Application of Section 81
Right to redeem
The High Court decision in Menere v Jackson Mews Management Limited(1) prompted a discussion of instruments of encumbrance and covenants in gross (for further details please see "Instruments of encumbrance and restrictive covenants in gross"). Subsequently, and to the relief of many practitioners, the Court of Appeal allowed an appeal in a judgment released on April 16 2010, stating that the type of encumbrance in question was widely used to secure the performance of obligations, a purpose which would be defeated if it could be discharged on payment.
The plaintiffs in Menere owned land which was subject to a memorandum of encumbrance in favour of a company providing "maintenance, services and facilities". The encumbrance obliged the property owner to enter into a management agreement with the company and to pay the company's levies. The encumbrance created a rent charge of 10 cents a year for a period of 99 years, which was to be paid only when demanded by the covenantee. The plaintiffs had paid the amount of NZ$9.90 - the total rent payable for the 99-year term - and sought a declaration from the High Court that the encumbrance be discharged.
Justice Young held that the encumbrance in question was a 'mortgage' as defined by the Property Law Act 1952, and that in applying Section 81 of the act, redemption of the mortgaged land was allowed before the time of redemption provided in the mortgage if the mortgagor tendered the whole sum owed, plus interest, for the full term. Thus, in the court's view, the payment of the sum of NZ$9.90 meant that the plaintiffs' position fell within Section 81 and that they were entitled to redemption. Jackson Mews Management Limited appealed to the Court of Appeal.
Given the extent and variety of the uses to which encumbrances containing covenants in gross are put in New Zealand, a decision was keenly awaited by the legal profession and others. Ultimately, the appeal was allowed on the basis that the respondents were found not to have been entitled to the declaration given by the High Court that they could "redeem the land… on the payment of $9.90".
On appeal, the court focused on two issues: the High Court's application of Section 81 and the question of whether the respondents had the right to redeem the mortgaged land. The court was not deciding whether unit owners may cancel or apply to cancel their services agreements.
Application of Section 81
The parties in the earlier case had agreed that Section 81 of the Property Law Act 1952 was the applicable law; however, given that payment was not tendered until March 2008, the Court of Appeal believed that the parties had overlooked the application of the new Property Law Act 2007 to the issues in hand. The 1952 act had been repealed by the 2007 act (which came into force on January 1 2008), and while Section 367 of the new act included a general transitional provision, the Court of Appeal believed that this had been incorrectly applied to the case. As the payment was made in March 2008, the court held that there was no longer an existing right under Section 81(2) of the 1952 act. Thus, the 2007 act applied, not the 1952 act.
The court acknowledged that the equivalents of Sections 81(1) and (2) of the 1952 act are Sections 97(1) and (2) of the 2007 act. Unlike the earlier provision, Section 97(2) makes clear that a mortgagee or encumbrancee is not obliged to discharge the relevant mortgage or encumbrance until all amounts have been paid and any other secured obligations have been fulfilled. On this basis the respondents would have had to perform all of the other obligations secured by the encumbrance (including being a party to the service agreement and continuing to pay the fortnightly levies).
Right to redeem
As the plaintiffs' obligations had not been fulfilled, the court ultimately held that the respondents were not entitled to a declaration that they were entitled to "redeem the land… on the payment of $9.90"; nor should Jackson Mews Management Limited have been ordered to provide the respondents with a discharge of the encumbrance. As part of the judgment, the court summarised the essential features of the rent charge system in England and discussed how rent charges should be treated under New Zealand law.
The court was satisfied that an encumbrance securing a rent charge falls into the definition of a 'mortgage' in the 2007 act, being "a charge over property for securing the payment of amounts or the performance of obligations".
The encumbrance in issue had been entered into for a term of 99 years and had been made expressly subject to further additional covenants, one of which was a covenant to enter into the services agreement with Jackson Mews Management Limited, along with a covenant to pay a fortnightly levy as fixed from time to time. In deciding the appeal, the court held that it was unnecessary to decide what the respondents' rights had been before the 2007 act came into force, as the 2007 act applied.
The court was satisfied that under the 2007 act, there was no right to discharge the encumbrance under Section 97(2). The court noted the belief that the Law Commission had anticipated the potential ambiguity highlighted in Section 81(2) of the former earlier act by providing in Section 97(2) for mortgages or encumbrances securing obligations other than the payment of money not to be discharged until all of those obligations had been performed.
The respondent appealed to the Supreme Court, but the application for leave to appeal was dismissed.
For further information on this topic please contact Michael Goodger or Chris Moore at Meredith Connell by telephone (+64 9 336 7500), fax (+64 9 336 7629) or email ([email protected] or [email protected]).