December 2008

The Property Law Update is produced to keep you up to date with the developments in the law relating to property. If you would like to know more about any of the topics covered in this update, please contact us. This update is produced by our Property and Private Services Group.

This issue:

• Able to complain or not to complain ...
  'No complaints' covenants are often used to obtain consent for developments or uses of land that might not otherwise obtain consent.  But are they always enough? more
• 'Standard' Agreements - beware of the 'unusual'
  'Standard' agreements are often used in sale and purchase of property situations. But what should parties look out for when they want to ensure the 'unusual' is covered? more
• Guarantees - do you know your obligations under them?
  Guarantees of leases are not secondary obligations. They rank equally with the obligations of the tenant. It is vital to consider and check the terms of any guarantee prior to signing. more
• When is a sale effective - and who gets the commission?
  This case provides a useful commentary for real estate agents on what is necessary to have effected a sale.  It also clearly demonstrates that a vendor can be liable to pay two commissions if an existing agency agreement is not validly cancelled before a new agency agreement is entered into. more

Able to complain or not to complain ...

'No complaints' covenants are often used to obtain consent for developments or uses of land that might not otherwise obtain consent.  But are they always enough?

A recent case, South Pacific Tyres NZ Limited v Powerland (NZ), centred on the enforceability of a no complaints covenant.  The plaintiff (South Pacific) operated a tyre manufacturing facility on a site that adjoined land owned by the defendant (Powerland).  Both sites were zoned "Business Industrial" under the Upper Hutt City Council District Plan.  Residential use of the defendant's land would not have been permitted without the consent of the plaintiff. 

In order to secure the plaintiff's consent for its residential development, the defendant entered into a no complaints covenant.  The effect of the covenant was to prevent the defendant and any future owner of the site complaining about the adverse effects generated by the plaintiff's activities, including effects relating to noise and odour.  In exchange, the plaintiff gave its consent for the defendant's development.  

Almost immediately after the defendant obtained the resource consent, it notified the plaintiff that it intended to unilaterally cancel the covenant.  The defendant then filed a complaint with the Council about the noise from the plaintiff's site.  In response the plaintiff filed proceedings seeking an order requiring specific performance of the covenant.  The defendant argued that:

• the covenant was illegal because it restricted its right to seek enforcement orders under the Resource Management Act 1991 ("RMA"); and

• the performance of the covenant would result in a breach of the RMA and was therefore illegal under section 5 of the Illegal Contracts Act ("ICA"). 

On the issue of contravening the RMA, the Court focused on whether the covenant had the effect of ousting the jurisdiction of the Court in relation to adverse effects generated by the plaintiff's activities.  It found that the covenant merely prevented the defendant from applying for an enforcement order in respect of the adverse effects under the RMA.  The Court noted that a party is at liberty to waive its rights just as it is at liberty to enforce them.  The Court liked the covenant to that of a settlement agreement in a civil action or an agreement in which a party waives the right to freedom of expression. 

The Court also noted that the covenant did not allow the plaintiff to contravene the RMA or remove the possibility of the duties under the RMA being enforced.  It only precluded the defendant and its successors in title from complaining.  The Court also noted that the defendant agreed to the covenant on a fully informed basis.  It extracted advantage out of the agreement, as the development would not have been permitted without the plaintiff's consent.  The Court noted that a no complaints covenant might advance public interest by preserving an effect-producing activity such as tyre manufacturing while facilitating a desirable residential development side by side on pre-agreed conditions.

Since the defence claim that the covenant was illegal under the ICA rested on the assertion that its performance would breach the RMA, and since the Court found that not to be the case, that defence necessarily failed. 

The Court found in favour of the plaintiff, and upheld the covenant between the plaintiff and defendant.  Consequently, an order was made for specific performance, which required the registration of the covenant against the title to the defendant's land. 

For more information please contact: Linda O'Reilly (Partner, Local Government), Deborah Miller, Ian McCombe or Howard Johnston (Partners, Commercial Property)

'Standard' Agreements - beware of the 'unusual'

Miktasov v Collins – Court of Appeal

Many people sign agreements for purchase of a property without first consulting a lawyer, believing standard term agreements will cover everything.  Unfortunately the mere fact that they are "standard" should alert buyers that the unusual might not be covered.  It is important to cross check all aspects of a contract, including whether the property can be used in the way you think it can.

One of the frequent property purchase pitfalls involves access and rights of way.  This case is an example of this.  The buyer purchased two properties from the seller – one in front of the other.  A right of way ran alongside the two lots and gave legal access to the back lots, but not the front lot.  The front lot already had a house on it and street access.

During negotiations, the buyer made it clear that he wanted to integrate the two properties for extended family, including building a house on the back lot and putting in a pool and tennis court.  There was no written agreement or contractual provision, covering the use of the right of way in favour of the back lot to access the front lot.

The case made its way to the Court of Appeal.  The Court was asked to declare that there was an equitable easement that had been informally created by the conduct of the seller in the course of the sale.  The Court refused to do this for a number of reasons, including the lack of an express statement on the part of the seller, the fact that the front property already had street access and that right of way access to the front property was not necessary for its reasonable use and enjoyment.  The fact that the same proprietor owned both properties did not give any rights of use to the front property.

For more information please contact: Deborah Miller, Ian McCombe or Howard Johnston (Partners, Commercial Property)

Guarantees - do you know your obligations under them?

Gielens v Broadway Developments Limited – High Court

It is common for landlords to require a guarantee of a lease.  Care must be taken however when giving such a guarantee. For example:

1. Guarantees are principal obligations.  Many director/shareholders of small and medium sized companies will be asked to provide personal guarantees when their companies enter into leases or borrow money.  It is critical that they understand the extent of the guarantee.
2. Most – if not all – leases include a clause that rent is payable notwithstanding set-off claims and it is dangerous to withhold rent without having first sought some advice about the nature (and likely success) of your claim.
3. Trustees should take extra care and ensure that the guarantee limits their liability to the trust assets.  Otherwise their personal assets may be vulnerable.

This case highlights some of the issues:

Gielens, the appellant, was the sole director and shareholder of Constant Trendz Pty Ltd, which entered into a deed of lease with Broadway Developments Limited, the respondent. Gielens was a guarantor of the lease.

Constant Trendz did not trade successfully and fell into rental arrears. Broadway Developments instructed its solicitors to make demand for payment and repeated demand letters were sent. In response Gielens claimed that a misrepresentation had been made which induced entry into the lease.  She said that the premises were part of a small development and it had been represented that this development would be completed much sooner than it was, and that the premises would then be part of a busy shopping mall.

Constant Trendz was struck off the companies register, so Broadway Developments filed proceedings for summary judgment (an application made on the basis that there is no arguable defence to the claim) against Gielens as guarantor. Gielens opposed the application and alleged set-off based on breach of lease, misrepresentation and the Fair Trading Act.

The District Court found in favour of Broadway Developments. Gielens then appealed on the basis (amongst others) that:

• as guarantor, she had a right of set-off for losses against Broadway Developments independent of Constant Trendz;

• Constant Trendz was induced into the agreement by the misrepresentation;

• she was entitled to cancel the guarantee.

The Court found for Broadway Developments for the following reasons:

• a counterclaim is not a defence to an application – it is a separate claim.

• set-off is a defence to an application, but in this case it was precluded by the terms of the lease which stated: “All rent shall be paid without any deduction or set-off by direct payment to the Landlord…”

• as guarantor, Gielens was a principal debtor and the terms of the lease applied equally to her as they did to Constant Trendz.

The Court noted that while Gielens may have had a separate claim, it could not be used in respect of these proceedings and judgement was entered for Broadway Developments for the rental arrears. Gielens would need to spend time and money if she wished to pursue her claim.

For more information please contact: Deborah Miller, Ian McCombe or Howard Johnston (Partners, Commercial Property)

When is a sale effective - and who gets the commission?

Heron Family Trust Limited v Barfoot and Thompson Limited

This case provides a useful commentary for real estate agents on what is necessary to have effected a sale.  It also clearly demonstrates that a vendor can be liable to pay two commissions if an existing agency agreement is not validly cancelled before a new agency agreement is entered into.

The Heron Trust appealed a District Court judgment against it in favour of Barfoot and Thompson Limited ("BLT") for commission of $84,937.50 together with interest, costs and disbursements.  On 1 August 2005 the Trust appointed BTL as its sole agent to sell its property at Bayswater.  The sole agency expired on 30 January 2006 but as often is the case was to continue as a general agency unless seven days notice of cancellation was given. On 26 August 2006, the Trust signed a sole agency agreement with Stanaway Real Estate Limited ("Stanaway").

The issues raised on the appeal were the timing of the cancellation of the BTL's general agency and the "causal link", the link between introduction and sale.

Around 24 September 2006, a salesperson for BTL showed Mr Liu around the property. Subsequently there was a discussion between the salesperson and Mr Heron (on behalf of the Trust) as Mr Liu had expressed an interest in purchasing the property.  Sometime during October 2006 the BTL salesperson told Mr and Mrs Heron that Mr Liu had "gone cold". Mr Liu later made a direct approach to Mr and Mrs Heron.  On 8 November 2006, Mr Liu and the Trust entered into an agreement for sale and purchase of the Property. No real estate agent was identified in the agreement as having effected the sale. 

For any cancellation notice of the general agency to be effective, it would have to have been received by BTL before the introduction date of 24 September 2006.  For BTL's case to be successful, it was necessary to show that their introduction led to the ultimate sale.  The District Court Judge had held that in order to establish this, it must be shown that there was no break in the chain of causation from introduction to binding contract.

The High Court was satisfied that the sale to Mr Liu resulted from BTL's showing Mr Liu the property.  Therefore BTL was entitled to receive commission on the sale.  The District Court Judge had previously noted that it was possible that the Trust could become liable for commission to Stanaway, as a result of prevailing contractual provisions.

For more information please contact: Deborah Miller, Ian McCombe or Howard Johnston (Partners, Commercial Property)

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Last updated: 17 December 2008

The contents of this publication are general in nature and are not intended to serve as a substitute for legal advice on a specific matter. In the absence of such advice no responsibility is accepted by Brookfields for reliance on any of the information provided in this publication.