Winter 2009

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:

• When are Agreements to Lease Binding?
  When no formal deed of lease has been executed, it is possible for both tenants and landlords to rely on an agreement to lease where certain elements are evident.  more
• Rent Review Notices – be meticulous
  It is essential that landlords pay particular attention to the details in any rent review notices.  A mistake may cost the landlord dearly.  more
• Directors – A word of warning from the High Court
  Body Corporate 183523 & Ors v Tony Tay & Associates Limited & Ors (High Court)
  In this case, a director of a design and building company was found to be not personally liable for problems which later arose.  However, the Hight Court did have a word of warning for such directors.  more
• Contracts with Auckland councils need care
  The Local Government (Tamaki Makaurau Reorganisation) Act 2009 includes requirements that will affect all contracts that impose any obligation on a local authority beyond 30 June 2011.  more
• What are your remedies under standard Agreements for Sale and Purchase
  The standard ADLS/REINZ agreement does provide remedies for breaches of warranties or misdescribed properties. A recent case illustrates the application of the standard form remedies and highlights some important issues for both vendors and purchasers.  more

When are Agreements to Lease Binding?

Northcott Lands Limited v Te Oranga Pai Trust

In an ideal tenancy situation, parties are bound by a deed of lease, setting out the terms of the lease and the obligations of both landlord and tenant.  However that is not always the case and sometimes parties must rely on oral or written agreements to determine whether or not breaches have taken place.  Where agreement cannot be reached, proceedings may be required to decide whether or not an agreement to lease is binding.

Northcott Lands Limited ("Northcott") was a company controlled by the Northcott family and owned farm land which was the subject of this dispute. Three members of the Northcott family and its accountant, Mr Richards, met with neighbouring farmer Mr Ritchie to discuss a lease of the Northcott land to him. Following the meeting Mr Richards sent a letter to the Northcott family setting out what had been agreed at the meeting, which included:

• the term of the lease would be 6 years;
• there would be a right of renewal of 3 years;
• the rent would be $150 per acre;
• the commencement date;
• the first rent review would be after 3 years;
• maintenance was to be undertaken by the tenant;
• 200 hay bales would be left on the property by the tenant at the end of the lease;
• Mr Richards had instructed Northcott’s solicitor to prepare a formal deed of lease on the terms described in the letter.

Mr Ritchie entered into possession of the land and he and Mr Richards conversed directly regarding the payment of rent.  Mr Richards sent another letter to the Northcott family in which he incorrectly noted the rent would be $45,000 plus GST per annum.  He then sent a letter to Mr Ritchie acknowledging that the Te Oranga Pai Trust ("Trust") was the nominated tenant, enclosing an invoice for rent addressed to the Trust and providing bank account details so an automatic payment could be established to pay rent on a monthly basis. The Trust sent a cheque to Mr Richards for the invoiced amount and then commenced monthly rent payments. The rent amount on the invoice was $42,000 plus GST per annum which was correct.

Several draft versions of a deed of lease were prepared but none was ever executed by the parties.

Some months later Northcott requested that the Trust pay arrears of rent on the basis that the correct rent was $45,000 plus GST per annum. The Trust refused and Northcott cancelled the agreement.  The Trust sued Northcott for damages.

The Trust needed to establish that there was an agreement to lease in the absence of an executed deed of lease. The four elements required for such an agreement are:

The Court held that there was sufficient certainty of all four elements for a binding agreement to exist. The Court also held that the evidence established that there was an intention by both parties to be legally bound by the agreement. It was noted that following the initial meeting both parties acted as if the lease was in place, namely by:

• the giving and taking of possession;
• the payment and receipt of rent;
• Mr Richards instructions for the preparation of a deed of lease.

Because a lease is a disposition of land, the Trust needed to prove that there was a memorandum or note in writing signed by or on behalf of Northcott which related to the agreement. The Court held that the letter sent by Mr Richards to the Northcott family was such a memorandum and that Mr Richards had acted as an agent of Northcott in arranging for the agreement to be effected.

This case illustrates two important points to consider when dealing with leases:

• it is not necessary to have an executed deed of lease for an agreement to lease to be binding and enforceable against both tenant and landlord provided the necessary elements for a binding agreement can be established.

• both parties should be careful when purporting to cancel an agreement to lease. It appears that Northcott may not have taken any advice before they cancelled the agreement but if they had a substantial award of damages could have been avoided.

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

Rent Review Notices – be meticulous

Hitech Investment v World Aviation Systems

Rent reviews are an important part of any commercial lease, providing landlords and tenants with the opportunity to renegotiate rents from time to time.  However, if you or your property manager make a mistake with a rent review notice, it may cost you dearly. 

In this case Hitech Investment ("Landlord") appealed to the High Court against a rent award made by an arbitrator in favour of World Aviation Systems ("Tenant").  The lease of three commercial premises to the Tenant contained rental review clauses.  From the outset of the lease term of one of the premises, as a result of a side agreement, the Tenant was not paying the stipulated rent figure, but a lesser amount, which had been described as "a rent-free holiday".  At the end of the first term of the leases the Landlord's property manager prepared a notice in terms of the lease.  That notice was designed to specify the rental the Landlord considered appropriate at the rent review date.  The property manager based his calculation of the reviewed figure not on the rental stipulated in the leases, but on the concessional figure. 

The Landlord did not detect this error until it was too late.  As a result, in terms of the leases, the figure specified in the Landlord’s notice became operative for the second three years of the lease term.  The arbitrator found in favour of the Tenant.  The arbitrator held that as a matter of contract under the leases, the notice given by the Landlord to the Tenant was "not invalid".  The arbitrator further found that it was not possible for the Landlord to invoke the equitable principles of unjust enrichment to obtain some form of relief under the lease. 

The High Court found that:

• the Landlord's notice was not ineffective even if the reviewed rental was lower than the rent reserved by the lease between the parties; and

• the arbitrator was correct to refuse the Landlord a remedy founded on the principles of unjust enrichment of the Tenant. 

The High Court also refused the Landlord leave to appeal this decision to the Court of Appeal.

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

Directors – A word of warning from the High Court

Body Corporate 183523 & Ors V Tony Tay & Associates Limited & Ors

This is a case where a director of a design and building company was not personally liable for problems which later arose on a development, but the High Court did have a word of warning for such directors.

The first and the second plaintiff in this case are the Body Corporate and the individual apartment owners of a block of 26 townhouses which were shoddily constructed.  The units suffered from "leaky building syndrome" and were consequently defective.  The leaks led to rotting timber, health hazards and a clear need to reconstruct part of the building to make the units reasonably habitable.  The plaintiffs sought damages, being the estimated cost of putting the building right.

The High Court upheld the plaintiffs' claims against the designer and the builder Tony Tay & Associates Limited ("TTA") and the building subcontractor (second defendant) in negligence on the grounds that:

• TTA was contracted to carry out work "in a thorough and workmanlike manner and in conformity with the Building Act 2004 and Building Regulations";
• the design details of the apartment block were defective.  In many critical areas the construction work was not carried out in a thorough workmanlike manner nor was it in conformity with the Building Act and the Building Code. These various proven defects caused loss to the plaintiffs; 
• it is clear law in New Zealand that regardless of the specific terms of a building contract, builders and architects (being no different in principle) owe a duty of care to the people who they should reasonably expect to be affected by their work.

The Court held that the second defendant (who contracted with the first defendant to conduct the building work on a labour only basis) together with the first defendant owed a duty of care to the plaintiffs and was jointly and severally liable.

As far as the personal liability of Mr Tay (who was the third defendant and director of both the development company and the first defendant) was concerned the Court held that he was not liable in his personal capacity as a developer.  The following factors were considered:

• Mr Tay's involvement was not so great and his control not so central, that he owed a non-delegable duty of care to the plaintiffs.
• Mr Tay was not personally liable for his role in signing the Practical Completion Certificate ("PCC").  However, the Court found that the PCC was negligently issued.  It had no difficulty with the preposition that architects and other professionals owed a duty of care when preparing PCCs, which is an integral part of any construction work. 
• Mr Tay, in his personal individual capacity, was not negligent as, on the facts, there was no assumption of responsibility by him towards the plaintiffs. 
• Mr Tay only played a "minor administrative role" and there was no evidence he personally was actively engaged or directly involved in the development.  Mr Tay's actions were carried out in his capacity as a director and were similar to what he would have done in other projects in which the first defendant was involved.

The Court did however comment that where companies are involved in construction work, and factual findings are available that a director was personally involved on the site in building supervision or architectural and design detail, then the liability would be differently assessed.  In this case the plaintiffs failed to prove that Mr Tay was personally involved to a degree so as to give rise to personal liability.

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

Contracts with Auckland councils need care

As part of the legislation which will restructure local government in Auckland, the Local Government (Tamaki Makaurau Reorganisation) Act 2009 is now in effect.

This Act applies to certain arrangements entered into during the "transition period" which runs from 24 May 2009 to 31 October 2010 for the region's local authorities, being Auckland Regional Council, Auckland City Council, Franklin District Council, Manukau City Council, North Shore City Council, Papakura District Council, Rodney District Council and Waitakere City Council. 

A decision to enter into contracts, for example leases, extending beyond 30 June 2011 with a value of $20,000 or more is automatically covered and will be subject to confirmation by the Transition Agency.

The Act affects all contracts that will impose any obligation on a local authority beyond that date, including contracts for services or to buy or dispose of assets.

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

What are your remedies under standard Agreements for Sale and Purchase

Property Ventures Investments Limited v Regalwood Holdings Limited

When you believe a vendor has breached a warranty or misdescribed a property in a standard agreement for sale and purchase, the standard ADLS/REINZ agreement does provide remedies. However it is important to ensure that standard clauses are appropriate in any agreement, and to make or check any changes where necessary.  A recent case illustrates the application of the standard form remedies and highlights some important issues for both vendors and purchasers.

Regalwood Holdings Limited ("RH") agreed to sell a property in Christchurch to Property Ventures Investments Limited ("PVI").  The standard Auckland District Law Society/Real Estate Institute of New Zealand Agreement for Sale and Purchase of Real Estate form was used ("Agreement"). 

Settlement did not occur on the settlement date.  PVI alleged that RH was in breach of its warranties to comply with the Building Act 1991 and to obtain a building warrant of fitness and code of compliance certificate for work done to the property (Clause 6.2). 

RH served a settlement notice on PVI.  Settlement still did not take place and RH issued a notice of cancellation of the agreement.  RH brought a successful summary judgment application where the High Court declared that RH's cancellation was valid and ordered PVI's caveat be removed and its deposit be forfeited to RH. 

PVI appealed the summary judgment submitting that RH could not compel PVI to settle until the parties had agreed on the amount of compensation or made some other arrangement to allow settlement to proceed.

One of the issues in this case was which of the following clauses applied to the RH's breach of the warranties under clause 6.2 of the Agreement:

Clause 6.5 provides that:

“Breach of any warranty or undertaking contained in this clause does not defer the obligation to settle. Settlement shall be without prejudice to any rights or remedies available to the parties at law or in equity, including but not limited to the right to cancel this agreement under the Contractual Remedies Act 1979.”

Clause 5.4, which deals with title, boundaries and requisitions, provides that:

"Except as otherwise expressly set forth in this agreement, no error, omission or misdescription of the property or the title shall annul the sale but compensation, if demanded in writing before settlement but not otherwise, shall be made or given as the case may require."

The Court did not agree with PVI's submission that the breach of warranty in this case could also amount to a misdescription.  It held that clause 5.4 did not apply but clause 6.5 did.  The Court further held that:

• a breach of a warranty or undertaking can amount to a misdescription in terms of clause 5.4 only if it is a misdescription at the time of entering into the agreement.

• the vendor’s warranties in clause 6.0 of the Agreement are divided into those that apply at each of four separate times: entry into the contract, possession date, on settlement, and on or immediately after possession.  Under the Agreement the warranties under clause 6.2 apply from possession. As a consequence, clause 5.4 will not govern this case because the warranties in question relate to the possession date, which in this case coincides with the settlement date.  The requirement in clause 5.4 that compensation must be demanded in writing before settlement precludes the application of the clause to a warranty which is not required to be performed until settlement. Until the time for performance of the warranty, there is no breach for which compensation could be demanded.

• the fact that clause 5.4 is in a separate clause relating to titles or boundaries can be seen as necessarily limiting the application of the whole of that provision to matters involving titles and boundaries.

The court also held that if a breach of the warranties in clause 6 is established, there is a range of possible remedies, depending on the nature of the warranty and the circumstances of the breach. This includes cancellation, which may be exercised before settlement. In this case, however, PVI did not seek to cancel the agreement as a result of the alleged breach of warranties.  As a consequence, the Court held that in accordance with clause 6.5, these remedies must be exercised after settlement has occurred at the full purchase price (where the purchaser decides not to cancel the agreement). It is clause 6.5, rather than clause 5.4 that should govern the situation where a warranty or undertaking covered by clause 6 is at issue.

For the above reasons, the Court ruled that PVI was obliged to settle in full in accordance with clause 6.5 (unless it had a right to cancellation and had exercised that before settlement, which it did not).  It had no right to defer settlement until compensation had been agreed.

While somewhat technical in nature, this case contains a number of important reminders for vendors and purchasers:

• check the warranties in the agreement are true;
• check that the property is correctly described. Obtain a presale title search;
• have your lawyer check the agreement and make appropriate changes to the standard agreement when buying;
• check the agreement to see when/what changes have been made;
• always get a pre-sale LIM and inspect the Council property file; and
• make sure your deposit is protected.

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

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Last updated: 19 June 2009

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.