Detour Clothing Ltd v Star Five Ltd
[2017] NZHC 1172
•31 May 2017
IN THE HIGH COURT OF NEW ZEALAND INVERCARGILL REGISTRY
CIV 2016-425-122 [2017] NZHC 1172
BETWEEN DETOUR CLOTHING LTD
Plaintiff
AND
STAR FIVE LTD Defendant
Hearing: 24 May 2017 Counsel:
D R Tobin and A Holland for Applicant
B M Russell for RespondentJudgment:
31 May 2017
JUDGMENT OF HEATH J
This judgment was delivered by me on 31 May at 4.00pm pursuant to Rule 11.5 of the High Court Rules
Registrar/Deputy Registrar
Solicitors:
Berry & Co, QueenstownLane Neave, Christchurch
DETOUR CLOTHING LTD v STAR FIVE LTD [2017] NZHC 1172 [31 May 2017]
CONTENTS
The application [1] Background [3] The first Property Law Act Notice [11] The second Property Law Act Notice [23] The “relief against cancellation” proceedings [36] Analysis
(a) Legal principles [39]
(b) Clause 33 of the Lease [45] (c) Proportionality: The balancing exercise [56] Result [77]
The application
[1] Detour Clothing Ltd applies for relief against cancellation of a lease (the Lease). Cancellation was effected following an alleged breach of the Lease caused by Detour Clothing’s failure to obtain consent to an effective change in its management structure.1 The application is made under s 253 of the Property Law Act 2007 (the Act). The Court’s powers on such an application are set out in s 256.2
[2] The application is opposed by the landlord, Star Five Ltd. It contends that cancellation of the Lease was justified on the information available to it at the relevant time. Further, it asserts that the wider range of considerations that can be taken into account on an application of this type do not justify the relief sought. It is
accepted that this Court has a wide discretion to grant relief.3
Background
[3] Since 1988, Detour Clothing has operated a business in Queenstown which involves the sale of fashionable apparel for both men and women. In 2014, it was keen to secure a prestigious location from which it could trade. It located a shop at
17 Rees Street, owned by Star Five. Those premises are in a street that runs parallel
to Lake Wakatipu, in the area between Queenstown Mall and Shotover Street.
1 See cl 33.3 of the Lease, set out at para [46] below.
2 Sections 253 and 256 of the Property Law Act 2007 are set out at para [39] below.
3 Studio X Ltd v Mobil Oil NZ Ltd [1996] 2 NZLR 697 (HC), at 701, set out at para [42] below.
[4] On 4 February 2014, in order to procure a lease, Detour Clothing entered into two interdependent agreements. The first was with the existing tenant, Beaver Liquor Ltd. This concerned the payment of “key money”. The second was the Lease, the counterparty to which was Star Five. Both Star Five and Beaver Liquor are companies owned by family interests associated with the director of Star Five, Mr Alastair Spary. While Mr Spary has described himself as “an advisor” to Beaver
Liquor, there is evidence that he exercises decision-making functions on its behalf.4
[5] In consideration of a payment of “key money” of $195,100, Beaver Liquor agreed to surrender its lease with Star Five. The “key money” represented the price that Detour Clothing was prepared to pay to obtain access to a store in one of the retail areas in Queenstown most accessible to tourists.
[6] Detour Clothing entered into the Lease with Star Five immediately after having obtained Beaver Liquor’s agreement to surrender its existing lease. Detour Clothing’s obligations under the Lease were guaranteed by its sole director and shareholder, Mr Michael Collins. The Lease was for a term of four years and seven months, commencing on 1 March 2014. One right of renewal was available, for a period of 10 years from 1 October 2018.
[7] Detour Clothing took possession of the premises on 1 March 2014. Before it began to trade, it refurbished the shop and undertook a full fit-out. The purpose of this work was to create customised racking systems, furniture and lighting. It included the installation of new stairs and fire alarms, strengthening and rebuilding the mezzanine floor, and cutting and polishing concrete floors. The shop opened for trading on 11 June 2014. Mr Collins has given evidence that Detour Clothing spent close to $250,000 on the fit-out of the premises.
[8] Just over one month later, on 21 July 2014, Mr Collins transferred 50 of his
100 shares in Detour Clothing to Ms Natalie Houghton. At the time, she was his de facto partner. Ms Houghton was appointed as a director of Detour Clothing on
1 September 2014.
4 The circumstances are described in paras [23]–[25] below.
[9] On 10 September 2014, Mr Collins sold eight further shares to Ms Houghton. That left her with 58 percent of the shares, and a controlling interest in Detour Clothing. On 23 September 2014, Mr Collins resigned as a director. That left Ms Houghton as the sole director of the company.
[10] Between June 2014 and July 2016, Ms Houghton appears to have taken over full responsibility for the management of Detour Clothing’s business. She injected funds to provide working capital for the enterprise. In financial statements provided to Star Five in May 2015, Detour Clothing was shown to be indebted to Ms Houghton in the sum of $250,000.
The first Property Law Act Notice
[11] Clause 33 of the Lease5 deals with circumstances in which Detour Clothing was required to obtain Star Five’s consent to an assignment or sub-letting of the premises, or to an effective change in its management.6 Star Five took the view that Ms Houghton’s assumption of management duties without its consent breached cl 33.3 of the Lease. On 10 February 2015, Star Five issued a notice under s 246 of the Act (the First Notice) giving notice of breach of a condition of the Lease, and requiring it to be remedied. In the First Notice, Star Five stated:
…
Default
1.The Landlord gives you notice that as a result of a change in shareholding in the Tenant from Michael Roy Collins to Natalie Anne Houghton and the removal of Michael Roy Collins as a director of the Tenant and the appointment of Natalie Anne Houghton as a director of the Tenant, you have breached the following covenants contained in the Lease:
a.Clause 33.3: Where any Tenant is a company which is not listed on the main board of a public stock exchange in New Zealand or Australia, then any change in the legal or beneficial ownership of its shares or the shares of its shareholder or issue of new capital in the company or its shareholder where in any case there is an effective change in management or control of the company will require the
5 The relevant parts of cl 33 are set out at para [46] below.
6 An analysis of the obligations assumed by Detour Clothing under cl 33 of the Lease is set out at paras [45]–[54] below.
written consent of the landlord which will not be unreasonably withheld or delayed.
Remedy
2.If you wish to remedy this breach, you must obtain written consent from the Landlord to the effective change in management and control of the Tenant from Michael Roy Collins to Natalie Anne Houghton, within 15 working days of the service of this notice (Specified Period).
Consequences
3.As a consequence of the breach of covenant, if you fail to remedy the breach in accordance with paragraph 2 above, the Lease will be considered to be cancelled at the expiry of the Specified Period.
4.The Landlord wishes to advise you of your right under Section 253 of the Property Law Act 2007 to apply to a court for relief against cancellation of the Lease and recommends that you seek legal advice on the exercise of that right and on this notice.
….
[12] Although the First Notice was issued on 10 February 2015, there is evidence that Mr Spary had known, since December 2014 at the latest, that Ms Houghton had been managing the business.
[13] In an email that Ms Houghton sent to Mr Spary on 5 December 2014, Ms Houghton wrote:
Hi Al [Spary],
Thanks for your email. I appreciate your patience over the last 2 months and understand that you require a solution asap. We also need certainty going forward as much as you do. As you know Detour was run terribly by Mike [Collins] and I am currently running the business by default, it was the only option I had to try and secure the money I invested in Detour this year. Had I have not stepped in Detour would have certainly closed as Mike was in huge debt with suppliers and haemorrhaging money.
Yes I am currently running Detour, but whilst Mike is still a 42% shareholder and you have a signed lease from Mike and rent is paid monthly on time, I see no pressure for me to become a guarantor. Mike negotiated the key money agreement prior to me taking over the business in September, and I most certainly couldn’t have committed to paying $1627.86 per week with a relocation and expensive fit out this year. To be honest Al the business isn’t capable of supporting it, therefore, I cannot take over the key money agreement.
As you know, Mike did not allow me to take over the 100% shareholding of Detour and he could not make a suitable offer to buy me out either. Over the last few months we have been trying to trade our way out of the debt Mike left us with but the $1627.86 per week required for key money would break us. We are technically running an insolvent company … which is illegal.
What I can propose is that we trade until the end of January and reassess the situation then. If you are going to press on with legal action over the key money Detour will be forced to close it’s doors. We have no other alternative unless another buyer comes into Detour as an investor? I have called out to Mike for extra cash, but heard nothing from him.
Please keep us informed of your decision going forward and anything resulting in legal proceedings will result in us calling insolvency asap.
Many thanks and best regards
Natalie
(Emphasis added)
[14] On 23 December 2014, Beaver Liquor made demand on Detour Clothing in respect of a sum of $14,955.80 that remained owing to Beaver Liquor under the “key money” agreement. The demand was sent by solicitors instructed by Beaver Liquor. Payment was required by 5.00pm on the following day, Christmas Eve. The letter made it clear that if the moneys were not paid by that time a statutory demand would be issued. The letter was delivered to the registered office of Detour Clothing in Queenstown. Ms Houghton was the person who responded to it.
[15] At 3.59pm on 23 December 2014, Ms Houghton sent an email to Mr Spary, with a copy to Mr Collins. I infer that the email was sent after she received the demand which was served on Detour Clothing on 23 December 2014. Ms Houghton said:
Dear Al
Mike Collins is in agreement to surrender the lease on 17 Rees Street, this includes the key money agreement he also guaranteed under Detour Clothing. As you know paying rent plus key money with all historic supplier debt was unsustainable for the business after fit-out and Mike Collins mis- management.
Please could you advise steps from here with ample warning for us exiting the premises.
Thank you and appreciate your patience with us over the quiet trading times. Natalie Houghton
[16] On 8 January 2015, Ms Houghton sent a further email to Mr Spary, referring to a telephone conversation that she had had with him on 7 January 2015. She confirmed that she was “currently away” but would meet with Mr Spary on her return “to agree terms to repay in full the outstanding key money (excluding interest payments)”. Ms Houghton concluded her email by saying that she would be in Queenstown from Monday 12 January 2015 “to agree and sign a new lease”. It is unclear what happened between Mr Spary and Ms Houghton immediately after that email was sent. Ms Houghton, who has since separated from Mr Collins, has not filed any affidavit in this proceeding.
[17] On 10 February 2015, two documents were sent to Detour Clothing by Lane Neave, as the solicitors for Star Five and Beaver Liquor. They were the First Notice issued by Star Five7 and a statutory demand for repayment of the outstanding “key money” by Beaver Liquor. The contemporaneous provision of both demands demonstrates that Mr Spary regarded the two obligations as interdependent, even though different contracting parties were involved. Detour Clothing’s solicitors
responded on 27 February 2015:
STAR FIVE LIMITED (“Landlord”) - DETOUR CLOTHING
LIMITED (“Tenant”): DEED OF LEASE DATED 4 FEBRUARY 2014
1.We act for Detour Clothing Limited and note that we are in receipt of your letters of 10 February 2015 enclosing a Section 246 Property Law Act Notice (“Notice”) and a Statutory Demand (“Statutory Demand”).
2. In terms of the Notice, we are hereby instructed to request that the
Landlord provide written consent to:
(a) the change in shareholding in the Tenant from Michael Roy
Collins to Natalie Anne Houghton;
(b) the removal of Michael Ray Collins as a Director of the
Tenant; and
(c) the appointment of Natalie Anne Houghton as the Director of the Tenant.
7 Set out at para [11] above.
3.We enclose a statement recording Natalie Anne Houghton's professional experience.
4.We are further instructed that upon receipt of the Landlord’s consent to the matters referred to at paragraph 2 above and confirmation that the Notice is withdrawn, that all outstanding sums referred to in the Statutory Demand will be promptly paid.
….
[18] Lane Neave requested further information to enable Star Five to consider whether to consent to the change in shareholding. In an email sent on 3 March 2015 they said:
…
… In order to assess the request we will require the following from you:
1. A copy of the latest set of financial accounts for the tenant;
2.Confirmation of the guarantors and statements of financial position for each guarantor; and
3.Your undertaking that our client’s costs, including its legal costs, incurred in respect of the Issue of the PLA Notice and assessing your client’s request for consent to the deemed assignment will be paid by your client.
In addition to the above Information, all other breaches of the lease and arrears under the lease will need to be brought up to date immediately.
We note that this request is made by your client in the context of repeated correspondence with our client in which she has stated that the tenant is in a poor financial position and its ability to continue trading is in question. You will therefore appreciate that our client has reasonably held reservations that your client and the tenant has the financial resources to meet the tenant’s commitments under the lease.
This email and our client’s consideration of the request to consent to the deemed assignment is made without prejudice to our client rights under the PLA notice, which expires to [sic] today.
….
[19] Separately, on 23 April 2015, Lane Neave (in their capacity as solicitors for Beaver Liquor) wrote to solicitors acting for Detour Clothing in relation to non- compliance with the statutory demand of 10 February 2015. The letter concluded:
…
3.Beaver has made repeated demands on Detour to comply with its obligations under the Key Money Agreement, which resulted in the service of Statutory Demand on 10 February 2015. Detour has ignored these demands and as of today, remains in arrears under the Key Money Agreement in an amount of $18,615.78.
4.The substantial breach of an essential term [of] the Key Money Agreement by Detour [gives] Beaver the right to cancel the Key Money Agreement. We now serve formal notice that the Key Money Agreement is cancelled as a consequence of the substantial and serious breach. This cancellation is without prejudice to Beaver’s right to claim from Detour the losses that it suffered, which include the total amount due under the Key Money Agreement as of today being $96,187.38 together with the costs incurred by Beaver in enforcing the terms of the Key Money Agreement.
5.Beaver will be moving ahead with applying to the Court for Judgement in respect of its losses suffered under the Key Money Agreement.
….
[20] On 19 May 2015, Beaver Liquor issued proceedings in the District Court at Queenstown to recover moneys under the “key money” agreement. This proceeding was subsequently settled on 12 February 2016.8
[21] On 21 May 2015, the solicitors for Detour Clothing wrote to the solicitors for Star Five in response to their request for further information in relation to the question whether consent to the change in shareholding should be given. After referring to earlier correspondence, which had included a statement that Detour Clothing’s bank had confirmed that it was “happier to have [Ms Houghton] managing the business and associated bank debt”, the solicitors for Detour Clothing continued:
…
5. In terms of the relevant information sought as to our client’s
position, we enclose the following -
5.1 Correspondence from McCulloch + Partners dated 5 May
2015.
5.2Projected statement of financial performance for 12 months ended 30 June 2015.
8 See paras [23]–[25] below.
5.3 Statements of ANZ bank accounts from 31 October 2014 to
30 April 2015. We note that the business current account has had a fairly consistent overall overdraft during that time,
which indicates that it is meeting its costs of business. This
supports the bank’s and the accountant’s assessments.
5.4An email from the ANZ Bank confirming their ongoing support for our client.
5.5A copy of the financial statements as at 31 March 2014. We note that the 2015 statements are still being prepared.
6.Further, we have discussed with Ms Houghton whether she would be prepared to provide a guarantee in place of Mr Collins, and she confirms that she is willing to do so.
7. In terms of the matter, our client continues to propose that-
7.1Star Five will provide its written consent to the alteration of the directors and shareholding of our client; and
7.2 Star Five will withdraw its Property Law Act Notice dated
10 February 2016.
7.3Our client will make a reasonable contribution to legal costs to be negotiated.
….
[22] Despite further correspondence, no decision was ever communicated by Star Five to Detour Clothing as to whether it consented to the change in effective management to Ms Houghton. Mr Russell, for Star Five, acknowledges that his client’s failure to respond to the request in a timely manner should be interpreted as acquiescence on the part of Star Five to the assumption of effective management by Ms Houghton. Although an issue was raised by Mr Tobin, for Detour Clothing, about the ability of Star Five to waive any breach of this type, I am satisfied that
cl 40.1 of the Lease authorised waiver.9 That clause states:
Waiver
40.1 No waiver or failure to act by either party in respect of any breach
by the other shall operate as a waiver of another breach.
(emphasis added)
9 More generally, see Strong v Ball [1950] NZLR 72 (SC) at 78 (Smith J).
The second Property Law Act Notice
[23] On 12 February 2016, a judicial settlement conference was held in the District Court at Queenstown in relation to the proceeding brought by Beaver Liquor to obtain payment of the total amount payable for “key money”. Ms Houghton represented Detour Clothing at that conference. Mr Spary was present on behalf of Beaver Liquor.
[24] A settlement was concluded. It involved payment of a sum of $42,000 on terms, including a guarantee from Ms Houghton. On my calculation, that settlement resulted in over $200,000 being paid to Beaver Liquor. The sum of $95,000 had been paid to entry into the premises. $68,000 had been paid before the settlement conference. A further $42,000 was to be paid under the settlement. The amount was inclusive of costs incurred by Beaver Liquor.
[25] One of the terms of settlement involved an acknowledgement that it did not compromise “outstanding issues between Detour Clothing and Star Five”, except in relation to some operating expenses that are not relevant for present purposes. The settlement document was signed by Mr Spary as an “authorised person” on behalf of Beaver Liquor. Ms Houghton signed both as an authorised representative of Detour Clothing and on her own behalf, as a guarantor of the settlement arrangements.
[26] Subsequently, Mr Collins arranged to re-acquire from Ms Houghton the whole of the shareholding that he had previously transferred to her. On 29 March
2016, there was an exchange of text messages between Mr Collins and Mr Spary, in which Mr Collins advised his intention to effect that change in shareholding as from
1 May 2016.
[27] The nature of text messaging is such that attempts to interpret precise meanings from the words (or abbreviations) used can be fraught. The thrust of the exchange was advice by Mr Collins that he would be re-acquiring Ms Houghton’s shareholding in Detour Clothing; advice from Mr Spary that he proposed to cancel the lease if that occurred; and, an indication from Mr Collins that he did not believe they would end up in Court if an attempt to cancel were made. All that can be gathered from that exchange is a determination on the part of Mr Collins to take back
effective control of the management of Detour Clothing and a corresponding determination by Mr Spary to cancel the Lease if he did so.
[28] Ms Houghton’s shareholding in Detour Clothing was transferred back to Mr Collins on 18 July 2016. At the same time, Mr Collins resumed his position as sole director of the company.
[29] In August 2016, Mr Spary became aware of a proposal by an associate of Mr Collins, Mr Mohan Ball, to inject some funds into Detour Clothing’s business. There was no indication, at that time, as to the way in which any payments might be structured; for example, as equity in Detour Clothing, a loan to Detour Clothing or a
loan to Mr Collins’ personally.10
[30] A second Property Law Act (the Second Notice) notice was issued on 27
September 2016. It alleged a breach of cl 33.3 of the Lease, in relation to the resumption of control of Detour Clothing by Mr Collins. While two further defaults were also alleged, in the form of non-payment of outgoings and legal costs payable to Star Five under the Lease, they were subsequently remedied. Star Five cancelled the Lease on the basis of the breach of cl 33.3. Relevantly, the Second Notice stated:11
…
1. Default
1.1The Landlord gives you notice that you have breached the following covenants:
1.2As a result of a change in shareholding in the Tenant from Natalie Anne Houghton to Michael Roy Collins and the removal of Natalie Anne Houghton as director of the Tenant and appointment of Michael Roy Collins as director of the Tenant, you have breached the following covenant:
a. Clause 33.3: Where any Tenant is a company which is not listed on the main board of a public stock exchange in New Zealand or Australia, then any change in the legal or beneficial ownership of its shares or the shares of its shareholder or issue of new capital in the company or its shareholder where in any case there is an effective change in management or control of the company will
10 See also para [72] below.
11 The relevant parts of cl 33 of the Lease are set out at para [46] below.
require the written consent of the landlord which will not be unreasonably withheld or delayed.
1.3You have further breached the covenant to pay outgoings contained in clause 3.1 of the Lease by failing to pay outgoings payments which fell due for payment on 7 September 2016 (in accordance with the outstanding invoice annexed to this notice).
1.4You have further breached the covenant to pay the Landlord’s legal costs of an incident to the enforcement of the Landlord’s rights under the Lease contained in clause 6.1 of the Lease by failing to pay legal invoices which fell due for payment on 7 September 2016 (in accordance with the outstanding invoices annexed to this notice).
2. Remedy
2.1If you wish to remedy the breach specified in paragraph 1.2 you must obtain written consent from the Landlord to the effective change in management and control of the Tenant from Natalie Anne Houghton to Michael Roy Collins by 5:00p.m on Tuesday 18
October 2016 being 15 working days of the service of this notice
(Specified Period)
2.2If you wish to remedy the breach specified in paragraph 1.3, you must make payment of:
2.2.1the total outstanding outgoings, being the sum of $1,403.00 including GST; and
2.2.2default interest of $9.67 pursuant to clause 5.1 of the Lease on the outstanding amount contained in clause 2.2.1; and
2.2.3 the amount specified in paragraph 2.4 below.
2.3If you wish to remedy the breach specified in paragraph 1.4, you must make payment of:
2.3.1the total outstanding legal costs, being the sum of $5,488.25 including GST; and
2.3.2default interest of $37.75 pursuant to clause 5.1 of the Lease on the outstanding amount contained in clause 2.3.1; and
2.3.3 the amount specified in paragraph 2.4 below.
2.4In order to remedy the breaches specified in paragraphs 1.3 and 1.4 you must also pay legal fees of $1,200.00 (plus disbursements) being the costs of preparing and serving this Property Law Act Notice.
2.5All payments required under paragraphs 2.2, 2.3 and 2.4 must be made by 5:00pm on Tuesday 11 October 2016 being 10 working days from the service of this notice (Expiry Date).
3. Consequences
3.1 As a consequence of the breach of covenant, if you fail to remedy:
3.1.1the breach specified in paragraph 1.2 in accordance with paragraph 2.1 by the expiry of the Specified Period; or
3.1.2the breaches specified in paragraphs 1.3 and 1.4 in accordance with paragraphs 2.2, 2.3, 2.4 and 2.5 by the Expiry Date,
then, in either case, the Landlord intends to cancel the Lease in accordance with section 244 of the Act.
….
[31] The first communication in response to the Second Notice was sent by
Detour Clothing’s present solicitors, Berry & Co, Queenstown, to Lane Neave on 18
October 2016. After referring to the relevant provisions of the Second Notice and the Lease, Berry & Co wrote:12
…
Detour Clothing Limited seeks the consent of Star Five Limited as landlord under the Lease to:
• the transfer of 58 shares in DCL from Natalie Houghton to
Michael Roy Collins on 18 July 2016;
• the removal of Natalie Houghton as a director of DCL on 7
July 2016; and
• the removal of Natalie Houghton as a director on 7 July
2016,
with the effect that Michael Roy Collins is the sole director and shareholder of DCL, as per the attached company extract.
We note that the present shareholding and directorship of DCL is the same as it was on the date that the lease was signed. We are advised that all payments of rent and outgoings are presently up to date. In addition, we understand each amount required to be paid under paragraphs 2.2, 2.3 and 2.4 of the PLA Notice has been paid. We also note that the landlord cannot unreasonably withhold nor delay its consent under clause 33.3 of the lease.
In the event that the landlord’s consent is not forthcoming in time for our client to have complied with paragraph 2.1 of the PLA Notice and the landlord thereafter takes steps to cancel the lease, please be aware that we have instructions to apply to the court for relief against cancellation of the
12 It appears that the third bullet point in the letter is in error, as it repeats what is said in the second. I infer it was intended to refer to Mr Collins’ reappointment as a director on that date.
lease under section 253 of the Property Law Act 2007 (without prejudice to any of our client's rights under the lease).
[32] For reasons that will become apparent,13 I consider that the solicitors on each side were proceeding on an incorrect assumption that the requirements of cl 33.1(a) of the Lease (in respect of assignment or sub-letting) were the same as those set out in the “change in effective management” provisions of cl 33.3.14 This correspondence (and similar correspondence in relation to the First Notice)15 must be read in that context.
[33] The following day, 19 October 2016, Lane Neave wrote to Berry & Co advising that Star Five did not consent to the “deemed assignment” proposed. They said:
2.We note the PLA Notice dated 27 September 2016 required your client to remedy the breach of the Lease by obtaining Star Five Limited’s (Star Five) consent to the deemed assignment by 5pm yesterday. Your client has failed to comply with the PLA Notice, with your brief email yesterday failing to prove to Star Five’s reasonable satisfaction that the proposed assignee is respectable, responsible and has the financial resources to meet the tenant's commitments under the Lease.
3. Star Five does not consent to the deemed assignment of the lease.
We record the following matters which are relevant to our client’s
reasonable withholding of its consent:
(a) There has been a long history of breaches of the Lease by the Tenant, which include (without limitation):
(i) two unconsented deemed assignments of the Lease involving Michael Collins;
(ii) numerous occurrences of rent and outgoings arrears resulting in the service of PLA Notices and regular late payment of rent and outgoings; and
(iii) the Tenant trading while insolvent when under the control and management of Michael Collins, which ultimately resulted in the Tenant entering into an arrangement with its creditor Beaver Liquor Limited.
(b) The directors of Star Five have been contacted several times by Michael Collins’ current business partner in the Tenant
13 See paras [45]–[55] below.
14 The relevant parts of cl 33 are set out at para [46] below.
15 See para [17]–[21] above.
company regarding matters concerning the Lease. That individual appears to exercise a degree of effective control and management of the Tenant company despite your email confirming that Michael Collins is its sole director and shareholder. The lack of disclosure regarding the level of involvement of the business partner is a concern to our client, and is relevant to its assessment that the assignee is neither respectable nor responsible.
(c) Michael Collins had effective notice from Star Five that it did not consent to a deemed assignment of the lease at the time that the shares in the Tenant were transferred to him. Despite that notice, Mr Collins proceeded with the unconsented deemed assignment in a blatant disregard of Star Five’s rights under the Lease.
(d) Your email requesting consent to the deemed assignment of the Lease contains no financial details for the Tenant or Michael Collins which enable our client to assess whether the Tenant has the financial resources to meet its commitments under the Lease, and provide any security to our client that the prior breaches of the Lease will not be repeated.
4.Your client has failed to comply with the PLA Notice with the result that Star Five considers the Lease to be cancelled. Star Five will be taking steps to take possession of the premises in accordance with section 244(1) of the Property Law Act 2007.
[34] Star Five effected peaceable re-entry into the Rees Street premises on 28
October 2016. A “Notice of Re-Entry and Cancellation of Lease” document was
affixed to the premises at that time. The locks to the building were changed.
[35] On 3 November 2016, Star Five entered into a new lease with Happy Travels NZ Ltd. That company was to take possession of the premises as soon as they were vacated. Happy Travels is now in occupation of the shop and is operating its business from that location.
The “relief against cancellation” proceeding
[36] On 8 November 2016, proceedings were issued by Detour Clothing, in the High Court at Invercargill, to seek relief against cancellation of the Lease. Initially, interim relief was sought to enable Detour Clothing to go back into possession of the shop, to trade over the lucrative Christmas/New Year period.
[37] The interim relief application was heard on 14 December 2016. In a reserved judgment given on 22 December 2016, Davidson J dismissed it.16 One of the issues that concerned the Judge was the possibility that any interim order might unfairly prejudice Happy Travels. At the time the interim relief application was heard, Happy Travels had not been served with the proceeding or notified of it by either party. In my view, the Judge was right to regard the possibility of infringing rights acquired
by a third party without notice of the current dispute as a significant reason for declining interim relief.
[38] Although declining to grant an interim injunction, Davidson J did express concern that Detour Clothing’s position be preserved in relation to the recovery of its “fit-out” of the premises. Notwithstanding his decision to dismiss the interim relief application, the Judge imposed “a condition” reflecting an application for alternative relief that Star Five “must take all practical and reasonable steps to allow recovery of the fit-out by Detour Clothing, and should secure the co-operation of Happy Travels
to do so”.17
Analysis
(a) Legal principles
[39] Sub-part 6 of Part 4 of the Act is a code that deals with the cancellation of leases.18 The application for relief against cancellation is brought under s 253 of the Act. The powers that may be exercised by the Court on such an application are set out in s 256. Those two provisions state:
253 Relief against cancellation of lease for breach of covenant or condition
(1) All or any of the following persons may apply to a court for relief against the cancellation, or proposed cancellation, of a lease on the ground of a breach of a covenant or condition of the lease:
(a) the lessee:
(b) a mortgagee of the leasehold estate or interest:
16 Detour Clothing Ltd v Star Five Ltd [2016] NZHC 3195.
17 Ibid, at para [71].
18 Property Law Act 2007, s 243.
(c) a receiver appointed in respect of the leasehold estate or interest:
(d) if 2 or more persons are entitled to the leasehold estate or interest as joint tenants, 1 or more of those persons on behalf of the other joint tenants.
(2) If an application made in accordance with subsection (1)(d) is not made by all of the joint tenants, the application must be served on every joint tenant who is not already a party, unless the court orders otherwise.
(3) Relief may be sought in—
(a) a proceeding brought by the lessor for an order for possession of the land; or
(b) a proceeding brought for the purpose of seeking the relief. (4) A proceeding referred to in subsection (3)(b) must be brought—
(a) before an order for possession of the land is made in a proceeding referred to in subsection (3)(a); or
(b) if the lessor has peaceably re-entered the land, not later than
3 months after the date on which the lessor peaceably re- entered the land.
(5) Subsection (4)(b) is subject to section 254.
…
256 Powers of court on application for relief
(1) In determining an application for relief against the cancellation, or proposed cancellation, of a lease, under section 253, a court may grant—
(a) the relief sought on any conditions (if any) as to expenses, damages, compensation, or any other relevant matters that it thinks fit; and
(b) an injunction restraining any similar breach in the future.
(2) The court may grant relief against the cancellation, or proposed cancellation, of a lease even though—
(a) the cancellation is for a breach of an essential term of the lease; or
(b) the breach is not capable of being remedied.
[40] The Court’s equitable power to grant relief against cancellation (or forfeiture, as it was previously called) is long standing. In 1806, the principle was expressed as follows:19
… That one party is taking advantage of a forfeiture: and as a rigid exercise of the legal right would produce a hardship, great loss and injury on the one hand arising from going to the full extent of the right, while on the other the party may have the full benefit of the contract, as originally framed, the Court will interfere; where a clear mode of compensation can be discovered.
[41] Historically, a distinction has always been drawn between cases involving breaches of rent and other covenants. I adopt the succinct summary of the different approaches articulated by Joseph Williams J, in Pike River Coal Ltd (in rec) v O’Malley Farming Ltd:20
[41] A distinction has been historically drawn in relief cases between rent and non-rent covenants. The courts have been ready to grant relief to a lessee in default of a rent covenant where the arrears is paid up fully, including any costs, by the time the matter comes to court, as long as the lessee is not hopelessly insolvent.
…
[43] In non-rent cases the courts have traditionally taken a broad approach in which the essential justice of the case is transparently assessed in a proportionality exercise. The question asked is whether in all the circumstances, determination of the lease is a proportionate response to the lessee’s breach. ….
[42] The approach to be taken by the Court on an application under s 253 of the Act is well settled. A broad range of considerations must be taken into account, whether or not known to the landlord at the time of cancellation. For example, in Studio X Ltd v Mobil Oil NZ Ltd, Hammond J identified 10 types of factors that could legitimately be brought to account on an application for relief from
cancellation for breach of a non-financial term of a lease. The Judge said:21
…
I therefore proceed on the basis indicated by Earl Loreburn LC in Hyman v
Rose [[1912] AC 623 (HL)] (at p 631) that the section confers “the widest
19 Sanders v Pope (1806) 12 Ves Jun 282, at 289. This extract was cited with approval in Pike
River Coal Ltd (in rec) v O’Malley Farming Ltd (2011) 6 NZ ConvC 95-559 (HC), at para [40].
20 Pike River Coal Ltd (in rec) v O’Malley Farming Ltd (2011) 6 NZ ConvC 95-559 (HC), at paras
[41] and [43].
21 Studio X Ltd v Mobil Oil NZ Ltd [1996] 2 NZLR 697 (HC), at 701.
discretion” on the Court. That said, a number of factors to be considered in the exercise of the Court's discretion have clearly been identified by trial and intermediate appellate Courts. These include:
* Whether the breach was advertent or deliberately committed. In such a case there are sound reasons why in the normal case relief should not be given: why should a lessor be compelled to remain in a relation of neighbourhood with a person in deliberate breach of his obligations?
* Conversely, whether the breach was caused by inadvertence or was entirely beyond the tenant's control.
* Whether the breach involves an immoral/illegal use. It must be wrong in principle for a lessor to be forced into improper or illegal relations, possibly even exposing the lessor himself to some form of legal sanction.
* 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.
* The conduct of the landlord.
* The personal qualifications of the tenant.
* The financial position of the tenant.
* Sometimes the position of third parties has had to be considered. For instance the position of a contracting purchaser of the interest.
* The gravity of the breach.
* Whether a breach has occasioned lasting damage to a landlord.
* There is a proportionality concern. Under this head there has to be concern whether whatever damage is said to have been sustained by the landlord can truly be said to be proportionate to the advantages she will obtain if relief is not granted. Generally speaking, and at a greater level of abstraction, there has to be a concern with keeping an even hand. After all a lease is both an interest in land and a contract and a Court ought not to estreat an entire interest of that character simply because (for instance) the tenant fails to repair (at a cost of $50) a window the tenant’s son happened to put a cricket ball through.
[43] The ten factors to which Hammond J referred in Studio X provide helpful guidance about the type of considerations that will need to be brought into the balance in determining whether relief against cancellation should be granted. But they do not constitute some form of checklist that must be applied in every case. In each case, the Court is required to isolate and weigh those factors that are relevant to the particular application before it. Some of the factors identified in Studio X will be relevant to most cases; others may only assume significance in some cases. In cases
arising out of unusual facts, it will be necessary to identify other factors to be taken into account when determining whether relief should be granted.
[44] I observe, as did Joseph Williams J in Pike River,22 that while Hammond J listed the “proportionality” factor discretely, the need for a proportionate response to any breach underpins the exercise of the Court’s discretion. Ultimately, a balancing exercise is required to determine whether, and if so on what terms, relief should be granted. That is the approach that I take in this case.
(b) Clause 33 of the Lease
[45] Mr Russell’s starting point was cl 33.3 of the Lease. While Mr Russell did not contend that a reasonable decision to refuse consent to the change in effective management would be determinative of the application in Star Five’s favour, he submitted that it would be a “very significant factor” that would be difficult to displace.
[46] Clause 33 of the Lease sets out the circumstances in which Detour Clothing was required to obtain consent from Star Five in the event that it proposed to assign or sub-let the premises, or make any change to the effective management or control of Detour Clothing’s business.23 Relevantly, for present purposes, cl 33.1(a) and
33.3 provide:
ASSIGNMENT OR SUBLETTING
33.1The Tenant shall not assign sublet or otherwise part with the possession of the premises, the carparks (if any) or any part of them without first obtaining the written consent of the Landlord which the Landlord shall not unnecessarily withhold or delay if the following conditions are fulfilled;
(a) The Tenant proves to the reasonable satisfaction the Landlord that the proposed assignee or subtenant is (and in the case of a company that the shareholders of the proposed assignee or subtenant are) respectable responsible and has the financial resources to meet the Tenant’s commitments under this lease and in the case of the subtenant the subtenants commitments under the
22 Pike River Coal Ltd (in rec) v O’Malley Farming Ltd (2011) 6 NZ ConvC 95-559 (HC), at para
[44].
23 For a discussion of the phrase “change in the effective management or control” in a regulatory
context, see Masterton Co-operative Dairy Company Ltd v Wairarapa Milk Board [1964] NZLR
771 (SC and CA).
sublease. The Tenant shall give the Landlord any additional information reasonably required by the Landlord.
…
33.3Where any Tenant is a company which is not listed on the main board of a public stock exchange in New Zealand or Australia, then any change in the legal or beneficial ownership of its shares or the shares of its shareholder or issue of new capital in the company or its shareholder where in any case there is a change in the effective management or control or the company, will require the written consent of the Landlord which will not be unreasonably withheld or delayed.
….
[47] Mr Russell submitted that the starting point for considering this issue was the decision of the Supreme Court, in Greymouth Gas Kaimiro Ltd v GXL Royalties Ltd.24 Greymouth Gas was not a case involving an application for relief from cancellation of a lease. It concerned a petroleum exploration permit to which the relevant provisions of the Act do not apply. Notwithstanding a provision which required consent of the grantee of the permit, GXL Royalties Ltd, to any assignment of the permit, the original holder, Swift Energy NZ Ltd, assigned its interest to Greymouth Gas without consent.
[48] GXL issued proceedings in the High Court in which it sought a declaration that the transfer was unlawful on grounds that included failure to obtain consent. As in the present case, consent was not to be “unreasonably withheld”. Clause 7.2 of the permit provided:25
[T]he Grantor [Swift] obtains the prior consent of the Grantee [GXL], which consent shall not be unreasonably withheld, where it is established that the purchaser, assignee or transferee [Greymouth] has sufficient financial capability to meet the obligations under the Permit and this Deed.
[49] Delivering the judgment of the Supreme Court, William Young J interpreted cl 7.2 of the permit, holding that “GXL did not have to address whether to give its consent unless and until it was established that Greymouth, as proposed assignee,
had sufficient financial capacity”.26 As is apparent from the terms of cl 7.2,
24 Greymouth Gas Kaimiro Ltd v GXL Royalties Ltd [2011] 1 NZLR 289 (SC).
25 Ibid, at para [1].
26 Set out at para [48] above.
“financial capability” was the touchstone against which the question whether consent
should be granted was to be determined.
[50] Mr Russell sought to equate the requirements of cl 33.1 and 33.3. However, they deal with discrete topics, in respect of which different considerations will apply. Clause 33.1 is directed to circumstances where the tenant wishes to “assign sub-let or otherwise part with the possession of the premises”. The inability of a tenant to do any of those things without the prior written consent of the landlord represents a restriction on alienation of its rights under the Lease. On the other hand, cl 33.3 assumes that the corporate tenant remains in occupation, but with a different person (or persons) having the effective management or control of its business. The distinct nature of each of those situations explains why cl 33.1 imposes an obligation on the tenant to satisfy the landlord of the proposed assignee’s or sub-tenant’s financial capacity, but cl 33.3 does not. By way of illustration, in Swift New Zealand
Company Ltd v Owen,27 Prichard J held expressly that an effective change in control
of a company does not amount to an assignment, because the company remains in existence as the relevant legal entity.28
[51] The use of the term “deemed assignment” in some of the correspondence29
has the potential to conflate the different types of arrangements to which cl 33.1 and
33.3 apply. I accept that the term appears to have been used loosely in other Court decisions in which it was unnecessary to distinguish the concepts. Examples of cases in which that description was used are PCL Industries Ltd v PH van den Brink Ltd,30 and Bartlett v McCarthy.31 In my view, while the term “deemed assignment” might be regarded as a useful shorthand expression in cases where there is no real difference between the two situations, it has the potential to create confusion in a case such as this.
[52] In common with cl 7.2 of the petroleum exploration permit in Greymouth
Gas,32 cl 33.1 puts an onus on the tenant to establish the circumstances that justify
27 Swift New Zealand Company Ltd v Owen (1981) 1 NZCPR 308.
28 Ibid, at 313–314.
29 For example, see para [33] above.
30 PCL Industries Ltd v PH van den Brink Ltd CA196/02, at para [3].
31 Bartlett v McCarthy HC Auckland CIV-2009-404-3349, 12 October 2009, at paras [31] and [32].
32 Set out at para [48] above.
consent being given. For example, under cl 33.1(a), there is a need for the tenant to prove “to the reasonable satisfaction” of the landlord that the proposed assignee or sub-tenant is “respectable responsible and has the financial resources to meet the Tenant’s commitments under [the] lease”, and in the case of a sub-tenant, its commitments under the sub-lease. The landlord, under cl 33.1(a) is entitled to seek additional information when making its decision whether to give written consent.
[53] By contrast with the type of alienation to which cl 33.1 is directed, cl 33.3 deals with a situation in which there is no change in the company occupying the premises but there has been a change in its effective management or control since the lease was signed. Clause 33.3 is silent as to the factors to be taken into account by a landlord in deciding whether to grant consent. In my view, the real issue is whether a landlord can point to some material prejudice arising out of the change in effective management or control of the company. If it can, a refusal to grant consent will more readily be regarded as reasonable.
[54] The present application falls to be determined against the changing position in relation to the shareholding and directorship of Detour Clothing, during the currency of the Lease. In my view, the following facts represent the starting point for analysis:
(a) Star Five made a deliberate decision to contract with Detour Clothing when the Lease was first granted.
(b)The position throughout has been that Detour Clothing was the tenant against which Star Five has rights of recourse under the Lease.
(c) At all times, Mr Collins guaranteed Detour Clothing’s obligations to Star Five under the Lease. Star Five’s rights against Mr Collins have not been adversely affected.
[55] Lane Neave gave Star Five’s reasons for withholding consent in the letter that
it sent to the solicitors for Detour Clothing on 19 October 2016.33 Leaving to one
33 Set out at para [33] above.
side the financial aspects to which Lane Neave referred, the first and third of the reasons given, which touched on “a long history of breaches of the Lease by” Detour Clothing represented legitimate concerns about the ability of Mr Collins to manage the business.34 They were relevant to whether trust and confidence in his ability to fulfil that role had been lost. In my judgment, the question whether Mr Spary, as the guiding mind of Star Five, had lost trust and confidence in Mr Collins’ ability to
manage Detour Clothing’s business effectively was relevant to whether the landlord
should consent to a resumption of effective management and control by Mr Collins.
(c) Proportionality: The balancing exercise
[56] The substantive application for relief was heard on the basis of affidavit evidence. Much of it had been available to Davidson J when he considered Detour Clothing’s application for interim relief in December 2016. Additional affidavits were filed to supplement those and to ensure that all relevant information was before me.
[57] Neither party sought to cross-examine witnesses called by the other. In the absence of cross-examination, I must generally accept what has been said by a deponent in his or her affidavit. However, I do “not accept uncritically evidence that is inherently lacking in credibility; for example, where it is inconsistent with
contemporary documents or inherently improbable”.35 There are some aspects of
material evidence on which I am not prepared to act.
[58] My starting point is the substantive question whether, viewed objectively, it was open to Star Five to refuse consent to the change in effective management of Detour Clothing. I do so on the basis of my interpretation of cl 33.3 of the Lease.36
The question whether a landlord’s conduct is reasonable or unreasonable is one of fact to be decided by the tribunal seized of any dispute. The landlord’s obligation is
to show that his or her conduct was reasonable, not that it was right or justifiable.37
34 See para [33] above.
35 Robertson v ASB Bank Ltd [2014] NZCA 597, at para [32], applying Eng Mee Yong v
Letchumanan [1980] AC 331 (PC) at 341 and Krukziener v Hanover Finance Ltd [2010] NZAR
307, at para [26].
36 See paras [50]–[53] above.
37 Ashworth Frazer Ltd v Gloucester City Council [2002] 1 All ER 377 (HL), at paras [3]–[5] (Lord Bingham). See also International Drilling Fluids Ltd v Louisville Investments (Uxbridge)
[59] The first point concerns Mr Russell’s emphasis on the lateness of the application for consent. While I consider that is relevant to Star Five’s assessment of the level of trust and confidence that it could reasonably repose in Mr Collins to manage Detour Clothing’s business, the fact that the application was late would not be sufficient of itself to impact on the reasonableness or otherwise of the decision to refuse consent.
[60] In seeking consent, a tenant in Detour Clothing’s position ought not to be regarded as in any worse position than it would have been had consent been sought earlier. Ultimately, it was for Star Five to determine whether it was prepared to grant consent based on the information before it at that time. The lease required that consent could not be refused “unreasonably”.38
[61] Viewed objectively, at the time Star Five was considering Detour Clothing’s
request for consent on 18 October 2016,39 the following factors were relevant:
(a) There had been no change in the contractual position that had pertained as at 4 February 2014 when Detour Clothing and Star Five entered into the Lease. The contracting parties were Star Five (as landlord) and Detour Clothing (as tenant). Mr Collins remained as guarantor. Notwithstanding the period during which Ms Houghton appears to have had effective control and management of Detour Clothing, that position remained constant. In other words, if it had been necessary for Star Five to sue to enforce provisions of the Lease, it could only rely on Detour Clothing’s and Mr Collins’ financial wherewithal to recover outstanding moneys. Star Five must be assumed to have made a judgment in February 2014 as to the creditworthiness of each.
(b)The business relationship between Mr Spary and Mr Collins had deteriorated to a point where Mr Spary justifiably lacked confidence
Ltd [1986] 1 All ER 321 (CA), at 325–326.
38 See cl 33.3 of the Lease, set out at para [46] above.
39 The contemporary reasons given by Star Five for refusing consent are set out in the letter from Lane Neave to Berry & Co of 19 October 2016, the relevant parts of which are set out at para [33] above.
in Mr Collins ability to turn the financial fortunes of Detour Clothing around. On the evidence, Mr Spary appears to have had more trust in Ms Houghton’s management skills than those of Mr Collins. Mr Spary’s lack of trust and confidence in respect of Mr Collins also stemmed from consistent breaches of the Lease over time, including multiple occasions on which rent was paid late and the failure of Detour Clothing to seek appropriate consents under cl 33.3 immediately upon the decisions to change the management structure were made. This indicated a slackness on the part of Mr Collins, in relation to the way in which he made managerial decisions affecting the Lease, to the prejudice of Star Five.
(c) Both Mr Collins and Mr Spary are experienced commercial men.
There was no inequality of bargaining position as between them. Star Five did not act unfairly or oppressively towards Detour Clothing. Mr Collins has made some commercial decisions which, with the benefit of hindsight, appear to have been poor (for example, his decision to pay $195,100 to Beaver Liquor by way of “key money”) but Star Five’s insistence on performance of contractual obligations cannot be gainsaid.
[62] On the basis of the information available as at the date on which consent was sought, I consider that it was open to Star Five to form a judgment that Mr Collins was unlikely to be able to manage Detour Clothing’s business satisfactorily. In light of Mr Spary’s lack of trust and confidence in Mr Collins’ ability to do that, it was an understandable decision to refuse consent and endeavour to find an alternative tenant with which it could deal more satisfactorily.
[63] That, however, is not the end of the analysis. My conclusion endorses the commercial decision made by Star Five on 19 October 2016. However, on an application for relief under s 253 of the Act I am required to have regard to broader considerations. They include factors relevant to equitable considerations that are not directly associated with the relationship between landlord and tenant, and relevant events that have occurred since the decision to refuse consent was made. The
reasonableness of Star Five’s commercial decision in October 2016 is but one factor to be considered in the balance.
[64] For an illustration of the broader range of considerations that I ought to take into account, I refer to the original arrangements involving Beaver Liquor. In effect, Detour Clothing was able to procure a Lease from Star Five because it made an arrangement with a company with similar family interests to pay a significant amount of money in return for surrender of its existing lease. Because I characterise Mr Spary as having a material role in both aspects of the transaction, the Lease and the “key money” agreement are so interdependent as to require consideration in the exercise of the remedial discretion.
[65] As a result of the “key money” agreement, Detour Clothing paid to Beaver Liquor a sum of $195,100 to procure the Lease. In addition, it has spent $240,000 fitting out the premises in a manner likely to attract a type of customer likely to buy the fashionable clothing that it was selling. Because of the need to undertake refurbishment of the premises, Detour Clothing was unable to commence trading from the Rees Street shop until 11 June 2014.
[66] The evidence establishes that Detour Clothing has paid something in the order of $435,000 by way of “key money” and refurbishment costs. If relief against cancellation were not granted, that money would have been paid for a lease that has had, to date, an actual trading time of just shy of two years and five months. Before any renewal is brought to account, the initial period for which Detour Clothing believed it had security of tenure was a term of four years and seven months from 1
March 2014.40
[67] Something that weighed heavily with Davidson J on the application for interim relief was the position of the new tenant, Happy Travels. It is now clear, however, that that company’s security of tenure under its existing lease with Star Five is three months; Star Five has the right to terminate on three months’ notice without cause. Mr Spary has deposed that he has kept Happy Travels apprised of
developments since the interim injunction decision was given by Davidson J in late
40 See para [6] above.
December 2016. While, no doubt, Happy Travels would prefer to continue its arrangements with Star Five (and it is plain that Star Five would wish to continue that relationship in preference to resumption of legal relations with Detour Clothing), the weight to be given to that circumstance is more limited than seemed apparent to Davidson J last year.
[68] Detour Clothing has adduced evidence from Ms Raeleen Hunter, a chartered accountant in public practice in Queenstown. Her firm, Hunter McLeod, has recently (1 February 2017) been engaged as accountants for Detour Clothing. During the course of the hearing, I ruled on a number of objections made by Mr Russell to her evidence. I have excluded opinion evidence for which no substantive reasons have been given. Mr Russell accepted that Ms Hunter’s evidence of primary fact was relevant and admissible.
[69] Ms Hunter has expressed views based on Detour Clothing’s cash profit and
loss statement that has been created through the Xero system for the year ended 31
March 2017. As Ms Hunter was not cross-examined, I am prepared to infer that she had reasonable grounds to believe that the information generated through the Xero system gave a reliable picture of Detour Clothing’s financial position at the relevant time.
[70] Relevantly, Ms Hunter deposes:
(a) There was “a substantial increase in turnover” during the period from August 2016 to late October 2016, after Mr Collins had resumed responsibility for managing the business.
(b)In September 2016, turnover was $95,245. That represented an increase of 60 percent on the average April 2016 to July 2016 turnover.
(c) Monthly sales from January 2017 in the temporary premises used by Detour Clothing on the upper floor of the O’Connell’s Pavilion Shopping Centre on the corner of Camp and Beach Streets,
Queenstown, represented “approximately a third of September 2016 sales in the Rees Street premises”. I can readily infer that one would expect trading in the holiday month of January to be more lucrative than in September.
[71] Mr Russell was critical of the lack of any prime evidence about the financial position to which Ms Hunter referred. He contrasted it with the type of information forwarded to Lane Neave in July 2014. However, for the reasons given,41 I consider that the evidence to which I have referred is sufficiently reliable for present purposes. Nevertheless, Detour Clothing’s failure to supply supporting financial evidence is symptomatic of the lax approach that Mr Collins has taken to compliance issues, both under the Lease and in respect of the present proceedings.
[72] Mr Spary also expressed some concern about the involvement of Mr Ball.42 I do not regard this as a significant issue. It appears that any indebtedness of Detour Clothing to Ms Houghton has been resolved. That being so, injection of further funds from Mr Ball is likely either to improve the position of Detour Clothing or represent a neutral factor. Even though it is not possible to determine whether any additional funds have been lent to Mr Collins, injected into Detour Clothing, or used to acquire Ms Houghton’s debt, the overall financial viability of both Detour Clothing and Mr Collins is unlikely to be materially affected in a manner adverse to Star Five’s interests.
[73] Overall, I consider that the balance comes down in favour of Detour Clothing and that relief against cancellation should be given on terms. Those terms should reflect the casual way in which Detour Clothing has dealt with obligations under the Lease. Examples of that type of behaviour can be seen from consistent late payment of rent (it is not Star Five’s function to operate as Detour Clothing’s short term banker), failure to request consents to changes in effective management in a timely manner and a failure to address the issues involved in the litigation in a professional way; an illustration being Mr Collins’ asserted misunderstanding that the Second
Notice simply repeated allegations about the transfer of effective control to
41 See para [69] above.
42 See para [29] above.
Ms Houghton contained in the first notice. Further, one can add failure, on the part of Detour Clothing, to comply with Court timetables and to pay hearing fees for its application in a timely manner, causing additional cost to Star Five.
[74] All of those factors, when taken together with others that justifiably have reduced Mr Spary’s confidence in Mr Collins’ ability to manage the business, require a significant award of costs to be made in favour of Star Five before relief is given effect. Mr Tobin responsibly accepted that in the present case Detour Clothing was seeking an indulgence from the Court. Typically, indulgences are granted on terms as to costs. I am expressly authorised by s 256(1)(a) of the Act43 to grant relief on conditions as to payment of compensation for unnecessary costs or expenses incurred by the landlord as a result of the tenant’s conduct.
[75] Towards the end of the hearing, I inquired of Mr Russell the extent of costs likely to have been incurred by Star Five in relation to the current dispute. He advised me that before completing preparation for the substantive hearing (in relation to which some evidence from Detour Clothing had been filed late), costs incurred were something in the order of $45,000. He suggested that a further allowance should be made of about $15,000 for preparation for the hearing and his appearance as counsel at it.
[76] In my view, a substantial portion of those costs should be paid by Detour Clothing as a condition of the grant of relief. That is required to compensate Star Five for unnecessary expenditure to which it has been put as a result of Detour Clothing’s own conduct. In my view, appropriate compensation should take the form of a global sum of $50,000. That is directed primarily to mitigating costs and disbursements that Star Five has incurred in this proceeding; but it is also intended to cover other wasted expenditure caused by Detour Clothing’s conduct.
Result
[77] For those reasons, subject to the payment of the sum of $50,000 by Detour
Clothing to Star Five by 4.00pm on 30 June 2017 (time being of the essence), I make
43 Set out at para [39] above.
an order granting relief against cancellation in favour of Detour Clothing. If the sum of $50,000 were paid, Star Five shall take such steps as are necessary to transfer vacant possession of the premises at 17 Rees Street, Queenstown to Detour Clothing, no later than 4.00pm on Friday 13 October 2017. That will provide time for Star Five to give adequate notice to Happy Travels of termination of its lease of the same premises.
[78] If the payment of $50,000 were not made by due date, the order granting relief against cancellation will automatically lapse. In that situation, there is no obligation on Star Five to cancel its lease arrangements with Happy Travels. Leave is reserved for Star Five to apply for costs in this proceeding, should that occur. Otherwise, questions of costs are resolved by payment of the sum of $50,000.
[79] I thank counsel for their assistance.
P R Heath J
Delivered at 4.00pm on 31 May 2017
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