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Millstone Grazing Limited v Myoak Holdings Limited [2017] NZHC 773 (24 April 2017)

Last Updated: 8 June 2017

IN THE HIGH COURT OF NEW ZEALAND NAPIER REGISTRY

CIV 2016-441-102 [2017] NZHC 773

_{JUDGMENT OF MALLON J}

Table of contents

Introduction ....................................................................................................................................... [1] The facts ............................................................................................................................................. [3] The settlement agreement ............................................................................................................... [35] The Buy Back Agreement ............................................................................................................... [41] The Subdivision Land ..................................................................................................................... [47] The parties’ respective positions .................................................................................................... [52] My assessment ................................................................................................................................. [54] Result ................................................................................................................................................ [73]

Introduction

[1] This claim concerns an option to purchase land. The plaintiff (Millstone), a company associated with Heughan Gordon, considers it is entitled to exercise that option. The defendant (Myoak), a company associated with John O’Connor, considers it is not. Which position is correct depends on the proper construction of

_{the terms of the option.}

MILLSTONE GRAZING LIMITED v MYOAK HOLDINGS LIMITED [2017] NZHC 773 [24 April 2017]

[2] Millstone has pleaded three causes of action. Its primary cause of action pleads that Myoak failed to perform its obligation in the option and seeks specific performance. The other two causes of action plead equitable estoppel and rectification and seek the same relief.

The facts

[3] The parties provided an agreed statement of facts. The following paragraphs are largely from that agreed statement. Additional evidence adduced at the hearing is also incorporated. Before discussing the agreed facts and evidence I note two matters:

(a) Both parties adduced evidence as to what they understood or intended when they agreed to the option. They did so on the basis that rectification had been pleaded. It is accepted this evidence is otherwise irrelevant.

(b) Counsel for each party submitted that, where the evidence of Mr Gordon and Mr O’Connor was in conflict, I should prefer the evidence of their client. However the only material respect in which their evidence differed concerned what they understood or intended by the option they agreed to. As that evidence is irrelevant to the first two causes of action, and fails to establish the existence of a mutual mistake for the third cause of action, it is not necessary to prefer the evidence of one over the other. Moreover I regarded both Mr Gordon and Mr O’Connor to be honest witnesses, doing their best to accurately recall events as they saw them.

[4] This proceeding has its genesis in an arrangement entered into between entities with two family groups:

(a) The Gordon interests comprise the trustees of the Heughan Gordon Family Trust, Timoti Limited and Millstone Grazing Limited (referred to generally as the “Gordon interests” or, where applicable, “Millstone”).

(b) The O’Connor interests comprise Silverfern Vineyards Limited (Silverfern), Seamar Investments Limited and Myoak Holdings Limited (referred to generally as the “O’Connor interests” or, where applicable, “Myoak”).

[5] Mr Gordon is a farmer. Prior to 2009 he ran a farm near Pahiatua. He was looking for a change when, in March 2009, he saw an advertisement for the sale of a

260 hectare (approximately) farm property in Waimarama, Hawke’s Bay which interested him. The property was owned by the O’Connor interests.¹ The property comprised about 250 hectares to the west of Waimarama Road (Lot 14) and about 9 hectares to the east of that road (Lot 13) (the Farm Land). It also comprised a further smaller parcel of land (Lot 58), also to the west of Waimarama Road, which was on a separate certificate of title.

[6] On approaching Mr O’Connor, Mr Gordon learned of complications. The Farm Land was part of a larger area of land, in total 320 hectares, owned by the O’Connor interests (the Original Land). The Original Land was comprised of 11 titles. It was subject to a Resource Consent dated 8 January 2009 permitting its subdivision. The Resource Consent enabled the O’Connor interests to subdivide the Original Land into the Farm Land and the Subdivision Land, and the Subdivision

Land to be further subdivided.² The Resource Consent contemplated the subdivision

being carried out in one stage. Because the subdivision had not been carried out, separate titles were not yet available for the Farm Land and it therefore could not be sold at this time.

[7] In light of this complication, negotiations took place in about June 2009. The negotiations led to an arrangement pursuant to which the O’Connor interests³ transferred the title to the Original Land to the Gordon interests.⁴ The Gordon

_{interests contemporaneously entered into an agreement to transfer the Subdivision}

¹ _Silverfern.

² The Resource Consent enabled subdivision of the existing 10 rural sites to create eight rural lifestyle sites and two balance rural sites and to adjust the boundaries of two existing lifestyle sites. The consent conditions required lots 12 and 15 to be held on the same title, lots 13 and 14 to be held on the same title and lots 1 and 16 to be vested in the Council as roads.

³ _Silverfern.

⁴ The Gordon Trust.

Land back to the O’Connor interests once separate titles were available. This

arrangement was documented as follows:

(a) an Agreement for Sale and Purchase dated 27 June 2009 pursuant to which the O’Connor interests⁵ transferred to the Gordon interests⁶ the Original Land and Lot 58 (the First Agreement); and

(b) an Agreement for Sale and Purchase dated 27 June 2009 pursuant to which the Gordon interests⁷ agreed to the transfer of the Subdivision Land to the O’Connor interests⁸ on issuing of new titles (the Buy Back Agreement).

[8] The First Agreement contained provisions concerning a water source on the property (Lot 14). The parties acknowledged the O’Connor interests held a resource consent to abstract water for certain water recipients and was entitled to do all things necessary to register an easement to implement the water scheme from the water source.⁹ The Gordon interests agreed to provide water for up to eight lifestyle lots until the water scheme was commissioned.

[9] The Buy Back Agreement provided for completion of the subdivision, who would own what land on completion of the subdivision and acknowledgements and requirements for implementing the water rights. Settlement of the Buy Back Agreement was to occur 10 working days after notification by the O’Connor interests of the deposit of the subdivision plan and the titles issuing for the Subdivision Land. The Buy Back Agreement did not contain any timeframe for the subdivision to take place, nor what was to happen if the subdivision did not take

place.¹⁰

[10] Mr Gordon became concerned about the delay in progressing the subdivision.

_{His expectation, based on his discussions with Mr O’Connor, was that the}

⁵ _Silverfern.

⁶ _{The Gordon Trust.}

⁷ _{Timoti Limited and the Gordon Trust.}

⁸ _{Seamar Investments Limited (Seamar).}

⁹ _{The water rights resource consent was dated 15 June 2007.}

¹⁰ The provisions of the Buy Back Agreement are discussed in more detail below.

subdivision would take about two years. He wished to obtain separate title for his farm and to remove the O’Connor interests’ caveat which protected their interest in the Subdivision Land.¹¹ He was concerned to have the ability to deal with the Farm Land if he needed to, for example if he was in injured in an accident on the farm and needed to sell it. Additionally, the O’Connor interests were permitted to carry out works on the farm for the water rights. This had the potential to cause disruption and he did not want the matter to drag on.

[11] Mr O’Connor was initially unaware of any concerns about the delay in the subdivision. Although he had discussed a possible time frame for the subdivision, he had provided no assurance about that. From his perspective the delay did not disadvantage the Gordon interests because the purchase price for the Original Land and Lot 58 only reflected the value of the Farm Land and Lot 58, and the Gordon interests also received grazing rights over the Subdivision Land for which the only cost was paying the rates. He did not wish to advance the subdivision because of concerns about the lifestyle market during this period and the cost of carrying out the full subdivision relative to that market. It was put to Mr O’Connor that he did not proceed because he could not due to financial difficulties. He maintained the issue was uncertainty about a satisfactory return in light of the market at that time.

[12] The Resource Consent was to lapse on 7 January 2014.¹² Mr O’Connor still needed to obtain separate titles for the Farm Land and the Subdivision Land. He therefore decided to apply to vary and extend the Resource Consent. Mr O’Connor says he discussed his intentions with Mr Gordon in June 2013. He understood Mr Gordon to be happy because the changes did not impact upon the Farm Land.

[13] The application to vary and extend the Resource Consent was made in July

2013. It was granted to Myoak on 19 November 2013 (the Varied Resource

Consent). The varied resource consent extended the expiry date for two years until

7 January 2016 and enabled completion of the subdivision in four stages.

_{[14] Stage one involved subdivision of the Original Land into three titles, namely:}

¹¹ _{A caveat was lodged by Seamar on 24 August 2009.}

¹² Resource Management Act 1991, s 125.

(a) one title for the Farm Land comprising Lots 13 and 14; and

(b) two titles for the Subdivision Land: one comprising Lot 5 (2.44 hectares), and one comprising lots 12, 15 and 16 (about 59 hectares).

[15] The following shows the location of these lots in relation to each other:

[16] Stage two involved:

(a) vesting Lot 16 in the Council as a road; and

(b) creating four new lots within lot 12 (lots 6 to 9) with lots 8, 12 and 15 to be held in the same title.

[17] Stage three involved creating three new lots within lot 15 (lots 1 to 3), with lots 8, 12 and 15 remaining on the same title. Stage four involved creating two further lots within lot 15 (lots 4 and 10), with lots 8, 12 and 15 remaining on the

same title. Lot 1 was to be vested in the Council as a road at either Stage three or four, whichever occurred first.

[18] Following the application to vary and extend the Resource Consent, the Gordon interests’ lawyers advised the O’Connor interests’ lawyers of their concerns. Communications between the lawyers continued after the Varied Resource Consent was granted. The Gordon interests considered it was unacceptable that the Varied Resource Consent extended the time for completing that part of the subdivision which would provide separate title for Lots 13 and 14 (Stage one), the title for the Farm Land, for up to another two years. They proposed a much shorter extension for this part. The Gordon interests threatened to object to the Varied Resource Consent. They also considered it was not appropriate to consider draft water scheme rules or a revised schedule of easements until the Farm Land titles were issued. Some proposals about these matters were made providing Stage one proceeded with urgency.

[19] The O’Connor interests responded that the work for Stage one was progressing and, if all went smoothly, documentation could be with LINZ by late January/early February 2014. The O’Connor interests were also concerned with the Gordon interests’ approach to the water scheme rules and the easements in light of their obligations under the Buy Back Agreement. The O’Connor interests, through their lawyers, sought and received an assurance that the Gordon interests were not seeking to unjustly enrich themselves.

[20] Shortly before Christmas 2013 the Gordon interests applied to remove the O’Connor interests’ caveat registered over the Original Land. With their lawyers’ office closing over Christmas, the O’Connor interests did not receive notice of this until mid-January 2014, by which stage the time for applying to sustain the caveat had passed. The Gordon interests had given no warning of this intended action and Mr O’Connor could not understand why they had taken this action.

[21] There were further exchanges between the respective lawyers in January and February 2014. The O’Connor interests assured the Gordon interests that work was progressing on Stage one. The Gordon interests remained concerned about progress.

The parties disagreed over the required water rights easements and encumbrance changes. In February 2014 Millstone was incorporated and the title for the Original Land was transferred to it.¹³ No deed of covenant was entered into on the same terms as the Buy Back Agreement therefore this was contrary to the agreement.¹⁴

[22] On 28 February 2014 Silverfern, an O’Connor entity, gave notice to a meeting of creditors to consider a compromise proposal. This proposal indicated Silverfern’s very poor financial position. However it neither had an interest in the Subdivision Land under the Buy Back Agreement¹⁵ nor under the Varied Resource Consent.¹⁶ Mr O’Connor maintained this was not an impediment to his subdivision plans because of the different entities involved, resolution of the financial issues of

the entities under strain was achieved, and a bankruptcy application against him was settled.

[23] On 17 March 2014 the lawyers for the Gordon interests gave notice that the Buy Back Agreement was at an end. The patience of the Gordon interests’ was said to be exhausted after five years of delay. Mr O’Connor was “completely shocked and bewildered” by this. He could not see how the Gordon interests could purport to retain the Subdivision Land when they only ever held it on trust for the O’Connor interests. Further correspondence ensued. The O’Connor interests gave notice of their intention to issue proceedings.

[24] On 31 March 2014 the O’Connor interests, pursuant to their interest under the Buy Back Agreement, lodged a caveat over the Original Land. By this time the Gordon interests in the Original Land had been transferred to Millstone. Millstone subsequently applied for the caveat to lapse.

[25] On 21 May 2014 the O’Connor interests commenced proceedings in the High Court. This proceeding alleged the Gordon interests had breached by the Buy Back Agreement by refusing to take steps to enable the subdivision to proceed, wrongly

_{purporting to treat the Buy Back Agreement as at an end, and transferring the title of}

¹³ From the Gordon Trust. This was the entity which held this interest prior to the transfer to

_Millstone.

¹⁴ _{Refer below at [42](c).}

¹⁵ _{This interest was held by Seamar.}

¹⁶ Myoak held the interest under the Varied Resource Consent.

the Original Land to Millstone. The proceeding sought declarations that the Subdivision Land was held on trust for the O’Connor interests, specific performance of the Gordon interests’ obligations under the Buy Back Agreement and damages.

[26] On 16 June 2014 the parties agreed to a consent order that the caveat not lapse pending the determination of the above proceeding. On 26 June 2014 the Gordon interests counterclaimed seeking a declaration that the Buy Back Agreement was at an end and damages.

[27] Subsequently the parties attended mediation before Robert Fisher QC on 8 and 9 September 2014. A settlement was reached. The terms of the settlement were set out in an agreement dated 9 September 2014. Lawyers for each party were involved in drafting its terms. The settlement agreement provided for specified conveyancing steps to be undertaken (set out at schedule A of the agreement) which would give effect to Stage one of the Varied Resource Consent and result in the

issuing of the three new titles it contemplated.¹⁷ It also provided Millstone with the

option to purchase which is the subject of this proceeding. The parties also agreed the High Court proceedings would be discontinued with no issue as to costs.

[28] As discussed in more detail below, at the time of the settlement Mr O’Connor was unsure if he would complete the subdivision and the Gordon interests were aware of this. The option to purchase arose out of a proposal by the Gordon interests to buy the Subdivision Land. The Gordon interests considered the land would be useful for its sheep and beef farming operations. It would provide more space, had better terrain, and it also had smaller paddocks close to the farmhouse and yards which were useful for holding small mobs of cattle or stock awaiting trucking. The O’Connor interests rejected the Gordon interests’ proposal to purchase the Subdivision Land. However that led to a suggestion of the option, which was agreed upon.

[29] The parties completed the conveyancing steps agreed in the Settlement Agreement on 10 October 2014. Separate titles for the Farm Land (one title) and the Subdivision Land (two titles) were issued in December 2014. These recorded

Millstone as the owner of the Farm Land and Myoak as the owner of the Subdivision

Land.

[30] However a dispute arose over the associated conveyancing costs of $27,000. Millstone considered they should be paid by Myoak because they were Myoak’s responsibility under the Buy Back Agreement. Millstone refused to execute authorities for the easements, despite having agreed to do so under the Settlement Agreement, until these costs were paid. Myoak considered each party was to bear their own costs as provided by the Settlement Agreement, which was in full and final settlement of all matters.

[31] Millstone remained liable for the rates over the Subdivision Land until 30

June 2015, being the end of the rating year. The grazing arrangement over the

Subdivision Land was therefore extended until this date. However on 7 May 2015

Mr O’Connor terminated the arrangement with immediate effect. This caused disruption and inconvenience to Millstone. On about 17 June 2015 Millstone registered a caveat over one of the two Subdivision Land titles (Lots 12 and 15). Mr Gordon says he did so because he learned Mr O’Connor had offered to sell the land to the farmer who had taken over grazing the land.

[32] Myoak did not progress Stages two to four of the subdivision. On 7 January

2016 the Varied Resource Consent lapsed, not having been renewed or extended. On

21 January 2016 Millstone’s lawyers asked Myoak’s lawyers to confirm the option to purchase was exercisable and requested Myoak’s notice to commence the process under the option. Myoak’s lawyers responded that Millstone’s option related only to what was left of lots 12 and 15 after the subdivision contemplated in Stages two to four. As subdivision had not taken place, this was not exercisable. It requested that Millstone remove the caveat.

[33] Further communications took place about whether the option was exercisable. No resolution was reached. In about February 2016 Myoak applied for Millstone’s caveat to lapse. Millstone applied for the caveat to be sustained. On 17

June 2016 the High Court ruled the caveat should be sustained.¹⁸ Myoak appealed

the High Court’s decision. The appeal is scheduled to be heard by the Court of

Appeal on 30 May 2017.

[34] On 23 August 2016 Millstone commenced this proceeding. The parties endeavoured to resolve the matter at a meeting in January 2017. On 26 January

2017 Millstone offered to purchase the land in Lots 12, 15 and 16 for $500,000, subject to finance, plus forgiveness of the disputed conveyancing costs of $27,000. Myoak did not respond. Mr O’Connor considered the offer was below the true market value of the land and should have been supported by a formal valuation. It seems that no formal valuation has been obtained by either party, and no valuation has been adduced in evidence.

The settlement agreement

[35] Clause 1 of the settlement agreement provided for steps, identified in Schedule A, to be taken “for the purpose of completing the requirements of the Buy- Back agreement ... to enable transfer of title to the Buy-Back land” to the O’Connor interests. It provided that most of these steps¹⁹ were to be completed by 31 October

2014, that time was of the essence, and if they were not completed the agreement was voidable at the option of either party.

[36] The steps identified in Schedule A included:

(a) the O’Connor interests withdrawing its caveat;

(b) the discharge of various mortgages and encumbrances;

(c) Millstone executing orders to enable the three new titles over the

Original Land to be issued;

(d) Millstone transferring title to Lots 5, 12, 15 and 16 to the O’Connor

interests;

(e) executing an authority to register an easement for the right to convey electricity, telecommunications and electronic data and the right to drain water over lots 5 and 16 in favour of Lots 5, 12, 13 and 15;

(f) Myoak registering a right of way over lot 5 in favour of lot 15;

(g) Millstone executing an authority to register an instrument for the right to convey water over Lots 14 and 58 in favour of Lots 5, 12, 13 and

15, and over other specified lots (under different DP numbers), and executing an encumbrance over Lot 14 to enable Myoak to abstract water from the water source for the benefit of the water recipients; and

(h) Millstone executing a consent to vest lot 16 as road.

[37] Clause 2 provided the option to purchase. It was as follows:

2. Myoak hereby grants to Millstone an option to purchase of Lots 12 and 15 (after completion of Stage 1) after subdivision out of those Lots, the lots contemplated in stages 2, 3 and 4 of the existing Resource Consent Variation granted to Myoak on 19 November

2013 (“Resource Consent Variation”). The option shall be

exercisable as follows;

a. The exact description and size of the Lots to be purchased shall be identified by Myoak at the point that Myoak has determined not to continue with any further subdivision of the residual land, being no later than expiry of the date the [sic] Resource Consent Variation to subdivide – whether existing, varied or new – lapses;

b. Following notice by Myoak to Millstone, each party shall obtain, within 28 days of such notice, a valuation from a registered and suitably experienced valuer in practice in Hawkes Bay, of the Lots based on then current market value;

c. Millstone thereafter shall have the right to purchase those Lots at a price which is the average of the 2 valuations and otherwise on the following terms;

a. The right must be exercised within 28 days of the determination of the purchase price in accordance with this clause; and

b. The right must be notified by an offer to purchase which is unconditional, due for settlement within

28 days, with a deposit of 10% and otherwise on the usual terms and conditions of the latest version of the Auckland District Law Society Inc/Real Estate agreement for sale and purchase.

[38] Clause 3 provided for the parties to use their best endeavours to settle and agree a Water Association to manage the water rights attached to the encumbrance and easements and provided a process for resolution of any disputes about this. Clause 4 provided that the Gordon interests were not to take any steps to challenge the validity of the Resource Consent Variation and Myoak was to consult with Millstone in any approach to the Council concerning the Resource Consent Variation. Clause 5 provided for the filing of a notice of discontinuance of the High Court proceedings on completion of the steps in Schedule A. Clause 6 provided there were to be no easements in gross. It further provided that Millstone would execute authorities to register easement instrument(s) for rights to convey water over Lots 14 and 58 in favour of Lots 5, 12, 13 and 15, a number of other specified lots, and such other neighbouring properties to which Myoak granted rights under the water scheme.

[39] Clause 7 provided:

7. The parties shall sign all documents and do all other things necessary to give effect to the provisions of this agreement.

[40] Clause 8 required notice if a party wished to transfer its rights. Clause 9 provided that the agreement was a full and final settlement of all claims by either party against the other connected with the subject matter of the proceedings. Clause

10 provided that the parties had authority to enter into the agreement. Clause 11 provided for solicitor/client indemnity costs if one party breached the agreement. Clause 12 provided that the agreement was confidential subject to exceptions (ie using it to bring or defend proceedings). Clause 13 provided that the parties had relied on their own judgment in entering into the agreement. Clause 14 provided that the agreement “constitutes the entire agreement, understanding and arrangement (express or implied)” between the parties relating to its subject matter. Clause 15 acknowledged that each party had received independent legal advice.

The Buy Back Agreement

[41] The Gordon interests rely on definitions in the Buy Back Agreement in support of their interpretation of the option to purchase. It is therefore necessary to consider the terms of that agreement in more detail.

[42] The Buy Back Agreement covered the following matters:

(a) The subdivision: The O’Connor interests agreed to “arrange for the preparation, approval and deposit of the subdivisional plan” (cl 16.4). The Gordon interests agreed to sign all necessary documentation to enable the deposit of the subdivision plan (cl 16.4). Who would own which parts of the land upon deposit of the subdivision plan was recorded (cl 16.6).

(b) Settlement: This was to occur 10 working days after notification by the O’Connor interests of the deposit of the subdivision plan and the titles issuing for the Subdivision Land (cl 16.3).

(c) Transfer of interests: If the Gordon interests were to sell or dispose of its interest in the land before subdivision, they must obtain from the transferee a deed of covenant protecting the O’Connor interests under the Buy Back Agreement (cl 16.7).

(d) Water rights: There were provisions concerning the water source, including that the O’Connor interests were entitled to do all the necessary works to convey water from the water source to the eastern side of Waimarama Road and to register an easement, and Lot 58 would be part of the water scheme and be a water recipient (cls 22.1-

22-25).

(e) Grazing rights: Until settlement the Gordon interests could continue to graze the property in accordance with good farming practice (cl 27).

[43] In the context of providing what interests were acquired the following definitions were provided:²⁰

15.1 ... [The Gordon interests] have agreed to purchase the lands in CFRs

292113, 360530 to 360537 inclusive and 360521 (“the Farm”) and

Lot 58 DP 385092 (“Lot 58”) (“The Prior Agreement”) ... upon the basis that [the Gordon interests] shall take title to the Farm and upon partition of the Farm, which will be achieved by the subdivision and issue of separate titles contemplated in this agreement, [the Gordon interests] shall retain Lots 13 and 14 on the annexed scheme plan (“the Land”) plus Lot 58 and [the O’Connor interests] acquires all interest in the Property as described on the front page of this agreement.

[44] And:

16.6 It is the intention of the parties that upon deposit of the plan of subdivision contemplated by this agreement and the settlement of this agreement [the Gordon interests] shall own the Land plus Lot

58. [The O’Connor interests] shall be the registered proprietor of

Lots 2 to 7 (inclusive), Lot 9, Lot 11, Lot 12 and Lot 15 on the annexed Scheme Plan or other description of those Lands on any

variation of the Scheme Plan (“the Final Property” and also

referred to as “the Residual Land” in the Encumbrance).

[45] In the context of the water rights, the following definitions were provided:

22.4 To that end [the Gordon interests] by their execution hereof acknowledges that the encumbrance to be registered against the title to the Farm pursuant to the Prior Agreement will on settlement of this agreement be discharged and the Encumbrance, modified to recognise that the Scheme Plan annexed shall be replaced by a subdivisional plan and modified to reflect the separate new legal descriptions and the interpretations set out later in this clause shall be given. Contemporaneously on the settlement date [the Gordon interests] ... shall deliver to [the O’Connor interests] such Encumbrance in registrable form duly executed and completed in all respects with priority over all mortgages of the Land to the intent that the Encumbrance shall be a first charge over the Land. For the purposes of interpretation and because certain lands to benefit from Water Source are not adequately defined in the Encumbrance the following shall apply in the definition of the Encumbrance:

“Farm” means the land presently comprised in the subdivision being all of the lands comprised in CFRs 292113, 360530 to 360537 (inclusive) and 360521.

“Land” means Lots 13 and 14 on the Scheme Plan which arise as a

result of the subdivision of the Farm.

“Residual Land” means the balance of the Farm after the Land has

been subdivided out and is the Final Property.

[46] A draft memorandum of encumbrance for the water rights was prepared. In that draft “residual land” was defined as meaning “the balance land remaining from the Farm once the Land has been subdivided out of the Farm”.

The Subdivision Land

[47] The O’Connor interests rely on evidence from Mr O’Connor about his intentions for the Subdivision Land as being relevant to the factual matrix when the option was entered into.

[48] Mr O’Connor’s evidence was that, at the time of the mediation, there was a high likelihood that Myoak would not undertake any of Stages two to four. This was because he thought Stages two to four would be costly and the lifestyle market was “reasonably dead”. It was also because the conflict with the Gordon interests had “eaten up” nearly a year of the two year extension under the Varied Resource Consent and caused substantial legal costs to be incurred.

[49] If the Varied Resource Consent expired before Stages two to four were implemented, those Stages could not be carried out subsequently. This was because under the Council rules, this level of subdivision depended on owning a larger parcel land than the Subdivision Land.²¹ Following Stage one, Myoak would own only

57 hectares of land. However, as Mr O’Connor saw it, subdivision options that

would remain open to Myoak were:

(a) A subdivision of the Subdivision Land into two blocks.

(b) A subdivision into three 20 hectare blocks, if Myoak acquired a further six hectares from neighbouring properties over which he had options, and combined this with the Subdivision Land.

[50] Mr O’Connor’s unchallenged evidence was that the vesting of the road in the Council would involve substantial upgrading work at an estimated cost of $50,000. However neither of these options would require Lot 16 to be vested in the Council as a road. Lot 16 was of value to the future potential of the Subdivision Land. This is both because it added to the total area of the Subdivision Land and it provided access to Waimarama Road for any future properties created in a subdivision.

[51] Mr O’Connor says these possibilities meant that it was not advantageous for him to agree to give the Gordon interests an option to purchase the Subdivision Land if Stages two to four did not proceed. Selling the Subdivision Land to the Gordon interests at the market price when the Varied Resource Consent expired would not reflect the potential value he could later extract from the Subdivision Land.

The parties’ respective positions

[52] Millstone seeks to purchase the Subdivision Land at fair market value. It submits the option applies whether Stages two to four were completed or not. It says Myoak was required to give it notice identifying the land to be valued at the time it determined not to carry out or complete the subdivision under the Varied Resource Consent, or when the resource consent expired, whichever came first. It says the question was when not if notice would be given. It acknowledges the option relates to Lots 12 and 15, and Lot 16 is not referred to. It refers to cl 7 of the Settlement Agreement which requires the parties to do all things necessary to give effect to the agreement. It says this required Myoak to remove Lot 16 from the title and its failure to do so is a breach of this clause. It says Myoak cannot rely on its own failure to avoid the option. Millstone is willing to take on the burden of purchasing Lot 16. Accordingly it says notice must be given under the option covering Lots 12,

15 and 16.

[53] Myoak contends it was only obliged to give notice if it had completed all stages of its subdivision. As it has not done so, it is not obliged to give notice to Millwood under the option. It submits the effective part of the option makes it clear that it applies to Lots 12 and 15 only “after” the lots in Stages two to four have been subdivided out of Lots 12 and 15. That is, the completion of Stages two to four was a condition precedent to the option arising. It submits that even if it was now

required to give notice (which it denies), it cannot because Lots 12 and 15 are the only two lots referred to in cl 2 and Lot 16 (a formed road subject to rights of way) remains within the same certificate of title. It says that once the Varied Resource Consent expired it had no right to remove Lot 16 from the title and if it was to be vested as a road it would be required to pay the costs of upgrading it.

My assessment

[54] The “essence of the modern approach”²² to determining the meaning of a contractual term is as follows:²³

... The necessary inquiry therefore concerns what a reasonable and properly informed third party would consider the parties intended the words of their contract to mean. The court embodies that person. To be properly informed the court must be aware of the commercial or other context in which the contract was made and of all the facts and circumstances known to and likely to be operating on the parties’ minds.

[55] The facts and circumstances include anything a reasonable person would regard as relevant, for example, the origins of the contract, the particular concerns and needs of the parties and the commercial purpose of the contract.²⁴ But the information must be relevant in that it might cast objective light on the meaning the words are intended to bear.²⁵ Where the words are ambiguous or otherwise susceptible to different interpretations, the court should adopt the interpretation which best accords with business common sense.²⁶ However, if there is an ordinary and natural meaning of contractual language, the conclusion that it reaches a commercially absurd result should only be reached in the most obvious and extreme

_{of cases.}²⁷

²² Burrows, Finn and Todd Law of Contract in New Zealand (5th ed, LexisNexis, Wellington,

_{2016) at 178.}

²³ Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5, [2010] 2 NZLR 444 at [19] per

_{Tipping J.}

²⁴ Burrows, Finn and Todd above n 22 at 179 citing Bank of Credit & Commerce International SA

_{v Ali [2001] UKHL 8, [2002] 1 AC 251 at [39] per Lord Hoffman.}

²⁵ _{Yandina Investments Ltd v ANZ National Bank Ltd [2013] NZCA 469 at [54].}

²⁶ Rainy Sky SA v Kookmin Bank [2011] UKSC 50, [2011] 1 WLR 2900 at [21] per Lord Clarke;

Lumley General Insurance (NZ) Ltd v Body Corporate 205963 [2010] NZCA 316 at [41]; and BOS International (Australia) Ltd v Strategic Nominees Ltd [2013] NZCA 643 at [56]. The parties in this case do not rely on subsequent conduct as relevant to the meaning of the option.

²⁷ Firm PI1 Ltd v Zurich Australian Insurance Ltd t/a Zurich New Zealand [2014] NZSC 147, [2015] 1 NZLR 432 at [93] per Arnold J. See also Wood v Capita Insurance Services Ltd [2017] UKSC 24 at [11].

[56] The opening words of cl 2 of the Settlement Agreement are that “Myoak hereby grants to Millstone an option to purchase”. The next words identify what the option relates to. Those identifying words are “of Lots 12 and 15 (after completion of Stage 1) after subdivision out of those Lots, the lots contemplated in Stages 2, 3 and 4 of the Resource Consent Variation ...”. The balance of cl 2 describes when the option is exercised.

[57] The dispute centres on the words which identify what the option relates to. The first few words identify that the option relates to Lots 12 and 15 after completion of Stage one. At the time of entering the agreement the parties were focussed on the need to complete Stage one and had agreed a process intended to ensure that completion occurred quickly. The words of the option therefore proceed on the basis that Stage one will be completed. It is clear the words relate to an option to purchase after this has occurred.

[58] However the option is further qualified by the words “after subdivision out of those Lots, the lots contemplated in stages 2, 3 and 4 of the existing Resource Consent Variation ...”. On the plain meaning of these words the option relates to Lots 12 and 15 after two things have occurred. First, the completion of Stage one (by which the separate titles for the Farm Land, Lots 13/14, and Lots 12/15/16 was obtained). Secondly, after subdivision out of Lots 12 and 15, the lots contemplated in Stages two to four. On its plain meaning, therefore, the option relates to what is left of Lots 12 and 15 once the contemplated Stages two to four have occurred.

[59] Myoak contends the matter ends there. It submits the option applies only if Stages two to four have been completed, because it only applies to the land that is left “after” those Stages have occurred. It says it has no obligation to carry out those stages and, as it has not done so, the option does not arise. Millstone submits this fails to have regard to the balance of cl 2.

[60] The question then is whether the balance of cl 2 describes what may be purchased if Stages two to four have not occurred. Subparagraph (a) provides that “the exact description and size of the Lots to be purchased shall be identified by Myoak” at a specified time. The time specified is “the point Myoak has determined

not to continue with any further subdivision of the residual land, being no later than expiry of the date [of] the Resource Variation to subdivide – whether existing, varied or new lapses.”

[61] The clause therefore contemplates that the description and size of Lots 12 and

15 over which the option is exercised may vary, depending on actions taken by Myoak. The point at which Myoak is to identify the description and size of Lots 12 and 15 is when it has “determined not to continue with any further subdivision of the residual land, being no later than expiry of the date [of] the Resource Consent Variation to subdivide – whether existing, varied or new lapses.” These words envisage that Myoak might decide not to carry out any further subdivision prior to expiry of the Resource Consent Variation. But otherwise, the point for Myoak to identify the exact description of Lots 12 and 15 for the option to purchase, is the expiry date of the Resource Consent Variation.

[62] Millstone submits the words “determined not to continue with any further subdivision” refers to Stages two to four and “the residual land” refers to the Subdivision Land. It submits the wording covers the possibility that none of Stages two to four would be completed. In that event it submits the option applies to the whole of Lots 12 and 15, rather than only the residual parts of those Lots after the lots contemplated in Stages two to four have been subdivided out of them. It says that if the option was only to apply if Stages two to four were carried out, these words would not have been necessary: the option need only have stated that it applied to Lots 12 and 15 only if Stages two to four were completed.

[63] In support of its submission, Millstone refers to the definitions in the Buy Back Agreement. Under that agreement “the Land” is defined as Lots 13 and 14 after subdivision (that is, after separate title to Lots 13 and 14 is obtained) and “Final Property” and “Residual Land” means the remaining property (that is, after lots 13 and 14 have separate title).²⁸ It submits the residual land referred to cl 2 of the Settlement Agreement means the land that is left after it has a separate title from Lots

13 and 14. In other words, the option to purchase Lots 12 and 15 arises after the

_{subdivision which provided separate title for Millstone’s farm, and relates to}

²⁸ See cls 15.1, 16.6 and 22.4 quoted at [43]-[45] above.

whatever is left of Lots 12 and 15 depending on the extent to which further subdivision was carried out by the expiry of the Resource Consent Variation.

[64] Myoak submits, however, that the words “determined not to continue with any further subdivision of the residual land” refers to possible further subdivision, after Stages two to four, of the remainder of Lots 12 to 15. It submits this was possible because the Resource Consent Variation could be further varied. It says it was reserving its right to carry out a different or additional subdivision than that covered by the Resource Consent Variation. It submits it did not need to grant Millstone an option to purchase the Subdivision Land if it did not proceed with some or all of Stages two to four, whereas if it had extracted all the value it could from the Subdivision Land it would be content to sell what was left of Lots 12 to 15 to Millstone. It submits there is no suggestion in the Settlement Agreement that “residual land” meant “Residual Land” as defined in the Buy Back Agreement. Moreover, under the Buy Back Agreement the Residual Land did not include Lot 16 (or Lot 1).

[65] Overall I consider the words, in the context and circumstances in which they were agreed, were intended to mean the option was to apply only to Lots 12 and 15 after Stage one and after the further subdivisions contemplated under Stages two to four (or some variation to the further contemplated subdivisions under Stages two to four). It was not intended to apply to Lots 12 and 15 if no further subdivision took place after Stage one.

[66] First, the structure of cl 2 supports this interpretation. The option identifies what it applies to in the opening paragraph. The words say that it applies “after” the contemplated Stages two to four. The plain meaning of this part of the clause is that Stages two to four (or some variation of them) are a condition precedent to the option arising. The use of the word “contemplated” indicates these stages have not yet happened and may not happen. If they do not happen the condition giving rise to the option is not satisfied. If the condition is satisfied then the balance of the clause explains how the option is to be exercised.

[67] Secondly, the words “determined not to continue with any further subdivision of the residual land” have meaning even if Stages two to four, or some variation of them, are completed in full. By these words Myoak reserved to itself the ability to carry out some further subdivision of Lots 12 and 15 beyond what was contemplated by Stages two to four. That might have been unlikely given the size of those lots if Stages two to four were completed. Nevertheless it is not surprising that Myoak, as a property developer, would wish to preserve all of its options to extract value from the land should further opportunities arise. If there were no better uses for what was left of Lots 12 and 15 then it made commercial sense to give Millstone an option to buy that land.

[68] Thirdly, I consider it does not matter whether “residual land” in cl 2 of the Settlement Agreement was meant to have the same meaning as “Residual Land” in the Buy Back Agreement. In their context, these words meant the land other than the farm land to which Millstone obtained title pursuant to Stage one (essentially the same as that under the Buy Back Agreement although at that time Lots 1 and 16 would vest in the Council when Millstone obtained title because the subdivision was to occur at once). But in my view this does not assist Millstone. The real issue is what was meant by “any further subdivision”. I consider those words meant any subdivision additional to that contemplated by Stages two to four.

[69] Fourthly, the option is expressed as applying to Lots 12 and 15. It was known at the time of the mediation that, if Stages two to four did not proceed, Lot 16 would remain on the title. The option could have been expressed to apply to Lots 12 and 15, and 16 if Stage two was not completed, if that was the intention. That said, if Stages two to four were completed, Lot 8 would be part of the same title as Lots

12 and 15. Unless that was varied before the expiry of the Varied Resource Consent, that too would have presented a problem with how the option was to work. This is not, therefore, the strongest of the points in favour of Myoak’s interpretation.

[70] Fifthly, I do not accept that Millstone’s interpretation is supported by the possibility that Myoak may want to sell the land before the Varied Resource Consent expired. If Myoak did wish to do so, without completing any of Stages two to four, it would not be in its interests to agree to provide Millstone with this option. It could

simply offer the land for sale and let the Gordon interests compete in the market to purchase the land if it wished to do so.

[71] Lastly, I do not accept Millstone’s submission that the option was of no value to it if it applied only if Myoak proceeded with Stages two to four. Mr Gordon did not say the remaining parts of Lots 12 and 15 would be of no use to his farm. Although it appeared unlikely at the time that Stages two to four would be completed, and therefore Millstone’s option was unlikely to arise, both parties obtained a mutually satisfactory settlement of their differences at the mediation irrespective of this. Specifically, the Gordon interests obtained a means to receive title to their farm in a timely fashion, Myoak obtained a way of resolving the issues relating to water rights and both parties achieved an end to the litigation and the associated costs and risks of that. In these circumstances, the option provided something of potential additional benefit to each party in the (unlikely) event Stages two to four were completed and no detriment to either party if they were not.

[72] I therefore find against Millstone on its first cause of action. Myoak has not breached cl 2 of the Settlement Agreement. I also find against Millstone on its remaining causes of action. What Myoak represented it would do is set out in the Settlement Agreement. It did not represent to offer Lot 16 as part of the option to purchase Lots 12 and 15 in the event that Stages two to four did not proceed. Nor has Millstone established there was any common intention about whether Lot 16 would be included if Stages two to four did not proceed.

Result

[73] Millstone’s claim is dismissed. Myoak is entitled to costs. If there is any issue regarding costs, the parties may file brief memoranda (limited to five pages each) within 30 days of the date of this judgment.

Mallon J