BUILDING CHOICES LTD t/a PLACEMAKERS RICCARTON v CARPE DIEM CONTRACTING LTD (In Liquidation) [2015] NZHC 1266

BUILDING CHOICES LTD t/a PLACEMAKERS RICCARTON v CARPE DIEM CONTRACTING LTD (In Liquidation) [2015] NZHC 1266 [8 June 2015]IN THE HIGH COURT OF NEW ZEALANDCHRISTCHURCH REGISTRYCIV-2015-409-000079[2015] NZHC 1266UNDER the Land Transfer Act 1952IN THE MATTER of an Application for an order pursuant toSections 145 and 145A of the Act fororders that caveat not lapseBETWEEN BUILDING CHOICES LIMITEDTRADING AS PLACEMAKERSRICCARTONApplicantAND CARPE DIEM CONTRACTINGLIMITED (IN LIQUIDATION)RespondentHearing: 2 June 2015Appearances: D J Clark for ApplicantD M Lester for RespondentJudgment: 8 June 2015JUDGMENT OF ASSOCIATE JUDGE MATTHEWS[1] Building Choices Limited trading as PlaceMakers Riccarton (PlaceMakers) carries on business as a supplier of building materials. Carpe Diem Contracting Limited (In Liquidation) (Carpe Diem) carried on business as a building company until it was placed in receivership on 1 May 2014 and then in voluntary liquidation on 2 May 2014.[2] At the time of its liquidation Carpe Diem owed PlaceMakers $277,806.27 together with penalty interest and costs of recovery which are claimed under the terms of a credit account which Carpe Diem ran with PlaceMakers.[3] That account was opened on 2 February 2012. It provided for Carpe Diem to operate an account with PlaceMakers and it contained the following clause, which is in issue in this proceeding:10. Mortgage:To better secure the amounts payable to PlaceMakers, whether in relation to these terms or on any other account, the Customer agrees, upon request by PlaceMakers, to grant to PlaceMakers a registrable mortgage over any land owned by the Customer from time to time. Such mortgage to be given is to be in the form of the then current Auckland District Law Society All Obligations mortgage. PlaceMakers may request a mortgage under this clause if an Event of Default occurs.(Clause 10)[4] As at 9 July 2013 Carpe Diem owned a one-eighteenth undivided share in 3,211m2 of land, comprised in Lot 107 Deposited Plan 460396, Identifier 608776 (the property). On that day it evidently signed a document1 described as a residential building contract on a form produced by Master Builders by which it contracted to build a house on this land for two companies, Feathermax Limited and Shunli Properties Limited, as to a half share each. The price was $410,000 for the completed house, as well as the land. Progress payments were provided for. Although payments were not made as scheduled, various payments were made including a final payment on 16 December 2014 of the balance of the contract price. By then the building was complete.[5] On the same day Carpe Diem entered a contract to sell the property to Feathermax Limited and Shunli Properties Limited for $410,000. Feathermax Limited is directed by Mrs H T McMillan, who is the wife of Mr S J McMillan, the director of Carpe Diem. Shunli Properties Limited is not owned by either Mr or Mrs McMillan and, on the evidence, it is not associated with either Feathermax or Carpe Diem.[6] PlaceMakers says that between 1 February 2014 and 30 April 2014 it supplied building products to Carpe Diem for which payment has not been made. On 1 May 2014, the same day receivers were appointed to Carpe Diem, PlaceMakers1 Only part of the document was produced in evidence. However, the Liquidator of Carpe Diem accepts that it signed a contract in the terms described.registered a caveat against the title to the property claiming an estate or interest in the title in these terms:Agreement to mortgage made between the registered proprietor, Carpe Diem Contracting Limited, and the caveator, Building Choices Limited trading as PlaceMakers Riccarton, dated 2 February 2012.[7] It is common ground that at no time prior to lodging the caveat did PlaceMakers request that Carpe Diem execute a mortgage, in terms of clause 10.[8] In this proceeding PlaceMakers seeks an order under s 145 Land Transfer Act 1952 that the caveat not lapse. It relies on clause 10 of the credit agreement executed on 2 February 2012 as the "Agreement to mortgage" cited in the caveat.2The liquidator opposes this application. Although a number of grounds of opposition are pleaded in Carpe Diem's notice of opposition, the argument focusses on the meaning of clause 10 of the agreement. Carpe Diem says that PlaceMakers does not have any interest in the land arising from clause 10, as it has not at any time requested a mortgage security over the land, nor is there any evidence that an event of default had occurred prior to the equitable interest of Feathermax Limited and Shunli Properties Limited arising on 16 December 2013.[9] The right to lodge a caveat against dealings with land under the Land Transfer Act is given by s 137. A caveat against dealings in land may be lodged by a person who claims to be entitled to an estate or interest in land arising in various ways, including as a mortgagee. Section 137(2)(c) provides that a caveat must state how the land or estate or interest claimed is derived from the registered proprietor.[10] In Park Lane Estates Ltd v Kim,3 Associate Judge Osborne summarised the principles relevant to consideration of an application that a caveat not lapse:4Application that caveat not lapse – the principlesI adopt the following principles in relation to this application:(a) The burden of establishing that the applicant has a reasonably arguable case for the interest claimed is upon the caveator;2 At [3] above.3 Park Lane Estates Ltd v Sung-Hyun Kim & Ors [2014] NZHC 782, (2014) 15 NZCPR 155.4 At [9].(b) The caveator must show an entitlement to, or beneficial interest in, the estate referred to in the caveat by virtue of an unregistered agreement or an instrument or transmission, or of any trust expressed or implied: s 137 Land Transfer Act 1952;(c) The summary procedure involved in an application of this nature is wholly unsuitable for the determination of disputed questions of fact –an order for removal of a caveat will not be made unless it is 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;(d) When the burden upon the applicant has been discharged, there remains a discretion as to whether to remove the caveat, which will be exercised cautiously;(e) The Court has jurisdiction to impose conditions when making orders.[11] In Philpott v NZI Bank Ltd,5 the Court of Appeal considered caveats lodged against properties owned by the appellants which claimed an estate or interest in certain parcels of land said to be derived:6 by virtue of Banking Terms dated 12 February 1988 between theCaveator and [the appellants] being the registered proprietor of thesaid land whereby [the appellants] agreed to provide to the Caveator a registrable mortgage of (inter alia) the said land if requested to do so by the Caveator.[12] The relevant clause of the Banking Terms provided:77.01 The Customer will, immediately on request, provide the Bank with such alternative or additional security for the obligations of the Customer as the Bank may require.[13] In his judgment, Cooke P said:8It seems to me that the plain scheme of the document is that the alternative or additional securities referred to in clause 7.01 will not be given, nor will any obligation to provide them arise, until there has been a request and requirement by the Bank pursuant to the terms of that clause. Until then the customer is free to deal with any of his or her properties without any obligation in respect of them to the Bank and no charge by way of security, legal or equitable, nor any other interest in them is created in favour of the Bank. That is to say, until there has been a request and requirement the Bank has no interest in any specific property. The clause contains no general charging provision (with some liberty to sell or deal in the meantime) and so5 Philpott v NZI Bank Ltd [Philpott] (1989) 1 NZ ConvC 190,246.6 At 190,247.7 At 190,247.8 At 190,247.contrast with provisions that are commonly found in company debentures, as illustrated by Driver v Broad [1893] 1 QB 744.[14] Casey J and Bisson J agreed with the learned President. Casey J, after summarising the judgment under appeal, said:9I regret that I am quite unable to accept such a reading of the clause as being commercially realistic in a banking document of this nature, which would have the effect of creating in respect of a private borrower a ... floating charge on all his property, wherever and of whatever kind, and for an indefinite period. On my interpretation of this clause in its context, its immediate and obvious intention is to give the bank the right to request a charge, but until it does so the customers are entitled to treat the property entirely as their own.[15] Mr Clark for PlaceMakers describes clause 7.01 in Philpott, as a generic right in the bank to call for alternative or additional security without specifying the kind of security or the kind of property over which a security might be sought, whereas clause 10 specifically refers to a mortgage security, and provides for that security to be given over any land owned by the customer from time to time. Mr Clark points out that in Pacific Homes Ltd v Consolidated Joineries Ltd (in receivership),10 the Court of Appeal found that an agreement to mortgage land to be acquired in the future is sufficient to give rise to an equitable interest which will support a caveat. He says that one factor which led the Court of Appeal to reach this conclusion was the reference in the document under consideration in that case, to granting a registrable mortgage, a provision which I understand Mr Clark to say is materially the same as the provision in clause 10.[16] In Pacific Homes, the caveat specifically stated that an interest as equitable mortgagee was derived from an agreement to mortgage contained in a certain document. That agreement was, to the extent presently material, in the following terms:11The Company [Consolidated Joineries Limited] shall be entitled to reasonable security from the Purchaser [Pacific Homes] in respect of any amounts which become overdue to the Company and the Purchaser hereby grants a registrable mortgage over any land owned by the Purchaser into which products of the Company have been incorporated in breach of these9 At 190,250.10 Pacific Homes Ltd (in receivership) v Consolidated Joineries Ltd [1996] 2 NZLR 652.11 At 654.conditions and where products are incorporated into land not owned by the Purchaser over any land which is owned by the Purchaser and/or debenture and/or chattel mortgage to the Company on terms [17] The Court of Appeal observed that where, "in breach of these conditions" thejoinery provided by Consolidated Joineries Limited becomes a fixture on PacificHomes' land, there is to be a mortgage of that land. The Court said:12The futurity of the provision can be seen from its context, especially the next sentence which contains a mechanism for the creation, execution and registration of a security, obviously one of registrable form, and from the expression "where products are incorporated". Another indicator is the reference to granting a registrable mortgage itself. The conditions were obviously not in a form capable of registration under the Land Transfer Act 1952. It cannot have been thought by the draftsperson that they would themselves suffice as a registrable security. When the conditions speak of the granting of a mortgage over land owned by the purchaser, Pacific Homes, it amounts to an agreement to grant a mortgage in registrable form if the contemplated circumstances arise at a later time.Such an agreement to mortgage land is sufficient to give rise to an equitable interest which will support a caveat.[18] In my opinion, the clause relied on in Pacific Homes is materially different from clause 10. In Pacific Homes, the purchaser granted a registrable mortgage, if certain events should occur, over any land owned by Pacific Homes. In clause 10, however, Carpe Diem agrees that it will grant a mortgage on request. Unlike the clause in Pacific Homes, there are no words in clause 10 by which Carpe Diem actually grants any interest at all. It merely agrees that if it is asked to do so, it will grant a registrable mortgage. The distinction is between the immediate creation of a charge over any land owned by Pacific Homes, on one hand, and an agreement by Carpe Diem to grant a mortgage at a future time if requested to do so, on the other hand. Under clause 10, there is no grant of an interest unless and until an event of default occurs, followed by a request that a registrable mortgage be granted.[19] The position is, in my view, exactly as described in Philpott. Certainly the reference to the type of security to be granted in Philpott is more broadly phrased than it is in clause 10, but I do not think that is relevant to the point in issue.12 Page 657 line 37-47.[20] Mr Clark argues as well that it is implicit in the agreement to grant a registrable mortgage that there is a present agreement to grant an equitable mortgage. I do not accept that submission. As Mr Lester says, the granting of an interest as mortgagee is not necessarily a two step process. After making a request, the right PlaceMakers had was to receive a registrable mortgage, or to register a caveat to protect the equitable interest it then had.[21] Mr Clark also relies on Adams and Buchanan (as Liquidators of Starplus Homes Ltd (in liquidation) v Sun).13 In that case the Court found that it was competent for Starplus to grant a mortgage which attached to land that it owned at the time the agreement relied on was signed, and in respect of land acquired after that date. The Court said that Starplus's landholdings were akin to stock in trade or inventory, and there would be no commercial reason for a building supplier to restrict its security to a property that it knew was likely to be sold in the near future. Rather, a security agreement that permitted the supplier to protect its equitable mortgage by lodging caveats against properties purchased as part of Starplus'sordinary business activities was more likely to have been intended. The Court found that sort of arrangement would better protect a long-term business relationship.14[22] Based on these propositions, Mr Clark submits that it would make no sense from a commercial perspective for trade suppliers to encumber properties being developed by trade customers with registered mortgages, particularly where the customers are not in default. I accept that proposition without hesitation; indeed, it is reflected in the judgment of Cooke P in Philpott who, in rejecting the view that the clause in that case immediately gave rise to an equitable interest in the Philpotts'land, said:15On the contrary it seems to me that this clause has been deliberately drafted with the contrary intent, as is understandable commercially or as a matter of banker and customer relations, in that if the other view were right the bank could immediately place caveats on all titles in the name of the customer even though as a matter of reasonable dealing between bank and customer there could be no warrant for such a course.13 Adams and Buchanan (as Liquidators of Starplus Homes Ltd (in liquidation) v Sun [2014] NZHC 912.14 At [26].15 At 190,248.[23] Mr Clark further submits, however, that the fact that clause 10 provides for a registrable mortgage only to be sought in the event of default does not of itself mean that an equitable interest did not arise when the terms of trade, including clause 10, were signed. That would be a commercially sensible course to take.[24] I accept this proposition but, with respect, it misses the point. Whatever the commercially sensible course to adopt may have been, the question is whether there was, or whether there was not, an immediate grant of an equitable interest in the land when clause 10 was signed. That depends on the wording of the clause. I find it to be materially the same as the clause in Philpott, and the same result must accordingly follow.[25] I find, therefore, that the agreement between PlaceMakers and Carpe Diem executed on 2 February 2012 does not create, prior to any request being made, an equitable mortgage.[26] In argument, Mr Clark sought to bolster PlaceMakers' claim to an interest inthe land beyond the express terms of the caveat by reference to the terms of a general security agreement which Carpe Diem granted to PlaceMakers on 12 March 2014. This agreement contains the following clause:1. In consideration of PlaceMakers supplying or having supplied any Goods or Services, the Customer hereby charges the Secured Property in favour of PlaceMakers as security for payment of the Secured Indebtedness and performance and observance by the Customer of all its other obligations to PlaceMakers. The charge created by this deed is a first charge.[27] "Secured Property" is defined to mean all the customer's personal propertyand all other property, whether situated in New Zealand or elsewhere, and to include all existing and future property.[28] This document is not referred to in the caveat, so in claiming an estate or interest in the land under the caveat, PlaceMakers does not rely on this document. It cannot be relied on by implication. Mr Clark submits that the effect of the two agreements, when combined, gives PlaceMakers the right to register a caveat.[29] The Court will not take an overly pedantic approach to the terms of a caveat, when considering whether it complies with s 137(2)(c). In Zhong v Wang, the Court of Appeal observed:16The purpose of the caveat procedure is to enable those with proper claims to proprietary interests to protect themselves against loss by forbidding dealing with the land pending resolution of substantive claims. The underlying purpose of the caveat regime could be undermined if too strict an approach were taken to the detail required to describe the interest claimed and its derivation from the registered proprietor.[30] Nonetheless, there is no authority for the proposition that a caveat can be sustained on the basis of an interest said to be derived from a completely separate document from that which is cited in the caveat, or from two documents where only one is referred to. Nor could this be correct in principle. When the caveat was executed, the second agreement had not been executed. The estate or interest claimed cannot possibly arise from a document not in existence.[31] I therefore conclude that on this application PlaceMakers cannot rely on the terms of the general security interest signed on 12 March 2014.Outcome(a) The application that caveat 9714155.1 not lapse is dismissed.(b) As a matter of formality, leave is granted for this proceeding to be issued under r 31.5 of the High Court Rules.(c) PlaceMakers will pay costs to Carpe Diem on a 2B basis together with disbursements to be fixed by the Registrar._______________________J G MatthewsAssociate Judge16 Zhong v Wang (2006) 5 NZ ConvC 194,308; (2006) 7 NZCPR 488 (CA) at [58].Solicitors:Wilson McKay, Auckland.Cameron & Co, Christchurch.