Composting (New Zealand) Limited v Crosscut Timbers Limited
[2024] NZHC 2431
•28 August 2024
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
I TE KŌTI MATUA O AOTEAROA TE WHANGANUI-A-TARA ROHE
CIV-2023-485-187
[2024] NZHC 2431
BETWEEN COMPOSTING (NEW ZEALAND) LIMITED
Plaintiff/Counterclaim DefendantAND
CROSSCUT TIMBERS LIMITED
Defendant/Counterclaim Plaintiff
Hearing: 21 August 2024 (by AVL) Appearances:
J K Mahuta-Coyle for Plaintiff/Counterclaim Defendant
B J Gibson and S Woodhead for Defendant/Counterclaim Plaintiff
Judgment:
28 August 2024
JUDGMENT OF ASSOCIATE JUDGE LESTER
This judgment was delivered by me on 28 August 2024 at 12:30pm pursuant to Rule 11.5 of the High Court Rules
Registrar/Deputy Registrar
……………………….……
COMPOSTING (NEW ZEALAND) LIMITED v CROSSCUT TIMBERS LIMITED [2024] NZHC 2431
[28 August 2024]
Background
[1] Crosscut Timbers Limited (CTL) was the owner of a three ha industrial site at Fielding and operated a commercial firewood business from part of that site. CTL sold the site to Composting (New Zealand) Limited (Composting) by an agreement for sale and purchase dated 16 May 2022 (the contract) which settled on 1 June 2022.
[2] The contract required CTL to clear the site of surplus equipment plant, machinery, rubbish, scrap and debris. Composting alleges in its proceeding that CTL failed to meet that requirement and seeks damages for that alleged breach.
[3] CTL has counterclaimed. The contract provided that Composting would provide CTL with a lease for CTL to continue its commercial operations on part of the site. CTL in its counterclaim alleges Composting locked it out of the site in breach of the contract. Composting seeks security for costs against CTL in respect of the counterclaim.
[4] Before turning to consider whether Composting has established that it appears CTL will be unable to pay costs if its counterclaim fails, I briefly address the issue raised by the counterclaim.
Counterclaim
[5] The issue in the counterclaim concerns the inter-relationship between cl 23(c) and cl 24 of the contract. Clause 23(c) provides:
(c) Crosscut Timbers shall be entitled to continue their business operations including the contracts for Countdown, Foodstuffs and local firewood supplies from the land and buildings on the area marked “pink” together with their sawmilling activities on the condition the vendor enters into a Deed of Lease for the term from settlement to 1 December 2022. The terms and conditions of the Lease are to be agreed by the parties within five (5) working days from the date of this Agreement although it is agreed no rental shall be paid (the vendor will however pay the top transformer power which runs their operations and the office block/living quarters).
[6]Clause 24 of the contract provides:
24.0 The vendor grants to the purchaser a first right of refusal to purchase the business assets of Crosscuts. Timbers, including plant & machinery, customer database and commercial records. The first right of refusal is to be exercised by 1 December 2022 on terms and conditions to be negotiated between the parties. The vendor following settlement of this Agreement will arrange for the business to be independently valued at their costs and provide a copy to the purchaser. If the parties cannot reach agreement on the terms the vendor may offer the business to a third party. In the event the parties cannot reach agreement the purchaser shall provide the vendor with a Lease to Rent the Land at Commercial rates for a further 12 month period or alternatively provide notice they must remove all remaining assets within 90 working days of receipt of notice.
[7] On 1 June 2022, that is, the settlement date of Composting’s purchase, CTL had a six month lease at nil rent pursuant to a Deed of Lease dated 23 May 2022 (the Lease) which is on the Sixth Edition 2012 Auckland District Law Society form.
[8] As I have said, rental for the period 1 June 2022 to 30 November 2022 was nil. For the period 1 December 2022 to 30 November 2023 if the Lease was renewed market rent would be payable by CTL.
[9] The Lease also provided that CTL could continue to dry firewood in kilns on site now owned by Composting at a fair cubic metre rate.
[10] On 7 November 2022, Composting sent to CTL a draft lease to apply from 1 December 2022.1 Composting had, on 26 October 2022, advised CTL it would not be exercising the option to purchase CTL’s business contained in cl 24 of the contract, set out in [6] above. While referred to as a first right of refusal, Composting has what, in my view, was an option to purchase but nothing turns on that point.
[11] In mid-December 2022, CTL advised it would not be renewing the Lease. On 15 December 2022, as a result of receiving that advice, Composting gave notice terminating the Lease as at 24 January 2023. On 25 January 2023, Composting locked CTL out of the premises.
1 While Mrs Gibson, counsel for CTL, submitted there was no evidence the draft lease was actually sent to CTL on 7 November 2022, CTL did not advise Composting at the time that the draft had not been received when Composting referred to the draft in early December 2022, nor did CTL in its evidence for this application, deny receiving the draft.
[12] The difference between the parties is that Composting treated CTL as holding over under the Lease meaning CTL’s occupation was governed by cl 36 of the Lease which provides:
Holding Over
36.1 If the Landlord permits the Tenant to remain in occupation of the premises after the expiration or sooner determination of the term the occupation shall be a periodic tenancy only terminable by at least 20 working days’ notice given at any time with the tenancy terminating on the expiry of the notice at the rent then payable and otherwise on the same covenants and agreements (so far as applicable in a periodic tenant) as expressed or implied under this lease.
[13] CTL’s position is that it was entitled to 90 days’ notice pursuant to the final part of cl 24 set out in [6] above.
[14] Composting has retained CTL’s plant and equipment left on site together with property said to be owned by third parties.
[15] Composting relies on cl 20.3 of the Lease to retain CTL’s chattels. Clause 20.3 provides:
20.3 The tenant may at any time before and will if required by the landlord no later than the end or earlier termination of the term remove all the tenant’s chattels in addition to the tenant’s obligation to reinstate the premises pursuant to subclause 20.1. The tenant will make good at the tenant’s own expense all his own damage and if the chattels are not removed by the end of earlier termination of the term of ownership of the chattels may at the landlord’s election pass to the landlord or the landlord may remove them from the premises and forward them to a refuse collection centre. Where subclause 27.5 applies (no access in an emergency) the time by which the tenant must remove the chattels and to make good all resulting damage will be extended to five working days after access to the premises is available.
[16] If Composting was required to give 90 days’ notice to CTL to remove its property, then it failed to do so and is in breach (assuming cl 24 conferred on CTL a right of occupation for 90 days). If CTL’s occupation was pursuant to the periodic tenancy provisions of the Lease and it was not entitled to the 90 days notice then
Composting gave notice as required by cl 36.1 of the Lease and the counterclaim will fail.2
Security for costs — the threshold under r 5.45(1) of the High Court Rules 2016
[17] Rule 5.45(1)(b) of the High Court Rules 2016 (the Rules) asks if there is reason to believe that a counterclaim plaintiff will be unable to pay costs to the counterclaim defendant if the counterclaim plaintiff is unsuccessful in its claim.
[18]The authors of McGechan on Procedure provide: 3
What is contemplated is that “there should be credible (that is, believable) evidence of surrounding circumstances from which it may reasonably be inferred that [the party] will be unable to pay the costs. This does not, of course, amount to proof that [the party] will in fact, be unable to pay them”.
It is up to the applicant to show that the threshold has been satisfied:
An adverse inference might be made where the counterclaim defendant has put a counterclaim’s inability to meet an award of costs sufficiently in issue to require more than a bald assertion of ability to pay.
What then is the evidence of the threshold being met in this case?
[19] Composting points to CTL having been incorporated in 2015. The title for the land sold by CTL shows it acquired the land in 2015. A mortgage was registered at the same time. Composting says CTL was dependent upon the use of the premises and in particular the kilns for the drying of firewood for its firewood business to operate. Composting says that with CTL apparently having no new premises and no access to kilns or the yards required for commercial firewood sales there is the appearance that CTL is a non-trading shell or, if it is trading, it is only at a very low level.
2 Mrs Gibson submitted Composting had to comply with s 246 of the Property Law Act 2007 when it gave notice under cl 36.1, set out at [12] above. No authority was advanced in support of that proposition and I do not consider s 246 of the Act has any application, as that section is focused on cancellation for breach and it is not applicable to a notice under a holding over clause.
3 Jessica Gorman and others McGechan on Procedure (online ed, Thomson Reuters) at [HR5.45.02], citing Concorde Enterprises Ltd v Anthony Motors (Hutt) Ltd (No 2) [1997] 1 NZLR 516 (SC) at 519.
[20] While CTL received the net sale proceeds for the property, it is common ground those proceeds have been advanced by CTL to the trustees of the Family Trust of its directors who applied the funds to the purchase of a property for them to live in.
[21] The title for that property is before the Court and it shows the property is in the names of the directors of CTL and a third party, who is a solicitor, consistent with the property being held in a family trust. Accordingly, Composting says the net sale proceeds no longer being held by CTL means there is every appearance that CTL has no funds to meet a costs award.
[22] CTL accepts that it has advanced the net sale proceeds to the trustees. CTL says that debt is an asset that it can call upon should it have to pay costs.
[23] Claiming commercial confidentiality, CTL has not produced its accounts or a copy of any agreement recording the advance — whether the advance is repayable on demand is not known but is inherent in CTL’s position.
[24] The title of the residential property purchased by the directors of CTL shows that the property is also subject to a mortgage. The directors settled the purchase of the property on 10 June 2022 but gave a mortgage on 6 April 2023, about a month before these proceedings were issued. The circumstances of that mortgage are unexplained.
[25] I am satisfied there is reason to believe that CTL will be unable to pay costs if its counterclaim fails.
[26] CTL’s position is that it would need to call upon the advance to meet an adverse costs award. Whether there is or will continue to be sufficient equity in the property purchased with the sale proceeds of CTL’s property to meet the advance given the mortgage cannot be determined on the evidence.
[27] I also note in an email of 22 November 2022, during discussions about the possible renewal of the Lease, there is reference to CTL owing Composting just under
$15,000. CTL said it was not in a position to pay that amount at that time. This was
while CTL was in fact trading from the site. Its inability to meet that relatively modest sum while trading gives me no confidence as to its ability to meet costs.
[28] CTL says if it has to pay security that will impact on its ability to fund its defence. At the same time, CTL says it continues to trade albeit on a reduced scale. This proceeding is at an early stage. Staged security is sought. That CTL says it could not meet staged security, which I estimate would have to be paid over something like 18 months, suggests CTL’s continued trading is at a modest level.
[29]I also take into account the fact that CTL’s financial records are not produced.
McGechan notes that:4
A plaintiff opposing an application for security for costs is not required to disclose their financial position. However, failure to do so places the plaintiff in a disadvantageous position because it effectively invites the Court to infer that the plaintiff will not be in a position to meet any costs order that may be made so as to foreclose the threshold question under r 5.45, and at the same time it makes it difficult for the plaintiff to mount an argument that an order will preclude them from pursing the claim.
[30] CTL could have sought agreement that its accounts be disclosed on a counsel-only basis or sought suitable directions from the court in that regard.
[31]As I have said, I am satisfied that the threshold under r 5.45(1) has been met.
Is it just in all the circumstances to grant security for costs?
Assessment of the merits
[32] Clause 23 of the Lease governs CTL’s occupation of the site up to 1 December 2022. By that date, Composting was to have elected whether to acquire CTL’s business assets, it deciding not to. Therefore, Composting had to: “… provide [CTL] with a lease to rent the Land at commercial rates for a further 12 month(s)… or give a 90 day notice to [CTL] to remove its assets”.
4 Jessica Gorman and others, above n 3, at [HR5.45.02], citing Monnery v Parsons [2021] NZHC 2845 at [51] — [52].
[33] Composting says it did provide CTL with a lease — being the draft sent on 7 November 2022. While Land in cl 24 is capitalised, it does not appear to be a defined term in the contract but in context it appears to mean the land in cl 23(c). CTL replied on 22 November 2022 that it did not want to lease all of the Land and made a counter offer in which CTL appears to offer to lease a smaller area than originally leased.
[34] Composting, in its 7 November 2022 draft lease, sought a rental of $137,610. The rental in the counter offer of 22 November 2022 was $26,000. Composting gave notice it required rental to be set in accordance with the provisions of the 23 May 2022 lease but that process did not progress.
[35] CTL replied on 8 December 2022 referring to a meeting on site with its representative which did not proceed saying in the email:
It was my understanding the onsite meeting requested last week was to discuss site dismantling of equipment and clearing of Crosscut plant and equipment so that both parties exit amicably.
[36] The email refers to CTL’s understanding that Composting did not want to renew the Lease.
[37] Composting’s lawyers replied, treating the email of 8 December 2022 as notice that CTL would not be renewing the Lease. CTL replied suggesting that the parties may have been at cross purposes but saying that removal of equipment was underway with CTL expecting to vacate earlier than the 90 days in cl 24.
[38] One view of the merits is that it is arguable CTL was offered a lease on commercial terms for the Land. Its right under cl 24 was to a lease of the Land. If terms as to leasing an alternative area could not be reached then CTL either accepted a lease of the Land on commercial terms or it vacated but if it chose to vacate, it was not entitled to a 90 day notice. Arguably cl 24 required Composting to provide a lease or give a 90 day notice. It is arguable that if Composting offered a lease on commercial terms, then having done so, it did not then also have to give a 90 day notice if CTL did not accept the Lease on commercial terms.
[39] An alternative interpretation of the closing words of cl 24 is to read the reference to a new lease or a 90 day notice as not options providing Composting with an election which, once exercised, meant the other alternative was not available but to read the 12 month lease or 90 day notice as being sequential alternatives. A literal reading of the clause appears to be against that approach with the clause using “or” rather than “then in the alternative” or similar.
[40] Mr Mahuta-Coyle, counsel for Composting, submitted that in effect the 90 day notice provision was impliedly varied by the parties entering into the 23 May 2022 lease. He submits that the holding over provision is inconsistent with the 90 day notice period in cl 24 which was therefore impliedly varied thereby deleting the 90 day provision. While I can see the basis of that argument, it is clear from the contemporary correspondence that CTL remained of the view that it had 90 days to vacate.
[41] However, it is important to identify what the 90 day period was for. It allowed CTL time to remove its assets. It does not purport to grant CTL a 90 day lease. Arguably, the 90 day period was only a right to CTL to access the property to remove its property. Viewed in that light, there is no inconsistency between the holding over provision in the 23 May 2022 lease and the 90 day access right as they are concerned with different rights. A 90 day lease (that is, a continuation of the Lease for 90 days) would have given CTL exclusive possession of the site in the usual way with some provision for the payment of rent. A right to remove chattels is just that — it is not a right to exclusive occupation. So while CTL’s lease may have come to an end, it does not follow its right to access the site only for the purpose of removing its chattels also came to an end. That would mean the relationship between a 90 day right to remove chattels and cl 20.3 of the Lease may need to be considered. Again, arguably the two clauses are not in conflict as cl 20.3 determines what is to happen before the expiry of the term in relation to the removal of tenant’s chattels with the 90 day period which applies thereafter. The right to remove chattels in the 90 day period is not a right to operate the business as if a lease existed during that time.
[42] In my view, the merits are not as clear cut as either party assumes. The bulk of CTL’s counterclaim is likely to be taken up with issues of loss. Liability is a short point. Either, CTL was entitled to 90 days to remove its chattels or it was not.
CTL’s ability to fund the proceeding
[43] CTL claims that it is continuing to trade, albeit on a reduced basis. It says that it is “asset rich” because of the advance noted earlier. CTL’s claim that having to pay security would frustrate its ability to pursue its defence, is difficult to assess given the absence of detailed financial disclosure. The idea that security would frustrate CTL’s defence really turns on the nature of the security that is ordered.
[44] Here, CTL asks the Court and Composting to accept that if Composting is successful in defending the counterclaim that CTL would meet those costs by calling on the advance. The advance is apparently represented at the property now occupied by the directors and held on trust. If security for costs was by way of a mortgage over that property then, assuming there is sufficient equity to provide a mortgage of value, that would in substance reflect what CTL puts its means of satisfying a costs award.
[45] Security is sought in the sum of $68,951 being a 2B costs calculation on the basis of a two week hearing. The schedule of staged security tendered by Composting includes a step that has already been completed, being the filing of the defence to the counterclaim.
[46] That takes the security sought in round numbers to $64,171, which assumes a two week hearing.
[47] I do not see CTL’s counterclaim, if it was run as a standalone hearing, taking two weeks even if the hearing had to assess damages. The liability point is a short one. Given the potential complexity around determining loss, it would make sense to determine liability separately from damages. I raised this with the parties during the hearing with Mrs Gibson, counsel for Crosscut, saying she would take instructions. CTL has now elected to pursue its counterclaim only in respect of liability. As that point is a short one, it is likely to only take a day of what is likely to be in total a five day hearing to determine Composting’s claim.
[48] Taking into account that the counterclaim will take a day of a five day hearing and excluding the amount claimed for the step already taken — I fix security in the sum of $20,000 — given as I have said, the merits are not clear cut.
[49] I reserve leave for CTL to seek to provide security by way of a registerable mortgage over the Foxton property. Such an application is to be made within 10 working days. Failing that, security is to be paid in two tranches — 50 per cent within 10 working days of this judgment and the balance to be paid three months prior to the hearing.
Costs
[50] The outcome of the application is different from what either party would have envisaged at the outset. That the counterclaim is to proceed only as to liability was only suggested by me with that step having a significant impact on the length of the hearing as discussed above. While it is said some success is still success for the purposes of costs, I suspect that had security of $20,000 been sought at the outset, such could have been agreed. My initial view is that costs should lie where they fall but memoranda can be filed within five working days failing which that will the costs order.
Associate Judge Lester
Solicitors:
Wakefield Lawyers, Wellington Treadwell Gordon, Whanganui
Copy to counsel:
J K Mahuta-Coyle, Barrister, Wellington
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