A Queenstown developer suggested increased costs associated with Covid were a ‘force majeure’ event which justified hiking prices of pre-sold residential units, purporting to cancel contracts for those who refused to stump up.

The matter was taken to the High Court at Invercargill — in his judgment, Associate Judge Owen Paulsen refused to lapse caveats lodged by Monique Lynch and Luke Sansom, and Marta Yates, over the head title of FCL CL Ltd’s ‘Clubhouse Lane’ development at Jack’s Point.

FCL’s sole director and shareholder is Dean Franklin.

Construction started on the McAdam Dr development, comprising 28 residential apartments in three separate blocks, in January, 2021.

Paulsen’s judgment says Lynch and Sansom entered a purchase agreement for their $795,000 unit in August, 2020.

Yates entered hers, agreeing to pay $1,301,000, in February, 2021.

Their agreements contained the force majeure clause, which included reference to a ‘‘pandemic, significant money or economic developments’’ which prevent the vendor ‘‘commencing or continuing construction’’, or ‘‘rendering it impractical’’ to commence or continue.

It stated the vendor may advise of the ‘‘specified event’’ and cancel the agreement.

‘No-caveat’ clauses were also included.

Price hikes ‘last resort’

FCL first requested a 12-month extension to the completion date — to November 30, 2023 — in July, 2022, citing supply challenges caused by a nationwide building boom.

Then in a project update on July 12 last year, it asked the parties to agree to an increased purchase price and requested a further extension for completion, to July, 2024.

FCL said due to Covid-related delays, and the effect on the escalation of material, labour and funding costs, ‘‘the existing funding facility is no longer sufficient to complete the … project’’.

It further stated the financier required the developer to ‘‘immediately’’ inject further significant cash contributions into the project.

‘‘In addition, the financier is seeking purchaser support via increasing individual purchase prices.’’

It noted the financier required ‘‘unanimous signed agreements from all purchasers’’ by July 28.

Franklin then emailed the applicants with variation agreements — for Lynch and Sansom the purchase price was to increase 37%, to $1,094,000, while Yates was asked to pay another $247,000, an 18% increase — stating the request was made as a ‘‘last resort’’ following
‘‘intense negotiation with the project funders’’.

‘‘They have committed to supporting the development to completion, but this requires additional funding that will have to be shared between the developer and our original purchasers.’’

Courting controversy: FCL CL Ltd’s Clubhouse Lane development, at Jack’s Point, is still under construction

During a High Court hearing in February, Franklin told Paulsen the increased building costs and construction delays were downstream effects of Covid, and FCL’s financier refused to provide further funding unless equity could be created in the development.

So, the company devised a proposal to seek purchasers’ consent to ‘‘an increase in the prices that they would pay for each of the units … and terminate the contract of those who did not agree’’.

Franklin says FCL tried to treat purchasers equitably by increasing prices to the midpoint between the original purchase price, and the then-current appraised values.

Ultimately, no agreement was reached between the applicants and FCL and last September the applicants’ lawyers received legal letters on behalf of FCL, purporting to cancel their agreements unless they agreed to the hiked prices.

The letters stated the only way the development could be completed was if the sale agreements for unit purchasers who didn’t, or couldn’t, agree to the proposal were cancelled and the units on-sold ‘‘at prices satisfactory to the funder’’.

‘‘There will not otherwise be sufficient funds to ensure that all units can be completed.’’

‘Substantial risk of liquidation’

The letters referenced the pandemic as a force majeure, noting the events ‘‘prevented the vendor from continuing construction of the development as it has no funding with which to do so’’, and warned unless the applicants accepted the offer, their sales agreements would be cancelled.

Instead, the applicants lodged their caveats — the following month, FCL’s lawyers wrote to the applicants’ lawyers again, demanding they be removed.

When they weren’t, FCL went to the Registrar-General of Land with an application to lapse them — so Lynch, Sansom and Yates filed their applications with the High Court.

Paulsen made interim orders preventing the caveats from lapsing on December 6.

By December 11 the applicants had been given notice their sales agreements had been cancelled and their deposits forfeited.

Franklin told the court when FCL’s funding facility ran out last August, it had no resources other than the development as security for funding, and there was a ‘‘substantial risk’’ the company would be put into liquidation and the development unfinished.

But Paulsen’s decision notes there’s no suggestion a specified event, including Covid, prevented FCL from starting construction.

The issue was whether Covid prevented construction continuing, or rendered continuing impractical.

Judge labels submission “fanciful”

Despite FCL’s arguments, Paulsen says he’s satisfied by the applicants’ evidence construction wasn’t prevented or impractical at any stage, continued throughout the period, and will continue to completion.

Regarding submissions the company validly cancelled the applicants’ agreements because they breached the ‘no-caveat’ clause, he says he saw ‘‘nothing’’ to support that, and found no evidence of ‘‘irreparable harm’’ or the ‘‘potentially huge damage’’ caused to the development company by the caveats being lodged.

He also didn’t accept lodging the caveats was premature, nor a submission there was no evidence Franklin had attempted to resell the units,
particularly given that was the ‘‘express intention’’.

And he describes Franklin’s suggestion the funder might suspend or cancel funding on no other basis than the caveats haven’t been discharged as ‘‘fanciful’’.

‘‘It is notable there is no evidence at all from the respondent’s funder that this is a realistic possibility, or would even be contemplated.’’

He also says the discretion to remove a caveat should only be exercised if the court’s completely satisfied the legitimate interests of the caveator won’t be prejudiced: ‘‘This is clearly not such a case.’’

The caveats remain, subject to the applicants issuing and pursuing proceedings to a further hearing.

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