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Cube Building Solutions Limited v Kingloch Holdings Limited HC Christchurch CIV 2009-409-935 [2010] NZHC 1866 (15 October 2010)

Last Updated: 27 October 2010

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

_{CIV-2009-409-000935}

UNDER the Land Transfer Act 1952

IN THE MATTER OF an application under s145A of the Land Transfer Act 1952 for an order that a caveat not lapse

BETWEEN CUBE BUILDING SOLUTIONS LIMITED

Applicant

AND KINGLOCH HOLDINGS LIMITED Respondent

Hearing: 14-15 October 2010

Appearances: J Costigan and k Lawson for Applicant

S Caradus for Respondent

Judgment: 15 October 2010

JUDGMENT OF ASSOCIATE JUDGE OSBORNE

_{as to application for order that ceaveat not lapse}

Background

[1] This case concerns a caveat lodged by Cube Building Solutions Limited against titles registered in the name of Kingloch Holding Limited.

[2] Cube undertakes dairy conversions. It undertook such a conversion on a mid- Canterbury property from 2008.

[3] On 1 February 2008 Thomas Frederick Mazlin King and Judith Ruth King had entered an agreement to buy the mid-Canterbury property.

[4] On 7 February 2008 they met with a representative of Cube at the property to discuss the conversion, including the construction of an 80 bale dairy rotary shed.

CUBE BUILDING SOLUTIONS LIMITED V KINGLOCH HOLDINGS LIMITED HC CHCH CIV-2009-409-

000935 15 October 2010

[5] On 23 February 2008 the Kings’ agreement to purchase the farm was declared unconditional.

[6] Ruth Margaret Hodges, a director of Cube, deposes that on or about 14

March 2008 she specifically asked Mr King whether the land was to be owned by a company. She says that he told her that he never before used company structures and was not about to.

[7] A construction contract dated 19 March 2008 between Cube on the one hand and Mr and Mrs King as “the customer” on the other hand was signed. The schedule to the contract identified specifically the eight certificates of title comprising the land on which the works were to be contracted (defined as “the section”). The parties agreed:

6.4 The Customer grants to CUBE an equitable mortgage over the site, and charges the site as security for performance by the Customer of all of the Customer’s obligations under this contract including the due payment of all monies that or may become payable to CUBE by virtue of this contract.

6.5 The Customer agrees that CUBE may lodge a caveat against the section so as to secure CUBE’s interest in the land as equitable mortgagee.

[8] Work then began on the dairy conversion.

[9] On 15 May 2008 Kingloch Holdings Limited was incorporated. Its shareholders are Mr and Mrs King. Its directors are Mr and Mrs King. It appears that pursuant to a right of nomination which Mr and Mrs King had under the agreement for purchase of the property they must have nominated Kingloch, which settled the purchase on 5 June 2008. Ms Hodge deposes that at no time did the Kings advise Cube that the farm had been transferred to Kingloch or that the farm was not to be used as security as agreed under the contract.

[10] Disputes arose between the parties and matters came to a head by October

2008. Cube lodged its caveat against Kingloch’s titles on 25 November 2008.

[11] Cube in its caveat claimed an estate or interest in the eight titles in these terms:

As Mortgagee pursuant to a Contract containing an Agreement to mortgage dated 19th March 2008 between the registered Proprietor as Mortgagor and the Caveator as Mortgagee.

[12] Cube subsequently issued a civil proceeding against the Kings (CIV-2009-

409-000034). An application for summary judgment was refused on 17 December

2009. Kingloch initiated the caveat lapsing procedure in April 2010. Cube then filed the present application for an order that its caveat not lapse.

Application that caveat not lapse – the principles

[13] The principles which I adopt in relation to this application are these:

(a) The burden of establishing that the applicant has a reasonably arguable case for the interest claimed is upon the caveator;

(b) The caveator must show an entitlement to, or beneficial interest in, the estate referred to in the caveat by virtue of an unregistered agreement or an instrument or transmission, or of any trust expressed or implied: s 137 Land Transfer Act 1952;

(c) The summary procedure involved in an application of this nature is wholly unsuitable for the determination of disputed questions of fact – an order for removal of the caveat will not be made unless it is clear that the caveat cannot be maintained either because there was no valid ground for lodging it or that such valid ground as then existed no longer does so;

(d) When an applicant has discharged the burden upon the applicant, there remains a discretion as to whether to remove the caveat, which will be exercised cautiously;

(e) The Court has jurisdiction to impose conditions when making orders.

The applicant’s case

[14] Cube says that the interest it claims is reasonably arguable because:

1) the contract granted Cube an equitable mortgage over the land, charging the site as security for performance of the customer’s contract obligations; and

2) Kingloch either:

(a) took the titles subject to Cube’s equitable interest as a party to fraud in terms of s 182 Land Transfer Act; or

(b) ratified the contract (including the grant of the equitable mortgage); and

3) the interest claimed was sufficiently described and detailed to enable Kingloch as registered proprietor to understand the nature of the interest claimed and the basis of the claim.

Was there arguably an equitable mortgage charging the land as security?

[15] The Kings were expressly granted an equitable mortgage. Kingloch’s Notice of Opposition did not assert that the construction contract did not grant an equitable mortgage. In his written submissions Mr Caradus made this submission:

4.2 A mortgage entitles a party to, inter alia, enter into possession and force the sale of the secured property. It is doubtful whether the Kings could grant an equitable mortgage over a property in respect of which it did not have ownership. Cube does not address this issue.

[16] This is what occurred. The Kings were purchasers under the 1 February 2008 agreement to purchase the land. Their purchase became unconditional on

23 February 2008. They had acquired rights in the land. They then entered the construction contract on 19 March 2008, to which they granted the equitable mortgage. The nomination of Kingloch to settle the purchase cannot have taken effect until, at earliest, 15 May 2008 when the Kings incorporated Kingloch. But in the meantime they had granted the mortgage.

[17] In these circumstances, while in his written submissions Mr Caradus expressed doubt as to whether the Kings could grant an equitable mortgage, it is clearly arguable that that is precisely what they not only intended to do but what they at law could do on 19 March 2008.

Arguably did Kingloch take its titles subject to Cube’s equitable interest as a party to fraud in terms of s 182 Land Transfer Act?

[18] In its Notice of Opposition Cube asserted that it would be inequitable to allow the caveat to lapse. In her submissions Ms Costigan further developed that ground by reference to the concept of Land Transfer Act fraud.

[19] The principles surrounding fraud against the holder of an unregistered interest may be summarised in this way, leaning heavily on the helpful analysis gathered in Hinde, McMorland & Sim Land Law in New Zealand LexisNexis 2003, Vol 1, para 9.021 pp 382-387:

1) at equity it was a species of fraud to take a conveyance with notice of the existence of another’s equitable interest;

2) the Torrens system removed the pitfalls of that doctrine by providing that mere notice of unregistered rights shall have no effect: s 182 Land Transfer Act;

3) the indefeasibility provisions of the Act nonetheless are not to be used as a means of cheating another of a known existing right;

4) knowledge of an unregistered interest plus other factors may amount to fraud. I adopt the classic formulation of Salmond J in Waimiha Sawmilling Co Ltd v Waione Timber Co Ltd;[1]

5) the concept or fraud involved is thus what is or the Court would deem to be actual fraud or dishonesty of some sort bought home to the registered proprietor whose title is impeached: Assets Co Ltd v Mere Roihi;[2]

6) each case must depend on its own circumstances – it is unnecessary and unwise to give abstract illustrations of what may constitute fraud in hypothetical fact situations;

7) if fraud is established, the remedy will vary according to the circumstances – often the conversion of an unregistered interest to a registered interest is appropriate, with execution and registration of necessary instruments ordered:[3] Alternatively the Court may issue an appropriate form of injunction: Webb v Hooper.[4]

[20] Ms Costigan referred to Kim v Pan [5] as a case illustrating the application of these principles. That case also involved a sale and purchase agreement. The applicant successfully sought an order that this caveat not lapse. In Kim v Pan, there was evidence that Mr Kim had an agreement to purchase a lot to be subdivided by a Mr Zhou. All subdivision properties were transferred to a Ms Pan instead. Mr Kim registered a caveat against Ms Pan’s title. The application to the Court ensued. The Court reviewed the evidence to determine whether there was a seriously arguable case of Land Transfer Act fraud, finding at [21] that:

A number of matters point to knowledge and initial acceptance on Ms Pan’s part.

[21] The specific factors relied on by Mr Kim were of a different nature to the present case involving alleged conversations, correspondence and then subsequent inaction by the registered proprietor.

[22] In the present case, with the transfer not being to a separate individual but to a company owned and controlled by the original purchaser of the land, Ms Costigan says that the knowledge of the respondent company is plainly arguable, if not clear. The Kings are the controlling minds in relation to their own actions and in relation to their company’s actions.

[23] The identity of interest between the Kings and Kingloch is a strong feature of these transactions. A fraudulent intent is at least arguable whereby those who

committed themselves to a form of security in order to get a dairy conversion done, now arguably hide behind a company subsequently formed. A trial court might, on a testing of evidence, find for Cube either on Land Transfer Act fraud principles or on broader principles in the company law such as veil lifting.

Did Kingloch ratify the construction contract?

[24] Cube relied on ratification as an alternative justification for its caveat. Having reached the conclusions that I have as to the applicant’s reasonably arguable case on the mortgage agreement and Land Transfer Act fraud, it is unnecessary for me to determine this alternative ground. Given that the issues may require substantive determination on evidence, it would be unhelpful for me to express conclusions in this summary context.

Was the interest claimed in the caveat sufficiently described and detailed?

[25] Mr Caradus submitted for Kingloch:

... the caveat does not disclose the nature of the interest claimed or how it is derived from the proprietor ...

He submitted that the caveat must therefore lapse on this ground alone, if no other.

[26] Section 137(2) of the Land Transfer Act provides:

A caveat under this section must contain the following information: (a) ...

(b) the nature of the land or estate or interest claimed by the caveator, which must be stated with sufficient certainty;

and

(c) how the land or estate or interest claimed is derived from the registered proprietor;

[27] In relation to the correct approach for the Court to adopt in determining whether the caveator has provided “sufficient certainty”, Mr Caradus relied on the decision of Ellen France J in Norrie v Registrar-General of Land. [6]

[28] In Norrie Mr Mark Norrie caveated the title held by three registered proprietors being I Norrie, C Norrie and M & H Trustee Services Limited. The interest claimed in the caveat was “as beneficiary of the Norrie Family Trust”. The plaintiff in the proceeding said that the caveat complied with both s 137(2)(b) or (c).

[29] Reference was made to the policy of the statute as articulated by Vautier J in New Zealand Mortgage Guarantee Limited v Pye.[7] Without quoting the full passage it is relevant to note His Honour’s observation cited by France J at [14] as follows:

... the inconvenience and injustice which is likely to arise from the upholding of caveats of this kind expressed in loose and general or inaccurate words is very obvious when one considers the scheme of the provisions as a whole. It is not simply a matter, as counsel for the applicants’ argument would imply, of acquainting the registered proprietor with the general nature of the claim made against his land ...

[30] Counsel for the plaintiff in Norrie then submitted that a much more detailed form of caveat set out at [19] of Her Honour’s judgment was required.

[31] Against that background Her Honour discussed the detail required to satisfy the “sufficient certainty” test. Her Honour noted with apparent approval the trend away from a stricter approach represented in New Zealand in cases such as New Zealand Mortgage Guarantee Limited v Pye and Holt v Anchorage Management Limited,[8] to what might be considered the more liberal approach. The authors Hinde McMorland & Sim have tracked the case law in relation to the same developments at para 10.013(a), through Buddle v Russell [9] and ultimately to the Court of Appeal

decision in Zhong v Wang.[10]

[32] In Norrie Ellen France J applied the law to the facts on that case from [38]- [41]:

[38] What will be “sufficient certainty” (“adequate” to the purpose – Oxford English Dictionary (2nd ed. 1989)) will vary according to the circumstances. Clearly, also, the Registrar on receipt of a caveat is not exercising an adjudicative function. The plaintiff did not dispute that. And, in Holt v Anchorage Management at p 115, McMullin J refers to the Registrar’s “administrative” act in accepting a caveat for lodgement.

[39] On the other hand, equally clearly, the Registrar must be satisfied that the requirements as to form are met. One purpose of requiring adherence to the form is to provide a threshold of some sort albeit there are avenues of redress for the registered proprietor (making an application for removal of a caveat under s 143 and the ability under s 146 to seek damages from the caveator).

[40] On balance, I do not consider it was necessary here to make reference to the fact the interest claimed was as a discretionary beneficiary. Although it is the “bare minimum”, the description here equates with that in In Re Peychers’ Caveat in terms of the description of the nature of the interest (see, Equity and Trusts in New Zealand (2003) (A Butler (editor): ch 3.1.4(5), p 53) and with the form in the Land Titles precedents booklet.

[41] The authors of Land Law in New Zealand suggest at para 10.013(a) that where a registered proprietor claims a caveator has not complied with s 137(2)(b), “frequently the real complaint” is non-compliance with s 137(2)(c) and I consider that is the case here. It was necessary to explain how the interest derived from the registered proprietor. In some cases this factor may be obvious from the title but that was not so here. “M & H Trustee Services” are not so clearly linked to the “Norrie Family Trust”.

[33] As is indicated in the final paragraphs, Her Honour concluded that the requirements as to stating the derivation of the interest under s 137(2)(c) were not sufficiently met. The caveat had not expressed sufficiently the relationship between the third registered proprietor “M & H Trustee Services” and the “Norrie Family Trust”.

[34] Her Honour recognised, as had the authors of Hinde McMorland & Sim, that such a complaint often goes to the derivation requirement under s 137(2)(c) rather than the identity of the interest under s 137(2)(b).

[35] In Zhong v Wang, the Court of Appeal allowed an appeal against orders removing caveats. The title in that case was in the name of Jia Yi Wang and Jue Jin. The caveat is set out at [21] of the judgment and reads:

[Cheng Rong Zhong] claims a beneficial interest in the land contained in the above Certificate of Title as cestui que trust of which the registered proprietor, Jia Yi Wang, is trustee.

The Court found that the language used in relation to a beneficial interest was sufficient. The Court of Appeal approved the line of cases around Buddle v Russell. Wild and Heath JJ noted Norrie as preferring the Buddle v Russell line of cases. In particular, the Court considered a caveat which identified that the form of trust

alleged, without expressly referring to it as a resulting or constructive trust, to be sufficient. Turning to the requirements of s 137(2)(c) Wild and Heath JJ said this:

[55] Applying the same test, did the caveats comply with s 137(2)(c)? In our view, they did. There was a clear link between the named trustee (Mr Wang) and the registered proprietors, of which he was one. The caveats made it clear that the interest was derived from Mr Wang’s involvement with Mr Zhong. The nature of the involvement would have been self- evident to Mr Wang.

[56] No suggestion was made to us that the caveat ought to be removed because Ms Jin was a co-owner of the property.

[57] It is unnecessary to require a caveator to explain the precise basis from which the interest qua beneficiary arises. Section 137(2)(c) applies to all types of interests that give rise to a caveatable interest. The derivation of those claimed interests may need greater explanation in some cases than in others. In this case a linkage between the claimed interest and Mr Wang suffices.

[58] The purpose of the caveat procedure is to enable those with proper claims to proprietary interests to protect themselves against loss by forbidding dealing with the land pending resolution of substantive claims. The underlying purpose of the caveat regime could be undermined if too strict an approach were taken to the detail required to describe the interest claimed and its derivation from the registered proprietor.

In short, Zhong v Wang saw a link between the alleged trust and the proprietors (or in that case, one of the proprietors) on the register as clear.

[36] The present case in my judgment is in an altogether different category to that in Zhong v Wang. I have set out above [35] the terms of the caveat in Zhong v Wang. I have set out above [11] the terms of the caveat in this case.

[37] It is clear when the contractual documents are read that the caveat in this case incorrectly refers to the parties. The parties to the mortgage agreement were the Kings and Cube, not Kingloch and Cube. It is no answer to s 137(2)(c) to say, as was the effect of Ms Costigan’s submissions in my paraphrase, that the caveat reflects in a comprehensive manner the fact that Kingloch has come to be mortgagee even if it was not a party to the original agreement. The caveat as drafted does not state the means by which Kingloch’s interest is derived from the base contract.

[38] An adequate means of stating the derivation of interest is illustrated in the caveat in Kim v Pan in which Asher J dealt with the caveat which I have referred to previously.

[39] I note in particular the last sentence of Asher J’s judgment at [27] where His Honour went on, in application of the more liberal approach in Zhong v Wang, to find that the words “transferred subject to the agreement”, could on a generous reading, be seen to cover Land Transfer Act fraud. The derivation was sufficiently stated through the reference to the right having been transferred subject to the agreement.

[40] In this case the derivation is, in my judgment, not stated at all. Section

137(2)(c) has not been complied with. The wording of the caveat cannot be justified.

Titles affected by the caveat

[41] In view of the conclusion I have already reached in relation to s 137(2) of the Act, it is unnecessary that I deal with an alternative ground of opposition advanced by Mr Caradus orally, although not forming part of the notified grounds of opposition.

[42] By virtue of definitions within the agreement between the Kings and Cube, Mr Caradus advanced a submission as to the invalidity of the caveat by its claiming an interest in eight titles rather than in CB 8K/322 alone. The argument turns on the different definitions of “section” and “site” within the contract and the fact that cl.6.4 of the contract grants an equitable mortgage over “the site” only, whereas cl.6.5 contains the Kings’ agreement to the lodging of a caveat over “the section”.

[43] That distinction has an impact on matters relating to a second caveat which I

will come to shortly.

Alternative course available to the caveator

[44] I outlined to counsel my tentative conclusions before proceeding to this judgment and I adjourned the case to this morning for further submissions.

[45] Ms Costigan has today made an application, in the event there is to be an order that the caveat lapse, for leave to Cube to file a second caveat. Section 148(1) Land Transfer Act provides:

If a caveat has been removed under section 143 or has lapsed, no second caveat may be lodged by or on behalf of the same person in respect of the same interest except by order of the High Court.

Principles

[46] The starting point for such leave lies in the Court’s discretion. I note the helpful collection of authorities in Hinde McMorland & Sim at 10.021 and also in New Zealand Land Law 2nd ed Bennion at 4.8.01. I adopt as a statement of the principles which I should apply the analysis of Randerson J in Lowther v Kim:[11]

[17] Section 148 of the Land Transfer Act provides:

148. No second caveat may be entered – When any caveat in either of the forms hereinbefore provided has lapsed, it shall not be lawful for the Registrar to receive any second caveat affecting the same land, estate, or interest by the same person, or in the same right and for the same cause, except by order of the High Court.

[18] The Court of Appeal has held that an order under s 148 will not lightly be made. It is an indulgence and the applicant’s claim is “scrutinised carefully”: Cotton v Keogh [1996] 3 NZLR 1 at p 8. In Muellner v Montagnat [1986] NZHC 19; (1986) 2 NZCPR 520 at pp 523-524, Thorp J reviewed previous authorities. He determined that the Court is given an unfettered discretion under s 148 but the Court will generally have regard to:

(a) the strength of the case made by the applicant to support the claimed interest in the land;

(b) any explanation for failure to exercise the caveator’s rights under s

145; and

(c) whether unavoidable prejudice would be suffered by those who have acted in reliance on the register and in the belief that the caveator was

not pursuing the claim.

[19] Thorp J, rightly in my view, did not accept the submission made to him that an order under s 148 should only be made in exceptional cases. In

considering the strength of the applicant’s claim to an interest in th eland, it is appropriate to adopt the standard of a reasonably arguable case as identified in Sims v Lowe [1988] 1 NZLR 656 (CA) at pp 659-660, but with the reminder that careful scrutiny is required where leave to lodge a second caveat is sought.

[47] To those principles, relevantly to this case, I would add that the judgment of Thorp J in Muellner v Montagnat, cited by Randerson J, is authority also for the Court’s jurisdiction to impose conditions on an order under s 148, including as to payment of costs.

[48] I turn then to the factors to be considered by the Court, but in the light of the unfettered discretion which I have under s 148:

1) The strength of the case of the applicant to support the claimed interest:- For the reasons I have previously stated I find that the applicant, Cube, has clearly an arguable case and, indeed, the matter might fairly be stated more highly than that in relation to a caveatable interest based on an equitable mortgage. The more difficult issue for the applicant lies in the possible overstatement of titles which can properly be covered by such a caveat, having regard to the distinction between “section” and “site” which I referred to earlier at [41]-[42]. I am not satisfied that the applicant has a reasonably arguable case in relation to an equitable mortgage over any part of the farm other than that covered by the title CB 8K/322.

2) Any explanation for failure to exercise the caveator’s rights under s 145:- I do not find that there is any criticism that can properly be levelled at the applicant in this case for failure to act on its rights. The reason it has failed in the main part of this application is in relation to what I see primarily as a drafting issue. To the extent that it had steps open to it to protect its interest, it has taken them in a diligent way.

3) Prejudice to others who have acted in reliance:- I have no evidence before me of prejudice to others and on the facts of this case it is difficult to envisage any tangible prejudice to the immediate parties or to third parties.

[49] Counsel addressed me as to the form of orders that might flow if I were to make an order granting leave to Cube to file a second caveat. I am grateful to them for their assistance which has significantly shaped the orders which follow.

Orders

1) I order pursuant to s 148 Land Transfer Act 1952 that Cube Building Solutions Limited may lodge a second caveat over the land bearing identifier CB 8K/322 in the terms attached as Schedule A, provided such caveat is lodged by 4.00 pm 19 October 2010.

2) I order that the interim order of this Court dated 31 May 2010 be rescinded.

3) I order that caveat 8007923.1 lapse forthwith upon the simultaneous presentation to the Registrar by Cube Building Solutions Limited of the sealed order made herein and the second caveat referred to herein, provided that caveat 8007923.1 shall lapse in any event and forthwith if the applicant fails to present the said documentation to the Registrar by

4.00 pm, 19 October 2010.

4) It is a condition of the order granting Cube Building Solutions Limited the right to lodge a second caveat, that Cube Building Solutions shall pay costs and disbursements in relation to this proceeding within five working days. I fix costs in favour of the respondent on a 2B basis and order that they be paid, together with disbursements to be certified by the Registrar. I certify for the length of hearing as to half a day for yesterday and as to quarter of a day for today. The Registrar will appreciate that there are consequentially items for preparation also.

5) Leave is reserved to counsel to request at short notice a telephone conference, if necessary, in relation to the implementation of these orders.

[50] Finally, I express my gratitude to counsel for the quality and frankness of their submissions which has enabled the Court to deal with this matter in the reasonably expeditious way that is needed in this caveat jurisdiction.

SCHEDULE A

As Mortgagee pursuant to a Contract containing an Agreement to Mortgage dated 19 March 2008 between the Caveator as Mortgagee and Thomas Frederick Mazlin KING and Judith Ruth KING, who at the date of that Contract were bound by an unconditional contract (“the Sale and Purchase Agreement”) to purchase the properties comprised in the affected Computer Registers and who subsequently nominated the Registered Proprietor to complete the Sale and Purchase Agreement and the Registered Proprietor took ownership of the properties in the knowledge of and subject to the Contract and the Agreement to Mortgage.

_{Associate Judge Osborne}

Solicitors:

Goodman Steven Tavendale Reid, PO Box 442, Christchurch

Rhodes & Co, PO Box 13444, Christchurch

[1] _{Waimiha Sawmilling Co Ltd v Waione Timber Co Ltd [1923] NZLR 1137 at 1175.}
[2] Assets Co Ltd v Mere Roihi [1905] AC 116 at 210.
[3] _{Cases collected at footnote 22, p 386 Hinde McMorland & Sim.}
[4] _{Webb v Hooper [1953] NZLR 111.}
[5] Kim v Pan HC Auckland CIV-2009-404-995, 20 May 2009, Asher J

[6] Norrie v Registrar-General of Land (2005) NZCPR 94 at [26]-[37].
[7] _{New Zealand Mortgage Guarantee Limited v Pye [1979] 2 NZLR 188 at 197.}
[8] _{Holt v Anchorage Management Limited [1987] 1 NZLR 108 at 117.}
[9] _{Buddle v Russell [1984] 1 NZLR 537.}
[10] Zhong v Wang (2006) 5 NZ Conv C 194, 308.

[11] Lowther v Kim [2003] 1 NZLR 327 at 331.