CITY PROPERTY HOLDINGS LIMITED V BRITISH MERCANTILE AND LOAN TRUST COMPANY LIMITED HC AK CIV 2006-404-006807

CITY PROPERTY HOLDINGS LIMITED V BRITISH MERCANTILE AND LOAN TRUST COMPANY LIMITED HC AK CIV 2006-404-006807 15 February 2007IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV 2006-404-006807UNDER the Land Transfer Act 1952 IN THE MATTER OF Caveat No. 7050130.1 (North Auckland Registry) AND IN THE MATTER OF of an application pursuant to s145A of the Act for an order that the Caveat not lapse BETWEEN CITY PROPERTY HOLDINGS LIMITED Applicant AND BRITISH MERCANTILE AND LOAN TRUST COMPANY LIMITED Respondent Hearing: 20 December 2006 Appearances: Mr Parmenter for respondent Mr Hurd for applicant Judgment: 15 February 2007 at 5.00 p.m.JUDGMENT OF ASSOCIATE JUDGE J P DOOGUE [amended]This judgment was delivered by me on15.02.2007 at 5.00 pm, pursuant to Rule 540(4) of the High Court Rules. Registrar/Deputy Registrar DateSolicitors: McWha Law Solicitors, Ponsonby, P O Box 47424 Graham & Co, P O Box 8793, Auckland Counsel David Hurd, Shortland Chambers, P O Box 4338, Auckland Ray Parmenter, Princes Court, 2 Princes Street, AucklandBackground[1] The applicant has applied for an order under s 145A of the Land Transfer Act 1952 for an order that a caveat that it has lodged against the title to a property at 53A Greenlane East, Remuera, Auckland not lapse. The respondent is the registered proprietor of the property. The caveat number is 7050130.1. [2] The applicant claims an interest in the land as purchaser under an Agreement for Sale and Purchase dated 14 July 2006 which it entered into with the respondent. The dispute between the parties concerns whether that agreement remains on foot or whether the respondent has validly cancelled it for non-fulfilment of a condition. The applicant either has, or intends to, commence proceedings in this Court seeking specific performance of the agreement [my notes are deficient concerning this aspect of the matter.] [3] The applicant wished to purchase the property, which was a residential property, in order to provide rental accommodation. The applicant's business is to provide rental accommodation. A deponent who gave evidence for the applicant, Mr Hudson, said that during negotiations he made it clear to the real estate agent representing the respondent, that agent being Mr van Velthooven, that the applicant was not registered for GST and that it was therefore important that the sale of property be exempt from GST. Mr Hudson says that Mr van Velthooven told him he would refer the matter to the respondents' principal, Mr Gray, and then come back to Mr Hudson. This he did, advising Mr Hudson that the sale would "absolutely not" attract GST. Mr van Velthooven has not filed an affidavit in the proceeding. [4] The parties then entered into an Agreement for Sale and Purchase which was for a price of $1,550,000.00 "plus GST if any". The Agreement included clause 14.0. That clause read as follows:14. This agreement is conditional upon the purchaser being satisfied that the property is suitable for the purchasers requirements in all respects following the purchaser completing his due diligence on the property. The date for satisfying this condition is ten working days after the date of this Agreement. This condition is for the sole benefit of the purchaser.[5] Clause 8.7 of the standard terms of contract is relevant. 8.7, so far as relevant, provided:8.7 If this agreement is expressed to be subject either to the above or to any other condition(s), then in relation to each such condition the following shall apply unless otherwise expressly provided: 8.7 (1) The condition shall be a condition subsequent. 8.7 (3) Time for fulfilment of any condition and any extended time for fulfilment to a fixed date shall be of the essence. 8.7 (4) The condition shall be deemed to be not fulfilled until notice of fulfilment has been served by one party on the other party. 8.7 (5) If the condition is not fulfilled by the date for fulfilment, either party may at any time before the condition is fulfilled or waived avoid this agreement by giving notice to the other. Upon avoidance of this agreement the purchaser shall be entitled to the return of the deposit and any other moneys paid by the purchaser and neither party shall have any right or claim against the other.[6] On 28 July 2006 the applicants solicitor wrote to the vendor's solicitor as follows:I confirm satisfaction of the condition embodied in clause 14 strictly on the basis that the transaction is the sale of a residential property and is an exempt supply. I am advised that your client company's Mr John Gray has represented to my client via the real estate agent that GST is not payable in respect of the transaction.[7] On 3 August the solicitors for the respondent sent a fax to the applicant's solicitors which said, amongst other things:We would appreciate it if you would telephone us to discuss the GST issue. From our point of view the contract is plus GST (if any) and GST is payable on the transaction.[8] They followed up with a further letter 25 August 2006 which said amongst other things:Our clients position is the GST is payable on this transaction. We can advise: 1. At the time our client purchased the property, the transaction was subject to GST although zero rated, it being a sale as a going concern.2. That being the case, our client now needs to account for GST on the sale of the property. 3. The contract specified the purchase price as being plus GST (if any). 4. If your client wishes for the transaction to be zero rated we can confirm that the agreement can be varied by including chattels. We attach a chattels list received from a valuer retained for the purpose of which assess a value of $30,000.00.[9] On 29 August 2006 the applicant's solicitor wrote back to the respondent's solicitor. The applicant's solicitor set out the assertion that the property was now used exclusively for residential purposes. The letter continued:3. On the basis of (2) above the supply that is the subject of this transaction is the supply of residential dwellings not the supply of a going concern. As such there is no ability for a registered person to charge on the supply of residential units. 4. What is now clear to the purchaser is that there was a change in use when the motel business ceased and the units were let as residential units. At that point your client was obligated to make a change of use adjustment and account for the GST. 5. My client will not accept an arrangement that involves the transfer of your client's GST liability.[10] On 27 September the respondents solicitor replied:We refer to previous correspondence. Our client's position has not changed. GST is payable on the transaction as provided in the agreement. You have advised that the only basis upon which you can make the contract unconditional is in the event that our client accepts that it is an exempt supply. Our client does not accept that to be the case and as we have been unable to resolve this matter the contract is hereby cancelled.Principles applicable to application to sustaining caveat[11] The principles to be applied in applications such as this are well established through the decisions of the Court of Appeal in cases such as Sims v Lowe [1988] 1 NZLR 656 and Pacific Homes Limited v Consolidated Joineries Limited [1996] 2 NZLR 652.[12] I propose to apply the following principles in reaching my decision: a) The onus is on the caveator to demonstrate that it holds an interest in the land which is sufficient to support the caveat. b) The caveator must put forward a reasonably arguable case to support the interest it claims. c) An order for the removal of the caveat will only be made if it is clear that there was either no valid ground for lodging it in the first place or, alternatively, that such ground as then existed has now ceased to exist. d) Caveat proceedings are wholly unsuitable for the determination of disputed questions of fact.Assessment[13] Mr Parmenter said that the point at issue was whether or not there had been a notification of satisfaction of the due diligence condition in the contract. It was his position that the letter which the applicant's solicitor sent to the respondent's solicitor 28 July 2006 did not amount to satisfaction of that condition. Mr Parmenter said that clause 8.7 of the standard conditions contained in the seventh edition of the Real Estate Institute of New Zealand and Auckland District Law Society Agreement for Sale and Purchase therefore applied. Clause 8.7 makes time of the essence in meeting obligations with respect to clauses such as the due diligence provision in clause 14. That had not happened. He said the purchaser was therefore entitled to cancel the contract. He drew particular attention to the first part of the sentence in the letter:I confirm satisfaction of the condition strictly on the basis that the transaction is the sale of a residential property and is an exempt supply.[14] That, Mr Parmenter said, was not a notice of fulfilment of the condition. He said that it was a conditional confirmation only. That would not suffice he said. He said that upon cancellation of the agreement the applicants ceased to have any interest in the subject land capable of sustaining a caveat.[15] In considering the meaning of the letter of 28 July 2006 it is necessary to place it in context. Part of that context is that the purchaser had to be satisfied that "the property" is suitable for the purchaser's requirements in all respects. Taking that as a starting point, it does not seem to have anything to do with the question of whether the transaction would attract GST. If that is so, any comments about GST could be seen as superfluous addition to the letter. It is difficult to see how any condition about GST could be attached to approval of the due diligence clause. Viewed in that way, the letter from the purchaser's solicitor could well be seen as confirming the due diligence clause was satisfied and reiterating the concern of the purchaser that the transaction should foresee on the footing that no GST was payable. [16] Mr Parmenter's submission that the letter was somehow conditional does not, in my view, seem to be a very likely meaning to attach to the letter. Putting it another way, it seems at least arguable that the solicitor was dealing with two separate aspects of the contract but rolled them up into one sentence. Viewed in this way, the letter might be seen as confirming that due diligence was complete but also emphasising that with respect to another aspect of the transaction, GST, the purchaser expected that its view that the transaction was to be GST free was the basis upon which the parties could go forward. [17] I think that an alternative analysis along the following lines is at least arguable. The purchaser had a view of what the contract meant and the vendor, as it turned out, had a different view. No doubt it would have been desirable from the purchaser's point of view if it could persuade the vendor to come round to its way of thinking concerning the GST issue. But in the end, either one party or the other would prove to be correct on the GST issue. If they could not agree that matter would have to be determined by the Court. Viewed in this way, it was entirely possible that the purchaser was electing to make the contract unconditional while at the same time expressing its view as to what the contract meant so far as GST was concerned. It could not of course require the vendor to accept its point of view. It was entitled to confirm the contract in the knowledge that there was a dispute as to what the GST arrangements meant. The process of advising due diligence required unilateral action from the purchaser. It required no action to be taken by the vendor.It did not require the vendor to conjointly confirm the contract following due diligence. That is, the purchaser did not require the vendor to cooperate in the confirmation of the agreement following due diligence - the purchaser did not require further agreement from the vendor. Confirmation was entirely the province of the purchaser. Therefore, the fact that the purchaser in the process of confirming expressed views about GST which were unpalatable to the vendor, did not vitiate the confirmation. [18] Nor did the terms in which the purchaser confirmed link notice of satisfaction of the due diligence with a requirement that the purchaser accept the vendor's interpretation of the GST provision. The purchaser did not, for example, say that it was minded to confirm that the due diligence condition was satisfied provided that it heard back within a stipulated period that the vendor accepted its interpretation of the GST provisions. Unless some sort of ultimatum of that kind was given, it is difficult to see how the confirmation of the due diligence provision was conditional. Both parties needed to know where the purchaser stood with respect to the due diligence provision. The terms of the offer did, stating it was satisfied; it did not require a response. It did not state that depending on the response it received from the vendor about the GST issue it would then give its final view on the due diligence clause. [19] It is possible that the interpretation of the contract that the purchaser relies upon is wrong and that its insistence that GST will not be payable amounts to repudiation of its contractual obligations, in that it has evinced an intention not to perform the contract. The vendor did not frame its submissions in those terms. Two points can be made. First, the point of who is right and who is wrong on the GST argument cannot be determined at this stage of the proceedings. Questions of fact and law must be determined before that stage is reached. Secondly, even if the purchaser were ultimately be found to have misconstrued the effect of the contract, the vendor would have had to confront the effect of authorities such as Starlight Enterprises Ltd v Lapco Enterprises Ltd [1979] 2 NZLR 744, 746:The erroneous interpretation of the contract by one party is not enough by itself to lead to the view that an attempt to make use of the interpretation has amounted to a downright refusal to act on the contract. Indeed it may bethought that a mistaken reliance upon one of the terms of the contract goes some distance towards indicating that in fact there is no fixed intention to repudiate – the error could be more consistent with an intention to perform the contract than to abandon it.[20] That being so, there are issues of fact and law which require to be determined in order to establish that the applicant has a reasonably arguable case for its claimed interest. One such issue is what the passage in the letter of 28 July 2006 which I have quoted above in paragraph [13], objectively considered, would convey to the reader. I take the view that it is reasonably arguable for the applicant to assert that the purchaser had completed due diligence and was satisfied so that the satisfaction of clause clause 14 was cleared away; that it did not have some other meaning such as "our client may be prepared to take clause 14 as being satisfied if your client will agree that GST is not payable on the transaction". I consider, as well, that it is not plain that by writing on behalf of their clients as they did, the solicitors communicated an intention on the part of their clients not to perform the agreement, thus exposing their client to justified cancellation for repudiation.. That being so, I consider that it is arguable that the purchaser has an enforceable contract relating to the land which in turn gives rise to an equitable interest in the land, and for the protection of which the continued existence of the caveat is justified.Orders[21] I grant the application. I make an order that Caveat No. 7050130.1 (North Auckland Registry) shall not lapse until further order of the Court. The order is conditional upon the applicant commencing proceedings seeking specific performance of the contract not later than 9 February 2007. If that condition is not satisfied, the way will be open to the respondent to apply for a discharge of this order. [22] If the parties cannot agree on the matter of costs, they should file brief memoranda on that matter by 9 February 2007. _____________ J.P. Doogue Associate Judge