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Encumbrances, Indefeasibility, and Beyond

05 October 2018 - By Thomas Gibbons

Four recent developments in property law command our attention.

Clearspan and Encumbrances

The first is the Court of Appeal’s decision in Clearspan (Spark New Zealand Trading Ltd v Clearspan Property Assets Ltd [2018] NZCA 248). The Court of Appeal confirmed that the transfer of an undivided share of a fee simple property subject to an encumbrance granting an exclusive use area is not a subdivision under s 218 of the RMA. The Environment Court had found that Clearspan’s arrangements with owners did constitute a subdivision, while the High Court had found otherwise.

The Court of Appeal sided with the High Court, noting that the term “subdivision of land” in s 218 of the RMA was defined exclusively, and a focus on the statutory text was appropriate. Further, at a policy level, the Court of Appeal held that Parliament had chosen a precise definition as it was focused on transactions with material environmental implications.

A row of new townhouses

Strictly speaking, the Court of Appeal’s decision seems correct: s 218 can be interpreted narrowly. At a policy level, however, the Court of Appeal seems to have failed to take into account the broader implications of allowing this kind of arrangement. The cross lease was invented as a workaround of subdivision rules, allowing for a separate certificate of title with an undivided share in a fee simple property, a lease of a flat, and (in some cases) an exclusive use area. The arrangement in Clearspan can also be seen as a workaround of subdivision rules, allowing for a separate certificate of title with an undivided share in a fee simple property, and an encumbrance recording an exclusive use area (analogous to a lease). There are many of these arrangements around the country, and – subject to mortgage finance remaining available, or a change in the RMA – we can expect to see many more of them. We may also see local authorities attempting to change their district plans to seek to restrict, or at least regulate, these kind of arrangements.

For now, however, the encumbrance arrangement described in this case remains outside the scope of subdivision under the RMA. All it needs is a decent name – whether the “cross-encumbrance”, the “exclusive encumbrance title”, or something else.

Overseas Investment Act

The Overseas Investment Amendment Bill was passed on 15 August, and is expected to come into force on 22 October. The Amendment Act makes residential land – that is, land that has the category of “residential” or “lifestyle” in a council’s District Valuation Roll – a category of “sensitive land” under the Act. A special definition of “ordinarily resident in New Zealand” applies to the new residential land rules; the existing “ordinarily resident in New Zealand” test no longer applies to residential land.

As outlined in an earlier article (see “Overseas Investment Act Changes”, LawTalk 914, February 2018), there are new pathways for consent to an acquisition by an overseas person, including based on a commitment to New Zealand, the provision of increased housing, the non-residential use test, and the incidental residential use test, with the latter tests applying to residential land that is not otherwise sensitive.

Existing pathways have been retained, including around an intention to reside (though this does not apply to residential land), and the general “benefit to New Zealand” pathway. There is also an ability to seek an exemption for certain apartment developments, allowing sales off the plans to overseas buyers.

Covenants and Green Growth

The decision of the Supreme Court in Green Growth No 2 Ltd v Queen Elizabeth the Second National Trust [2018] NZSC 75 is an interesting one. The case concerned a specific arrangement: an open-space covenant under the Queen Elizabeth the Second National Trust Act 1977. Russell granted a covenant to the Trust over a 404ha block of land near Tairua in 1997. The covenant as executed and notified on Russell’s title was incomplete, as it referred to a protected area defined by reference to an aerial photograph that was not attached. There were also irregularities in the execution and certification of the covenant. Both the High Court and Court of Appeal had determined that the covenant was valid, and that it should be rectified.

The Supreme Court followed a different approach from the High Court and Court of Appeal. It is worth noting that the Supreme Court’s judgment drew on the Land Transfer Act 1952, not the Land Transfer Act 2017, and the Supreme Court was careful to note that its reasoning was specific to the 1952 Act.

In particular, the Supreme Court observed that while a range of commentators had taken the view that notification of a covenant under s 307(5) of the Property Law Act 2007 (and its precursor, s 126(b) of the Property Law Act 1952) did not confer on the covenantee the status of a registered proprietor, the Supreme Court was less certain of this. The Property Law Acts did not intend to deny the status of registered proprietor to a covenantee. Rather than being focused on issues in execution, s 307(5) was designed to allow a finding that a covenant provision that was contrary to law was ineffective, such as a restraint of trade. An open space covenant created an interest in land, and the trust was rightly seen as the proprietor of this interest.

The Supreme Court also saw the key issue as being construction of the covenant, rather than rectification. After largely avoiding the issue in some other recent cases, the Supreme Court approached the issue of interpretation head-on, and largely followed the approach in Westfield Management Ltd v Perpetual Trustee Co Ltd [2007] HCA 45. Generally, the court concluded, registered documents should be constructed without reference to extrinsic evidence which is not apparent from the register, though facts such as the configuration of the land and its physical features could be taken into account. While rectification could in theory be available, it should not have been granted in this case.

Green Growth makes some bold, but sound, findings. A notified covenant can have the protection of indefeasibility. A notified covenant is to be interpreted without reference to extrinsic materials, except for the physical characteristics of the land. And ultimately, the covenant remained in place.

New Horizons for Torrens conference

I recently had the opportunity to attend the New Horizons for Torrens conference, hosted by the University of Auckland, and attended by speakers from around the globe. It was a tremendous experience, and there were strong debates on topics including the automation of the register; whether deferred or immediate indefeasibility represent the better, or purer, policy choice; the role of artificial intelligence and human intelligence in registration matters; the nature and extent of the ‘manifest injustice’ test under the Land Transfer Act 2017; and where risk should properly be allocated in a Torrens system.

Details of the speakers are available from http://landlaw2018.org/, and the conference as a whole serves as a reminder of the link between theory and practice in land law, and how a term like indefeasibility is not just a shibboleth, but a term of real vitality and meaning.

Thomas Gibbons Thomas.gibbons@mccawlewis.co.nz is a director of McCaw Lewis. He writes and presents extensively on property law and is author of A Practical Guide on the Land Transfer Act 2017 (LexisNexis NZ Ltd).

Last updated on the 5th October 2018