LSK BUILDERS 2011 LIMITED v CHAMBERLAIN [2022] NZCA 228

LSK BUILDERS 2011 LIMITED v CHAMBERLAIN [2022] NZCA 228 [7 June 2022]IN THE COURT OF APPEAL OF NEW ZEALANDI TE KŌTI PĪRA O AOTEAROACA537/2021[2022] NZCA 228BETWEEN LSK BUILDERS 2011 LIMITEDAppellantAND MARK ELWYN DAVID CHAMBERLAINAND SUZANNE CATHERINECHAMBERLAINRespondentsHearing: 28 March 2022 (further submissions received on 1 April 2022)Court: Brown, Clifford and Lang JJCounsel: G D Pearson and M E Byczkow for AppellantL S B Acland for RespondentsJudgment: 7 June 2022 at 10.30 amJUDGMENT OF THE COURTA The appeal is dismissed.B The appellant must pay the respondents costs for a standard appeal on aband A basis and usual disbursements.____________________________________________________________________REASONS OF THE COURT(Given by Brown J)Introduction[1] The appellant (LSK) is a building company that was engaged by therespondents (the Chamberlains) to build their new home. LSK and the Chamberlainsare in dispute concerning the payments due under the relevant residentialbuilding contract (the contract). The contract conferred on LSK the entitlement toregister a mortgage over the residential property owned by the Chamberlains(the property), to secure payment of moneys due and owing under the contract.The contract conferred a further entitlement to lodge and maintain a caveat against thetitle to the property for the protection of LSK's rights in the contract.[2] Having lodged a caveat against the Chamberlains' title to protect its right toregister a mortgage, on 16 January 2019 LSK registered an "all obligations" mortgagesecurity which included a priority amount of $175,000.[3] In response to the Chamberlains' application to the Registrar-General of Landfor the lapse of the caveat, LSK sought an order under s 143 of the Land TransferAct 2017 that the caveat not lapse. An affidavit in support of LSK'soriginating application stated that the caveat was necessary to prevent any dealingswith the title to the property, and to ensure LSK's interest in the property was protecteduntil the dispute was resolved. There was no specific reference in the application orsupporting affidavit to the priority amount included in the mortgage or its implications.[4] On 5 August 2021, Associate Judge Johnston dismissed the application.1LSK appeals that decision.The High Court judgment[5] The key clause in the contract, cl 5.4, entitled "Payment", provides forprogress payments and payment following practical completion in fairly orthodoxterms. The builder's protections to which this appeal relates are contained incls 5.4.5 to 5.4.7:5.4.5 The Owner hereby irrevocably agrees and acknowledges that tosecure payment of the monies due and owing to the Builder under thisContract, they shall grant a registered mortgage over the Site, the realproperty description of which is contained in the First Schedulehereof, in favour of the Builder. The form of the mortgage shall bethe current Auckland District Law Society All Obligations MortgageMemorandum (or in the event the Auckland District Law Societyceases to exist the form used by the lawyers for the Builder from timeto time).1 LSK Builders 2011 Ltd v Chamberlain [2021] NZHC 2018 at [27].5.4.6 For the purposes of clause 5.4.5, if the Owner refuses or fails forwhatever reason to execute the necessary documentation to effect themortgage security in favour of the Builder, the Owner herebyirrevocably appoints the Builder and, if the Builder is a company,the directors of the company to be the attorney of the Owner at anytime to:a) execute and sign the mortgage in favour of the Builder; andb) procure the registration of the mortgage; andc) execute and perform any act or deed, matter or thing inaccordance with this clause as fully and effectually asthe Owner could do.5.4.7 The Owner irrevocably authorises the Builder to lodge and maintaina caveat against the title to the Site for the protection of the Builder'srights in this Contract.[6] The Associate Judge observed that LSK did not purport to invoke any interestin the Chamberlains' land other than that asserted in the caveat instrument,2 whichcontained the following statement:Estate or Interest claimedSubject to the Caveator's right to mortgage the property pursuant toclause 5.4.5 to 5.4.7 of the Residential Building Contract dated 27 July 2017between the registered Proprietors and the Caveator.The Associate Judge concluded that LSK's caveat became redundant once itsmortgage was registered and that the caveat should therefore lapse.3[7] The Associate Judge noted that LSK was claiming approximately $200,000under the contract and that the Chamberlains disputed that claim.4 While not expresslyaddressing the mortgage's priority amount or its implications, the Associate Judgediscussed LSK's concern about increases to its claim due to accumulating interest andescalating costs in this way:[26] Mr Pearson [counsel for LSK] also raised in submission that LSK'sclaim is now for a greater amount than it was as at the date of the registrationof the mortgage, essentially because of accumulating interest andescalating costs. I do not accept that that alters the position. LSK's arguableinterest in the land extends only to the debt due under the contract.Any amount due under the contract could and should be covered by2 At [23(d)].3 At [23(e)], [24] and [27].4 At [2].an all obligations security of the sort it was contractually entitled to register.Any claim not due under the contract does not constitute an interest inthe land.Issue on appeal[8] LSK's notice of appeal contended that the judgment erred in two respects:(a) in failing to recognise that the agreement to mortgage was not, or wasarguably not, limited to one or any particular mortgage; and(b) in failing to recognise that at the time of the application to sustain thecaveat LSK had an interest in land, namely an agreement to mortgageto secure unpaid and accruing costs.[9] The parties agreed on the issue to be determined on the appeal, namely whetherthe Judge erred in finding that LSK had no caveatable interest in the Chamberlains'land. However, we consider that a more focused issue is:Upon registration of a mortgage, does a caveat previously lodged to protectthe mortgagee's interest become redundant?Discussion[10] The submissions of Mr Pearson, counsel for LSK, first invoked the followingobservation in Sims v Lowe:5But it would in our view make a nonsense of the law and of the provisionsabout caveats if the registration of a subsequent mortgage should of itself domore than postpone the unregistered charge to the registered.[11] Mr Pearson suggested that this Court was making the point that the entitlementto a caveat does not turn on the terms of any mortgage, registered or unregistered, buton whether a person has an interest in land. However, this Court's observation mustbe read in the context of the argument advanced in that case, based on a discrepancybetween the terms of the unregistered mortgage and the terms of the caveat registeredby the mortgagee one year after that mortgage was signed. While the5 Sims v Lowe [1988] 1 NZLR 656 (CA) at 660.mortgage instrument gave an interest as a fourth charge, the caveat, owing to theintervening registration of a subsequent mortgage, claimed an interest as a fifth charge.It was asserted that, as a result, there was no interest capable of supporting the caveat.This Court soundly rejected that argument and held that the registration of asubsequent mortgage did not prevent the lodging of the caveat.6 The propositionwhich Mr Pearson seeks to draw from that decision does not assist LSK, whichobtained, as it was entitled to do, registration of a second mortgage behind the existingfirst mortgage over the property.[12] Mr Pearson's second point was that the registered mortgage offers LSK onlypartial protection as a consequence of the inclusion of the priority amount. As heput it:The reality is that given the loss of the caveat substituted by a mortgage witha priority amount of $175,000, there is nothing to prevent the respondentsdischarging their mortgage to the bank, transferring the property to anotherparty subject to the Appellant's mortgage and the Appellant only has $175,000secured, despite being owed more.[13] Mr Pearson submitted that the caveat prevented that course because it stoppedany further dealing with the title and hence the registration of the mortgage did notrender the caveat redundant. Mr Acland, counsel for the respondents, characterisedthis strategy as inappropriately utilising a caveat to provide separate security for"additional debt". On Mr Acland's analysis, LSK had a contractual right to registera charge, which it had exercised. It did not have a right to register a second chargeand hence there was no interest in land which could justify a caveat.[14] LSK's perceived difficulty has arisen because of its unilateral inclusion in itsmortgage of the $175,000 priority amount. That figure is a "stated priority limit",a term defined in the Property Law Act 2007 as the maximum amount for which themortgage has priority in relation to any subsequent mortgage.7 Section 92(1)provides:86 At 660.7 Section 93.8 This is an exception to the general rule in s 89(1) of the Property Law Act 2007 that the priorityof a mortgage over property in relation to any subsequent mortgage over the property does notextend to advances made under the prior mortgage after the subsequent mortgage comes intooperation.92 Priority extends to further advances up to stated priority limit(1) If a mortgage over property secures further advances by way offinancial accommodation up to a stated priority limit, the priority ofthe mortgage, in relation to any subsequent mortgage over theproperty, extends to every such further advance, up to the statedpriority limit.[15] Because some implications of the Property Law Act might not have beenanticipated, we invited counsel to file further submissions, should they wish to do so,concerning the implications of LSK's priority amount for this appeal. Both partiestook up the invitation.[16] The submissions for LSK correctly recognised that the $175,000 ceiling wouldapply both to advances made prior to the registration of a third mortgage and to furtheradvances subsequent to the third mortgage becoming operative. Mr Pearsonsubmitted, therefore, that LSK's mortgage would have no priority over a subsequentmortgage in respect of all outstanding amounts in excess of the $175,000 priority limit,irrespective of the timing of the advances relative to the subsequent mortgage.Mr Pearson was particularly critical of the Associate Judge's observation that anyamount due under the contract could and should be covered by the all obligationsmortgage.9 He contended that, because the priority limit in LSK's mortgage wasinsufficient to cover accumulating interest and escalating costs in respect of thecontractual debt, the retention of the caveat was essential.[17] Mr Pearson explained that the selected priority amount reflected the moneythat LSK considered was due and owing at the time of registration. He recognisedthat one way in which LSK could have sought to secure priority was by nominating apriority amount greater than the claimed level of indebtedness at the time the mortgagewas registered. However he suggested, somewhat faintly, that there might be difficultywith that course, observing that at least one authority has had to consider allegationsthat a priority sum included unilaterally on the mortgagee's behalf was "a fabricatedpriority amount".9 LSK Builders 2011 Ltd v Chamberlain, above n 1, at [26].[18] A submission to that effect was made by counsel in Thorn v United Steel Ltd.10However that argument does not appear to have been pursued and there was no rulingon the issue.11 It is certainly not authority for the proposition that a builder in LSK'sposition is precluded from nominating a genuine priority amount sufficient toanticipate accruing indebtedness. If LSK's apprehension was sound, it would followthat any builder with a contractual right to register a mortgage to secure payment of adisputed amount would likely wish to maintain a caveat in every case. For, repaymentconsiderations aside (which would not likely be relevant in the building contract debtscenario), there would be no advantage for a builder/mortgagee in stating a priorityamount that was no greater than the level of indebtedness at registration.[19] Turning to what we identify as the central issue in this appeal, where the rightunder a building contract to register a mortgage has been exercised, we do not acceptthat the contractual right to maintain a caveat "for the protection of the Builder's rightsin this Contract" remains extant. That is so even if the objective of the caveat is toavoid the consequences of a stated priority limit (or a specified principal amount)which, for whatever reason, is less than the amount due and owing to a builder underthe building contract. We agree with Mr Acland's analysis on this point.12[20] Whatever the consequences may be of the inclusion in the mortgage instrumentof a stated priority limit which is considered, on reflection, to be insufficient,the contractual right to maintain a caveat is spent once the contractual right which thecaveat protects, namely the right to register a mortgage, has been exercised. We aresatisfied that there was no error in the Associate Judge's conclusion on the ultimateissue of whether in the circumstances the caveat could be sustained.Result[21] The appeal is dismissed.10 Thorn v United Steel Ltd [2017] NZHC 1865, (2017) 18 NZCPR 711.11 See at [93]–[95].12 Discussed at [13] above.[22] The appellant must pay the respondents costs for a standard appeal on aband A basis and usual disbursements.Solicitors:Isherwood Le Gros Law Ltd, Nelson for AppellantRout Milner Fitchett, Nelson for Respondents