Kbl Investments Ltd v Kbl Courtenay Ltd and Others

• Jurisdiction: New Zealand
• Judge: Harrison,French,Miller JJ
• Judgment Date: 25 May 2016
• Neutral Citation: [2016] NZCA 227
• Docket Number: CA84/2015
• Court: Court of Appeal
• Date: 25 May 2016

BETWEEN

Kbl Investments Limited

Appellant

and

Kbl Courtenay Limited

First Respondent

Stephen Kinsgley Edgar Turner

Second Respondent

Adrian Lance Green

Third Respondent

[2016] NZCA 227

Court:

Harrison, French and Miller JJ

CA84/2015

IN THE COURT OF APPEAL OF NEW ZEALAND

Appeal against a High Court decision which found the second and third appellants had not owed a fiduciary duty to the appellant — the appellant had owned a property — faced with a mortgagee sale, it obtained finance from the second and third respondents — the first respondent company had been established to purchase the property and then sell it back to the appellant — the appellant was unable to finance the buy-back — the first respondent then subdivided the property itself — whether there had been a fiduciary duty owed and how long had it lasted — whether there had been a breach of that duty when it had existed — whether the warehousing agreement was a credit contract for the purposes of the Credit Contracts and Consumer Finance Act 2003

counsel:

P J Dale and V E Fletcher for Appellant

D J Chisholm QC and MJW Lenihan for Respondents

• A The appeal is dismissed.

• B The appellant must pay the respondents one set of costs for a standard appeal on a band A basis and usual disbursements. We certify for two counsel.

JUDGMENT OF THE COURT

REASONS OF THE COURT

(Given by Miller J)

Introduction

1 In 2011 KBL Investments Ltd (KBL) was unable to service the first mortgage on its commercial property at 11–13 Courtenay Place, Wellington, and faced a forced sale at the hands of its mortgagee. Its principal, Kevin Clark, turned to Kingsley Turner and Adrian Green, owners of GTF Capital Ltd, to secure new financing. It was a role Mr Turner had played for him in the past, notably when KBL bought the building in 2003.

2 Orakei Securities Ltd (Orakei), a company controlled by Messrs Turner and Green, made an offer but it was conditional on investor support, which was not forthcoming. Messrs Turner and Green then offered, and KBL accepted, a warehousing facility under which a company they set up for the purpose, KBL Courtenay Ltd (Courtenay) would purchase the property for $3,550,000 and KBL could buy it back not later than 16 December 2011 for $3,815,000. KBL was also to pay a fee of $20,000 and “interest” of $24,000 per month.

3 The mortgagee sale was averted and deeds documenting the warehouse transaction were executed on 5 October 2011. However, KBL was unable to finance the buy-back despite an extension of time until 16 February 2012. It blames this result on Courtenay's refusal to agree to the property being unit-titled. Courtenay has refused to re-convey to KBL, and in April 2012 it proceeded to unit-title the property itself.

4 KBL brought proceedings in the High Court, without success. 1 It sued Courtenay in contract, alleging breach of implied terms that it would facilitate unit-titling and allow KBL six months from the date on which the warehousing transaction settled in which to exercise its option. That claim is not pursued on appeal.

5 KBL also sued Messrs Turner and Green alleging breach of fiduciary duty. Some of the particulars of that claim corresponded to the contract allegations. But KBL also alleged that Messrs Turner and Green had withheld from KBL until 9 June

2011 the knowledge that investors would not support the Orakei loan offer, and made the warehousing offer for the purpose of acquiring the property for themselves. That claim is pursued on appeal

6 Courtenay was also sued in oppression under the Credit Contracts and Consumer Finance Act 2003 (CCCFA). KBL alleged that the warehousing agreement was in substance a credit contract and Courtenay behaved oppressively by refusing to cooperate with unit-titling and refusing to extend time. That claim is also pursued on appeal.

Background

The acquisition and proposed subdivision

7 Mr Clark is an experienced real estate professional and property developer who was legally advised throughout the events we describe here. In 2002 he formed KBL with associates to acquire the property. The intention was to redevelop it, subdividing it into a strata title building of mixed use, consisting of up to four retail units on the ground floor and eight apartments on the upper level. Finance for the purchase was arranged by Mr Turner and GTF Capital. The property was refinanced in 2004, with a first mortgage being granted to Perpetual Trust Ltd, whose agent and manager was Balmain New Zealand Ltd (Balmain).

8 KBL obtained a resource consent from the Wellington City Council to allow the subdivision, but the redevelopment created issues with an adjoining land owner that was also intending to develop its property. An agreement was negotiated between them for boundary adjustments, the creation of various easements and a transfer of air rights. Until the boundary adjustment was completed KBL could not proceed with the subdivision. These steps required the consent of KBL's mortgagee, which was not forthcoming. That in turn led to the neighbouring owner lodging a caveat against the title.

9 While KBL was working through this process over a period of several years it ran into financial headwinds, experiencing trading losses in the years 2007 to 2010. It fell into default under the mortgage and failed to pay rates. It also, and significantly for present purposes, exceeded the loan to value ratio of 70 per cent of the market value of the property. Indebtedness was approximately $3,500,000, which amounted to 78 per cent of the value of $4,450,000 before subdivision that was disclosed by a valuation supplied in December 2010. A later addendum to the valuation estimated the value at $6,125,000, comfortably within the loan to value ratio, following subdivision.

The mortgagee sale

10 On 2 February 2011 Balmain served a default notice under the Property Law Act 2007 alleging defaults in payment and breach of the loan to value ratio. KBL could not remedy the default, and Balmain commenced to sell the property by tender. It refused to await the subdivision, taking the view that it was a complex process in connection with which KBL had been uncooperative. Further, KBL allowed the resource consent to lapse in May 2011, a fact that became known in mid-June. The tender process was to close on 29 June 2011, at which date Balmain had received five tenders.

KBL's attempts to refinance

11 In the meantime, Mr Clark attempted to refinance the mortgage. He appointed a mortgage broker, Gary Hey. He also sought finance from ASB Property Finance, which made an indicative proposal but ultimately declined on 18 May 2011 to make a firm offer.

12 Immediately on learning of ASB's decision, Mr Clark called Mr Turner. They met on 19 May. On the same day, Mr Turner wrote to Balmain stating that he was confident he could sort things out, arranging finance and enabling KBL to complete the subdivision and hold on to its equity. In response Balmain stated that the marketing campaign would start the following week and there would be four weeks until the tender closed.

13 Mr Turner set about sourcing finance. At the same time Mr Hey was instructed to approach financiers. It was agreed that Mr Turner would deal with BNZ and Westpac, and Mr Hey could talk to anyone else.

14 On 24 May Mr Turner emailed an offer of finance on the letterhead of Orakei, which as noted is a company owned by Messrs Turner and Green. It stated that the purpose of the loan was to refinance existing mortgagees and to enable KBL to complete unit-titling of the property and then refinance Orakei. The maturity date of the facility, which was $3,500,000, was to be six months from the date of advance. The offer was conditional on investor support and it contained various conditions indicating that it was an arm's length transaction; for example, Orakei was to prepare all the necessary documents to protect its interests and it was to review and be satisfied with the status of the proposed subdivision. Orakei confirmed subsequently that it would give its consent as mortgagee to enable the registration of easements and the boundary adjustment.

15 In connection with the refinancing Mr Clark provided Mr Turner with various documents, notably the existing valuation, the amount owed under the mortgage and a seismic assessment advising that the building was not deemed earthquake prone.

16 It is not in dispute that Mr Turner was unable to obtain the investor support that he needed, and that he and Mr Green knew this by about the beginning of June 2011. However, Mr Clark did not learn that the Orakei offer had fallen through until 9 June, when he was presented with the warehousing proposal.

17 In the meantime, and unbeknown to Mr Clark, Mr Green had approached BNZ for financing to support the warehousing proposal, under which, it will be recalled, KBL would no longer own the property. On 26 May Mr Green emailed Andrew Hay at BNZ as follows:

Hi Andrew,

Tried your landline this am, when you have a clear 5 mins would you please call me. I have an opportunity to participate in a freehold, leased, commercial property in a prime location in Wellington, has real upside. Current Colliers valuation $4.45 M as is. Contracted rent roll circa $0.32 K pa. Looking to gear reasonably aggressively.

…

This email, as the Judge recorded, was one of a number of communications between Mr Green and BNZ that were not discovered before the trial and were only supplied while Mr Green was under cross-examination.

18 Mr Green's explanation at trial for contacting BNZ was that he wanted a fallback scenario in the event that investors would not support the Orakei loan. He accepted that the approach to BNZ envisaged that a “Green/Turner entity” would acquire the property to avoid a mortgagee sale, explaining that that was so because “KBL was unbankable”.

19 By letter of 3 June BNZ Capital offered Mr Green indicative...