Adams v Touchtwo Ltd HC Auckland CIV 2009-404-5274
[2010] NZHC 873
•7 May 2010
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2009-404-5274
BETWEEN COLIN DENNIS ADAMS and
RICHARD NEIL ADAMS and the
E W PARKER TRUSTEE COMPANY LIMITED
Plaintiffs
ANDTOUCHTWO LIMITED First Defendant
ANDLOUIS PHILIP JONES Second Defendant
ANDJULIE CLAIRE CHRISTIE Third Defendant
ANDBFS AUCKLAND LIMITED Fourth Defendant
ANDHOWARD STANLEY MOORE Fifth Defendant
ANDGILLIAN PATRICIA MOORE Sixth Defendant
ANDCAROLINE ROSER CHAPMAN Seventh Defendant
Hearing: 25 March 2010
Counsel: G P Blanchard and P A Chambers for Plaintiffs
T J Cooley for First to Third Defendants
No appearance for Fourth to Seventh Defendants
Judgment: 7 May 2010 at 4:30pm
RESERVED JUDGMENT OF HUGH WILLIAMS J.
COLIN DENNIS ADAMS AND RICHARD NEIL ADAMS AND THE E W PARKER TRUSTEE COMPANY LIMITED V TOUCHTWO LIMITED AND ORS HC AK CIV-2009-404-5274 7 May 2010
This judgment was delivered by The Hon. Justice Hugh Williams on
7 May 2010 at 4:30pm
pursuant to Rule 11.5 of the High Court Rules
……………………………………………..
Registrar/Deputy Registrar
AThe lease in question having been surrendered by operation of law, the plaintiffs’ application for summary judgment against the First to Third defendants, and the First to Third defendants’ application for summary judgment against the plaintiffs are both dismissed for the reasons set out in this Judgment.
B Costs are to lie where they fall.
TABLE OF CONTENTS
Paragraph
Introduction [1] Facts: [4] (1) Lease and Assignments [4]
(2) Defaults, Further Assignment, Termination [13]
(3) Evidence [16] Submissions:
(1) Plaintiff’s surrender by operation of law [25]
(2) Express or Implied Agreement [26] (3) Estoppel by Convention [28] (4) Contractual Mistakes Act 1977 [31] (5) Failure to Mitigate/Unreasonable Refusal to Assign [32] (6) Touchtwo Defendants [37] (7) Plaintiffs’ Reply [44]
Discussion and Decision:
(1) Surrender by operation of law and Re-grant of the
Lease of 7 December 1999 [45] (2) Contractual Mistakes Act 1977 [84] (3) Express or Implied Agreements/Estoppel by Convention [91] (4) Unreasonable Refusal of Consent to Assignment/
Mitigation of Loss [97] Quantum of Claim [101]
Result [104]
Introduction
[1] In this proceeding the plaintiffs, the Trustees of the C R Adams Trust, seek summary judgment against the First-Third Defendants (“the Touchtwo defendants”) for $431,929.19, the sum which the plaintiffs say is owing under a lease dated
7 December 1999 and the Touchtwo defendants seek summary judgment against the Adams Trust on the basis that none of the causes of action in the claim against them can succeed.
[2] The pivotal question on which both applications depend is whether the lease has been surrendered by operation of law. Broadly put, if it has, then the Adams Trusts cannot obtain summary judgment. If it has not, then the Touchtwo defendants’ application to strike out the relevant portions of the claim cannot succeed.
[3] It was said by counsel that the point in issue appears not to be the subject of any directly applicable precedent in this country.
Facts:
(1) Lease and Assignments
[4] The central facts are straightforward.
[5] The Adams Trust has at all material times been the registered proprietor of the property at 144 Parnell Road, Auckland. Throughout, the premises have been utilised as licensed/eating house premises, though with a different emphasis from time to time.
[6] On 7 December 1999 the Adams Trust leased 144 Parnell Road to the
Touchtwo defendants for a term of 10 years from 1 January 2000 to 31 December
2009. There were to be bi-annual reviews of the rent – set initially at $202,000 plus
GST – but the lease contained no right of renewal.
[7] As with many commercial lettings, the lease obligated the lessees to pay rates, insurance premiums and similar levies, contribute to a maintenance reserve fund (the amount of which was varied by letter mid-term), and prohibited assignment without consent and without complying with a right of first refusal by the Adams Trust.
[8] The lease provided for early termination (cl 21) and holding over as monthly tenant “otherwise than pursuant to the grant of a further lease” (cl 22) and said termination of the lease would not release the Touchtwo defendants from liability for rent then unpaid. In the event of termination the Lessee was to indemnify the Lessor “against any loss of rent and payment of outgoings ... for the period from the determination date to the date when the term of this lease would otherwise have expired” (cl 13.1(c)). Touchtwo agreed to pay interest at 5% over the lessor’s overdraft rate on amounts payable but unpaid for 14 days.
[9] The second and third defendants, Mr Jones and Ms Christie, guaranteed
Touchtwo’s obligations.
[10] On 30 June 2006 Touchtwo entered into an assignment of the lease to the fourth defendant, BFS Auckland Limited, with the fifth – seventh defendants guaranteeing BFS’s obligations (the “BFS defendants”). (Counsel said the BFS defendants acknowledge their liability in this claim and are in negotiation with the plaintiffs. Those negotiations are in abeyance until determination of the summary judgment applications.)
[11] The assignment was in the ADLS[1] form then current. It obligated the assignee and its guarantors to pay rent for the balance of the term of the lease. Touchtwo expressly acknowledged:
That the covenants of the assignee are not in substitution for and do not reduce prejudice or vary the liability of the assignor under the lease.
[1] Auckland District Law Society.
[12] Also on 30 June 2006 the Adams Trust entered into a Deed of Variation of
Lease with the BFS defendants whereby the term of the lease was extended to
31 May 2016. Touchtwo was not a party to that Deed. That extension of term is crucial to the present dispute.
(2) Defaults, Further Assignment, Termination
[13] Payments under the lease were made until about 2 June 2008 but fell into arrears thereafter. Although some further payments were made, by 9 April 2009 the position had been reached where, according to the Adams Trust, $134,854.46 was owed. It gave notice on that date to BFS of its intention to cancel the lease under s 245 of the Property Law Act 2007 (the “2007 Act”). That notice was copied to the Touchtwo defendants.
[14] On 6 May 2009 the Adams Trust solicitors notified the Touchtwo and BFS defendants that the 7 December 1999 lease was at an end. The letter said that took effect from 2 May 2009, but it is a little difficult to correlate that advice with the commencement date in the lease to the new tenant, Juice TV Bar Limited, of 1 July
2009. The rental payable under the Juice lease was rent free for the first four months, $160,000 plus GST from 1 July 2009-28 February 2010, $200,000 plus GST for the next period ending on 31 January 2011 and $220,000 plus GST from
1 February-31 December 2011. It was then to be subject to rent review. Thus the rent payable under the Juice lease was significantly lower than reviewed rent payable by BFS.
[15] On 18 June 2009 the Adams Trust issued demands to the Touchtwo and BFS defendants. The former were said to be liable for $431,929.19 and the latter for an additional $291,775.32. The letter said the total claim against the Touchtwo defendants was for money payable under the lease up until cancellation plus the Adams Trust’s damages to 31 December 2009. The claims against the BFS defendants were for moneys payable under the lease until cancellation plus the
Adams Trust damages to 31 December 2011. The claims were said to be the “difference between the contractual rent under the lease and the rent recoverable under the new lease with a net present value adjustment” plus outgoings and re- letting costs. The demand letter included a number of schedules giving details of the plaintiffs’ calculations of the losses, including differences arising from reductions in the plaintiffs’ overdraft interest rate from 31 January 2009.
(3) Evidence
[16] Initially at least, the Touchtwo defendants’ response to the claim was largely confined to matters of quantum, but Mr Jones’ first affidavit sworn on 27 October
2009 said neither Ms Christie nor he were signatories to the variation extending the lease term and were not provided with a copy before service of these proceedings. He continued:
Whilst we were aware that the landlords had agreed to lease the premises to BFS for an extended term, we did not appreciate that the Deed of Variation of lease may have had a legal impact upon our obligation to the Landlord under the Lease, Guarantee and Assignment.
At no time did the plaintiff request Ms Christie or myself to sign the variation of Deed of Variation of Lease or agree that the obligation of Touchtwo under the lease and myself and Ms Christie under the Guarantee were to extend to the terms of the variation. Certainly, Touchtwo, Ms Christie and myself would not have agreed to sign the Deed of Variation of Lease as we had no intention of incurring any further liability to the plaintiffs in relation to the premises.
We now understand that the Lease, including the Guarantee, was surrendered by operation of law when the Deed of Variation of Lease was executed and the term was extended from 31 December 2009 to 31 May
2016. Accordingly, we believe that the plaintiff’s claim against Touchtwo, Ms Christie and myself should be dismissed on the basis that the Lease, including the Guarantee, was no longer in effect from 30 June 2006.
[17] Mr Jones’ affidavit then went on to claim further defences on the basis that the Adams Trust failed to mitigate its losses after BFS fell into default because they
were relying on Mr Jones and Ms Christie’s guarantees and acted unreasonably in withholding their consent to assignment of the lease. He dealt at some length with issues of quantum.
[18] Those matters need not be particularised at this juncture save to note he points out that after the date of the assignment – which he views as the date of termination of the liability of the Touchtwo defendants – it was not until
19 December 2008 that the Touchtwo defendants were advised the Landlords were negotiating with a prospective new tenant. That fell through. The Touchtwo defendants expressed concern. Negotiations with the Juice parties over the concessional rental then revived. Others were interested from early 2009 and the new lease with its reduced rental was entered into on the terms earlier mentioned. Mr Jones takes the view that the “rental concessions made by the landlord effectively required us to subsidise [Juice] in starting up their business”.
[19] That produced further affidavits from Mr Adams and the plaintiffs’ solicitor, Mr Macky.
[20] Mr Adams pointed to the fact that it was only recently that the Touchtwo defendants raised the argument that the Deed of Variation of 30 June 2006 surrendered the lease of 7 December 1999 by operation of law from that date.
[21] He pointed to the Deeds of Assignment and Variation being executed on the same day “because they were negotiated simultaneously and were intended to work together as a package”. He suggested the Touchtwo defendants were “closely and intimately involved” in the negotiation of both Deeds and were “fully involved in the negotiations in relation to the variation”. It was, he asserted, Mr Jones who was “the main party driving the negotiations” which resulted from BFS’s insistence on a
10 year term before it would take assignment.
[22] The deponents put in evidence correspondence between the period
19 December 2008-30 January 2009 which may be relevant to the failure to mitigate/refusal of consent to assignment point and the period 20 April 2006-27 June
2006 concerning the terms on which BFS was prepared to take an assignment from
Touchtwo. The latter suggests the Touchtwo defendants may not have been as divorced from the detail of the negotiations as Mr Jones now asserts – indeed the agreed price for the extension (so called) of the lease and removal of an early termination clause were payments of $25,000 plus GST from each of Touchtwo and BFS.
[23] Mr Adams said the negotiations leading to the 30 June Deeds took place over the two or three months prior to that date and were “always on the understanding and agreement that the first to third defendants would remain liable under the lease until
31 December 2009.” He particularly pointed to a meeting on 12 May 2006 involving all defendants where he says that agreement was reached. His assertions were supported in an affidavit from Mr Macky. Mr Jones, in a further affidavit, disputed Messrs Adams’ and Macky’s version of the 12 May 2006 meeting with his version being supported by an affidavit from a Ms MacGregor, a business broker who also attended the meeting.
[24] The plaintiffs accept that because there is little conclusive in the way of documentary record of what ensued over this period and any agreements reached – especially at the 12 May 2006 meeting – those issues become a matter of contested fact unable to be resolved on affidavits alone, even by a “robust and realistic judicial attitude” (Eng Mee Yong v Letchumanan; Bilbie Dymock Corporation Ltd v Patel).[2]
[2] Eng Mee Yong v Letchumanan [1980] AC 331; Bilbie Dymock Corporation Ltd v Patel
(1987) 1 PRNZ 84, 85-86.
That aspect of the matter must therefore await resolution at any substantive hearing
of this claim.
Submissions
(1) Surrender by operation of law
[25] Presumably recognising the unanimity of English precedent to the effect that an assignment extending the term of a lease beyond that originally contemplated triggers the legal fiction of surrender by operation of law and a re-grant of a new
lease, Mr Blanchard submitted that New Zealand Courts were not bound by the English cases and should not follow them, particularly given the fictional nature of the doctrine. He submitted the doctrine serves no useful purpose and is unnecessary to protect the lessee/assignor from liability for matters agreed between the lessor and the assignee to which the lessee/assignor has not agreed. Indeed, he submitted the fiction could have serious consequences the parties did not intend at the outset.
Blanchard J’s summary of the relevant legal position in Gibbons Holdings Ltd v Wholesale Distributors Ltd[3]was obiter and should not therefore be regarded as binding in this case.
(2) Express or Implied Agreement
[3] Gibbons Holdings Limited v Wholesale Distributors Limited [2008] 1 NZLR 277, 283-286 paras [10]-[16].
[26] Mr Blanchard next submitted the evidence showed the Touchtwo defendants either expressly or impliedly agreed they would be liable for the totality of the lease payments which BFS covenanted to pay. In that, he principally relied on Mr Macky’s description of events at the 12 May 2006 meeting – although acknowledging the factual conflict on the evidence. He submitted the 30 June 2006
Deeds should be regarded as one transaction recorded in two instruments and the surrounding correspondence. There was, he submitted, a sufficient note or memorandum in writing of the entirety of the transaction to satisfy both s 2(2) of the Contracts Enforcement Act 1956 and s 24 of the 2007 Act (and the transitional provisions in s 366 and 367) even though he accepted the Deeds contain no mention of the two $25,000 payments.
[27] Even if, as mentioned, the factual conflict could not be resolved, Mr Blanchard submitted it applied as much to the plaintiffs’ summary judgment application as to that of the Touchtwo defendants.
(3) Estoppel by Convention
[28] Mr Blanchard next submitted the Touchtwo defendants were estopped by convention from resiling from the position they had previously taken, relying on National Westminster Finance NZ Ltd v National Bank of NZ Ltd.[4]He relied on the requirements for the establishment of estoppels by convention set out by Tipping J as follows:
[4] National Westminster Finance New Zealand Limited v National Bank of New Zealand Limited
[1996] 1 NZLR 548, 550, and the full unreported judgment: CA159/92, 30 March 1993.
The authorities show that for an estoppel by convention to arise the following points must be established by the party claiming the benefit of the estoppel (the proponent):
(1)The parties have proceeded on the basis of an underlying assumption of fact, law, or both, of sufficient certainty to be enforceable (the assumption).
(2) Each party has, to the knowledge of the other, expressly or by
implication accepted the assumption as being true for the purposes of the transaction.
(3) Such acceptance was intended to affect their legal relations in the sense that it was intended to govern the legal position between them.
(4)The proponent was entitled to act and has, as the other party knew or intended, acted in reliance upon the assumption being regarded as true and binding.
(5)The proponent would suffer detriment if the other party were allowed to resile or depart from the assumption.
(6)In all the circumstances it would be unconscionable to allow the other party to resile or depart from the assumption.
[29] Here, both parties, he submitted, had proceeded on an underlying assumption of law which was intended to affect their legal relations. The plaintiffs, he submitted, were entitled to act and did in fact act in reliance on the assumption being correct and would suffer detriment if the Touchtwo defendants were allowed to resile from it. It would be unconscionable to allow them so to do.
[30] He submitted all parties assumed for over three years the Touchtwo defendants would continue to be liable following assignment and variation of the lease. During that period the Adams Trust acted in reliance on that assumption by executing the 30 June 2006 documents and undertaking all its other actions including, of course, BFS remaining in occupation of their premises. If the Touchtwo defendants were permitted to resile from the assumed position the Adams Trust would suffer detriment in being unable to recover the amounts owing. He
submitted the following passage from Butler, Equity and Trusts in New Zealand[5] was
[5] Andrew Butler Equity and Trusts in New Zealand (2nd ed) 619-620.
especially apt:
Changed circumstances may tempt a party to renege from an agreement which was once to its advantage. Opportunistic attempts to avoid an agreement by alleging that it is ultra vires, illegal, imperfect in form, or void for uncertainty, or to change unilaterally the nature of the arrangement by reneging on an underlying shared assumption, are generally frowned on by the courts. In such a case a fair-weather contractor may be estopped from denying the validity or underlying basis of the agreement he or she once endorsed.
(4) Contractual Mistakes Act 1977
[31] Mr Blanchard submitted all parties to the Deeds of Assignment and Variation/Extension contracted under a common mistake of law namely that the documents would continue to bind the Touchtwo defendants. He submitted the mistake was not one as to the interpretation of the contract – debarred from consideration under the Act by s 6(2)(a) – and the mistake resulted in a substantially
unequal exchange of values or conferred a benefit on the Touchtwo defendants which was substantially disproportionate to the consideration: a complete release from liability by a payment of $25,000 plus GST. It would therefore be appropriate, he submitted, under s 7(3) to order the varied lease continued to bind the Touchtwo defendants.
(5) Failure to mitigate/unreasonable refusal to assign
[32] Mr Blanchard pointed to the fact that the onus of proving a failure to mitigate or the unreasonableness of any refusal to assign was that of the Touchtwo defendants. They had put forward no evidence of substance on the topic, certainly not any expert opinion.
[33] He submitted the evidence did not suggest the plaintiffs failed in their obligations through relying on the guarantor’s liability: it would expire on
31 December 2009 in any case, only about a year after the negotiations.
[34] He pointed to evidence the Adams Trust was doing the best it could towards the end of 2008 to find new tenants, and it was no fault of the plaintiffs the prospective tenants then ceased negotiations. The Adams Trust took independent advice concerning the negotiations which confirmed that the proposed lease with Juice was on appropriate market terms for the time. The Touchtwo defendants produced no evidence challenging that view.
[35] Mr Blanchard pointed to the proposition – undoubtedly correct – that until a lease is terminated the lessor is entitled to recover unpaid rent as a liquidated claim and has no obligation to mitigate (Metcalfe v Waterbedroom (Dominion Road) Limited (in statutory management).[6]Thus no obligation to mitigate arose before the lease was cancelled.
[6] Metcalfe v Waterbedroom (Dominion Road) Limited (in statutory management) [1991] 1 NZConvC
190,756.
[36] As to consent to assignment, Mr Blanchard submitted there was evidence
BFS would not accept an assignment of the lease on existing terms but required the
term to be extended. The plaintiffs were entitled to refuse to consent to any assignment until the term was agreed. Other information to which they were entitled was not forthcoming. Rent remained unpaid. The Adams Trust was entitled to refuse consent until all those issues had been dealt with.
(6) Touchtwo Defendants
[37] For the Touchtwo defendants Mr Cooley naturally relied on the English cases to the effect that the extension of term pursuant to the variation of lease operated as a surrender by operation of law and a fictional grant of a new lease.
[38] He submitted estoppel by convention was not applicable because there were two separate transactions with different parties and suggested there was “no shared assumption between the parties that the Touchtwo defendants would remain legally bound under the lease”.
[39] He similarly submitted that the Contractual Mistakes Act 1987 was inapplicable because there were two contracts and at the time of executing the Deed of Assignment the Touchtwo defendants were unaware of the existence and content of the Deed of Variation by way of extension. They therefore could not have been under the influence of a mistake as to their interpretation of a document they had not seen and to which they were not parties. He also submitted there was insufficient evidence there was a substantially unequal exchange of values.
[40] Mr Cooley adopted the observation in Burrows, Finn and Todd, “Law of
Contract in New Zealand”,[7] that:
The weight of judicial authority clearly favours the view that there can only be a mistake where the relevant party or parties to the contract have given consideration to a particular matter and come to an erroneous conclusion as to that matter...where the party has simply not turned his or her mind to the particular matter there is no mistake at all.
[7] Burrows Finn and Todd Law of Contract in New Zealand (3rd ed) 274, at para 10.3.3
[41] Mr Cooley submitted no one can be influenced to enter into a contract - as required by s 6(1)(a) of the Act - if they are ignorant of the matter.
[42] By reference to s 224 – 227 of the 2007 Act (applied to leases made before or after the commencement date of 1 January 2008 by s 206). Mr Cooley submitted the correspondence showed the plaintiffs failure to consent to the assignment from December 2008 caused loss to the Touchtwo defendants. The prospective tenants at that time were prepared to agree to a rent of $210,000 plus GST for the period to
1 January 2010 but the plaintiffs refused to negotiate on the operating expenses and refused to accept rent reviews according to a particular formula. It was that which caused the prospective tenants to withdraw. Following the successful resumption of negotiations the terms on which the BFS defendants ultimately agreed was much less favourable with the rent being fixed at the significantly lower sums earlier mentioned. That, he submitted, demonstrated the plaintiffs acted unreasonably in refusing consent to the assignment in December 2008.
[43] As to mitigation of loss Mr Cooley submitted that when the BFS defendants ceased trading in June 2008 the Adams Trust should have accepted their repudiation, cancelled the contract and actively sought a replacement tenant at that point in order to mitigate their loss. Instead they made no reasonable effort to locate a new tenant until the second half of December 2008 and by the time the new tenants took occupation the premises had been vacant for nearly a year and the terms which Juice agreed to accept were substantially less favourable than the BFS lease. Accordingly, he claimed the plaintiffs had failed to mitigate their loss and any judgment in their favour should therefore be reduced.
(7) Plaintiffs’ Reply
[44] In reply Mr Blanchard submitted:
a) The extension of term did not effect a surrender of the lease by operation of law. This was indicated – at least by analogy – by s 116 of the Land Transfer Act 1952 in relation to registered leases. The knowledge of the parties was irrelevant.
b)Even if the disputed evidence regarding the 12 May 2006 meeting was put aside there was sufficient evidence for the Court to find the Touchtwo defendants agreed to remain liable under the lease until
31 December 2009.
c) The shared mistake or assumption of the parties in this case “crossed the line” to give rise to estoppel by convention - National Westminster[8] - particularly when the meeting of minds could be express or implied. The test was whether the proponent would suffer detriment if the other party were allowed to resile or depart from the assumption[9]. If the Touchtwo defendants resiled from the assumption they were bound by the lease until 31 December 2009 then the plaintiffs would clearly suffer loss by being unable to obtain Judgment against them for $431,929.
[8] National Westminster (unreported) p 24 citing K Lokumal & Sons (London) Ltd v Lotte Shipping Co
Pty Ltd (the “August Leonhardt”) [1985] 2 Lloyds Rep 28, 34.
[9] Ibid, at 550.
d)This was not a case of ignorance for the purposes of the Contractual Mistakes Act 1977 nor one where the parties had not turned their mind to whether the Touchtwo defendants would continue to be liable. Mr Jones’ evidence earlier cited supported the view that although they did not see a copy of the variation they were aware the lease was being varied and assumed they would remain liable despite the variation.
e) The provisions of the 2007 Act were inapplicable because the lease came into force before the Act (but Mr Blanchard appeared to have overlooked the provisions of s 206 in that submission). In any case the plaintiffs did not unreasonably withhold consent because Juice was not prepared to take an assignment of the lease on its existing terms and required a variation to which the plaintiffs could not be compelled to agree. In addition a significant sum for rent was
outstanding and landlords are entitled to refuse consent on that ground
(Hardley v Fatupaito).[10]
[10] Hardley v Fatupaito [2009] 3 NZLR 676 at 688-689 para [60].
Discussion and Decision
(1) Surrender by Operation of Law and Re-grant of the Lease of
7 December 1999
[45] On 7 December 1999 the Adams Trust leased 144 Parnell Road to Touchtwo
(and permitted assigns) until 31 December 2009.
[46] However, on 30 June 2006 the Adams Trust and the BFS defendants entered into a Deed of Variation of Lease under which BFS (and permitted assigns) were entitled to occupy 144 Parnell Road until 21 May 2016.
[47] On the same day, 30 June 2006, the Adams Trust entered into a Deed of Assignment under which BFS agreed to perform all of Touchtwo’s obligations under the 7 December 1999 Lease from 3 July 2006 onwards with Touchtwo acknowledging the assignment to BFS did not release Touchtwo from its obligations under the 7 December 1999 lease.
[48] The effect – at least in English law – of the Deed of Variation extending the term of the lease from 31 December 2009 to 31 May 2016 (and similar variations) is perhaps best summarised in Halsbury[11],to the following effect:
[11] 27(1) Hals Laws of England (4th ed, Reissue 200) 653 at 635.
Variation of terms of lease. Where the terms of the relationship between the landlord and the tenant are altered by agreement, it is necessary to decide whether the alteration amounts to the creation of a new tenancy upon the altered terms, and thus of necessity the surrender by operation of law of the previous tenancy, or whether the alteration merely continues the previous tenancy in a varied form. Certain agreed alterations necessarily involve the surrender of the previous tenancy and its replacement by a new tenancy. The only way in which new land may be added to the demised premises is by the
process of surrender by operation of law of the old lease and the grant of a new lease to include both the old and the new premises. Equally the duration of a lease can be extended only by the surrender of the existing lease and its replacement by a new lease for the longer term. As a matter of law the parties can achieve this intention only by the fiction of a surrender and regrant.
[49] The principal cases on which that passage rests, and the two primarily relied on by the BFS defendants, were Jenkin R Lewis & Son Ltd v Kerman[12] and Friends’ Provident Life Office v British Railways Board.[13]
[12] Jenkin R Lewis & Son Limited v Kerman [1971] 1 Ch 477.
[13] Friends’ Provident Life Office v British Railways Board [1996] 1 All ER 336.
[50] In the former, a tenancy agreement demised land for three years from
29 September 1941 but the tenant held on as a yearly tenant following expiry of the term and by 1968 the then tenant was paying more rent to the then landlord for less land. The tenancy had been assigned on a number of occasions. On 5 September
1968 the then landlords served the then tenant with notice to quit. On the notice being challenged, the English Court of Appeal held the intervening agreements showed no intention to create a new contract of tenancy but were based on continuation of the 1941 agreement. An agreement to increase the rent did not necessarily result in the surrender of the existing tenancy and creation of a new one. The decision is largely based on the terms of the documents but Russell LJ, speaking
for the Court, did observe:[14] (at 496):
[14] Jenkin R Lewis & Son Ltd at 496.
The question then arises whether it is correct in law to say that a mere agreement by landlord and tenant for an increase in the rent reserved on a letting necessarily involves a new letting despite their contrary intentions.
If a tenant holding land under a lease accepts a new lease of the same land from his landlord he is taken to have surrendered his original lease immediately before he accepts the new one. The landlord had no power to
grant the new lease except on the footing that the old lease is surrendered and the tenant by accepting the new lease is estopped from denying the surrender of the old one. This “surrender by operation of law” takes effect whether or not the parties to the new lease intend it to take effect. Moreover, even if there is no express grant of a new lease the old lease will be surrendered by operation of law if the arrangements made between the landlord and the tenant are such as can only be carried out so as to achieve the result which they have in mind if a new tenancy is in fact created.
If, for example, a tenant holds a lease of land for 20 years and he and his landlord wish the period of his right to hold the land to be extended by a further 20 years, their object can be achieved by the landlord granting the tenant a reversionary lease to take effect on the expiry of the existing lease, but if they wish a single term for the extended period to come into being that result can only be achieved if the existing term is surrendered and a new term is created. It is not possible simply to convert the existing estate in the land into a different estate by adding more years to it, and even if the parties use words which indicate that this is what they wished to achieve the law will achieve the result at which they are aiming in the only way in which it can, namely by implying a fresh lease for the longer period and a surrender of the old lease: see In re Savile Settled Estates [1931] 2 Ch. 210; Baker v Merckel [1960] 1 Q.B 657.
[51] In Friends’ Provident in 1957 an underlease for 21 years and a reversionary underlease from 1978 was varied by assignment as the parties changed and the rent increased. When the then assignee defaulted in payment of rent in 1993 the then lessor, Friends’ Provident, sued the British Railways Board and earlier assignees for the unpaid rent and was met with the defence that a 1985 variation which substantially increased the rent and altered certain other covenants was so fundamental that, notwithstanding the contrary intention of the parties, it amounted to a surrender of the lease by operation of law and a re-grant. Holding that the trebling of the rent in 1985 released the then lessee for later liability for anything
more than the original rent, Beldam LJ held:[15]
In the absence of an increase in the extent of the premises demised or of the term for which they are to be held, both of which would change the legal estate, I can see no reason why the lessor and assignee could not achieve the changes they desired in the terms of the lease without the law implying its surrender and a regrant for the remainder of the term of the lease.
[15] Friends’ Provident at 345.
[52] Then he cited from the speech of Lord Templeman in City of London
Corporation v Fell[16] to the following effect:
The common law did not release the original tenant from liability for breaches of covenant committed after an assignment because of the sacred character of covenant in English law. I understand that Scots law releases the original tenant once he has been replaced by a permitted or accepted assignee. This only means that the fortunate English landlord has two remedies after an assignment, namely his remedy against the assignee and his remedy against the original tenant. It does not follow that if the liability of the original tenant is released or otherwise disappears then the term granted by the lease will disappear or that the assignee will cease to be liable on the covenants. As between landlord and assignee the landlord cannot enforce a covenant against the assignee because the assignee does not covenant. The landlord enforces against the assignee the provisions of a covenant entered into by the original tenant, being provisions which touch and concern the land, because those provisions are annexed by the lease to the term demised by the lease. The assignee is not liable for a breach of covenant committed after the assignee has himself in turn assigned the lease because once he has assigned over he has himself in turn assigned the lease because once he has assigned over he has ceased to be the owner of the term to which the covenants are annexed. Covenants are introduced on the creation of a lease but are not necessary to sustain a lease. Upon an assignment of a lease, the provisions of the covenants by the original tenant continue to attach to the term because those provisions touch and concern the land and not because there continues to exist an original tenant who has ceased to own any interest in the demised land but remains liable in contract to fulfil the promises he made under covenant.
[16] City of London Corporation v Fell [1994] 1 AC 458 at 465
[53] Sir Christopher Slade began his judgment by observing:[17]
[17] Friends’ Provident at 350.
...the authorities establish that where a landlord and tenant enter into an agreement which varies the terms of the subsisting tenancy but shows a clear intention not to create a new tenancy, the court will give effect to such intention, unless the only way by which the law can give effect to the arrangements made between the parties is to imply the surrender of the old tenancy and the creation of a new one....
I for my part doubt whether this exceptional situation can ever arise, save in the two sets of circumstances mentioned by Russell LJ, albeit only by way of example, in Jenkin R Lewis & Son Ltd v Kerman [1970] 3 All ER 414 at
419-420, [1971] Ch 477 at 496, namely where the parties wish either a single term for an extended period to come into being, or further land to be added to the existing holding.
Be that as it may, the last-mentioned authority clearly establishes that the invocation of the fiction of a new lease and surrender by operation of law will not be regarded as necessary merely because the parties agree to an increased rent. Though in the present case the deed of variation embodied not merely a substantial increase in rent, but also an advancement of the date for its payment and a number of additional variations of the parties’ respective obligations, I can see no reason why the law should not be able to give effect to all these arrangements without implying the surrender of the old tenancy and the creation of a new one.
[54] Ironically, almost contemporaneously with the judgment in Friends’ Provident, the British Parliament changed the law in a way which, if implemented in this country, might affect the outcome of this case.
[55] The context in which that change occurred is perhaps best described by Gray and Gray, Elements of Land Law, where the learned authors say: [18]
At common law, in all cases ... the intense contractual nexus between L1 and T1 implicates both in enduring liabilities of an unexpected order of magnitude. Prior to statutory intervention in 1995, the contractual analysis of their relationship was so dominant that, in the absence of some expressly agreed release, both used to remain fully liable on all the covenants of the lease for the duration of the whole term – quite irrespective of assignment by either. The commencement of the lease effectively initiated a liability on both sides which continued throughout the entire leasehold term. Given that a term of years can be of extensive duration (eg 125 years or 999 years), the common law liability undertaken by L1 and T1 was so considerable that it necessitated certain modifications by statute with effect from 1 January
1996.
[18] Kevin Gray and Susan Gray Elements of Land Law (5th ed, Oxford University Press, 2009) at 523, para 4.5.10.
[56] Two additional points of interest arise from the authors’ discussion of that principle.
[57] In the first – in an observation of relevance to New Zealand – the authors say:[19]
[19] Ibid at 525, para 4.5.15.
In realistic commercial terms the primary target for enforcement in the event of breaches occurring after assignment is usually the defaulting assignee himself. Nevertheless, with the spate of insolvencies which emerged during the 1980s and early 1990s, it became increasingly common for landlords to have recourse to the ultimate contract-based liability of their original tenant. If L1 (or, in his turn, L2) discovered that an assignee of the leasehold term was bankrupt or insolvent, it was obviously tempting and sometimes relatively easy to enforce a money liability against an attractively solvent T1. For many original tenants such enforcement came as a wholly unanticipated (and financially disastrous) form of liability. The principle of enduring contractual liability often produced harsh consequences. T1, although he had long ago transferred the residue of his term and retained no control over the demised premises, was suddenly confronted with an enforceable demand for arrears of rent unpaid by T2 or T3 or for damages in respect of some other default of which he was wholly innocent. As Lord Nicholls of Birkenhead observed in Hindcastle Ltd v Barbara Attenborough Associates Ltd [[1997]
AC 70 at 83G], a ‘person of modest means is understandably shocked when out of the blue he receives a rent demand from the landlord of the property he once leased’. The potential impact on T1 was intensified when, during the 1980s, the courts began to hold that T1’s liability on his covenants could be increased by subsequent variations of the original leasehold terms agreed between L1 and T2 or T3, over which (of course) T1 had little or no control.
[58] The second point of interest is that the text makes the point that “the common law principle has global acceptance” citing Australian and Canadian authorities and, for New Zealand, W E Wagener Ltd v Photo Engravers Ltd.[20]
[20] W E Wagener Limited v Photo Engravers Limited [1984] 1 NZLR 412, 417.
[59] Before leaving the British position it is to be noted that the statutory intervention of which Elements of Land Law speaks is the Landlord and Tenant (Covenants) Act 1995 (UK), (the “Covenants Act”), s 5 of which provides that where a tenant assigns the whole of demised premises he is “released from the tenant covenants of the tenancy” and “ceases to be entitled to the benefit of the landlord covenants”. Section 6 provides the corollary that landlords assigning the reversion of premises releases the landlord from the covenants of the tenancy and terminates their entitlement to the benefit of the tenant covenants.
[60] What, then, is the position in New Zealand?
[61] The learned authors of Hinde Campbell and Twist, “Principles of Real Property Law”[21]say that whether extensions or variations agreed between landlord and assignee bind the original tenant or any guarantor:
[21] Hinde Campbell and Twist, Principles of Real Property Law (2007) pp 681-682 para 11.118.
... depends upon whether the transaction so change the obligations of the parties that the extension or variation takes effect as a surrender and re-grant, or otherwise operates to extinguish the liability of one or more of the original parties to the lease.
discussing and relying on Friends’ Provident.
[62] The position was discussed – albeit in what the plaintiffs argue is a possibly obiter dicta passage – by Blanchard J in Gibbons Holdings.[22]His judgment said the interpretation of the contractual documents with which the case was primarily concerned “requires an understanding of the architecture of the complicated rules which govern the holding and assignment of leasehold interests in land”. The judgment’s “sketch” of those rules began - relying on City of London Corporation:[23]
[10] If A leases premises to B, the relationship between them is one of both privity of estate (B holds that estate from A) and privity of contract (the lease agreement). If B assigns the lease to C, the leasehold estate passes to C who thereafter holds it from A. There is now privity of estate between A and C and consequently there is no longer privity of estate between A and B. But B remains contractually liable to A for the performance of the lessee’s covenants during the remainder of the term of the lease. C’s position vis-à- vis A is different. In the absence of any contract whereby C covenants with A to observe the lessee’s covenants under the lease, there is no privity of contract between them. But, because privity of estate exists between A and C, there is an obligation on C, while remaining as current lessee, to observe all of the covenants of the lessee which touch and concern the land. The most burdensome of these are normally the obligations to pay the rent and to keep the property in repair. Unless C has entered into a direct contract with A, once C further assigns the lease to D and thus ceases to be the lessee of the premises, C, unlike B, has no liability to A for future breaches of the lessee’s obligations.
[22] Gibbons Holdings Ltd v Wholesale Distributors Ltd at 283-284, para [10]; City of London
Corporation v Fell [1993] QB 589 (CA).
[23] City of London at 283-284.
[63] The judgment then observed:[24]
[24] At 284-285, paras [12]–[15].
[12] Two matters were not entirely clear until quite recently. The first concerned B’s liability to A if an assignee from B (either C or D in the previous example) were without reference to B to agree with A on a variation of the terms of the lease which placed an additional burden on the lessee. Some English cases contained suggestions that B might be liable for
the increase in the lessee’s burden despite never having agreed to it.9 In Friends’ Provident Life Office v British Railways Board10 the English Court of Appeal put this notion to rest. If what is done amounts to more than a variation and so has to be regarded as a surrender of the lease and a new grant to the current lessee, then B is released from all obligation to A. B is not liable for performance of an assignee under any lease other than the one B signed. But the Court identified only two situations where this surrender and regrant would occur, namely where the term of the lease was extended beyond the original expiry date and where the boundaries of the premises were extended and more land brought within the lease. In other than these exceptional cases, a variation of the lease covenants between, say, A and D does not altogether release B (or an intermediate assignee, C, who has covenanted with the lessor to observe them), but the variation cannot throw upon B or C any greater burden. So in Friends’ Provident where there was no rent review provision but an assignee had, in exchange for certain concessions by the lessor, reached agreement with the lessor for an increase in the rent from £12,000 per annum to £35,000 per annum for the rest of the term, the original lessee remained liable for the £12,000 per annum but was not liable for the increase of £23,000 per annum. On the other hand, if the rent had been reduced by variation to, say, £6000 per annum, that was all the original lessee would have henceforth been liable for in the event of default by the current lessee.
[13] The position is different if the lease provides for a review of rent. Where an increased rent is fixed in accordance with a review provision there is no variation of the lease covenants. The original lessee is therefore liable as it would have been if it were still the lessee and had itself faced the rent review provided for in the lease.
[14] The decision of the New Zealand Court of Appeal in Sina Holdings Ltd v Westpac Banking Corporation11 resolved the second doubtful matter. It is entirely consistent with the law as described in Friends’ Provident. The Court held that where an assignee exercises a right of renewal provided for in the lease, the original lessee (or an intermediate assignee who has covenanted with the lessor) is not liable for the payment of rent or the performance of covenants under the renewed lease. This is because the
renewal of a lease, like the two exceptional circumstances described in
Friends’ Provident, constitutes a new grant.
[15] These basic rules are of course subject to the terms and conditions of a particular lease. Those terms and conditions could, for example, provide that after an assignment the original lessee is in fact to be liable for defaults under a renewed lease if the assignee chooses to exercise the right of renewal.
[64] Though argued as obiter, those passages in this Court’s view correctly summarise the position in England (prior to the passing of the Covenants Act) and also correctly represent the position in Australia,[25] Canada it seems, and New Zealand.
[25] See, for example, Butt “Land Law” (5th ed, 2006, p 406-407 paras 15-43).
[65] The position in Britain reflected in Elements of Land Law had its echoes in New Zealand, particularly in the numerous bankruptcies and liquidations of lessees and guarantors that followed the 1987 sharemarket crash. When tenants in that or any period of economic downturn are unable to pay rent, landlords not infrequently look for an “attractively solvent” earlier tenant (and its guarantors) notwithstanding they may have long quit the premises.
[66] There were many cases in the early 1990s where such tenants and guarantors found themselves unhappily facing judgment for unpaid rent for premises they had long left, and the lists of those liable according to the doctrine of privity of contract was sometimes lengthy. Henry B Norcross (Holdings) Limited v Rankin,[26] is one example of a number which could be listed. That decision reviewed the cases, both ancient and modern, where that was the result. As Blanchard J observed in Gibbons
Holdings, those liable by way of privity of contract found themselves liable for significant sums, particularly in leases containing rent review clauses (especially if
they also contained ratchet clauses) which the parties then involved in the premises utilised.
[26] Henry B Norcross (Holdings) Limited v Rankin (1992) 2 NZConvC 191,217, 191,225 (noted in Principles of Real Property Law para 11.118 p 683 fn[5]).
[67] One of the consequences of the historical and other issues discussed in Norcross was that lessees and former lessees and guarantors sought any escape available at law from their liabilities but, provided the claims against them came within the boundaries – even extended boundaries resulting from rent reviews – of the leases and assignments they had earlier executed, they remained liable, subject, of course, to the terms of the documents.
[68] But their liability remained confined to liability incurred within those boundaries or extended boundaries: they could not be made liable beyond those limits, again subject to the documents.
[69] For completeness, it may be helpful to refer to two other cases, one of which is Sina Holdings v Westpac Banking Corporation[27]- discussed by Blanchard J in Gibbons Wholesalers – and the other W E Wagener, discussed by the Court of Appeal in Sina Holdings.
[27] Sina Holdings v Westpac Banking Corporation [1996] 1 NZLR 1.
[70] In Wagener, a 15 year lease executed in 1965 (from 1 April 1964) was extended in 1971 to a term of 20 years expiring in 1984 with the lessee having three five-yearly rights of renewal. The lessee, Photo Engravers, then in liquidation and receivership, wished to assign the lease to a third party but the lessor refused consent, the trial Judge found arbitrarily. He held the requirement that Photo Engravers entered into a covenant with the lessor to be responsible for payment of the rent in compliance of the conditions of “this lease” extended to “this lease with its potential for renewal”. McMullin J summarised the issue in the following
passage: [28]
[28] At 420.
The question is whether the lessor is entitled on assignment to the direct covenant, provided for in the last part of the clause, from the lessee, Photo
Engravers, and the assignee ... to be responsible for payment of the rent and the observance of the conditions of the lease. The lessor has insisted that the covenant be given in respect of the term of the lease now expired and any further term for which it is renewed. The lessee is willing to give a covenant in respect of the first term, but not for any extended period.
[71] The Court of Appeal was unanimous in dismissing the lessor’s appeal. Cooke J (as he then was) held:[29]
[29] At 416-417.
The expression used by Casey J “this lease with its potential for renewal” appears to be another way of saying “this lease and any renewal thereof”. With great respect to the Judge, there seems to me to be insufficient reason for departing from the actual words used in cl 2(3). That is to say, “the lease” means simply that. It refers to whatever lease is current for the time being. The Judge saw some support for his suggested definition in the provisions as to expiry in the latter part of cl 4(g); but ... the words “the lease” there can be understood likewise to refer to whatever lease (original or by renewal) is current.
and Somers J held:[30]
The privity of contract between original lessor and lessee terminates with the contract. Thus where the assignee of the lease is granted a new term the original lessee in the absence of agreement to the contrary will not be liable for the due performance of the terms and conditions of that new lease. If the new term is merely a renewal or extension of the old term it may be the case that upon the proper construction of the lease liability extends to the period of renewal.
[30] At 425.
[72] In Sina a six year lease ended in 1983 but contained two rights of renewal each for six years. The first was exercised with a deed of renewal extending the lease to 1989 and during that term it was assigned to a third party. The third party exercised the second right of renewal and entered into a deed of renewal to lease the
premises to 1995. However, it fell into breach in 1992 and a dispute arose as to the liability of the third party’s assignor for rent accruing during the second renewal. The Court of Appeal decided that liability of Westpac, the original lessee as assignor on its covenants in the original lease and any deeds of renewal, depended on the true construction of the respective rights and obligations arising out of the documents.
The Court of Appeal held:[31]
We are of the opinion that the renewed lease granted pursuant to cl 12 of the landlord's covenants clearly was the grant of a new lease which followed expiry of the original lease and was on terms expressed in the deed of renewal. It cannot properly be described as simply an extension of the original term. The new (or as it is termed renewed) lease was for a term of six years which expired on 1 June 1989. The tenant's contractual obligations did not extend beyond that date, at which time there ceased to be privity of contract as between landlord and tenant in respect of future occupation of those premises. The wording of the subsequent renewal effected by [the Third Party] to which Westpac was not a party is irrelevant, and however that was put into place cannot affect the rights and obligations of the parties to these proceedings as between themselves, which are governed by the original lease.
[31] Ibid, at 5.
[73] From all of that it follows that, in this case, the lease containing rent reviews but no renewals, the potential liability of the Touchtwo defendants throughout the term was for rent increases during the term but that ongoing liability would have ended with the lease on 31 December 2009.
[74] Though no party to the 2006 negotiations appears to have turned their minds to it at the time, when the parties agreed in the period up to 30 June 2006 and on that day to extend the term of the 7 December 1999 lease to 31 May 2016, they were unable to lease 144 Parnell Road to the BFS defendants for the period 30 June 2006–
31 December 2009 as it was already leased. However much it might be regarded as a legal fiction, the documents they signed on 30 June 2006 therefore effected a
surrender of the balance of the 7 December 1999 lease’s term by operation of law and a re-grant of a new lease to BFS from that date until 31 May 2016.
[75] True, as the authorities show, such a legal fiction can be displaced by clear evidence of the intention of the parties expressed in the documents, but the 30 June
2006 Deeds were conventional in form, there is no evidence the negotiating parties ever realised the risk of fictional surrender and re-grant implicit in their negotiations and accordingly – at least in a summary judgment application – it could not be concluded that the parties all intended to avoid the fictional surrender and re-grant outcome. They were replacing one lease, still current, with another for the balance of the existing term plus a substantial period thereafter.
[76] It is also not without importance that the 30 June 2006 Variation/Extension materially altered the 7 December 1999 lease by deleting the lessor’s power of early termination and limiting the lessee’s right to alter the premises. It also included four additional rent reviews for some of which, on the Adams Trust’s arguments – though not claimed in this case – the Touchtwo defendants may have been liable. Though phrased as a Variation of the 7 December 1999 lease, the 30 June 2006 Deed should therefore be seen as a renewal or grant of a new lease on materially different terms from the old. The transaction should therefore properly be seen as a surrender of the
7 December 1999 lease and a re-grant of a new lease to BFS.
[77] In all those circumstances, the conclusion must be that the Adams Trust has failed to demonstrate to the required standard that a fictional surrender and re-grant outcome did not occur as the result of the 2006 negotiations, nor as the result of the
30 June 2006 documents substantially extending BFS’s occupancy of the premises from December 2009 to 31 May 2016. The doctrine under discussion therefore applied and the 30 June 2006 Deeds amounted in law to a surrender of the balance of the term of the 7 December 1999 lease and a re-grant of a new lease on materially different terms and until 31 May 2016.
[78] The plaintiffs’ summary judgment application accordingly fails. [79] That result is not to overlook two questions.
[80] The first is that counsel for the plaintiffs argued that New Zealand should not follow British law as outlined in the authorities discussed, especially in Gibbons Holdings. The difficulty with that submission is that Mr Blanchard was unable to suggest what precepts of law should replace the British law and, in any case, the longstanding common law developed what is admittedly a fiction to deal with what lessors, lessees and guarantors actually agreed in a commercial context and, as discussed in the New Zealand cases, that seems entirely apt. Any divergence from English law adopted in New Zealand would most likely tend to reflect the terms of the Covenants Act. That leads to the following observation.
[81] The second point is to note that in enacting the 2007 Act, the New Zealand Parliament apparently decided not to follow the British approach to this question as appears in the Covenants Act. When our Parliament did not follow the British Parliament’s lead, it would not be for this Court so to do. That is particularly the case having regard to Part 4 Sub-Part 5 of the 2007 Act.
[82] Pursuant to s 206 of the 2007 Act, Part 4, that relating to leases of land, applies to every lease or sublease of land made before or after 1 January 2008 and subpart 5 specifically sets out the effect of the transfer of assignment of leases before or after that date. Section 240 makes the transferee or assignee of a lease the lessee and s 241 expressly provides:
241 Transferor or assignor remains liable
(1) If there has been a transfer or assignment of a lease, the transferor or assignor remains liable to the lessor for –
(a) the payment of the rent payable under the lease; and
(b)the observance and performance of all covenants of the lessee.
(2)However, if, without the consent of the transferor or assignor, the transferee or assignee agrees with the lessor to vary the lease, the variation does not increase the liability of the transferor or assignor beyond that provided for by the lease at the time of the transfer or assignment.
(3)Subsection (1) does not apply to a covenant that, immediately before the transfer or assignment, was not binding on the lessee, or on the lessor, as the case requires.
(4) Subsection (2) does not apply if the lease provides for the variation.
[83] That section appears largely to reflect the common law position as set out in Gibbons Holdings. Here, s 241(2) makes clear that the Touchtwo defendants, not having consented by executing the 30 June 2006 Deed of Assignment, could not have their liability increased beyond that in the lease. The section does not, however, impinge on the fictional surrender and re-grant occasioned by the extension of term.
(2) Contractual Mistakes Act 1977
[84] Consideration of all the other bases on which the plaintiffs claim to be entitled to summary judgment is largely dependent on what took place and what was agreed during the negotiations leading up to the 30 June 2006 Deeds. The remaining issues can be dealt with briefly.
[85] It is sufficient to dispose of most of the remaining issues, at least in a summary judgment context, to observe that there are factual differences of recollection between the participants in the negotiations who have sworn affidavits in this proceeding. Their varying views of what occurred are sufficient both to debar the entry of summary judgment and to conclude that the claims by the Adams Trust against the BFS defendants are not incapable of success.
[86] There are, remarkably in the circumstances and given the professions of the participants, only a few documents which bear on the issues. It is sufficient to say that these were extended negotiations between persons well versed in business each seeking to advantage their own position or that of their clients and, although detailed as to the terms under discussion and, in particular, the terms under which BFS would take a lease of 144 Parnell Road, the documents and affidavits contain virtually no suggestion that those negotiating ever turned their minds to what might happen as a matter of law should they agree to proceed in the terms ultimately agreed. To the
extent any party turned their minds to the future at the time of the negotiations, their motivating forces appear to have been the desire on the part of Touchtwo and its guarantors to quit the premises on the most advantageous terms negotiable and the desire on the part of BFS and its guarantors to take the premises only if their terms were met. The Adams Trust and its representatives were similarly intent on negotiating the most favourable terms on which they would agree to Touchtwo vacating the premises and BFS taking them over for an extended period.
[87] The parties may have been so intent on negotiating the best deal possible that nobody, on the evidence to date, seems to have given consideration to the legal consequences which would follow automatically on conclusion of their negotiations in the way they eventuated.
[88] Therefore, again in a summary judgment context, the fictional surrender and re-grant consequence does not appear to have been in anyone’s mind when they were discussing Touchtwo vacating the premises and BFS taking them over for the extended term to 31 May 2016.
[89] Therefore, as the authorities discussed in the passage quoted from “Law of Contract in New Zealand” say, where the parties have not turned their mind to an issue, they cannot be said to have been mistaken about it. Having regard to that finding, it is unnecessary to discuss the remaining submissions concerning the Contractual Mistakes Act 1977.
[90] The application for summary judgment by the plaintiffs further fails to the extent that it is based on the Contractual Mistakes Act 1977.
(3) Express or Implied Agreements/Estoppel by Convention
[91] The Adams Trust may ultimately turn out to be on firmer legal ground as far as estoppel by convention and express or implied agreement are concerned but the evidence to date is insufficient for the Court to reach a conclusion that either summary judgment application should be granted.
[92] The negotiating parties hammered out an agreement having regard to their respective intentions as earlier outlined, not with recognition of the legal consequences which would inevitably follow the nature of that agreement, but without turning their minds to it. What they did was arrive at a contract whereby for payment to the Adams Trust of $25,000 by each of Touchtwo and BFS, Touchtwo would be entitled to vacate the premises and BFS take them over until 31 May 2016. While the legal consequences were inexorable, the freeing of Touchtwo by the nature of the agreements reached was a matter of happenstance unknown to any of the negotiating parties at the time. Indeed that fortunate consequence for Touchtwo was not only unknown to it at the time but remained unknown for about three years thereafter - though cleaved to by the Touchtwo defendants ever since.
[93] At a substantive hearing the evidence may disclose an express or implied agreement specifically for the Touchtwo defendants to remain liable to the Adams Trust until 31 December 2009 but, for the present, the evidence could not be said to show express agreement and could not be said to satisfy the requirements for the
implication of a term as set out in Devonport Borough Council v Robbins.[32]
[32] Devonport Borough Council v Robbins [1979] 1 NZLR 1 at 23.
[94] Similarly, evidence at trial may demonstrate that the negotiating parties proceeded on an underlying assumption of fact or law which proved to be incorrect, but the evidence to date does not suggest other than that they never turned their minds to the legal consequences of the arrangement they were negotiating, or that the assumption affected the legal discussion in which they were engaged.
[95] The passage from “Equity and Trusts in New Zealand” earlier cited does, as Mr Blanchard submitted, seem apt at this stage to describe the Touchtwo defendants’ stance, but more evidence needs to be adduced before any firm conclusion could be reached.
[96] The evidence to date does not therefore support the entry of summary judgment for the plaintiffs against the Touchtwo defendants on the basis of express or implied agreement or estoppel by convention but, equally, extra evidence which
may emerge at trial shows neither of those approaches is necessarily incapable of success and accordingly the Touchtwo defendants’ summary judgment application similarly cannot succeed.
(5) Unreasonable Refusal of Consent to Assignment/Mitigation of Loss
[97] These aspects, too, may be briefly dealt with.
[98] Comparison between the terms being discussed between the Adams Trust and the BFS defendants at the critical period and the deal actually arrived at is certainly striking – particularly the rent - but, without expert evidence as to the state of the market for premises such as 144 Parnell Road during this period, it would be unsafe to reach any conclusion as to whether the Adams Trust were failing to mitigate their loss by not being more accommodating to BFS’s terms towards the end of 2008.
[99] Similarly, the Adams Trust was under no duty to mitigate their loss until after they terminated the lease. That only occurred on between May and July 2009. So it is only their actions after that period which can be the subject of challenge.
[100] Thirdly, as Mr Blanchard said, this is an area of the case where the onus of proof lies on the Touchtwo defendants, and, beyond commenting on the situation and setting out their views, they have adduced no expert evidence to support their conclusions. This, too, is a matter which will need to be ventilated at trial.
Quantum of Claim
[101] The Touchtwo defendants initially complained in their affidavits at what they suggested was a lack of particularisation of the Adams Trust’s claim against them. That may have been remedied by Mr Adams’ late affidavit, but counsel did not address that.
[102] Similarly, the parties will need to consider their positions in the light of this Judgment and it may be that outstanding issues of quantum will resolve before the substantive trial.
[103] Finally, it needs to be noted that there may well have been rent owing at the date of cancellation of 7 December 1999 lease, but counsel did not advance the summary judgment applications on that basis and any such amount did not clearly appear from the evidence.
Result
[104] The result therefore is that the plaintiffs’ application for summary judgment against the first-third defendants, and the first-third defendants’ application for summary judgment against the plaintiffs are both dismissed for the reasons set out in this Judgment.
[105] As both parties contesting this litigation to date have been both successful and unsuccessful as a result of this hearing, the Court is minded to allow costs to lie where they fall. If counsel take a different view, memoranda may be filed.
[106] The case is to be listed for mention in the Duty Judge’s list on 9 June 2010 to make appropriate orders for the future conduct of the case. The remaining areas of disputed fact of law seem relatively confined and the parties (including the BFS defendants) may care to give consideration to entering the claim on the “fast track” list in the Auckland Registry for earlier resolution than might otherwise be the case.
.................................................................
HUGH WILLIAMS J.
Solicitors:
Macky Roberton Limited, PO Box 37622, Parnell, Auckland 1151, for plaintiffs
Kensington Swan, Private Bag 92101 Victoria Street West, Auckland 1142, for 1st-3rd Defendants
Copy for:
Gregory Blanchard, P O Box 1235 Shortland Street, Auckland 1140.
Case Officer: In[email protected]
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