Ipsofactoj.com: International Cases [2000] Part 6 Case 3 [NZCA]



Robert Bryce & Co Ltd

- vs -

Stowehill Investments Ltd




16 AUGUST 2000


Blanchard J


  1. This appeal concerns the effect of a covenant by a sublessee to pay the ground rent under the head lease in circumstances where the head lease and the fee simple have subsequently become vested in the same person but there has been no merger of those estates. The sublessee says that there is no longer any ground rent to pay because the head lessee cannot owe any obligation to itself.


  2. Robert Bryce & Co Ltd ("Bryce") was granted subleases of two adjacent premises at 18 and 20 Barnes Rd, Seaview, Lower Hutt by Stowehill Investments Ltd ("Stowehill") for a term commencing on 6 February 1989 and expiring on 29 September 1997, with a right of renewal for a further term to expire on 5 February 2006 — 17 years in all. There were warehouse and office buildings on the premises. Under the terms of the subleases Bryce covenanted to pay annual rents totalling $194,676 per annum plus GST, subject to review from time to time. Bryce also covenanted to pay rates and other outgoings for services supplied to or used on the premises.

  3. Central to the appeal is a further covenant in the subleases whereby Bryce promised to pay "all ground rent payable from time to time to the Wellington Harbour Board under the Head Leases herein mentioned or any renewals thereof".

  4. At the time when the subleases were granted, Stowehill held perpetually renewable head leases of the land from the freehold proprietor, the Wellington Harbour Board. The head leases were registered against the certificates of title for the land under the Land Transfer Act 1952. The then current terms of the head leases had commenced on 1 October 1987. Being renewable every 10 years, they were due to expire on 30 September 1997. The annual ground rents fixed for that period were $39,580.

  5. In each sublease Stowehill covenanted with Bryce to take the steps to secure the renewal of the head leases as necessary to provide Bryce with the "full term" of 17 years.

  6. No question is raised concerning Stowehill’s ability to grant the subleases and rights of renewal.

  7. The freehold of both properties subsequently became vested in the Hutt City Council pursuant to the Local Government (Wellington Region) Reorganisation Order 1989. In March 1994 the Council agreed to sell its reversionary interest in both properties to Stowehill for $235,000. Each agreement for sale and purchase contained a provision acknowledging that upon transfer to Stowehill of the fee simple estate the leasehold estate under the head lease would not merge.

  8. Settlement was due on 1 May 1994. Memoranda of transfer from the Council to Stowehill were executed on 3 May 1994 but not registered against the titles until 11 January 1995. Each transfer had endorsed on it a request to the District Land Registrar that upon registration no merger was to occur. The Registrar accordingly did not record a merger of Stowehill’s registered leasehold interests with the fee simple.

  9. Bryce has since entered into a deed of lease (expressed to be a sub-lease) of 18 Barnes Rd to Harding Electronic System Ltd for a period, including renewals, of 9 years from 24 January 1997.

  10. Bryce took the view that its obligation to pay ground rent ceased as from 3 May 1994. The agreed statement of facts says that as at 1 November 1999 Stowehill claimed that the ground rents owing to it by Bryce were, in total, $244,901.25. Stowehill also claims interest at a contractual rate of 18 percent per annum.

  11. Stowehill brought this proceeding in the District Court at Wellington seeking judgment for unpaid ground rents and also an order that Bryce is liable to pay ground rent for the duration of the head leases. The statement of facts records that there has been a renewal of the head leases for 10 years from 1 October 1997 at the same ground rents.

  12. Stowehill also sued the second respondent in the same proceeding. It was the firm of solicitors instructed to act for it on its purchase of the freehold from the Council. Essentially Stowehill says that it was advised that ground rent would continue to be payable by Bryce if there were no merger of the fee simple and the head leases and that, if that advice proves not to be correct, the solicitors were in breach of a duty of care owed to Stowehill. The present appeal is not concerned with that issue, which has not been determined below. Obviously, however, the second respondent has an interest in the outcome of the appeal. It has appeared by counsel and made submissions supporting the judgment below.

  13. In its defence Bryce contended that it was released from any obligation to pay the ground rents once Stowehill had acquired the freehold. In a counterclaim it sought a refund of $19,830.55 which is part of the rents paid to the Council for the period from 1 April 1994 to 30 September 1994. It appears that on settlement on 3 May 1994 the Council made an allowance to Stowehill by way of apportionment for the amount now claimed by Bryce.


  14. An application by Stowehill for summary judgment was dismissed by Joyce DCJ who took the view that once Stowehill stepped into the shoes of the Council, Bryce ceased to have any ground rent obligations. The proceeding was subsequently moved into the High Court and was tried by Gendall J who delivered a reserved judgment in favour of Stowehill on 7 December 1999. He referred to the decision of the House of Lords in Rye v Rye [1962] AC 496, which was the focus of Mr O’Sullivan’s argument for the appellant in this Court, and to its abrogation in New Zealand by s 66A of the Property Law Act 1952. Their Lordships had affirmed the principle that "a person could not grant to himself a lease of land of which he was the owner", despite the existence in the Law of Property Act 1925 of a provision, equivalent to s 49 of our Act, that a person may convey land to or vest land in himself (s 72(3)), with "convey" being defined in s 205 of the English Act in a manner which would include a lease, as it is in s 2 of the New Zealand Act.

  15. Sections 49, 66 and 66A of the Property Law Act 1952, which Gendall J discussed, are as follows:


    Person may convey property to himself

    A person may convey or mortgage property for any estate or interest to himself or to himself jointly with another or others.


    Covenants and agreements made by a person with himself and others


    A covenant, whether express or implied under this or any other Act, or an agreement made by a person with himself and another or others, shall be construed and be capable of being enforced in like manner as if the covenant or agreement had been made with the other or others.


    This section applies to covenants or agreements made or implied before or after the commencement of this Act.


    Covenants and agreements made by a person with himself


    A covenant (whether express or implied under this or any other Act), or an agreement, made by a person with himself as an incident of or with respect to or for the purposes of any conveyance or mortgage of property under section 49 of this Act, shall be capable of being enforced in like manner as if the covenant or agreement had been made by that person with another person.


    This section shall apply to all covenants and agreements, whether made before or after the commencement of this section:

    Provided that nothing in this section shall affect the rights of the parties under any judgment given in any Court before the commencement of this section, or under any judgment given on appeal from any such judgment, whether the appeal is commenced before or after the commencement of this section.

  16. Gendall J said that s 66A enables a covenant to be enforced only if it arises from or as an incident of a conveyance pursuant to s 49, but there had been no such conveyance by Stowehill.

  17. The Judge observed that Bryce had not seriously contended that any merger had occurred. He accepted the submission for Stowehill that there had been no merger. The common law doctrine of merger does not, he said, apply to land under the Land Transfer Act, citing Bevan v Dobson (1905) 26 NZLR 69. He noted also s 30 of the Property Law Act which is in the following terms:


    No merger by operation of law

    There shall not be any merger by operation of law only of any estate the beneficial interest in which would not be deemed to be merged or extinguished in equity.

    The Judge saw this as being supportive of the view which he took.

  18. Gendall J referred also to s 112(1):


    Rent and benefit of lessee's covenants to run with reversion


    Rent reserved by a lease, and the benefit of every covenant or provision therein having reference to the subject-matter thereof, and on the lessee's part to be observed or performed, and every condition of re-entry and other condition therein, shall be annexed and incident to and shall go with the reversionary estate in the land or in any part thereof immediately expectant on the term granted by the lease, notwithstanding severance of that reversionary estate, and may be recovered, received, enforced, and taken advantage of by the person from time to time entitled, subject to the term, to the income of the whole or any part, as the case may require, of the land leased. This subsection extends to a covenant to do some act relating to the land, notwithstanding that subject-matter may not be in existence when the covenant is made.

  19. The Judge derived from this provision the principle that once the original lessor has transferred the reversion, the right to recover rent and enforce covenants which refer to the subject matter of the lease passes to the transferee or assignee (Paramoor Nine Ltd v Pacific Dunlop Holdings (NZ) Ltd (1990) 1 NZ Conv C 190, 449).

  20. Accepting that Rye v Rye was "not abrogated on the present facts" because of the absence of any conveyance by Stowehill to itself, the Judge said that he did not think the position could be described as Stowehill covenanting with itself. The covenant (to pay rent) arose as between the original head lessor and Stowehill:

    Stowehill then transferred the burden of ground rent covenant to Robert Bryce pursuant to the contractual terms of the sublease. Robert Bryce acquired further benefits arising out of the sublease, namely the contractual covenant of Stowehill to ensure that the Head Lease runs for a certain duration so as to afford Robert Bryce the benefit of the full term of the leases. It is not open for Robert Bryce to assert, in my view, that the Head Lease and its contractual provisions, must fall to the ground when its benefits or entitlements arise under a sublease, dependent on the Head Lease, and dependent upon compliance by Stowehill that it will ensure the continuation of the Head Lease. It was for that reason, at least, that it was provided that there be no merger of estates upon acquisition of the freehold. So, too, it is not open for Robert Bryce to take the benefit of some covenants in the sublease, but avoid burdensome covenants, vis-à-vis Stowehill as sublessor, when the estates have not merged. The covenants cannot be sub-divided off.

  21. The Judge concluded that Bryce could not avoid its contractual obligations under the sublease simply because, without any merger of the freehold and (head) leasehold estates, Stowehill had acquired the freehold.


  22. In this Court Mr O’Sullivan realistically did not pursue two other arguments which Gendall J had rightly rejected. He concentrated on the submission that at common law a person is unable to covenant with or pay him or herself; that this principle is not abrogated by anything in the Property Law Act and accordingly applies in this case; and that, in particular, s 112 does not override it or provide Stowehill with any remedy.

  23. Mr O’Sullivan submitted that in Rye the House of Lords had recognised that the concept of someone granting a lease to themselves is an "absurdity". Where the benefit and burden of a covenant reside in one person the covenant is necessarily unenforceable: you cannot bring an action for rent against yourself. Here the covenants in the lease were extinguished when Stowehill purchased the freehold from the Council.

  24. It was submitted that any abrogation of Rye related only to the ability to create a lease, including covenants on the part of the lessee to pay moneys. Section 66A in its express terms could apply only where a covenant had been given for the purpose of a conveyance under s 49. In this case there had never been a conveyance under that section. In this connection Mr O’Sullivan drew attention to the fact that, as with its English equivalent, s 49 is contained in a Part of the Act (Part III), dealing with assurances of property, whereas s 66A is in Part IV dealing with covenants and powers, which, as Lord Radcliffe said in Rye, "regulate obligations in the nature of contracts, covenants or bonds". Lord Radcliffe did not read s 72(3), the equivalent of s 49, as being concerned with anything more than rules as to the forms and effects of conveyances and other instruments. "It could not by itself touch the contractual element that in most situations constitutes the essence of a demise". (p 510-511)

  25. Counsel submitted that whilst estates can be kept separate (unmerged), there can be no continuing obligation by a lessee to make a payment where the payee would be itself. Counsel suggested that if Stowehill were now to transfer one of its estates to someone else, there would still be no enforceable covenants; new head leases would need to be created. He seemed to accept that this would restore the obligation to pay ground rents. Mr O’Sullivan also pointed out that the decision in Rye was not based upon merger having occurred.


  26. Mr Chisnall, supported by Mr Morrison, submitted that Rye has been completely abrogated in New Zealand by the combined effect of s 66A and the other Property Law Act provisions which have been mentioned; that there is no room left for the common law rule to operate sensibly in a manner consistent with the statute.

  27. It was argued that it was not necessary for Stowehill to show that payment could be enforced by the head lessor. The sublease covenant given by Bryce was to pay ground rent which was "payable" under the head leases. It was not necessary that there should first be any actual payment by the head lessee.

  28. The head leases were still extant. It was accepted there had been no merger. Section 30 confirmed the equitable rule. Equity looks to the intention of the person in whom two estates become vested and takes account of that person’s obligation to any other party. Here the intention that there should not be merger was expressed both in the agreements and the transfers. Here also there was an obligation to Bryce on the part of Stowehill as head lessee to obtain renewal of the head leases.

  29. Bryce had relied upon Stowehill’s obligation to renew the head leases; it had granted a lease to Harding Electrical Systems extending for a period beyond the renewal date of the relevant head lease. Bryce cannot be permitted to pick and choose between those aspects of the head leases which advantage it and those which do not, it was submitted.

  30. Mr Chisnall also argued that Rye was not concerned with the present situation and, in particular, with the application of a provision equivalent to s 112. Privity of estate exists between Stowehill’s unmerged estates, ie between Stowehill as transferee of the reversion and Stowehill as head lessee. The right to the benefit of the covenant to pay rent has vested in Stowehill in the former capacity. The obligation to pay the ground rent still exists in terms of the covenant in the head leases. The subleases continue to exist, with privity of estate and contract between Stowehill and Bryce.


  31. Mr O’Sullivan’s argument was attractively presented but its adoption would lead to an unattractive and unfair result. Stowehill’s acquisition of the reversion of the head leases would produce for it no financial return on its investment of $235,000 and Bryce would gain a windfall by way of a substantial reduction in its rental obligations. It seems most unlikely that this outcome would have been sought by Bryce or found acceptable by Stowehill if it had been contemplated when the subleases were negotiated and granted. Nonetheless, the Court must determine the issue on the basis of the law, not upon its perception of the morality or fairness of the position taken by Bryce.

  32. Counsel for Bryce, in the face of s 30 and also of s 99 of the Judicature Act 1908, accepted that there had been no merger of the head leases and the fee simple reversions. The approach of equity to merger prevails in this country. Regulation 37 of the Land Transfer Regulations 1966 requires that before notifying a merger on the register and the appropriate instruments of title the District Land Registrar must be satisfied that it has been effected at law and in equity. Hinde McMorland & Sim Land Law para 5.168 state:

    In equity, however, merger depended on the actual or presumed intention of the parties; and there was a presumption against merger if it was against the interest or inconsistent with the duty of the person who acquired the two estates.

  33. In this case it is said that Stowehill as head lessee had an obligation to Bryce as sublessee. However, the primary reason why there was no merger was because of the express contrary intention of Stowehill, not because of the existence of an obligation to Bryce, although that no doubt influenced that intention. It is clear that the subleases would not have been extinguished if merger had occurred. Where termination of a head lease requires the assent of both parties, so that it cannot be done unilaterally by the head lessor, it will not have the effect of prematurely bringing the sublease to an end. A head lessee who has created a sublease may not by voluntarily doing some act, such as surrendering the head lease, destroy the sublease. Consequently, the sublease will continue notwithstanding a surrender or other act of the head lessee which brings about a merger. It is treated as continuing until its natural determination so far as this is necessary to support the derivative interest of the sublessee (Barrett v Morgan [2000] 2 WLR 284, 288; and see the Law Commission’s discussion paper on the Property Law Act (NZLC PP16, 1991) at para 494-500). The reversion upon the sublease is not in these circumstances regarded as being entirely surrendered; a sufficiency of the reversion, known as a continuance, continues to exist to support the sublessee’s title and to enable the enforcement of the sublessor’s obligations (Wilson v Jolly (1948) 48 SR(NSW) 460). In Barrett Lord Millett cites (p 289) the following passage from Lord Ellenborough CJ in Doe d. Beadon v Pyke (1816) 5 M & S 146, 154:

    .... we consider it as clear law, that though a surrender operates between the parties as an extinguishment of the interest which is surrendered, it does not so operate as to third persons, who at the time of the surrender had rights, which such extinguishment would destroy, and that as to them, the surrender operates only as a grant, subject to their right, and the interest surrendered still has, for the preservation of their right, continuance.

  34. In England Rye v Rye is regarded as authority for the general proposition, found in Lord Denning’s speech (p 513), that "[a] person cannot be, at the same time, both landlord and tenant of the same premises" (see Lord Millett in Barrett at p 288). We confess that our reading of the speeches in Rye leaves us doubtful whether any of their Lordships, apart from Lord Denning, intended to go this far. The approach of equity towards merger is not mentioned, nor is a situation like the present considered.

  35. The speech of Viscount Simonds (with whom Lord Reid agreed) examines whether an owner of an estate in land can create a lesser estate for himself (p 505):

    The question, then, can conveniently be examined by asking whether the subsection enables A to grant a lease to himself of land of which he is the owner, or, in other words, to carve out of his larger estate a lesser estate which creates (I know not how to put it otherwise) the relationship of landlord and tenant between himself and himself. I find this a strange conception. In Grey v Ellison [(1859) 1 Giff 436, 444] Stuart V-C. describes as fanciful and a whimsical transaction the proposal that a man should grant a lease to himself. He had, no doubt, in mind that a lease is in one aspect contractual. Of things necessary to a lease, says Sheppard’s Touchstone of Assurances (see 7th ed., vol II, p 268), one is that: "There must be an acceptance, [actual or presumed,] "of the thing demised." Yet it is meaningless to say that a man accepts from himself something which is already his own. I recognise that a lease not only has a contractual basis between lessor and lessee, but operates also to vest an estate in the lessee. But what sort of estate is in these circumstances vested in the lessee? I will assume that it will not at once merge in the higher estate from which it springs, though I see no reason why it should not. Yet it must be an estate hitherto unknown to the law. Even a bare demise implies certain covenants at law: but to such an estate as this no covenants can be effectively attached.

  36. What his Lordship was speaking of is a situation in which only one person is involved, purporting to deal with him or herself in order to create a new lesser estate. Viscount Simonds does not appear to have had in mind a transaction between two parties which has the result of vesting their previously separate existing estates in one of them, let alone that this is done with an express intention that there shall be no merger.

  37. Lord Radcliffe said that s 72(3), the equivalent of s 49, "does extend to the grant of a lease by a person to himself in the strictly limited sense that a term of years is not incapable of being created by such a transaction" (p 510). He took this view because "convey" included the operation of leasing. Thus the section was plainly intended to bring about some change in the law, although his Lordship thought that it was merely a technical one bearing upon the necessary form of documentation and the section had nothing to say about "the substantial validity of a transaction which is absurd in itself, such as a single individual purporting to make himself his own tenant". (There is certainly nothing deserving of that epithet in Stowehill’s transaction with the Council in the present case). The important point about Lord Radcliffe’s observation is that he too did not appear to be directing his mind further than the situation described by Viscount Simonds.

  38. It was therefore only Lord Denning who put the matter more broadly. (Lord MacDermott does not discuss the point in his speech.) First, he considered the position at common law (p 513):

    Is it possible for a person to grant a tenancy to himself? Or for two persons to grant a tenancy to themselves? At common law it was clearly impossible. Nemo potest esse tenens et dominus. A person cannot be, at the same time, both landlord and tenant of the same premises: for as soon as the tenancy and the reversion are in the same hands the tenancy is merged, that is, sunk or drowned, in the reversion; see Blackstone’s Commentaries (1766 edition), vol II, p 177. Neither could a person at common law covenant with himself, nor could two persons with themselves.

  39. Lord Denning then asked whether the 1925 Act had brought about a change and expressed the opinion that it had not — even under that Act a person could not grant a tenancy to himself (p 514):

    . . . for the simple reason that every tenancy is based upon an agreement between two persons and contains covenants expressed or implied by the one person with the other. Now, if a man cannot agree with himself and cannot covenant with himself, I do not see how he can grant a tenancy to himself. Is the tenancy to be good and the covenants bad? I do not think so. The one transaction cannot be split up in that way. The tenancy must stand or fall with the agreement on which it is founded and with the covenants contained in it: and as they fall, so does the tenancy.

  40. The decision in Rye v Rye gave rise to concern in New Zealand about the titles to many residential apartments. The "cross lease" system of creating a combined freehold / leasehold title under the Land Transfer Act had been devised to enable people to have ownership of apartments with separate titles under that Act. At that time there was no statute enabling the issue of what are now called unit titles. It had been found convenient by some conveyancers to have their developer clients execute long term leases to themselves and to convey to each purchaser an undivided interest in the freehold plus the lease pertaining to the particular flat. If Rye represented the law in New Zealand, it was thought that notwithstanding registration under the Land Transfer Act the purchasers’ titles might be suspect; and that the covenants intended to be enforceable among residents of the same building, operating like the rules of the building, might be ineffective.

  41. Against this background, the legislature proceeded to enact s 66A by an amending Act in 1968. It was regarded as overcoming the difficulty possibly presented by the decision of the House of Lords. Obviously it was thought that the existing definition of "conveyance" and "convey", expressly including a leasing, was not to be read down. The view of Lord Radcliffe on this point was apparently accepted. The deficiency which his Lordship had observed, the absence of any "contractual element", was supplied by the new section. A covenant, whether express or implied, or an agreement made by a person with himself as an incident of or with respect to or for the purposes of a conveyance of property under s 49 (or a mortgage, reference to which was added in s 49) was to be capable of being enforced in the like manner as if made by that person with another person. Our legislature, in a different conveyancing context, did not see it as absurd that one could create a set of covenants with oneself. It also did not think it necessary to limit the new provision to cross leases only or even just to leases. Utility was evidently seen in a person being able to create covenants in advance of entering into a transaction with another to which they would apply.

  42. Mr O’Sullivan accepted during oral argument that s 66A must have the effect that if Stowehill had created a head lease to itself providing for a ground rent and then, as head lessee, had granted a sublease to Bryce containing a covenant by Bryce to pay the ground rent, Bryce would be obliged to make such payments. Counsel agreed that to that extent the common law rule which is the basis for the decision in Rye has been displaced in New Zealand law. This concession was properly made. But it seems to us that it must follow that the common law of New Zealand is to be taken to have adjusted for consistency with the purposes of s 66A. To adopt Lord Radcliffe’s epithet, it would be an absurdity if the rental covenant in a head lease from Stowehill to itself was effective, yet the identical covenant in the present case were held to have been extinguished by Stowehill’s acquisition of the freehold.

  43. Although the statute does not in its terms apply to the situation, its influence on the surrounding area of common law must be recognised, for otherwise there will be an unacceptable incongruity between leases created in reliance upon s 49 and those where the two estates have come into the same ownership after the term has already commenced. There is no justification for New Zealand law to say that there is a difference. This is a case where the reversal by statute of a common law rule must be taken to have had an effect beyond its immediate purport, to use the words of Professor J F Burrows in Statute Law in New Zealand, 2 ed (1999) p 326.

  44. In any event, for the reasons already mentioned, it is questionable whether the decision in Rye has any application to these facts. Stowehill did not lease to itself. At different times Stowehill acquired different interests, which were not merged, in the subject land. This situation was not adverted to, directly or indirectly, in Rye.

  45. We have therefore concluded that the covenants in the head leases requiring payment of ground rent are extant. We agree with Mr Chisnall’s submission that Bryce was obliged under the subleases to pay the ground rent payable under the head leases. On our analysis that ground rent remains payable.

  46. Before leaving this matter reference should be made to the position once the head leases had been renewed at the same ground rent. Even if it had been our view that the covenants under the expired head leases ceased to have any effect upon acquisition by Stowehill from the Council of the reversion, we nevertheless consider that the granting of the renewals, which are of course new head leases for a further term of ten years — being concurrent leases i.e. grants to Stowehill of the immediate reversions upon the subleases to Bryce, entitling the head lessee to receive the sublease rentals (see Domb v Owler [1924] NZLR 532, 534-5) — would very arguably have revived Bryce’s obligation to pay the ground rents as from 1 October 1997. In the circumstances it is unnecessary to say more on this question as the parties are agreed that if this Court, as it does, finds the unpaid ground rents to be due to Stowehill, that will include the rents accruing since that renewal date.

  47. We agree with the conclusion reached by Gendall J and dismiss the appeal with costs of $3,500 to the first respondent and $1,500 to the second respondent, together with their respective disbursements reasonably incurred on this appeal.


Rye v Rye [1962] AC 496; Bevan v Dobson (1905) 26 NZLR 69; Paramoor Nine Ltd v Pacific Dunlop Holdings (NZ) Ltd (1990) 1 NZ ConvC 190; Barrett v Morgan [2000] 2 WLR 284; Doe d. Beadon v Pyke (1816) 5 M & S 146; Domb v Owler [1924] NZLR 532; Wilson v Jolly (1948) 48 SR(NSW) 460


New Zealand

Property Law Act 1952: s.2, s.30, s.49, s.66, s.66A

Judicature Act 1908: s.99

Land Transfer Regulations 1966: Reg.37


Law of Property Act 1925: s.72(3), s.205

Authors and other references

Hinde McMorland & Sim Land Law

Blackstone’s Commentaries (1766 edition), vol II

J F Burrows in Statute Law in New Zealand, 2 ed (1999)


S M O’Sullivan and M J Kingswood for Appellant (instructed by Phillips Fox, Wellington)
P R W Chisnall and P A H Hobbs for First Respondent (instructed by Gibson Sheat, Wellington)
J M Morrison for Second Respondent (instructed by Simpson Grierson, Wellington)

all rights reserved