IN THE COURT OF APPEAL OF NEW ZEALAND CA690/2008 [2009] NZCA 563

Transcription

1 IN THE COURT OF APPEAL OF NEW ZEALAND CA690/2008 [2009] NZCA 563 BETWEEN AND JACKSON MEWS MANAGEMENT LIMITED Appellant JANICE MARY MENERE, RUPERT OLIVER SMITH AND KELLEE ANN MENERE Respondents Hearing: 5 May 2009 Court: Counsel: Hammond, Chambers and Baragwanath JJ P S J Withnall for Appellant G W D Manktelow for Respondents Judgment: 27 November 2009 at 3 pm JUDGMENT OF THE COURT A The appeal is allowed. B The judgment of the High Court is set aside. C The respondents must pay to the appellant costs for a standard appeal on a band A basis, plus usual disbursements. D Costs in the High Court are, in the absence of agreement between the parties, to be fixed in that Court. REASONS Hammond and Chambers JJ [1] Baragwanath J [58] JACKSON MEWS MANAGEMENT LTD V MENERE & ORS CA CA690/ November 2009

2 HAMMOND AND CHAMBERS JJ (Given by Chambers J) Grumbles in a retirement village [1] Jackson Mews is a retirement village of 34 units in Petone. It was developed in the early 1990s by a company called Jackson Mews Limited ( JML ). JML set up the village in a way which is common in New Zealand. Each retirement unit had its own certificate of title. JML, through an associated company, Jackson Mews Management Limited ( Mews Management ), the appellant, would provide management and maintenance services for the village. Unit-owners would pay for those services by means of a fortnightly levy. [2] The potential problem with these legal structures does not arise with the initial unit purchasers, as their obligations to their fellow residents can be secured by appropriate contractual terms at time of purchase. But how does one ensure that subsequent unit purchasers, who will not be contractually tied to the village developer or service provider, become bound by the same arrangement? It is in everyone s interest that they should be bound as each unit-owner wants an assurance that all the other unit-owners will pay and continue to pay their share of the common services provided by the village service provider. The method JML used in its attempt to tie in initial and subsequent unit-owners was a memorandum of encumbrance registered against each unit title. We shall return to the detail of that encumbrance later. The encumbrance method has been commonly used in housing developments and retirement villages in New Zealand at least since the 1970s and in England since the 19 th century. [3] The encumbrance JML stipulated refers to a management services agreement, which the encumbrancer (the unit-owner) is bound to sign. The agreement stipulates the services Mews Management must provide and the levies the unit-owner must pay. The encumbrancer is also bound to ensure that the person to whom in due course he or she sells his or her unit signs the services agreement.

3 [4] Unfortunately, all is not well at Jackson Mews. A large number of the village residents and the village s body corporate are dissatisfied with the quality of services provided by Mews Management. The body corporate has purported to cancel the agreement it had with Mews Management. A number of the unit-owners have cancelled their automatic payments with respect to the fortnightly levy and are refusing to pay it. Some of them have formed their own Residents Association which now provides the services they say Mews Management should have provided but failed to do. [5] Among the disgruntled residents is Janice Menere. She lives in unit 21. Her unit is owned by a family trust, the trustees of which are herself, Rupert Smith, and Kellee Menere, the respondents on this appeal. The original owner of unit 21 was Jean Reid. She did sign a memorandum of encumbrance and it was, and continues to be, registered against unit 21 s title. It is unknown whether she ever signed a services agreement. The respondents have never signed a services agreement. [6] Litigation between Mews Management, the body corporate and the disgruntled residents (including the present respondents) is being pursued on several fronts. Whether the body corporate has successfully cancelled its services agreement with Mews Management, whether those residents who had signed services agreements have successfully cancelled theirs, and whether Mews Management can sue residents who have not signed services agreements for unpaid levies are matters in issue in District Court litigation. We are not concerned with that. Rather, this appeal comes to us from the other strand of litigation. The respondents took a test case in the High Court trying to get rid of the encumbrance. [7] The disgruntled residents lawyers devised the following stratagem. They reasoned that memoranda of encumbrance are mortgages. Mortgages are redeemable by payment of the amount secured. The amount secured in this case was, with respect to each encumbrance, an annual rentcharge of 10 cents to be paid on the first day of April in each year if demanded by that date. The encumbrance had a 99 year term. So, in early March last year, the respondents tendered the sum of $9.90, the total rental payable for the 99 years, and asked Mews Management to discharge the encumbrance. It refused to do so. The respondents intent was

4 obvious. If the encumbrance could be discharged, then Mews Management would have no way of compelling current unit-owners to enter into services agreements with it. [8] After Mews Management refused to discharge the respondents encumbrance, the respondents commenced a proceeding, seeking a declaration that the encumbrance was a mortgage and an order that Mews Management discharge the encumbrance on payment to it of $9.90. Ronald Young J heard the case. He found in the respondents favour. He held that the encumbrance was a mortgage and that the respondents were entitled to redeem the land under s 81(2) of the Property Law Act 1952 ( the 1952 Act ) on payment of the $9.90. He made a declaration and an order discharging the encumbrance: (2008) 9 NZCPR 898. From that decision, Mews Management has appealed. [9] It would be fair to say that the High Court decision has been viewed with concern in conveyancing circles and the hope has been expressed that we would reverse it: see Goodger Instruments of Encumbrance and Restrictive Covenants in Gross (2009) International Law Office < The consternation stems from the fact that the encumbrance device [used in this case] has been so widely relied upon for registering covenants in gross and that the effect of the High Court decision is to render the device useless. That is because Ronald Young J s decision was not based in any way on the alleged failings of Mews Management; those failings remain untested. If the High Court decision is correct, Mrs Reid could have redeemed the mortgaged property by paying $9.90 and insisted on discharge of the encumbrance the day after she signed it. So the decision is of great significance not only to the respondents and their fellow residents in Jackson Mews but also to many others in retirement villages and housing estates where the encumbrance device has been used. Issues on the appeal [10] Before us, the respondents accepted they were bound by the encumbrance, but asserted that they were entitled to have it discharged on payment of what they called the principal, namely $9.90. Mews Management submitted before

5 Ronald Young J that the right of redemption simply does not arise with regard to this memorandum of encumbrance : at [33]. The Judge rejected this argument on the basis that the statutory right of redemption contained in s 81 was not subject to any of the propositions advanced by [Mews Management] : at [36]. So the issue presented to us was simply whether the respondents had the right to redeem the mortgaged land by payment of $9.90. That is the question we shall attempt to answer. [11] In the course of preparing these reasons for judgment, however, it occurred to us that the parties assumption that s 81 of the 1952 Act was the applicable law might be in error. That Act after all had been repealed by s 366 of the Property Law Act 2007 ( the 2007 Act ), which came into force on 1 January The disgruntled residents stratagem, as set out at [7] above, had not been implemented until after that date. Before, therefore, we answer the issue in this case, we shall briefly discuss the applicable law. The applicable law [12] Before Ronald Young J, the parties agreed that the relevant law continued to be s 81 of the 1952 Act, notwithstanding that Act s repeal. The continued applicability of s 81 was said to arise from the general transitional provision, s 367 of the 2007 Act, and in particular from subss (3) and (4) of that section. Before us, the parties adhered to that agreement and the matter was argued on the basis of s 81 of the 1952 Act. For convenience, we set out s 367(3) and (4): (3) No alteration in the law made by this Act affects (a) a right, interest, title, immunity, or duty, or a status or capacity, existing under the law so altered and immediately before 1 January 2008; or (b) the validity, invalidity, effect, or consequences of (i) (ii) an instrument of the kind to which this Act applies and that came into operation before 1 January 2008; or anything done or suffered before that date.

6 (4) All instruments of the kind to which this Act applies and that came into operation before 1 January 2008 must, to give effect to subsection (3), be read and construed as if the law existing immediately before 1 January 2008 continued to have effect, and must be given only the effect and consequences that they would have had under that law. [13] We now think the parties assumption that s 81 continued to apply was in error. The parties overlooked s 367(7), which provided that subss (1) to (6) of that section are subject to express provision to the contrary in this Act or any other enactment. There is express provision to the contrary in the 2007 Act. Part 3 of that Act deals with mortgages. Section 75(1), the first section in Part 3, provides that the new Part 3 (except as provided in section 76) applies... to every mortgage that comes into operation before, on, or after 1 January For reasons we shall come to, the encumbrance in this case is, for the purposes of the Act, a mortgage. Section 76 stipulates a number of sections in Part 3 which were to apply only to mortgages coming into operation on or after 1 January The equivalent provision to s 81(2) of the 1952 Act is s 97(2) of the 2007 Act. Section 97, which is within Part 3, is not one of the excepted sections listed in s 76. In our view, therefore, the relevant statutory provision we should be considering is s 97(2) of the 2007 Act. [14] The parties may have assumed that the entitlement to redeem under s 81(2) of the 1952 Act was a right... existing... before 1 January 2008, in terms of s 367(3) of the 2007 Act. Mews Management, of course, disputes the existence of any such right, and so it is unclear what its reasoning on this point was. But assuming for a moment that the respondents are correct that s 81(2) did entitle them to redeem this mortgage on the payment of $9.90, was this a right right... existing... before 1 January 2008? That sum was not tendered until March [15] The courts have given detailed consideration to what is an existing or accrued right in the context of applying the interpretation legislation: see Burrows and Carter Statute Law in New Zealand (4ed 2009) at That law is directly applicable here, as the terms used in s 367(3) are taken from the Interpretation Act As this Court said in Löwer v Traveller [2005] 3 NZLR 479 at [57], the authorities have tended to the view that a right is not in existence where some

7 further event still has to take place before its crystallisation. Tipping J in Dental Council of New Zealand v Bell [1992] 1 NZLR 438 at 443 (HC) explained: The essence of an accrued right in this context is that something must have happened to give the person claiming the right the ability to prosecute the same to judgment. Although the right need not have matured into formal legal relief the facts entitling the person concerned to relief must have happened before the repeal in such a form that the right, although not having matured into judgment or relief, can nevertheless be described as inchoate or contingent. [16] Tipping J in that case was explaining the meaning of an accrued right, but the change in expression to existing right in s 17 of the Interpretation Act 1999 effected no substantive change: Löwer at [57]. [17] It follows that a mere right, existing at the date of a repealing statute, to take advantage of an enactment, without any act done by an individual towards availing himself of that right, cannot properly be deemed a right accrued : Abbott v Minister for Lands [1895] AC 425 at 431 (PC). [18] In this case, the statutory right to redeem the respondents have contended for would have accrued or come into existence only on the payment of the $9.90. As noted above, that sum was not tendered until March 2008, after the repeal of s 81. Therefore, even on the respondents approach, we think there was no right [to redeem under s 81(2)] existing in terms of s 367(3)(a). [19] Of course, even if we are wrong on that, and the entitlement to redeem was an existing right in terms of s 367(3)(a), or otherwise came within s 367(3), it must yield to s 75 as a contrary express provision. If s 367(3) were to trump, it would render unworkable the specific provisions in ss 75 and 76. Such an interpretation would effectively lead to s 97 and most, if not all, of the other sections in its subpart (Subpart 4) being read into s 76. [20] We have not gone back to counsel to seek further submissions on this issue because we have little doubt that the respondents would say: the change in law makes no difference as we are still entitled to redeem the mortgaged land under

8 s 97(2) of the 2007 Act, just as Ronald Young J found we were entitled to redeem it under s 81(2) of the 1952 Act. Did the respondents have the right to redeem the mortgaged land by payment of $9.90? [21] Ultimately the answer to this question can be stated in a few paragraphs. But the law relating to encumbrances securing rentcharges is not well known, even to conveyancers. In order that our decision may be more understandable, therefore, we begin with a summary of the essential features of the rentcharge system in England and shall then discuss how rentcharges have been treated under New Zealand law. Only after undertaking that exegesis will we turn to discussing the actual encumbrance in this case. Rentcharges in English law [22] Rentcharges are of great antiquity in English land law. A convenient summary is provided in the English Law Commission s report on rentcharges, Transfer of Land: Report on Rentcharges (Law Com No ) ( Law Com 68 ) at [9]: A rentcharge is an annual or periodic sum of money payable to someone who is not entitled to the reversion to the land charged with its payment. This feature distinguishes it from ordinary rent payable under a lease. As a matter of history, the separate existence of rentcharges seems to have arisen in consequence of the statute Quia Emptores (1290). Prior to that date, a grant of freehold was apt to create a lord and tenant relationship between grantor and grantee in the same way as did a grant of a term of years, and it was a common law incident of such a relationship that the lord could distrain against chattels on the land for arrears of any rent reserved by the grant. The statute, however, stopped subinfeudation on the grant of freeholds, with the result that if the grantor reserved a rent the remedy of distress was no longer available to him at common law. In order to preserve the remedy, it became the practice to include in the deed a clause expressly charging the land with a distress for payment of the rent: hence the name rentcharge. [Footnotes omitted] [23] How and when rentcharges were used in England evolved over time. In England, prior to the enactment of the Rentcharges Act 1977 (UK), rentcharges were

9 being created in three main situations: see Burn and Cartwright Cheshire and Burn s Modern Law of Real Property (17ed 2006) at 707. [24] First, on the sale of land, a vendor, instead of receiving the purchase money in the form of a lump sum, might reserve to himself or herself a legal rentcharge, under which a sum of money was payable annually to himself or herself and his or her heirs for ever, and, in addition, would receive a capital payment. The rentcharge bound all subsequent purchasers of the land. This type of transaction was apparently very common in parts of England. The English Law Commission reported that rent payers were very disenchanted with rentcharges of this sort. In Law Com 68 it said at [26]:... We have been left in no doubt whatever that a high proportion of rent payers find perpetual rentcharges on freehold land conceptually unacceptable. A liability to pay rent for leasehold property is understood; and so is a liability to pay mortgage instalments to a Building Society. But a freeholder does not expect to have to pay an annual sum not readily distinguishable from a leasehold ground rent; nor, even if he appreciates that the rentcharge arose as part of a purchase consideration, does he expect to be paying for ever what look like instalments of some (unknown) capital amount.... [25] Secondly, a rentcharge might be created voluntarily or in consideration of marriage or by way of family settlement for the life of any person (or for any shorter but indefinite period, such as widowhood) or for providing sums for the advancement, maintenance or benefit of any persons. [26] The third situation has particular relevance to the present case and, for this reason, we quote Professor Burn and Mr Cartwright in full (at 707): Where, as a result of a property development, there is a distinct grouping of separate freehold houses or where a single building is divided into separate freehold parts, a rentcharge is sometimes used as a conveyancing device to enable the burden of positive covenants to run against the unit holder for the time being. As we have seen, it was held in Rhone v Stephens that the burden of positive covenants on the sale of land by a freeholder does not run at common law, and neither does it in equity under the doctrine of Tulk v Moxhay which is confined to restrictive covenants. In Austerberry v Corporation of Oldham Lindley LJ expressly mentioned the use of the rentcharge for this purpose. [fn: (1885) 29 Ch D 750 at 783] One scheme in common use for smaller developments has been described as follows: [fn: Law Com 68 at [49]; [1998] Conv 99 (S Bright)]

10 A rentcharge affecting each unit will be imposed for the benefit of the other units and this rentcharge will be supported by positive covenants to repair, insure, and so on. The purpose of this scheme is not to procure the actual payment of the rentcharge its amount may be nominal and the rent owners are unlikely to trouble very much whether it is paid or not but to create a set of positive covenants which are actually designed to preserve the development as a whole but which are directly enforceable because they happen incidentally to support the rentcharge. The amount of the rentcharge may, however, not be nominal, but considerable, where the object is to provide funds for a management company to look after the maintenance of a large development as a whole. [Footnotes omitted, except where indicated] [27] We shall refer to these three categories of rentcharges as first category rentcharges, second category rentcharges, and third category rentcharges respectively. As will already be clear, the rentcharge under discussion on this appeal is a third category rentcharge. [28] The Law Commission found third category rentcharges sufficiently beneficial that it exempted them from its proposed ban on the future creation of new rentcharges. The Commission proposed exempting rentcharges forming an integral part of schemes beneficial, directly or indirectly, to the land charged. The Commission continued at [48]: The need for this exception arises mainly in cases where a property development has produced a distinct group of separate freehold houses or where a single building is divided into separate freehold parts. In such a situation the preservation, value and enjoyment of each unit may well depend upon the observance of certain covenants by the owners of the other units. These covenants may be negative in form (such as a covenant not to carry on a trade), or they may be positive (for example, a covenant essential in a block of flats, that each unit owner will keep his own unit in repair). [29] The Law Commission s recommended reforms were largely implemented by the Rentcharges Act. That Act rendered the creation of first category rentcharges void after 21 August 1977 and provided that existing first category rentcharges would be extinguished 60 years after the date of the passing of the Act (ie 22 July 2037) or 60 years after the date on which the rentcharge first became payable, whichever was the later: ss 2(1) and 3. Rentcharges in the other two categories were, however, expressly preserved by s 2(3).

11 Rentcharges in New Zealand law [30] We now turn to the position in New Zealand. Memoranda of encumbrance securing rentcharges were registrable right from the early days of the Torrens system: see Land Transfer Act 1870, s 59. At that stage, the law drew a distinction between an encumbrance securing the payment of any annuity or sum of money other than a debt, including a rentcharge, and a mortgage, which was defined as any charge on land created merely for securing a debt. The significance of this Act for current purposes lies in its treatment of a mortgage as a charge. That was to be contrasted with the effect of a mortgage at that time in English land law. [31] The distinction between mortgages and encumbrances under the land transfer legislation has continued from 1870 right through to the present day. It is true that the definition of mortgage in the current statute, the Land Transfer Act 1952 ( the Land Transfer Act ), includes a charge on land... for securing... the payment to any person or persons by yearly or periodical payments or otherwise of any annuity, rentcharge or sum of money other than a debt, but that should not disguise certain fundamental differences between a true mortgage, securing the repayment of a loan or satisfaction of an existing debt, and a mortgage by way of encumbrance. At the time the rentcharge in the present case was created, for instance, different forms were required: see the old forms C and D in the Second Schedule. The Act as currently enacted also draws distinctions between mortgage instruments and encumbrance instruments : see s 101. [32] From 1870, the encumbrancer of registered land has been at risk of having the land sold by the encumbrancee should the encumbrancer default: see ss 59 and 60. This differed from the position in England where a defaulting rentcharger has never been at risk of a forced mortgagee sale : see Cheshire at and Law Com 68 at [93]-[94]. [33] We turn now to the Property Law Act We need to discuss that Act as it was the statute in force at the time the encumbrance in this case was created. The 1952 Act continued and enlarged upon the process of partial codification of the rules of common law and equity which had begun with the passage of the Property Law

12 Consolidation Act Like its predecessors, it applied to both registered land and deeds land. The relationship between the 1952 Act and the Land Transfer Act (which applied, of course, only to registered land) was spelt out in s 3 of the 1952 Act: (1) This Act shall be read and construed so as not to conflict with the provisions of the Land Transfer Act 1952 as regards land under that Act. (2) Except as otherwise expressly provided, all the provisions of this Act shall, so far as they are applicable, apply to land and instruments under the Land Transfer Act 1952, as well as to other land and instruments. (3) The provisions of this Act which are specified in the First Schedule to this Act do not apply to land or instruments under the Land Transfer Act [34] Part VII of the 1952 Act dealt with mortgages. Part XVI dealt with rentcharges and other annual sums. But what might at first stage appear to be a clear distinction between mortgages and rentcharges was to a large extent nullified by the definition of mortgage in s 2 of the 1952 Act: Mortgage, mortgagee, and mortgagor, in relation to land under the Land Transfer Act 1952, have the same meaning as in that Act: [35] As we have said above at [31], the definition of mortgage in the Land Transfer Act 1952 includes a charge on land... for securing... the payment... of any... rentcharge. Accordingly, the provisions of Part VII of the 1952 Act applied to encumbrances securing rentcharges, so far as those provisions were applicable. Two of the provisions in Part VII were s 81(1) and (2): (1) A mortgagor is entitled to redeem the mortgaged land at any time before the same has been actually sold by the mortgagee under his power of sale, on payment of all money due and owing under the mortgage at the time of payment. (2) A mortgagor is entitled to redeem the mortgaged land although the time for redemption appointed in the mortgage deed has not arrived; but in that case he shall pay to the mortgagee, in addition to any other money then due and owing under the mortgage, interest on the principal sum secured thereby for the unexpired portion of the term of the mortgage.

13 [36] The point of subs (1) was to confirm the rule of equity that, where default had occurred and a mortgagee sale was threatened, a mortgagor could redeem at any time before the mortgagee had actually sold the land under his or her power of sale by paying what was owing: compare the position historically at common law, as to which see Hinde and others Hinde McMorland & Sim Land Law in New Zealand (looseleaf ed) at [15.038]-[15.039]. [37] The point of subs (2) was to make clear that if the mortgagor sought to redeem early, he or she had to pay not only the principal sum of the debt but also interest on it for the unexpired portion of the term of the mortgage. It was the respondents argument in this case that that subsection entitled them to redeem the mortgaged land (ie the land subject to the encumbrance) on payment of the principal secured by the mortgage/encumbrance, namely $9.90. Mews Management responded that the respondents argument overlooked the other obligations secured by the rentcharge in this case. That made the subsection inapplicable to third category rentcharges secured by form D mortgages by way of encumbrance. [38] We do not need to determine who would have been right under s 81(2). That is because, in our view, the position has been clarified by the 2007 Act, to which we now turn. [39] The definition of mortgage in the 2007 Act differs from the definition in the 1952 Act. But there can be no doubt that a third category rentcharge, such as the rentcharge in this case, comes within the definition. Such a rentcharge is a charge over property for securing the payment of amounts or the performance of obligations : see definition (a) of mortgage in s 4 of the 2007 Act. [40] As we have already indicated, the modern equivalents of s 81(1) and (2) of the 1952 Act are s 97(1) and (2), which read as follows: (1) The current mortgagor or any other person entitled to redeem mortgage property may redeem it in accordance with this subpart at any time before it has been sold, under a power of sale, by the mortgagee or a receiver. (2) The mortgagee must, on payment to the mortgagee of all amounts and the performance of all other obligations secured by the mortgage, at

14 the expense of the current mortgagor or other person seeking to redeem the mortgage property, discharge the property from the mortgage in accordance with section 83. [41] We also set out, for completeness, ss 98 and 100 of the 2007 Act, as they qualify s 97(2), even though the qualifications are not relevant to the present appeal: 98 Amounts secured include interest for unexpired portion of term (1) This section applies if (a) the term of the mortgage has not expired; and (b) the mortgagee (i) (ii) (iii) is not in possession of the mortgaged property; and has not appointed a receiver; and has not taken any other steps to realise the security (except giving notice under section 119 or 128). (2) For the purposes of section 97, the amounts secured by the mortgage include interest on the principal amount secured by the mortgage for the unexpired portion of the term. Compare: 1952 No 51 s 81(2), (4) 100 Requirement to pay interest subject to credit contract legislation Sections 98 and 99 are subject to (a) (b) Parts 2 and 5 of the Credit Contracts and Consumer Finance Act 2003; and Part 1 of the Credit Contracts Act 1981 (as applied by section 143 of the Credit Contracts and Consumer Finance Act 2003). [42] Section 97(1) requires no discussion. It reinforces that the right to redeem may be exercised at any time before the mortgaged property has been sold under a power of sale. The subsection also provides that redemption, if it is to occur, must be in accordance with this subpart. In that regard, s 97(2) and, depending on circumstances, ss 98 and 99 might be relevant. Of those provisions, only subs (2) has relevance here, which is why it was that subsection (albeit in its earlier form) on which counsel rightly concentrated for the purposes of this appeal. [43] It is unclear the extent to which s 97(2) changed the law, if at all. It certainly made explicit for the first time that the mortgagee/encumbrancee is not obliged to

15 discharge the property from the mortgage/encumbrance until all amounts payable under it have been paid and all other obligations secured by the mortgage have been performed. The insertion of the italicised words was suggested by the Law Commission in its report leading to the enactment of the 2007 Act (New Zealand Law Commission A New Property Law Act (NZLC R )). These words are not commented upon, however, by the Commission in its section-by-section commentary on the draft Bill it was recommending: see the discussion on the Commission s s 93 (now s 97) at [376]-[382]. The lack of comment may indicate that the Commission considered it was simply making explicit what was already implicit. [44] We know for a fact that the Commission was alive to the issue of rentcharges and their potential susceptibility to the Commission s draft s 93. The Commission expressly referred to rentcharges in part of its commentary on s 93 at [380]: Where a mortgage is given to secure a contingent obligation (eg, a guarantee) or one which is to continue for an uncertain period (eg, a rentcharge during the lifetime of the holder), it may be impossible for the mortgagor to seek to redeem the mortgage until the liability so secured has been determined or its period of payment has come to an end. This is because it is not yet possible to know what moneys or other obligations are secured by the mortgage and, therefore, to be able to pay or perform them. [45] Further, the Commission would have been well aware of the use of third category rentcharges in New Zealand, at least since the 1960s, if not earlier. Professor Brookfield, a leading New Zealand land lawyer, referred to the use of third category rentcharges (as we are calling them) in an instructive article, Restrictive Covenants in Gross [1970] NZLJ 67. In that article, Professor Brookfield provided a precedent for an encumbrance securing a rentcharge. The rentcharge itself was nominal: an annual charge of five cents to be paid by the 1 st day of January in each year if demanded by that date (the first payment if so demanded being due by the 1 st day of January 1969). The real point of the encumbrance, as here and as in other third category cases, was not to procure the actual payment of the rentcharge but to bind the encumbrancer and his or her successors, at that time by s 104 of the 1952 Act, to do certain things and not to do other things. Professor Brookfield remarked that a memorandum of the sort he advocated had been accepted somewhat reluctantly by a District Land Registrar : at 71. Professor Brookfield suggested,

16 with some confidence, that the Registrar s reluctance was unjustified. We agree with that observation, and there is now no dispute about the appropriateness of the registration of third category rentcharges. [46] Professor Brookfield later developed other precedents in his conveyancing text. The edition of Brookfield Goodall and Brookfield s Law and Practice of Conveyancing with Precedents current at the time of the Law Commission s report was the fourth edition, published in 1980: see the precedents at [23.37]-[23.39]. From this and from its general knowledge of what was happening in the conveyancing marketplace, the Commission would have been well aware of the widespread use of the rentcharge device to secure ongoing obligations, to mutual advantage, in retirement villages and other group housing situations. [47] The addition of the words and the performance of all other obligations secured by the mortgage to s 81(2) of the 1952 Act in the Commission s replacement section (now s 97) may be seen as confirmation that these third category rentcharges should not be redeemable on payment of the nominal sum of the annual rent. The Commission was making quite clear that such payment would not, of itself, entitle the mortgagor to a discharge of the mortgage; to permit redemption on payment of the nominal rentcharge would be to render the encumbrance device useless in these third category rentcharge situations. There is no indication in the Act that our Law Commission considered continued use of the rentcharge device undesirable. [48] Section 97 as enacted reflects the Commission s thinking: the changes from the Commission s draft are merely stylistic and reflect changed drafting practice between 1994 and The Commission s intent in these circumstances can safely be attributed to Parliament. The rentcharge in this case [49] The rentcharge in this case was drawn up in terms of form D in the Second Schedule to the Land Transfer Act. Form D was entitled Memorandum of encumbrance for securing a sum of money. There can be no doubt that the

17 encumbrance was registrable: see ANZCO Foods Waitara Limited v AFFCO New Zealand Limited [2006] 3 NZLR 351 at [51], [161], and [296] (CA). [50] The encumbrance recorded that Mews Management would be providing certain services to the encumbrancer under a services agreement. Mews Management also covenanted that it would procure and retain in full force and effect for the duration of the encumbrance Memoranda of Encumbrance on the same terms as this Memorandum from the other registered proprietors of all Units (other than Unit 46) in Jackson Mews. (Unit 46 was exempted, as it was the manager s unit owned by Mews Management.) [51] In return, Mrs Reid encumbered her fee simple estate in unit 21 for a term of 99 years with an annual rental charge of 10 cents to be paid on the first day of April in each year if demanded by that date the first payment if so demanded being due on the 1st day of April That encumbrance was made expressly subject to further additional covenants. The most important for current purposes was her covenant to enter into the services agreement, by which the retirement village was to be maintained and serviced by Mews Management. In order to ensure that Mews Management was remunerated for those services, she covenanted to pay the fortnightly levy as fixed from time to time. Mews Management, as owner of unit 46, benefited from Mrs Reid s covenants, just as it did from the like covenants of every other unit owner. There was in this case none of the problems associated with covenants in gross, which is why the argument was focused entirely on when the right to redeem arose under s 81(2) (now s 97(2)). [52] It is unnecessary for us to decide what the respondents rights were prior to 1 January 2008, the day on which the 2007 Act came into force. From that date, however, it is clear in our view that the right to a discharge of the encumbrance under s 97(2) has not accrued. That is because, for good reason, the respondents and their successors in title, just like all the other current unit owners and their successors in title, must perform the other obligations secured by the encumbrance, namely continuing to be a party to the services agreements and continuing to pay the fortnightly levies.

18 [53] Counsel cited to us two learned articles, the first by Rod Thomas, Possible Hazards of Memoranda of Encumbrance (1997) 8 BCB 1, and a rejoinder by Professor Brookfield, Possible Hazards of Memoranda of Encumbrance: A Reply (1998) 8 BCB 13. Mr Thomas, in his article, had cast some doubt on the rentcharge device. In particular, he suggested that s 81(2) of the 1952 Act applied to rentcharges securing a nominal annual rent, allowing an encumbrancer to redeem the mortgage by, perhaps, providing an alternative form of security : at 3. Professor Brookfield, in his reply, disputed that, concluding that s 81(2) simply does not apply in such a case : at 15. In the appeal before us, Mr Withnall, for Mews Management, supported Professor Brookfield s argument while, understandably, Mr Manktelow, for the respondents, preferred Mr Thomas s view. Both authors were dealing, of course, with the 1952 Act. Neither referred to the Law Commission s report. If we had had to choose between the competing views, we would almost certainly have followed Professor Brookfield s reasoning. But whatever the merits of the respective arguments on the wording of s 81(2) of the 1952 Act, we think it clear that the Law Commission had anticipated the potential ambiguity of s 81(2) when applied to third category rentcharges by providing in its replacement section that, in cases where mortgages/encumbrances secured obligations in addition to the payment of money, no discharge of the mortgage/encumbrance should take place until all obligations had been performed. Result [54] We allow the appeal. We set aside the judgment of the High Court. The respondents were not entitled to a declaration that they were entitled to redeem the land on the payment of $9.90. Nor should Mews Management have been ordered to provide to the respondents a discharge of the encumbrance. [55] The respondents must pay costs to Mews Management on the appeal. Costs in the High Court are, in the absence of agreement between the parties, to be fixed in that Court. [56] We are not deciding whether unit owners can cancel or apply to cancel their services agreements. Nor are we deciding what the consequences would be if a court

19 ruled that the services agreements had been validly cancelled. Those questions have not been before us. [57] Ronald Young J, having concluded the encumbrance should be discharged, went on to express a view about the continued efficacy of the services agreement. He concluded that it survived and would continue to define the parties legal rights and responsibilities : at [51]. The respondents have not cross-appealed concerning that finding if it was appealable and no submissions were advanced on that topic. Since the encumbrance is not being discharged, we need express no view on the Judge s observation. BARAGWANATH J [58] I agree with the judgment of Chambers J. His conclusion is supported by legal principles of quite general application. [59] As well as constituting a charge on land, a mortgage agreement is a contract. All contracts are to be construed according to the presumed intent of those who are party to them. Such intent is inferred from the language employed within its factual and legal setting. [60] Here the author of the document set out to achieve the result proposed by Professor Brookfield in his 1970 essay cited at [45] of Chambers J s judgment. The parties are to be taken as accepting that purpose. Any rational reader of the language reproduced at [51] of that judgment would construe it as a contract to ensure the performance of the relevant services and to charge the land for 99 years to ensure that happened. Its purpose was not to make a loan to the encumbrancer. [61] Section 5 of the Interpretation Act 1999 states that a statute is to be interpreted according to its purpose as well as its text. The purpose of redemption of a security for a loan is well understood. It is laid down by the common law rule stated in Kreglinger v New Patagonia Meat and Cold Storage Co Ltd [1914] AC 25 (HL) which is part of New Zealand law: Bannerman Brydone Folster & Company v Murray [1972] NZLR 411 (CA): a borrower must be permitted to redeem the

20 security by payment of the debt. That rule was confirmed by s 81(2) of the Property Law Act 1952 and now by s 97(2) of the 2007 Act. But the application of the rule must be confined to land intended as a security for a loan. [62] Use of form D in the Second Schedule to the Land Transfer Act 1952, which is headed Memorandum of encumbrance for securing a sum of money, does not alter that reality. It is true that form D can be used for the purpose of securing a loan. If that were the true construction of the document the redemption rule would apply. But New Zealand conveyancers also use the device for a very different purpose. [63] As has been the law since the time of Sir Edward Coke, when the reason of a particular law ceases so does the law itself: Co Litt 70b. Since it was not the purpose of the document to create a loan, the redemption rule has no application. Instead there applies a very different rule, deriving from Roman law: that contracting parties are to be held to their bargain: see Farley v Skinner [2002] 2 AC 732 at [21] per Lord Steyn, citing earlier House of Lords authority. [64] In Raiffeisen Zentralbank Österreich AG v Five Star General Trading LLC [2001] QB 825 at 27 (CA) when dealing with the characterisation of issues in the conflict of laws Mance LJ observed: The classes of categories of issue which the law recognises at the first stage [that is, the characterisation] are man-made, not natural. They have no inherent value, beyond their purpose in assisting to select the most appropriate law. A mechanistic application, without regard to the consequences would conflict with the purpose for which they were conceived. They may require redefinition or modification, or new categories may have to be recognised... Citing that passage the authors of Dicey, Morris and Collins on Conflict of Laws (14ed 2007) conclude at [2-045]:... the way lies open for courts to see common-sense solutions based on practical considerations. [65] Here the High Court fell into the error of extrapolating one principle that dealing with loans on security, so far as to embrace a fact situation that of a 99 year contract for services protected by the rent charge, which is properly classified as

21 falling within another the very different principle that contracts are to be performed. Today s decision of this Court corrects that error. Solicitors: Duncan Cotterill, Wellington, for Appellant Guy & Toby Manktelow, Lower Hutt, for Respondents