taylor submits that the Lepionka mortgagee is not exercising its powers as mortgagee in good faith. When GLW defaulted, the Lepionka purchasers stood to lose their deposits and the lots they had purchased, and Mr Lepionka admits in his evidence that he incorporated the Lepionka mortgagee and had it take over the

bank’s mortgage in order to retain the lots.⁴⁵Mr Taylor submits that the Lepionka

mortgagee is not exercising its powers for the bona fide purpose of repaying the Westpac mortgage; rather, it bought the mortgage in order to obtain the mortgagee powers of sale. It is preferring the interests of associated entities over its equitable obligations. Further, the Lepionka mortgagee knew of Mr Coltart’s interests when it took the assignment of the mortgage. It did so with the intention of defeating those interests.

[108] Mr Taylor refers to the agreement under which compensation was to be paid by the Lepionka mortgagee if the contracts were not completed, and submits that if

_{the Lepionka mortgagee ever had to pay that compensation, it would
simply claim}

⁴⁵Mr Lepionka said in his evidence “the intention was for [the Lepionka mortgagee] to complete the subdivision as mortgagee and settle the sales to [the Lepionka purchasers] because we wanted to retain the properties” (emphasis added).

the payment as an expense incurred in the exercise of its power of sale as first mortgagee. The purpose of the compensation agreement was purely to benefit the Lepionka purchasers.

[109] More generally, Mr Taylor submits that no independent mortgagee, acting independently, would have chosen to adopt the agreements with the Lepionka purchasers and enter into the compensation agreement with them. The same matters advanced for Mr Coltart on Issue 5 (alleged breach of duty to obtain best price reasonably obtainable) amount to ongoing breaches by the Lepionka mortgagee of its equitable obligations: in particular, the decision to proceed with the subdivision at an estimated additional cost of $1.3 million, while rejecting offers from Mr Coltart and Mr Johnston which, if accepted, would have resulted in a return for the second mortgagee and GLW approximately $2 million higher than the likely return if the subdivision is completed. As Mr Taylor put it in his oral submissions, everything has been tainted by the improper adoption of the agreements with the Lepionka purchasers.

[110] For the Lepionka mortgagee, Mr Cox submits that there has been nothing improper in its conduct. It is entitled to sell to a related party in which it has an interest, and it has been candid about its intentions throughout.

[111] In any case, submits Mr Cox, mere knowledge of an unregistered interest does not amount to LTA fraud. Something more is required, that is, an intention to deliberately act to disadvantage the holder of the unregistered interest. “Moral turpitude” is required to establish the requisite dishonesty. In this case, the Lepionka mortgagee’s intention was to complete the agreements for sale and purchase with the Lepionka purchasers, not to defeat Mr Coltart’s interest.

[112] We are concerned in this issue with a mortgagee’s equitable duty to exercise its powers in good faith for the purpose of obtaining repayment. The equitable duty has been described as a duty to ensure that a mortgagee is diligent in discharging the

mortgage and returning the property to the mortgagor.⁴⁶The duty is said to be owed to the mortgagor and subsequent encumbrancers.⁴⁷

[113] In De Spa v Lewis, Hillyer J followed the decision of the Privy Council in Tse Kwong Lam⁴⁸in holding that the mortgagee’s duty is not necessary restricted to obtaining the best price, but may include an obligation to act fairly in the exercise of the mortgagee’s powers. (In Tse Kwong Lam, the Board referred to the heavy onus on the mortgagee to show that in all respects he acted fairly to the borrower and used his best endeavours to obtain the best price reasonably obtainable).

[114] The mortgagee’s equitable duty may arise in the context of an issue over whether there has been fraud under the LTA, such as to defeat what would otherwise have been the mortgagee’s indefeasible title. In addition, the rights of a registered mortgagee may be displaced by unconscionable conduct on the part of the mortgagee, even absent consent under s 105 of the LTA. In his very recent judgment

in Gold Band Finance Ltd v Philpott & Ors,⁴⁹Associate Judge Osborne referred to

the distinction between LTA fraud and unconscionable conduct giving rise to an in personam claim, citing the Court of Appeal decision in C N & M A Davies Ltd v Laughton. In that case, Thomas J, delivering the judgment of the Court, explained that an in personam claim challenges not the validity of the registered title, but the freedom of the registered proprietor to disregard an equity arising out of his or her

[115] The Associate Judge noted that the Court of Appeal has recognised that the in personam exception to the indefeasibility rule should be confined to cases that truly engage the conscience of the party whose registered proprietorship is challenged.⁵¹

It is also essential that the claim must be grounded in a recognised cause of action. It

⁴⁶_{Downsview Nominees Ltd v First City Corporation Ltd
[1993] 1 NZLR 513, 524 (PC).}

⁵¹At [25], referring to Cashmere Capital Ltd v Crossdale Properties Ltd [2009] NZCA 185, [2009]

[116] LTA fraud requires that there must be some element of dishonesty. As it was put in Waimiha Sawmilling Co Ltd v Waione Timber Co Ltd, if the designed object of the transfer be to cheat a man of a known existing right, that is fraudulent for LTA purposes. Actual dishonesty calls for more than mere knowledge: there must an intent to cheat a man of a known existing right.⁵³

[117] The necessity for some element of dishonesty in cases of LTA fraud was recognised by Associate Judge Christiansen in Centillion Investments Ltd, where the learned Associate Judge stated that the caveator had to show that when Centillion (the mortgagee) took its security, or when it sought to act upon it to the prejudice of

the caveator’s equitable interest, it may have been acting dishonestly.⁵⁴The

Associate Judge considered that there may be cases wherein the knowledge a mortgagee has of prior equitable interests would make it unconscionable to permit the mortgagee to resort to the power of sale to defeat those interests.⁵⁵

[118] Mr Taylor relied strongly on Centillion in support of his arguments based on LTA fraud and/or unconscionable conduct, but it seems to me that the case is clearly distinguishable from the present circumstances. In Centillion, the unregistered sale and purchase agreements held by the purchaser/caveator pre-dated Centillion’s mortgage, and the mortgage contained a provision that, in the event of default by the mortgagor, Centillion would have the right to assume the mortgagor’s rights under the relevant sale agreements. In this case, Mr Coltart’s interests do not pre-date the interests of the Lepionka mortgagee, which derive from the bank’s October 2009 mortgage.

[119] Mr Taylor also relied on the judgment of Venning J in Instant Funding Ltd.⁵⁶

In that case, the mortgagee, apparently at the request of the receivers of the mortgagor, refused to assign their mortgage to a party introduced by the purchaser/caveator. His Honour considered that it was reasonably arguable for the purchaser/caveator that, in exercising its powers to sell as mortgagee, Instant

_{Funding was doing so at the direction of, or by agreement with, the
receivers, to}

⁵⁴_{Centillion Investments Ltd v Hillpine Investments
Ltd, above n 42 at [18].}

enable the receivers to defeat the purchaser/caveator’s interest in the property. There was no apparent reason for Instant Funding’s refusal to assign its mortgage when it would be paid the full amount owing under the mortgage, and the purchaser/caveator had an arguable case that Instant Funding was improperly motivated by a desire to defeat the purchaser’s unregistered interest (or to enable the receivers to achieve that result).

[120] In this case, it is difficult to see anything in the nature of dishonesty or bad faith in the adoption of the Lepionka purchasers’ agreements, directed to Mr Coltart’s interests. I accept that it is arguable for Mr Coltart that there was a conflict between the Lepionka mortgagee’s duty to obtain the best price for the property and its acknowledged desire to benefit its associated parties, the Lepionka

purchasers. ANZ Ltd v Bangadilly⁵⁷provides sufficient authority that the adoption of

the Lepionka purchase agreements on 1 April 2015, avowedly to protect the interests of the Lepionka purchasers and not to secure the best price for the land, was arguably not a bona fide transaction. The Lepionka mortgagee clearly owed equitable and/or statutory duties to GLW and to the second mortgagee to act in good faith in the realisation of the land, and those duties arguably included an obligation not to improperly prefer the interests of the Lepionka purchasers over those of GLW and the second mortgagee.

[121] It is not necessary for me to make any findings on whether that did or did not occur, but I think it at least arguable for Mr Coltart that the decision to adopt the Lepionka purchaser agreements was made solely in the interests of the Lepionka purchasers, and without adequate regard to the question of whether a better price might have been obtained for the land, for example, by abandoning the subdivision and by selling the land as a whole. The Lepionka mortgagee adopted the Lepionka purchase agreements only a few days after it had been incorporated, and it was incorporated for the express purpose of adopting the Lepionka purchase agreement. I accept too Mr Taylor’s submission that the terms of the compensation agreement reached between the Lepionka mortgagee and the Lepionka purchasers raise questions over the bona fides of the adoption of GLW’s contracts with the Lepionka

_{purchasers: it seems at least arguable that an independent mortgagee may
not have}

committed to those compensation obligations, in addition to taking on expenditure of more than $1 million to complete the subdivision. Added to those considerations, the bank apparently declined to proceed with subdivision and only a month or so after the Lepionka purchasers’ agreements had been adopted Mr Coltart made an offer of $6.9 million for the land (which apparently would have been acceptable to GLW and to the second mortgagee). The Lepionka mortgagee’s reason for declining to proceed further with Mr Coltart’s offer for the land appears to have been that the Lepionka purchasers were unwilling to give up their rights under the (by then adopted) Lepionka purchaser agreements.

[122] The problem with these circumstances is that any wrongful adoption by the Lepionka mortgagee of the Lepionka purchaser agreements did not directly affect Mr Coltart’s interest in the homestead lot. Indeed, when GLW’s financial difficulties became apparent his prospects of acquiring the homestead lot depended on the mortgagee (whether the bank or any assignee from the bank) electing to continue with the subdivision.

[123] There is, in my view, insufficient connection between any lack of bona fides on the part of the Lepionka mortgagee in deciding to adopt the Lepionka purchase agreements, and Mr Coltart’s rights which are the subject of his two caveats. Put another way, there is no reason why Mr Coltart should be in a better position because of the Lepionka mortgagee’s dealings with purchasers of other lots within the subdivision than he would have been in if the mortgagee had decided to sell the land as a whole, or to sell the homestead lot to someone else (as it would have been entitled to do).

[124] At the end of the day, the Lepionka mortgagee’s rights derive from the October 2009 registered mortgage, and that interest must prevail over Mr Coltart’s unregistered interests regardless of whether the adoption of the Lepionka purchase agreements was or was not a good faith step taken by the Lepionka mortgagee.

[125] Mr Taylor points to the April 2015 cancellation of the Coltart agreement as evidence of an intention by the Lepionka mortgagee to wrongfully defeat Mr Coltart’s unregistered interests. It is not clear whether the Lepionka mortgagee’s

decision to cancel the Coltart agreement may have been related in some way to its decision to adopt the two Lepionka purchaser agreements. If it was, I think it would be arguable for Mr Coltart that any lack of good faith or dishonesty in the decision to adopt the Lepionka purchase agreements also infected the cancellation. But even if the cancellation was not a good faith step, the evidence shows that adopting the Coltart agreement would have brought in only approximately $650,000, whereas by April 2015 the homestead lot may have been worth somewhere in the vicinity of three times that amount. If that is right, any independent mortgagee who had elected to proceed with the subdivision would probably have declined to adopt the Coltart agreement, and would have sold the homestead lot elsewhere.

[126] Mr Coltart refers to the refusal by the Lepionka mortgagee to accept a number of substantial offers for the land as a whole, including his own offer of $6.9 million. The problem with that argument is that it has nothing to do with Mr Coltart’s interests under his two caveats. Those interests are concerned only with the homestead lot and the right to roam and associated rights. Mr Coltart was wearing a completely different hat when he made his purchase offer, and that offer was itself inconsistent with the continuing existence of the Coltart agreement (under which Mr Coltart might have purchased the homestead lot, and so made it impossible to sell the land as one block).

[127] Mr Taylor did not offer any authority to suggest that the Lepionka mortgagee may have owed some duty to Mr Coltart in his capacity as an offeror for the land. I would be surprised indeed if any such duty existed – for one thing, such a duty would seem to be inconsistent with the identified classes of people to whom mortgagees owe statutory duties relating to price under s 176 of the PLA. But it is not necessary to decide the point on that basis. A breach of any duty to properly consider Mr Coltart’s offer (or the other offers which have been made), if it existed, could not form a basis for sustaining Mr Coltart’s caveats.

[128] A final point is that it is by no means clear what cause of action Mr Coltart could articulate against the Lepionka mortgagee if the caveats were sustained and he were required to issue a proceeding to enforce his rights. Cases such as Vegar- Fitzgerald and Instant Funding make it clear that Mr Coltart’s unregistered rights

were always liable to be defeated by the registered mortgagee validly exercising its power of sale, and I see no reason why that should not continue to be the case as and when the Lepionka mortgagee enters into a bona fide transaction for the sale of the homestead lot to some third party or (if the adoption of the Lepionka purchaser agreements is for some reason invalid) re-sells the lots with which those agreements are concerned or sells the land as a whole.

[129] In the end, any lack of good faith which may have been demonstrated by the Lepionka mortgagee in adopting the Lepionka purchase agreements and/or cancelling the Coltart agreement cannot improve Mr Coltart’s position. Absent some new agreement with the Lepionka mortgagee, he will inevitably lose his interests in the land as and when the homestead lot, or conceivably the land as a whole, is sold.

[130] For the foregoing reasons, I conclude that Mr Coltart may have an arguable case that the Lepionka mortgagee has exercised its powers fraudulently or in bad faith, or for the collateral purpose of protecting the Lepionka purchasers, but that that does not provide a sufficient reason to refuse the application to remove Mr Coltart’s caveats.

Issue 7: Is the Lepionka mortgagee seeking an equitable remedy when it applies to have the caveats removed? If so, should the application be refused because it has not “come to equity with clean hands”? Is the application an abuse of process?

[131] Mr Taylor submits that the application by the Lepionka mortgagee is an abuse of process, as Mr Lepionka has the aim of benefitting entities in which he has an interest. As (in his submission) the actions of the Lepionka mortgagee constitute fraud, the Lepionka mortgagee has not come to equity with clean hands. In those circumstances, the balance of convenience favours the retention of Mr Coltart’s caveats.

[132] Mr Cox repeats his submission that the Lepionka mortgagee has done nothing improper in adopting the contracts with the Lepionka purchasers, cancelling the Coltart agreement, putting the homestead lot up for tender, and taking steps to

market the remaining lots with a view to selling them to interested parties. He reiterates his point that the Lepionka mortgagee has acted with candour. He submits that the balance of convenience favours the removal of the caveats in order that the Lepionka mortgagee may exercise its legitimate rights to subdivide and sell the land under its superior interest.

[133] I do not think there is anything in Mr Taylor’s arguments on this issue. I accept that equity imposes certain obligations on mortgagees in the exercise of their power, but the Lepionka mortgagee is not asking the Court to grant it an equitable remedy – it is asking the Court to exercise a statutory power to remove the caveats under s 143 of the LTA. The authority referred to by Mr Taylor, New Zealand Netherlands Society “Oranje” Inc v Kuys, represents no more than an affirmation of the general principle that a party seeking equitable relief must come to equity with

[134] Nor is there anything in the abuse of process argument. Mr Taylor refers to Goldsmith v Sperrings Ltd, a case where abuse of process was alleged but not found.⁵⁹The Court considered that it had to be shown that the party alleged to be guilty of the abuse had an ulterior motive in seeking a collateral advantage for himself beyond what the law offered as a remedy for his grievance, and that but for his ulterior motive he would not have started the proceeding at all. The case was a

[135] In this case, the starting point is that the Lepionka mortgagee has the right to transfer the homestead lot to a third party purchaser, and I do not think it can be said that it is pursuing some “collateral benefit” in applying to remove Mr Coltart’s caveats so that it can give clear title to a purchaser. Mr Taylor appears to acknowledge (at para 46 of this written submissions) that Mr Coltart’s caveats can only remain on the title pending a valid sale of the land, and he has not argued that the discretion under s 143 is insufficiently wide to permit an application being made

⁵⁸_{New Zealand Netherlands Society “Oranje”
Inc v Kuys [1973] 2 NZLR 63.}

Issue 8: Should the Court, in the exercise of its discretion, decline the application? If so, what orders should be made in respect of the caveats (if any)?

[136] I am not persuaded that there is any basis for me to exercise my discretion to decline the removal application. As I have stated, it appears inevitable that the Lepionka mortgagee will exercise its powers of sale (if that has not already occurred) and so extinguish Mr Coltart’s interests.

[137] In Pubic Trust v Toussaint, the Associate Judge cited National Bank v Radisich, where the Court noted that while an order to remove a caveat may not be justified until such time as the transfer to the mortgagee’s purchaser is presented for registration, the Court can deal with the inevitability of such a presentation under the wide wording of s 143 and the corresponding ability of the Court to make whatever

[138] I am satisfied that this is also a case where, although there has been no memorandum of transfer yet presented, such an outcome is inevitable, and that I should not exercise my discretion to decline the removal application. However I do not think it is sufficiently clear that the caveats should be removed immediately, on the basis of the purported cancellation of the Coltart agreement under s 178(2). If the April 2015 cancellation was sufficiently linked to the adoption of the Lepionka purchasers’ agreements a few days earlier, Mr Coltart may have an argument that the cancellation was invalid. In the circumstances, the appropriate course is to direct Land Information New Zealand (LINZ) to remove the caveats as and when the Lepionka mortgagee presents for registration a transfer of the land, or the homestead lot, to a party other than Mr Coltart.

[139] The application succeeds, and there will be an order for the removal of Mr Coltart’s caveats as and when (i) a transfer of the land by the Lepionka mortgagee (acting in the exercise of its power of sale as mortgagee) to some third party or (ii) a

_{transfer of the homestead lot by the Lepionka mortgagee (acting in the
exercise of its}

power of sale as mortgagee) to some third party, is presented to LINZ for registration. In the case of a sale of the homestead lot to a third party, “transfer” is intended to include the presentation to LINZ of any document or documents (with the memorandum of transfer to the third party) which may be necessary to obtain a separate title for the homestead lot which is capable of being transferred to the purchaser.

[140] The precise form of the orders is to be as approved by the Court. Counsel for the Lepionka mortgagee is invited to file and serve a draft form of the orders to be made, within seven days of this judgment. Mr Coltart may file and serve a memorandum commenting on the draft orders submitted by the Lepionka mortgagee, within 3 working days after his receipt of the draft orders.

[141] The Lepionka mortgagee is to have costs on a 2B basis, plus disbursements as fixed by the registrar.

High Court of New Zealand Decisions

Lepionka & Company Investments Limited v Coltart [2015] NZHC 2849 (17 November 2015)