Ipsofactoj.com: International Cases [2002] Part 5 Case 12 [NZCA]


COURT OF APPEAL, NEW ZEALAND

Coram

Fulton

- vs -

Woods

GAULT J

HERON J

GENDALL J

22 NOVEMBER 2001


Judgment

Gault J

(delivered judgment of the court)

INTRODUCTION

  1. This is an appeal against the judgment of Fraser J in the High Court at Christchurch granting summary judgment sought by the respondents (the trustees of the Dennis Woods Family Trust) against the appellants (Mr and Mrs Fulton) on their claim and on the respondents’ counterclaim for possession of certain farmland.

    BACKGROUND

  2. The facts appearing in the three affidavits filed are that in 1993 Mr Fulton, who is a qualified valuer, was employed by AMP Society as a lending manager. He had a long held interest in becoming a dairy farmer on his own account. To that end he was introduced to Mr Woods who had some available property. Discussions between the two ensued with a view to Mr Fulton taking over the property either under a sharemilking arrangement or a lease. Mr Woods eventually indicated his preference for the lease option but he did not want a written lease, expressing preference for an arrangement resting on mutual trust.

  3. In early 1994 Mr and Mrs Fulton entered into an oral agreement with Mr Woods as manager of the Dennis Woods Family Trust whereby they would take on lease part of the Woods’ property at an agreed rental. The Fultons subsequently took possession of the property and associated equipment including the shed milking plant and proceeded to develop a dairy unit. The family moved into a small cottage on the property. There is a dispute in the affidavits on the term of the arrangement, the Fultons contending that it was a continuing one and Mr Woods contending that it was for a fixed term of three years.

  4. Mr Fulton’s affidavit evidence was that he undertook extensive improvements to the property, involving considerable expense and hard work on the part of himself and his wife. With effect from 1 June 1997 another ten hectares were added to the Fultons farm, as from 1 June 1999 another block of six hectares was included and from 1 June 2000 a further 1.6 hectares was included, in each case with an additional agreed rental. In the course of developing the dairying business Mr Fulton received assistance and advice from Mr Woods. This assistance included general farming advice and significantly an unsecured loan to acquire dairy company shares (subsequently repaid in accordance with the agreed terms, the last payment being made on 1 June 2001). It is clear that there was mutual trust between the parties and that over the years the relationship between them was co-operative and became closer.

  5. In early 2001 the Kiwi Dairy Company informed the Fultons that they would receive a larger than usual payout due to high production outputs. This led Mr Fulton to approach Mr Woods suggesting a rent review as he estimated that he was paying below the market rate. Mr Fulton explained that he wanted Mr Woods to share in the profit from the dairy company payout.

  6. In response to that approach Mr Woods intimated that he would get a valuation and that was done. A copy was provided to Mr Fulton on 18 February 2001. The valuation assessed the current market rental at $49,495 per annum on the assumption that various specified provisions as to rates, maintenance, application of fertiliser and the like would be included and that the lease would be for three years with a right of renewal.

  7. Due to a combination of factors, Mr Fulton did not respond immediately and on 29 May 2001 Mr Woods’ solicitors wrote to him saying that they had been instructed to arrange a formal lease and suggesting that lease be based upon the recommendations contained in the valuation. Mr Fulton was invited to confirm that this was his preferred course of action or alternatively suggest another one.

  8. Mr Fulton replied by telephone and then by letter. He indicated that a formal fixed term lease of three years would be acceptable and that he agreed that the rent should be increased from the former level. However, he did not accept the valuer’s assessment. He felt that it was too high when compared with similar properties and did not take into account other matters such as compensation for improvements. The letter concluded:

    We would be prepared to increase the rentals to $48,500 p.a. (plus GST) but including all rates (Selwyn District Council) and irrigation plant and machinery.

    Term to be 3 years with a right of renewal after 2 x 1 year periods, lessees to be able to exit the lease agreement at any stage during the term of the lease agreement.

    In his second affidavit Mr Fulton explained that the reference to exit at any stage was intended to mean any stage at the end of a dairying year. In his first affidavit he had explained that it was usual in the dairy industry for participants to conduct their business with reference to the dairying year. He said:

    46.

    I have referred above to the "dairying year" commencing on 1 June.

    47.

    In the dairy industry, virtually all contracts (including land sale transactions and sharemilking contracts) are implemented with effect from 1st June in any one year and the period 1 June to the following 31 May is regarded as the "farming calendar year".

    48.

    For this reason, most land sale/lease transactions for example have included as special condition that the farm being purchased is de-stocked by 28 February or certainly by 31 March. This allows a lead-in time to ensure enough autumn saved pasture is accumulated; critical farm management practices are established; and forward planning undertaken.

    49.

    In addition, most dairy farmers are required to establish supply contracts with a dairy company for the forthcoming season and own shares in the company whom they supply.

    50.

    I doubt anyone within the farming industry would have any expectation that dairy farming arrangements could be determined or transacted except by reference to the start or finish of a particular season with an adequate lead-in time before the start of production.

  9. On 6 June 2001 Mr Woods’ solicitors replied to Mr Fulton’s letter saying that he was most unhappy with the offer and that Mr Fulton’s offer was too far from the market rental. That letter also purported to be formal notice of termination of the lease on 8 June 2001 (two days notice). Understandably, in light of their previous relationship with Mr Woods, this came as quite a shock to the Fultons. On 13 June their solicitors replied to that effect, setting out how the Fultons saw the position and proposing further discussions. Mr Woods’ solicitors merely replied that he required possession at the earliest. More correspondence followed but to no avail. On 22 June Mr Woods gave notice requiring the Fultons to quit at the expiration of one month from and inclusive of the date of service of the notice. A subsequent compromise proposed by the Fultons which included the staggered return of the land was rejected.

  10. The Fultons applied for an interim injunction restraining Mr Woods from acting on the notices to quit or otherwise taking possession of the land. Mr Woods resisted that application and sought summary judgment against the Fultons on their claim and on his own counterclaim for possession.

    THE HIGH COURT DECISION

  11. The Fultons relied on an oral agreement to lease alleged to contain the express term as to duration that it was for "as long as [the Fultons] liked and commencing June 1994". The agreement was further alleged to contain the implied term that the lease would be determined on reasonable notice from either party and such notice would take effect at the conclusion of the dairy season in which the notice was given.

  12. Proceeding on the basis that the express term of the agreement to lease was that it was to be for as long as the Fultons liked, Fraser J took the view that the lease was for an uncertain period with the result that it was void as a term of years but had effect as a periodic tenancy. He accepted that s105 of the Property Law Act 1952 applied thereby creating a rebuttable presumption that the tenancy was determinable by one months notice in writing. He noted that in order to rebut the statutory presumption it is necessary to prove either

    1. an express agreement that the tenancy should be determinable in some other way or

    2. facts or surrounding circumstances from which such an agreement may be implied: Beattie v Lyttelton Borough [1966] NZLR 65.

  13. The Fultons effectively sought to rebut that presumption with the contention that, by implication, any notice had to take account of the seasonal nature of dairying and therefore had to expire at the end of the dairy season on 31 May.

  14. In applying the test of the implication of terms from BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 16 ALR 363, 376, Fraser J addressed the requirement that the term contended for must be necessary to give business efficacy to the contract so that no term will be implied if the contract is effective without it. He concluded:

    It seems to me that the implied term contended for by Mr Rennie, or some similar form, might well have been adopted by the parties as reasonable people if it had been suggested to them, but I am unable to accept that it is necessary to give business efficacy to the contract i.e. the agreement under which the defendants agreed to lease a certain area of farm land to the plaintiffs. The contract would be completely effective and have business efficacy without it.

  15. Accordingly, he took the view that the Fultons did not have an arguable case and that Mr Woods was entitled to possession.

    THE PRESENT APPEAL

  16. In this Court Mr Weston QC for the appellants accepted that there existed a periodic tenancy between the parties and that s105 prima facie applied. But he took issue with the test for rebutting the statutory presumption contained in s105 as applied by Fraser J. Relying on the judgment of Williams J in O’Brien v Jarrett (1886) 5 NZLR SC 14, he submitted that the issue was not whether a term as to notice should be implied as a matter of law but rather whether as a matter of fact the circumstances could be said to support such an implication.

  17. In the alternative Mr Weston submitted that the notice term could be implied as a matter of construction from the express terms of the contract. In support of that argument he relied on the judgment of Cooke P in Vickery v Waitaki International Ltd [1992] 2 NZLR 58 in which the Judge set out three broad classes of implied terms; terms implied by rules of law, terms deduced by implication or interpretation from the express terms of the contract, and terms held to be implied to give business efficacy to the contract.

  18. Lastly it was submitted that the Judge was wrong in concluding that it was not necessary to imply the term as a matter of business efficacy in terms of the composite test laid down by the Privy Council in BP Refinery and approved by this Court in Devonport Borough Council v Robbins [1979] 1 NZLR 1.

  19. Mr Dawson for the respondents supported the judgment. He submitted that once it is accepted, as it is, that the lease was of uncertain duration, s105 applies and there is no room to vary by implication the period of notice of termination.

  20. Mr Dawson urged us to resist implying a term merely because we considered that it would have been reasonable or sensible for the parties to have reached.

  21. No argument was directed to any difference in the appropriate approach to summary judgment on the application as between the Woods as defendants to the claim and as counterclaimants. We approach the matter with reference to the common principle that, if there are disputes of fact to be resolved, the plaintiffs are entitled to the opportunity to establish their allegations at trial. On the other hand, if assuming the plaintiffs can establish that which they assert, they still cannot succeed, judgment should be entered against them: Attorney-General v Jones CA7/01, judgment 13 August 2001.

  22. As Mr Weston for the appellants accepted that the Judge correctly held that s105 Property Law Act applies, it is unnecessary to review the approach to tenancies of indeterminate term. We agree, however, that the section should not be confined to the limited application adopted in Australia in respect of the corresponding provision: see the Law Commission discussion paper on The Property Law Act 1952, Preliminary Paper No.16, p192. Section 105 states:

    Tenancy from year to year not to be implied – No tenancy from year to year shall be created or implied by payment of rent; and if there is a tenancy it shall be deemed in the absence of proof to the contrary to be a tenancy determinable at the will of either of the parties by one month’s notice in writing.

  23. No doubt it reflected the manner in which the matter was argued before him, but we consider the Judge may have approached the matter too narrowly in applying as the test for showing departure from the default position prescribed by s105 the established test from the BP Refinery case for the implication of terms in contracts.

  24. It is somewhat artificial to approach the case by examining whether and to what extent the express terms of the lease are supplemented by implied terms when the lease itself was concluded orally. The real enquiry is to determine the terms of the arrangement settled between the parties. That is a matter for evidence of what was said in the context of the matrix of facts against which the arrangement was made.

  25. As Williams J said in O’Brien v Jarrett (p15):

    The agreement as to the duration of a tenancy, however, may be made either by express words or may be an inference not of law but of fact, from the surrounding circumstances – an inference which, being an inference of fact, is such as a jury or a Judge sitting as a jury might properly draw.

  26. What was said there about duration of a tenancy applies equally to the period of notice to terminate.

  27. It is accepted, as was made clear by Wilson J in Beattie v Lyttelton Borough, the onus of establishing "proof to the contrary" is upon the party seeking to displace the statutorily deemed position.

  28. We do not see that proof to the contrary need necessarily involve considerations of the need to give an arrangement business efficacy. It may simply be a matter of proving the arrangement made.

  29. On the affidavit evidence, the nature of the arrangement between the parties is far from clear. There is evidence that at the outset Mr Woods preferred a lease to a sharemilking agreement, but when shown a form of lease declined to have lawyers involved and insisted the arrangement should rest on mutual trust. Mr Fulton deposed to the arrangement being a lease "for as long as we liked" but maintained that because it was for the purpose of dairy farming it was understood that it would be governed by the dairying year cycle.

  30. The evidence also indicates that although access to the property at the outset was from March 1994, for the period until 1 June the Fultons were charged for grazing. Rent commenced from 1 June. On each of the three occasions additional land was included in the arrangement that was from 1 June. The dairy company shares were transferred at the end of May and payments of instalments of the purchase price were set for 1 June each year. Mr Woods claimed that at the time the shares were transferred they agreed to review the rent from 1 June 2001 (though Mr Fulton disputes this).

  31. Mr Woods said:

    I concede however it would be difficult for Mr Fulton to find another farm to go to for the balance of this milking season as I agree that most milking arrangements and land sales/leases in respect of dairy units are timed to take effect on or from 1 June in each year and with cows in Lincoln generally coming in to milk by the end of July.

  32. The arrangement continued, with additional land included, for some seven years. In argument before us possible characterisations of its legal status canvassed were a lease initially for three years then at will, a lease of indeterminate length, merely a licence, a lease from year to year, and a lease which by operation of s105 is a tenancy at will but subject to determination only at the end of a dairying year.

  33. We cannot accept that the correct characterisation of the arrangement, and its terms, can be determined on the basis of the affidavits. We do not find this to be a case in which the factual position can be found with sufficient certainty to justify the entry of summary judgment – particularly in favour of defendants.

  34. Mr Dawson argued that even on the appellants’ version of events, there is no basis at law for a tenable argument that would enable the appellants to continue in occupation. He contended that an agreement that the relationship would continue "as long as we liked" necessarily is inconsistent with termination only at the end of a dairying year. We see no necessary inconsistency. The argument seems to rest on inconsistency with the operation of s105, but that only operates if there is not proof to the contrary.

  35. It was submitted also that the letter written by Mr Fulton at the end of May, in response to the formal proposal for a three year lease based on a valuation made on assumptions not previously part of the arrangement, showed a stance by him inconsistent with the on-going arrangement he has claimed. In particular reliance was placed upon the statement at the end of the letter seeking a right to exit the new lease "at any stage".

  36. Mr Fulton explained in his second affidavit that he intended that any earlier exit would be at the end of a dairying year. Whether or not that was what the letter was intended to convey, we do not see that a response to an entirely new proposal gives much assistance in determining the nature and terms of the arrangement it was proposed to replace. We do not see this as necessarily evidence of inconsistency.

  37. For the reasons we have given, we are satisfied that the Judge erred in his approach in focussing on whether arguably there could be implied a term necessary to give the arrangement business efficacy (although we add that even if that were the correct approach we do not see the appellants’ case as unarguable). We do not see this as a case appropriate for summary judgment.

  38. That means we must turn to the appellants’ application for interlocutory injunction. A seriously arguable case having been established, we need to address the "balance of convenience". On the affidavit evidence there is no real contest. The difficulties and potential losses for the appellants in having to leave the property at this stage of the season are clearly set out. In his first affidavit Mr Fulton said:

    I supply the Kiwi Cooperative Dairy Company ("Kiwi"), I am contracted to supply Kiwi for this season. My wife and I own 76,150 shares in Kiwi that I have been required to own in order to supply Kiwi.

    I am unable to supply Kiwi, then Kiwi is able to compulsorily acquire our shares. In that event, the purchase price for our shares would be $2 per share based on our previous years supply value.

    If I continue as a supplier for this season (1 June 2001 to 31 May 2002), then the shares will be worth at least $4. If I am a supplier at the start of next season, then the shares are estimated to be worth $5.50 and $5.80.

    Thus, if we are unable to supply Kiwi this season then we stand to suffer a significant loss which I calculate to be between $150,000 and $288.000.

    I may also be forced to sell stock. It is presently a very bad time to sell. Canterbury has recently suffered one of its worst autumn droughts in history. There is low feed supply and grazing prices have risen sharply so there is little demand for the purchase of cows. It would be extremely difficult to make alternative grazing arrangements. If I am forced to sell my entire herd (approximately 250 cows) then I would suffer a loss on the sale of the cows that, under the present conditions, I estimate to be approximately $500 per head.

    I believe Mr Woods would know that giving up possession, at this time, would have the disastrous consequences upon my wife and I.

    As noted earlier, Mr Woods conceded the difficulties.

  39. On the other hand the respondents have not sought to advance reasons why they will be prejudiced by not having the property before the end of the dairying year though receiving rent, or until judgment after trial if that is earlier.

  40. Fraser J plainly recognised the greater prejudice to the appellants. He added at the end of his judgement a paragraph commending to the respondents consideration of an arrangement to allow the appellants to remain until the end of the season.

  41. The interests of justice favour the grant of an interim injunction in terms of para (a) of the orders sought.

  42. The appeal is allowed. The order for summary judgment in favour of the respondents is quashed. There will be an order by way of interim injunction restraining the respondents from acting upon notices given to vacate and otherwise taking any steps to take possession of the land prior to 31 May 2002 or until further order of the Court.

  43. The appellants are entitled to costs which we fix at $5,000 together with the cost of preparing the case and disbursements including the reasonable travel and accommodation costs of counsel fixed, if necessary, by the Registrar.


Cases

Beattie v Lyttelton Borough [1966] NZLR 65

BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 16 ALR 363

O’Brien v Jarrett (1886) 5 NZLR SC 14

Vickery v Waitaki International Ltd [1992] 2 NZLR 58

Devonport Borough Council v Robbins [1979] 1 NZLR 1

Attorney-General v Jones CA7/01, judgment 13 August 2001

Legislations

Property Law Act 1952: s.105

Authors and other references

Law Commission: "The Property Law Act 1952: Preliminary Paper No.16

Representations

T C Weston QC for Appellants (instructed by Rhodes & Co, Christchurch)
D H P Dawson and J H M Dawson for Respondents (instructed by Joynt Andrews, Christchurch)


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