In
a ruling with implications for proportionate sales of commercial property, a
substance-over-form approach has been adopted by the Supreme Court in the
interpretation of Blue Chip investment contracts. Blue Chip’s financing construction of inner
city apartments were in the form of contracts for the sale of land which are
exempt from securities law but were held to be in substance debt securities unenforceable
because Blue Chip did not issue a prospectus.
It has been a long
battle for Blue Chip investors who signed up for over-priced apartments to be
constructed in Auckland’s central business districts. Led to believe they were lending money to
finance the construction of apartment blocks, they later discovered they were
committed to buying a finished apartment and at risk of losing their own
debt-free homes to meet their commitment.
Newspaper reports have
indicated that deals have been struck by some investors allowing them to stay
in their own homes with Blue Chip apartment debts deferred until their death,
to be paid out of their estate.
Blue Chip sought money
from public investors to finance the construction of three Auckland inner city
projects. The primary funder in each
case was Westpac Bank. A specified level
of pre-sales was a condition of bank funding being released. Blue Chip agreed to underwrite the
pre-sales. Sales levels were achieved by
making sales to short-term investors with the intention that second purchasers
would take out the original buyer when each development was completed over the
next eight to nine months. When the
market collapsed, these short-term investors were left as the only “buyer” and
committed to paying the purchase price.
Both the High Court
and the Court of Appeal dismissed investor arguments that their contracts were
securities governed by the Securities Act, being void and unenforceable because
Blue Chip did not issue a prospectus for the securities offered to the public.
Each investor had
signed up to a web of contracts which included a sale and purchase agreement
for a specified apartment. Both Courts
ruled the sale and purchase agreement was the primary contract and exempt from
Securities Act requirements because contracts for the sale of land do not
require a prospectus.
The Supreme Court took
a different view.
In substance, each of the
web of transactions put in front of an intending investor amounted to a debt
security offered to the public. Blue
Chip was offering to pay money to investors who signed contracts and stumped up
with the deposit for an apartment.
Investors were offered reimbursement for the deposit paid and promised a
return for the money invested. This
created a debt payable by Blue Chip. The
sale and purchase agreements were secondary to the creditor/debtor
relationship. Rights of repayment were
the primary feature of the web of transactions.
This was not an ordinary apartment purchase with the buyer intended to
take ownership and possession.
The Supreme Court
ruled that sales of real estate become securities governed by the Securities
Act when accompanied by collateral arrangements intended to provide a return to
investors based on the efforts of others.
Examples can arise in proportionate sales of agricultural and commercial
properties where shares in a property-based business are offered to the public
for investment.
In the case of Blue
Chip contracts, the Supreme Court ruled that each Blue Chip investor needed to
return to the High Court to prove the circumstances of their individual case
before their contract was invalidated.
Those investors signing agreements for sale and purchase at the same
time or after signing up to a Blue Chip financing package will have their
agreements ruled unenforceable as being in breach of the Securities Act. But those investors who signed an agreement
for sale and purchase before being introduced to Blue Chip must prove in their
individual case that the transactions were linked in such a way as to be an
issue of debt securities in breach of the Act.
Hickman
v. Turner & Waverley Ltd – Supreme Court (9.08.12)
12.020