Property developer $7m out of pocket in Albany project

Kingston Development bought the piece of land in Albany, north of Auckland, in November 2014.

Kingston Developments Group will miss out on a $7 million profit from an Albany project after the Official Assignee successfully argued in the Court of Appeal that the developer's lawyer failed to reveal plans to discharge a mortgage on the property that would have allowed settlement.

Kingston bought the piece of land in Albany, north of Auckland, in November 2014 for $16.7m, financed with a $14m mortgage, from a company called BC Corporate Administration, a company previously associated with financier Paul Bublitz and Chinese fugitive William Yan.

The OA was appointed because of court orders made at about the same time under the Criminal Proceeds (Recovery) Act related to a police investigation which gave the bankruptcy administrator an option to buy back the property at the original price plus Kingston's costs.

In anticipation of exercising the option, the OA entered an agreement to onsell the property to Shanghai Zhenchang International Machinery and Engineering Co for $25m. If the buyback option wasn't exercised, Kingston would be left holding a property valued at $25m for which it had paid $16.7m.

The OA exercised its buyback option and had until January 16, 2015, to settle the deal.

However, after a period of tense negotiations between Kingston's lawyer John Macdonald, of Short & Partners,and the OA's lawyer Kelly Johnson, of Greenwood Roche Chisnall (GRC), the purchase wasn't completed by that date and Kingston deemed the agreement to be cancelled, the Court of Appeal judgment says.

The OA first sought to have the cancellation overturned in the High Court, arguing that Kingston's lawyer Macdonald had been in talks with ASB Bank on settlement day and had the lender's agreement to grant a "force limit" on his firm's trust account, which would have allowed the mortgage to be discharged, but its claim was rejected.

It subsequently challenged that ruling in the Court of Appeal and succeeded.Where the courts differed was on whether Kingston's counsel misled the OA's legal team by not telling them about the financing deal with ASB that would have discharged the mortgage and allowed settlement.

The High Court judge ruled that Kingston's Macdonald hadn't intended to mislead the OA or have his client repudiate the contract by not telling her that he had arranged an alternate way for settlement to occur.

However, the Court of Appeal bench said Johnson's belief that settlement couldn't occur was reasonably based on her interactions with Kingston's solicitors, and McDonald had effectively endorsed that conclusion by his silence.

"Mr Macdonald must have known that Ms Johnson was acting under a false belief that had been engendered by his actions and words," the judges said.

"Yet he said nothing. While silence is often uncertain in its implications, it was not here. This was a case where the silence spoke unequivocally.

"The Appeal Court judges said Kingston had a contractual duty to be ready, willing and able to settle, and Macdonald's duty to his client "cannot be invoked to justify misleading another solicitor."

The judges said Kingston, through its solicitors, had given an unambiguous indication that it couldn't settle, and it would be unconscionable for Kingston to then be able to cancel the agreement.

Under a partial settlement, $7m - the difference between the $18m the OA was to pay Kingston, and the on-sale settlement of $25m - was held in escrow.

The appeal court ruled GRC could disburse the funds, and said Kingston must pay the OA's appeal costs, while the High Court must determine how costs should fall in accordance with its judgment.