IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV NAJDA COURT & ORS Respondent RESERVED JUDGMENT OF MILLER J

Transcription

1 IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV BETWEEN AND MACLENNAN REALTY LIMITED Appellant NAJDA COURT & ORS Respondent Hearing: 18 February 2004 Appearances: J Waymouth for Appellant D K Wilson for Respondent Judgment: 24 February 2004 RESERVED JUDGMENT OF MILLER J [1] The respondents engaged the appellant, a licensed real estate agent, to sell three town houses located at 36 Mona Vale Avenue and 21 Darvel Street, Christchurch. This litigation concerns the appellant s entitlement to commission. [2] The properties were sold to a family trust. A director in the firm of Maclennan Realty Ltd, Mr Bruce Maclennan, and his wife Marilyn were among the trustees of the family trust. [3] The issues raised at trial in the District Court and on appeal are whether Maclennan Realty was disentitled to its commission by reason of: a) a breach of s.63(2) of the Real Estate Agents Act 1976, resulting from the fact that Mr Maclennan became a registered proprietor of the properties in his capacity as trustee. MACLENNAN REALTY LIMITED V NAJDA COURT & ORS HC AK CIV [24 February 2004]

2 b) a breach of the agency pursuant to which Maclennan Realty sold the properties, in that Mr Maclennan did not disclose his long-time friendship with the couple who contracted to purchase the properties and subsequently decided to put them into a family trust. Factual background [4] Pursuant to a fax sent on 27 July 2001, Najda Court, one of the respondents, engaged the appellant to sell the Christchurch properties. Ms Court represented the respondents throughout. [5] It was subsequently agreed that the commission on the sale of all three properties would be $13,500 including GST. That is a substantial discount from the appellant s normal commission, no doubt reflecting the fact that Ms Court is herself a very experienced real estate agent. [6] Mr Maclennan took responsibility for the sale. He introduced Frederick and Prudence Mason, who were longstanding friends of his. There was an issue at trial regarding the date on which Ms Court became aware of the friendship. The learned District Court Judge found that Ms Court was not told of the relationship prior to the contracts being executed. Mr Waymouth sensibly did not seek to disturb this finding on appeal. It is plain that she was told of the relationship after the contracts had become unconditional but prior to settlement on 2 May [7] The contracts were entered into on or about 9 March 2002, and they became unconditional on or about 26 March. It was common ground before me that the possibility of the Masons using a family trust to acquire the properties was not raised until after the contracts became unconditional. It was raised in a discussion between the Masons and their solicitor, and the Masons suggested Mr Maclennan and his wife as possible trustees. Until that point, Mr Maclennan had no inkling that he would be asked to assume this role. [8] The purchasers named in the contracts were F J and P J Mason or nominee. There was no separate agreement for the Masons to sell to the trustees, and it appears

3 that the Masons must have nominated the trustees. It was accepted before me that there was a single transaction that culminated in title being taken by the trustees. [9] The family trust was settled by the Masons on 2 April 2002, and shortly afterwards the respondents were advised that Mr Maclennan would be a trustee. Objection was taken but, for reasons that are not presently material, the respondents elected to continue with the purchase. [10] On settlement, title to the properties was taken in the names of the Masons and the Maclennans as trustees of the family trust. It was common ground that Mr Maclennan and his wife have no beneficial interest in the properties. The District Court Findings [11] The District Court dismissed the appellant s claim, with costs. The decision dealt with both grounds together. The learned Judge s reasoning emphasised his finding that there was an undisclosed relationship of friendship between the Masons and Mr Maclennan. The essence of the District Court s reasoning appears to be that there was a conflict of interest that had not been disclosed, such that there was a breach of s.63(2). [12] Section 63 provides: Purchase or lease by agent voidable (1) No real estate agent shall, without the consent on the prescribed form of his [or her] principal, directly or indirectly and whether by himself [or herself] or by any partner or sub-agent, (a) Purchase or take on lease, or be in any way concerned or interested, legally or beneficially, in the purchase or taking on lease of any land or business which he [or she] is commissioned (at the instigation of the principal or otherwise) by any principal to sell or lease; or (b) Sell or lease to his [or her] spouse or child any such land or business. (2) No partner or employee of a real estate agent and no officer of a company that is a real estate agent shall, without the consent on the

4 prescribed form of the principal of the real estate agent, directly or indirectly, (a) Purchase or take on lease, or be in any way concerned or interested, legally or beneficially, in the purchase or taking on lease of any land or business which the real estate agent of whom he [or she] is a partner or by whom he [or she] is employed, or of which he [or she] is an officer, is commissioned (at the instigation of the principal or otherwise) by any principal to sell or lease; or (b) Sell or lease to his [or her] spouse or child any such land or business. (3) Any contract made in contravention of this section shall be voidable at the option of the principal. No commission shall be payable in respect of any such contract, whether the principal has avoided it or not; and any commission paid in respect of the contract shall be repayable by the real estate agent to his [or her] principal and shall be recoverable by the principal as a debt. Appellant s Submissions [13] In a very careful submission, Mr Waymouth contended that the question whether the appellant had purchased, or was in any way concerned or interested, legally or beneficially, in the purchase of the properties, should be determined as at the point the contracts were entered or, at the latest, when they became unconditional. At the latter point, he submitted, the agent is ordinarily entitled to commission. [14] His submission was that s.63 is aimed at the misuse of the agent s position to profit at the expense of his or her principal, and that as a matter of logic the opportunity for profit can only be taken prior to the contract being entered into. He relied on the fact that there was no suggestion that Mr Maclennan would take title to the properties in his capacity as trustee until after the contracts became unconditional. He pointed out that s64 envisages that, in any case where s. 63 applies, a valuation will be provided before the client gives its consent, and submitted that it is implicit in this procedure that consent will be obtained before the contract is executed. [15] Accordingly, Mr Waymouth invited me to read purchase in s.63(2) to mean entry into the contract of sale.

5 [16] In relation to the second issue, Mr Waymouth contended that the nondisclosure was not material and so did not breach Maclennan Realty s obligations to the respondents. Respondent s Submissions [17] With respect to the first issue, Mr Wilson took the approach that s.63 applies when the agent s mandate to sell a property results in a transaction in which the agent acquires a legal or beneficial interest of whatever kind. In his submission, purchase refers to the entire transaction from entry into the contract to completion. In conveyancing practice, completion does not occur until the vendor has complied with its obligation to procure registration of the transfer under s41 of the Land Transfer Act: Montgomery & Rennie v Continental Bags (NZ) Ltd [1972] NZLR 884. [18] He responded to Mr Waymouth s point that the relevant time for determining whether s.63 applies is the time at which the contract was entered by submitting that the underlying concern of the section is with conflicts of interest that have not been disclosed and made the subject of an informed consent in the prescribed form. He argued that such conflicts ordinarily exist from the outset even if they do not result in the agent acquiring a legal or beneficial interest until the transaction is completed on registration. [19] With respect to the second issue, Mr Wilson contended that Mr Maclennan had a conflict of interest by reason of his friendship with the Masons, and argued that the appellant s failure to disclose it at the outset was a material breach of its obligations. It was material because Ms Court relied on Mr Maclennan s views regarding the value of the properties, and because she entrusted him with the task of appointing a valuer to assess another property that the respondents were to acquire from the Masons in part exchange. That contract was conditional upon a valuation satisfactory to the respondents. She had consented to Maclennan Realty acting for the Masons on that sale.

6 Decision [20] I deal firstly with s.63. Plainly this litigation involves issues of principle for the protagonists, both of whom are respected real estate agents. When Mr Maclennan was asked to act as trustee, his work as agent for Ms Court had effectively ended. It seems that he acted in good faith. In the circumstances, I can understand that he may feel a sense of grievance. Equally, I can understand that Ms Court might doubt whether her interests had been served in the negotiations that preceded execution of the contracts. [21] In my view the matter does not turn on ethical considerations, however, but rather on the words of the statute. Section 63(2) relevantly prohibited Mr Maclennan, without consent on the prescribed form, from directly or indirectly purchasing or being in any way concerned or interested, legally or beneficially, in the purchase of the properties, which Maclennan Realty had been commissioned to sell. It is undeniable that the mandate given to Maclennan Realty resulted in a transaction in which Mr Maclennan acquired an interest in the property as registered proprietor. [22] I consider that the prohibition on being in any way interested in the purchase of a legal interest in the property contemplates the outcome of the transaction, in the sense that it looks forward to the identity of the person who will take the legal interest. A legal estate or interest is created in the manner prescribed by statute or the common law. It must include the estate or interest acquired by the registered proprietor upon registration under the Land Transfer Act. [23] This construction of the section is consistent with its policy. The section is concerned with undisclosed conflicts of interest. In Were Real Estate Limited v Keenan [1984] 2 NZLR 650, Eichelbaum J held at 652: The mischief under consideration in ss 63 and 64, and the intent of the legislation, are I think clear enough. Real estate agents who seek to purchase property on their own account are to be prevented, as far as possible, from taking advantage (innocently or otherwise) of their own clients. Unless certain prerequisites are fulfilled such a transaction is voidable at the option of the vendor; and as a further and separate matter no commission will be payable. Broadly stated the requirements are first that the vendors must sign a consent that demonstrates their awareness of the nature of the transaction.

7 Further to make such consent hold water the agent has to supply a valuation. On analysis there are six elements: the agent must (a) supply (b) at his own expense (c) a valuation made by (d) an independent (e) registered valuer (f) of the land or business in question. [24] In Christie & Anor v Harcourt & Co [1973] 2 NZLR 139, the agent introduced a purchaser who was engaged to his daughter. There was no intention at the time, some years prior to the Matrimonial Property Act 1976, that she should acquire an interest in the property. A contract was signed and she subsequently decided to make a contribution to the deposit. Her name was then added to the contract. Disclosure was made prior to settlement. As in this case, the agent appears to have acted in good faith throughout. White J held that the agent was required to return the commission. He held the words sale or lease in section 78 of the Real Estate Agents Act 1963, which is relevantly identical to s.63, referred to the actions of the agent (as of course does the word purchase ), and that the words directly or indirectly are used in a section that is in part declaratory of the general law of agency regarding conflicts of interest. At p 141, he held that The essence of a land agent s duty being to get the best possible offer, that duty is deemed to be affected if the possibility of conflict of interest exists through the agent s connection with the purchaser. [25] Undisclosed conflicts pose a significant risk to the client. It is appropriate that the agent, who is best placed to identify and avoid conflicts, should take the risk that s.63 will be breached unless conflicts that may lead to the agent taking an interest in the property are identified and disclosed at the outset. It will be a rare case in which the acquisition of an interest on completion of the very transaction in respect of which the agent is taking a commission does not reflect a conflict of interest that existed at the time the contract was executed. [26] In this case, I accept that the possibility of Mr Maclennan acquiring an interest in the property did not arise until after the contract had become unconditional. But it was open to him to avoid a breach of s.63 by declining to act as trustee. Further, the fact that he was asked to become a trustee suggests that his prior friendship with the Masons was sufficiently close to raise a conflict of interest.

8 [27] Turning to the second issue, counsel referred me to McDonnell v Barton Realty [1992] 3 NZLR 418, a case in which an agent failed to disclose to the vendor that it was also acting for the purchasers on the sale of their existing home. Relying on Farrington v Rowe McBride & Partners [1985] 1 NZLR 83, the Court of Appeal held that an agent who wishes to act for opposing interests must make full disclosure of material facts and obtain an informed consent. Failure to do so is a bar to recovery of commission. The underlying principle is that an agent who has special knowledge of relevant facts is under a duty to disclose them to the principal. [28] In this case, the learned District Court Judge plainly considered that Mr Maclennan s relationship with the Masons was material. It is a question of fact in each case whether a relationship is close enough, having regard to the role performed by the agent in the particular transaction, to create a conflict. The Judge s finding was open to him and I am not prepared to disturb it on appeal. [29] The appeal is dismissed. Costs [30] Counsel may file memoranda if they cannot reach agreement on costs. F Miller J Solicitors: John Waymouth, Auckland for Appellant D K Wilson, Auckland for Respondent