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Powell v K2 Investment Group Limited [2013] NZHC 3167 (29 November 2013)

Last Updated: 7 March 2014

IN THE HIGH COURT OF NEW ZEALAND NAPIER (transferred to Christchurch) REGISTRY

CIV-2013-441-000359 [2013] NZHC 3167

UNDER the Land Transfer Act 1952

IN THE MATTER of an application pursuant to s 145 of the Land Transfer Act 1952 for an order that a caveat not lapse

BETWEEN RICHARD OWEN POWELL Applicant

AND K 2 INVESTMENT GROUP LIMITED First Respondent

GABOR KEMENY

Second Respondent (joined as a party)

Hearing: 22 November 2013

Appearances: G A Hair and M McKay for Applicant H C Matthews for Second Respondent No appearance for First Respondent

Judgment: 29 November 2013

_{JUDGMENT OF ASSOCIATE JUDGE MATTHEWS}

[1] The plaintiff, Mr Powell, applies for orders under the Land Transfer Act that caveats 9306281.1 and 9316761.1 in the Hawkes Bay Registry not lapse. In the alternative he applies for an order under s 148 of the Land Transfer Act 1952 permitting him to register a second or further caveat against the titles to the properties against which the caveats are presently registered.

[2] Caveat 9306281.1 was registered on 11 February 2013 and caveat 9316761.1 was registered on 12 March 2013. In each caveat Mr Powell claims to have an estate

_{or interest in the relevant titles which is said to arise thus:}

R O POWELL v K 2 INVESTMENT GROUP LTD [2013] NZHC 3167 [29 November 2013]

Pursuant to an agreement to mortgage clause of a Loan Agreement dated

7 September 2012 between the registered proprietor in its capacity as trustee of K 2 NZ Trust: Quest Hastings and K 2 NZ Trust: Quest Napier as

borrower and the caveator as lender.

[3] Mr Powell accepts that the equitable interest he claims to have in each caveat arose on 8 March 2013.

[4] The registered proprietor of the relevant titles is the first respondent, K 2

Investment Group Limited. It does not oppose the application. The second respondent, who was joined as a party, does.

[5] Mr Powell accepts that the caveats cannot be sustained against certain of the titles against which it was initially registered, and now says caveat 930628.1 should not lapse in relation to identifiers 454266 and 454314, and that caveat 9316761.2 should not lapse in relation to identifier HB23/146. Similarly, the orders sought in the alternative relate only to these titles. The reason is that the remaining titles are registered in the name of Mr Gabor Kemeny.

[6] The outcome of the application to sustain caveat 9306281.1 is derived from s 137 of the Land Transfer Act 1952 which provides:

137 Caveat against dealings with land under Act

(1) Any person may lodge with the Registrar a caveat in the prescribed form against dealings in any land or estate or interest under this Act if the person –

(a) claims to be entitled to, or to be beneficially interested in, the land or estate or interest by virtue of any unregistered agreement or other instrument or transmission, or of any trust expressed or implied, or otherwise; ...

[7] Because Mr Powell’s interest in the land against which this caveat was registered arose on 8 March, but the caveat was lodged on 11 February 2013, it was lodged before his interest arose.

[8] It is clear from the wording of s 137(1) that the right to lodge a caveat is dependent upon the intending caveator being entitled to an interest in the land. It is for that reason, for example, that a person alleging an interest under a remedial

constructive trust cannot protect that interest by lodging a caveat, prior to the existence of a remedial constructive trust being declared by the Court.¹

[9] It follows that caveat 9306281.1 cannot be sustained, and must lapse.

[10] As noted Mr Powell also seeks in the alternative an order under s 148 of the Land Transfer Act allowing a second caveat to be lodged, in respect of the same interest. I return to this later in this judgment.

[11] In relation to caveat 9316761.1, the first issue is whether Mr Powell has an interest in the relevant land that is capable of supporting the caveat. The second issue is whether the balance of convenience favours the caveator remaining on the titles.

Facts

[12] In the loan agreement dated 7 September 2012 the borrower is described as K 2 Investment Group Limited, but in two capacities, first as trustee for the K 2 NZ Trust: Quest Hastings, and secondly as trustee for the K 2 NZ Trust: Quest Napier. The sum borrowed from Mr Powell was AUD$77,916.20. The advance was made within 24 hours after the loan agreement was signed, and was repayable six months later. The document is signed by Ms Bronwynne Anne Durney as director of K 2

Investment Group Limited. Ms Durney is also said to be the guarantor of the advance, though in the copy produced to the Court there is no indication that she has signed the document in that capacity.

[13] The loan agreement contains the following relevant terms:

5. SECURITY

(a) As security for the Principal Sum, interest and all other amounts payable by the Borrower under this Agreement, the Borrower agrees that in the event the Borrower defaults in payment of the Principal Sum or interest, or in the observance of performance of any other covenants expressed or implied in this Agreement, the Borrower will immediately grant and execute in favour of the Lender a mortgage over the Borrower’s 50% equitable share of the properties described in

¹ Fortex Group Ltd v MacIntosh, Cox & Forde [1998] 3 NZLR 171 (CA).

Schedule C and the Borrower acknowledges that the Lender shall be entitled to lodge a caveat against the titles to those properties to protect its interest as equitable mortgage over the Borrower’s share of those properties.

(b) The parties acknowledge that the Borrower only owns a 50% equitable share of the properties described in Schedule C and that the Lender has no rights in respect of the other 50% equitable share of those properties, and that if a caveat is required, the Lender will properly describe the interest that the caveat supports.

[14] Ms Durney and Mr Kemeny were formerly in a personal relationship. In

2007 they decided to buy a significant number of the titles comprising the property operated as Quest Napier, and the title to the property operated as Quest Hastings. They set up a relatively complicated structure for these acquisitions.

[15] There are two companies, the respondent K 2 Investment Group Limited of which the director and shareholder is Ms Durney, and K 2 Investment Group Australia Pty Limited of which Mr Kemeny is the director and sole shareholder.

[16] There are four trusts. K 2 Investment Group Limited is the sole trustee of two of them – K 2 NZ Trust: Quest Hastings and K 2 NZ Trust: Quest Napier. K 2

Investment Group Australia Pty Limited is the trustee of the other two – K 2 AUS Trust: Quest Hastings and K 2 AUS Trust: Quest Napier.

[17] Then, two partnerships were formed between K 2 Investment Group Limited, and K 2 Investment Group Australia Pty Limited. The first partnership was formed to carry on the business of property development in relation to the Hastings property, and the second was formed for the same purpose, though in relation to the Napier property.

[18] K 2 Investment Group Limited was appointed as agent to manage the two partnership businesses. These appointments are recorded in the respective partnership agreements, which also provided that neither the partners nor any key person, which in respect of each company is defined to be its named director, could take certain steps, including mortgaging or charging its share in the partnership’s business.

[19] All the titles of the land which was purchased were registered in the name of

K 2 Investment Group Limited.

[20] Reference in paragraph 5 of the loan agreement to K 2 Investment Group Limited only owning a 50% equitable share of the properties reflects the fact that whilst it owned the entire legal estate in each property, it held half the equitable estate of Napier and similarly of Hastings as trustee of the relevant K 2 NZ Trust, and the other half of the equitable estate in each property on behalf of K 2

Investment Group Australia Pty Limited, which in turn was trustee of the relevant K

2 AUS Trust: or, in other words, for Mr Kemeny’s interests. As Ms Durney arranged the loan, the share referred to is the former of these. The reference to the two New Zealand trusts in each caveat is intended to reflect the requirements of paragraph 5(a) and (b).

[21] The personal relationship between Mr Kemeny and Ms Durney ended late in

2011. Proceedings in the Family Court of Australia at Sydney ensued.

[22] The agency of K 2 Investment Group Limited for the two partnerships was terminated by written notice in November 2012 following an order of the Family Court which required Ms Durney to take all necessary steps to appoint Mr Kemeny as agent of the two partnerships.

[23] The final order of the Family Court at Sydney on 15 July 2013 requires both Ms Durney and Mr Kemeny to do all things necessary to transfer to Mr Kemeny all assets owned by K 2 Investments Group Limited including all interests in the Hastings and Napier properties (and any related assets).

[24] This judgment was registered in New Zealand on 4 November 2013 under the

Trans-Tasman Proceedings Act 2010.

[25] There is no mention in this judgment of the interest in the Hastings and

Napier properties claimed by Mr Powell, nor of his caveats over those properties.

[26] Likewise there is no mention of these in the first judgment issued by the Family Court on 1 November 2012, on interim orders sought by Ms Durney. In this judgment reference is made to a number of sums received by Ms Durney from “the bank accounts of the partnership or directly from the tenants” but none are after June

2012, three months before Mr Powell’s advance to K 2 Investment Group Limited.

[27] Mr Powell says that no interest was paid on the advance from the outset, nor was the loan repaid when due in March 2013. There is now owing a sum of just under NZ$200,000.

[28] Mr Powell says that in April 2013 his solicitors received a letter from a firm of solicitors stating that it acted for a partnership called “K 2 Partners: Napier”. They said that the partnership agreement expressly prohibits partners granting security over partnership assets, and neither K 2 Investment Group Limited nor Ms Durney was authorised to grant any such security. Mr Powell says that this was the first time that he became aware of the existence of the partnership.

Application to join Mr Kemeny as a party

[29] Mr Matthews applies to join Mr Kemeny as a party under r 4.56(1)(b)(ii) of the High Court Rules, on the basis that his presence before the Court may be necessary to adjudicate on and settle all questions involved in the proceeding. He bases this contention on the appointment of Mr Kemeny as the agent of the respondent by the Family Court in Sydney, the fact that the respondent has signed an authority to transfer to him the titles over which Mr Powell’s caveats are registered, and the Family Court order requiring the respondent and Ms Durney to assign all property interests to Mr Kemeny in order for the partnerships to be terminated.

[30] Mr Hair does not oppose the joinder of Mr Kemeny as a party. He accepts that for the reasons given by Mr Matthews, Mr Kemeny has sufficient status to be a respondent to this application.

[31] I agree, and order that Mr Kemeny is added as second respondent to this proceeding.

Relevant legal principles

[32] It is established that the onus of showing that he has a reasonably arguable claim to the interest described in his caveat lies on Mr Powell.²

[33] Mr Powell’s claim to be entitled to an estate or interest in the land against which the caveat is lodged by virtue of an unregistered agreement to mortgage contained in the loan agreement, is a ground for lodging a caveat under s 137(1)(a) of the Land Transfer Act 1952.

[34] In a proceeding to sustain a caveat it is not the task of the Court to determine the rights of the parties.³ In Macrae v Rapana,⁴ Fisher J said:

Except where patently lacking in credibility on its face, the evidence advanced by and on behalf of the plaintiff should be accepted as correct for present purposes.

And further on the approach to evidence in conflict:

Faced with such a conflict, and for present purposes only, the plaintiff’s

evidence must be assumed to be correct.

The case for Mr Powell

[35] Mr Powell says that he is entitled to maintain a caveat against the titles to the property by virtue of clause 5(a) of the loan agreement but limited by the provisions of clause 5(b). He says that an agreement to grant a mortgage can itself confer a proprietary interest in the subject-matter to which that agreement relates and if capable of being the subject of a decree of specific performance, this is capable of taking effect as an equitable mortgage.⁵ He says an equitable mortgage of land

_{confers on the mortgagee an equitable interest that will support a caveat.}⁶

² _{Castle Hill Run Ltd v NZI Finance Ltd [1985] 2 NZLR 104 (CA).}

³ _{New Zealand Limousin Cattle Breeders Society Inc v Robertson [1984] 1 NZLR 41 (CA).}

⁴ _{Macrae v Rapana HC Auckland M633/94, 17 June 1994.}

⁵ Somme Ltd v Central House Movers Ltd HC Wanganui CIV-2011-483-2, 9 September 2011, Kós J at [64].

⁶ Mawhinney v Nags Head Horse Hotel Ltd [2013] NZHC 1530 at [41] Associate Judge Christiansen. See also Hinde McMorland & Sim Land Law in New Zealand (online looseleaf ed, LexisNexis) at 10.009.

[36] Given the terms of clause 5(a) Mr Powell accepts that his equitable interest did not arise when the loan agreement was executed, rather it arose when the borrower, the first respondent, went into default, on 8 March 2013.

[37] Mr Hair on behalf of Mr Powell says that the first respondent had an indefeasible title to the land, and granted a mortgage in accordance with its right to do so as registered proprietor. He says Mr Powell was entitled to rely on the first respondent’s indefeasible title. Any arrangements the first respondent may have made with other parties cannot affect Mr Powell, as on the evidence he had no notice of the existence of the partnership, on which Mr Kemeny relies in his argument. Further, he says that the orders of the Family Court in Sydney on which Mr Kemeny also relies were made without his being heard, or put on notice that orders may be made which might affect his interest. He says the orders cannot therefore displace his interest in the properties on which his caveat depends.

The case for Mr Kemeny, and discussion

[38] I do not understand Mr Kemeny to take issue with Mr Powell’s right to lodge caveats in terms of the loan agreement, nor to suggest that if all else were equal Mr Powell would not be entitled to sustain caveat 9316761.1. However, Mr Matthews says that the position is not as straight-forward as a consideration solely of the loan agreement would dictate.

[39] First, he says that when the loan agreement was signed Mr Powell was on notice of an equitable interest in the properties held by K 2 Investment Group Australia Pty Limited. That company had previously lodged a caveat over the titles by which it claimed a beneficial interest in the land “as cestui que trust of which the registered proprietor K 2 Investment Group Limited is trustee”. As well, prior to his agreeing to advance the loan a barrister then acting for Ms Durney sent him an email in which he advised:

The agreement contains within it the security that we discussed. You will recall that I told you that Ms Durney’s associated trusts (as described as the borrower in the agreement) are partners with her former de facto partner in owning the Napier and Hastings properties. The legal owner is K 2

Investment Group Limited (if you were to search the titles). However that

company only holds the properties as an agent for the two associated trusts of Ms Durney and her ex de facto partner. So the security you are being given is over the share that Ms Durney’s associated trusts own which is the correct (50%) owner.

[40] Mr Matthews says that the best Mr Powell can claim in a caveat is an interest in a one-half share of the titles, but on the face of the caveat he purports to rely only on the equitable interest of K 2 Investment Group Limited as the interest against which he is entitled to lodge a caveat.

[41] I do not accept this argument. It is certainly correct that Mr Powell was on notice of the claim by K 2 Investment Group Australia Pty Limited, but a trustee can mortgage trust property. As to the limited interest that could be mortgaged, I am satisfied that the caveats sufficiently reflect the requirements of the loan agreement and the limited interests that the first respondent held in the titles by the references to capacity in which the first respondent held the land. It also held the land on behalf of K 2 Investment Group Australia Pty Limited as far as that company’s interests then extended but the limitation excludes those interests in the land.

[42] Secondly, Mr Matthews says that because of the judgment of the Family Court in Sydney, the interest now protected by the caveat lodged by K 2 Investment Group Australia Pty Limited is an interest in the entire equitable estate. Pursuant to the judgment, the first respondent has signed a registration authority to enable a transfer of all the titles to Mr Kemeny. Thus neither the first respondent nor Ms Durney has any entitlement to or any interest in any of the property, so Mr Powell no longer has any interest in the property which can be protected by his caveat.

[43] Mr Matthews elaborated on this submission by saying that the basis of the judgment of the Family Court was that Mr Kemeny and his family had contributed large sums of money to the business venture, and the orders of the Court recognised that the properties were always held on trust by the first respondent as a result. Thus Mr Matthews says that Mr Kemeny had an institutional constructive trust in the land from the outset, that Mr Powell was on notice of it by virtue of the information given to him at the time he made his advance, and that any equitable interest he may have had would be subject to Mr Kemeny’s equitable interest.

[44] Mr Hair says that this argument was not identified in the notice of opposition. In that document Mr Kemeny said that he is the owner in equity of the properties by virtue of the Family Court order and the consequent signed client authority form, not as a result of a constructive trust. He says that an allegation that there is an institutional constructive trust arising from the Family Court judgment cannot be argued without fair notice, as it is a complex argument requiring the laying of an evidentiary foundation and a response to it.

[45] I agree with Mr Hair. An argument that an institutional constructive trust arose at the outset of the dealings between Ms Durney and Mr Kemeny is an argument requiring an evidentiary foundation and careful analysis based on that evidence and any evidence given in response. It cannot be raised without notice of intention to do so. For that reason I am not prepared to decide this case by determining whether Mr Kemeny had an interest in the property throughout, under an institutional constructive trust.

[46] In case I am wrong in that decision, I add these observations. First, as Mr Hair correctly pointed out, there is no evidentiary foundation in this case to find an institutional constructive trust, and I am being asked to draw inferences from findings in the Family Court in Australia which was concerned with determining the rights to property of parties to a former domestic relationship, not the existence of an institutional constructive trust.

[47] Secondly, whilst the judgment of the Family Court is to the effect that Mr Kemeny is entitled to the properties held by the first respondent, it is by no means clear that that entitlement arises under a constructive trust. Rather, in my view, it arises as a result of application by the Family Court of the relevant New South Wales legislation.

[48] Thirdly, if it could be shown that it arises as a result of a constructive trust, that would in my view be a remedial constructive trust, a trust imposed by the Court to give Mr Powell a remedy, in the events which had taken place. If it were an institutional constructive trust, this would mean that from the outset Ms Durney would have had no interest whatever in the properties. The improbability of that can

readily be demonstrated. If the business venture she and Mr Kemeny undertook had been a success, on Mr Matthews’ argument the fruits of their joint efforts would nonetheless have been held by her on trust for him. That has the appearance of being completely inconsistent with a business venture entered into by two parties in the manner this one was entered. Had it been intended that Mr Kemeny would be the sole beneficiary of the entire operation one would be left wondering why the structure they elected to create was put in place, and in particular two trusts on which each was, effectively, the sole trustee. To the extent that any inference can – or for that matter needs to be – drawn from the Family Court judgment, it is that the Court imposed an outcome which reflected the events which had occurred, some of which are outlined in the judgment.

[49] Fourthly, there is no mention in either of the judgments of the Family Court of Mr Powell’s interest in the property, nor of his caveats which were registered some months before the second of the two judgments was issued. It does not seem that Mr Powell was made aware of the proceedings in Australia. I have reservations on whether the judgment has any effect on his position, in these circumstances.

[50] Mr Matthews’ third submission is that Ms Durney committed a fraud on the partnership by granting a mortgage over partnership property without a unanimous resolution of the partners. He says her fraud can be visited on Mr Powell, relying on Nathan v Dollars & Sense Finance Ltd.⁷

[51] Clause 11 of the partnership agreement prohibits a partner or any key person, without the prior consent of the partners, taking certain steps including mortgaging or charging that partner’s share in the partnership business, or doing anything by which any partnership property may be seized, attached or taken in execution of a judgment. The actions of the first respondent in executing the loan agreement would be in breach of this clause, if the land is partnership property. Mr Kemeny says that the first respondent was holding the properties as bare trustee for the two partnerships, which implies that the partnerships owned the properties. I am satisfied for the purposes of this argument that the properties were partnership assets.

On that basis the actions of the first respondent in creating a charge in favour of

Mr Powell were in breach of the partnership agreement.

[52] Mr Matthews seeks to characterise that as fraud. Whether a breach of contract can be thus classified is moot. A finding would require an examination of a good deal more factual material than is available to me. I need not take this analysis further though, because the argument Mr Matthews presents also requires him to establish that the fraud which he classifies as that of Ms Durney can be visited on Mr Powell. That proposition falters on a lack of any connection between her conduct and Mr Powell. In Nathan v Dollars & Sense, the borrower had the task of obtaining execution of the loan documentation including securities, and did so by forging certain signatures. He was acting as agent of the lender and the lender took the benefit of his actions. There is no such connection with Mr Powell in this case, nor any conduct on his part that might associate him with Ms Durney’s orchestration of her company’s breach of the partnership agreement. Nathan v Dollars & Sense is distinguishable. It follows that Mr Kemeny cannot seek to take advantage of the fraud exception to indefeasibility in s 182 of the Land Transfer Act.

[53] Mr Matthews’ fourth argument is based on Construction Engineering (Aust) Pty Ltd v Hexyl Pty Ltd.⁸

[54] In this case, Construction Engineering entered a building contract with a land-owner, Tambel. When a dispute arose, it gave notice to Tambel under the contract requiring reference to arbitration. It then gave notice to Hexyl on the basis that Tambel and Hexyl were in partnership, Tambel had contracted on behalf of the partnership, and Hexyl and Tambel were both liable to Construction Engineering.

[55] The Court found that Tambel and Hexyl agreed that the building contract would be entered by Tambel only. The Court also recorded that Construction Engineering did not enter the contract under a belief that Tambel was acting as agent of the partnership: it did not know of the existence of the partnership. It did not believe Tambel was contracting for an undisclosed principal, be that Hexyl or any other entity.

[56] The Court said:

[12] The second limb of s 5 deals with ostensible authority. Even though actual authority be lacking, the act of every partner who does any act for carrying on in the usual way business of the kind carried on by the firm of which he is a member binds the firm and his partners unless the other party “either knows that he has no authority or does not know or believe him to be a partner”. Again, this limb effectively states the common law. Again, Construction can gain no solace from it since it is conceded that Construction neither knew nor believed Campbell to be a partner.

[57] As I understand Mr Matthews’ argument, he aligns Mr Powell with Construction Engineering in that case, as Mr Powell neither knew nor believed the first respondent to be a partner. On that basis he says that Mr Powell does not have a claim against partnership property, let alone an interest capable of supporting a caveat.

[58] The equivalent of s 5 of the legislation under consideration in Construction Engineering is s 8 of the Partnership Act 1908. On the basis of that section and the Construction Engineering case Mr Powell has no claim against the partnership for his debt. That is a quite different proposition from the consequence of Construction Engineering that Mr Matthews enunciates. An interest in the property charged is still created. The first respondent owned the legal estate in the land, and half the beneficial estate in the land. It was able to validly charge those estates as security for Mr Powell’s advance. Construction Engineering confirms that Mr Powell could not sue both the first respondent and K 2 Investment Group Australia Pty Limited to recover his debt. The first respondent was unable to bind the firm in the absence of

its authority to do so, when Mr Powell did not know that it was a partner.⁹ But that

is not the issue presently before the Court.

[59] Mr Matthews’ fifth argument is based on the way in which Mr Powell asserts his claim to an interest in the properties, in his caveats:

Pursuant to an agreement to mortgage clause on a loan agreement dated

7 September 2012 between the registered proprietor in its capacity as trustee of the K 2 NZ Trust: Quest Hastings and K 2 NZ Trust: Napier as borrower

and the caveator as lender.

[60] Mr Matthews says that a caveat must support an interest that is ultimately capable of being registered under the Land Transfer Act. Therefore the interest claimed by Mr Powell relies on the first respondent, itself having a caveatable interest that would be capable of registration. However, he says, the interest of a partner in a partnership asset is in the nature of a future interest in the distribution of any profits or proceeds of sale of partnership property, and not an interest in the land

itself that will support a caveat.¹⁰ Mr Matthews says that Mr Powell’s caveat relies

on the interests of the first respondent in its capacity as trustee of two trusts, but in that capacity it was in partnership and had, therefore, no interest in the properties themselves that would support a registered dealing or caveat on its behalf.

[61] In my opinion this argument founders on Mr Powell’s lack of knowledge of the partnership. He lent money to a company which, on the face of the register, owned the relevant pieces of land, and he was entitled to rely on the contractual commitment of the registered proprietor of that land to grant a mortgage in his favour and to authorise him, accordingly, to lodge a caveat to protect that interest. The question of whether the first respondent was capable of obtaining an interest in the land which was able to be registered under the Land Transfer Act does not arise where the affairs of the partnership have been conducted in such a way that it already had title.

[62] Aegean Developments Ltd v Love is distinguishable. In that case one party to a business arrangement was registered proprietor of some land which the parties intended to develop. The other party lodged a caveat claiming an interest in the land. The Court found that he did not have an interest in the land, though he did have an interest in the development project, or the profit from it. The position of the first respondent is the inverse – it has title to the land. Aegean Developments might be applicable if there were a dispute between the first respondent and K 2 Investment Group Australia Pty Limited over whether the latter company can maintain a caveat against the land. Mr Powell does not seek to derive his interest in the land from K 2

Investment Group Australia Pty Limited so Aegean Developments is of no relevance.

[63] For these reasons none of the arguments advanced by Mr Matthews leads me to a conclusion that Mr Powell does not have an arguable case for a caveatable interest in the land.

[64] Mr Matthews says that nonetheless caveat 9316761.1 should not be sustained, because I must consider the balance of convenience, and that favours Mr Kemeny. He says that even if there were a valid ground for the caveat to be lodged, that ground no longer exists as the Family Court in Sydney requires the properties to be transferred to Mr Kemeny, and the first respondent has executed the papers which are necessary under the land transfer system for the properties to be transferred to Mr Kemeny in accordance with the court order. In this circumstance the caveat

should not be sustained. He relies on Sims v Lowe:¹¹

An order for the removal of such a caveat will not be made under s 143 unless it is patently 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.

[65] Mr Hair says that the interest Mr Powell has in the properties cannot be affected by a decision of the Family Court which did not take them into account. The grounds for the caveat remain as they were.

[66] I do not accept that the principle on which Mr Matthews relies should be applied in this case. Although the Family Court in Sydney has determined the rights of Ms Durney and Mr Kemeny resulting from the breakdown in their relationship, the court order did not specifically refer to the rights of Mr Powell which arose on default under the loan agreement in March 2013, four months before the court order. It cannot be said that the basis upon which Mr Powell was entitled to lodge his caveat no longer exists, nor that there is no practical advantage in his maintaining a caveat. He remains unpaid. He has a contractual agreement to mortgage with the first respondent and on the face of it is entitled to enforce it.

[67] I therefore find that the balance of convenience favours maintaining the caveat.

[68] Finally, Mr Matthews says that if the decision of the Court is to sustain the caveat, an order should be made conditionally, allowing registration of a transfer to Mr Kemeny. He says this would be consistent with the right Mr Kemeny has under the judgments of the Family Court, and is recognised by Ms Durney’s execution of transfer documents for the first respondent.

[69] Mr Hair opposes this course. He says it would deprive Mr Powell of the right to a remedy on an application for specific performance of the agreement to grant him a mortgage.

[70] I am not prepared to adopt this course. It is arguable that Mr Powell has an interest in the land. He is entitled to the protection offered by the caveat while he establishes that right in a proceeding against the first respondent. I am not satisfied that Mr Powell’s rights in relation to the titles would not be prejudiced by permitting transfer of them to a third party. He is entitled to raise his dispute with the party with which he contracted.

Alternative application – s 148 Land Transfer Act 1952

[71] As noted, Mr Powell’s alternative application is that if either or both of the caveats are not to be sustained under s 145, he should be granted leave to file a second caveat under s 148.

[72] Section 148 provides:

(1) If a caveat has been removed under s 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.

[73] Caveat 9306281.1 must lapse for the reasons given earlier in this judgment.

[74] The principles to be applied by the Court are summarised by Randerson J in Lowther v Kim.¹² Although the Court is given an unfettered discretion, 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.

(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.

(d) In considering the strength of the applicant’s claim to an interest in the land, 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.

[75] In the foregoing paragraphs of this case I have said all that I need to say in relation to the strength of Mr Powell’s case, and the reasons for the caveat lapsing have been given. The only other factor identified by Randerson J to which attention must be given is in paragraph (c).

[76] For Mr Kemeny, Mr Matthews relies first on the following passage from Hinde McMorland & Sim: Land Law in New Zealand at 10.021 where, in relation to s 148, the learned author says:

(f) Priorities

An order under s 148 allowing the lodgement of a second caveat cannot affect the priorities recognised by ss 37 and 41 of the Land Transfer Act 1952 and the Court cannot direct that the second caveat retain the priority of the first: Wigglesworth v Mitri [1979] 1 NZCPR

127 at 129 per Chilwell J. The result is that if there are documents that must be accepted for registration ahead of any second caveat the

second caveat is postponed “to the end of the queue”.

[77] Mr Matthews then notes that the first respondent has signed a registration authority to transfer all titles to Mr Kemeny which he has lodged for an electronic transaction. Only Mr Powell’s caveats prevent registration of this transfer. All other titles have already been transferred to Mr Kemeny. Thus if the caveats lapse the Land Registrar will be required to register the transfer to Mr Kemeny, and if a second caveat is lodged by leave, it will be “at the end of the queue”.

[78] Mr Matthews then says that Mr Kemeny will be the registered proprietor, and

Mr Powell would have no equitable mortgage or right deriving from the registered

proprietor, as the loan agreement was only ever directed at the equitable share of the properties that was held by the first respondent in its capacity as trustee for the two New Zealand trusts. He says those two trusts no longer have any equitable interest in the property.

[79] Mr Matthews then says that, applying the wording of s 148(1), any second caveat must be in relation to the same interest as the first caveat. He says that in this case that same interest no longer exists.

[80] Mr Hair describes the registration of caveat 9306281.1 as a technical error, and says that this provides a reasonable explanation to support an application under s

148.¹³

[81] Mr Hair then refers to Mr Matthews’ argument based on Mr Kemeny becoming the registered proprietor and a new caveat going to the end of the queue. He says that the concept of indefeasibility of title as expressed in s 62 of the Land Transfer Act, on which this proposition is based, is subject to certain exceptions, including fraud. Fraud in this context is described in the following terms, in

Waimiha Sawmilling Co Ltd (In Liq) v Waione Timber Co Ltd:¹⁴

Where a purchaser actually knows for certain of the existence of an adverse right which will be destroyed by his purchase he is, as already indicated, guilty of fraud. Where, on the contrary, he has no knowledge that such a right exists or is even claimed he is a purchaser in good faith. In between these two extremes there lie those intermediate cases in which, although there is no certain knowledge of the existence of an adverse right, there is knowledge of a claim and of the possibility of that claim being wellfounded.

[82] And further at page 1175:

The true test of fraud is not whether a purchaser actually knew for a certainty of the existence of the adverse right, but whether he knew enough to make it his duty as an honest man to hold his hand, and either to make further enquiries before purchasing or to abstain from the purchase, or to purchase subject to the claimant’s rights rather than in defiance of them. If, knowing as much as this, he proceeds without further enquiry or delay to purchase an unencumbered title with an intent to disregard the claimant’s rights, if they exist, he is guilty of that wilful blindness or voluntary ignorance which,

¹³ _{R W French v Public Trust Office HC Hamilton M167/02, 6 December 2002, Master Faire.}

14. Waimiha Sawmilling Co Ltd (In Liq) v Waione Timber Co Ltd [1923] NZLR 1137 (CA) at 1174, per Salmond J.

according to the authorities, is equivalent to actual knowledge, and therefore amounts to fraud.

[83] In the context of the application before me I need not, and indeed should not, determine whether Mr Kemeny will take title to the property, on registration of his transfer, by a fraud within these terms. Certainly, there can be no doubt that since the caveat was registered in February he has had express notice of the interest claimed by Mr Powell, and his counsel maintains that right would be destroyed, to use Salmond J’s terminology. Prima facie it would appear, on the basis of these facts alone, that the argument presented by Mr Hair may be difficult to deny.

[84] For present purposes, however, I need only consider it in the context of the issues identified by Randerson J in Lowther v Kim. There is sufficient in Mr Hair’s argument to satisfy me that unavoidable prejudice would not be suffered by Mr Kemeny, should a second caveat be registered. He has known of Mr Powell’s claim to an interest in the land against which the caveat was lodged since February, as I have noted. He has obtained the execution of a transfer, and seemingly prior to that a court order, without taking that interest into account in any discernible way.

He is entitled to have the caveat lapse for the reasons set out above,¹⁵ but I do not

think it can be described as prejudicial to him to have to face an argument, resulting from a second caveat being registered, that he obtained title to the land by fraud as that term is used in this context.

[85] Taking into account all factors I am satisfied that it is appropriate that leave be granted for a second caveat to be registered claiming the same interest as is claimed in caveat 9306281.1.

Outcome

(a) Caveat 9306281.1 has lapsed.

_{(b) Caveat 9316761.1 will not lapse.}

¹⁵ [6] – [11].

(c) Mr Powell has leave under s 148 of the Land Transfer Act to lodge a second caveat claiming the same interest as is claimed in caveat

_9306281.1.

Costs

[86] The relative timing of the registration of caveat 9306281.1 and the arising of Mr Powell’s equitable interest, which has led to that caveat lapsing, was not noted by counsel until drawn to their attention after the close of argument. Supplementary submissions were invited and lodged on s 148 which had not received attention from counsel in submissions at the hearing. The entire hearing was devoted to the issues surrounding the application to sustain both caveats. Had caveat 9306281.1 been lodged after 8 March an order would have been made sustaining it, as for caveat

9316761.1.

[87] In that event Mr Powell would have succeeded entirely, and would have been entitled to costs. In the event he has failed in his application to sustain one caveat but succeeded in his application for leave to register a further caveat.

[88] Overall, therefore, Mr Powell has succeeded in this case, and the basis on which the application to sustain caveat 9306281.1 was unsuccessful did not occupy any time at the hearing, nor of itself necessitate any further submissions, because once identified, it was accepted that sustaining that caveat was, for timing reasons, inarguable. Argument on sustaining the caveats would have been the same, had it been directed at only one caveat.

[89] For these reasons my provisional view is that Mr Powell is entitled to costs without deduction or offset. As I have not heard counsel on this point I refrain from making an order. If Mr Matthews disagrees with my provisional view he may file a memorandum within three working days, and Mr Hair may reply within two further

_{working days. I will then determine costs on the papers.}

J G Matthews

Associate Judge

Solicitors:

Malley & Co, Christchurch.

White Fox & Jones, Christchurch