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Tonga Development Bank v Howard [2001] TongaLawRp 6; [2001] Tonga LR 25 (5 February 2001)

IN THE SUPREME COURT OF TONGA
Supreme Court, Nuku'alofa

C 89/00

Tonga Development Bank

v

Howard

Ford J
1, 2 February 2001; 5 February 2001

Contract law – common mistake involving house - remedied

In about 1988 Penisimani Muti took out a loan of approximately $27,000 with the plaintiff, the Tonga Development Bank, to purchase computer hardware and software for the operation of a magazine called "Tonga Today". The loan was secured over various assets including his four acre tax allotment (the "four acres") and various personal assets including a "concrete block residential house plus contents". The magazine failed. In about 1995 Penisimani was seriously in arrears with his loan account. He heard that the plaintiff was about to foreclose and so went to live in Salt Lake City, Utah. When Penisimani left for the USA the plaintiff, as mortgagee, moved into possession and on 11 July 1996 it advertised in the Tonga Chronicle inviting tenders to "sub-mortgage the following tax allotment. Penisimani L. Muti - Ha'ateiho, four acres tax allotment to sub-mortgage for 28 years." After protracted negotiations an agreement was reached between the plaintiff and Jimmy and Meleane Matthews (the second defendants). The deed of possession that resulted provided that the Matthews could have possession of the tax allotment for 28 years and they were to pay $20,500 lump sum and $600 a year as annual rental. The issue to be determined was, when the plaintiff sold off the four acres to the second defendants, Mr and Mrs Matthews, whether the sale included the concrete block dwelling house.

Held:

1. The plaintiff established that, at the time the deed of possession was signed, both parties were acting under the perfectly innocent misapprehension that the dwelling house was not on the four acres and consequently the term "improvements" where used in the deed was intended to refer to the shop building at the front of the four acres, fencing etc and not to the dwelling house which everyone firmly believed was on the town allotment.

2. That situation was called "common mistake". The agreement was not void and the mistake could be remedied because in Tonga it was well established that, unlike in some jurisdictions, houses were regarded as items of personal property rather than accretions to the land.

3. The Court made the declarations requested in the statement of claim that the deed of possession dated 19 May 1997 did not include the dwelling house and the dwelling house was not owned by the second defendants. There was no award of costs.

Case considered:

Kolo v Tonga (Supreme Court, C 20/1997, 7 August 1998)

Counsel for plaintiff : Mrs Vaihu
Counsel for first defendant : Mr Foliaki
Counsel for second defendants : Mr 'Etika

Judgment

In about 1988 Penisimani Muti took out a loan of approximately $27,000 with the plaintiff, the Tonga Development Bank, to purchase computer hardware and software for the operation of a magazine called "Tonga Today". The loan was secured over various assets including his four acre tax allotment (the "four acres") and various personal assets including a "concrete block residential house plus contents".

The magazine failed. In about 1995 Penisimani was seriously in arrears with his loan account. He apparently heard that the plaintiff was about to foreclose and so he packed up and went to live in Salt Lake City, Utah, where he remains to this day, leaving others to sort out the mess. That is the background to this litigation. The issue to be determined is, when the plaintiff later sold off the four acres to the second defendants, Mr and Mrs Matthews, did the sale include the concrete block dwelling house?

The land in question is situated on Taufa'ahau Road about a quarter of a mile or so on the southern or airport side of the Royal Tongan Golf Club. The four acre tax allotment is a rectangular section running back from the road. It is not perfectly rectangular because in the southern corner of the property fronting on to Taufa'ahau Road there is a square section of land which is not included in the four acres. That corner block was referred to as Penisimani's town allotment but apparently it has never been officially registered as a town allotment, hence, the plaintiff did not have security over the "town allotment" as such but, as I have noted, the loan was secured over the dwelling house which the plaintiff believed was situated on Penisimani's town allotment. For present purposes, I will refer to that section as the "town allotment".

When Penisimani left for the USA the plaintiff, as mortgagee, moved into possession and on 11 July 1996 it advertised in the Tonga Chronicle inviting tenders to "sub-mortgage the following tax allotment. Penisimani L. Muti - Ha'ateiho, four acres tax allotment to sub-mortgage for 28 years."

The plaintiff only received one reply to the advertisement. It was a tender from the second defendants, Jimmy and Meleane Matthews. In his tender letter dated 25 July 1996, Mr Matthews said:

"RE: PENISIMANI MUTI 4 ACRES OF LAND AT HA'ATEIHO. 28 YEAR LEASE.

Dear Sir's,

With reference to advertisement in Tonga Chronicle on 11th of June 1996, concerning the above Land.

I would like to put an offer in for the above Land in the name of Meleane Matthews (Tongan) my wife and myself, Jimmy Matthews. I would like the lease to be put in Both name but with a condition that I can transfere (sic) the lease from my name into my wife, Meleane Matthews sole name at any time before my death or when I die. It is my intension(sic) that my wife as a Tongan should have this lease if you accept our offer.

The intention is to farm this Land and grow taro, by drip feed. We have been working with Haniteli Fa'anunu on this. Also we plan to grow Hybrid, Hawaiian Pawpaw. Also we plan export the produce.

If our offer is accepted I will deposit on acceptance the purchase price with the Tonga Development Bank. Also on acceptance, I would like to be able to clear the land at our cost.

I enclose a copy of my statements of account with the AIB Bank in London where I have a deposit of £41,619 which is over $80, 000.

Our offer is $10,500.

Waiting to hear from you.

Yours sincerely.

Jimmy Matthews."

Jimmy's offer was not accepted. He left for overseas and did not return to Tonga until 15 October 1996. The plaintiff wanted a higher price for the four acres. Further negotiations followed upon Jimmy's return but they were protracted. In January 1997 Mr Matthews increased the offer to $20,500 and on 25 February 1997 he wrote stating that he wanted the offer in the names of "Mrs & Mr Jimmy Matthews and Mrs & Mr Paul Karalus".

On 19 May 1997 agreement was finally concluded. That day the plaintiff wrote to Mr Matthews as follows:

"Dear Jimmy

I am pleased to inform you that after considering your tendered price for the tax allotment at 'Atele belonging to Mr Peni Muti, the Bank wishes to make an offer as follows:

1. That a lump sum payment of $20,500 be made upon the signing of the Sub Mortgage Document.

2. That an Annual Rental of $600 per year be paid at the commencement of every calendar year of every year.

3. The use of the Land for either private or commercial purposes shall include the premises of trade store which is located on the sub Mortgaged Land.

May I seek your approval, should the offer is acceptable, would you please submit your acceptance within seven days of this.

Yours faithfully

'Etuate Sakalia

MANAGER LEGAL/INSURANCE DIVISION."

Although Mr Matthews in his evidence could not specifically recall receiving that letter, I conclude that it was handed to him sometime on the day it was written and he then had a reply typed out (which unfortunately is undated) confirming the terms contained in the letter and a formal Deed which is headed "DEED OF MORTGAGED LAND POSSESSION BY MORTGAGEE" was signed between the plaintiff and Mr and Mrs Matthews. That document was variously referred to by witnesses, probably inaccurately, as the "Mortgage Deed" and the "Deed of Mortgage". For convenience, I will refer to it as the "deed of possession".

After the recitals, the relevant part in the deed goes on to state:

"The mortgagee (the Bank) lets for himself to the POSSESSOR (the Matthews) all the said piece of land. (hereinafter, together with improvements hereon called "the premises" from the 7th day of May, 1997 until the 19th day of April, 2018 ..."

The lump sum consideration of $20,500 was paid by payments of $2650 on 19 May 1997 and $17,850 on 23 May 1997.

The principal witness for the plaintiff bank, Mr 'Etuate Sakalia, said that the next development came in about November or early December 1997 when Jimmy Matthews approached the Bank and said that since the signing of the deed of possession he had discovered that part of the dwelling house which everyone thought was on the town allotment, was, in fact, located on his four acres and therefore he was the legal owner of the dwelling house. Mr Sakalia said that he advised Jimmy that if that was so then, because neither the Bank nor he was aware of the correct situation at the time the deed was signed, he should not benefit from something he was unaware of. Surprisingly, the plaintiff did not produce any file note or minute relating to that meeting. Mr Matthews disputes the account given by Mr Sakalia.

In all events, Mr Sakalia said that he took the matter up with management for the Bank and on 16 December 1997, after being instructed in the matter, he wrote to Mr Matthews giving him the opportunity to tender an offer for leasing the dwelling house on the four acres. Mr Matthews ignored the letter and it appears that there were no further discussions or correspondence between the parties until the writ was issued in January 2000.

The dwelling house was described to the Court as a "substantial improvement" containing five bedrooms and two very large reception areas. No one gave any estimate of the market value of the building. Mr Matthews, who is in the business of renting houses and selling land through his firm called "House Rental Agency" said that one cannot value houses in Tonga in the same way as valuations are carried out in Australia and New Zealand based on the prices of other properties sold in the neighbourhood. In Tonga, Mr Matthews said, the value of a property is the price that someone is prepared to pay for it on the day.

Before he left for the States, Penisimani Muti and his wife lived in the dwelling house. After his departure, he left a power of attorney with his brother Morton Muti and Morton, as it turned out, instructed Jimmy Matthews, House Rental Agency, to find a tenant. That was Jimmy's first involvement with the dwelling house and, of course, it was long before he tendered for the four acres. Jimmy eventually found a tenant in the form of Mr Alexander Howard who is the named first defendant. Mr Howard agreed to pay rental of $400 per month with a cash payment of $200 per month and the balance of $200 per month was to be applied by Mr Howard on required improvements and repairs to the property.

Mr Howard lived in the house from August 1995 until 5 December 1998 when he eventually vacated at the request of Mr Matthews who had told him that he then wanted the property for his own use. Mr Howard had been aware for sometime that Mr Matthews claimed ownership of the dwelling house.

Mr Howard said that initially after moving into the house in 1995 his rental payments were being paid to Peni Muti's brother, Morton, but after about a year he had a visit from Peni's wife, Alisi, who said that she had a power of attorney from Peni in Utah and she directed him to make his rental payments in future to the Tonga Development Bank.

Later that month Mrs Muti gave Mr Howard formal notice to vacate the property but he pointed out that he had entered into a written tenancy agreement with Morton under an earlier power of attorney and he was entitled, therefore, to remain in possession.

The records show that Mr Howard paid rent to the plaintiff Bank in August, September and October 1996 of $200 per month and again in August, September and October 1997. He was not asked why he had not paid rent on a regular basis and it appears that the plaintiff took no action to follow up on his missing payments apart from in the present proceeding where a claim is made for $5200 being unpaid rental between August 1996 and December 1998.

Mr Matthews said that in his capacity as "owner" of the dwelling house he never followed up the rental question with Mr Howard because at that stage he did not want possession of the house. He said that he knew Mr Howard was not paying any rent but he also knew that he didn't have the money and he had three very young children. Besides, as he put it, if he had got rid of Mr Howard he would have had to get a caretaker in to look after the property so it suited him to allow Mr Howard to remain in possession rent free. This part of Mr Matthew's evidence was explored further in cross-examination and his answers were not totally convincing.

Arising out of all that, the plaintiff says the dwelling house was never part of the deal with Mr Matthews because both parties thought at the time the deed of possession was signed that the dwelling house was situated, not on the four acres but, on the adjacent town allotment. The plaintiff says the reference in the deed to "improvements" was a reference to a four-room shop at the front of the four acres which originally contained the newspaper office, a showroom and some other business.

Mr Matthews gave evidence and he said that there never had been any mistake on his part. He said that he was aware all along during the negotiations leading up to the signing of the deed of possession that the dwelling house was on the four acres and he took strong exception to Mr Sakalia's evidence that initially when he approached the Bank, he had said that only part of the house was on the four acres.

Mr Matthews said that at the time the deed was signed he knew that the Bank was under the mistaken impression that the dwelling house was on the town allotment but in a rather colourful way the 68 year old said that it was not his responsibility to tell the Bank, as vendor, what was on the land that they were supposed to be selling.

Mr Matthews said that at one stage Mr Sakalia admitted to him that he thought that he (Mr Matthews) owned the house but he pleaded with him not to pull it down and he asked him if he would put on hold any development of the property until after he had retired from the Bank when he turned 55 years of age. I record that evidence but I propose to ignore it in my deliberations because it was never put to Mr Sakalia in cross-examination and he was never given the opportunity to comment on the proposition.

Well, where does the truth of the matter lie?

Mr Matthews quoted various figures to the Court in support of his contention that he would never have agreed to pay the sort of money mentioned in the deed unless the dwelling house was included. He said that the old shop at the front of the land was "rubbish" made from off-cuts of coconut trunks and he said that three of the four offices had blown over in a hurricane about 15 months after he took possession.

Mr Sakalia, on the other hand, also quoted various figures to support his contention that the sums of money talked about in the deed were not as much as the Bank anticipated being able to receive on the transaction and hence its decision to reduce the term of the deed of possession from 28 years to 21 years. He said that if the intention had been to include the dwellinghouse then that would have been stated in the advertisement and the asking price would have been higher.

In the end, these two approaches cancelled themselves out and only went to demonstrate quite remarkably how similar figures can be used to demonstrate conflicting propositions. I do accept, however, that it would be unusual for the bank not to have specifically referred to the house in the advertisement if it was intended to be included in the sale.

When the plaintiff's witnesses gave evidence I was interested in trying to ascertain how it was that Mr Matthews had first learned or become aware of the fact that the dwelling house was on the four acres. The evidence was silent on that point. Similarly, when Mr Matthews gave evidence, nothing was said as to how he first found out that the house was not on the four acres allotment. He was content to say simply that he knew that that was the situation before he signed the deed of possession.

It was not until Mr Howard gave evidence that the full picture emerged. Although Mr Howard is the named first defendant, through his counsel, he reached an agreed compromise with the plaintiff early on in the hearing and he was excused from further attendance. He was later called as a witness, however, by Mr Matthews.

Mr Howard said that he knew that Mr Matthews had bought the four acres although he could not be precise about dates. He also thought that Mr Paul Karalus was somehow involved in the transaction and he assumed that they had both bought it. He said that one day after he thought that they had bought the four acres he came home from work and saw that they had started to plough the land. That evening, the wife of the estate holder who lives nearby approached Mr Howard and made inquiries about the ploughing because she alleged that they had gone over the boundary of the four acres and that some of the land they were ploughing did not belong to them. Mr Howard then described how he came home from work on a later date and found people walking over his front lawn and when he inquired as to what they were doing, they told him they were checking for survey pegs. Upon inquiry, he was told by the men that the boundary line was 3 meters in front of his house meaning that the house was totally on the four acres. Mr Howard said that at that point he realised for the first time that the house, which everyone had assumed up till then was on the town allotment, was in fact on the four acres.

I found that convincing and helpful although it was vague as to dates. Nevertheless, it shows that Mr Matthews had taken possession and was having the land ploughed when the discovery was made about the boundary pegs. In. other words, the discovery was made after the deed of possession had been signed. All that is consistent with the statement Mr Matthews had made in his tender letter of 25 July 1996 where he said, "on acceptance, I would like to clear the land at our costs." Significantly, Mr Matthews said nothing at all in his evidence about the ploughing incident.

Mr Howard gave other evidence which, if accepted, would indicate that the Bank was aware that the dwelling house was on the four acres before the land was sold to Mr and Mrs Matthews. I did not find that evidence as convincing and I do not accept it.

I am satisfied, therefore, on the balance of probabilities that the plaintiff has established that, at the time the deed of possession was signed, both parties were acting under the perfectly innocent misapprehension that the dwelling house was not on the four acres and consequently the term "improvements" where used in the deed was intended to refer to the shop building at the front of the four acres, fencing etc and not to the dwelling house which everyone firmly believed was on the town allotment.

In law that situation is called "common mistake". The agreement is not void and the mistake can be remedied because in Tonga it has been well established that, unlike in some jurisdictions, houses are regarded as items of personal property rather than accretions to the land -- see Kolo v Tonga (Supreme Court, C 20/1997, 7 August 1998).

I, therefore, make the declarations requested in the statement of claim that the deed of possession dated 19 May 1997 did not include the dwelling house and the dwelling house is not owned by the second defendants.

The plaintiff, in addition, seeks from the second defendants rent up to the date of judgment totalling, on my calculations, $11,250 together with interest and costs. I am not prepared to award any of these additional matters. There was no evidence presented to the Court in support of the plaintiff's rent claim and, of course, that meant that Mr 'Etika was never given an opportunity to cross examine on the subject. In relation to any items of discretionary relief I am satisfied that there is substance in Mr 'Etika's submission that the delays on the plaintiff's part in seeking to establish its rights, after first having its attention drawn to the serious boundary challenge back in 1997, has been inordinate. The evidence shows that action was finally taken by the plaintiff to have the matter verified by survey in July 2000 at a cost of only $133.50.

In fairness, Mr Sakalia did acknowledge the delay and indicated that he accepted that it was unacceptable but he explained that one of the problems was that he had been moved to another division within the Bank at quite an important time in terms of the development of the case. I, nevertheless find the overall delay unacceptable and for that reason I decline to award costs. Quite apart from the delay factor, the just result in my opinion, in all the circumstances, is that there should be no award of costs.

Having made the declaratory orders sought by the plaintiff, that is still not the end of the matter. No further relief has been asked for and all that the declarations establish is that there is a house owned by the plaintiff Bank sitting, without any access, on the four acres belonging to the second defendants. The matter is now crying out for a speedy final resolution of all outstanding matters by negotiation between the parties.

I prefer the parties to attempt to negotiate a settlement of all outstanding issues without further involvement of the Court but I do not want the matter to drag on indefinitely. To this end, unless the Court receives earlier advice that the matter has been settled, I have scheduled a Directions Hearing which will take place on Friday 23 March 2001 at 9 am. If there has been no resolution by that date then I will proceed to deal with the matter. As an initial step in the negotiation process I direct that the plaintiff is to provide the second defendants with its suggested options for resolving outstanding issues, in writing, on or before Friday 23 February and the second defendants are to let the plaintiff have their considered response in writing on or before 9 March.