IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY

CIV-2015-419-73 [2015] NZHC 1802

BETWEEN	ASB BANK LIMITED
Plaintiff	

AND	
JUDY KIM IDA THOMPSON AND JEANETTE ANN CROWE (as Trustees of the Fallowfield Trust)
Defendants	

Hearing:	14 July 2015	

Appearances:	
Mr Powell for Plaintiff
Mr McKenna for defendants	

Judgment:	
3 August 2015	

JUDGMENT OF ASSOCIATE JUDGE J P DOOGUE

This judgment was delivered by me on
03.08.15 at 11 a.m., pursuant to
Rule 11.5  of the High Court Rules.

Registrar/Deputy Registrar

Date……………

ASB BANK LIMITED v THOMPSON AND ANOR (as Trustees of the Fallowfield Trust) [2015] NZHC 1802 [3
August 2015]

[1]       On or about 10 July 2012, ASB, as lender, entered into a facility agreement with the the Fallowfield Trust, as borrower, the trustees of which are the defendants, Judy  Thompson  and  Jeanette  Crowe.    The  facility  agreement  established  the following term loans:

a)	a term loan for $250,000; and b)	a term loan for $329,500
[2]       The borrowings were to be secured over a property at Matamata which the defendants owned.

[3]	The defendants have fallen into arrears with their obligations under the facilities.  ASB now brings this proceeding to obtain possession of the property over which it was granted security.  It also seeks judgment for all amounts owed under the lending facilities.

Background

[4]       The plaintiff summarised the factual position as follows.  The summary is not disputed by the defendants.

[5]       The defendants’ obligations to ASB are secured by a first ranking mortgage (the Mortgage) over the defendants’ property at 97 Taihoa North Road, Matamata (Certificate of Title SA 70D/748) (the Property).

[6]       ASB served notices on the defendants under the Property Law Act on 19

March 2014.   Since the expiry of those notices, ASB has taken steps to sell the property under its power of sale.    ASB asserts that it has been unable to sell the property as a result of the conduct of the defendants.  As a result, ASB decided to exercise its power under the mortgage to obtain possession of the property.   The defendants have declined to leave the property.

[7]       The defendants responded with a Notice of Opposition alleging that:

a)	the  property  is  subject  to  a  binding  lease  agreement  that  ASB

consented to; and

b)	to grant vacant possession to ASB would be unduly oppressive to the defendants in the circumstances.

[8]       The defendants have advised that they do not now rely on the second ground of opposition.

[9]       I would add to the above statement of background that the second-named defendant is the mother of the first.  I would also add that the Fallowfield Trust had entered into a lease agreement for the property with Amber Mountain Bengals Limited, a company owned by the first named defendant, commencing on 1 March
2013.   The first named defendant   also states that previous lease agreements had been signed with LSM Consultants Limited, a company which was also owned by the first named defendant.  After this company was placed into liquidation, Amber Mountain Bengals Limited took over the lease on the same terms.

ASB’s Case

[10]     The defendants provided the mortgage over the property as security for their obligations under the Facility Agreement.  The mortgage relevantly provides:

5.2       Negative undertakings relating to Secured Property: The Mortgagor undertakes that it will not, without the prior written consent of the Bank:

…

(b)	Dealings  with  the  Secured  Property:  …  grant  a  lease  or licence in respect of any Secured Property …

…

7.2       Rights of the bank on default: On the security created under this Mortgage becoming enforceable, the Bank may in the name of the Mortgagor or otherwise, at any time do anything and exercise any right which the Mortgagor could do or exercise in relation to the Secured Property, including (without limitation) the right to:

(a)	Take Possession: take possession of … the Secured Property

[11]     ASB says that on or before 20 February 2014, the defendants defaulted on their obligations to ASB under the Facility Agreement by failing to pay amounts when due.  Further, on 20 February 2014, ASB issued a demand on the defendants for $9,847.80.  The defendants failed to make payment in response to the demand.

[12]     On 19 March 2014, ASB served the defendants personally with a notice issued under s 119 of the Property Law Act 2007 (the PLA Notice).  The defendants failed to remedy the default.

The defence

[13]     Mr McKenna for the defendants said that their contention is that when they obtained finance from the plaintiff it was upon the basis that the premises would be leased to a company operated by the first named defendant.

[14]     Mr McKenna said that other factual disputes exist relating to allegations that the first named defendant has been actively attempting to frustrate the plaintiff’s efforts to sell the property.  Counsel does not intend to address these factual disputes. It is not necessary for the plaintiff to establish that the first named defendant has acted in an obstructive way in order to obtain an order for vacant possession.   In other words, these allegations are irrelevant to the issues currently before the Court.

[15]     I was referred to what Mr McKenna submitted were the relevant provisions of the the Property Law Act and the mortgage.

[16]     Section 138(1) of the Property Law Act 2007 states that:

If a mortgagee has consented to a lease of all or part of the mortgaged land or goods, the mortgagee may not, in accordance with section 137(1)(a), enter into or take possession of any land or goods that are subject to the lease, except in the exercise of a power conferred by section 147.

[17]      Mr  McKenna  noted  that  the  Deed  of  Mortgage  adds  the  additional stipulation that the lease must be consented to in writing.  It states at clause 5.2(b):

5.2       Negative undertakings relating to Secured Property: The mortgagor undertakes that it will not, without the prior written consent of the Bank:

…

(b)	Dealings  with  the  Secured  Property:  …  grant  a  lease  or licence in respect of any Secured Property …”

[18]     Counsel said that the defendants’ case is not that the plaintiff has consented to the lease purely by acquiescence.   The defendants’ case is that the basis upon which the loan was granted in the first place included the lease of the premises to the first named defendant’s business.   It was upon this basis that the loan offer was made.  The loan offer, he said, is the document that comprises written consent to the lease in that this document is written evidence that the bank consented to the defendants entering into a lease to the company run by the first named defendant.

[19]	Counsel submitted that the determination of this issue falls on a factual analysis of what was said and communicated at the time the lease was entered into. This requires the examination of witnesses and, as such, it should be determined at a full trial rather than on a summary judgment basis.

Discussion

[20]      Both counsel agreed that the authority central to the question of whether a mortgagee takes his interest subject to a lease is the case of Cashmere Capital Ltd v Carroll.1   The following passage is of particular relevance:2

These decisions indicate that a consent which, under ss 105 and 119 [of the Land Transfer Act 1952], binds a mortgagee to the competing estate or interest in another instrument, requires conduct which affirms the lease.  A mortgagee who is aware of a third party’s interest, and passively stands by, making no objection, has not consented.   For there to be a valid consent the mortgagee must either have been aware of the essential terms of the lease or be shown to have consented to the lease whatever its terms may be.  Only then does the mortgagee consent to the terms of the other instrument, in the sense of agreeing to be bound by it.  Making an advance as mortgagee, while being aware of the other instrument and another party’s interest in it, of itself, does not amount to consent.

1	Cashmere Capital Limited v Carroll [2009] NZSC 123.
2	At [79].

[21]     Mr  Powell  also  referred  me  to  the  decision  of  the  Court  of  Appeal  in

Registered Securities Limited v Christensen Potato Company Limited:3

At common law a lease by a mortgagor would be binding between him and his tenant by estoppel … but as against the mortgagee’s claim to possession the tenant has no defence … unless the mortgagee recognises the lessee as tenant … or is otherwise estopped from denying the tenancy.  The onus lies on the tenant to show that the mortgagee must recognise his right of occupation.  Mere knowledge by the mortgagee of the existence of the lease is not enough.

[22]     The issue in the present case is whether there is in fact any evidence of consent.    The first  named  defendant  has  deposed  that  she had  a discussion,  or something of that kind,  about how the ability of the defendants to  manage the mortgage liabilities depended upon a lease of the property.  The question is whether, in these circumstances, a substantial defence is arguable that there was consent on the part of ASB to the entry into the lease so that they are prevented from taking vacant possession of the property in terms of the summary judgment application to that end.

[23]     I accept that at the summary judgment stage it is not incumbent upon the defendant  to  actually  prove  on  the  balance  of  probabilities  that  the  plaintiff consented to the grant of a lease.  The defendant does not have to do more than show that it is reasonably arguable that there was such a consent.   Having reached that point the defendant would not have to do any more to defeat the summary judgment application.

[24]     The following matters seem to me to be relevant to the question of whether the defendants, in fact, have an arguable defence.

[25]     The starting point is the well-known extract from the judgment of Eng Mee

Yong v Letchumanan:4

Although in the normal way it is not appropriate for a judge to attempt to resolve conflicts of evidence on affadavit, this does not mean that he is bound to accept uncritically, as raising a dispute of fact which calls for further investigation, every statement in an affadavit however equivocal, lacking in precision, inconsistent with

3	Registered Securities Limited v Christensen Potato Company Limited (1991) ANZ Conv R 57 (CA) at [4].
4	Eng Mee Yong v Letchumanan [1980] AC 331 at 341.

undisputed contemporary documents or other statements by the same depondent, or inherently improbable in itself it may be.

[26]     The first named defendant says that it was agreed that the mortgage would be subject  to  a  lease  that  the  Fallowfield  Trust  would  be  entering  into  with  her company.  However, no detail is given of when and where the discussion, in which this agreement is said to have been made, took place or with whom it was had.

[27]     While  the  precise  words  of  the  discussion  do  not  need  to  be  proved,  a reasonably firm and clear account of what the parties actually said to each other in the context of arranging the loan should be put forward by the defendants if they are to demonstrate to the Court that they have an arguable case that the parties actually entered into an agreement of the kind for which they contend.

[28]     In paragraph 10 of the first affidavit which he gave on behalf of the plaintiff, Mr Rugen denies the allegation that ASB had consented to the lease.  This comment was  made in  anticipation  that  the defendants  would  claim  that  ASB  had  given consent.  The reply on behalf of the defendants contained in the affidavit given by the first named defendant was:

I deny paragraph 10.  When I took out the loans it was on the basis that the lease would pay the loan payments.  Amber Mountain Bengals Limited is a business I run that breeds and sells Bengal cats and undertakes consultancy work for local government.  This was discussed at length with the plaintiff before the loans were entered into.

[29]     On  its  face  the  most  that  this  averment  shows  is  that  the  first  named defendant intended to generate income from the property by leasing it to her company.   Even if this evidence was accepted without question, it would not demonstrate that she had stipulated for a condition that the proposed lease would continue in effect even if the defendants, as borrowers, defaulted under the loan from the plaintiff. Still less would it establish that the plaintiff agreed to such a term.

[30]    What seems likely is that whether solicited or otherwise the defendants mentioned the proposed lease as providing a source from which they would earn income which would support the mortgage.  The fact that a mortgagee was informed that  such a  lease was  intended  does  not  mean  that  it  was  incumbent  upon  the

mortgagee to say in the circumstances that “of course if you default, our rights to possession will remain unimpaired and we will take possession even if there is a lessee on the property” or something to that effect.   I mention that because, of course, there is no evidence that the mortgagee ever explicitly agreed that such would be a term of the mortgage.  The only way in which it could be supportive of the position of the defendants would be if an inference would be taken by a reasonable and properly informed third-party hearing the discussion that the bank should be taken as agreeing to a proposition of the kind such as that the mortgagee agreed that it was waiving rights it would otherwise have to retake possession of the property so long as the lessee was in possession.

[31]     In Vector Gas Ltd v Bay of Plenty Energy Ltd the Supreme Court stated:5

The ultimate objective in a contract interpretation dispute is to establish the meaning the  parties  intended  their  words  to  bear.    In  order  to  be  admissible,  extrinsic evidence must be relevant to that question.   The language used by the parties, appropriately interpreted, is the only source of their intended meaning.  As a matter of policy, our law has always required interpretation issues to be addressed on an objective basis.   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. Evidence is not relevant if it does no more than tend to prove what individual parties subjectively intended or understood their words to mean, or what their negotiating stance was at any particular time.

[32]     I do not consider that it is reasonably arguable that a Court would draw an inference, simply from the fact that the defendant said they intended to lease the property, that the bank was to be taken as tacitly agreeing to the rights under the mortgage remaining in abeyance so long as the property was subject to the lease. While the parties did not refer to this fact, I was told that the lease between the Fallowfield Trust and LSM Consulting had been in the same form as the lease to Amber Mountain Bengals Limited.  It is instructive to consider that the term of the lease would have been five years with three three-year renewals being available to the lessee.  It could accordingly be a lease that stayed in effect for 14 years.  The
argument for the defendant is that the bank agreed to such an arrangement which

5	Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] 2 NZLR 444 at [19].

would mean that a significant impairment of their security would be the result of such a covenant.

[33]     It is not suggested that the defendants showed the bank the lease that they had entered into or were intending to enter into.   The defendants do not say that they showed the lease to the bank.  The bank has given evidence that it did not obtain a copy of the lease until after disputes had arisen about the exercise of the power of sale.  The evidence for the defendant does not even establish that the bank was told what the terms of the lease were.   It is not plausible that the bank in such circumstances would give what would have to be an open-ended agreement to the proposed  lease.    The  likelihood  that  the  contentions  which  the  defendants  put forward would be accepted is still less when it is considered that apparently the agreement extended not only to the lease with LSM Consultancy but to still other leases that were yet to come into existence such as the one that is now relied upon between the defendants and Amber Mountain Bengals Ltd.  The case put forward for the defendants is based upon the supposition that the bank would agree to future leases with a counterparty about whom the bank knew nothing.

[34]     It seems implausible that the bank, which was proposing to lend $579,000, would do so on the basis of a security which was largely reduced in potency having regard to the effect that the supposed consent would have on enforceability of its mortgage.  Such an outcome would be “inherently improbable” in the words of Eng Mee Yong v Letchumanan.

[35]      In my view it is quite unrealistic for the defendants to contend that the bank agreed that its mortgage would be subject to the lease.

[36]     My conclusion is that the defendants do not have an arguable defence to the claim for possession of the property.  The bank has proved all that it needs to prove in order to obtain an order for possession.

Terms of the order

[37]     The first named defendant gave evidence that Amber Mountain Bengals Ltd is still carrying on business of breeding cats at the property.   There are nine cats present there.  She says there are no other facilities “readily available to move these cats to”.   It is primarily for that reason that the defendants seek additional time before having to vacate the property.  The defendants, through their counsel, have submitted that 12 weeks would be a suitable period of time.

[38]     The first matter that is relevant to the issue of time for vacating the premises is that at a conference in May of this year I raised with the defendants the legal difficulties that the proposed defence faced and I referred them to the decision in Cashmere Capital.  I suggested that it would be sensible for the parties to discuss the matters so that the terms of an orderly withdrawal from the property could be agreed. Nothing apparently resulted from that suggestion.

[39]     The default which the plaintiff relies upon dates back to February 2014.  On that date the bank made demand on the defendants and they followed that up with a notice under the Property Law Act 2007 on 19 March 2014.  The bank has attempted to sell the property and the defendants have made it clear that they disagreed that a sale should be undertaken.

[40]     There are therefore two factors to be balanced.  The first is the interests of the defendants who said in an affidavit dated almost two months ago that there were no other facilities readily available to move the cats to.   Permitting Amber Mountain Bengals Limited to continue operating its business as a cat breeder is a factor that is entitled to some weight.  On the other hand, the defendants as the lessor to Amber Mountain Bengals Limited have put themselves in a difficult position in agreeing to the  lease  without  properly documented  consent  of  the  mortgagee.    Further,  the parties in occupation of the land have had many months within which to come to a realistic appreciation of their position and make alternative arrangements.

[41]     The  foregoing  is  to  be  balanced  by  the  observation  that  it  would  be inimicable to the functioning of the finance industry if lenders are faced with months of delays in enforcing their entirely legitimate rights as mortgagees.

[42]	I consider that by fixing a close off date of 9 September 2015 for possession to be made available gives more than adequate weight to the interests and needs of the defendants, albeit at the expense of the plaintiff.  There will be an order accordingly.

Costs

[43]     Counsel  agreed  that  in  the  event  that  the  plaintiff  was  successful  the defendants would pay its costs relating to this proceeding on a solicitor client basis, being the basis to which the plaintiff is entitled to costs under the mortgage which the defendants entered into.  The solicitor client costs in this case have been proven to be $14,673.38.   I have no reason to believe that such costs are not properly payable.   It was not submitted that they were out of line with costs that litigation lawyers generally would charge for the range of services involved in bringing the claim on behalf of the plaintiff.

[44]	In addition, disbursements are sought in the sum of $1350 which includes filing fees and service fees.  These, too, appear to lie within a reasonable range.

Orders

[45]     I make the following orders:

a)	there will be judgment for the plaintiff against the defendants in the sums of:

i)	$655,918.71; and

ii)	interest of $26,692.88

b)        an order that the defendants vacate and deliver up possession to the plaintiff of the property at 97 Taihoa North Rd, Matamata, (Certificate of Title SA 70K/748) not later than 5 p.m. 9 September 2015;

c)	an order that the defendants pay to the plaintiff costs in the sum of

$14,673.38 and disbursements of $1350.

J.P. Doogue
Associate Judge