October 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:

• Guarantors' liability and lease variations
  A recent case clearly sets out that liability of a guarantor may be preserved even if a guarantor does not expressly consent to a variation.  Preservation of liability will depend on how a guarantee clause is drafted. more
• Nominees and enforcing agreements
  A High Court case has made it clear that if you use the phrase "or nominee" in the agreement, the nominee can sue on the warranties or undertakings in the agreement. more
• Enduring Powers of Attorney
  This Act came into force on 26 September 2008. It provides better protection against abuse of the Enduring Power of Attorney (EPA)  by the attorney. more
• Unit Titles Bill
  A Bill that was introduced last May will reform the current rules relating to unit titles by replacing legislation that was originally enacted in 1972. Threre are several key changes. more
• New Legislation
  In the flurry of activity generated by Parliament going into urgency, a range of legislation was pushed through its schedule at a rapid rate. We have outlined some key property related statutes. more
• Publications
  Brookfields is committed to keeping its clients up to date and produces regular updates on the law. You are welcome to subscribe to any of these. more

Guarantors' liability and lease variations

Stonehurst Accommodation Limited v Dumelow & Cameron (Formerly Dumelow) (High Court)

This was an appeal from a District Court decision dismissing the appellant's application for summary judgment.  The appellant, Stonehurst, purchased a property in Christchurch which was subject to a registered memorandum of lease expressed to be for 20 years from 1 June 2003.  The parties to this lease, which was dated 3 June 1998, were BHL as lessor and a company called Occidental Hotel (1998) Limited ("Occidental") as lessee.  Occidental was owned and operated by the Dumelows, the respondents, for the purposes of running a backpackers' hostel.

The two respondents, who at the time were married to each other, had provided personal guarantees under the lease, including a guarantee to pay rent and other payments under the lease.  By the time Stonehurst purchased the property in 2006, the respondents, had separated and one of the respondents, Ms Cameron, was involved in the daily running of the backpackers business.  The respondents had signed a Relationship Property Agreement under which Ms Cameron had undertaken to secure Mr Dumelow's release from his liabilities under the guarantee.  The agreement for sale and purchase to Stonehurst recorded "Mablo Holdings Limited" ("Mablo"), not Occidental as the tenant.  The agreement made no mention of the guarantee.  Mablo was the name of the new company established by Ms Cameron following separation.

The rent fell in arrears in August 2006 and the lease was forfeited.  In the District Court there was an argument as to which entity was the correct lessee, was it Occidental or was it Mablo; and whether there had been an assignment of the lease from Occidental to Mablo or was it an entirely new lease granted to Mablo?  The High Court judge agreed with the District Court judge that the lessee was Occidental, in accordance with the registered lease and that a new lease to Mablo was never granted.

The court discussed the legal principles relating to the liability of guarantors under a lease following the transfer of the reversion (the landlord's interest in the leased land).  The legal principles can be summarised as follows:

• At common law a guarantor of a lease is automatically liable to the transferee of the reversion for the breaches of the tenant's covenants which run with the land without there being any need for formal assignment of the guarantee.
• A covenant by a guarantor touches and concerns the land and is to be performed and observed as a covenant that touches and concerns the land.
• The benefit of a guarantor's covenant runs with the reversion and the covenant is in force without express assignment.

The court decided that Ms Cameron did not have an arguable defence based on the absence of any formal assignment of the guarantee or the lack of notice.

In relation to the defences raised by Mr Dumelow, the court considered that one of the conditions of the property relationship agreement settlement was that Ms Cameron could secure Mr Dumelow's release from the guarantee under the BLH lease.  In 2005, certain variations were made to the registered lease without Mr Dumelow's consent.  Prior to the relationship property agreement, directors of BLH had assured Mr Dumelow that a new lease of the premises had been granted on new terms to Ms Cameron.  Mr Dumelow had understood that he had no further obligations under the old lease.  However in reality the lease to Mablo was never signed.

The court discussed the law underpinning discharge of guarantor's liability due to a change in terms of the lease.  In summary, the court noted the following:

• In equity, a variation to the principal contract made without the consent of the guarantor operates to discharge the guarantee, unless the variation is clearly not material or cannot prejudice the guarantor.
• In Pogoni v R & W H Symington & Company (Court of Appeal) the court held that a principal debtor clause standing alone was sufficient to preserve a guarantor's liability.  This case makes it clear, that the construction of the particular clauses at issue will determine whether or not a guarantor's liability is preserved.

In this case the court held that the guarantee clauses were broad enough to effectively preserve Mr Dumelow's liability even in the event of an increase in the obligation occasioned by a two year extension of the lease.

The court concluded that the fact certain changes were made to the lease in May 2005 without Mr Dumelow's consent did not afford him an arguable defence to the appellant's claim.

However, the court held that Mr Dumelow may have an estoppel defence available to him.  In order to find an estoppel argument, Mr Dumelow would have to show reliance on the statement made to him by BLH directors.  The court held that there was sufficient evidence to show that Mr Dumelow had relied on the BLH statements.  There was also some suggestion that an entirely new lease would be signed. 

The court commented that had Mr Dumelow known that he was still liable under the guarantee, it was highly unlikely he would have settled the relationship property agreement.  He would have insisted on the release of the guarantee being obtained.  The court commented that without further evidence it was impossible to say whether the estoppel defence will ultimately succeed.  The court was satisfied that there was an arguable defence.  The court found that the appellant was not entitled to summary judgment against Mr Dumelow.  However the court allowed summary judgement in respect of the claims against Ms Cameron.

This case clearly sets out that liability of a guarantor may be preserved even if a guarantor does not expressly consent to a variation.  Preservation of liability will depend on how a guarantee clause is drafted.   The benefit of a guarantor's covenant runs with the reversion and this covenant is in force without express assignment.  Prior to providing a guarantee under a lease clients should seek legal advice in relation to their present and future obligations as guarantors.  If a guarantee clause is intended to have limited application, then such clauses should be drafted with sufficient clarity.

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

Nominees and enforcing rights and benefits

Parsonage v Laidlaw (High Court, Auckland, Abbot AJ)

Many purchase agreements state that the buyer is the purchaser "and or nominee" This wording allows later substitution of (for example) a family trust or investment company.

As a rule, under contract law, you must be a party to the agreement to enforce any benefits or rights accruing from it. However, under s4 of the Contracts (Privity) Act 1982, a person who is not a party to the agreement can enforce a benefit if they are designated by name, description or reference to a class.

A High Court case has made it clear that if you use the phrase "or nominee" in the agreement, the nominee can sue on the warranties or undertakings in the agreement.

In this case, the agreement was a standard ADLS/REINZ agreement.  The nominee of the buyer was a trust.  Under the agreement, the vendor warranted that all obligations under the Building Act 1991 had been complied with, that required permits had been obtained and that a code compliance certificate had been issued.

Following settlement, it quickly became apparent that the house was leaky and that there had been breaches of the warranties. The nominated Trust sued to recover the costs of repairs and lost rent. The trustees used the summary judgment procedure, which allows a party to claim that the other party has no defence and that judgment should therefore be entered in their favour.

The vendors countered that the dispute was not suitable for summary judgment as they had a defence. The Trust was not a party to the agreement and therefore was not entitled to sue for its breach. As to the privity argument, they said that the phrase "and or nominee" was not sufficient designation of a party entitled to the benefits of the agreement. They said that the Act contemplated that the person be identified or identifiable at the point of entry into the agreement.

The Court agreed to enter summary judgment on the repair costs in favour of the Trust (the issue of the rent was to go to an ordinary hearing as it was not suitable for summary judgment). Following an earlier decision, it held that there could only be one nominee under the agreement and that once nominated, that person could be identified with certainty. The Judge said that there was an intention to create an obligation that could be enforced by the nominee.

The situation is different when a company that is not yet formed is to be the nominee.  The company must comply with section 182 of the Companies Act 1993. This provision requires ratification of pre-incorporation contracts.  If a pre-incorporation contract is not ratified by the company (or the Court under s 184) the company cannot enforce or receive any benefit under the contract.

While on the subject of ratification, the other party to the contract should bear in mind that a company to be formed does not have to ratify the contract – and the court may decide not to use its discretion under s184 to do so. To reduce this risk (but not negate it),  parties entering into an agreement with an agent for a company to be formed should consider inserting a clause specifying a timeframe for incorporation and ratification.

Finally, there may be an exception to the s182 rule. If the contract is between two individuals for the benefit of the company to be formed, the company may still be able to claim under the Contracts (Privity) Act. This is because it is not a pre-incorporation contract – the company is not a party to the agreement.  This has not been tested, and the case establishing this provision predates the current Companies Act. However it is possible that it is still good law.

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

Enduring Powers of Attorney

Protection of Personal and Property Rights Amendment Act 2007

This Act came into force on 26 September 2008. It provides better protection against abuse of the Enduring Power of Attorney (EPA)  by the attorney. From now on, the person giving the EPA must seek independent legal advice first. The witnesses to the donor signing the EPA cannot be the same as the witnesses to the attorney's signature. The attorney has a duty of care imposed when dealing with property.  Consultation with any person specified by the donor is required.  Where abuse is suspected, a number of people can now challenge the attorney, including family, doctors, social workers and anyone given leave to by the Family Court. The EPA must be in the form specified by the regulations promulgated on 19 September 2008.

Our Trusts and Management Services Team have prepared a newsletter outlining the rules relating to EPAs. If you would like to receive this or any of our Trusts Newsletters, please use our Opt In form and let us know which publications you would like to see. For more detailed information, please contact Senior Associate, Alison Gilbert.

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

Unit Titles Bill

A Bill that was introduced last May will reform the current rules relating to unit titles by replacing legislation that was originally enacted in 1972.  The time frame for the passing of this Bill is likely to be longer than a year, but in the meantime, interested parties will be able to make submissions to select committee on its provisions when Parliament resumes sitting post-election.

A number of factors have driven the reform, such as the changing patterns of multi-unit developments, and in particular the scale and number of these.  Another major catalyst has been the leaky building issue.  Many of these leaky buildings are apartments. In some cases, urgently required repairs have been held up by one or two owners who refuse to consent to the remedial work – usually on cost grounds. 

The proposed changes include:

• Larger developments – such as staged or mixed use developments - may be "layered" to allow the creation of subsidiary bodies corporate to oversee the various elements of the development. This is in recognition that some activities (for example, the operation of a carpark in a shopping mall complex) are best separately administered.
• New survey and title processes will allow developers to comply with subdivision consents in stages, as opposed to having to meet all requirements at the start of the development
• The body corporate will own the common property. It will be able to sell part of it or grant easements over it.
• Maintenance and repair issues (such as those arising in leaky building situations) will be easier to handle, as the body corporate will be able to act in the interests of all owners and the overall development.
• There is a new definition for "building elements" to cover external and internal shared components of the building (such as roofs, stairwells) that affect more than one unit and are necessary for the structural integrity, exterior aesthetics and health and safety of the occupants.  There are obligations on owners to permit access for emergency repairs of these and on the body corporate to "maintain, repair or renew all building elements and all infrastructure that relate to or serve more than 1 unit." (clause 122)
• The long-term value of investments will be protected by requiring the body corporate to establish a long-term maintenance plan and fund, together with extending the body corporate's maintenance and management role.
• At present a unanimous vote is required for certain activities. This is being relaxed in favour of a 75% majority. However, minorities will be able to seek relief from the court in respect of unjust or inequitable resolutions.
•  Disclosure requirements for vendors and developers will be introduced to ensure informed decisions are made by purchasers.  Cancellation of the purchase agreement will be possible within stated periods post disclosure. Contracting out of the disclosure provisions is prohibited.
• Disputes between owners below a $50,000 threshold can go to the Tenancy Tribunal.  Disputes between $50,000 to $200,000 will be within the District Court's jurisdiction.
• One suggestion in the Bill is that  Government should establish a dispute resolution service for unit title matters. It will include mediation and adjudication.

There will be plenty of time for everyone to examine this Bill and come to terms with its proposed changes. One thing is for sure – if passed it will mean significant changes for owners, developers and bodies corporate alike.

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

New Legislation

In the flurry of activity generated by Parliament going into urgency, a range of legislation was pushed through its schedule at a rapid rate:

Real Estate Agents Act
This is a consumer driven piece of legislation that is aimed at tightening the regulatory framework controlling the real estate industry. Licensing requirements and procedures have been modified, and an independent complaints and discipline procedure set up.  Mandatory disclosure obligations have been introduced, including a provision stating that agents cannot receive any fees or expenses that are not first set out in the agency agreement.  There is a (limited) cooling off period for sole agency agreements. Although the provisions setting up the complaints authority and providing for the regulation making powers come into force immediately, the in force date for most of this legislation is 14 months after assent.

Affordable Housing: Enabling Territorial Authorities
This Act allows local authorities to opt to develop their own affordable housing policies. Territorial authorities can choose to require that builders/developers either build some affordable housing in new developments, or contribute money or land towards affordable housing to be built elsewhere.  In return, the territorial authority can provide a range of development incentives (such as density bonuses) to offset the costs of providing such housing.

Companies (Minority Buy-out Rights) Amendment Act 2008
Under the current minority buy-out provisions of the Companies Act, the company can agree to the purchase of the shares of shareholders who have unsuccessfully opposed a fundamental change to the structure or operation of the company.  The company can nominate a fair and reasonable price for the shares.  However there is no procedure or guidance on how this fair price is to be arrived at, or the date at which the value is to be set.  This failure was the subject of judicial criticism and a subsequent report by the Law Commission. This Act attempts to rectify matters with greater clarity and provide an effective mechanism for dealing with buyouts.

Walking Access Act 2008
This Act sets up mechanisms for a nationally co-ordinated approach to target areas to which people want access and then negotiate agreements for access to occur.  It does not create a right for people to wander at will and does not interfere with existing private property rights. A Commission is tasked with negotiating, establishing, maintaining and improving walking access over public and private land as well as access with firearms, dogs, bicycles or motor vehicles.

For more information on any of this legislation, please contact: Deborah Miller, Ian McCombe or Howard Johnston (Partners, Commercial Property)

Publications

Brookfields produces a range of newsletters and updates on legal developments. These include:

The Property Law Update
LGLaw and Public Law
Immigration
i-News
Employment Law
TrustLaw

If you would like to be notified when any of these publications are issued, please contact us.

Last updated: 1 October 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.