Brian Green Properties (1971) Limited v Bindon Holdings Limited
[2016] NZHC 1993
•25 August 2016
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
CIV-2015-412-000121 [2016] NZHC 1993
IN THE MATTER OF
AND
the Property Law Act 2007 IN THE MATTER OF
an application by BRIAN GREEN PROPERTIES (1971) LIMITED for relief from cancellation of a Lease Instrument dated 27 April 2009
BETWEEN
BRIAN GREEN PROPERTIES (1971) LIMITED
Applicant
AND
BINDON HOLDINGS LIMITED Respondent
CIV-2016-409-000048
IN THE MATTER OF
AND
the Property Law Act 2007
IN THE MATTER OF an application by BINDON HOLDINGS LIMITED for an order for vacant possession
BETWEEN BINDON HOLDINGS LIMITED Applicant
ANDBRIAN GREEN PROPERTIES (1971) LIMITED
Respondent
Hearing: 20 July 2016 Appearances:
J W Maassen for Applicant
J M Moran for RespondentJudgment:
25 August 2016
BRIAN GREEN PROPERTIES (1971) LIMITED v BINDON HOLDINGS LIMITED [2016] NZHC 1993 [25
August 2016]
JUDGMENT OF DUNNINGHAM J
Introduction
[1] This is a dispute over the performance of a covenant in a ground lease (or Glasgow lease) between Bindon Holdings Limited (Bindon) as lessor and Brian Green Properties (1971) Limited (BGPL) as lessee. The leased property is located at 112 Anzac Avenue, Dunedin. It is located in an area that is zoned for campus use, although it is adjacent to industrially zoned land, and is near to the new, covered Forsyth Barr stadium in Dunedin. On the property stands a large, rather run-down warehouse (the building).
[2] The dispute between BGPL and Bindon is over whether BGPL has complied with its obligations to keep the improvements on the land in “good and tenantable condition”. Bindon says that BGPL’s failure to comply with notices to undertake repairs warranted cancellation of the ground lease. That prompted an application by BGPL for relief against cancellation of the lease pursuant to s 253 of the Property Law Act 2007 (PLA). In response, Bindon has applied for vacant possession, pursuant to s 250 of the PLA or, in the alternative, for orders which include requiring BGPL to meet the cost of bringing the premises back to the standard required or, alternatively, to demolish the premises.
[3] At issue in the proceedings is:
(a) whether there has been a breach of the covenant to repair given:
(i)BGPL’s position that the lease commenced on 1 October 2008 when the building was in substantially the same condition at that time as it is now; and
(ii) having regard to the terms of s 223 of the PLA;
(b)if there has been a breach, has a loss been suffered such as would warrant cancellation?
(c) if there is a right to cancel, should the Court exercise its discretion to grant relief against cancellation?
The leasing arrangements
[4] To place the issues in context, it is necessary to set out some of the history of the lease arrangements for the property.
[5] The property is subject to a Glasgow lease. A description of such leases was given in Mandic v Cornwall Park Trustboard Inc as follows:1
[25] Long-term ground leases (usually of 14 or 21 years) renewable in perpetuity with rent calculated either by an assessment of fair or market rent (or some similar concept) or, as in this case, as a percentage of a sum established pursuant to stipulated valuation exercises, are referred to as Glasgow leases. They were mainly put in place in the 19th and early 20th centuries. A Glasgow lease is, in economic substance, a bond which is revalorised every 14 or 21 years and secured against the demised land…
[26] Glasgow leases proceed on the basis that:
(a) increases in the value of the land due to extrinsic factors are
for the lessor’s benefit; but
(b) the rent should not be fixed in relation to value due to improvements made by the lessee.
[6] The original lessor of this property was the Otago Harbour Board, and the Court was provided with the copies of the three leases which preceded the current lease and which commenced on 1 October 1945, 1 October 1966 and 1 October 1987 respectively. They all name the Otago Harbour Board as lessor. The last of these leases was signed on 14 March 1988 when the land was leased from the Otago Harbour Board to Smart Group Khyber Pass Properties Limited. This lease was for a term of 21 years from 1 October 1987, and expiring on
30 September 2008.
1 Mandic v Cornwall Park Trust Board Inc [2011] NZSC 135, [2012] 2 NZLR 194 at [27].
[7] In 1990, Smart Group Khyber Pass Properties Limited assigned the lease to Volumex Investment No. Nine Limited (Volumex). Mr Brian Green, the director of BGPL, was also the sole director of Volumex.
[8] Bindon purchased this, and other ground leases in the area, from the then lessor (being Chalmers Properties Limited, a subsidiary of Port Otago), in 2001. Shortly afterwards, Bindon’s consent was sought to the transfer of the lease from Volumex to BGPL. The assignment of the lease to BGPL was registered on
23 August 2001. It was at that point that the parties to these proceedings became the relevant lessor and lessee.
[9] On 26 February 2008, BGPL gave notice of its wish to renew the lease in accordance with cl 9 of the memorandum of lease. That clause provides for a right of renewal of the lease as follows:
9(1) On the expiry by effluxion of time of the term hereby granted the Lessee shall have a right to obtain in accordance with the provisions hereinafter contained a renewal Lease of the land hereby demised at a rent for the First Seven (7) years of the term of the renewal Lease to be determined in accordance with the said provisions for the term of Twenty-One (21) years computed from the expiration of the Lease hereby granted and subject to the same covenants and provisions as this lease including this present provision for the renewal hereof and all provisions ancillary or in relation thereto. The rent for the subsequent periods of seven (7) years of the term of the Lease shall be determined in the manner provided in clause 10 hereof.
A similarly worded clause, providing for a renewed lease of 21 years, appeared in all the previous lease agreements.
[10] The rental payable on the new lease between Bindon and BGPL was not agreed, and was the subject of the rent review process specified in the lease. Those negotiations were not concluded until early 2009, by which time the lease had expired.
[11] A new lease was executed in April 2009. It is material to note that the schedule to the lease instrument records the following:
AND THE LESSEE HEREBY ACCEPTS this Lease of the said land to be held by the Lessee subject to the conditions, restrictions and covenants
above set forth. The Lessor and Lessee certify that this Lease is in renewal of Lease 708963.
AND IT IS REQUESTED that the District Land Registrar shall state in the renewal of this lease that it is in substitution for lease 708963.
[12] The current lease contains the same covenant as all earlier leases requiring the lessee to keep and maintain the improvements to the land in good and tenantable condition and repair. That provision reads as follows:
4.That the lessee will during the said term keep and maintain in good and tenantable condition and repair all buildings, fences, erections and drains now or hereafter erected or laid upon or under the said land.
[13] It is this provision which has led to the current dispute.
The events which lead to these proceedings
The breach notices
[14] Ms Hagaman, the sole director of Bindon, explained that, in mid 2014, Bindon’s Dunedin property manager initiated discussions with Mr Green regarding the poor condition of the building at 112 Anzac Avenue. Mr Green responded in an email dated 14 July 2014 saying:
We are aware that the property is untidy and is, in fact, the worst we own by far and not a property we are proud of and if we were to finalise a redevelopment this aspect would quickly change.
[15] In due course Bindon retained an engineer, Mr Kevin Simcock, of TM Consultants Limited, to provide a report to Bindon on the state of the building. That report was provided in March 2015. It identified that the building suffered from a range of maintenance issues and, while structurally the building was in a reasonable condition, there were major issues with weather tightness. This was primarily because the roof was in poor condition and needed replacing. The report concluded that it would require “a lot of work to return it to a building condition reflective of its age and good maintenance habits”.
[16] Bindon’s evidence is that it decided to take formal breach steps under the
lease to ensure BGPL would not ignore its maintenance obligations. As a result,
two separate notices of breach, both dated 29 April 2015, were issued in respect of the alleged breaches of the repair and maintenance covenant. One of the notices concerned the condition of the roof of the main building and gave BGPL until
15 January 2016 to remove and replace the roof because of its poor condition (the roof repair notice). The other notice dealt with the balance of the maintenance issues identified in the report (the building repair notice). It required those to be rectified by 16 November 2015. The notices both warned that if the repairs were not done in the timeframes specified, Bindon may seek to cancel the lease by applying to the Court for an order for possession of the land, or by re-entry.
[17] The notices were served on BGPL on 5 May 2015. They were also served on BGPL’s mortgagee, the Bank of New Zealand, and its subtenant, Wilson Parking New Zealand Limited.
[18] Ms Hagaman’s evidence is that after the notices were served, Mr Green appeared to focus on exploring whether BGPL could buy Bindon’s freehold interest in the land or whether Bindon was interested in purchasing BGPL’s leasehold interest. It was not until 24 September 2015 that a substantive response was received from BGPL’s solicitors to the breach notices. That response challenged the validity of the breach notices, stating that the repairs were not necessary and labelling many of them as “cosmetic”. It also raised the issues of the unresolved rent review and the possible rezoning of the property (which might warrant redevelopment of the property as allowed by a less restrictive zoning), as being reasons for the maintenance being deferred.
[19] While Bindon accepted that some of the items were cosmetic in nature, it was satisfied that others were not and, when considered together, the cumulative effect was that the building had not been maintained in good and tenantable condition and repair as required by the lease.
The rent review process
[20] It cannot be ignored that, during the same period, the parties were engaged in a rent review process and that, too, proved contentious.
[21] A rent review had commenced for the seven year period commencing on
1 October 2015. The parties were well apart on where the new ground rent should be set. At the time, it was $198,550 per annum plus GST. The new ground rent proposed by Bindon was $282,031 per annum plus GST, while the ground rent proposed by BGPL was $167,000 per annum plus GST, a decrease on the existing rent. BGPL’s position was that it should not be required to undertake the repairs until the rent review had been completed and the requirements of any new tenant were known, so that the repair work on the building could be undertaken in conjunction with alterations to the building that may be required as part of any new tenancy.
[22] There were delays in the rent review process and, at the date the lease was purportedly cancelled, BGPL had not appointed its arbitrator. However, in due course, BGPL applied to the Court seeking an order with regard to the appointment of an umpire, having by that stage appointed an arbitrator. Eventually, the arbitration process was implemented without the Court’s further intervention and a new rental was fixed in an award dated 4 May 2016, at $246,000 plus GST per annum. Thus the rental dispute is no longer a complicating factor in the present application, although resolution of the rent review process is still said to be relevant to the issues faced by BGPL and to what it says is a reasonable time to complete repairs in all the circumstances if it is required to do so.
The applications
[23] Just before the first notice of breach expired, BGPL applied for relief from cancellation.
[24] While BGPL acknowledged that the building needed repair, it opposed having to effect those repairs until the rent review was completed and it could secure a new tenant. Mr Green pointed out that:
(a) Bindon did not own the building and so it was not seeking to protect its own asset;
(b) the building was currently vacant;
(c) BGPL continued to pay the ground rent and there were no other breaches of the lease;
(d)if BGPL was required to effect repairs at that stage, it may have to repeat the exercise after the rent review and when a new tenant was put into place; and
(e) the repairs were not necessary to prevent significant deterioration to the building.
[25] In short, from BGPL’s perspective, commercial reality dictated that any repair work should await a new tenant being signed up, so the repairs could be co-ordinated with the requirements of the new tenant. A new tenant could not be confirmed until the rent review issues were resolved. Furthermore, as Bindon did not own the building the only risk to Bindon was if it had to re-enter and it did not have a building which was in good and tenantable repair and which would generate an income stream from a tenant. In that regard, BGPL’s evidence was that there was no real risk, as it had never defaulted on its rent, and the application was supported by an undertaking as to damages.
[26] On 17 November 2015, Bindon’s lawyers wrote to BGPL’s lawyers advising that their client would now cancel the lease because the work required in the building repair notice had not been undertaken by the deadline of
16 November 2015. In the letter, Bindon said it would oppose BGPL’s application for relief against cancellation and would seek an order for vacant possession which could be dealt with at the same time.
[27] In due course, Bindon filed its notice of opposition to BGPL’s application for relief against cancellation and an application seeking an order for vacant possession. The application was supported by evidence from a quantity surveyor, Mr Mark Burrows, who assessed the cost of the repairs and maintenance identified in the TM Consultants’ report, at $1,549,000.
[28] In his affidavit filed in response to this application, Mr Green updated the Court on the resolution of rent issues. He also provided evidence that the building on the leased premises had not changed substantially in condition since 2008 when the most recent 21 year lease to BGPL commenced. In response to the report produced by Mr Burrows, Mr Green gave evidence that the building was in a similar condition in 2008. He also advised that, since 2008, BGPL had spent approximately
$60,000 in replacing the roof above the mezzanine floor. He considered that the standard that Mr Burrows had specified would bring the building to an “excellent standard” and well beyond its state in 2008. He then explained that he had placed
$200,000 in his solicitor’s trust account as a form of security for the work being done, being his:
… professional assessment, assisted by valuation expertise, of the upper limit that is likely to be required to get the building to a state that it would need to be in an appropriate state of repair and tenantable by that basket of tenants that I could see who could use the property for industrial purposes over the medium term.
[29] Ms Hagaman’s evidence in reply explained that, while it is correct that the ground lease rental is assessed without reference to the improvements, which are owned by the lessee, there are “other commercial reasons why observation of the maintenance requirement is important”. Her evidence was that these include:
(a) the run-down state of the building is unattractive to potential subtenants, and so may compromise BGPL’s ability to pay the rent due to Bindon;
(b)the building will almost certainly be unattractive to any new tenant should BGPL elect not to renew the lease; and
(c) maintaining an attractive environment so that the market views the area as commercially desirable is important to maintaining rental levels in respect of other leases that Bindon and other companies had in the area.
[30] It is in this set of circumstances that the issues for determination arise.
Issue 1 - Has there been a breach of the covenant to repair?
[31] The first issue turns on whether the obligations under the covenant to keep the building in good maintenance and repair are referenced to the condition of the building at the commencement date of this lease on 1 October 2008, as BGPL says, or whether they should be referenced back to an earlier time, which is Bindon’s position.
[32] BGPL says that the lease between the parties dated 27 April 2009 (with the term commencing on 1 October 2008) is a new lease. As a consequence, it provides the reference point in respect of the lessee’s repair obligations. BGPL refers to the Court of Appeal’s judgment in Sina Holdings Limited v Westpac Banking
Corporation, which quoted from Halsbury’s Laws of England as follows:2
Where a lease contains an option to renew the lease, the exercise of the option ordinarily involves the creation of a new lease, and as regards to the new lease there is no privity of contract between the landlord and the original tenant under the old lease which contains the option to renew; but the right given to a tenant may be simply to extend the term, in which case privity of contract and due as between the original parties, even during the extended term.
[33] BGPL accepts the issue falls to be decided on the construction of the original lease and of the terms of the renewal. As Henry J commented in Sina Holdings:3
Each case will depend upon the true construction of the respective rights and obligations of the parties as expressed in the relevant documentation.
[34] However, BGPL says that the usual position is that a right to a renewal of lease is treated as a right to be granted a new lease. This principle is acknowledged by the authors of New Zealand Land Law who say:4
Traditionally, the word “renewal” has indicated the grant of a new lease and the parties’ documentation may serve to reinforce this construction. It is suggested that unless there are clear words to indicate otherwise in a lease, “renewal” should indicate a new lease.
2 Halsbury’s Laws of England (4th ed, 1997) vol 27 at [467].
3 Sina Holdings Ltd v Westpac Banking Corporation [1996] 1 NZLR 1 (CA) at [5].
4 Tom Bennion and others New Zealand Land Law (2nd ed, Brookers, Wellington, 2009) at
[8.13.10] (citations omitted).
[35] In the present case, BGPL argues that not only are the present circumstances entirely consistent with those in Sina Holdings, where it was found that a renewed lease granted pursuant to the terms of the existing lease was the grant of a new lease, but here that conclusion was reinforced by the fact the parties, in the schedule to the lease, expressly requested the District Land Registrar to state in the renewal of the lease that “it is in substitution for lease 708963”.
[36] BGPL submits that the provisions of cl 9 of the previous memorandum of lease, which gave the lessee “a right to obtain … a renewal lease” albeit “subject to the same covenants and the provisions as this lease, including this present provision for the renewal thereof”, can only be read as contemplating that a new lease would be entered into. In any event, a new lease was entered into and was issued with its own unique identifier, as a new leasehold estate under the Land Transfer Act 1952. The obligations of the parties must, therefore, be referenced from that date.
[37] Bindon, on the other hand, submits that having regard to the terms of the prior lease dated 14 March 1988, the 27 April 2009 lease constituted an extension of term and was not a new lease. In particular, Bindon refers to the decisions in Powell v Tinline Properties Ltd,5 and van Leeuwen v Super Shine Products Ltd as supporting that analysis.6 As a consequence, Mr Moran submits that the relevant point to look
to is the condition of the building when Volumex became the lessee in 1990. In selecting this date he submits that no distinction should be made between BGPL and Volumex as lessees because Volumex was another company controlled by Mr Green and, when Volumex sought Bindon’s consent to the transfer to BGPL, it had said that the transfer represented “no change of beneficial ownership whatsoever”. He argues, therefore, that through his two companies, Mr Green has been in possession of the premises for over 25 years and it is over that time that the standard of repair and maintenance has progressively deteriorated.
[38] I am satisfied that both Powell and van Leeuwen (which mirrored the circumstances in Powell) can readily be distinguished from Sina Holdings and the
present case. In Powell, the Court held that the renewal under the lease was a
5 Powell v Tinline Properties Ltd [2002] 1 NZLR 568 (HC).
6 van Leeuwen v Super Shine Products Ltd HC Auckland CIV-2009-404-8401, 27 January 2011.
“unilateral act, rather than a bi-lateral transaction involving any new or additional terms …” and noted there was no deed recording the new term.7 This was in contrast to Sina Holdings where it was said “the deed alone would have been sufficient to create a new lease”.8 In addition, Powell related to the liability of a guarantor and, in that regard, the Court held that the guarantor should not be released from liability for the period of the renewal as “the words of the guarantee … clearly anticipate its subsistence into the first renewal of the lease” even if the renewal was a new lease.9
[39] In the present case, I am satisfied on both the construction of the original lease, and of the new lease, that a new lease was created. The reference to a “renewal” of the lease is relevant. As was said in Gardner v Blaxill, the use of a word such as “renew” imports the idea of “making afresh”.10 While the provisions of the earlier lease were imported into the new lease, it is clear the parties took care to formally record the new lease agreement. The memorandum of lease they
executed reflected the new term of the lease, being 21 years commencing on 1
October 2008, the new initial rental of $198,550, and the relationship between this lease and the previous lease 708963, specifying that it was a lease in “substitution” of the old lease.
[40] The further point made by BGPL, which is that the Public Bodies Leases Act
1969, and its predecessor, distinguish between “renewal” and a “new lease”11 does not, in my view, add anything. In that context the terms are used to distinguish between a new lease between the same parties on the same terms, and a lease, which could be for a shorter term, that is offered for auction to the highest bidder.
Section 223 of the Property Law Act 2007
[41] Having accepted BGPL’s submission that the contractual relationship
between the parties commenced afresh in 2008, I now consider BGPL’s argument that s 223 of the PLA applied and the obligation to repair must be referenced to the
7 Powell v Tinline Properties Ltd, above n 5, at [19].
8 At [15].
9 At [23](iii).
10 Gardner v Blaxill [1960] 1 WLR 752 (QB) at 758.
11 In ss 5 and 7 of both the Public Bodies Leases Act 1908 and the Public Bodies Leases Act 1969.
state of the building as at that date. In that regard, Mr Green’s evidence was that the building was already in a very poor state at that date and, in fact, BGPL had undertaken some repairs, such as to part of the roof, since then.
[42] Section 223 of the PLA provides:
In a lease, unless the context otherwise requires, a covenant to keep leased premises in good condition (or words to that effect) does not require the lessee to put the premises into good condition if they are not in good condition when the term of the lease begins.
[43] In the Law Commission’s report on the proposed new Property Law Act, the commentary on this proposed section read as follows:12
584 This new section adopts the proposal in para 408 of NZLC PP16. At present, an obligation to keep premises in good condition may include an obligation to put them in good condition if they are not in that condition at the beginning of the term: Payne v Haine (1847) 16 M & W 541: 153 ER
1304. This rule is negated in leases coming into operation after the new Act comes into force. A covenant to keep leased premises in good condition (or
words to that effect) will not require the lessee to put the premises into good condition if they are not in good condition when the term of the lease begins.
However, this limitation can be overridden by express agreement of the parties concerning the repair work which must be done by the incoming
lessee.
[44] While the purpose of s 223 is clear, the real issue is whether it can stand in light of cl 11 of the lease which provides as follows:
That the covenants and provisions implied in leases by the Land Transfer Act
1952 and the Property Law Act 1952 or any amendment or re-enactment thereof, shall be negatived or modified in respect of this lease insofar as the
same are or may be inconsistent with the modifications hereby made or the
covenants and provisions here and expressed.
[45] In Cornwall Park Trust Board Inc. v Chen, a similarly worded Glasgow lease, albeit for a residential property, was the subject of litigation.13 One of the issues discussed was whether s 106 of the Property Law Act 1952 was relevant to the lessee’s obligations to keep and maintain the land and buildings. Section 106(b)
provided that the lessee:
12 Law Commission A New Property Law Act (NZLC R29, 1994) at 359.
13 Cornwall Park Trust Board Inc v Chen [2016] NZCA 65, [2016] 2 NZLR 637.
… will, at all times during the continuance of the said lease, keep, and at the termination thereof yield up, the demised premises in good and tenantable repair, having regard to their condition at the commencement of the said lease, accidents and damage from fire, flood, lightning, storm, tempest, earthquake, and fair wear and tear (all without neglect or default of the lessee) excepted:
[46] In that case, the Court accepted the submission that the implied covenant in s 106(b) was negatived by cl 17 of that lease which, like cl 11 of this lease, excluded implied covenants and provisions under the Property Law Act 1952 where they were inconsistent with the provisions of the lease. Because the maintenance obligation in the lease did not contain the fair wear and tear exception found in s 106(b) of the
1952 Act, cl 17 of the lease excluded the application of s 106(b). A similar finding was made in both Mobil Oil New Zealand Ltd v Development Auckland Ltd,14 and in BP Oil NZ Ltd v Ports of Auckland Ltd,15 that the clause in those leases which excluded implied covenants under the Property Law Act 1952 had the effect of excluding the implied covenant in s 106(b) of the Property Law Act 1952.
[47] Equally, I am satisfied that s 223 of the PLA16 cannot stand when cl 11 is taken into account. The requirement contained in cl 4 of the lease to keep all improvements on the land in good and tenantable condition and repair would be rendered meaningless if, as here, the premises were not in good and tenantable condition at the time the term of the lease began and would therefore be inconsistent with s 223.
[48] As a consequence, I consider s 223 is excluded by cl 11 of the lease. The obligation in cl 4 is simply to be construed in accordance with established legal principles. These were summarised by the Court of Appeal in Cornwall Park Trust Board v Chen,17 as follows:
(a) the construction of a repair covenant ultimately turns on the ordinary meaning of the particular covenant in the context of the lease as a
whole;
14 Mobil Oil New Zealand Ltd v Development Auckland Ltd [2016] NZSC 89 at [36].
15 BP Oil NZ Ltd v Ports of Auckland Ltd [2004] 2 NZLR 208 (HC).
16 Which is encompassed by the terms of cl 11 as being a re-enactment of the Property Law Act
1952.
17 Cornwall Park Trust Board Inc v Chen, above n 11, at [90].
(b)a covenant to “keep and maintain” premises in “good, clean, substantial order, condition and repair” may oblige the lessee to put them in repair if they are not already in repair when the lease began, but a covenant in such terms does not entitle the lessor to something different to what was demised;
(c) “repair” may in the circumstances require replacement of an item in hold or in part;
(d)in assessing the standard of repair, regard is to be had to the age, character and locality of the premises;
(e) in the end the assessment of what is reasonable to comply with a repair covenant is a matter of fact and degree (citations omitted).
[49] Ultimately, therefore, the lessee’s obligation is governed by the language of
the repair covenant. As was said in Woodfall’s Law of Landlord and Tenant:18
… while the condition of the premises at the time of the demise provides a useful indication of what standard of repair was contemplated by the parties, the covenantor’s obligation depends primarily on the words of his covenant. Thus a covenant “to put premises into habitable repair” is not governed by the state in which the covenantor found them; the covenant binds them to put them into such a state that they may be occupied not only with safety, but with reasonable comfort for the purposes for which they were taken.
[50] Applying these principles to the present circumstances, I accept there is no obligation to put the building in “as new” condition, but there were clearly a number of deficiencies in the building which would have to be rectified to put it in “good and tenantable” condition.
[51] Taking some guidance from the repairs identified as being required in the
High Court decision in Chen (which involved the obligation to keep and maintain a
1920’s house in good repair under a Glasgow lease), I consider that BGPL’s
obligations include:
18 Kim Lewison and others Woodfall’s Law of Landlord and Tenant (looseleaf ed., Sweet and
Maxwell, London, 1994) at [10.040].
(a) repairing anything that is broken or not working (such as the broken window frames and window panes);
(b) ensuring the roof does not leak; (c) remediating water damage;
(d)removing and replacing any rotten components of the building, such as the fascia timbers;
(e) replacing or repairing any items which do not meet required regulatory standards, including health and safety standards (for example, the missing balustrade and, possibly, some aspects of the wiring);
(f) replacing any item that is at the end of its useful life and cannot simply be repaired (for example, the gutters and most downpipes).
[52] In short, it seems that a large number, if not all, of the items identified in Mr Simcock’s report, are matters which should properly be addressed by the lessee as a consequence of its obligations under the covenant. These obligations arise regardless of when the lease commenced, as a consequence of interpreting the covenant in its context.
Issue 2 - Did a right to cancellation arise?
[53] As was outlined in Bindon’s submissions, rights of cancellation may be conferred by the PLA or expressly under the contract. The lease did not specify any grounds for cancellation but Schedule 3 of the PLA, cl 12(1) provides a right to cancel the lease, in accordance with s 244, if “the lessee has failed for a period of
15 working days, to observe or perform any other covenant, condition or stipulation on the part of the lessee expressed or implied in the lease.
[54] Sub-part 6 of the PLA specifies the procedure to be followed before a lease can be cancelled and this sub-part is a code of cancellation rights.19 However, even if that procedure is followed, the Court has an overriding discretion to grant relief against cancellation on such terms and conditions as it thinks fit.20
[55] BGPL’s arguments, developed in oral submissions, were essentially that:
(a) The procedure in s 246 of the PLA had not been appropriately followed in the circumstances; and
(b)in deciding whether cancellation is available, or when considering the question of relief, the Court should “have an eye to those requirements that exist for a contract to be cancelled under the Contractual Remedies Act 1979” (“the CRA”), and here there was no breach that had the effect of substantially increasing the burden to the cancelling party.
[56] For Bindon it was submitted that it was entitled to issue the two breach notices and the terms of those notices were reasonable. The need to replace the roof was recognised as a significant aspect of the repair, which is why the roof repair notice provided a longer timeframe for compliance than the building repair notice. Bindon expressly denied that the notices were issued to take advantage of BGPL’s vulnerability while the rent determination was proceeding, noting that BGPL itself took four and a half months to provide any substantive response to the breach notices.
Were the notices served under s 246 valid?
[57] BGPL’s first criticism of the notices was that they were based on the TM Consultants’ report and that report was undertaken “to determine the likely work required to return the building to a serviceable condition”. Given BGPL’s assumption that its obligations to maintain and repair the building had to be
referenced to its condition in 2008, that would have been an inappropriate basis on
19 Section 243.
20 Section 253.
which to assess the scope of works. However, as I have found, cl 4 is not constrained by the state of the building at the commencement of the lease, but is to be construed in accordance with established legal principles which begin with the ordinary meaning of the particular covenant in the context of the lease as a whole.
[58] Having reviewed the TM Consultants’ report, I do not consider any of the maintenance and repair issues identified are so obviously beyond the scope of the covenant, that a notice to repair issued in reliance on it was flawed from the outset.
[59] However, I am more sympathetic to BGPL’s argument that the timeframes contained in the notices were not reasonable. It appears likely given the extent of the work (reflected in Bindon’s costing of the work), that the timeframes were ambitious. However, I heard no evidence to determine that issue either way, and so I cannot safely conclude that, all other things being equal, the timeframes given were insufficient to complete the broad range of work identified in the breach notices.
[60] BGPL’s challenge to the timeframes imposed in the repair notices is not based on the practicalities of undertaking the work in that timeframe, but rather the economic realities of being required to do the work when the rent review process was still ongoing and before it could re-tenant the building.
[61] Having considered these matters, I do not consider that they impact upon the question of whether the period of notice given in each case was reasonable in all the circumstances. While these matters made it inconvenient for the lessee to comply with the notice within the time period specified, they did not of themselves make the time period unreasonable. My conclusion is reinforced by the fact that Mr Maassen could not articulate a finite time period in which his client should be required to commit to doing the work. If that is the case, then time periods of even several years could still be argued to be unreasonable if the lessee had still not secured a long term subtenant, or for some other reason.
[62] Where a lessee wishes to challenge a timeframe given in a notice served under s 246, then it is incumbent on the lessee to demonstrate what finite time period is reasonable and why. That has not occurred in this case. Accordingly, the lessee
has not satisfied me that the timeframes for compliance given in each repair notice were unreasonable.
Was there a breach such as would warrant cancellation?
[63] The other limb to this argument is whether a right of cancellation should arise at all, because there was no breach which reaches the threshold in s 7(4) of the Contractual Remedies Act of being a substantial breach such as would justify cancellation.
[64] In this regard, counsel for BGPL referred me to Cash Handling Systems Ltd v Augusta Terrace Developments Ltd, where Elias J observed that the provisions of the Contractual Remedies Act 1979 applied to leases, and I should bear this in mind, in deciding whether the breach in this case substantially affected the benefits the lessor, Bindon, received under the contract.21
[65] However, Mr Maassen also acknowledged that subpart 6 of the Property Law Act is a code and specifies the procedure to be followed before cancellation can be undertaken by the landlord. As observed in the text New Zealand Land Law.22
The Contractual Remedies Act is no longer relevant to the lessor’s remedy of forfeiture and the difficult relationship between s 5 Contractual Remedies Act and the Property Law Act 1952 provisions on forfeiture, as interpreted by Elias J in Cash Handling, will no longer be in issue. The Property Law Act 2007 solution is consistent with Elias J’s analysis that forfeiture effected a cancellation…”.
[66] I am satisfied that a right to cancellation arises on completion of the procedure provided for in ss 244-252. The issue of whether the lessee is entitled to relief against cancellation under s 253 is the proper stage at which to take into
account the issues raised by BGPL regarding the lack of detriment to Bindon.
21 Cash Handling Systems Ltd v Augustus Terrace Developments Ltd (1996) 3 NZ ConvC 192, 398 (HC).
22 Tom Bennion, above n 4.
Relief
Should I grant relief against cancellation?
[67] Section 256 of the PLA provides that, in determining an application for relief against cancellation, a Court may grant:
(a) the relief sought on any conditions (if any) as to expenses, damages, compensation, or any other relevant matter that it thinks fit; and
(b) an injunction restraining any similar breach in the future.
[68] The principles relating to the exercise of that discretion were considered by the Court of Appeal in McIvor v Donald.23 In that case Somers J said:24
The legislature has not seen fit to lay down rules as to the exercise of the wide discretion it has conferred on the Court and the undesirability of the Court attempting to do what was emphasised in Hyman v Rose.25
He went on to observe that “relief is normally granted to one who has made good the breach and is able and willing to fulfil his obligations in the future”.26 As Bindon emphasised, he also observed that:27
Save in rare cases, a lessee will not be permitted to buy his way out by the payment of a sum of money to his landlord unless the forfeiture clause is merely security for the payment of money. In particular, damages will seldom be a real or proper substitute for the performance of a covenant to repair.
[69] In McIvor the breaches had not been remedied by the time of hearing, and
Somers J noted that, in such a case, it was:28
… necessary for the lessee to demonstrate his willingness and ability to remedy the same as soon as may be and to show that the damage occasioned by his breaches is not irreparable. And where remedy lies in the future and is promissory only the preservation of a fair balance between the lessor and lessee will usually call for the imposition of terms by the Court.
23 McIvor v Donald [1984] 2 NZLR 487 (CA).
24 At 494.
25 Hyman v Rose [1912] AC 623 (HL).
26 McIvor v Donald, above n 21 at 494.
27 At 494.
28 At 494.
[70] Both parties also referred to the factors identified in Studio X Ltd v Mobil Oil NZ Ltd, a decision of Hammond J, as being relevant to the exercise of the discretion.29 In summary these were:
(a) whether the breach was advertent or deliberately committed. In such a case there are sound reasons why in a normal case relief should not be given;
(b)conversely whether the breach was caused by inadvertence or was entirely beyond the tenants control;
(c) whether the breach involves an immoral/illegal user;
(d)whether a tenant has made or will make good the breach of the covenant and is able and willing to fulfil his obligations in the future;
(e) the conduct of the landlord;
(f) the personal qualifications of the tenant; (g) the financial position of the tenant;
(h) the position of third parties; (i) the gravity of the breach;
(j) whether a breach has occasioned lasting damage to a landlord;
(k)whether the damage said to have been sustained by the landlord can truly be said to be proportionate to the advantages that will be obtained if relief is not granted.
[71] With reference to those factors Bindon says the following are relevant in this case:
29 Studio X Ltd v Mobil Oil NZ Ltd [1996] 2 NZLR 697 (HC).
(a) The breach was deliberate. BGPL elected to defer maintenance over a period of years in the hope that it could be undertaken in conjunction with securing a new sub-tenant or, alternatively, in conjunction with a redevelopment opportunity in respect of the property;
(b) There is insufficient evidence that BGPL can make good the breach.
The sum of $200,000 which has been deposited to BGPL’s lawyers’ trust account is not based on a principled assessment of the cost of repairs and maintenance and the only professional costing of repair work has been undertaken by Mr Burrows, the quantity surveyor. Given the premises have been vacant since March 2015, and BGPL is not prepared to commit to a timeframe for undertaking the repairs, Bindon says there can be no certainty as to when, or if, BGPL will fulfil its obligations;
(c) Bindon has acted reasonably. In particular; it provided separate breach notices, each providing reasonable timeframes for the repair work noted in them, it has not forcibly re-entered, it acceded to BGPL’s request to proceed with rental arbitration at which Bindon was effectively the successful party, and it has endeavoured to reach agreement with BGPL on terms for the repair or redevelopment of this site.
(d)It considers the breach to be serious and the TM Consultants’ report demonstrates that the premises are now in a poor state of repair. There is a risk that Bindon could be faced with the future costs of repairs or demolition at the end of the lease, and there could be a loss of amenity in the area, and a potential adverse effect on land values in the area, when Bindon owns other land in the area.
[72] On the other hand, Bindon acknowledged that BGPL was a property investor of long standing and it had no reason to doubt BGPL’s financial position. It also accepted that the current situation could be rectified and would not be the cause of
lasting damage and that BGPL would potentially face a significant loss if relief was not granted.
[73] However, overall, it considers that BGPL is the author of these circumstances and, had it (and its related predecessor, Volumex) undertaken routine maintenance on a periodic basis over the last 25 years, then it would not be faced with the present problem and the cost to comply with its lease obligations.
[74] Bindon, however, says, having regard to all of the circumstances that the Court normally considers, there is no justification for cancellation of the lease. In particular, it says that the evidence demonstrates that BGPL was, and remains, on a “cleft stick” as a result of the attitude of Bindon. BGPL did not know what the best economic option was until the rental was determined. Furthermore, once Bindon purported to cancel, there was nothing to provide to tenants until the Court had determined the matter. In those circumstances, it was quite reasonable for BGPL to defer repairing the building. BGPL suggests that the situation “has been exploited as part of a pre-determined effort by Bindon to extinguish BGPL’s interests”, so that Bindon could establish a hotel on the site.
[75] BGPL also argues that Bindon’s concerns are either irrelevant or overstated. BGPL had provided evidence of its financial soundness, and of the broader asset backing of the Brian Green Property Group. There was no real risk that the rent would not be paid in the interim, nor, if the lease was not renewed, that the cost of repair or demolition could not be met, if BGPL had not met its obligations by then. In any event, the risk to Bindon in this regard was overstated, particularly as Bindon had no financial interest in the building and could not expect to receive the value of the building at the end of the lease. This was demonstrated by the fact that the lease allowed for BGPL to demolish the building during the term of the lease, if it chose to do so.
Discussion
[76] There is no dispute in this case that the building is in a poor state of repair, and I have found that the covenant does oblige the lessee to put the building in the condition required by the covenant. Given the age of the building, there is no
requirement to put it in as new condition, but nevertheless, substantial repairs need to be carried out.
[77] It is also not disputed that this lessee is in a sound financial position and has continued to pay its rent. There was no reason to think that the lessee will default on payment of rent, despite the fact that the building is not currently sublet to a tenant.
[78] I also accept that the breach of the covenant will not cause any loss to the lessor which cannot be compensated for by damages. The reasons which Ms Hagaman gives to explain why observation of the maintenance requirements in the covenant is important, do not alter that view. Her argument that the run down state of the building may compromise BGPL’s ability to pay the rent due to Bindon is answered by the financial information which BGPL supplied to the Court, which is unchallenged.
[79] While Ms Hagaman is correct to say the building would be unattractive to any new tenant should BGPL elect not to renew the lease, the cost of rectifying that situation can be met by an appropriate award of damages. In any event, Bindon can have no expectation that there will be a building on the property at the end of the lease given BGPL’s ability to demolish the existing building.
[80] Finally, Ms Hagaman observes that “maintaining an attractive environment so that the market views the area as commercially desirable, and therefore maintaining rental levels in respect of other leases that Bindon and associated companies have in the area” is important. However, there is no evidence before the Court that the condition of this one building does affect property values in the area nor is there evidence, which would quantify that difference. There is no suggestion that rent reviews for the Bindon owned properties such as that occupied by the Hocken Library building and this property have been adversely affected to date. There is also no basis for me to consider the terms of the lease were intended to benefit third parties.
[81] In my view, the primary risk to the lessor is that, if the building is not maintained then, at the conclusion of the lease, a financial burden may fall on the
lessor which would not otherwise be the case. That burden could either be the cost of implementing the required repairs, to make it attractive to someone to lease the property, or should the building be in such disrepair at the end of the lease that it needs to be demolished, then the lessor would incur the cost of demolition in order to offer the land to a new lessee who can develop the property as that lessee thinks fit. In that regard, it seems the parties are in general agreement. However, they differ in terms of the appropriate relief.
[82] The relief sought by BGPL is that there should be a permanent injunction preventing Bindon from exercising any right of cancellation on the grounds contained in its notices of breach of lease dated 29 April 2015 and the refusal of any relief sought by Bindon under s 251 of the PLA.
[83] Bindon, on the other hand, says that there has been a clear breach, which has been ongoing, and Bindon should be entitled to enforce the terms of the lease. A permanent injunction such as sought by BGPL would be too harsh on Bindon. It would render that covenant in lease effectively unenforceable, which should not be permitted.
[84] If, however, the Court is minded to grant relief, then BGPL should be required to either:
(a) meet the cost of bringing the premises back to the standard required by the lease; or
(b)if the premises have reached the end of their useful life, to demolish the premises.
[85] I consider this is an appropriate case to grant relief against cancellation. A key factor in my determination is that there is no immediate risk of loss to Bindon. This is not a situation such as in Strong v Hurunui Hotel (2004) Ltd (No 1), where the solvency of the tenant was in question, the building was owned by the lessor and there was a clear need to enforce the maintenance obligations as it was an aging
hotel with a heritage listing.30 In that case the lessee was given a limited opportunity to rectify matters, but when it failed the lease was cancelled. Here the lessee is solvent and is the owner of the building and the lessor had been content for many years to allow the maintenance obligations to slide. Furthermore, at least over the last two years during the rental review process, there was an explicable basis for the lessee deferring the maintenance obligations.
[86] For these reasons I do not consider that relief against cancellation of a lease under s 253 of the PLA needs to be imposed on particularly strict conditions. On the other hand I am also not prepared to grant the relief sought by BGPL. That would, in effect, render the covenant unenforceable except in an action for damages. While I consider there was no evidence of a direct financial implication for Bindon, at least during the term of the lease, I do not consider that Bindon should simply have to accept that for the 13 years the lease has to run, the building will continue to deteriorate with its only remedy being a right to sue for damages if the lease is not renewed at that point. Furthermore, while BGPL can provide evidence of its financial security at this point in time, there can be no certainty that that position will continue into the future.
[87] In my view, a fairer exercise of the discretion would be to allow BGPL relief against cancellation, but on certain conditions. Relief against cancellation will allow it to actively seek a new tenant. Work on the property can then be undertaken, whether that is maintenance of the existing building, or is reconfiguring the building to suit the tenant’s needs and I consider a 24 month time period is adequate to complete such a process.
[88] If, however, it is not practicable to complete it in that time period then I consider adequate security should be provided by BGPL to ensure the potential loss to Bindon is addressed. The appropriate measure of damages is the cost of returning the property to Bindon in a state that complies with the terms of the lease. However, both parties acknowledge that Bindon can have no expectation that the building will remain on site, so I do not consider, in this case, that this should be referenced to the
cost of repairs if the cost of demolition is less. While the cost of repair is the usual
30 Strong v Hurunui Hotel (2004) Ltd (No 1) [2015] NZHC 1216, (2015) 16 NZCPR 375.
measure of damages, repair in this case is not the only way of complying with the terms of the lease. 31
[89] However, I have no evidence as to the cost of demolishing the building and leaving the site in good condition in accordance with cl 4 of the lease, so I cannot determine whether that is a lesser sum than the cost of repairing it. For that reason the amount of security to be provided is initially based on the cost of repair. While this is the current assessment of the cost of undertaking the current building repair and maintenance, and is contested by BGPL, I consider it a sufficiently robust figure to form the basis of an amount to be provided for security, as well as to provide an incentive to BGPL to complete the work. I will reserve leave however to substitute it with the cost of demolition if BGPL considers that a more appropriate measure.
Orders
[90] Relief against cancellation is granted on the following condition:
(a) if the covenant is not complied with within 24 months of the date of this decision, BGPL must provide security to Bindon for the sum of
$1,549,000 or such other sum as the parties agree or as is fixed by the
Court.
[91] I reserve leave to the parties to revert to the Court for further directions and/or relief if:
(a) security is not provided as required; or
(b)to determine the amount of security to be paid if demolition costs are the measure adopted; or
(c) to increase the amount of security should it be considered materially less than any updated assessment of the actual costs for repair or
demolition at the time of the application.
31 Maori Trustee v Rogross Farms Ltd [1994] 3 NZLR 410 (CA).
[92] It follows that Bindon’s application for possession is not granted.
Costs
[93] Costs on the applications are reserved. If the parties are not able to agree on the issue of costs then they may file memoranda sequentially. Such memoranda are not to exceed seven pages. I will determine costs on the papers unless I need to hear from counsel.
Solicitors:
Cooper Rapley, Palmerston North
Meares Williams, Christchurch
Wadham Partners, Palmerston North
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