Annie Enterprises Limited v Cho
[2018] NZHC 2962
•16 November 2018
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2018-404-001378
[2018] NZHC 2962
UNDER the Property Law Act 2007 IN THE MATTER
of an application under s 253 of the Property Law Act 2007 for relief against cancellation of a lease
BETWEEN
ANNIE ENTERPRISES LIMITED
PlaintiffAND
HYUN SOOK CHO
Defendant
Hearing: 12 November 2018 Counsel:
PL Rice for Plaintiff
JB Murray for Defendant
Judgment:
16 November 2018
JUDGMENT OF DOWNS J
This judgment was delivered by me on Friday, 16 November 2018 at 3 pm pursuant to r 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Solicitors/Counsel:
Shehan Ebenezer, Auckland.Vallant Hooker & Partners, Auckland. PL Rice, Auckland.
ANNIE ENTERPRISES LTD v CHO [2018] NZHC 2962 [16 November 2018]
When is a motel not a motel?
[1] Ms Hyun Cho owns 24 Walmsley Road, Mangere, on which she built a motel. Annie Enterprises Ltd1 leases the property. The lease requires the property be used as a motel (and bed and breakfast business). On 8 June 2018, Ms Cho gave Annie Enterprises notice of her intention to cancel the lease. The notice alleges Annie Enterprises has used the property other than as required, by devoting its use to Work and Income New Zealand2 for emergency accommodation for its clients. Annie Enterprises accepts it allows WINZ to use the property this way, but says the arrangement does not constitute a change of use as a motel. All of which raises the headlined issue. Others arise too, but can be swiftly addressed.
Some observations about the application and hearing
[2] The case lies under s 253 of the Property Law Act 2007. This section permits the holder of a lease to apply for relief against its proposed cancellation. Annie Enterprises applies for relief—the quashing of Ms Cho’s notice—on the basis the property’s use has not changed. It is common ground Ms Cho must prove it has.
[3] Substantial affidavits were filed. Core facts are not in dispute, but other things are. For example, Annie Enterprises contends this case is really about Ms Cho’s desire to increase the rent now the property is profitable. Hence her insistence for substantial compensation for the alleged change of use. Ms Cho contends Mr Rajesh Sachdeva, the director of Annie Enterprises, has been less than candid with her about the property’s use, and something other than “an excellent tenant”.
[4] All witnesses were present at the hearing—as observers. Neither party wished to cross-examine despite my encouragement and signalled concern fact-finding may be imperilled. Which is exactly what happened. Absent cross-examination—and the protection for a witness in having the case put to them3—I am unable to divine the often-elusive question of motive or determine other factual disputes. And, I am unprepared to do so. Annie Enterprises alleges Ms Cho is using the notice of
1 Annie Enterprises.
2 WINZ.
3 Evidence Act 2006, s 92.
cancellation as a blunt bargaining tool for a share of the pie; she that Mr Sachdeva is unreliable. New Zealand is a small place. Reputations matter. In any event, the only material issue is that described.
Background
[5] 24 Walmsley Road comprises a six-unit motel block and separate house. The house has two guest rooms. Ms Cho bought the property in 2002. She later built the motel units.
[6] Between 2007 and 2011, Ms Cho leased the property to a company that operated a motel. But, it encountered financial difficulty in 2011 and “fell behind in its rent”. Ms Cho acquired the motel business from it, which she operated until early 2014. She then sold the business to Walmsley Lodge Motel Ltd, who in 2015 sold it to Annie Enterprises. With Ms Cho’s agreement, Walmsley Lodge Motel Ltd assigned the lease to Annie Enterprises then too.
[7]The lease is a long one. It does not expire until 2044.
[8] Mr Sachdeva said Annie Enterprises struggled to make a profit. But in 2016, its fortunes changed. The Ministry of Social Development4 began referring clients of WINZ who needed emergency accommodation. The referrals were initially on a casual basis. On 2 August 2017, this changed. Annie Enterprises agreed with MSD— in writing—the motel units were available exclusively to WINZ, again, for those needing emergency accommodation. The agreement endures. MSD may terminate it with 30 days’ (written) notice.5
[9] In March 2017, a neighbour complained to Ms Cho about alleged activity at the property, including Police visits; an increase in both noise and rubbish; and a single instance of graffiti. On 4 April 2017, Ms Cho visited the property. Mr Sachdeva told her the company was accommodating WINZ clients. The next day, Ms Cho, sent
4 Or MSD.
5 Transitional housing is now the responsibility of the Ministry of Housing and Urban Development. For ease of reference, I continue to refer to MSD.
Mr Sachdeva a letter saying this breached the lease. A long chain of correspondence followed. It is unnecessary to rehearse it, save for one aspect.
[10] Ms Cho required Mr Sachdeva to provide written confirmation Auckland Council considered this usage accorded with the property’s resource consents. On 22 February 2018, the Council did so. Its letter was produced in evidence:
The Resource Consents were granted under the Auckland Council District Plan (Manukau section) in 2003 and 2011 respectively. The motel was approved as ‘Travellers Accommodation’ and as such must abide by the rule and definition as well as the conditions of consent on an ongoing basis.
WINZ clients are staying at the premises on a ‘transient basis’ as they are staying for a short period of time and then moving on, they are not permanently living at the premises and WINZ is paying a ‘daily tariff’ for their stay.
The use of the units by WINZ clients does not involve the use of the unit as a residential dwelling in the sense that it becomes the primary dwelling of the occupants on a permanent basis. The facility is already operating as a motel and if WINZ clients are not using the units, then these would be used by other visitors or travellers. The proposal does not involve a tenancy agreement or a boarding house arrangement.
The lease
[11] The lease requires Annie Enterprises to use the property as a “motel and bed and breakfast business”.6 Annie Enterprises may not change this “without the prior written consent of [Ms Cho]”.7 Consent is at Ms Cho’s “sole discretion”,8 but she may not “unreasonably” withhold it.9 Among other things, the change of use must be reasonably suitable for the premises, and comply with the Resource Management Act 1991.10
[12] Other aspects of the lease confirm the importance of the property’s use as a motel. For example, the rent review mechanism requires identification of a market rent based on the proposition “the only use of the premises is as a motel and bed and
6 First Schedule, item 13. Clause 16.4(a) refers to use as “a motel (which term shall include a bed and breakfast establishment)”.
7 Clause 16.1.
8 Clause 16.1.
9 Clause 47.1(v).
10 Clause 16.1.
breakfast”.11 And, Annie Enterprises must “keep and conduct the motel in an orderly, quiet and civil manner so … [its] custom and reputation of the motel may be in no way prejudiced or diminished”.12
[13] But, the lease does not define what a motel is. Or, what constitutes a bed and breakfast business.
What is a motel?
[14]The parties cited a host of definitions:
(a)A roadside hotel providing accommodation for motorists and parking for their vehicles …. a portmanteau word blending motor and hotel.13
(b)An establishment which provides lodging and parking and in which the rooms are usually accessible from an outdoor parking area.14
(c)A lodging place, especially designed for motorists, characterised by separate outside entrances to individual sleeping accommodation, and close-by parking.15
(d)A hotel providing travellers with lodging and free parking facilities, typically a roadside hotel having rooms adjacent to an outside parking area, or an urban hotel offering parking within the building.16
[15] These are consistent with the definition of travellers accommodation in the Manukau District Plan, which applied when Ms Cho sought resource consents, and consistent with the definition of visitor accommodation in the Auckland Unitary Plan. which now applies. Each reads:
11 Additional cl 2.2(4).
12 Additional cl 16.4(b).
13 Concise Oxford English Dictionary (edition not provided, Oxford University Press, Oxford).
14 Merriam-Webster Dictionary (online ed, accessed November 2018).
15 Webster’s New International Encyclopedic Dictionary (edition not provided).
16 Dictionary.com (online ed, accessed November 2018).
Travellers Accommodation
means premises used on a transient basis for accommodation and includes motels, holiday flats, motor tourist lodge and a tourist house licensed in accordance with the Sale of Liquor Act 1989, all rental residential accommodation offered at a daily tariff, conference and retail facilities which are ancillary to and form an integral part of the travellers accommodation but does not include a hotel or camping ground, provided that travellers’ accommodation in any residential zone shall not incorporate conference or retail facilities or more than 60 bedrooms.
Visitor accommodation
Facility used for accommodating tourists and short-stay visitors away from their normal place of residence.
Includes:
· backpacker lodges;
· motels and hotels;
· services or amenities such as restaurants, bars, gyms and ancillary retail provided on-site for the exclusive use of people staying in the accommodation and their guests;
· serviced rental accommodation for visitors offered at a daily tariff or with a pricing structure consistent with short stay accommodation; and
· timeshare accommodation.
Excludes:
· boarding houses and hostels;
· letting of dwellings, including for holiday purposes; and
· accommodation on a marae.
[16] All this and experience suggests a motel provides, in return for payment, typically brief, temporary accommodation, with associated parking.
[17]The parties also cited definitions of a bed and breakfast. These include:
(a)Sleeping accommodation for a night ... provided in guest houses and hotels.17
(b)Accommodation offered by an inn, hotel or especially a private home consisting of a room for the night and breakfast the next morning for one inclusive price.18
17 Oxford Living Dictionaries (online ed, Oxford University Press, accessed November 2018).
18 Dictionary.com (online ed, accessed November 2018).
(c)In a hotel, boarding house etc, overnight accommodation and breakfast.19
[18] These—and again, experience—imply two material features of a bed and breakfast lie in its name: accommodation for one or more nights, with provision of breakfast each morning. To which must be added a third: in return for payment.
[19] Neither definition is intended to be exhaustive. Rather, each is offered as a typical, workable understanding of a thing (and associated service) with which many are familiar, and intuitively understand.
Ms Cho’s argument in brief
[20]Ms Cho’s argument has four aspects, some interrelated.
[21] First, use is now more akin to a boarding house, a different thing. In Karmarkr v Pandem,20 van Bohemen J explored boarding houses under the Residential Tenancies Act 1986. Important to these are facilities for communal use by tenants. Ms Cho argues the laundry and kitchen are for general communal use, and length of stay by WINZ clients more consistent with the operation of a boarding house.
[22] Second, pattern of occupation has changed, and with it, usage. WINZ clients tend to stay for weeks, not days. And, are not motorists, travellers or tourists. Property wear and tear is more pronounced, a critical concern. Noise has increased too. All this harms the motel’s reputation as a motel.
[23] Third, use has changed because MSD clients are living at the property until relocated, unlike tourists, travellers or other guests, who stay for different reasons— and stay differently.
[24] Fourth, Annie Enterprises’ arrangement with MSD requires the company to provide MSD with exclusive access to all units and guest rooms, the position since August 2017. Consequently, members of the public cannot book the motel until the
19 Collins English Dictionary (online ed, accessed November 2018).
20 Karmarkr v Pandem [2018] NZHC 693.
arrangement ends. The motel no longer promotes itself as a motel, for, it is captive to MSD. Termination of the arrangement (with only 30 days’ notice) may lead Annie Enterprises with no viable business. And, no means to pay Ms Cho rent.
Analysis
[25] The first and second aspects can be dealt with quickly, and by reference to something prosaic but fundamental: the onus of proof. There is no evidence the kitchen and laundry are used as a communal facility. While WINZ records do not provide the precise length of its clients’ stays, most have been guests at the property between a matter of days and 12 weeks. There is no evidence this pattern of use is inconsistent with hospitality industry standards. There is no independent evidence or expert evidence wear and tear is now different. Ms Cho says it is in her (first) affidavit, but in general terms only.
[26] The only evidence of noise or other undesirable behaviour is the single, albeit omnibus complaint by the neighbour mentioned at [9]. The neighbour did not swear an affidavit. It follows no attempt has been made to observe admissibility requirements for hearsay evidence.21 In any event, injury to business reputation in consequence of undesirable behaviour cannot be established because Ms Cho adduced no evidence about the motel’s reputation.
[27] In summary in relation to these aspects, Ms Cho’s concerns are unsupported by evidence or adequate admissible evidence to prove change of use.
[28] The third aspect adds nothing. Guests may stay at a motel for many reasons. Often, guests will be on business or tourists. Others may need a place to stay because they are renovating, between homes, or confronted by challenging personal circumstances. Why people stay at a motel does not change it into something else, unless perhaps a sufficient number of guests behave in a manner incompatible with the maintenance of a motel over a sufficient period, thereby compromising its operation. So, this aspect is merely a reformulation of the second, an argument already rejected on the evidence.
21 Evidence Act, ss 18–22.
[29] The fourth aspect correctly reflects the state of evidence, but is incomplete. WINZ clients have no greater licence than would any other guest at the property. And, MSD pays for the rooms on a daily tariff, in the same way as would any other guest. The only difference is that Annie Enterprises is obliged to keep all rooms free for MSD, so MSD pays for all irrespective of actual occupation. On average, occupancy is 80 percent. This means Annie Enterprises receives income for all rooms even though 20 percent are, on average, empty.
[30] I am unpersuaded this exclusivity constitutes a change of use. Some motels seek to attract tour groups, employees of corporates or those working for other organisations, governmental or otherwise, as the primary source of their business. Consequently, these motels may sometimes be fully booked, and hence unable to accommodate individual guests. None of the cited definitions of motel place any emphasis on the ability of individuals to book a room whenever they want one, irrespective of availability. And, nothing about existing arrangements is inconsistent with these definitions, or my definition offered at [16].
[31] Ms Cho stressed MSD’s arrangement with Annie Enterprises has existed for more than a year, and betrays no hint of ending. True, but it could do at any time— and on no more than 30 days’ notice. Again, WINZ clients gain no greater licence than any other guest would have, and there is no evidence their pattern of usage is materially different from that of any other motel guest. All this suggests exclusivity of access constitutes a different business model for a motel, not a change of use from one. Put another way, the motel is still used as a motel, but in a different manner.
[32] Other factors support this conclusion. Conditions of property use of the type in question often exist to protect the owner’s reversionary interest in the property, and might conceivably exist to protect goodwill of an ongoing and associated business. The latter does not arise. Ms Cho sold her motel business to another company, who sold it to Annie Enterprises. Ms Cho has no interest in the goodwill of Annie Enterprises’ business. This leaves Ms Cho’s reversionary interest in the property. But as observed earlier, the lease is long. It does not end until 2044. Ms Cho’s reversionary interest is thus remote.
[33] Most importantly, nothing Annie Enterprises is doing under its arrangement with MSD adversely effects Ms Cho, or for that matter, anyone else. WINZ clients come and go, seemingly as other guests would, and Annie Enterprises continues to pay its rent. In other words, the motel continues to operate as one, albeit with some idiosyncratic features. That it does not need to utilise Trip Advisor or advertise is neither here nor there. In short, it does not need to. And, if Ms Cho’s real concern is that rent needs to be reviewed, the lease provides a mechanism for that.
[34] All this is equally applicable to use of the property as a bed and breakfast business. No separate analysis is required.
Other matters
[35] Annie Enterprises invited me to find Ms Cho unreasonably withheld her consent—if I concluded business use had changed. I decline to do so. It is common ground Annie Enterprises did not expressly seek Ms Cho’s permission to change the property’s use, presumably because the company considered, correctly, this had not changed. It is therefore undesirable to decide this issue. And, unnecessary.
[36] Ms Cho’s cancellation notice also alleges Annie Enterprises has failed to maintain the premises. At the hearing, Mr Murray for Ms Cho responsibly accepted “no current maintenance issues” exist. Mr Murray also accepted, again responsibly, all Annie Enterprises’ unauthorised alterations to the property have been remedied.22
Conclusion and order
[37] Ms Cho’s notice of 8 June 2018 discloses no basis for her to cancel the lease, and is quashed.
22 This point is not identified in the notice. Nor a complaint Annie Enterprises has failed to properly insure the premises. On behalf of Annie Enterprises, Mr Rice accepted it must pay such insurance under the lease. I agree.
Costs
[38] I can think of no reason why Annie Enterprises should not have 2B costs. If the parties consider otherwise, they may submit memoranda of not more than five pages: Annie Enterprises by 30 November 2018; and Ms Cho by 7 December 2018.
……………………………..
Downs J
2