Chambers v Chatfield
[2016] NZHC 1871
•15 August 2016
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2016-404-000245 [2016] NZHC 1871
IN THE MATTER OF the District Courts Act 1947 BETWEEN
SHANNON GORDON NICHOLAS CHAMBERS
Appellant
AND
GREGORY CHARLES CHATFIELD and BRUCE GREGORY HANCOCK Respondents
Hearing: 2 June 2016 Counsel:
M J W Lenihan for the Appellant
G D Stringer for the RespondentsJudgment:
15 August 2016
JUDGMENT OF EDWARDS J
This judgment was delivered by Justice Edwards on 15 August 2016 at 12.30 pm, pursuant to
r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Date:
Counsel: M J W Lenihan, Auckland
Solicitors: Inder Lynch, Papakura
Copy To: Franklin Law Limited (K P House), Pukekohe
CHAMBERS v CHATFIELD [2016] NZHC 1871 [15 August 2016]
Introduction
[1] Mr Chambers signed an Agreement to Lease containing a covenant to enter into a guarantee, and a covenant to execute a Deed of Lease. A Deed of Lease was prepared and apparently signed by Mr Chambers, although an executed copy has never been located.
[2] The covenant to enter into a guarantee was enforced against Mr Chambers in the District Court. The principle in Inglis v Clarence Holdings Ltd was applied so as to treat the parties as being in the same position as if a deed, and a guarantee, had been formally executed.1
[3] Mr Chambers appeals on the ground that Inglis is no longer applicable in light of s 27 of the Property Law Act 2007 (PLA), which now governs contracts of guarantee.
Background
[4] The respondents are trustees of the M J Bouman Family Trust (trustees). They were the owners of a commercial property at 179 Harris Road, East Tamaki.
[5] On 7 June 2012, the trustees entered into an Agreement to Lease part of the property to Hyline Construction Ltd (Agreement to Lease). Mr Chambers, the appellant, was a director of Hyline Construction (now in liquidation).
[6] The Agreement to Lease provided that Hyline Construction would lease the property from the trustees for a period of three years, with two rights of renewal. The commencement date was 11 June 2012. The annual rental was $52,000 plus outgoings and GST.
[7] Clauses 10 and 11 of the Agreement to Lease provided as follows:
1 Inglis v Clarence Holdings Ltd [1997] 1 NZLR 268 (CA).
10. Deed of Lease
The Lessor and the Lessee agree to complete a formal Deed of Lease. Subject to this Agreement, the Lease shall be on the terms of the Auckland District Law Society Deed of Lease 5th Edition 2008 (“Lease”).
Each party shall be responsible for its own Solicitors cost in respect of this Agreement and the deed of Lease.
11. Guarantee
Where the Lessee is a limited liability company, the personal guarantees and indemnities of each of the directors, and/or major shareholders of the Lessee Company as the Lessor requires (jointly and severally if more than one) shall be arranged by the Lessee to the performance of the terms and conditions of the Lease.
[8] The Agreement to Lease was signed by the trustees as lessors. Mr Chambers and Mr Burden signed the Agreement to Lease as “lessee/lessee guarantors”.
[9] Mr Bouman swore an affidavit in support of the trustees’ claim in the District Court. He stated that a formal Deed of Lease in the 5th edition of the ADLS standard form (Deed) was prepared but not signed. He personally handed the Deed to Mr Chambers’ assistant on two occasions, because the first copy was lost. He says that after the second copy was delivered, he followed up to see whether it was signed. He was told by Mr Chambers’ assistant that the Deed had been signed, but it was not located and not delivered to him. That evidence was not challenged at trial and no evidence was called on behalf of Mr Chambers.
[10] The third schedule to the Deed contains the following clause:
IN CONSIDERATION of the Landlord entering into the lease at the
Guarantor’s request the Guarantor:
(a) guarantees payment of the rent and the performance by the
Tenant of the covenants in the lease, and
(b) indemnifies the Landlord against any loss the Landlord might suffer should the lease be lawfully disclaimed or abandoned by any liquidator, receiver or other person.
THE GUARANTOR covenants with the Landlord that:
1. NO release delay or other indulgence given by the Landlord to the
Tenant or to the Tenant’s successors or assigns or any other thing
whereby the Guarantor would have been released had the Guarantor been merely a surety shall release prejudice or affect the liability of the Guarantor as a guarantor or as indemnifier.
2.AS between the Guarantor and the Landlord the Guarantor may for all purposes be treated as the Tenant and the Landlord shall be under no obligation to take proceedings against the Tenant before taking proceedings against the Guarantor.
3.THE guarantee is for the benefit of and may be enforced by any person entitled for the time being to receive the rent.
4.AN assignment of the lease and any rent review in accordance with the lease shall not release the Guarantor from liability.
5.SHOULD there be more than one Guarantor their liability under this guarantee shall be joint and several.
6. THE Guarantee shall extend to any holding over by the Tenant.
[11] The Deed prepared by Mr Bouman records Messrs Burden and Chambers as guarantors.
[12] Hyline Construction occupied the property from 11 June 2012 until
2 July 2014 when it was placed into liquidation. It ceased trading the same day. On
4 August 2014, the liquidator disclaimed the lease and all remaining items left on the premises. The trustees incurred expenses in carrying out repair work to the property which Mr Bouman says was left in a damaged state when vacated.
[13] The trustees arranged for another company to use part of the property after this time and received rental income between August 2014 and November 2014. The trustees subsequently sold the property with settlement taking place on 18 February
2015.
[14] The trustees sought to recover outstanding rent and other costs from Mr Chambers. A payment of $11,244.32 was made by the Chambers Family Trust on 28 July 2014.
[15] Mr Bouman says that he received a text message from Mr Chambers on
1 August 2014. The text message is in the following terms:
I have just had my Solicitor on the phone. I simply cannot deal with all this.
I don’t know what the problem is LiftX want to still rent the building but are
very fast running out of patience. They said they will pay 30k a year on a month to month. I have a PG which will have to cover the rest which suxs but is life. You want to sell the building which LiftX all ready knows and when you do they will move out and my PG will be released. Please just call Jason so he can move his gear back in there today and bill them direct and the [sic] bill me the remainder. If you send the invoices to Nick every month he will have it paid. Sorry for the problems this has all caused.
[16] It is not disputed that the “PG” reference in this text is to a guarantee.
[17] The trustees commenced proceedings in the District Court seeking to recover losses from Mr Chambers as guarantor.
District Court decision
[18] The pleadings before the Judge included an admission by Mr Chambers that he had signed a guarantee of the company’s obligations. The Judge noted that there had been a late application for leave to file an amended statement of defence denying the guarantee. That application was opposed. The Judge did not consider it necessary to grant leave for the amendment, finding that it was incumbent on the
plaintiffs to prove the validity of the guarantee if their claim was to be successful.2
[19] After reviewing the relevant law and competing arguments, the Judge found that the Court of Appeal’s decision in Inglis applied so as to make the guarantee clause in the Agreement to Lease enforceable. The Judge held that the Agreement to Lease was a valid contract, and there was no reason why specific performance of the obligations in the lease would not be ordered.
[20] The Judge also found that the parties were to be treated as having executed the lease incorporating the form of guarantee so as to give rise to rights of enforcement. The argument that s 27 of the PLA rendered the decision in Inglis obsolete was rejected.
[21] Judgment for the plaintiffs in the sum of $61,541.51 was entered against
Mr Chambers. This comprised net rental, unpaid outgoings, costs of repair to damage, costs of re-entry, costs of enforcement, interest and costs of chattels. A
2 Chatfield v Chambers [2016] NZDC 661 at [12].
claim for replacement costs of chattels was allowed in part, and a further claim for damages for lost rental was declined.
Approach on appeal
[22] The appeal is brought under s 72 of the District Courts Act 1947. It is by way of rehearing and the approach in Austin, Nichols & Co Inc v Stichting Lodestar applies.3 The application of this principle means that if I reach a different view from the view of the District Court Judge, then the appeal must be allowed.
Relevant law
[23] The issue on appeal concerns the interrelationship between the principle in Walsh v Lonsdale, the Court of Appeal decision in Inglis, and s 27 of the PLA. It is therefore necessary to consider each of those in further detail.
[24] A Court may order specific performance of an agreement to lease so as to require a party to execute a deed of lease.4 As a result, the parties to a lease are treated as being in the same position as if a legal lease had been granted at the outset. That principle was extended in Walsh v Lonsdale, so that where a Court would grant an order of specific performance of an agreement to lease the parties are to be treated as if a formal lease had been executed. The underlying principle informing that decision is that equity treats as done that which ought to have been done.5
[25] In Inglis, that principle was extended to covenants to enter into a guarantee which were contained in an agreement to lease. The agreement to lease at issue in Inglis had been signed by Mr and Mrs Inglis who joined with their executors and assigns as “covenantors”. The covenant required the parties to execute a lease in the form attached, being a lease approved by the Auckland District Law Society
(3rd edition, 1993). Clause 16 of the agreement to lease provided as follows:
3 Austin, Nichols & Co Inc v Stichting Lodestar [2007] NZSC 103, [2008] 2 NZLR 141 at [16].
4 Hinde, McMorland and Sim, Land Law in New Zealand (online looseleaf ed, LexisNexis) at
[11.042].
5 At [11.043].
The covenantors shall give a personal joint and several guarantee as provided in the Law Society form of lease to a maximum of one years rental at the time, plus rates insurance and other outgoings required from time to time. The covenantors will provide a personal financial position to the satisfaction of CLARENCE.
[26] No lease was executed. However, the tenants took possession of the premises, paid rent and outgoings up until 25 April 1995. The following month the premises were vacated and the lease was abandoned and it was accepted that there was a repudiation of the lease.
[27] Clarence Holdings commenced proceedings to recover its losses. Summary judgment against Mr and Mrs Inglis was entered in the High Court. On appeal, Mrs Inglis and the estate of her late husband argued that because the lease was not executed, the guarantee of the obligations of the tenant was not effective. That argument was rejected by the Court of Appeal. The Court said:6
As is well established, on the principle that equity will regard as having been done that which should have been done, an agreement to lease on stated terms and conditions will be treated as having been performed so as to enable enforcement of the terms of the lease if the agreement is one which would be specifically enforced.
[28] Applying that principle to the facts of Inglis, the Court found the following:7
In the present case the contractual obligation to sign the guarantee in the lease is in the same agreement as contains the obligations on Clarence Holdings Ltd and the tenant to execute the lease. We heard no argument that specific performance of those obligations would not be ordered. It would be untenable to suggest that Clarence Holdings Ltd would be ordered to execute the lease as lessor without the guarantee of the tenant’s obligations also being executed. The situation is quite different from that in the Chan case. Here the steps that ought to have been taken by the respective parties and which they are to be treated as having taken relate to the same lease and give rise to interdependent equitable obligations. In Chan the legal guarantee in the lease was in respect of the tenant’s obligations in that lease not in the equitable lease treated as existing under the Walsh v Lonsdale principle.
Accordingly, the decision in the Chan case, if it should be followed in New Zealand, is distinguishable. The present case is appropriate for the application of Walsh v Lansdale so that the parties are to be treated as having executed the lease incorporating the form of guarantee so as to give rise to rights of enforcement. The same conclusion was reached in similar
6 Inglis v Clarence Holdings Ltd, above n 1, at 272.
7 At 272.
circumstances by Greig J in Fergusson Drive Holdings Ltd v Kerr
(High Court, Wellington, CP 375/89, 1 October 1991).
[29] The appeal was allowed in part but not on grounds that are relevant to the present case.
[30] Inglis was decided when the Contracts Enforcement Act 1956 (CEA) was in force, although there is no reference to the requirements of the Act in the decision. Section 2 of that Act applied to contracts relating to land and guarantees. It provided that no contract of that type would be enforceable unless the contract or some memorandum or note of it was in writing and was signed by the party to be charged or by some other person lawfully authorised by that person.
[31] The PLA came into force on 1 January 2008. Different provisions now govern contracts for the disposition of land, and contracts of guarantee.
[32] Section 24 relates to contracts for the disposition of land. That section provides that a contract for the disposition of land is not enforceable by action unless the contract is in writing or its terms are recorded in writing and the contract or written record is signed by the party against whom the contract is sought to be enforced. Section 26 of the PLA provides that ss 24 and 25 do not affect the operation of the law relating to part performance.
[33] Section 27 relates specifically to contracts of guarantee. That section provides:
27 Contracts of guarantee must be in writing
(1) This section applies to contracts of guarantee coming into operation on or after 1 January 2008.
(2) A contract of guarantee must be—
(a) in writing; and
(b) signed by the guarantor.
(3) Subsection (2) does not require the consideration for a contract of guarantee to be in writing or to appear by necessary implication from a writing.
(4) In this section, contract of guarantee means a contract under which a person agrees to answer to another person for the debt, default, or liability of a third person.
[34] The scope of s 27 of the PLA was considered by Associate Judge Bell in Northcott v Davidson.8 The Associate Judge noted that under s 27, an oral contract of guarantee is no longer enforceable, even if the guarantor has signed a written record of the guarantee. Similarly, as s 26 only preserves the law relating to part performance as it effects contracts governed by s 24 and s 25, it does not apply to contracts of guarantee.9
[35] The Associate Judge also noted that the effects of non-compliance in relation to contracts of guarantee had changed. Contracts governed by s 24 of the PLA that lack the requisite formalities are not enforceable by action but may nevertheless still have some effect. That was the position under s 2 of the CEA. However, in the Associate Judge’s view, the requirement for the contract to be in writing signed by the guarantor goes to the validity of the contract of guarantee so that a guarantee that does not comply with the requirements of s 27 is a nullity rather than simply
unenforceable.10 The Associate Judge noted that equity will not grant specific
performance of a void contract.11
[36] There has been no judicial authority applying Inglis since s 27 of the PLA
came into force.
Meaning of clause 11
[37] Mr Lenihan submits on behalf of Mr Chambers that the trustees’ claim proceeds on the basis that clause 11 of the Agreement to Lease is a guarantee. Mr Lenihan submits that this cannot be correct as the plain meaning of clause 11 is that it is a covenant to procure a guarantee and not a guarantee itself. He further
submits that clause 11 is a conditional covenant which has not yet been triggered.
8 Northcott v Davidson HC Whangarei CIV-2012-488-97, 7 June 2012.
9 At [27] and [30].
10 At [30].
[38] I consider the plain meaning of clause 11 is that it is a covenant to procure a guarantee and indemnity, rather than a guarantee itself. That flows from the words “shall be arranged by the lessee to the performance of the Lease”. The term “Lease” is defined in clause 10 to mean the Deed. The plain meaning of the words in the clause envisage the execution of a guarantee and indemnity of the covenants in the Deed which is itself to be executed by the parties.
[39] I do not however agree with Mr Lenihan’s further submission that clause 11 is a conditional covenant which has not yet been triggered. He relied on the case of Frimley Estate Ltd v Stonewall Homes Ltd in making that submission.12 That case also concerned a covenant to execute a guarantee contained in an agreement for sale and purchase. The relevant clause provided:
If the purchaser is a company then at the request of the vendor the directors of that company shall jointly and severally guarantee the performance of the purchaser’s obligations pursuant to this agreement.
(emphasis added)
[40] The Court found that this clause was not itself a guarantee, but rather a conditional clause requiring a non-party to take some step on demand.13 As demand to enter into a separate guarantee had never been made, the condition in the clause had never been triggered, and there was no basis upon which a valid or enforceable guarantee could be said to arise.
[41] I do not consider clause 11 in this case to be analogous to the clause in Frimley. The phrase “as the Lessor requires” in clause 11 does not require the lessor to decide whether it requires a guarantee and indemnity. There is already a mandatory obligation on the lessee to arrange for that to happen. The discretion in that clause relates to the selection of major shareholders in addition, or in the alternative to the directors, but does not relate to the requirement of a guarantee itself.
[42] But even if I am wrong about that, the nomination of Messrs Burden and
Chambers as guarantors in the Agreement to Lease, and the subsequent preparation
12 Frimley Estate Ltd v Stonewall Homes Ltd (2009) 10 NZCPR 637 (HC).
of the Deed which also nominated these parties, would suffice to trigger any pre- condition in clause 11 in my view.
[43] In summary, clause 11 of the Agreement to Lease is a covenant to enter into a guarantee of the clauses of the Deed. The clear intention of the parties was for a guarantee in the form of the third schedule to the Deed to be executed. Prior to the enactment of s 27 therefore, I consider specific performance of the Agreement to Lease, containing clause 11, would have been granted. The principle in Inglis would have applied so that the parties would have been treated as being in the same position had the Deed been signed by the parties and the guarantee and indemnity clause would be enforced. The only issue is whether the application of s 27 of the PLA would lead to a different result.
Effect of s 27 PLA
[44] Mr Lenihan submits that s 27 does lead to a different result. He submits that the changes effected by s 27 mean that equity no longer has any role to play in relation to contracts of guarantee. He draws a line of comparison between s 27 and s 2 of the Law of Property (Miscellaneous Provisions) Act 1989 (UK) (LMPA) and English authorities concerning that section.
[45] He further submits that the rule in Walsh v Lonsdale has not survived s 2 of the LMPA in the United Kingdom, and on the same basis the principle in Inglis has not survived s 27 of the PLA. Finally, drawing on the decision in Northcott, Mr Lenihan submits that the change in wording from s 2 to s 27 means that an unsigned guarantee is a nullity and specific performance will not be granted of a nullity.
[46] The starting point is to consider what is sought to be enforced in this case. It is not the Deed which is to be enforced, but the Agreement to Lease containing a covenant to enter into a guarantee. Section 27 does not apply to either the Agreement to Lease or the covenant as neither are contracts of guarantee within the meaning of s 27(4). This distinguishes the case from Northcott where the issue was
whether a contract of guarantee had come into existence and whether it could be enforced pursuant to s 27 of the PLA.
[47] The enforcement of agreements to lease is governed by ss 24 to 26 of the PLA. Those sections preserve the position which applied under s 24 of the CEA. Contracts for the disposition of land, including agreements to lease, may therefore be proved by way of oral agreement and the law of part performance still has role to play as preserved by s 26 of the PLA. There is nothing to suggest that the doctrine of Walsh v Lonsdale no longer applies to an agreement to lease. Even if Mr Lenihan’s submissions as to the effect of the changes made in the United Kingdom were correct (which I need not, and do not, determine), those changes were not adopted and they have no application in New Zealand.
[48] The equities of the position favour specific performance of the Agreement to Lease in this case. The covenant to enter into a guarantee is interdependent with the other obligations in the Agreement to Lease. As the Court of Appeal observed in Inglis, it would be untenable to require the trustees as lessor to execute the Deed without also requiring the lessee to execute a deed of guarantee.
[49] In this case, the equities are even stronger, as Mr Chambers not only agreed to enter into a Deed incorporating the terms of the guarantee, but he appears to have either signed the Deed, or at the very least accepted that he is bound by its terms. It would be inequitable in those circumstances for Mr Chambers to now use s 27 to escape liability on the grounds that a signed Deed can no longer be found.
[50] It is beyond argument that s 27 of the PLA changed the law as it relates to enforceability of guarantees. But I do not consider any of those changes mean that specific performance of the Agreement to Lease would not be granted in this case. None of the policy considerations behind the changes reflected in s 27 of the PLA
are engaged in this case.14 This is not a case about an oral guarantee, or part
performance being relied on to prove the existence of a guarantee. There is no uncertainty in the terms of the guarantee, as it is clearly set out in the Deed itself.
14 See Law Commission A New Property Law Act (NZLC R 29, 1994).
[51] Specific performance of the covenant is consistent with the requirements of s 27 in my view. Such an order would require Mr Chambers to fulfil his obligation to sign the Deed containing the contract of guarantee. That would meet the requirements of s 27 so as to make the contract of guarantee enforceable. The principle in Walsh v Lonsdale applies so that the parties are to be treated as if that step had been taken. In that context, specific performance of the covenant is in furtherance of the purpose underlying s 27, and is not at odds with it.
[52] It follows that I agree with the District Court Judge’s finding that s 27 does not render the principle in Inglis obsolete.
[53] But if I am wrong in that analysis, I note that s 27 would not apply to enforcement of an indemnity covenant in sch 3 of the Deed, as opposed to a guarantee covenant. Many of the losses claimed by the trustees appear to fall within the former category as they are losses that the landlord has suffered as a result of the lease being lawfully disclaimed or abandoned by the liquidator as provided in sub- clause (b) of sch 3. There is nothing in s 27 which would prevent specific performance of the Agreement to Lease to enforce an indemnity, and this is another route by which enforcement might be achieved.
Result
[54] The appeal is dismissed.
[55] The respondent is entitled to costs. If costs cannot be agreed, then a memorandum of counsel in support of costs shall be filed within 15 working days,
with a memorandum in reply filed within five working days thereafter.
Edwards J
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