WILLIAM ANDREW CLYDE COLTART V LEPIONKA & COMPANY INVESTMENTS LIMITED [2016] NZCA 102

DRAFT – 4 April 2016WILLIAM ANDREW CLYDE COLTART V LEPIONKA & COMPANY INVESTMENTS LIMITED [2016]NZCA 102 [7 April 2016]IN THE COURT OF APPEAL OF NEW ZEALANDCA666/2015[2016] NZCA 102BETWEEN WILLIAM ANDREW CLYDE COLTARTAppellantAND LEPIONKA & COMPANYINVESTMENTS LIMITEDRespondentHearing: 25 February 2016Court: Ellen France P, Harrison and Kós JJCounsel: L J Taylor QC and D A Chan for AppellantM G Colson and K J Dobbs for RespondentJudgment: 7 April 2016 at 3.30 pmJUDGMENT OF THE COURTA The appeal is allowed.B The order made in the High Court is set aside and substituted by the order set outin [92] of this judgment.C Leave is reserved for either party to apply to the High Court for further orders.D The respondent must pay the appellant costs for a standard appeal on a band A basistogether with usual disbursements.____________________________________________________________________REASONS OF THE COURT(Given by Harrison J)ContentsIntroduction [1]Background [6]High Court [20]Principles [28]Issues [31]Decision [37](1) Equity of redemption [37](2) Equitable duty [53](3) Breach of duty [56](4) Discretion [70](a) Cancellation [71](b) Extinguishment by sale [82]Summary [89]Result [91]Introduction[1] This appeal from a decision of Associate Judge Smith ordering the removal oftwo caveats from the title to a property raises issues about the nature and extent of theduties imposed on a party which has acquired a mortgage consequent upon themortgagor's default.1[2] In 2009 a company called GLW Group Ltd (GLW) purchased a 24-hectare ruralproperty on the banks of the Tukituki River in Hawke's Bay for subdivision into anumber of separate lots. Westpac Banking Corporation (Westpac) agreed to fundGLW's expenditure in return for a first mortgage over the property.[3] GLW granted an option to the appellant, Andrew Coltart, to purchase oneundivided lot on which a homestead was situated (the homestead lot) for $650,000.Despite not having the security of title Mr Coltart says he has expended over$1.5 million on improvements. He has, however, lodged caveats to protect hisinterests under the option and easements in favour of the homestead lot. GLW lateragreed to sell four other undivided lots to Lepionka & Company Ltd (LCL) and aseparate lot to Stefan Lepionka and another as trustees of a family trust (collectively,including LCL, the Lepionka purchasers). The total purchase price was $4.63 million.1 Lepionka & Company Investments Ltd v Coltart [2015] NZHC 2849 [HC decision].The subdivision remains incomplete; GLW has been unable to give title or settle withany of the purchasers.[4] In 2015 GLW defaulted on the Westpac mortgage. Another Lepionka entity,the respondent Lepionka & Company Investments Ltd (the Lepionka mortgagee), wasformed to buy Westpac's mortgage. Within days of acquiring the security, theLepionka mortgagee adopted GLW's contracts with the Lepionka purchasers, agreedto pay them substantial compensation if the subdivision did not proceed and cancelledMr Coltart's option. The Lepionka mortgagee later declined offers by Mr Coltart anda relative to purchase the property at market value.[5] The Lepionka mortgagee claims that Mr Coltart's caveats are frustrating itsattempts to complete the subdivision, give title and sell. Associate Judge Smith upheldits application for removal of Mr Coltart's caveats. He was satisfied that its prior legalcharge prevails or will ultimately prevail over Mr Coltart's equitable interest in theproperty.Background[6] The relevant facts leading to the Lepionka mortgagee's acquisition ofWestpac's mortgage are as follows:(1) In 2009 Mr Coltart and GLW's managing director, Garth Paterson,agreed that Mr Paterson would buy the property for the purpose ofsubdivision; that Mr Coltart, who is an architectural designer, wouldproject manage the resource consent application and build a home forMr Paterson on what was known as lot 4; and that Mr Coltart wouldpay $800,000 to buy the homestead lot, also known as lot 2.(2) Mr Paterson formed GLW which bought the property. Mr Coltartcontributed $150,000 towards the purchase price, to be credited in partpayment of the homestead lot.(3) On 9 October 2009 Westpac agreed to fund GLW's purchase anddevelopment of the property, with the loan to be secured by a firstmortgage.(4) Also in October 2009, Mr Coltart took possession of the homestead lot.He subsequently renovated the homestead itself at a cost of $1.573million including GST. Mr Coltart and his wife have since moved in tolive in the homestead.(5) Mr Coltart designed and built a house for Mr Paterson on lot 4.Construction was completed in December 2011. Mr Paterson disputedMr Coltart's claim for payment of the building costs of $1.656 million.In August 2012, as a term of settlement of their dispute, GLWundertook to complete the subdivision. The parties cancelled the 2009agreement for sale and purchase of the homestead lot and, insubstitution, GLW granted Mr Coltart an option to purchase thehomestead lot for $650,000 (the original purchase price of $800,000less the $150,000 paid later). In exchange Mr Coltart agreed to foregohis claim for payment of the lot 4 costs and gave permission for GLWto create two additional lots within the subdivision of the property.(6) On 15 February 2013 Mr Coltart lodged his first caveat to protect hisinterests under the option. On 22 May 2013 he lodged his secondcaveat to protect his right to roam over common land within theproperty and easements in favour of the homestead lot.(7) Early in 2011 Mr Coltart introduced Mr Lepionka to the property. Hewas then designing a house for Mr Lepionka in Auckland.Mr Lepionka did not have any interest in buying any part of theproperty. However, a third party later reintroduced Mr Lepionka to theproperty. The circumstances of this litigation suggest thatMessrs Coltart and Lepionka have not remained on good terms.(8) In January 2013 GLW entered into agreements to sell three other lots— lots 3, 5 and 8 — to LCL, and lot 4, together with another lot to becreated for a fishing hut, to Mr Lepionka's family trust. Theseagreements were the result of a six week tender process conducted byGLW. The Lepionka purchasers paid GLW deposits totalling $463,000or 10 per cent of the total purchase price. But GLW has failed tocomplete the subdivision and, contrary to its contractual obligations,has used the deposit payments for its own purposes.[7] On 14 May 2014 GLW granted a second mortgage over the property to anAustralian entity, AFI Management Pty Ltd. This charge is secured by a caveat lodgedagainst the title on 3 March 2015. The amount said to be secured is contested. AFIapparently asserts that GLW's indebtedness exceeds $7 million. Mr Lepionka, on theother hand, calculates the debt is more likely about $60,000.[8] GLW fell into arrears under the Westpac mortgage. On 29 January 2015 thebank served a notice of demand on the company to pay $235,716.05 by 5 March 2015.2GLW failed to comply. Westpac also served a copy of the notice on Mr Coltart. Inearly March 2015 the bank rejected Mr Coltart's request to adopt his option topurchase the homestead lot and complete the sale.[9] On 25 March 2015 Mr Lepionka incorporated the Lepionka mortgagee. On 31March 2015 the company took an assignment of all Westpac's rights under the firstmortgage. The amount then owing was $2,665,000. The purpose of these steps,according to Mr Lepionka, was "to create a solution to the problem". As the AssociateJudge explained:[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 thirdparty, or to proceed with the proposed subdivision but sell lots 3, 4, 5 and 8 toother parties, the effect of the mortgagee sale or sales would be to extinguishthe interests of the Lepionka purchasers under their agreements to buy thoselots. In that eventuality they would lose their deposits, just as Mr Coltartwould lose the money he had spent for his interests in the land if the land (orthe homestead lot) were sold to another party or parties.2 Property Law Act 2007, s 119.[10] On 1 April 2015 the Lepionka mortgagee adopted GLW's contracts with theLepionka purchasers. According to Mr Lepionka, this step was taken "so we couldcomplete our contracts and own the land and, if we can, we still want to do that". Inhis view there were sound commercial reasons for the Lepionka mortgagee adoptingthe contracts. Among them were avoiding the usual mortgagee's discount for theabsence of vendor warranties and another set of agents' commissions, as well as theuncertainty resulting from a mortgagee's sale.[11] On the same day the Lepionka mortgagee entered into a subdivision andcompensation agreement with the Lepionka purchasers which agreed to advance$50,000 towards the costs of completing the subdivision. In the event that thesubdivision was not completed within six months and all the agreements werecancelled, the Lepionka mortgagee agreed to pay the Lepionka purchasers (1) thesubdivision advance of $50,000 plus interest at the rate of 12 per cent compounding;(2) $463,000 representing the deposits earlier paid to GLW plus interest at 12 per centper annum; and (3) $750,000 as compensation. The Lepionka mortgagee has neverexplained the commercial rationale for accepting what appears to be a gratuitouscontingent liability for the last two items, exceeding $1.213 million plus compoundinginterest.[12] On 9 April 2015 the Lepionka mortgagee gave Mr Coltart notice ofcancellation of his option to buy the homestead lot. Mr Lepionka later explained thatthe company wished to free the homestead lot for sale to a third party and realisesufficient funds to complete the subdivision. He referred to the fact that the agreedoption price of $650,000 fell well below independent valuations of the lot on a forcedsale of between $1.84 million and $2 million. These assessments did not quantify thediscrete value of Mr Coltart's improvements to the property.[13] In April and May 2015 Mr Coltart and latterly his nephew, Mr McHardy, madethe Lepionka mortgagee a series of offers to buy the property. In response toMr Coltart's second offer of $6.65 million plus GST if any, the Lepionka mortgageeacknowledged that the offer may net more for the mortgagor and the second mortgageethan completing the Lepionka contracts.[14] The last offer, from Mr McHardy on 1 May 2015, was for $6.93 million plusGST if any. GLW and AFI apparently consented. On 29 May 2015 the Lepionkamortgagee advised Mr McHardy that it rejected his offer because the Lepionkapurchasers wished to complete their contracts.[15] In an affidavit sworn in the High Court Mr Coltart calculated the net amountlikely to be realised if the Lepionka mortgagee completed the sales to the Lepionkapurchasers (plus $1.3 million which Mr Lepionka estimated as necessary developmentcosts) and sold off the property the rest in exercise of its powers (using the maximumvalues which the Lepionka mortgagee ascribed to individual lots) as follows:(1) five lots to Lepionka purchasers $4,630,435(2) Homestead lot $1,739,132(3) Lot 6 $347,826(4) Less:(a) Development costs to complete $1,300,000(b) GLW's deposits $463,000(c) GST refund $440,433Net realisation $4,823,958[16] By comparison, Mr Coltart's offer for the whole property was $6.93 million(zero rated for GST), yielding some $2,106,042 more than the amount availableaccording to the Lepionka mortgagee's subdivisional sale approach.[17] Notably, also, when the application was heard in the High Court in August2015 Mr Lepionka estimated the outstanding costs of subdivision at $1.3 million.Mr Coltart pointed out that approximately $1 million of that estimate was for buildinga new fishing lodge on one of the lots sold to the Lepionka purchasers. By hisuncontradicted estimate, the true costs of completion were about $300,000. Allowingfor that adjustment, the differential between Mr McHardy's last offer and the netrecovery available to the Lepionka mortgagee on the subdivisional sale approachwould increase by a further $1 million, to over $3.1 million.[18] Three relevant events have occurred since the High Court hearing. First,without explanation in October 2015 the Lepionka mortgagee and the Lepionkapurchasers cancelled the subdivision and compensation agreement. Second, inNovember 2015 the Lepionka mortgagee agreed to sell the homestead lot to a thirdparty for $2.5 million GST inclusive, conditional on a number of events includingvacant possession. That contract was recently cancelled.[19] Third, the Lepionka mortgagee has carried out almost all the physical worksalong with the surveying work necessary to complete the entire subdivision of theproperty. The new subdivision has created a total of 11 new lots, plus a residualcommon lot, as opposed to the four originally planned by GLW. Mr Lepionkaforecasts new titles will be available shortly.High Court[20] Associate Judge Smith delivered a comprehensive judgment. His rejection ofmost of the grounds raised to support Mr Coltart's caveats is not challenged on appeal.He identified and answered eight issues for determination which were, as argumentdeveloped before us, further refined.[21] The Associate Judge was uncertain about the availability of a cause of actionto Mr Coltart against the Lepionka mortgagee if the caveats were sustained and he wasrequired to issue a proceeding to enforce his rights.3 He was disadvantaged by theabsence of a draft of Mr Coltart's statement of claim, identifying and particularisingthe legal foundation for a case against the Lepionka mortgagee. At our requestMr Taylor QC tendered during the hearing of the appeal an abbreviated statement ofclaim. A clearer picture has now emerged than was available to the Associate Judgeof the nature of Mr Coltart's claim and the relief sought against the Lepionkamortgagee.[22] The Associate Judge concisely identified the ultimate issue for hisdetermination as:3 HC decision, above n 1, at [128].[34] 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 itappears that his caveats could not survive a sale of the homestead lot (or ofthe land) by the Lepionka mortgagee to a third party, the question will bewhether my discretion under s 143 should be exercised in favour of removalnotwithstanding Mr Coltart's interest.[23] The Associate Judge was satisfied that Mr Coltart's option to purchase thehomestead lot and the unregistered easements gave him equitable interests in theproperty.4 However, the Lepionka mortgagee's application to remove the caveats wasmade on the ground that Mr Coltart's interests would inevitably be extinguished, eitherby the cancellation notice or, if the notice was ineffective for any reason, on sale bythe Lepionka mortgagee.5 In the event, the Associate Judge found against Mr Coltarton both premises and exercised his discretion to remove accordingly.[24] In particular the Associate Judge found that:(1) Mr Coltart's equitable interest was extinguished in April 2015 by theLepionka mortgagee's valid cancellation of his option to buy thehomestead lot.6(2) The Lepionka mortgagee owed equitable or statutory duties to GLWand the second mortgagee to act in good faith when selling the land butnot to Mr Coltart.7(3) The Lepionka mortgagee's duties included an obligation not toimproperly prefer the interests of the Lepionka purchasers over GLWand AFI. It was not arguable that the Lepionka mortgagee had actedfraudulently in the sense of dishonestly adopting GLW's agreementswith the Lepionka purchasers.8 It was, however, arguable that byadopting the agreements, cancelling Mr Coltart's agreement andrejecting offers by Mr Coltart and third parties to purchase the property,4 At [38].5 At [39].6 At [70]–[79].7 At [96]–[101].8 At [116]–[120].the Lepionka mortgagee had exercised its powers in bad faith or for thecollateral purpose of protecting the Lepionka purchasers.9(4) There was an insufficient connection between any lack of good faith bythe Lepionka mortgagee and Mr Coltart's rights because any wrongfuladoption of GLW agreements with the Lepionka purchasers did notdirectly affect Mr Coltart's interest in the homestead lot.10(5) The Lepionka mortgagee's rights derived from the first mortgage andmust prevail over Mr Coltart's unregistered equitable interestsirrespective of whether the Lepionka mortgagee acted in bad faith.11(6) Mr Coltart's interests were always liable to be defeated by a validexercise of the mortgagee's power of sale and any lack of good faithcould not improve Mr Coltart's position, with the inevitable result thathe will lose his interest in the homestead lot when the property as awhole is sold.12[25] The Associate Judge exercised his discretion to order removal of the caveatson these terms:[138] I am satisfied that this is also a case where, although there has beenno memorandum of transfer yet presented, such an outcome is inevitable, andthat I should not exercise my discretion to decline the removal application.However I do not think it is sufficiently clear that the caveats should beremoved immediately, on the basis of the purported cancellation of the Coltartagreement under s 178(2). If the April 2015 cancellation was sufficientlylinked to the adoption of the Lepionka purchasers' agreements a few daysearlier, Mr Coltart may have an argument that the cancellation was invalid. Inthe circumstances, the appropriate course is to direct Land Information NewZealand (LINZ) to remove the caveats as and when the Lepionka mortgageepresents for registration a transfer of the land, or the homestead lot, to a partyother than Mr Coltart.9 At [121].10 At [122]–[123].11 At [124].12 At [128]–[129].[26] The Associate Judge has since ordered a stay of execution of his judgmentpending our determination of Mr Coltart's appeal with the result that LINZ is unableto remove the caveats in the interim.13[27] The Associate Judge's disputed findings are that the Lepionka mortgagee didnot owe an actionable duty to Mr Coltart after acquiring the Westpac mortgage andthat, even if the Lepionka mortgagee had acted in bad faith or for collateral purpose,its valid cancellation of Mr Coltart's option or prospective sale of the homestead lotwould inevitably extinguish Mr Coltart's interests.Principles[28] It is well settled that a caveat is a notice to others that the person lodging itclaims to protect an interest in and a right to the subject land. The estate or interestprotected by the caveat may not be charged or transferred.14 Another party cannotdefeat the caveator's right of claim by lodging an instrument for registration againstthe title.[29] However, as the Associate Judge noted, this prohibition is subject to importantqualifications. One is where the underlying interest protected by the caveat ceases toexist, and so the caveat cannot logically be sustained. The other is where the propertyis the subject of a mortgage, the purchaser's rights are always subject to those of themortgagee: its title is paramount and the purchaser's equitable interest is extinguishedby the mortgagee exercising its power of sale.15[30] Similarly, the principles governing removal of caveats are settled. Theregistered proprietor or any other person having a registered estate or interest in theproperty may apply for an order for removal.16 The caveator has the onus of showingthat he or she has a reasonably arguable case for the interest claimed.17 But the caveatwill not be removed unless it is patently clear that it cannot be maintained, either13 Lepionka & Company Investments Ltd v Coltart [2016] NZHC 5 at [66](2).14 Land Transfer Act 1952, s 141(1).15 HC decision, above n 1, at [32] applying Vegar-Fitzgerald v Aorangi Forests Ltd [2014] NZCA200 at [12]; Land Transfer Act, s 105.16 Land Transfer Act 1952, s 143.17 National Bank of New Zealand v Radisich HC Hamilton CIV-2003-419-928, 25 August 2003 at[6].because there was no valid ground for lodging the caveat or, if there was, that groundno longer exists.18 Within these parameters, the Court has a measure of discretion.Issues[31] As argument developed before us, the appeal came down to whether four issueswere arguable: namely, whether (1) Mr Coltart has an interest in GLW's equity ofredemption of the Lepionka mortgage; (2) if so, the Lepionka mortgagee owedMr Coltart a duty relating to the exercise of its powers of sale; (3) if so, the Lepionkamortgagee was in breach of that duty; and (4) if so, Mr Coltart's caveats should beremoved.[32] We refer briefly to the background to the emergence of these issues. The PrivyCouncil's decision in Downsview Nominees Ltd v First City Corporation Ltd is themost recent in a long line of authority on the nature and extent of a mortgagee's dutieswhen exercising its powers of sale.19 Courts of equity have gradually developed rulesdesigned to strike a fair balance between the competing rights and interests of variousparties in a security. The mortgagee must (1) exercise its powers of enforcement onthe borrower's default for the purpose of preserving and realising the charged assetsto discharge its debt; and (2) while it is entitled to give priority to its own interests, actfairly and equitably towards the mortgagor, subsequent mortgagees and others with aninterest in the equity of redemption.[33] Those powers and duties are now largely but not exclusively codified by s 176of the Property Law Act 2007; in short, a mortgagee exercising a power to sellmortgaged property owes "a duty of reasonable care to obtain the best pricereasonably obtainable as at the time of sale". The duty is owed specifically to thecurrent and former mortgagors, any covenantor, a subsequent mortgagee and theholder of any subsequent encumbrance.[34] In the High Court Mr Taylor attempted to establish that Mr Coltart fell withinthe statutory category of an encumbrancer to whom the Lepionka mortgagee owed a18 Sims v Lowe [1988] 1 NZLR 656 (CA) at 659–660.19 Downsview Nominees Ltd v First City Corporation Ltd [1993] 1 NZLR 513 (PC).duty when exercising its powers. The Associate Judge was correct to reject thisproposition.20[35] Before us, Mr Taylor's emphasis shifted. He argued that the Lepionkamortgagee also owed Mr Coltart an equitable duty to act in good faith and use itspowers for proper purposes; and to exercise reasonable care to obtain the best pricereasonably obtainable for the property.21 That is because Mr Coltart has an interest inGLW's equity of redemption of the Lepionka mortgage which gave him the same rightto redeem. Mr Coltart's draft statement of claim alleges that in breach of its duty tohim the Lepionka mortgagee acquired the mortgage and obtained registration for theimproper and collateral purpose of protecting the interests of the Lepionka purchasersand with the intention of defeating his interest in the property. Mr Coltart's particularsof the Lepionka mortgagee's breaches will be addressed within our analysis of thethird issue.[36] Mr Colson accepts that a mortgagee owes a mortgagor and subsequentmortgagees coexisting duties of good faith in equity and of care by statute whenexercising its power of sale.22 But he says that as a purchaser under an executoryagreement for sale of part of the mortgaged property Mr Coltart does not have asufficient interest in GLW's equity of redemption to justify the existence of a dutyowed by the Lepionka mortgagee.Decision(1) Equity of redemption[37] The first issue is whether Mr Coltart arguably has an interest in GLW's equityof redemption of the Lepionka mortgage.[38] The equity of redemption is the mortgagor's right to redeem or pay off the debtsecured by a mortgage, representing "the sum total of the mortgagor's rights in the20 HC decision, above n 1, at [96]–[101] and [127].21 Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] Ch 949 (CA).22 Apple Fields Ltd v Damesh Holdings Ltd [2001] 2 NZLR 586 (CA) at [40].property" beyond the mortgagee's secured debt.23 Its value is measured by thedifference between the amount owing under the mortgage and the value of themortgaged land. The right exists because the mortgaged interest is not a contract forsale but a security for repayment of principal and interest.24[39] The nature and extent of the equitable right to redeem is now recognised bys 97 of the Property Law Act which materially provides:97 Equity of redemption(1) The current mortgagor or any other person entitled to redeemmortgaged property may redeem it in accordance with this subpart atany time before it has been sold, under a power of sale, by themortgagee or a receiver.(2) The mortgagee must, on payment to the mortgagee of all amounts andthe performance of all other obligations secured by the mortgage, atthe expense of the current mortgagor or other person seeking toredeem the mortgaged property, discharge the property from themortgage in accordance with section 83.(Emphasis added.)[40] Section 4 defines a person entitled to redeem as follows:person entitled to redeem, in relation to mortgage property,—(a) means a person with an interest in a mortgage property andentitled to redeem it; and(b) includes the current mortgagor, any former mortgagor, andany covenantor[41] It also defines redeem:redeem, in relation to mortgaged property, includes the right to have theproperty discharged from a mortgage over the property[42] In its report to Parliament the Law Commission said this:2523 Charles Harpum, Stuart Bridge and Martin Dixon Megarry & Wade: The Law of Real Property(8th ed, Sweet and Maxwell, London, 2012) at [24-017].24 Tarn v Turner (1888) 39 Ch D 456 (Ch) at 459–460 per Kekewich J, affirmed in Tarn v Turner(1888) 39 Ch D 463 (CA) at 464 per Cotton LJ. Compare Property Law Act, s 79.25 Law Commission A New Property Law Act (NZLC R29, 1994) at 311–312.[Section 97] declares that an owner (or other person entitled to redeem), canredeem mortgage property at any time before sale by the mortgagee undera power of sale. Those also entitled to redeem are other persons with aninterest in the property; for example, other mortgagees, purchasers and lessees(Emphasis added.)[43] The Law Commission's statement and Mr Taylor's submission thatMr Coltart's option entitles him to redeem the Lepionka mortgage are supported byauthority, starting with the Privy Council's statement of settled principle in DownsviewNominees Ltd that "all persons having any interest in the property subject to themortgage or liable to pay the mortgage debt can redeem".26[44] In Pearce v Morris Lord Hatherley LC stated to the same effect that any personwith an interest in a property subject to a mortgage is entitled to redeem and have theproperty conveyed to him.27 The right of a purchaser of part of the property under anexecutory contract for sale to redeem was accepted without challenge. The purchaserwas not required first to perfect his equitable right by settlement of the contract andacquisition of legal title. However, the Court upheld the mortgagee's consequentialrefusal to deliver legal title until the purchaser owned the property.28[45] In Tarn v Turner the Court of Appeal, affirming Kekewich J, held that a tenantof a property under an agreement to lease for a fixed term was entitled to redeem thelessor's mortgage.29 The tenant had expended a significant amount on improving theproperty before the lessor fell into default. The Court rejected the mortgagee'sargument that the right of redemption granted to persons having a partial interest inthe equity of redemption had never been extended to a tenant for years.30 Therelatively limited nature of the interest was irrelevant. It was sufficient that the tenantmay be prejudiced by the mortgagee's actions and should not be denied the only26 Downsview Nominees Ltd, above n 19, at 526 (emphasis added).27 Pearce v Morris (1869) LR 5 Ch App 227 at 229. See also Halsbury's Laws of England (4th ed,reissue, 1998, online ed) vol 77 Mortgage at [306].28 At 231–232. See also Van Den Bosch v Australian Provincial Assurance Associate Ltd [1968] 2NSWR (NSWSC) 550 at 554.29 Tarn v Turner, above n 24.30 At 458.available remedy for relief from the effect of the mortgage. The tenant's position wasanalogous to that of assignee of the equity of redemption.31[46] Mr Taylor acknowledged that Tasker v Small appears to be to the contrary.32In that case, Lord Cottenham LC stated that, while a purchaser under an executoryagreement for sale and purchase can be said to have contracted to buy the equity ofredemption, he cannot redeem the mortgage until the purchase is completed.33 As themortgagee was not a party to the agreement, and no suit for specific performance layagainst him, the purchaser's rights could not affect the security or interfere with themortgagee's remedies.[47] The premise for the Lord Chancellor's statement — that only one party canever exercise a right to redeem — appears to run directly counter to Tarn and Pearce.Nevertheless, Mr Colson says that Tasker remains good authority for the propositionthat a purchaser of part of a property under an executory contract is not entitled toredeem a mortgage. He relies on Forthwith Shelf Co No 95 Ltd v Johnston LawrenceElder Solicitors Nominee Co Ltd, where Doogue J cited Tasker for the proposition thatuntil an executory contract is carried into effect the purchaser cannot enforce againsta mortgagee equities attaching to the property including the mortgagor's right ofredemption.34 The purchaser's rights arising out of its equitable interest are limited toenforcement of the contract — it was not entitled to act as if the contract had beenspecifically performed.[48] In Forthwith Doogue J observed that, in Firth Concrete Industries Ltd vDuncan, McMullin J had accepted Tasker as good law.35 However, McMullin Jaccepted Tasker as authority for the limited conclusion that only a party to a contractof sale could enforce it or seek damages for breach.36 This was in the context offinding that the vendor under a conditional agreement for sale and purchase31 At 464–465.32 Tasker v Small (1837) 40 ER 848.33 At 851.34 Forthwith Shelf Co No 95 Ltd v Johnston Lawrence Elder Solicitors Nominee Co Ltd (1995) 3 NZConvC 192,178 (HC) at 8–9.35 Firth Concrete Industries Ltd v Duncan [1973] 1 NZLR 188 (SC) cited in Forthwith Shelf, aboven 34, at 8.36 At 192.surrendered its interest in the subject land on the date the contract was entered into.The vendor's only interest from that point was in the payment of the balance ofpurchase money. McMullin J did not rely on Tasker for any wider proposition.[49] We doubt whether Forthwith was correctly decided. Doogue J referred toPearce and Tarn, apparently to support his finding that until the contract for sale hadbeen specifically performed the purchaser was not entitled to argue that it had aninterest in the equity of redemption.37 But those two decisions have stood the test oftime as authority to the contrary.[50] We add what is possibly obvious. Mr Coltart's exercise of GLW's right toredeem the Lepionka mortgage would not without more materially improve or protecthis position. The subdivision of the property would remain incomplete. He wouldhave no title despite parting with $2.681 million plus accumulated interest and othercosts. He would remain exposed to AFI and, to a lesser extent, GLW (which is nowapparently in liquidation). And GLW would arguably remain bound to settle itsagreements with the Lepionka purchasers.[51] So the only viable option available to Mr Coltart was to purchase the propertyas a whole, redeeming the Lepionka mortgage in the process. While, as the AssociateJudge noted, that event may arguably defeat the Lepionka purchasers equitableinterests, the same option was available to those parties providing the Lepionkamortgagee accepted that the price offered was the best price reasonably available.[52] In our judgment Mr Taylor is correct that Mr Coltart's option to purchase thehomestead lot arguably gave him an interest in GLW's equity of redemption and thusa right to redeem the Lepionka mortgage.(2) Equitable duty[53] The second issue, once it is settled that Mr Coltart has an interest in GLW'sequity of redemption, is whether the Lepionka mortgagee arguably owed him a dutyof good faith in that capacity when exercising its power of sale for the purpose of37 Forthwith Shelf, above n 34, at 9.realising its secured debt by selling the property for the best price reasonablyobtainable.[54] We can answer this issue shortly. Mr Colson is correct that the duty to act ingood faith and for the purpose of obtaining repayment of the debt is a composite one.38However, the duty to take reasonable precautions to obtain a proper price is acomponent of the overall duty to act in good faith,39 extending to all those interestedin the equity of redemption such as a purchaser. 40 A mortgagee must use its powersfor that predominant purpose, and not act in a manner which unfairly prejudices orwilfully and recklessly sacrifices the interests of the mortgagor or a party claimingthrough it.41[55] It must follow that from the moment of acquiring Westpac's charge theLepionka mortgagee owed Mr Coltart and all others with an interest in the equity ofredemption of the mortgage a duty to act in good faith when exercising its powers ofsale. In this respect all the relevant steps taken by the mortgagee — including adoptionof GLW's agreements with the Lepionka purchasers, entry into the compensationagreements with the Lepionka purchasers, cancellation of Mr Coltart's option andrefusal of his offers to purchase the property — were incidental to its powers of sale.(3) Breach of duty[56] The third issue is whether, assuming the Lepionka mortgagee owed Mr Coltarta duty of good faith, it was arguably in breach by acquiring the mortgage, adopting theLepionka purchaser's contracts, cancelling Mr Coltart's option and rejecting his offersto buy.[57] The Lepionka mortgagee's challenge to the Associate Judge's affirmativefinding on this issue must be assessed against its decision to acquire the Westpacmortgage when GLW was in substantial default, and when there was no realistic38 Downsview Nominees Ltd, above n 19, at 521–522.39 Forsyth v Blundell (1973) 129 CLR 477; 1 ALR 68 per Menzies J at 69–70, dissenting in the resultbut not on the principles, approved in Australian and New Zealand Banking Group Ltd vBangadilly Pastoral Co Pty Ltd (1978) 139 CLR 195 at 541–542.40 Raja v Austin Gray [2003] 1 EGLR 91 (CA) at [57]; Wayne Clark (ed) Fisher and Lightwood'sLaw of Mortgage (12th ed, Lexis Nexis Butterworths, London, 2006) at [30.22].41 Kennedy v De Trafford [1897] AC 180 (HL) at 185.prospect of remedying that default or of the Lepionka mortgagee enjoying a return onits investment. Acquisition of a distressed security, with a right of recovery limited tothe amount of the debt and contingent upon a forced sale of the charged property, wasnot a commercially rational decision. The Associate Judge was correct that theLepionka mortgagee's apparent intention to protect the equitable interests of theLepionka purchasers could not affect the validity of its status as owner of the mortgagewith the associated rights of priority.42 Nevertheless, this close connection, to the pointof an apparent identity of interests, placed a burden on the Lepionka mortgagee toprove its bona fides, inevitably exposing it to challenge in these circumstances unlessit could show independence and freedom from conflict.43[58] It is necessary only to refer to two leading authorities which reflect the risk ofan adverse finding of bad faith against the purchaser of a distressed security. InDownsview Nominees Ltd the Privy Council upheld findings in New Zealand courtsthat the purchaser of a first ranking debenture with knowledge of the mortgagor'sdefault breached its duty of good faith in refusing the second debenture holder's offerto purchase the debenture.44 The company was not acting for the proper purpose ofrealising its security but, by appointing its beneficial owner to act as receiver of themortgagor's business, for the improper purpose of allowing the mortgagor to continuein trade.45[59] In Australian and New Zealand Banking Group Ltd v Bangadilly Pastoral CoPty Ltd the purchasers of a property, who had part performed the contract of sale bypaying about 40 per cent of the price, formed a company to buy the first mortgagefollowing the vendor's default.46 The new mortgagee sold the property at auction to arelated company. All three entities were controlled by the one individual. The HighCourt of Australia set aside the sale on the ground that the evidence did not supportthe existence of an independent bargain, given the relationship of all three participants.The particular breach was the first mortgagee's failure to pursue the prospect of42 See HC decision, above n 1, at [81]–[82].43 Bangadilly, above n 39, at 541–542.44 Downsview Nominees Ltd, above n 19.45 Compare Property Law Act 2007, ss 102–103, obliging a mortgagee to transfer a mortgage afterreceiving a request from a subsequent mortgagee.46 Bangadilly, above n 39.obtaining a higher price when it was aware that another party was prepared to paymore for the property than was yielded at auction. Among other things, there was nolocal advertising of the proposed auction sale, interested parties were not informed ofthe date of the auction sale and the purchaser made all the decisions about the saleprice without consulting the interested parties.47[60] In Mr Colson's submission the Associate Judge's finding that bad faith isarguable is unavailable where the Lepionka mortgagee acted with mixed motives orpurposes, one of which was the genuine purpose of recovering its debt in whole or inpart. He relies on the decision of Lewison J in Meretz Investments NV v ACP Ltd &Ors.48[61] The facts in Meretz are very complex, giving rise to a large number of issuesfor determination. But, in minimal summary, a construction company granted a chargeto its parent over a rooftop lease securing finance for the construction of penthouseflats. The development encountered financial difficulties. The mortgagee exercisedits powers following a breach by its subsidiary and sold to a third party. The ownersof two other interests in the property sought to set the sale aside, alleging that by savingits mortgagor subsidiary from suffering further financial loss on the development themortgagee acquired a benefit consequent upon the sale which was unrelated torecovery of its debt.[62] We note that in the passages from Meretz upon which Mr Colson reliesLewison J was addressing an argument that the power of sale would only be exercisedproperly where the mortgagee had "purity of purpose";49 that is, its only motive wasto recover the debt secured by the mortgage. This argument was rejected. Lewison Jaccepted that a mortgagee validly exercises its power of sale where its motives orpurposes are mixed, providing one was the genuine purpose of recovering its debt.50A mortgagee is entitled to protect and give priority to his own interests:51 "the fact that47 At 523.48 Meretz Investments NV v ACP Ltd & Ors [2007] Ch 197 (HC) at [296]–[314]. See also Clark,above n 40, at [30.22].49 At [300].50 At [314].51 At [299].the mortgagee will acquire benefits consequent upon the sale does not necessarilyinvolve a breach of the mortgagee's duty of good faith".52[63] However, it is important to emphasise that Lewison J's analysis is confined tothe interests of the mortgagee as a mortgagee. In our judgment a mortgagee maylawfully have other purposes coinciding with its core interest in discharging the debtand obtaining the best price reasonably obtainable and thereby properly anticipate theenjoyment of benefits collateral to exercising its power of sale. But an exogenouspurpose — that is, a purpose flowing from interests outside the function of a mortgagee— cannot be allowed to prevail.[64] In any event, we doubt that an inquiry into a mortgagee's motives will beproductive. As Lewison J noted in Meretz, "dissection of a mortgagee's motives islikely to be difficult in practice".53 And to strive for a purity of purpose would be toposit a fiction that ignores the complexities of decision-making.[65] The leading authorities confirm that a mortgagee will come under the scrutinyof equity when the effect of its actions invites the inference that it was acting in breachof its duties. The ultimate question is whether a mortgagee has acted primarily for thepurpose of recovering its debt. That question is to be answered objectively, not byexamining a mortgagee's subjective motives, but by examining whether its actions aretaken in good faith,54 bearing in mind its entitlement to prefer its own interestswherever they conflict with other interested parties.[66] So, in determining whether the Lepionka mortgagee has arguably acted in badfaith towards Mr Coltart, its conduct must be examined objectively against thetouchstone of an obligation to establish that its primary purpose has been to realise itssecured debt by selling the property for the best price reasonably obtainable. TheLepionka mortgagee has not sought to disguise that it acquired Westpac's mortgagewith the predominant, possibly sole, intention of preserving the security and exercisingits power of sale to protect related parties. While that intention does not of itself prove52 At [313].53 At [314].54 Compare Glenharrow Holdings Ltd v Commissioner of Inland Revenue [2008] NZSC 116, [2009]2 NZLR 359 at [38].bad faith, we agree with the Associate Judge that the Lepionka mortgagee's subsequentactions arguably give rise to an inference that its predominant purpose was not to sellfor the best price reasonably obtainable or to protect its security. Instead, the Lepionkamortgagee's actions invite the inference that its predominant purpose was to securecollateral advantages for the Lepionka purchasers, driven by factors extraneous to therelationship of mortgagee and mortgagor.55 The strict legal separation between thetwo Lepionka entities is not enough to shield the Lepionka mortgagee's actions fromchallenge. Mr Lepionka's overt control of and identification with each makes itdifficult to maintain the appearance of independence.[67] We refer in particular to these factors:(1) The Lepionka mortgagee's adoption of the Lepionka purchasersagreements with GLW and undertaking to complete the subdivision.Mr Lepionka may be correct that the agreed prices would not bebettered by embarking on a new tender process. But there is noevidence that the Lepionka mortgagee paused to consider this option,or the alternative of selling the property as is, without incurring furthersubdivisional costs. The die was then cast. The Lepionka mortgageeeffectively foreclosed the realistic prospect of selling the property as isat a considerably higher price.(2) The Lepionka mortgagee's agreement to pay compensation of $750,000and a fee of $50,000 and return the deposits of $463,000, all attractinginterest at the rate of 12 per cent per annum compounding, if thesubdivision did not proceed. As we have noted, the Lepionkamortgagee made no attempt to justify what appears to be the gratuitousassumption of a contingent liability to pay the Lepionka purchasers atotal of $1.213 million plus compounding interest.(3) The Lepionka mortgagee's cancellation of Mr Coltart's option.Mr Coltart's uncontradicted evidence about the actual costs ofcompleting the subdivision and Mr Lepionka's confirmation that this55 Bangadilly, above n 39, at 520–521.objective has now been achieved without selling the homestead lotthrow into question the Lepionka mortgagee's rationale forcancellation. The inferences arguably available are that the Lepionkamortgagee was always able to finance the subdivisional costs withouthaving to resort to the proceeds of sale of the homestead lot; and thatits intention was to use those proceeds instead to construct a fishing huton one of the lots which the Lepionka purchasers had agreed to buy.Arguably the Lepionka mortgagee's cancellation of Mr Coltart's optionunnecessarily sacrificed his interests, not for the purpose of obtainingthe best price reasonably obtainable for the property but for the purposeof benefiting the Lepionka purchasers.(4) If the Lepionka mortgagee's primary objective was repayment of itsdebt and securing the best price reasonably available for the property,it would have accepted at least the last of the offers made byMessrs Coltart and McHardy to purchase. The result would have beensale of the property for market value, redemption of the Lepionkamortgage and the Lepionka mortgagee's discharge of its duties to allparties to whom they were owed. Instead the Lepionka mortgagerationalised its refusal of Mr McHardy's last offer on the ground thatresult did not suit related parties, the Lepionka purchasers. TheLepionka mortgagee's reliance on its contractual liabilities to thoseparties, assumed on adoption of the GLW agreements, is no answer toa claim that its course of conduct arguably showed bad faith towardsMr Coltart and others.[68] Mr Colson argued that Mr Coltart was attempting to leapfrog the ordered chainof priority between those with legal and equitable interests in the property. Hesubmitted that the untenability of Mr Coltart's position was established by acounterfactual analysis. In that event the Lepionka mortgagee should have conducteda full inquiry about whether to continue with subdivision or sell as is: if it elected tocontinue with the subdivision then inevitably the homestead lot would have beenresold given the low purchase price and Mr Coltart's rights would be at an end; andthe same result would have occurred if the Lepionka mortgagee had sold the propertyas is.[69] The flaw in this analysis is its premise that the Lepionka mortgagee was actingin good faith in rejecting Mr Coltart's offers to purchase the property at market value.For the reasons briefly given, we are satisfied that the Lepionka mortgagee wasarguably acting in bad faith at the relevant times.(4) Discretion[70] In view of our answers favourable to Mr Coltart on the previous three issues,the question remains whether an order should be made removing his caveats. Asnoted, the Associate Judge exercised his discretion adversely to Mr Coltart becausehis interests either had been extinguished by the Lepionka mortgagee's validcancellation of his option or would inevitably be extinguished by the mortgagee's saleof the homestead lot. We shall address his alternative findings in the same order.(a) Cancellation[71] First, the Associate Judge was satisfied that the Lepionka mortgagee'scancellation of Mr Coltart's option was effective in terms of s 178(2) of the PropertyLaw Act.56 Section 178 materially provides:178 Powers incidental to power of sale(1) If, under a mortgage and subpart 5, a mortgagee or receiver becomesentitled to exercise a power to sell mortgaged property, the sale—(a) may relate to the whole or any part of the property:(b) may be subject to, or free of, any mortgage or otherencumbrance having priority over the mortgagee's mortgage:(c) may be in 1 lot or in separate lots:(d) in the case of mortgaged land, may be by way of subdivision orotherwise:56 HC decision, above n 1, at [79].(2) The mortgagee or receiver may cancel a contract for the sale of themortgaged property and resell the property without being liable forany loss on resale.(3) Subsection (2) is subject to section 19 of the Receiverships Act 1993or section 176(1), as the case requires.[72] The Associate Judge was not satisfied that the power of cancellation given bys 178(2) was restricted to contracts of sale entered into by the mortgagee. In hisjudgment:[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 amortgagee or receiver under a mortgage and the statutory provisions ofsubpart 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 Ithink it is wide enough to include any contract for sale of the mortgagedproperty which may have been made by the mortgagor.[73] In the Associate Judge's view an anomaly would arise if the mortgagee weregiven statutory powers to cancel a sale contract which it had entered into with a bonafide third party, without any apparent responsibility to that party, but with nocorresponding entitlement to cancel if the sale contract had been made by themortgagor.57 This construction was also consistent with s 179, authorising themortgagee to elect to adopt for sale and purchase agreement previously entered intoby the mortgagor.[74] In our view the Associate Judge's construction of s 178 does not appear tocomply with its sequential structure. Section 178(1) refers to exercising the "powerto sell mortgaged property" and the permissible terms and conditions of "the sale".Section 178(2) refers to the power to cancel a contract "for the sale of the mortgagedproperty". This second power appears consequent upon and related to the mortgagee'sexercise of the first power to enter into a contract for sale in accordance with its powersunder s 178(1).[75] The purpose of s 178(2) is limited to relieving the mortgagee of a liability tothose to whom it owes duties under s 178(1) for loss on the resale of a propertyfollowing cancellation of a contract which it has entered into. The Law Commission's57 At [74].report confirms that the powers incidental to the primary power of sale listed in s 178are an adaptation of s 101(c)(i) of the Property Law Act 1925 (UK), allowing amortgagee to "rescind any contract for sale, and to resell, without being answerablefor any loss occasioned thereby".58 The Privy Council's decision in Wright v NewZealand Farmers' Co-operative Association of Canterbury Ltd, an appeal from adecision of this Court, illustrates its application.59 The mortgagee in exercise of itspowers of sale agreed to sell a mortgaged property to a vendor who defaulted. It thenresold the property at a considerably lower sum to another purchaser. The mortgagorclaimed he was entitled to be credited with the higher price payable under the firstagreement. By reference to cl 7 of sch 4 of the Land Transfer Act 1915 which includedthe mortgagee's power "to rescind any contract for the sale [of a mortgaged property]and to resell the same without being answerable for any loss or diminution in price"the Privy Council held that a mortgagee cannot be held accountable for purchasemoney which it has never received as a result of a legitimate rescission.[76] There is nothing in the English legislation or in the Wright decision to suggestthat s 178(2) was enacted to empower the mortgagee to cancel a contract for sale ofthe mortgaged property to which it was not a party. Also, the Associate Judge'sattention was not apparently drawn to pt 1 of sch 2 to the Property Law Act. Amongthe powers implied by cl 13(4) are those arising "if a contract for the sale of mortgagedland entered into by the mortgagee or a receiver is cancelled " (emphasis added).This provision, within a power implied by statute into the mortgage, suggests that itrelates to the power of cancellation vested by s 178(2).[77] In our judgment a mortgagee's entitlement to cancel a contract for sale andresell without being liable for loss must relate solely to contracts to which themortgagee is a party. The Lepionka mortgagee was not a party to the option agreemententered into between GLW and Mr Coltart. The careful regime for cancellationprovided by the Contractual Remedies Act 1979 would be nullified if a strangerenjoyed an absolute right to cancel the contract without cause. Section 7 strictly limitsthe power of cancellation in certain circumstances to "a party to the contract". If,58 Law Commission, above n 25, at 335.59 Wright v New Zealand Farmers' Co-operative Association of Canterbury Ltd [1939] NZLR 388(PC).however, the cancellation power under s 178(2) extends to a contract entered into bythe mortgagor, the mortgagee would still be required to exercise its discretionarypower of cancellation in accordance with the provisions of the Contractual RemediesAct.60[78] In disagreeing with the Associate Judge, we consider our construction isconsistent with the succeeding power under s 179 of the Property Law Ac to adopt anexisting agreement for sale and purchase between the mortgagor and a third party.Section 179 provides:179 Mortgagee may adopt agreement for sale and purchase(1) If, at any time during which the mortgagee is entitled to exercise apower to sell mortgaged property, the whole or any part of theproperty is subject to an agreement for sale and purchase entered intoby the current mortgagor or any former mortgagor, the mortgagee mayelect, by notice served on the purchaser, to adopt the agreement forsale and purchase.(2) On making an election under subsection (1),—(a) the mortgagee has all the rights and powers in relation to thepurchaser that the current mortgagor would have had asvendor of the property; and(b) the mortgagee may execute all assurances and do all otherthings necessary to effect the transfer or assignment of theproperty; and(c) the mortgagee must account for the proceeds of the sale asthough the property had been sold by the mortgagee....[79] By the means of formal adoption the mortgagee can elect to become a party tothe agreement, acquiring the rights and assuming the liabilities as agreed by thecontracting parties. Without adopting an agreement, the mortgagee is under noliability to the purchaser if it agrees to sell at a higher price to a third party which willtake free of the existing purchaser's interests.61 By contrast, the consequence of themortgagee's inability to cancel the same contract is that the purchaser's interest in the60 The law on cancellation of contracts in New Zealand was codified by s 7 of the ContractualRemedies Act: Mana Property Trustee Ltd v James Developments Ltd [2010] NZSC 90, [2010] 3NZLR 805 at [21].61 Land Transfer Act 1952, s 105.equity of redemption is not extinguished. Consistently with our earlier analysis, thatparty will be entitled to a share in the residue of the mortgagee's sale unless inexercising its overriding power the mortgagee sells for a higher price.[80] Also, s 179(1) refers in detail to existing agreements for sale and purchaseentered into by the mortgagor. If Parliament intended that the power of cancellationof such contracts was to vest in the mortgagee, it would presumably have provided asimilarly extensive explanation of the mortgagee's powers and duties consequent uponcancellation.[81] Moreover, we cannot see the purpose in providing the mortgagee with a powerto cancel a contract to which it is not a party. The reference in s 178(2) must be to anexecutory contract — that is, one which has yet to be settled. The purchaser in thatposition cannot obtain clear title unless and until it discharges all mortgages, therebysecuring repayment of the charged indebtedness. Once that happens, the mortgageewould have no interest in cancellation. However, in the event that the purchaserfailed or was unable to settle, the mortgagee would be entitled to resort to its powersof sale to a third party, extinguishing the purchaser's equitable interest under theexisting agreement without exposure to liability to other interested parties for any losssuffered on sale at a lesser amount. The addition of a discrete and absolute power ofcancellation, especially where the mortgagee is not required to exercise it for thepurpose of selling or preserving the security, seems unnecessary.(b) Extinguishment by sale[82] Second, the Associate Judge's conclusion is based on the premise that theLepionka mortgagee will, irrespective of the validity of the Lepionka mortgagee'scancellation of Mr Coltart's option, extinguish his interest when the power of sale ofthe homestead lot is validly exercised. For the reasons given, we agree with theAssociate Judge that the actions taken by the Lepionka mortgagee were arguably inbreach of its duty of good faith. Where we differ from him is in our satisfaction thatthe duty extended to Mr Coltart, and that his interest remained extant when he offeredto buy the property and subsequently.[83] Mr Coltart's draft statement of claim was unavailable to the Associate Judge.Among other things it seeks an injunction restraining the Lepionka mortgagee fromselling or otherwise dealing with the land except in accordance with orders(1) directing sale of the property to Mr Coltart or a nominee; or alternatively (2) saleof the whole of the property by the Registrar of the High Court pursuant to ss 107 and108 of the Property Law Act. Significantly, that remedy is available on applicationamong others by, any "person entitled to redeem the mortgaged property".62[84] We do not purport to forecast the result of Mr Coltart's application to the HighCourt, which should be made promptly. However, we are satisfied that Mr Coltart hasan arguable case for such relief. All the four arguable issues which we have identifiedwill require determination by the High Court on evidence given at trial.[85] It is true, as Mr Colson emphasised, that s 105 of the Land Transfer Act 1952stipulates that upon registration of a transfer from a mortgagee exercising its power ofsale the mortgagor's estate or interest passes to the purchaser free of all interests unlessthey have priority over the mortgage. It is arguable, however, that equity will treat theLepionka mortgagee's conduct as ceding priority to Mr Coltart's equitable and limitedinterests in the property.63 Equity may also tailor a remedy which requires theLepionka mortgagee to settle the agreements with the Lepionka purchasers beforetaking any further steps in exercise of its powers, such as sale of the homestead lot.We should record our agreement with the Associate Judge's rejection of Mr Taylor'salternative argument that the Lepionka mortgagee has consented to his option.64[86] It follows that for these reasons we are satisfied that the Associate Judge erredin exercising his discretion to remove Mr Coltart's caveats.[87] Mr Colson submitted that, if the appeal was allowed, we should neverthelessorder removal of Mr Coltart's caveats on condition that LINZ acceptscontemporaneously new caveats to be lodged by Mr Coltart against lots 2 and 7 of the62 Property Law Act, s 107(2)(d).63 National Mutual Finance (1998) Ltd v Berryman HC Wellington M 451/91, 2 October 1991 at [4],applied in Instant Funding Ltd v Greenwich Property Holdings Ltd HC Auckland CIV-2007-404-6806, 20 December 2007 at [22]; Centillion Investments Ltd v Hillpine Investments Ltd HCAuckland, CIV-2006-404-00695, 5 December 2006 at [34]–[35].64 HC decision, above n 1, at [59].current proposed subdivision contained in COA 4/424. Mr Taylor submits thatMr Coltart's caveats should remain against the existing title or all new titles, therebyenabling Mr Coltart or Mr McHardy to reinstate his offer to purchase the entireproperty.[88] We agree with Mr Colson that Mr Coltart's caveats cannot be sustained againstthe title to the whole property once the subdivision has taken effect. The offers byMessrs Coltart and McHardy to purchase the property provided evidence that theLepionka mortgagee was acting in bad faith. However, he has no right to a decree ofspecific performance of an offer. He cannot use his equitable interest to enforce a saleof the property to himself. Adoption of Mr Colson's proposal is all that is necessaryto ensure that Mr Coltart's equitable interests are protected pending his application tothe High Court for interim or permanent relief against the Lepionka mortgagee.Summary[89] In summary, we are satisfied that arguably:(1) Mr Coltart had an interest in GLW's equity of redemption of theLepionka mortgage;(2) the Lepionka mortgagee owed Mr Coltart a duty to act in good faithwhen exercising its powers of sale;(3) the Lepionka mortgagee was in breach of that duty; and(4) the Lepionka mortgagee was not entitled to cancel Mr Coltart's optionto purchase the homestead lot.[90] In these circumstances, in exercising our statutory discretion, we are satisfiedthat Mr Coltart's caveats should not be removed except to the limited extent set out in[92].Result[91] The appeal is allowed.[92] We order that Mr Coltart's caveats be removed on condition that LINZ acceptscontemporaneously new caveats to be lodged by Mr Coltart against lots 2 and 7 of thecurrent proposed subdivision contained in COA 4/424.[93] Leave is also reserved for either party to apply to the High Court for any furtherorders necessary to implement this judgment.[94] The respondent must pay the appellant costs for a standard appeal on a band Abasis together with usual disbursements.Solicitors:Carlile Dowling Lawyers, Napier for AppellantBell Gully, Wellington for Respondent