New Zealand Law Society - Rectification and indefeasibility of title

Rectification and indefeasibility of title

Rectification and indefeasibility of title

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The equitable remedy of rectification of documents (expressly preserved by ss 22(3)(b) of the Contract and Commercial Law Act 2017) enables a court to correct a document so that it properly reflects the intention of the original parties to that document.

The document in question need not be purely contractual – documents creating an interest in land fall within the equitable remedy. Examples of this are Wellington City Council v New Zealand Law Society [1988] 2 NZLR 614 (HC); affirmed [1990] 2 NZLR 22 (CA) (lease); Westland Savings Bank Ltd v Hancock [1987] 2NZLR 21(mortgage); Green Growth No. 2 Ltd v Queen Elizabeth the Second National Trust [2016] NZCA 308; [2016] 3 NZLR 726 (covenant over land) (CA).

Such documents inevitably cause remedial tension, because the interest in the land invariably changes hands. One or both of the original parties to the document may cease to be parties to it.

Where the interest does not change hands, rectification should not cause a problem. There is no good reason why the document creating the interest should not be altered to reflect properly the original parties’ common contractual intention.

Successors in title

What, though, as to a successor in title to the original party? Should the document still be capable of correction, when the successor may have purchased on the basis of the document as registered? Does the situation change if the successor knew of the possibility of rectification?

These were the questions that arose before the Supreme Court in Green Growth No. 2 Ltd v Queen Elizabeth the Second National Trust [2018] NZSC 75.

The respondent (a statutory trust) sought rectification of a covenant that had been granted to it by the appellant’s predecessor in title. The covenant defined a parcel of “protected land” with reference to an aerial photograph that was, erroneously, omitted when the covenant was registered against the land’s title.

It was accepted that if the original parties to the covenant had applied to the court, they would have had been entitled to rectification. However, the appellant now asserted that that any remedy was barred, amongst other things, due to its right to indefeasibility of title under the Land Transfer Act 1952 (LTA).

While the High Court and the Court of Appeal determined that rectification should be available, despite that indefeasibility, the Supreme Court ruled that it should not.

It began its analysis by noting the position in equity:

  • The assignee of a contract takes subject to equities, and thus is susceptible to a claim to rectification;
  • A person who acquires an interest in land will be able to exercise any right to rectify a prior agreement affecting that interest which that person’s vendor had;
  • Where the competition is between a party with a right to rectify and a subsequent equitable owner of the land, the principles of indefeasibility are not engaged.

It then turned to the legal position.

As to this, it determined that the appellant was protected by s 62 and s 182 of the Land Transfer Act 1952, namely the indefeasibility provisions. Section 62 reads (as relevant):

“Notwithstanding the existence in any other person of any estate or interest … the registered proprietor of land ... shall, except in case of fraud, hold the same subject to such encumbrances, liens, estates, or interests as may be notified on … the register … but absolutely free from all other encumbrances, liens, estates or interests whatsoever…”

Section 182 reads (as relevant):

“Except in the case of fraud, no person contracting … with … the registered proprietor of any registered estate or interest shall … be affected by notice, direct or constructive, of any trust or unregistered interest, any rule of law or equity to the contrary notwithstanding, and the knowledge that any such trust or unregistered interest is in existence shall not of itself be imputed as fraud.”

The Supreme Court held that the appellant was not guilty of fraud, even though it had been aware of the likelihood of claim for rectification. This conclusion was on the basis of the last clause of s 182; the availability of a claim for rectification being determined to be an unregistered interest for these purposes.

Australian authority followed

In making its determination, the Supreme Court distinguished two authorities from the lower courts and decided instead to follow Australian authority.

In Merbank Corp Ltd v Cramp [1980] 1 NZLR 721 (SC), a charging clause had been omitted in a mortgage deed, that was then registered. Other charges were also registered. Barker J, in the New Zealand High Court, held that rectification was available, because any third parties would not be prejudiced. It was distinguished on the basis that indefeasibility of title was not specifically addressed and that the charging clause could have been implied into the deed, with no need to resort to rectification.

In Child v Dynes [1985] 2 NZLR 554 (HC) a restrictive covenant was incorrectly drafted. The successors in title to the original parties sought rectification. Barker J held that rectification was available, again on the basis that there was no prejudice. Once more, his decision was distinguished on the basis that indefeasibility of title was not really addressed and that the covenant could be construed to have the intended effect. This was the approach which the Court of Appeal took when the decision was appealed [1985] 2 NZLR 561 (CA).

The Supreme Court instead followed the decision in the New South Wales Supreme Court: Tanzone Pty Ltd v Westpac Banking Corp [1999] NSWSC 478, where the court upheld indefeasibility above any equity of rectification.

The fact that such an equity of rectification might not prejudice a successor in title or be adverse to its interests was found to be irrelevant.

Deceptively good news

The decision of the Supreme Court is deceptively good news as to commercial certainty. If a document creating an interest in land is registered against the title to that land then a successor in title will take subject to that interest, as registered, without fear that the document may be rectified in due course to alter that interest. The only exception is fraud, which, by virtue of s 182, does not include knowledge of the existence of a right to rectification.

However, what the Lord giveth with one hand, he taketh away with the other. In a continuing trend, the Supreme Court in Green Growth in effect determined that the covenant was wrongly expressed, and interpreted it in a way such that its function became very close to that of rectification. As it noted (at [55]):

“As a matter of logic, construction should come before rectification. This is because construction involves interpreting the words used in a document to reflect the intention of the parties. Conversely, rectification achieves this by altering the words used. If the words used in a document as it stands can be construed to reflect the intention of the parties, there is no need to alter the document to reach the same result.”

So, while a purchaser may take a transfer of land knowing of the possibility of rectification but understanding that rectification will not be effected, it may still see the error in the registered document remedied by the courts under the guise of “construction”.

Rectification requirements are exacting, demanding cogent evidence of the parties’ common intention. Construction, however, has different requirements.

As a result, it appears that the courts will be trying to fulfil the common intention of the parties on the basis of the standard tools of interpretation (the wording of the document and its background factual matrix) rather than adducing and assessing actual evidence of that intention.

Quite why this is a preferable course to the more stringent approach required under rectification remains to be seen. Arguably, the approach has the potential to further distance the enforcement of rights from the intentions of the original parties and their informed successors.

Tim Herbert is a civil and commercial barrister sole, High Street Chambers, Auckland.

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