By Jenny Ruth
May 13 (BusinessDesk) - Synlait Milk has landed itself in a right pickle after a Court of Appeal judgment that renders its new Pokeno factory in breach of covenants restricting use of that land to grazing, lifestyle farming and forestry.
Synlait jumped the gun, starting earthworks in March last year and starting to build the factory in May when it still only had a conditional contract to buy the land.
The key condition was that the vendor, Stonehill Trustees, would get the covenants removed.
Once Justice Mark Woolford of the Auckland High Court decided to rule in Stonehill’s favour in November and to order the covenants extinguished, Synlait went ahead and took legal title to the land.
A panel of three Court of Appeal judges have now decided that Justice Woolford’s ruling was wrong and they’ve reinstated those covenants.
That’s a big win for Ye Qing and his company New Zealand Industrial Park, which owns adjacent land to Synlait’s 28 hectares and which owns the benefits of the covenants.
Synlait’s factory is all but completed and had been set to be commissioned in time for the upcoming 2019/20 dairy season.
As the Court of Appeal judges note, Justice Woolford had accepted that Synlait, with Stonehill’s consent, “had started to build its plant on part of the servient land in knowing breach of the covenants and that Stonehill had made a business decision to act unlawfully.”
The covenants were first created when Winstone Aggregates held some of the land Synlait now owns as well as Ye's adjacent property, and had planned to establish a quarry.
The neighbouring land had been owned by Paul and Diane Cleaver who had agreed to the covenants in August 1998 and in September 2000, restricting its use to grazing and lifestyle farming under the first covenant which was extended to forestry in the later covenant. The covenants were to last for 200 years.
Winstone had sought the covenants after learning that the Cleavers were thinking of building a house on their land. It didn’t want trouble with its neighbours down the track when its proposed quarry resulted in “noise, vibration, earth movement, dust, effects of explosion and the usual incidents of quarrying,” the latest judgment explains.
Winstone gained resource consent for a quarry in 2002 which expired in 2009 without it ever being established. Winstone then sold the land, as did the Cleavers.
Both parcels of land were amalgamated and subdivided. Most of Ye’s land used to be owned by Winstone while the land Synlait owns is a mix of land owned by Winstone and the Cleavers.
The trouble is, most of Synlait’s new factory sits on land the Cleavers used to own and is affected by the covenants.
The Court of Appeal judgment notes that Justice Woolford had suggested Synlait could have chosen to build on land Winstone used to own, and which doesn’t have covenants attached to it. Much of the site beyond the existing factory “is relatively steep,” the judgment says.
“Whether in practice, Synlait could have built its dairy factory on this other land is speculation,” it says.
After signing the conditional sale agreement with Synlait in February last year, Stonehill had first tried and failed to negotiate with Ye to extinguish the covenants.
Ye's company NZIPL had complained in June last year about Synlait starting to build its factory and had requested building stop but Stonehill had ignored the complaint.
So then Stonehill went to court. However, two other parties own land that benefit from the covenants, Stuart PC and Grander Investments.
Stuart PC agreed to its rights under the covenants being extinguished in April last year. However, Grander Investments only discovered the action after Justice Woolford’s first judgment.
While a second judgment, which had ordered Stonehill to pay Ye’s costs, directed Stonehill to provide Grander Investments with information on the legal action, the appeal court judges note that was too late.
“It was Stonehill’s responsibility to ensure that service was attended to on the Waikato District Council and on all potentially affected landowners. It failed to do so,” they say.
“As a result, Grander Investments has been denied the opportunity to be heard. It has lost a property right and that right may have been of value to it.”
Their judgment notes other legal precedents dealing with the sanctity of contract and the expropriation of property rights.
“The courts are reluctant to allow contractual property rights to be swept aside in the absence of strong reasons,” the judges say, and certainly not just because they become inconvenient to a party such as Synlait or Stonehill.
And they disagreed that the changing nature of Pokeno from a small village surrounded by farms and vineyards into a much larger residential settlement with a significant industrial precinct had rendered the covenants worthless.
“We do not agree with the judge’s conclusion that the covenants, although only 18 to 20 years old, are now of little or no effect and of no practical value,” the judges say.
“In our judgment, the judge was wrong to conclude that the extinguishment or modification of the covenants, so as to permit operation of the Synlait dairy factory, will not substantially injure NZIPL and valuation evidence was not required to establish that it sustained injury.”
Stonehill was ordered to pay Ye's "reasonable costs."