IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2012-404-6010 [2013] NZHC 1881

BETWEEN	MARK STEPHEN HOTCHIN Plaintiff	

AND	
KA NO 4 TRUSTEE LIMITED Defendant	

AND	
FINANCIAL MARKETS AUTHORITY Intervener	

Hearing:	30 April, 1 and 2 May 2013	

Counsel:	
J Farmer QC, J Long and ITF Hikaka for Plaintiff
N Gedye and K Cornege for Defendant
C Carruthers QC, BH Dickie and T M Molloy for the Financial
Markets Authority - Intervener	

Judgment:	
26 July 2013	

JUDGMENT OF WINKELMANN J

This judgment was delivered by me on 26 July 2013 at 3.30 pm pursuant to
Rule 11.5 of the High Court Rules.

Registrar/ Deputy Registrar

Solicitors:
Tompkins Wake, Hamilton
Lee Salmon Long, Auckland
Meredith Connell, Auckland

Counsel:
James Farmer QC, Auckland
Nathan Gedye, Auckland
Colin Carruthers QC, Wellington

HOTCHIN v KA NO 4 TRUSTEE LTD & FMA [2013] NZHC 1881 [26 July 2013]

Introduction

[1]       The defendant, KA No 4 Trustee Limited (KA 4 Limited), is the registered proprietor of a large piece of land in Paratai Drive, Auckland in its capacity as the trustee of the Kelly Ashley No 4 Trust (KA 4 Trust).  KA 4 Trust is a trust associated with the family of Mr Mark Hotchin, the plaintiff in this proceeding.   Mr Hotchin spent a substantial sum of his own money building a very large house on the Paratai Drive land.   Before construction was complete, Mr Hotchin ran into financial difficulties.   Consequently, KA 4 Trust paid for the house to be finished, mainly using borrowed money.

[2]       It was originally intended that Mr Hotchin and his family would live in the house, but those plans have now been abandoned, and the house is to be sold. Mr Hotchin seeks a declaration as to the nature and extent of his entitlement in respect of the money he spent building the house.

[3]       The Financial Markets Authority (FMA) has, with the consent of all parties, intervened in this proceeding.  The background to its intervention is as follows.  In separate proceedings the FMA seeks compensation orders against Mr Hotchin and others in their capacity as directors of the Hanover Group of companies.  The FMA alleges they are liable to depositors who subscribed for debt securities in reliance upon  allegedly  untrue  statements  contained  in  Hanover  Group  company prospectuses.  In yet another proceeding the FMA has obtained freezing orders over assets owned by Mr Hotchin, and assets in which he has an interest or a potential interest, including the Paratai Drive property.  Because of its claim and the freezing orders,  the  FMA is  interested  to  ensure  that  any rights  Mr  Hotchin  has  to  the proceeds of sale of the Paratai Drive property are fully vindicated.

[4]       The parties’ respective positions in this proceeding can be summarised as follows.  It is common ground between Mr Hotchin and KA 4 Trust that Mr Hotchin began to pay the cost of construction in the expectation that he would own the building on the site, and that his family’s right to occupy that house would be secured through a long term lease of some description.  That expectation not having been  met,  Mr Hotchin  has  a right  to  recover the amounts  he paid  towards the

construction of the house.   To allow otherwise would permit KA 4 Trust to be unjustly enriched at Mr Hotchin’s expense.  However, KA 4 Trust and Mr Hotchin disagree on the priority of that right to recovery.  KA 4 Trust says that Mr Hotchin’s claim is unsecured, coming behind all other claims on the proceeds of sale.  This means, if there is a shortfall, it is to be borne by Mr Hotchin.  Mr Hotchin differs from KA 4 Trust on this last point.  He says that the burden of any shortfall should be shared between him and KA 4 Trust.

[5]       The  FMA supports  Mr  Hotchin’s  analysis  as  a  fallback  position,  but  its primary argument is that the money Mr Hotchin paid toward the cost of construction was a loan to KA 4 Trust.  This means that the individuals who were trustees at the date the loan was made are personally liable in respect of it.  They are entitled to an indemnity out of the assets of KA 4 Trust in respect of that liability, supported by an equitable lien over the trust’s assets.  The FMA says that as a consequence there are significant priority issues arising between the parties which cannot be resolved at this point in time, and should be held over until proceedings can be issued in which all necessary parties are before the Court.

[6]       The issues for determination in this proceeding are as follows:

(1)	On what basis can Mr Hotchin claim the return of his investment in the construction of the house?

(2)	If  he  has  a  right  of  reimbursement,  is  that  right  reduced  by  any shortfall, and if so, to what extent?

B.        Factual background

[7]       Mr Hotchin settled the KA 4 Trust by deed dated 1 May 2003.  Mr Hotchin was initially the sole trustee, but on 25 August 2005 Mr John Radley, solicitor for Mr Hotchin  and  his  family  trusts,  became  a  joint  trustee  with  Mr  Hotchin. Mr Hotchin and Mr Radley were replaced by the defendant as sole trustee in March
2009.

[8]       By the time of Mr Radley’s appointment, trusts associated with Mr Hotchin had begun buying the three adjacent sites in Paratai Drive that would eventually make up the block of land on which the house is situated.  These were then acquired by KA 4 Trust between about August 2005 and March 2006, and the titles were amalgamated.

[9]       In August 2006 Mr Hotchin began paying for the demolition of the existing houses on the property, and for the design and construction of a new house. At some point, likely May 2007, a company, Paratai Limited, was incorporated and used as the contracting party on the construction.  The new house was to be very large, and so construction continued through 2007, 2008 and into 2009. Throughout this period of time, discussions were on-going as to the legal arrangement which would enable Mr Hotchin and his family to live in the house he was building.

[10]     In order to address the issues between the parties, it is necessary to consider those discussions in some detail.  Fortunately they are relatively limited both in number and content, and are in large part recorded in emails and letters.  In addition, four witnesses gave evidence at the hearing as to their involvement in and understanding of those discussions.  Mr Hotchin gave evidence on his own behalf. KA 4 Trust called Mr Hotchin’s business advisor, Mr Dwayne McGorman.   The evidence was that Mr McGorman handled almost all dealings with Mr Hotchin’s co- trustee, Mr Radley, in respect of the Paratai Drive land, and had Mr Hotchin’s authority to do so.  KA 4 Trust also called Mr Radley and Mr Tony Thomas, KA 4
Trust’s accountant and a current shareholder and director of KA 4 Limited.  A brief of evidence from a valuer was also handed up, there being no dispute as to his evidence.

[11]     The discussions can readily be broken up into two periods of time: the first three years (roughly 2005 through to the end of 2008) during which all parties proceeded  on  the  basis  that  the  cost  of  construction  would  be  met  entirely  by Mr Hotchin; and then 2009 through to the present day, during which time it has been known that Mr Hotchin will not pay for the completion of the house.

2005-2008: Mr Hotchin funding construction

[12]     It is apparent that several considerations shaped the initial discussions as to how to document a situation in which KA 4 Trust owned land on which Mr Hotchin was building a house that he intended to occupy with his family in the long term. Mr Radley first addressed this issue before he was a trustee, when acting as solicitor for KA 4 Trust and Mr Hotchin.  Mr Radley’s evidence was that in the early stages he was concerned about relationship property issues that might arise if a family home was built on trust land.  He proposed that these issues might be adequately addressed  if  the  land  was  owned  by  one  of  Mr  Hotchin’s  family  trusts,  while Mr Hotchin owned the house, and had a leasehold interest in the land (to allow him to occupy the house).

[13]    In evidence Mr Hotchin described the background thinking to these initial discussions as follows.   The KA 4 Trust was a family trust so owned the land at Paratai Drive for the benefit of its beneficiaries, namely his children and grandchildren.  Therefore, all aspects of the property at Paratai Drive were to be managed for the long term benefit and enjoyment of family members.   The construction of the house on the land and its long term occupation by him and his family was consistent with these purposes.  Although proper exchanges of value had to take place, his evidence was that there was never any suggestion that the arrangements would commercially benefit one side or the other.

[14]     In October 2005, a few months after Mr Radley became a trustee of KA 4

Trust, he made a note for himself to incorporate a new company to hold the three titles that made up the Paratai Drive property as bare trustee for KA 4 Trust.    His note also recorded that the company would:

...do 50 year terminating ground lease to [Mr Hotchin] with 5 yearly review
@ x% (say 6.9%) of capital cost with lessee liable for outgoings etc.

[15]     Ultimately however, it was KA 4 Trust that became the registered proprietor of all three titles.  In order for this to occur, one of the three properties purchased had to be transferred to KA 4 Trust from “KM Trust”, the Hotchin family entity that had

acquired it.  The trustees of  KA 4 Trust resolved to enter into that agreement, their resolution recording:

The Trust has acquired neighbouring properties and rather than holding the properties individually for their beneficial owners it is proposed that the amalgamated land be divided into a leasehold and freehold unit with the [KA
4 Trust] retaining the freehold while a lease will be granted to the occupier of the property.

[16]     These initial plans for a ground lease quickly ran into difficulty because of concerns raised by Mr McGorman about the tax implications of the proposed arrangement.  The lease income would, on the face of it he said, be taxable in the hands of KA 4 Trust, and the payments would be non-deductible for Mr Hotchin as he would be paying for the right to occupy his personal residence.  Mr McGorman suggested that instead of paying rent, Mr Hotchin should purchase the leasehold interest in a 50 year lease, which would cover Mr and Mrs Hotchin’s life expectancy. Mr McGorman suggested the purchase price could either be left as a debt back, or dealt with by way of a distribution made to Mr Hotchin either upfront or over time. The lessor, KA 4 Trust, would have the right to acquire any improvements on the property at market value at the end of the lease.

[17]     In August  2006,  Mr McGorman suggested to  Mr Radley a shorter lease, perhaps of 25 years, with the lease structured so that improvements reverted to KA 4
Trust upon termination, on payment of fair value.  Although he noted that an alternative was for these improvements to be passed to KA 4 Trust on termination for no consideration, that would likely create difficulties for the valuation of the lease and  could  increase  the  likelihood  of  the  arrangement  being  challenged  by Mrs Hotchin “if it came to that”.

[18]     On the basis of this idea, advice was sought from a firm of valuers as to the value of the proposed leasehold interest in the land.   The valuers were asked to assume that the leasehold interest would terminate at between 20 to 40 years, at which point the lessee would be compensated by the ground lessor for the value of the improvements.

[19]     Following the receipt of this advice Mr McGorman wrote to Mr Hotchin’s tax advisors,  checking  on  the  tax  implications  of  an  ownership  structure  whereby Mr Hotchin would own the improvements on the land and hold a leasehold interest for a defined period, whilst KA 4 Trust retained the freehold.

[20]     Mr  Hotchin’s  evidence  was  that  throughout  this  time  Mr  Radley  was receptive in principle to the idea of KA 4 Trust granting Mr Hotchin and his wife a lease,  but  it  was  Mr McGorman  who  promoted  the  concept  and  undertook  the necessary investigations associated with it.  Mr Hotchin said that Mr Radley did not promise a lease would definitely be granted and he always expected that Mr Radley would  want  to  consider  carefully  any  actual  lease  terms  before  giving  his commitment to them. Mr Radley’s evidence was that the intention was always that Mr Hotchin would own the improvements, and it was for this reason that the discussion was of a ground lease.  Mr Hotchin would pay for use of the land, but not the house.  He said that there was no doubt that the lease would have to include a number of other clauses, such as what would happen to the house on the expiry of the lease – would KA 4 Trust have to pay for it or Mr Hotchin have to remove it? That was never finally agreed.

[21]     By April 2007 no formal arrangement had yet been agreed.  In an email to Mr Radley dated 18 April 2007 Mr McGorman summarises the position reached as at that date as follows:

I attempted to go down the process of a formal lease arrangement with [M]ark/Trust such that Mark owned the house with a lease over the land and the Trust owned the freehold. A formal lease has issues of transfer value, tax and GST consequences etc. I have therefore not taken this any further.

...

The only uncertainty is that in the future the house will be complete and
Mark will need to be compensated for the building. ...

My thoughts are that Mark and the Trust enter into an agreement that a put/call arrangement after say 20 years (i.e to allow children to have grown up and left home) whereby the Trust has the option to buy the improvements at depreciated cost or market value whichever is the lesser.

[22]     In March 2008 Mr Radley sent an email to Mr McGorman requesting an

update   as   to   Mr   McGorman’s   thinking   “with   financing   of   the   house”.

Mr McGorman responded that while there were no formal arrangements between Mr Hotchin and KA 4 Trust, the expectation was that KA 4 Trust would allow Mr Hotchin to use the land, and in the future, the KA 4 Trust might choose to make an offer to purchase the improvements from Mr Hotchin.

2009 to present day

[23]     Mr Hotchin’s evidence was that by early 2009 he was no longer able to fund the  construction  of  the  house.    It  seems  likely  that  this  fact  was  conveyed  to Mr Radley  by  Mr  McGorman,  who  was  still  looking  after  this  project  for Mr Hotchin.   The assumptions that had been underpinning the dealings between KA 4  Trust  and  Mr  Hotchin  were  therefore  no  longer  sound,  and  some  other arrangement was needed.

[24]     Mr Radley’s evidence was that from his perspective as a trustee, the situation was now very difficult.  The house was partially built, and a lot of money was required to complete it.  He did not believe that KA 4 Trust had access to the amount of  money  required.    Moreover,  Mr  Radley  wanted  to  ensure  that  Mr  Hotchin remained responsible for building the house, as Mr Radley did not want to be liable in respect of the types of issues commonly associated with construction of a house.

[25]     In  February  2009  Mr  Radley  emailed  Mr  McGorman,  Mr  Hotchin  and Mr Thomas.  Mr Radley attached to that email a draft resolution recording a possible settlement of issues in connection with the use and ownership of the house and land, and funding of the completion of construction.   In the recitals to the resolution (recital C) Mr Radley recorded:

The trustees of Kelly-Ashley No. 3 Trust (“KA3”) have agreed to advance the sum of $2.8m to KA4 to enable KA4 to commence reimbursing Mark Hotchin for payments he has made to date in respect of construction of the House. ...  It is intended that subject to funds being available to it, KA3 will also subsequently make further advances to KA4 for payments for the completion of the House.

[26]     The operative part of the draft resolution provided:

1.	... The trustees agree to apply the advances received from KA3 in reimbursing Mark Hotchin for costs he has incurred in constructing the  House  to  date  and  for  bills  incurred  by  Mark  Hotchin  for

completion of the House so that KA4 thereby obtains ownership of the improvements to the Land.

2.	That the loan from KA3 is on the express basis that the beneficiaries of KA3, namely Mark Hotchin and his family be granted a 10 year lease (with 2 rights of renewal of 10 years each) to live in the House on the basis that Mark Hotchin and his family pays all outgoings and keeps and maintains the House in good order and condition.

[27]     Mr McGorman was not happy with the proposed resolution.   He thought KA 3’s funds should not be used to reimburse Mr Hotchin, but rather to finish the house.  He also noted an error in one of the amounts recorded in the draft resolution. He did, however, agree that Mr Hotchin should sell the improvements to KA 4 Trust in accordance with the proposal in the draft resolution.  He proposed a “money go round” involving other Hotchin family entities to accomplish this.  Mr Radley was not prepared to agree to Mr McGorman’s proposal, and it was not adopted, although all had settled upon the idea of KA 4 Trust acquiring Mr Hotchin’s interest in the house.

[28]     It seems from the documentary record that by March 2009 Mr Thomas had agreed to become a director, along with Mr Radley, of a company which was to replace both Mr Hotchin and Mr Radley as trustees of KA 4 Trust.   Mr Radley incorporated  KA 4  Limited  as  the  proposed  corporate  trustee  and  couriered  to Mr Hotchin and Mr Thomas the necessary documentation to effect the change in trustee.

[29]     Although the appointment of the corporate trustee was dated 1 May 2009, it seems likely that the date recorded was in error and that the change of corporate trustee was  actually effected in March 2009,  as in that month Mr Thomas and Mr Radley both signed a KA 4 Trust resolution as directors of KA 4 Limited.  This is the resolution as to the loan from KA 3 Trust and how that loan was to be applied, which had been the subject of the earlier draft.  The recital is amended so that it now records as background that the KA 3 Trust advance was to be used to build the house although noting that subject to funds being available to it, KA 3 Trust would make further  advances  to  KA  4  Trust  to  complete  the  house  and  also  to  reimburse Mr Hotchin.

[30]     Resolutions 1, 2 and 3 are as follows:

1.	That KA 4 borrow the sum of $2.5m and further advances from KA3 for a term of 10 years, at an interest rate of 5% pa if demanded, provided that no demand is to be made during the term of the lease provided for in paragraph 2 below.  The trustees agree to apply the advances received from KA3 to fund construction costs for completion of the House so that KA4 thereby obtains ownership of the improvements made to the Land.

2.	That the loan from KA3 is on the express basis that the beneficiaries of KA3, namely Mark Hotchin and his family be granted a 10 year lease (with 2 rights of renewal of 10 years each) to live in the House on the basis that Mark Hotchin and his family pays all outgoings and keeps and maintains the house in good order and condition.

3.	It is agreed as a term of the loan that on the completion of the House, the House will be valued by a registered valuer.  In the event that the market value of the House is less than the total cost of the House, the amount of the loan shall be reduced by the difference between the valuation and the cost.

[31]     At  this  point  in  time,  therefore,  the  working  assumption  remained  that Mr Hotchin and his family would live in the house.  Things changed in mid-2010 however, when Mr Hotchin and his wife abandoned their plans to live in the Paratai Drive property, instead deciding to live permanently overseas.  From that time on, although KA 4 Trust proceeded to finish the construction of the house, there were no further discussions regarding the lease arrangement contemplated in the KA 4 Trust resolution of March 2009.

[32]     As at the date of hearing, the house was nearing completion, and was being readied for market.  The total amount spent on improvements as at 29 April 2013 was $26.9 million.   Of that, Mr Hotchin had spent $12.2 million, and KA 4 Trust
$14.7 million.  Of the $14.7 million, KA 4 Trust had borrowed all but $1.5 million:

$5.9 million was borrowed from a third party lender, ASAP Finance Limited (ASAP Finance), and $7.3 million from KA 3 Trust.     ASAP Finance has a mortgage registered against the Paratai Drive property, and KA 3 has the security of an agreement to mortgage.

C.       The issues

(i)	On what basis can Mr Hotchin claim against the KA 4 Trust for return of his investment?

[33]     The FMA argues that in the absence of any formal contract recording the basis upon which Mr Hotchin paid the money for the construction of the house, a presumption applies to the effect that Mr Hotchin is to be treated as having lent the money to the trust, subject to an obligation to make repayment.  It relies upon Seldon v Davidson and a line of cases that follow that decision as authority for the proposition that in the absence of any evidence as to the basis upon which money is
paid, it is presumed to be a loan.1   The FMA says that even if the costs were incurred

by Mr Hotchin in the expectation that KA 4 Trust would grant him a ground lease, that was an unenforceable expectation, and the law fills this vacuum with the presumption of a loan.

[34]    Alternatively, the FMA says that even without the application of such a presumption, the parties’ dealings support a finding that the parties intended the money Mr Hotchin spent on building the house should be a loan to KA 4 Trust.  In this regard the FMA relies upon the references in the draft March resolution and the signed resolution to reimbursement of Mr Hotchin for construction costs.   These documents reflect an acknowledgement that the obligation to reimburse was separate and additional to the grant of a lease.  This is consistent with acknowledging an obligation to repay a loan.  The FMA attaches significance to the fact that in all of the contemporaneous documentary evidence filed in this proceeding, there is nothing suggesting that the parties did not anticipate Mr Hotchin being repaid for the money he had spent, even if in the future.

[35]    The FMA overstates the significance of the Seldon v Davidson line of authorities.  Seldon v Davidson is not authority for the proposition that in the absence of a formal contract the Court will imply a contract of loan.   As the following
statements make clear, Seldon v Davidson does no more than establish an evidentiary

1	Seldon v Davidson [1968] 1 WLR 1083 (CA); Ohnuma v Jiang HC Auckland CP301/96, 29
October 1997; Milne v Armijo HC Christchurch CP7/88, 25 August 1989;  Friendlander v
Leeming HC Auckland CP 1009/90, 25 June 1993.

presumption, capable of rebuttal on the evidence produced in any particular case. In that case Wilmer LJ observed that:2

Payment of the money having been admitted, prima facie that payment imported an obligation to repay in the absence of any circumstances tending to show anything in the nature of a presumption of advancement.  This is not a case of father and child, or husband and wife, or any other such blood relationship which could give rise to a presumption of advancement.…

No such considerations arise in the present case; indeed they are clearly ruled out, because we have from the defendant in this case a clear admission of the payment of the money, and no suggestion that it was paid in settlement of an existing debt, or that it was given in return for cash, or anything of that sort.  In the absence of any such circumstances, money paid by the plaintiff in circumstances such as these is prima facie repayable on demand.  If the defendant seeks to evade repayment of the money which was paid to him, it seems to me that the Judge was right in placing the onus upon him to prove the facts which he alleges show that the money was not repayable.

[36]     Edmund Davies LJ put the matter thus:3

I ask myself what is to be inferred as to the nature of the transaction when a simple  payment  of  money  is  proved  or  admitted  between  strangers.    I entirely agree with my Lord that, on that bald state of affairs, proof of payment  imports  a  prima  facie  obligation  to  repay  the  advance  in  the absence of circumstances from which presumption of an advancement can or may arise.

[37]     In order to address either of the FMA’s arguments it is therefore necessary to consider what the evidence establishes as to the basis upon which the payments were made.  As to the evidence in this case, it is clear from the documentary record that when Mr Hotchin paid for the on-site demolition and construction of the new house, he expected that he and his family would own the improvements to the land.  It is clear that this was also the expectation of Mr Radley.  The fact that Mr Hotchin paid the money to create an asset he and KA 4 Trust intended he should own is of course inconsistent with the notion that he paid for the construction intending that those payments would be advances to KA 4 Trust.

[38]     It is true that, as the FMA observed, KA 4 Trust and Mr Hotchin’s advisor,
Mr McGorman, did distinguish between issues of ownership of the house and the lease.   But that was because Mr Hotchin needed some right to occupy his house

2	At 1088.
3	At 1090.

since he built it on KA4 Trust land.  The expectation was that the right to occupy, however documented, would be granted on a commercial basis, but worked out so as to best preserve the interests of both Mr Hotchin and the beneficiaries of the KA 4
Trust.  It is apparent from the documents, and from the evidence of Mr Hotchin’s co- trustee Mr Radley, that these expectations were shared by him.

[39]     Because  these  dealings  were  essentially  in  a  family  context  (between Mr Hotchin and his family trust, KA 4 Trust), all parties proceeded on the basis that they could take their time over working out the exact legal basis upon which this arrangement should be grounded.   Considerations which informed the parties’ thinking were the desire to protect the land asset from any potential relationship property claims by Mrs Hotchin, and the need to ensure that the structure be tax efficient.  The initial discussions were that Mr Hotchin would own the improvements on the land (the house), but would pay ground rental for the use of the land.  There were various proposals about what should happen to the improvements at the termination of the lease, including having Mr Hotchin paid out on some agreed basis.

[40]     By early 2009 the basis of this understanding had been undermined by the fact that Mr Hotchin could no longer pay to finish construction.  At that point the KA 4 Trust assumed responsibility for funding and overseeing the completion of the house. This raised the issue of its ownership.   It was one thing for it to be the property of Mr Hotchin when he had paid for its construction, another when that cost was now shared with KA 4 Trust.  The March 2009 resolution reflects the trustee’s determination (also evident in emails passing between the directors of the trustee, and between each of them and Mr McGorman at that time) that the improvements should pass to the KA 4 Trust.  It is also true, as the FMA notes, that the resolution refers to reimbursing Mr Hotchin.  But it is reimbursing him for payments made to contractors and suppliers in respect of the house because the KA 4 Trust was now to own it.  KA 4 Trust was not repaying a loan.  “Reimbursing” is in any case a rather unusual word to use when speaking of repaying a loan.

[41]     Mr Hotchin was not a signatory to the resolution because by this time he was no longer a trustee.   However the person who had Mr Hotchin’s authority to deal with the KA 4 Trust in respect of the Paratai Drive property, Mr McGorman, agreed

to the form of the resolution, and there is no indication that Mr Hotchin disagreed with what was proposed.

[42]     It follows that I do not accept the FMA argument that the documents and evidence support a finding that the money spent by Mr Hotchin on the house was a loan to the Trust.  He spent the money on his own asset, even though that asset was a house located on the Trust’s land.  There is ample evidence to rebut the evidential inference referred to in Seldon that a payment of money one to another is made pursuant to a loan transaction.

[43]     It is common ground between the plaintiff, defendants and the FMA that Mr Hotchin has a restitutionary claim flowing from his payment for part of the cost of construction of the house built on the Paratai Drive site.  Although this is not the FMA’s preferred argument, I have rejected its alternative analysis as set out above.

[44]     Mr Hotchin brings his restitutionary claim on the alternative bases of either failure of basis or quantum meruit/quantum valebat, the former being the preferred analysis.  As to the failure of basis claim, Mr Hotchin says he spent the money in anticipation of a contract being entered into at an unspecified future time.  The contract  was  to  include  leasing  terms,  terms  to  eventually  effect  transfer  of ownership of the improvements from Mr Hotchin to the KA 4 Trust, and associated with that, terms providing for reimbursement of Mr Hotchin for the construction costs.  The basis for Mr Hotchin making the expenditure subsequently failed when he could no longer complete the construction and was unable, or at least unwilling, to take the lease.  As a consequence the expected contractual provisions covering leasehold interests, ownership and reimbursement did not come about.

[45]     Failure of basis, is a well recognised ground for a claim to restitution.  As

Goff & Jones The Law of Unjust Enrichment put it:4

The core underlying idea of failure of basis is simple: a benefit has been conferred on the joint understanding that the recipient’s right to retain it is conditional.  If the condition is not fulfilled, the recipient must return the benefit.

4	Charles Mitchell, Paul Mitchell and Stephen Watterson (eds) Goff & Jones The Law of Unjust
Enrichment (8th ed, Sweet & Maxwell, London, 2011) at [12-01].

[46]     A failure of basis claim can arise where a party has conferred a benefit on another in anticipation of a contract that never eventuates.  Such a claim can also be brought where the benefit has been conferred in expectation of an event rather than a contract which fails to occur. For example, in Roxborough v Rothmans of Pall Mall Australia Ltd it was an assumed future event, that the wholesaler would be required
to pay over tax collected by the retailer, which did not eventuate.5

[47]     It is possible to analyse this fact situation as a failure of basis case, although the facts are unusual.  They are unusual because the benefit conferred on KA 4 Trust by Mr Hotchin is the value conferred on KA 4 Trust by improvements to the land which initially at least, both he and KA 4 Trust considered Mr Hotchin owned. However, these were improvements to KA 4 Trust land, leaving the issue as to who was to receive the value of the improvements when or if Mr Hotchin no longer occupied the home.  The intention initially was that in the indeterminate longer term, KA 4 Trust would acquire the house from him for some amount to be agreed.  This would  result  in  him  being reimbursed  for the cost  of construction,  again  in  an amount to be agreed.

[48]     This was not then a case of Mr Hotchin unilaterally building a house on the land of another, taking a risk as to who owned the house, and a risk that he would never receive any value in return for his expenditure and his efforts.  Neither he nor KA 4 Trust intended the construction of the house to be a benefit he unconditionally conferred on KA 4 Trust at no cost to it.

[49]     The situation that has transpired is that the ground lease has not eventuated. Moreover, KA4 Trust has completed construction of the improvements, muddying the waters as to the ownership of those improvements.  The point at which the house becomes an asset that Mr Hotchin cannot enjoy has now been reached.  The house cannot be re-located, and the property is to be sold.  When it is sold, property in the house will pass to the purchaser, and KA 4 Trust will receive the value of the house in the form of the proceeds of sale.  If KA 4 Trust sells the land and the house (with Mr Hotchin’s consent) without accounting to Mr Hotchin for some portion of the
sale price, it will likely be enriched at his expense.   The failure of the original

5	Roxborough v Rothmans of Pall Mall Australia Ltd [2001] HCA 68, (2001) 208 CLR 516.

common understanding or condition is the “unjust factor” (an expression used in the

law of restitution), providing the basis for relief in these circumstances.

[50]     I acknowledge the arguments advanced by Mr Hotchin that this claim could also be formulated as a case of “incontrovertible benefit”.  The house was built on the land with Mr Radley’s full knowledge and approval.  He knew of Mr Hotchin’s expectation that he would live in the house and, in the long term, convey the house to the Trust for value.   The failure of all of those assumptions and expectations leaves KA 4 Trust with an “incontrovertible benefit”, the realisable value of the house attributable to  Mr Hotchin’s  efforts  and  expenditure.    However,  it  is  not unusual for such a claim to restitution to be capable of formulation in more ways than one.  The failure of basis claim being made out, and given the view I take in relation to relief, I see no point in proceeding to consider alternative formulations in
any detail.6

(ii)       If  Mr  Hotchin  has  a  right  to  be  reimbursed  for  the  cost  to  him  of construction, is that right reduced by any shortfall realised on re-sale, and if so, to what extent?

[51]     Mr Hotchin accepts that any obligation to reimburse him should not arise until the trust’s borrowings and associated costs are met.   He accepts that ASAP Finance’s and KA 3 Trust’s costs and debts should be satisfied first from any net sale proceeds.  In addition to the lenders’ rights under their security, this is, Mr Hotchin says, an acknowledgement that it would not be equitable for KA 4 to be left holding external debt, which it effectively had no choice but to incur.

[52]     He also accepts that KA 4 Trust should recover the value of the land as the next in line for the proceeds of sale.  After that, Mr Hotchin says that he and KA 4

6	Further alternative legal frameworks for a claim by Mr Hotchin were referred to in the pleadings or were initially referred to during the hearing, but had fallen away by the time of closing. Mr Hotchin and the FMA had initially argued that Mr Hotchin had a claim to reimbursement arising under the loan agreement between KA 3 Trust and KA 4 Trust.  It was argued that the former had agreed to lend the money to enable KA 4 to both finish the construction, and to reimburse Mr Hotchin, and that this gave rise to a claim under the Contracts (Privity) Act 1982. That claim was abandoned by Mr Hotchin in closing and was also not pursued by the FMA. There was in any event no evidence upon which there could be a finding that KA 4 Trust intended to bind itself to KA 3 Trust to use part of the advances to reimburse Mr Hotchin, let alone that it intended to create an obligation enforceable by Mr Hotchin to that effect. The FMA also abandoned an argument that KA 4 Trust was estopped from denying that it agreed to reimburse Mr Hotchin for the cost of construction.

Trust should divide the balance in the proportions that they contributed (calculating

KA 4 Trust’s proportion as excluding that part funded by ASAP Finance and KA 3

Trust).    KA  4  Trust  spent  $1.5  million  towards  construction  (10.93%),  while Mr Hotchin  invested  $12.227  million  (89.07%).    Mr  Hotchin  says  that  such  an outcome is consistent with the equities between the parties.   Although he acknowledges his own role in the unravelling of the assumptions that has led to the present situation, he says that this is no bar to relief.  The simple issue is the amount by which KA 4 Trust has been enriched.

[53]     Mr Hotchin says that relevant to the question of the equities between the parties is the fact that he and KA 4 Trust shared a common interest in the development of the property.   That development was enabled by Mr Hotchin, and KA 4 Trust was to benefit from a development managed, carried out and paid for by Mr Hotchin.  He says there was no fault or deliberate breach on his part; when the development began, it was not foreseeable that his personal circumstances would change with the effect that he would no longer be able to finish building.

[54]     I accept the position common to Mr Hotchin and KA 4 Trust that the value of the land, and the amounts owing to ASAP Finance and KA 3 Trust should be paid out of the proceeds of sale first.  Mr Hotchin can have no claim to the value of the land.  Lenders who are external to these dealings between the parties have obvious prior claims to the sale proceeds, and KA 4 Trust would not have incurred this indebtedness were it not for Mr Hotchin’s inability to complete what he had set out to do.

[55]     We then come to the balance available to meet the remaining claims of Mr Hotchin and KA 4 Trust, and how any shortfall (should there be a shortfall) should be dealt with.  There seems to be no basis upon which KA 4 Trust should be required to share with Mr Hotchin in any deficit.   At the commencement of the parties’ dealings all issues in relation to the house were for Mr Hotchin, including its dimensions and cost.   KA 4 Trust was not a co-venturer with him in this.   It was Mr Hotchin’s inability to complete construction that forced KA 4 Trust into paying for the house’s completion.  It was common ground between the parties that KA 4
Trust had no choice but to complete the construction of his house, and that a failure

to do so would have led to deterioration of the site, and would have negatively impacted upon its value on re-sale.  Its expenditure preserved the value of the asset for Mr Hotchin.   In these circumstances KA 4 Trust cannot be said to have been unjustly enriched until it has received more than the money it paid to complete the house.

[56]     There was discussion during the hearing as to how Mr Hotchin’s conduct is to be factored into the relief to be granted.  It was Mr Hotchin’s failure to complete the house that has led to the present situation.  However, the fact that Mr Hotchin is responsible for the failure of basis is no bar to relief.  Even contract breakers can be
entitled to restitution.7   But Mr Hotchin’s conduct is relevant to the nature and extent

of relief because it is part of the narrative that assists in assessing where the risk of loss should fall. The law of restitution does not usually allow recovery to risk takers. Here, Mr Hotchin, not KA 4 Trust, took the risk as to the re-sale value of the house he set out to build, and it was his conduct that compelled KA 4 Trust to spend money on the house to ready it for sale.  I therefore consider that any shortfall in the sale of the house, following payment out to ASAP Finance and KA 3 Trust, and KA 4 Trust for the value of the land, must be borne by Mr Hotchin alone.

[57]     That leaves the issue as to the value to be ascribed to the land for these purposes.  Mr Taylor, the expert valuation witness called by KA 4 Trust, addressed this issue in his brief of evidence, which was received on a consent basis.  He gave evidence as to the likely market value of the completed property.  He suggested that value could be apportioned between land as to 47.59% and improvements as to
52.41%.  If a price outside of the identified range was achieved, Mr Taylor said this split would have to be revisited.

[58]     During closing submissions both Mr Hotchin and KA 4 Trust moved away from the fixed percentage approach.  They submitted that there may be a difficulty with a valuation based upon a percentage as the value ascribed to the land could drift up or down, depending upon the price secured, without any regard to the land’s true market value.   This is a difficulty also identified by Mr Taylor in his evidence.
Instead they proposed that the purchase price of the land be utilised as the value to

7	Rover International Ltd v Cannon Film Sales Ltd [1989] 1 WLR 912 (CA).

be ascribed to it.  The purchase price was $17,351,374.00.  The FMA made no submissions on this issue.

[59]     I  favour  the  approach  now  suggested  by  KA  4  Trust  and  Mr Hotchin. Mr Taylor’s evidence is that the value of the land is around that range, based on recent sales figures.   However, the value of the improvements he arrives at is not based on sales figures as no comparable property, including improvements of this nature, has been sold.  For these reasons I adopt the suggested approach of fixing a
value for the land in accordance with the purchase price paid.8

D.        Summary and conclusion

[60]    It is clear on the evidence that the money spent by Mr Hotchin on the construction was not a loan to KA 4 Trust.   Initially, he expected to own the improvements on the land.

[61]     However, Mr Hotchin does have a claim in unjust enrichment, either a failure of basis or an incontrovertible benefit claim.  In respect of the failure of basis claim, Mr Hotchin paid for the construction of the house, initially anticipating that he could live in it pursuant to an agreement he was to reach with KA 4 Trust, and ultimately expecting reimbursement for some of the cost of construction at the end of a long term lease.   Mr Hotchin and KA 4 Trust did not intend the house to be a benefit unconditionally conferred on KA 4 Trust.   The lease agreement not having eventuated, the only party who will benefit from his expenditure, absent an order for restitution, is KA 4 Trust.  The failure of the common understanding or condition is the “unjust factor”, providing the basis for relief in these circumstances.

[62]     Alternatively, this case may be viewed as one of “incontrovertible benefit”. The house was built on the land with the trustees’ full knowledge and approval.  The

8	The usual rule is that for the purposes of relief, enrichment is measured as at the date of receipt: Goff & Jones, above n 5, at [4-34]; Cressman v Coys of Kensington (Sales) Ltd [2004] EWCA Civ 47, [2004] 1 WLR 2775 at [40]; Sempra Metals Ltd (formerly Metallgesellschaft Ltd) v Inland Revenue Commissioners [2007] UKHL 34, [2008] 1 AC 561 at [103]. In this case, if it is accepted that at least that part of the house Mr Hotchin paid for remains his until sale, the enrichment is received by KA 4 Trust on the date that it receives the proceeds of sale, and not before. The benefit that KA 4 Trust has received is the amount above that which it has expended on the house.

trustees knew of Mr Hotchin’s expectation that he would live in the house and that

he would ultimately convey the house to the Trust for value.

[63]    Accepting that Mr Hotchin has a right to recover sums paid towards the construction of the house, the only remaining issue is what order of priorities applies in respect of the various interests in the property.  I accept that the secured creditors who lent money to complete construction, ASAP Finance and KA 3 Trust, must be paid first.  KA 4 Trust must then be reimbursed for the value of the land. For the purposes of this judgment, that value is set at $17,351,374.

[64]     As between Mr Hotchin and KA 4 Trust, the money spent by the latter on construction must take priority.  Construction of the home was initiated and driven by Mr Hotchin, and it was his inability to finish construction that forced KA 4 Trust into paying for the house’s completion.  KA 4 Trust was left with no choice but to fund completion, as otherwise the site would have deteriorated, adversely affecting the sale value of the property.   The risk of building the house was assumed by Mr Hotchin, and that risk cannot be shifted to KA 4 Trust.   No issue of unjust enrichment can arise until KA 4 Trust has received back more than the money it paid to complete the house.

E.        Orders

[65]     I declare that Mr Hotchin has an unsecured interest in the Paratai Drive property in the amount of $12,227,786.56.  That interest falls behind other claims to the proceeds of sale of the property.  I order that the proceeds of sale be applied to those claims in the following order of priorities:

(1)	Debt owed by KA 4 Trust to ASAP Finance (quantity unknown);
(2)	Debt owed by KA 4 Trust to KA 3 Trust (approximately $7,304,040); (3)	Money   spent   by   KA  4   Trust   in   purchasing   the   land   (being
$17,351,374);

(4)	Money spent by KA 4 Trust on the improvements (being $1,500,531);

(5)	Money	spent	by	Mr	Hotchin	on	the	improvements	(being

$12,227,786.56).

[66]     Leave is reserved to  file memoranda on costs. Any application for costs should be filed within 15 working days of delivery of this judgment. Any replies are to be filed within 10 working days thereafter.