Ipsofactoj.com: International Cases  Part 9 Case 10 [NZCA]
COURT OF APPEAL, NEW ZEALAND
Tram Lease Ltd
- vs -
9 APRIL 2003
(delivered the judgment of the court)
This is an appeal from a judgment of Salmon J in the High Court at Auckland, reported at  1 NZLR 73, in which he:
made a finding that a building erected on land of which the respondents, the trustees of the Croad family trust, are the registered lessees encroaches on the adjoining land owned by the appellant, Tram Lease Ltd;
concluded that it was just and equitable to grant relief to the respondents under s129 of the Property Law Act 1952 in respect of the encroachment; and
directed that there be a further hearing of issues relevant to the nature of the relief.
It is appropriate to begin with a brief history of the two pieces of land which are in Broadway, Newmarket. Since 1996 the fee simple interests in both pieces have been owned by Tram Lease. The first (Lots 27, 28 and 29 with an area of 378 square metres) is on the corner of Broadway and Balm Street. At one time it was occupied by a Kentucky Fried Chicken outlet. It is conveniently called "the KFC site". The other property (Lot 26 with an area of 118 square metres), of which the respondents are the registered lessees and on which the building in question is erected, has for over 50 years been used as a shoe repair premises. It can be called "the shoe repair site".
On different dates in 1936 His Majesty the King granted leases of the two properties to Philip White. They were what are often called Glasgow leases, namely ground leases for terms of 21 years with perpetual rights of renewal for similar periods.
On 21 April 1947 a transfer of the lease of the shoe repair site from Mr White to Auckland Footwear Repair Co Ltd was registered. In a separate memorandum of transfer registered immediately afterwards and bearing the next consecutive registration number, Mr White, as registered proprietor of the leasehold estate in the KFC site, created a party wall easement in favour of Auckland Footwear Repair Co Ltd. That easement document, although long since expired, has been the source of some confusion. It appears that one of the recitals, which speaks of a building erected by Mr White on Lots 27, 28 and 29 with a northern wall adjoining Lot 26 may have been quite inaccurate. The wall intended to be the subject of the party wall easement would actually seem to have been the southern wall of a building on Lot 26, that wall being for the most part situated just over the common boundary on Lot 27.
Salmon J’s findings and conclusions about the party wall easement, with which we entirely concur, are recorded in his judgment as follows:
The party wall easement also grants an easement of light over an area of land marked "light well" on a plan attached to the Transfer. That easement is described as being –
Reference to the photographs show that that window is still in existence. The Transfer continues as follows:
The obvious conclusions to be drawn from these words are that at the time of the transfer there was already a building on the shoe repair site utilising the wall, the subject of the easement. It is also clear that the building on the Kentucky Fried site did not extend the full depth of the site. Indeed, the building there at that time might be that which is still there. What is clear, is that Mr White must have erected the building on the shoe repair site and must have constructed the southern wall of that building on the Kentucky Fried site. There must have been then, as there is now, an open yard at the rear of the Kentucky Fried site. It is clear that at the time of the grant of the easement the shoe repair building was the only building which utilised at least the rear part of the party wall. That remains the position today. Indeed, the relationship between the two buildings, as shown in the photographs produced, would lead a viewer to the conclusion that the wall was that of the shoe repair shop, rather than the Kentucky Fried building.
As noted earlier, for a substantial portion of its length the wall provides support only for the shoe repair building. That portion of its length is, in part, two levels high. It is also apparent from the photographs that the flashing of the roof of the shoe repair building extends over the top of the wall and that the wall itself has on it advertising of the defendants’ business.
The Judge also found, and again we agree, that the original intention of the two lessees who were parties to the party wall easement was that it would subsist not only during the term of the existing lease of Lots 27, 28 and 29 but also during any extended term. However, the reference to the extended term was the subject of a requisition from the District Land Registrar, as a result of which it was deleted from the document. As a consequence, when the lease expired in 1957 the party wall easement ceased, notwithstanding that both leases were renewed in that year and again in 1978 and 1999, by which time Tram Lease had become the registered proprietor of the fee simple estate in both properties.
The position in 1999 so far as the shoe repair site is concerned was that the registered lessee was a Mr Lockington as successor to Auckland Footwear Repair Co Ltd. He had in fact subleased the premises by an unregistered lease to a company owned by members of the Croad family. That arrangement between Mr Lockington and the Croad family had existed from 1968. In 1999 Mr Lockington was granted a renewal of the ground lease of Lot 26 by Tram Lease. In July 2000 Mr Lockington transferred that renewed lease to the trustees of the Croad family trust.
Shortly before the grant of the renewed lease for the shoe repair site, Tram Lease had renewed the lease for the KFC site to a company called Blossom (NZ) No. 2 Ltd. That company subsequently transferred the lease to Petra Consulting Group Ltd and in 2002 Petra Consulting surrendered the lease to Tram Lease. There is presently no lease of the KFC site but the building formerly used as a KFC outlet remains, as mentioned in para  of Salmon J’s judgment. His judgment also records that Tram Lease is interested in redeveloping both sites and has made an offer to buy the lease of the shoe repair site. That offer was rejected, as was a later offer at an increased figure.
The uncontested evidence is to the effect that neither of the parties appreciated until 2002 that the exterior wall on the southern side of the building used by the Croads for their shoe repair business was actually, for most of its length, protruding (by about 22.5cm) into the KFC site. When its efforts to purchase the lease of the shoe repair site became frustrated the appellant announced its intention to demolish that wall. It took the precaution, however, of issuing the present proceeding in which it claimed, as relevant to this appeal, declarations: (a) that all rights in respect of the party wall easement terminated on expiry of the leases in 1957 and that the present respondents have no legal or equitable interest in the wall; and (b) that Tram Lease is entitled to remove the wall and that the respondents are responsible for "taking such measures as are necessary to protect the structure of their building".
In a counterclaim the Croad family trustees applied for an order under s129 of the Property Law Act. They also claimed that the circumstances "gave rise to an equitable estoppel by acquiescence or proprietary estoppel", and that the decision by Tram Lease to remove the wall "would amount in the circumstances to derogating from the grant of the ground lease" and/or "breaching the implied covenant…for quiet enjoyment of the premises".
THE HIGH COURT JUDGMENT
The estoppel issue was put before Salmon J on the basis of a claim asserting estoppel by acquiescence. The Judge found that the prerequisites for this claim were not met. There was no evidence of the requisite knowledge about the status of the wall on the part of Tram Lease at the time the respondents purchased their lease. There was nothing to indicate to Tram Lease that the wall was on the KFC site.
Nor did the Judge accept the argument on behalf of the present respondents that Tram Lease was derogating from its grant (of the renewed lease). He said that in seeking removal of the wall Tram Lease was acting in its capacity as owner of the adjoining site. It happened to be also the owner of the freehold interest in the shoe repair site, but, the Judge said, it was not appropriate on that basis to claim derogation from the grant in relation to Tram Lease’s obligations as lessor. Similarly, he considered, there was no breach of the implied covenant for quiet enjoyment.
The final matter considered by the Judge was the application for relief under s129 of the Property Law Act, which in relevant part provides:
Power of Court to grant special relief in cases of encroachment
Salmon J said that the Croads were relying on subs(2)(b). It was clear to him from subs(5) that the owner of a leasehold interest was entitled to apply for an order. The Judge was of the view that it did not matter whether the building said to be encroaching was erected by the owner or one of the predecessors in title. He had concluded that Mr White had built the shoe repair building and that when he did so the wall of at least the rear part of the building served that building only. It followed that the building encroached upon Mr White’s adjoining site. In a practical sense, the wall was obviously part of the shoe repair building which could not exist without it. On the evidence before the Court, the Judge said, the roof would cave in without the support of the wall. It was clearly the intention of the parties at the time when Mr White sold his interest in the shoe repair site that the building on that property would be able to use the wall on his adjoining property indefinitely. In the Judge’s view, the Court had jurisdiction to grant relief under s129 because a predecessor in title had erected a building which encroached onto the KFC site.
The Judge also found that it was just and equitable to grant relief, listing the factors leading him to that conclusion:
The intention of the original parties to the party wall agreement that that arrangement should subsist indefinitely.
The acceptance of the existing situation apparently without demur, by successive lessees and lessors of both sites after the expiry of the term of the lease in force at the time of the agreement.
The clear and obvious incorporation into the defendants’ premises of the wall to the extent where the rear portion of it appears to have no connection with the [KFC site].
The Judge said that the finding in relation to s129 meant that it was appropriate to grant the trustees of the Croad family trust relief under that section. In granting relief, he said, it would be necessary to take into account matters such as appropriate payment to Tram Lease for the use of the land. Those issues were not canvassed at the hearing and accordingly the Judge directed that there be a further fixture for the hearing of remaining issues.
From the Judge’s order to that effect the present appeal is brought. The respondents seek to support the judgment on the additional grounds of estoppel and derogation from the lease.
We are in no doubt that the Judge was correct in his conclusion that the present situation is within the jurisdiction conferred on the Court by s129. We agree with the Judge’s findings of fact concerning the physical situation, both when the party wall easement was created in 1947 and, more importantly, at the present time. There was in 1947 a situation of encroachment of the building erected by Mr White on the shoe repair site once he had agreed to transfer that lease to Auckland Footwear Repair Co Ltd. The easement was clearly intended to regularise that position, but unfortunately that was not able to be done permanently by providing for an extension of the term of the easement when the two leases were from time to time renewed. Once the easement expired with the lease of the KFC site in 1957 there was again a situation of encroachment (defined in Black’s Law Dictionary (7th ed) as "An infringement of another’s rights or intrusion on another’s property"). Certainly there is an encroaching building at the present time, which is all that is required to invoke the jurisdiction. There is common ownership of the fee simple estates in Lot 26 and Lots 27, 28 and 29 but, so far as the position of the respondents as lessees of Lot 26 are concerned, there is an encroachment of the shoe repair building into the adjoining Lot 27.
It is not appropriate that we should express any firm view on whether any particular form of relief would be just and equitable in the circumstances. We do, however, reject Mr McEntegart’s argument that because the respondents when acquiring their lease may have had constructive notice of the expired party wall easement from the presence of reference to it on the certificate of title, they are disentitled to relief. Their position is in no way comparable to the position of what Mr McEntegart, pointing to s129(2), called an intentional encroacher. On the unchallenged affidavit evidence of Mr P A Croad, the respondents were quite unaware of the encroachment at that time. We should add that we are not expressing any view on whether or not someone who acquires a property knowing that a predecessor has erected an encroaching building is disentitled to the assistance of the Court under s129.
Although the Judge expressed the opinion that it was an appropriate case for relief - and he may well be right in that view - he plainly was conscious of the need to explore some further matters before making a final decision. He will need to look at the matter overall in light of those matters and any further developments on the site before deciding what (if any) form of relief should be granted. We envisage that he will give consideration to the effect on the future use of the KFC site for a development if the wall remains in its present position a little distance within Lot 27 and also to the effect on the respondents’ business if a new wall has to be built within the very narrow confines of Lot 26.
The appeal against Salmon J’s order therefore fails, but we should briefly say something about the other defences raised by the respondents.
We are not persuaded that an estoppel, by convention or otherwise, prevents the appellant from denying that the respondents have an entitlement to have the wall remain in place as part of their leased building. Mr Templeton placed most of his emphasis on estoppel by convention, but it was not shown that at the time when the appellant granted Mr Lockington the renewed lease of the shoe repair site in 1999, or the time when the appellant consented to the transfer of that lease to the respondents in 2001, any common assumption of fact about the wall was made by the parties to those transactions. On the contrary, it is doubtful that the parties ever turned their minds to the question. In this connection, there is some force in Mr McEntegart’s point that what they were concerned with was a ground lease. In fixing the new rental the building was irrelevant and its exact position was therefore unlikely to have been given any thought. We consider also that the Judge was right when he rejected the respondents’ argument for an estoppel by acquiescence. No implied representation on this subject was made by the appellant. It was not even aware of the problem.
The other defence is of more substance and would seem to present some difficulty for Tram Lease’s proposed course of action. If there were to be no s129 order and Tram Lease were to demolish the wall, which it would have to do without interfering with the portion of it at the Broadway end of the common boundary within the boundary of Lot 26, the interior of the shoe repair business premises would be exposed to the weather and possibly to security risks and the business would be likely to be disrupted. The Judge actually made a finding that the building could not exist without the wall and that the roof would cave in without its support. Mr McEntegart told us that he had objected to receipt of some of the evidence on which that finding was based because the affidavit of a surveyor for the respondents went beyond his area of expertise and contained hearsay; and the confirming affidavit of an engineer came in very late and Tram Lease was disadvantaged in having no time to reply to it. It is unnecessary for us to say anything about this evidence or about the Judge’s finding. It is sufficient to consider the position if the building were indeed to collapse as a result of demolition of the wall by the appellant. Whether that is a probable consequence of demolition is something which might have to be considered further if the respondents find it necessary to pursue the application which they have already made for an injunction to prevent demolition from occurring.
The principle of law called "non-derogation from the grant" consists in this: that no-one who has granted another a right of property, whether by sale, lease or otherwise, may thereafter do or permit something which is inconsistent with the grant and substantially interferes with the right of property which has been granted. It is a principle which embodies common honesty and fair dealing. "A grantor having given a thing with one hand is not to take away the means of enjoying it with the other": Birmingham, Dudley & District Banking Co. v Ross (1888) 38 Ch D 295, 313 per Bowen LJ. And, as Lord Loreburn LC pointed out in Lyttelton Times Co Ltd v Warners Ltd  AC 476, 481, there is a "similar and equally binding duty" in the grantee.
The rule is not restricted to grants of interests in land. It has, for example, been applied by the House of Lords to the sale of the goodwill of a business and the sale of a car by the manufacturer: Trego v Hunt  AC 7; British Leyland Motor Corporation Ltd v Armstrong Patents Co Ltd  AC 577. It does not depend for its operation on a construction of the document conferring the grant, but is implied to ensure the grant is not frustrated. Cotton LJ stated in Birmingham, Dudley & District Banking Company v Ross (at p 308):
By an implied obligation [not to derogate from the grant] or an implied right I mean this: an obligation or right arising not from the express words of an instrument, nor from that which, having regard to the circumstances, must be considered the true meaning and effect of the words in the instrument; but that obligation or that right which results from the position into which the parties have placed themselves by the contract .... That obligation arises, I repeat, not from any interpretation of the conveyance, but from the duty which is imposed on the grantor in consequence of the relation which he has taken upon himself towards to grantee.
Bowen LJ agreed, saying that it "is not an obligation which arises simply from an interpretation of the deed as read by the light of the circumstances outside", but "is a duty that arises from the outside circumstances having regard to the relation of grantor and grantee which the deed creates" (p314). This cuts both ways, for His Lordship went on to make the observation that an obligation preventing the grantor derogating from the grant may be negated by the circumstances of the grant.
In its application to a lease of land, the rule has the effect that a lessor, which at the time of the grant has land not included in the lease, may not during the term of the lease do, or to the extent that it can control the position, permit on that other land any activity or state of affairs which will substantially interfere with the use of the premises and thereby frustrate the purpose for which the lessor knows the lessee is taking the premises or is likely to use them. The lessor’s knowledge of that purpose, including likely changes in the actual use, is to be determined in light of all the circumstances of which the lessor was aware at the time of the grant.
The obligation not to derogate from the grant has been said to be analogous to a restrictive covenant binding on the lessor: Browne v Flower  1 Ch 219, 226. D W Elliott in Non Derogation From the Grant (1964) 80 LQR 245 has said that the rule against derogation possesses "a unique combination of some features of both easements and covenants". In New Zealand, the leading cases are the decisions of this Court in Mount Cook National Park Board v Mount Cook Motels Ltd  NZLR 481 and Kalmac Property Consultants Ltd v Delicious Foods Ltd  2 NZLR 631, and the decision of Elias J in the High Court in Nordern v Blueport Enterprises Ltd  3 NZLR 450, particularly in a valuable discussion at pp454-456.
Where the derogating activity involves physical interference with the demised premises, as would be the case if a building on the leased land were damaged as a consequence, a breach of the lessor’s express or implied covenant of quiet enjoyment may also be committed even though the activity is conducted entirely on the lessor’s adjacent land. Lord Millett recently observed that there seems to be little if any difference between the scope of such a covenant and the non-derogation rule: Southwark London Borough Council v Mills  1 AC 1, 23.
Mention has been made above of the possibility of a security risk following demolition. And in fact, the New South Wales Court of Appeal has held in Lend Lease Development Pty Ltd v Zemlicka (1985) 3 NSWLR 207 that there was a derogation from the grant when demolition by a lessor on adjacent property resulted in a reduction of security to the demised premises which facilitated a burglary of them.
In a thoughtful argument, Mr McEntegart submitted that in the present case at the time when the renewed lease was granted to Mr Lockington there was already an existing ground lease of the KFC site under which the lessee had the right to remove buildings. We will assume that was so, although such a right is not expressly stated in the document. Possibly, however, it would follow from the nature of a ground lease. Mr McEntegart said that his client accordingly had no ability to control what the lessee of the KFC site might do in this respect. Again, we will assume the correctness of this submission. Counsel then directed our attention to the following dictum of Younger LJ in Harmer v Jumbil (Nigeria) Tin Areas Ltd  1 Ch 200, 226:
The rule is clear but the difficulty is, as always, in its application. For the obligation laid upon the grantor is not unqualified. If it were, that which was imposed in the interest of fair dealing might, in unscrupulous hands, become a justification for oppression, or an instrument of extortion. The obligation therefore must in every case be construed fairly, even strictly, if not narrowly. It must be such as, in view of the surrounding circumstances, was within the reasonable contemplation of the parties at the time when the transaction was entered into, and was at that time within the grantor’s power to fulfil.
Mr McEntegart’s contention was that there could be no prohibition on removal of the wall by Tram Lease because at the time of the grant it had no power to prevent the KFC site lessee from removing it.
We reject this submission. It seems to us that, if the restriction on the lessor were in fact to cease during the term of the grant, as it did in this case on the surrender of the KFC site lease very early in the renewed term, the lessor would thereafter be acting inconsistently with its grant if it did or permitted on the adjacent site something which frustrated the purpose of the subject lease. As the Birmingham case shows, the better question is not whether such a restriction was agreed to by the parties at the time of the grant, but whether it should be implied because it is necessary to prevent the purpose of the grant being frustrated. The purpose of the lease was to afford the lessee of the shoe repair shop throughout the term of the lease exclusive and secure possession of that land, including the building which is part of the land. This purpose would be frustrated by the lessor if the wall were pulled down and the building, in consequence, were to collapse. It is of no moment that at an earlier time during the currency of the grant another person might have taken this action.
We do not accept that this would be inconsistent with what Younger LJ was saying in the passage to which counsel referred. In Harmer itself no issue actually arose about whether the lessor had the power to fulfil the implied obligation at the time of the grant. There is also nothing novel about taking into account as part of the surrounding circumstances at the time of the grant the rights which may vest in the lessor in the future, as well as its existing rights. As Bowen LJ stated in Birmingham, "if it is an obligation which arises from such an implication, it must be measured by all the surrounding circumstances" (p315). There is nothing in the circumstances in 1999 in which the grant was made, as they appear from the material now before the Court, to indicate that, if they had appreciated the problem, the parties would have contemplated anything other than that the wall would remain intact during the term of the lease.
Furthermore, if the dictum of Younger LJ was intended to suggest that it is not possible to imply a restriction unable to be fulfilled by the lessor at the time of the grant, then it has been overtaken by the important judgment of Nicholls LJ for the English Court of Appeal in Johnston & Sons Ltd v Holland  1 EGLR 264. In Johnston Nicholls LJ held, with Lloyd and Ormrod LJJ concurring, that the obligation not to derogate from the grant may have application even to activities on adjoining land acquired after the grant by the lessor or by assigns of the lessor. (In this country the position of an "assign" who has become registered under the Land Transfer Act 1952 may, however, be protected by the indefeasibility provisions of that Act.) Nicholls LJ said that where the grantor owned no other land, very great weight indeed must be given to that factor: It will be a very exceptional case for it to be necessarily implicit in a lease that the activities of a lessor who owns no adjoining land, and has no plans to buy any adjoining land, are to be restricted on the adjoining land should he ever become owner or tenant of that land. Whether it is so implicit or not will depend on all the circumstances, including the purpose of the grant and the nature of the activities sought to be restrained. But if the facts in a given case point clearly to such a restriction being implicit, I can see no reason in principle why the law should treat that case differently from one where the lessor already owns the adjoining land at the time of the lease. (p268)
In the present case Tram Lease already owned the reversion of the adjacent land at the time of the grant and subsequently acquired the leasehold estate by surrender. Any restriction on its control of the adjacent land then dropped away. The two properties are obviously, in the eyes of Tram Lease, a potential development site. It may be that even in 1999 Tram Lease was hopeful of obtaining the surrender of the leases.
Finally, it was put to us by Mr Templeton that, if the wall were demolished and the respondents had to build a new wall within Lot 26, they might have under this head a claim for damages based on the reduction in the economic value of the respondents’ (very narrow) premises. We doubt that would be so. The grant was of the land actually comprised in Lot 26. The confining of the lessee’s use of the premises, including the siting of the building, within the boundaries of the grant cannot be in any way inconsistent with the grant. But, as we have indicated, an action which damaged the building within the boundaries of Lot 26 and substantially interfered with the respondents’ business would amount to a derogation. It follows that on this issue we take a different view from Salmon J.
The appeal is dismissed with costs of $5,000 to the respondents, together with their reasonable expenses, including travel and accommodation costs of counsel, to be fixed if necessary by the Registrar.
Birmingham, Dudley & District Banking Co. v Ross (1888) 38 Ch D 295; Lyttelton Times Co Ltd v Warners Ltd  AC 476; Trego v Hunt  AC 7; British Leyland Motor Corporation Ltd v Armstrong Patents Co Ltd  AC 577; Browne v Flower  1 Ch 219; Mount Cook National Park Board v Mount Cook Motels Ltd  NZLR 481; Kalmac Property Consultants Ltd v Delicious Foods Ltd  2 NZLR 631; Nordern v Blueport Enterprises Ltd  3 NZLR 450; Southwark London Borough Council v Mills  1 AC 1; Lend Lease Development Pty Ltd v Zemlicka (1985) 3 NSWLR 207; Harmer v Jumbil (Nigeria) Tin Areas Ltd  1 Ch 200; Johnston & Sons Ltd v Holland  1 EGLR 264
Property Law Act 1952: s.129
Authors and other references
Black’s Law Dictionary (7th ed)
L McEntegart for Appellant (instructed by Burton & Co, Auckland)
WGC Templeton for Respondents (instructed by Friedlander & Co, Auckland)
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