GATESHEAD INVESTMENTS LTD v PARANUI PROPERTIES LTD CA622/2013 [2014] NZCA 361

GATESHEAD INVESTMENTS LTD v PARANUI PROPERTIES LTD CA622/2013 [2014] NZCA 361 [30 July 2014]IN THE COURT OF APPEAL OF NEW ZEALANDCA622/2013[2014] NZCA 361BETWEEN GATESHEAD INVESTMENTSLIMITEDFirst AppellantPARANUI PROPERTIES LIMITEDSecond AppellantAND CHRISTOPHER MICHAEL HARVEYAS EXECUTOR OF THE ESTATE OFMICHAEL GEORGE HARVEY(DECEASED)RespondentHearing: 3 June 2014Court: Randerson, Harrison and French JJCounsel: G J Toebes for AppellantsL A Kemp for RespondentJudgment: 30 July 2014 at 2.30 pmJUDGMENT OF THE COURTA The appeal is dismissed.B The appellants must pay the respondent's costs for a standard appeal ona band A basis and usual disbursements.____________________________________________________________________REASONS OF THE COURT(Given by French J)Introduction[1] Joint tenancy is a form of co-ownership of property. This appeal concerns the circumstances in which a joint tenancy may be severed.[2] Mr and Mrs Harvey owned their family home (the Coatesville property) as joint tenants.[3] Mr Harvey died and Mrs Harvey was subsequently adjudicated bankrupt.[4] Following Mr Harvey's death, a dispute arose between his estate andMrs Harvey's creditors over ownership of the Coatesville property. The creditors contended that Mr Harvey's interest had passed on his death to Mrs Harvey by survivorship, leaving her the sole owner of the entire property. Mr Harvey's executor, however, claimed that prior to Mr Harvey's death the joint tenancy hadbeen severed, with the result that Mr Harvey and Mrs Harvey each owned a half share as tenants in common.[5] If the creditors were correct, the entire property would vest in the Official Assignee for the benefit of the creditors. If the estate were correct and the joint tenancy had been severed, then only a one half share would vest in the OfficialAssignee and the other half would be part of Mr Harvey's estate.[6] The case was heard in the High Court by Katz J. The Judge upheld theexecutor's claim.1 She found on the facts that the joint tenancy had been severed in equity either by mutual agreement or by a course of conduct.[7] Mrs Harvey's creditors now appeal that decision.[8] The key issues raised by the appeal are:(a) whether Mr and Mrs Harvey agreed to sever the joint tenancy under a relationship property agreement executed prior to Mr Harvey's death;and1 Harvey v Gateshead Investments Ltd [2013] NZHC 2253, [2014] 2 NZLR 79.(b) whether s 47 of the Property (Relationships) Act 1976 voids any severance of the joint tenancy.BackgroundJoint tenancies[9] We turn first to explain the concept of joint tenancy and the distinction between joint tenancy and another form of co-ownership called tenancy in common.[10] As noted in the decision under appeal, joint tenancy arises where a parcel of land is vested in two or more persons without any indication they are to take distinct and separate shares.2 Each has a right to the whole property but not to any particular share in it. Joint tenancy regards co-owners as, in effect, a single entity.[11] In contrast, where co-owners hold land as tenants in common, each has a defined share in the property.[12] There are two key features of a joint tenancy.3 The first is the existence of the four unities, namely unity of possession, unity of interest, unity of title and unity of time. The four unities reflect the concept that joint tenants have interests in the property that are equal in all respects.[13] The second key feature is the right of survivorship. On the death of one joint tenant, his or her interest accrues by operation of law to the survivor or survivors.There is no vesting or transfer of the deceased joint tenant's interest. When a jointtenant dies during the subsistence of the joint tenancy, his or her interest simply ceases to exist, and the interests of the remaining joint tenants expand by accretion. Where there is but one survivor, the joint tenancy has run its course and the survivor becomes the full owner of the whole property.42 At [14].3 See GW Hinde and others Principles of Real Property Law (2nd ed, LexisNexis, Wellington, 2014) at [12.004]–[12.006].4 Corin v Patton (1990) 169 CLR 450 at 575.[14] Again, this can be contrasted with the position of tenants in common. On thedeath of one such tenant, that tenant's proportionate share forms part of his or her estate to be distributed in accordance with his or her will or under the provisions of the Administration Act 1969 if there is an intestacy.[15] As for severance, that has been defined in a leading text as "the process by which either unity of interest or unity of title [is] destroyed, resulting in theconversion of the joint tenancy into a tenancy in common".5 Severance destroys the right of survivorship.[16] In New Zealand a joint tenancy may be severed either at law or in equity. A legal severance occurs upon registration of the appropriate instrument under the Land Transfer Act 1952. This case concerns severance in equity.The facts of this case[17] Mr and Mrs Harvey purchased the Coatesville property in November 2001. The title was registered in their name as joint tenants.[18] Mrs Harvey was involved in three rest home businesses which borrowed money from the appellants (the creditors). Mrs Harvey personally guaranteed the loans.[19] The businesses defaulted on the loans and on 26 November 2009 the creditors issued summary judgment proceedings against Mrs Harvey. The proceedings were not defended.[20] On 16 December 2009 Mr and Mrs Harvey entered into a relationship property agreement under s 21 of the Property (Relationships) Act. The agreement contained a schedule listing various items of property that it was agreed would become separate property as from the date of the agreement. Significantly forpresent purposes, the Coatesville property was shown as Mr Harvey's separateproperty, while the items listed as Mrs Harvey's separate property included sharesheld in her name in the rest home businesses.5 Hinde and others, above n 3, at [12.013].[21] Clause 3 of the agreement provided that each party would forthwith: execute all transfers, assurances and other documents and deliver and yield up possession of such property and documents and take all such steps as may be necessary to secure to the other party the title to and the possession of the property to which that other party may be entitled under the agreement.[22] It was a further term of the agreement that it would be binding on the parties in all circumstances including bankruptcy, the taking of property in execution by creditors, separation and death.[23] It is not disputed that in entering into the relationship property agreement, Mr and Mrs Harvey's intention was to remove the family home completely from the reach of Mrs Harvey's creditors.[24] In January 2010 the creditors obtained judgment against Mrs Harvey for $1,442,800 together with interest and costs. Later, on 9 February 2010, they registered a charging order against the title to the Coatesville property.[25] That same month, without knowledge of the charging order, Mr Harvey entered into an agreement to transfer the Coatesville property to a family trust. Because of the charging order, neither the transfer of the property into Mr Harvey'ssole name nor the subsequent transfer to the family trust could be registered under the Land Transfer Act.[26] On 5 November 2010 Mr Harvey made a will appointing his son, the respondent, as his executor. Under the will, Mr Harvey devised the Coatesville property to the family trust, reserving a life interest to Mrs Harvey.[27] Mr Harvey subsequently died on 3 February 2011.[28] Both parties then took steps to protect their competing claims. The respondent executor registered a notice of claim against the title to the property, relying on the relationship property agreement. The creditors sealed a sale order inrespect of Mrs Harvey's interest in the property.[29] The creditors also issued summary judgment proceedings in the High Court seeking orders declaring the relationship property agreement void, vesting the Coatesville property in Mrs Harvey by survivorship and removing the notice of claim registered against the title.[30] Associate Judge Faire held that the relationship property agreement was entered into with the intention of defeating creditors in terms of s 47(1) of the Property (Relationships) Act.6 Section 47(1) states:Any agreement, disposition, or other transaction between spouses or partners with respect to their relationship property and intended to defeat creditors of either spouse or partner is void against those creditors and the Official Assignee.[31] Associate Judge Faire declared the relationship property agreement void against Mrs Harvey's creditors to the extent it had the effect of defeating thosecreditors. However, the Associate Judge declined to grant the other applicationssought by the creditors. He considered Mr Harvey's estate had raised arguabledefences and the proceeding was accordingly sent to trial before Katz J.The decision under appeal[32] The executor accepted at the hearing before Katz J (as he did in this Court) that the relationship property agreement was void under s 47 of the Property (Relationships) Act to the extent that it purported to transfer Mrs Harvey's interest in the property to Mr Harvey. That is to say, it was accepted that Mrs Harvey's interestin the property was still available to her creditors, notwithstanding the relationship property agreement.[33] That concession meant the dispute was limited to whether the creditorsobtained only Mrs Harvey's share or both shares in the Coatesville property.[34] The executor also accepted that there could not have been a legal severance of the joint tenancy, because of the failure to register the relevant transfers.6 Harvey v Gateshead Investments Ltd [2012] NZHC 1059.[35] It was therefore common ground that the case turned on whether an equitableseverance of the joint tenancy had occurred prior to Mr Harvey's death.[36] In her decision, Katz J said that the starting point for any discussion of the law of severance was the judgment of Sir William Page Wood VC in Williams v Hensman, in particular the following paragraph:7A joint-tenancy may be severed in three ways: in the first place, an act of any one of the persons interested operating upon his own share may create a severance as to that share. The right of each joint-tenant is a right by survivorship only in the event of no severance having taken place of the share which is claimed under the jus accrescendi. Each one is at liberty to dispose of his own interest in such manner as to sever it from the joint fund–losing, of course, at the same time, his own right of survivorship. Secondly, a joint tenancy may be severed by mutual agreement. And, in the third place, there may be a severance by any course of dealing sufficient to intimate that the interests of all were mutually treated as constituting a tenancy in common. When the severance depends on an inference of this kind without any express act of severance, it will not suffice to rely on an intention, with respect to the particular share, declared only behind the backs of the other persons interested. You must find in this class of cases a course of dealing by which the shares of all the parties to the contest have been affected .[37] Justice Katz went on to say that although five possible methods of severance are now recognised, only two were relevant in the present case, namely the second and third categories identified in Williams v Hensman; that is, severance by mutual agreement and severance by a course of dealing sufficient to intimate that the interests of all were mutually treated as constituting a tenancy in common.[38] The Judge noted that many of the modern cases involving severance by mutual agreement have arisen in the context of the breakdown of a personal relationship between the joint tenants, which was not the case here. However, theJudge said she considered the Harveys' situation to be analogous to a marriagebreakdown in the sense that due to changed circumstances (Mrs Harvey'sindebtedness) survivorship would no longer serve its usual purpose. It would not provide Mrs Harvey with a home and a degree of financial security were Mr Harvey to die first.87 Harvey v Gateshead Investments Ltd, above n 1, at [19] citing Williams v Hensman (1861) 1 J & H 546 at 557, 70 ER 862 (QB) at 867.8 At [40].[39] In the Judge's assessment, the evidence viewed as a whole (including the steps taken by Mr Harvey after the relationship property agreement was signed andMrs Harvey's evidence)9 indicated that Mr and Mrs Harvey had a common intention to sever their joint tenancy and its associated right of survivorship.10[40] Alternatively, to the extent that severance by course of dealing is a distinct method of severance (which some commentators have doubted), the Judge said she was satisfied Mr and Mrs Harvey engaged in a course of conduct pursuant to which they treated their interests as several.11 Had it been necessary, the Judge wouldtherefore have found the Harveys' joint tenancy was severed in equity by course ofconduct.[41] The Judge further held that her conclusion the joint tenancy had been severedprior to Mr Harvey's death was not affected by the fact the relationship property agreement was in breach of s 47 of the Property (Relationships) Act.[42] The creditors' application for an order that the entire estate in fee simple bevested in the Official Assignee was accordingly dismissed.Grounds of appeal[43] On behalf of the creditors, counsel Mr Toebes submitted that the Judge was wrong to find the joint tenancy had been severed. He advanced three main arguments:(a) What Mr and Mrs Harvey agreed under the relationship property agreement was not to sever the joint tenancy but rather to transfer the entire property to Mr Harvey.(b) Even if the relationship property agreement purported to sever the joint tenancy, it was void and of no effect due to s 47 of the Property9 Mrs Harvey gave evidence that she had agreed with her husband to terminate the joint tenancy concurrently with a transfer of her interest to him.10 At [50].11 At [55].(Relationships) Act. That meant Mr and Mrs Harvey must be held tohave remained joint tenants until the former's death.(c) Any course of dealing must similarly be void and so of no legal effect.AnalysisWas the only agreement an agreement to transfer rather than sever?[44] Mr Toebes developed his argument as follows.[45] He took as his starting point two statements of principle. First, the statement in Fleming v Hargreaves that:12The absolute assignment of an interest in a joint tenancy operates in equity to sever the joint tenancy and thereafter the property is held as tenants in common in equal shares.Secondly the statement quoted above at [15] that severance is "the process by which either unity of interest or unity of title [is] destroyed, resulting in the conversion ofthe joint tenancy into a tenancy in common".[46] In reliance on those two statements, Mr Toebes submitted it was fundamental to the concept of severance that the joint tenants remain co-owners. Thus, while assignment of an interest in a joint tenancy operates in equity to sever the tenancy, transfer of the entire property (whether to one of the joint tenants or a third party) is an act of the joint tenants acting together. It cannot be an act of severance.[47] In Mr Toebes' submission, the relationship property agreement in this casenever purported to convert the joint tenancy into a tenancy in common. Rather, the object was that Mrs Harvey would not retain any share and that Mr Harvey would become the sole owner. Such an agreement was therefore not a severance. It was a transfer by both owners of the entire property to one person, as evidenced by the e-dealing instructions signed by Mr and Mrs Harvey on the day the relationship property agreement was signed. These e-dealing instructions described thetransaction as a transfer from Mr and Mrs Harvey to Mr Harvey as "sole tenant".12 Fleming v Hargreaves [1976] 1 NZLR 123 (CA).[48] In support of this analysis, Mr Toebes referred us to a 1932 decision of the Supreme Court of Victoria, Re Allingham.13[49] In Allingham, a husband and wife owned land as joint tenants. They both signed an agreement to sell the property to a third person. The purchaser paid the deposit to the husband, who then paid it into a bank account in his sole name. Thehusband died. A dispute then arose between the wife and the husband's estate as tothe ownership of the sale proceeds. The estate argued that either the sale of the property and/or the banking of the deposit had effected a severance of the joint tenancy.[50] The Court rejected that argument. It held that there was no reason why the making of the contract and the change in the form of the property should in themselves affect an alteration in the nature of the ownership. It further held that the husband had paid the deposit into his bank account as agent for both himself and his wife. There had been no severance of the joint tenancy and the sale proceeds were therefore owned as joint tenants (and so passed to the wife by survivorship).[51] In our view, Allingham is plainly distinguishable. The case very much turned on its own facts, in particular the absence of any evidence of the necessary intention or agreement to sever the joint tenancy. It is not authority for an absolute proposition that a sale by joint tenants of the entire property can never in any circumstances amount to severance of the joint tenancy.[52] In every case where it is contended there has been a mutually agreed severance, the primary question must always be whether the evidence establishes such an agreement.[53] In this case there was, in our view, compelling evidence of a mutual intention to sever. Unlike the sale contract in Allingham, the agreement at issue dealt with the reclassification and division of various items of property as between the joint tenants. The underlying intention was undoubtedly for Mrs Harvey to dispose of or assign a divided half share interest in the Coatesville property absolutely to13 Re Allingham [1932] VLR 469 (SC).Mr Harvey, just as it was the intention that he dispose of his half share interest in the rest home businesses. Such a disposition made in those circumstances must in our view amount to a severance in equity of the joint tenancy.[54] The agreement to sever was supported by consideration and, apart from the attempt to defeat creditors, to which we return later, there was nothing improper about it.[55] We also agree with Katz J that the e-dealing form does not detract from that analysis. It is the substance of the transaction between the parties that should prevail, not the form. Or, to put it another way, in the circumstances of this case the greater (transfer to Mr Harvey as sole owner) must be taken to include the lesser(severance of the joint tenancy and transfer of Mrs Harvey's half share as tenant incommon to Mr Harvey).What is the effect of s 47?[56] For convenience, we set out the relevant part of s 47:(1) Any agreement, disposition, or other transaction between spouses or partners with respect to their relationship property and intended to defeat creditors of either spouse or partner is void against those creditors and the Official Assignee.(2) Any such agreement, disposition, or other transaction that was not so intended but that has the effect of defeating such creditors is void against such creditors and the Official Assignee during the period of 2 years after it is made, but only to the extent that it has that effect.[57] It was common ground that the present case fell within s 47(1).[58] Mr Toebes submitted that because s 47 renders the relationship property agreement void, that means the position falls to be regarded as if that agreement never existed. He also referred us to a passage in the Supreme Court decisionJohnson v Felton, where the Court held that on an impugned transaction being voided under s 47, the property re-vests in the person who disposed of it.14 Thus, so Mr Toebes argued, if the relationship property agreement in this case did purport to14 Johnson v Felton [2006] NZSC 31, [2006] 3 NZLR 475 at [21].sever the joint tenancy, s 47 renders any such severance ineffective and the joint tenancy remains intact.[59] We disagree. As the Court makes clear in the same passage, any voiding and re-vesting is only "to the extent necessary to meet the [creditor's] claim". Further, asthe Court also makes clear, this qualification applies whether the agreement in question is caught by s 47(1) or s 47(2).[60] As a matter of principle and logic, the creditor's claim for the purposes ofs 47 must be determined as at the date of the impugned agreement. In this case, at the time the relationship property agreement was entered into the creditors only had a claim to Mrs Harvey's interest in the property. They never had a claim toMr Harvey's interest. As at that time, any right to the entire property by dint ofsurvivorship was at best inchoate and not available to creditors.[61] In those circumstances, we agree with Katz J that voiding the transaction tothe extent necessary to meet the creditors' claim must mean voiding the agreement in so far as it provided for a transfer of Mrs Harvey's half share in the property but notinsofar as it evinced a mutual intention to sever the joint tenancy. The purpose of s 47 is not to improve the position of the creditors, only to preserve it.[62] Such a result also accords with common sense and the justice of the case. In our view, if the creditors were to obtain the entire property, that would be an undeserved windfall. So too if the positions were reversed and Mrs Harvey had died first. It would be unjust if the creditors were to receive nothing. Yet that is thenatural corollary of Mr Toebes' argument.[63] Because of the view we have taken, it is unnecessary for us to consider whether Katz J was correct to rely on a course of dealing as an independent mode of severance.Outcome[64] The appeal is dismissed.[65] There is no reason why costs should not follow the event and accordingly we order that the appellants must pay the respondent's costs for a standard appeal on aband A basis and usual disbursements.Solicitors:JT Law, Wellington for AppellantsKemp Barristers & Solicitors, Auckland for Respondent