Downer v Signature Developments Limited
[2020] NZHC 2488
•23 September 2020
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV 2019-404-000544
[2020] NZHC 2488
BETWEEN MALCOLM ROBERT DOWNER
Plaintiff
AND
SIGNATURE DEVELOPMENTS LIMITED
Defendant
Hearing: 27 & 28 July 2020 Appearances:
M J W Lenihan for the Plaintiff
R Amaranathan for the Defendant
Judgment:
23 September 2020
JUDGMENT OF VAN BOHEMEN J
This judgment was delivered by me on 23 September 2020 at 3.00pm Pursuant to Rule 11.5 of the High Court Rules
…………………………
Registrar/Deputy Registrar
Solicitors/Counsel:
Alan Jones Law Ltd, Auckland
M J W Lenihan, Barrister, Auckland Rice Craig, Papakura
DOWNER v SIGNATURE DEVELOPMENTS LIMITED [2020] NZHC 2488 [23 September 2020]
Introduction
[1] The plaintiff, Robert Downer, seeks recovery of the deposit of $466,000 he paid the defendant, Signature Developments Ltd, when entering into an agreement for the sale and purchase (ASP)1 of a property in Pukekohe.
[2] Signature Developments had agreed to build an early childhood education (ECE) centre on the property (Pukekohe centre) and had agreed that the centre would be leased and operated by Kindergarten New Zealand Ltd (KiNZ), a subsidiary of the Auckland Kindergarten Association (AKA).
[3] Clause 26 of the ASP provided that the property would be subject to a tenancy under which KiNZ would be the tenant on the terms and conditions set out in an attached agreement to lease (ATL) between Signature Developments and KiNZ which Mr Downer had received and approved.
[4] Mr Downer cancelled the ASP before settlement because, without seeking or obtaining Mr Downer’s approval, Signature Developments consented to KiNZ assigning the ATL to Pukekohe Educare Ltd, a subsidiary of Educare Group Ltd, with the consequence that KiNZ would not have been the tenant of the Pukekohe centre at settlement of the ASP.
[5] Mr Downer says that, in entering into a deed of lease with Pukekohe Educare instead of KiNZ, Signature Developments breached cl 26, that cl 26 was an essential term of the ASP, and that he was entitled to cancel the ASP in accordance with s 37(2)(a) of the Contract and Commercial Law Act 2017 (CCL Act). In addition, Mr Downer says that in breaching cl 26 of the ASP, Signature Developments substantially reduced the benefit of the ASP to Mr Downer and that Mr Downer was therefore entitled to cancel the ASP in accordance with s 37(2)(b)(i) of the CCL Act.
[6] Signature Developments denies that cl 26 was an essential term of the ASP and says that it substantially performed cl 26 and that Mr Downer suffered no substantial material loss because he would have purchased the Pukekohe centre with a reliable
1 A list of acronyms is in the appendix to this judgment.
and secured tenant if he had settled the purchase of the centre with Pukekohe Educare as the tenant.
Agreed questions for determination
[7]The parties agree that the questions for determination are:
(a)Did the parties expressly agree on the signing of the ASP that the performance of cl 26 was objectively essential to Mr Downer?
(b)If not, did the parties impliedly agree on the signing of the ASP that the performance of cl 26 was objectively essential to Mr Downer?
(c)Was there sufficient and substantial performance of cl 26?
(d)Did the assignment of the ATL to lease to Pukekohe Educare substantially reduce the value of the ASP to Mr Downer?
Relevant background
[8] The following summary is taken principally from the evidence of Mr Downer and Dale Prosser, a development consultant for Signature Developments. Mr Downer and Mr Prosser each filed substantial affidavits and were cross examined. Shoneet Chand, a director of Colliers International Ltd, who was Mr Downer’s initial contact with Signature Developments, did not give evidence. Accordingly, Mr Downer’s account of his dealings with Mr Chand is unchallenged.
[9] The summary also draws on affidavits by Gavin Hunt, the sole director of Signature Developments, and Paul Bull, the Chief Executive Officer of Signature Homes Ltd and Managing Director of Residential Indemnity Ltd. Neither Mr Hunt nor Mr Bull were required for cross examination.
Mr Downer and his investments
[10] Mr Downer is in his late 70s. He has been investing in commercial property for over 30 years. Most of those investments have been long-term investments,
averaging about 10 and a half years in duration. Some have been for considerably longer periods. Two of Mr Downer’s current investments are in ECE centres; one in Takanini, which he has owned outright since 2003, and one in Te Atatu, of which he has been a two-thirds owner since 2014.
Signature Developments
[11] Until 27 May 2019, Signature Developments was called Signature Building Ltd. For convenience, I refer to the company as Signature Developments except when the context requires otherwise. Signature Developments is part of the Signature Group of companies which includes Signature Homes and Residential Indemnity. Mr Hunt and his wife own, through family trusts, both Signature Developments and Signature Homes.
[12] Signature Homes has built around 130 ECE centres. Signature Developments has developed seven new ECE centres and has other 10 projects under development. Mr Hunt and his wife own, through a family trust, an ECE centre built by Signature Developments at Orewa (Orewa centre). The Orewa centre, the Pukekohe Centre and another ECE centre built by Signature Developments at Pokeno (Pokeno centre), were to be tenanted by KiNZ once construction had been completed.
Mr Chand pitches Pukekohe centre to Mr Downer
[13] In early October 2017, Mr Downer was contacted by Mr Chand to see if Mr Downer was interested in investing in the Pukekohe centre. Mr Chand knew of Mr Downer’s interest in investing in ECE centres from discussions earlier that year over another ECE centre opportunity that Mr Downer did not pursue because it did not meet his investment criteria. Mr Downer had told Mr Chand what he looked for in an investment: a long-term investment with solid tenants and low risk of default.
[14]Mr Chand’s email said:
Hi Bob, see IM attached for 144 Kitchener Road, Pukekohe. This one is a cracker and i think you can get it for a good yield. Great tenant (KINZ) and developer (Signature Homes).
Look forward to your thoughts – this one does tick the boxes.
[15] The Investment Memorandum identified KiNZ as the intended tenant of the centre and AKA as its guarantor, and noted their respective experiences in early childhood education, and stated that KiNZ was an “exceptional tenant”.
[16] Mr Downer told Mr Chand by email that it looked like a reasonable opportunity, but he had a number of questions about the rent and the construction of the building. Mr Chand, with the assistance of Mr Prosser, sought to answer those questions through email exchanges and telephone calls. In those email exchanges, Mr Downer, Mr Chand and Mr Prosser each referred to the quality of KiNZ as a tenant.
Mr Downer agrees to buy Pukekohe centre
[17] In late November 2017, Mr Downer made a formal offer to purchase the Pukekohe centre in an agreement for sale and purchase prepared by Mr Chand. After some negotiations, Mr Downer and Signature Developments agreed a purchase price of $4,660,000, with a 10 per cent deposit of $466,000.
[18] The ASP was dated 19 December 2017. It referred to the ATL on the front page and in some of its substantive clauses. Mr Downer paid the deposit on 21 February 2018.
Building gets underway
[19] Construction of the Pukekohe centre began in early 2018. In late April 2018, Mr Downer met with Chris Coombe, Chief Operating Officer for KiNZ, and Mark Gedye, Property Strategy and Development Manager for KiNZ. Mr Downer says he was satisfied from that meeting that everything was in order. Mr Downer went overseas some time after that meeting and was away until October 2018.
AKA and KiNZ change policy and plans
[20] In mid-2018, Mr Prosser was told by Mr Coombe that AKA had a new board which had a different focus from the old board and was no longer interested in the private ECE centre model. On 19 June 2018, Mr Prosser was informed by Mr Gedye
that KiNZ wanted to assign the lease of the Pokeno centre.2 Mr Prosser said no mention was made at that time of not proceeding with the Pukekohe centre or of assigning the ATL.
[21] At some point, Mr Prosser asked Mr Gedye whether KiNZ was also wanting to let the Pukekohe centre go. He said it took some time to get an answer because Mr Gedye needed Board direction. Mr Prosser said that by early August 2018 Mr Gedye had still not clarified the position but on 4 August 2018 he considered it appropriate to ask Mr Chand to let Mr Downer know KiNZ was thinking of assigning its interest in the Pukekohe centre.
[22] In the days just before Mr Prosser asked Mr Chand to contact, Mr Downer had emailed Mr Prosser from overseas seeking an indication of when the building might be completed. In his reply of 3 August 2018, Mr Prosser said he would give an indicative timeframe for completion by mid-October 2018 but did not mention KiNZ’s desire to exit the Pukekohe centre. Mr Downer responded the following day, saying that he was on the internet every day and would appreciate any communications regarding the Pukekohe centre’s development.
[23] Mr Downer received an email from Mr Chand on 9 August 2018 asking to talk by phone. Mr Downer then called Mr Chand by Facetime. During that call Mr Chand said KiNZ was considering assigning the lease for the Pukekohe centre. Mr Downer was surprised at this information and asked Mr Chand to keep him informed. Mr Chand agreed to do so.
[24] Whatever Mr Prosser’s state of knowledge about KiNZ’s plans for the Pukekohe centre at the beginning of August 2018, it is apparent plans were already in train by early August 2018 to seek assignments of KiNZ’s interests in both the Pukekohe and Pokeno centres. Mr Chand, apparently as agent for KiNZ, prepared an invitation for expressions of interest in KiNZ’s interests in both properties. While there is no date on the document, the closing date for expressions of interest was
2 In fact, the lease of the Pokeno centre was dated 18 October 2018, some months after the approach from Mr Gedye.
5 September 2018. It can be assumed, therefore, that preparations for the marketing of the two properties were under way by early August 2018.
[25] Mr Prosser accepts he saw Colliers’ invitation for expressions of interest before the closing date for expressions of interest. Colliers’ invitation for expressions of interest carried Signature Developments’ branding.
KiNZ finds no takers for Pokeno and Pukekohe centres until Educare comes on scene
[26] Colliers’ request for expressions of interest failed to find new tenants for the Pokeno and Pukekohe centres. However, in September 2018 Mr Prosser was contacted by Alan Lints of the Educare Group. Mr Lints and his wife, Jacqueline Armstrong, are the directors of Educare Group.
[27] Mr Prosser showed Mr Lints and others around the Orewa centre over a two- day period. Mr Prosser says Mr Lints expressed a potential interest in all three centres; Orewa, Pokeno and Pukekohe. Mr Lints thanked Mr Prosser by email for his time and provided a “snapshot” of Educare and other information about himself and Educare.
[28] Mr Prosser referred Mr Lints on to Colliers as agent for KiNZ. He did not inform Mr Prosser of Mr Lints’ interest.
Mr Downer asks for copy of ASP
[29] In late September 2018, Mr Downer emailed Mr Chand asking for a copy of the ASP. Mr Chand replied the next day saying he would send the agreement when back in the office the following week. Mr Chand made no reference to his marketing an assignment of the ATL for the Pukekohe centre or Mr Lints’ interest in the centre.
Progress with construction and notice of commencement of Fit Out Period
[30] In October 2018, Mr Prosser advised Mr Downer that Signature Developments would be handing over to KiNZ for their fit-out period on 31 October 2018 and that this meant the building was close to final completion. Mr Prosser said the lease commencement would be triggered around the end of December but that because of the Christmas break, settlement could occur mid-January 2019. Mr Prosser said he
would communicate further “once we get closer to this time.” Mr Prosser made no mention of the proposed assignment by KiNZ.
Mr Downer told of proposal to assign to Educare
[31] By email dated 14 November 2018, Mr Prosser provided Mr Downer with a further update of progress with regard to the Pukekohe centre. Among other things, the email advised that the building had been handed over to “Auckland Kindergarten for their Fit Out and licensing as of 31 October 2018”, that the Commencement of Lease would occur on 26 December 2018 which would be the settlement date.
[32]The last two paragraphs of the email stated:
Further, as previously communicated to you by Shoneet (Colliers) in regard to the tenancy, I believe KINZ are submitting to us documentation to assign the Lease to Educare, an established operator with some 12 plus centres, coupled with the appropriate Covenants. I shall have further details which I can convey to you once we have viewed the documents.
I believe they will be looking to commence fit-out once formalities have been completed with a view to opening the centre early in the new year.
[33] There are a number of inaccuracies and omissions in this message. In particular:
(a)Mr Chand had not told Mr Downer that KiNZ had decided to assign the ATL let alone the identity of the proposed assignee; and
(b)The identification of “Educare” as assignee did not indicate whether it was Educare Group itself or another entity that would be the assignee. Mr Prosser says he was not aware at this stage exactly who would be the tenant of the Pukekohe centre.
[34] Mr Downer did not reply to this message. He understood from the message that Mr Prosser would send him the documents regarding the proposed assignment, once Signature Developments had them, for his comment and approval.
KiNZ assigns interests in Orewa, Pokeno and Pukekohe centres
[35] On 30 November 2018, Signature Developments confirmed its consent to the assignments of the lease of the Pokeno centre and of the ATL for the Pukekohe centre.
[36] On 3 December 2018, the deed of assignment of lease of the Orewa centre to Orewa Educare, the deed of assignment of lease of the Pokeno centre to Pokeno Educare, and the deed of assignment of the agreement to lease the Pukekohe centre to Educare Pukekohe were all executed.
Mr Downer informed of assignment of ATL
[37]In an email dated 3 December 2018, Mr Prosser said to Mr Downer:
Further to my correspondence of some weeks back I write to confirm the lease on 144 Kitchener Rd has been assigned and approved by Signature Building to Educare Group. This is a group of some significance with some 15 plus centres under ownership and in an expansionary mode. They are a hands on family operation. Our due diligence of their financials was accepted and approved by Signatures principals and comes with a strong covenant of a Bank Guarantee. I have requested our Solicitor to advise formally.
[38] Mr Prosser’s message was in error in referring to an assignment of a lease rather than an agreement to lease (i.e. the ATL) and in identifying the purchaser as Educare Group, rather than Pukekohe Educare. By this stage Mr Prosser knew, from a letter dated 15 November 2018 to him from KiNZ’s solicitors, that the assignment was of the ATL and that the purchaser was Pukekohe Educare.
The solicitors engage
[39] By an undated letter, but which is understood to have been sent on 7 December 2018, Mr Wiltshire, the solicitor for Signature Developments wrote to Mr Jones, the solicitor for Mr Downer to advise that KiNZ had given notice of the assignment of the lease of the Pukekohe centre to “Educare Limited”. The letter said it attached the draft deed of assignment of lease and a summary of Educare’s structure, business experience and financial position. The letter stated that Signature Developments had no reasonable grounds to withhold consent to the assignment and has therefore granted consent.
[40] There were a number of factual and other errors in this letter and its attachments. The most relevant of these were:
(a)The identification of Educare Limited rather than Pukekohe Educare as the assignee of the ATL;
(b)The inclusion, in the attached materials, of the assignment to lease of the Pokeno centre rather than the assignment of the ATL for the Pukekohe centre.
[41] Included with the letter were the email and attachments Mr Lints had sent Mr Prosser on 16 September 2018 and an ‘EDUCARE – ALL ENTITIES’ financial report to July 2018. There was no information about or any reference to Pukekohe Educare in the included materials.
[42] Mr Wiltshire’s letter crossed with one sent by Mr Jones, the same day, 7 December 2018. In his letter, Mr Jones pointed to various problems in the communications Mr Downer had received from Signature Developments. The letter recorded that Signature Developments had yet to disclose any form of lease to Mr Downer and that, in any event, any such lease must be between Signature Developments and KiNZ as at settlement date.
[43] The exchanges between the solicitors continued for another two months. It is unnecessary to set out the details.
Mr Downer cancels ASP
[44] By letter dated 22 February 2019 to Signature Developments’ solicitors, Mr Downer’s solicitor gave notice under cl 10.8(5) of the ASP that Mr Downer terminated the ASP with immediate effect because of breach of cl 26 . The letter also stated that because of the breach of cl 26, Mr Downer had grounds to cancel the ASP under s 37(2)(a) of the CCL Act, because performance of cl 26 was essential to Mr Downer, and under s 37(2)(b)(i) of the CCL Act, because the breach of cl 26 of the ASP had substantially reduced the benefit of the ASP to Mr Downer.
[45] By letter dated 1 March 2019, the solicitors for Signature Developments said Signature Developments did not accept that Mr Downer had grounds to cancel the ASP. The letter responded to the various points made in the letter of 22 February 2019 from Mr Downer’s solicitor and concluded by advising that Signature Developments remained ready willing and able to settle, and advised that if Mr Downer continued to purport to cancel the ASP, he would forfeit his deposit.
[46] A further exchange of correspondence between the solicitors and a discussion between Mr Hunt and Mr Downer did not resolve the dispute.
[47]On 29 March 2019, the present proceeding was filed and served.
Sale of Pukekohe centre
[48] On 29 May 2019, Signature Developments sold the Pukekohe centre, subject to the lease to Pukekohe Educare, for $5,100,000 – an increase of $440,000 on the price for which Mr Downer had agreed to purchase the centre.
The agreements
The Agreement for Sale and Purchase
[49] The ASP was in the standard form approved by the Auckland District law Society (ADLS). On the front page, under the heading “TENANCIES (if any)”, it was stated: “Refer executed agreement to lease between KINZ Limited and Signature Building Limited dated 16 June 2017”.
[50] There were no amendments to the standard terms in the form but a further 14 terms were included under the heading ‘Further Terms of Sale’. These included:
(a)Clause 19, which provided that the date of settlement would be the commencement date of the lease to be executed pursuant to the ATL, which was estimated to be July 2018. The clause went on to provide that if, on the commencement date of the lease, a Code Compliance
Certificate (CCC)3 had not been issued, Signature Developments warranted that a Certificate of Public Use (CPU)4 will have been issued and the Landlord’s Work will have been satisfactorily completed and that, in those circumstances, settlement will proceed notwithstanding that a CCC had not been issued.
(b)Clause 26 which provided:
The property will be subject to a tenancy under which the registered proprietor of the property will be the Landlord and Kindergarten NZ Ltd will be the Tenant, such tenancy to be on the terms and conditions set out in the Agreement to Lease attached. The Purchaser acknowledges that it has received and approved a copy of the Agreement to Lease.
The Agreement to Lease
[51] The ATL defined Signature Developments as Landlord, KiNZ as Tenant, AKA as Guarantor and the Pukekohe centre as the Premises. Under the ATL, the Landlord agreed to grant the Tenant, and the Tenant agreed to take, a lease of the Premises on the terms set out in the First, Second and Third Schedules to the ATL, and the Guarantor agreed to guarantee to the Landlord the obligations of the Tenant, and to sign the lease as a guarantor.
[52]Relevant provisions of the Schedules were:
(a)Under cls 3, and 5 of the First Schedule, the term of the ATL was for 15 years with two rights of renewal of 10 years each.
3 Section 92 of the Building Act 2004 provides that an owner must apply for a CCC after all building work to be carried out under a building consent is completed. Section 94(1) provides that a building consent authority must issue a CCC if it is satisfied that the building work complies with the building consent.
4 Section 363A(1) of the Building Act provides that a person who owns, occupies, or controls premises to which the public may have access may apply for a CPU if a building consent has been granted for building work affecting the premises but no Code Compliance Certificate has been issued. Section 363A(2) provides that the territorial authority may issue a CPU for the premises only if satisfied that members of the public can use the premises safely.
(b)Under cl 4 of the Second Schedule, the Tenant agreed to enter into a formal lease with the Landlord using the current ADLS Deed of Lease form as amended by the ATL.
(c)Clause 6.1 of the Second Schedule provided:
The Tenant shall not assign or agree to assign this Agreement of the Tenant’s interest under this Agreement and the Tenant shall not register any caveat against the land in respect of its interest under this Agreement. The Tenant shall not be entitled to exercise the right pf assignment contained in the Lease until such time as the Tenant has signed the Lease.
(d)Under cl 12.1 of the Third Schedule, the Commencement Date of the Lease was to be the later of the expiry of the Fit Out Period, and the date the Landlord provided the Tenant with a CCC or a CPU for the Premises with respect to the Landlord’s Work and the Tenant’s Work.5
(e)Clause 16.1 of the Third Schedule provided that if the Tenant was other than KiNZ, it must, if required by the Landlord, provide a bank guarantee that was irrevocable until the Expiry Date and equivalent to twelve months of the initial rent plus GST.
(f)Clause 16.7 of the Third Schedule provided that if the Tenant was KiNZ, the liability of the Guarantor was limited to the maximum of 12 months rental plus GST at the rental rate at the date of default by the Tenant, and that no bank guarantee was required.
Relevant law
[53]Section 37 of the CCL Act provides:
(1)A party to a contract may cancel it if—
(a)the party has been induced to enter into it by a misrepresentation, whether innocent or fraudulent, made by or on behalf of another party to the contract; or
5 Tenant’s Work was defined in cl 1.1 of the Third Schedule to mean the fitout work to be carried out by the Tenant in accordance with plans and specifications for the fitting out and completion of the premises. Clause 10 of the Third Schedule set out the obligations of the Tenant in relation to the Tenant’s Work.
(b)a term in the contract is breached by another party to the contract; or
(c)it is clear that a term in the contract will be breached by another party to the contract.
(2)If subsection (1)(a), (b), or (c) applies, a party may exercise the right to cancel the contract if, and only if,—
(a)the parties have expressly or impliedly agreed that the truth of the representation or, as the case may require, the performance of the term is essential to the cancelling party; or
(b)the effect of the misrepresentation or breach of the contract is, or, in the case of an anticipated breach, will be,—
(i)substantially to reduce the benefit of the contract to the cancelling party; or
(ii)substantially to increase the burden of the cancelling party under the contract; or
(iii)in relation to the cancelling party, to make the benefit or burden of the contract substantially different from that represented or contracted for.
(3)Subsection (1) is subject to the rest of this subpart, but does not limit section 36.
[54] Blanchard J, on behalf of the Supreme Court in Mana Property Trustee Ltd v James Development Ltd, considered s 7(3) and (4) of the Contractual Remedies Act 1979 which, for present purposes, were not materially different from s 37(1) and (2) of the CCL Act which repealed and replaced the 1979 Act. Blanchard J said that the equivalent section to s 37(1)(b) was concerned with actual breach and the equivalent section to s 37(1)(c) with anticipatory breach; the equivalent section to s 37(2)(a) was about breach of an essential term while the equivalent section to s 37(2)(b) concerned a breach with a substantial consequence.6
[55] In the context of the present case, the first question to be determined is whether there has been a breach of the ASP or whether it is clear that the ASP would have been breached. One of the threshold requirements in ss 37(1)(b) or (c) must be established before the questions of essentiality and substantiality under ss 37(2)(a) and (b) can be considered.
6 Mana Property Trustee Ltd v James Development Ltd [2010] NZSC 90, [2010] 3 NZLR 805 at [22].
[56] With regard to s 37(2)(a), as discussed in Burrows, Finn and Todd on the Law of Contract in New Zealand, it is clear that:7
(a)It is essentiality to the cancelling party that is relevant; it is not necessary that the term be essential to both parties; and
(b)Both parties must have expressly or impliedly agreed on the essentiality of the term to the cancelling party.
[57]As discussed in Mana:
(a)It is the intentions of the parties at the time of entering into the contract and their likely effect on the foundation of the contract that are relevant.8
(b)Whether the parties have expressly agreed that a particular term is essential to the cancelling party or must be taken to have impliedly so agreed is, in both cases, a matter of interpretation of the contract.9
(c)No special form of words is necessary, provided it can be seen that the parties have agreed that adherence to the provision is essential.10
(d)In ascertaining the intention of the parties as to the essentiality of a term, regard must be had to the language of the term, read in the context of the whole of the contract and the surrounding circumstances when the contact was made.11
(e)Of particular importance will be what must have been in the contemplation of the parties concerning the likely effect of a breach of the term.12
7 Jeremy Finn, Stephen Todd and Matthew Barber Burrows, Finn and Todd on the Law of Contract in New Zealand (6th ed, LexisNexis, Wellington, 2018) at [18.2.2].
8 Above n 6 at [23].
9 At [24].
10 Ibid.
11 Ibid.
12 Ibid.
(f)In the end, the preferable approach is to ask whether, unless the term in question was agreed to be essential, the cancelling party would more probably than not have declined to enter into the contract.13
(g)This question must be asked by an objective contextual appraisal which disregards what a party may unilaterally have said about its intention in this regard.14
[58] As discussed in Burrows, Finn and Todd,15 and by Blanchard J in Mana,16 s 37(2)(a) deals with the status or importance of the term that has been breached while s 37(2)(b) deals with the severity or seriousness of the consequences of the breach. In that regard, the tests of essentiality under s 37(2)(a) and of substantial breach under s 7(2)(b) are independent of each other, and it is possible to have a case where a term is found to be essential even though the consequences of the breach are relatively minor.17 Mana itself illustrates the point: the Supreme Court held that a term in an agreement that provided for a boundary adjustment between two sites that stipulated that one site must not be less than 4.7150 hectares was an essential term justifying cancellation of the contract, even though the difference between what was contracted for and what was delivered was only 160 square metres or 0.003 per cent of the total site area.
[59] In Mana, Blanchard J also considered whether, as argued by Dawson and McLauchlan,18 some essential terms may require only substantial performance rather than exact performance. While the Supreme Court did not express a concluded view on the issue, it observed that if there can be no cancellation in the case of an essential breach unless the failure of performance is beyond what can be seen to be substantial performance, that risks blurring the distinction in the separate operation of paragraphs
(a) and (b) of s 37(2) as seems to have been the legislative intention.19
13 At [25].
14 Ibid.
15 Above n 8, at [18.2.2(b)].
16 Above n 6, at [22] and [33].
17 Mana, above n 6, at [33] and Burrows, Finn and Todd, above n 8, at [18.2.2(a)(i)].
18 Francis Dawson and David W McLauchlan The Contractual Remedies Act 1979 (Sweet & Maxwell (NZ) Ltd, Auckland 1981) at 115-116.
19 Above n 6, at [32]-[34].
Analysis
[60] Having regard to the above, and notwithstanding the questions for determination as agreed by the parties, I consider that the questions that must be determined are:
(a)Did Signature Developments breach cl 26 of the ASP or was it clear that cl 26 would be breached by Signature?
This is the threshold question in s 37(1).
(b)If cl 26 was breached, had Mr Downer and Signature Developments agreed expressly, or must they be taken to have impliedly agreed, on the signing of the ASP that the performance of cl 26 was essential to Mr Downer?
It is clear from Mana and subsequent decisions that the focus is on ascertaining the intention of the parties without separate analysis of whether their intention was express and implied.
(c)If cl 26 was essential, was there sufficient and substantial performance of cl 26?
This question, which has been agreed by counsel, presumes that substantial performance of an essential term may be sufficient to avoid cancellation under s 37(2)(a), notwithstanding the doubts expressed by the Supreme Court in Mana about blurring the distinction between paragraphs (a) and (b) of s 37(2).
(d)If cl 26 was breached, did the assignment of the ATL to Pukekohe Educare substantially reduce the benefit of the ASP to Mr Downer?
Was there a breach of cl 26 or would cl 26 have been breached at settlement?
[61] In their submissions, both Mr Lenihan, counsel for Mr Downer, and Ms Amaranathan, counsel for Signature Developments, focus on s 37(1)(c) and
whether it was clear that Signature Developments would be in breach of the ASP at settlement.
[62] Mr Lenihan says that as a result of the assignment of the ATL to Pukekohe Educare it was clear that Signature Developments would be in breach of cl 26 at settlement because it was a requirement of cl 26 that KiNZ was to be the tenant at settlement. Therefore, s 37(1)(c) was engaged.
[63] Ms Amaranathan says that it was not a requirement that KiNZ was to be the tenant because it was always possible that KiNZ could have assigned its rights as tenant before settlement. Ms Amaranathan also says cl 26 makes no reference to settlement, so it does not follow that KiNZ had to be the tenant at settlement.
[64] It is clear from the first sentence of cl 26 that it was envisaged that KiNZ would be the tenant. That statement is emphatic: “The property will be subject to a tenancy under which … Kindergarten NZ Ltd will be the tenant …”. The statement is not subject to conditions or qualifications. In the context of the ASP, which becomes complete at settlement, the sentence must also mean that KiNZ will be the tenant at settlement.
[65] That conclusion is reinforced by cl 19 of the ASP and cl 12.1 of the Third Schedule of the ATL:
(a)Under cl 19 of the ASP, the date of settlement was the commencement date of the lease executed pursuant to the ATL. Under that clause, Signature Developments also warranted that as at that date, a CPU would be available and the Landlord’s Works20 would be completed.
(b)Under cl 12.1 of the Third Schedule of the ATL, the commencement date of the lease was the later of the expiry of the fit-out period and the date a CPU or CCC had been issued.
20 Landlord’s Work was defined in cl 1.1 of the Third Schedule to mean the construction of the building and other works to be completed by the Landlord as set out in a schedule to the ATL and detailed plans and specifications. Clause 9 of the Third Schedule set out the obligations of the Landlord in relation to the Landlord’s Work.
[66] Having regard to the definitions of ‘Fit Out Period’, ‘Date of Tenant Access’, and ‘Substantially Finished’ in cl 1.1 of the Third Schedule of the ATL,21 that means the lease could commence at the later of either:
(a)When a CPU or CCC was issued; or
(b)Eight weeks from the date when the Landlord’s Work had been completed to the stage where the Tenant would not be obstructed or delayed from carrying out the Tenant’s Work and written notice had been given to the Tenant.
[67] Regardless of which of those was the later event, once the later event had occurred, the lease commenced and the ASP was required to settle. That is, lease commencement and settlement of the ASP were to occur together.
[68] KiNZ itself had no unilateral right to assign its interest in the ATL. That is evident from cl 6.1 of the ATL which provides that KiNZ “shall not” assign or agree to assign the ATL or its interests under the ATL and “shall not” be entitled to exercise the right of assignment in the Lease until it has signed the Lease. In addition, it is clear from cl 6.1 of the ATL that Signature Developments was under no obligation to consent to an assignment of the ATL. That is the case, even if, as Ms Amaranathan submitted, the ATL should be regarded as conveying a lease over the Pukekohe centre. Section 225(3) of the Property Law Act 2007 (PLA) provides that a prohibition on assignment of a lease is not affected by the duty not to unreasonably withhold consent in s 226(2)(a) of the PLA.
[69] As to whether Signature Developments had the right to consent to an assignment of the ATL, cl 26 of the ASP refers expressly to the ATL and records Mr Downer’s acknowledgment that he has received and approved the ATL. It is implicit from that express reference to the ATL and the recording and
21 Clause 1.1 of the Third Schedule defined ‘Fit Out period’ to mean a period of eight weeks from the ‘Date of Tenant’s access’ which, in turn, was defined as the date when the Landlord’s Work was ‘substantially finished’ which, in turn, was defined to mean when the Landlord’s Work was completed to the stage where the Tenant would not be obstructed or delayed from carrying out the Tenant’s Work and written notice had been given to the Tenant.
acknowledgement of Mr Downer’s approval that if there were to be a material change to the ATL, Mr Downer must be informed of the change and his approval obtained. That implication is reinforced when the change is to the tenant, which is the principal focus of the clause. I have concluded that Signature Developments had no right to consent to an assignment of the ATL, and thereby to agree to a change of tenant, unless it sought and obtained Mr Downer’s consent.
[70] That conclusion also accords with established principle. It is stated in McMorland’s Sale of Land that, subject to the terms of the contract, the vendor of a property retains the right to possession until settlement and is in possession for a period when the purchaser has the equitable estate in the property, and the vendor is treated as the trustee of the property for the purchaser.22 As constructive trustee for the property, the vendor owes a duty to have regard to the interests of the purchaser. That duty includes a duty not to terminate a tenancy against a vendor’s wishes and, more generally, a duty to consult the purchaser as fully as possible and act as far as possible on the purchaser’s wishes.23 I am satisfied that, having regard to the context of the ASP and the language of cl 26, Signature Developments had a duty to consult Mr Downer as fully as possible and act as far as possible in accordance with his wishes once it learned of KiNZ’s wish to assign its interest in the Pukekohe centre.
[71] The evidence shows that Signature Developments did not inform Mr Downer in any meaningful sense of KiNZ’s wish to assign the ATL, let alone obtain Mr Downer’s views and act in accordance with his wishes.
[72] First, in early August 2018, when responding to Mr Downer’s request for an update on progress, Mr Prosser gave no indication of the possible change of tenant at the centre. The fact that Mr Prosser may not have known fully of KiNZ’s intentions with respect to the Pukekohe centre does not absolve Signature Developments from its responsibility to consult Mr Downer as fully as possible. I consider it inherently unlikely that Signature Developments itself did not know at the beginning of August 2018 of KiNZ’s intentions to exit all three centres, given:
22 D W McMorland Sale of Land (3rd ed, Cathcart Trust, Auckland, 2011) at 10.06.
23 Ibid, at 8.06.
(a)Mr Hunt’s evidence that KiNZ had asked to assign its interests in all three centres at Orewa, Pokeno and Pukekohe;
(b)Mr Prosser’s evidence that Mr Coombe told him in “mid 2018” of AKA’s change of policy and that it was no longer interested in the private ECE centre model, and that Mr Gedye told him on 19 June 2018 of KiNZ’s wish to assign its interests in the Pokeno centre;
(c)Colliers, who were agents for both Signature Developments and KiNZ, commenced a campaign to seek expressions of interest in the assignments of the ATL for the Pukekohe centre and the lease for the Pokeno centre in early August 2018.
[73] Secondly, on 4 August 2018, when Mr Chand, as Signature Development’s agent, indicated to Mr Downer in the Facetime call that KiNZ was thinking of assigning the Pukekohe centre lease, Mr Chand must have known that Signature Developments’ intentions were much more advanced than that because he was in the process of preparing the invitation for expressions of interest. The fact that Mr Chand may have been acting as agent for KiNZ in preparing the invitation does not absolve Signature Developments of its responsibilities to Mr Downer.
[74] Thirdly, in September 2018, after Mr Prosser had spent a considerable time showing Mr Lints and others from the Educare Group around the Orewa centre and after Mr Lints had told Mr Prosser he was interested in all three centres and had provided information about the Educare Group, Mr Prosser gave no information about that possible interest to Mr Downer. Also in September 2018, when responding to Mr Downer’s request for a copy of the ASP, Mr Chand gave no indication of KiNZ’s efforts to assign its interest in the Pukekohe centre.
[75] Fourthly, in October 2018, when Mr Prosser advised Mr Downer that Signature Developments would be handing over to KiNZ for their fit-out period, Mr Prosser gave no indication of KiNZ’s intention to assign its interests in the Pukekohe centre.
[76] Fifthly, in November 2018, when Mr Prosser informed Mr Downer that KiNZ was about to provide documentation regarding an assignment of its interests in the Pukekohe centre, Signature Developments:
(a)Did not provide adequate information about the proposed assignee that would enable Mr Downer to make an informed assessment of the assignee;
(b)Did not invite Mr Downer for his views on the proposed assignment;
(c)Told Mr Downer it would be providing further information about the proposed assignment but did not do so before consenting to the assignment.
[77] Sixthly, on 3 December 2018, Signature executed the assignment of the ATL without asking Mr Downer for his views and without obtaining his consent.
[78] Lastly and more generally, in cross examination Mr Prosser agreed that it was Signature Developments’ position that Mr Downer had to accept whatever decision Signature Developments arrived at regarding the assignment of the ATL.
[79] As Mr Lenihan submitted, the contrast between what Signature Developments knew and what it told Mr Downer between August 2018 and December 2018 invites the conclusion that Signature Developments deliberately chose to keep Mr Downer in the dark about the proposed assignment until it had been completed, and chose to prefer its commercial relationship with KiNZ and AKA over its obligations to Mr Downer.
[80] Ms Amaranathan submits that, in carrying out its duties as constructive trustee, Signature Developments was entitled to protect its own interests. She refers to the decision of the House of Lords in Shaw v Foster [1872] LR 5 HL 321 in which Lord Cairns said that until a sale is completed, the vendor has a personal and substantial
interest in the property and has a paramount right to actively protect that interest.24 Ms Amaranathan submits that Signature Developments’ paramount right extended to protecting its interest against the possibility that the sale to Mr Downer might “go off” for any reason if Signature Developments had not consented to the assignment and KiNZ had not proceeded with its tenancy.
[81] The difficulty with that submission is that Signature Developments has put forward no evidence to show that KiNZ would not have proceeded with the Pukekohe centre if Signature Developments had not consented to the assignment or even if that question was ever put to KiNZ. At best, Mr Hunts’ evidence that KiNZ wanted to assign its interests in all three centres gives rise to a reasonable inference that KiNZ would not have been happy about staying involved with the Pukekohe centre. But, in the absence of any evidence to show that the question was discussed with KiNZ, there is no adequate basis for concluding that Signature Developments’ interests in the Pukekohe centre would have been seriously prejudiced if it had consulted Mr Downer and sought his consent to the assignment.
[82] More importantly, KiNZ had entered into a binding commitment with respect to the Pukekohe centre and had no right to assign its interest in the centre without Signature Developments’ consent, and Signature Developments had no duty to grant that consent. In these circumstances, I do not accept that Signature Developments’ right to protect its interests in the Pukekohe centre extended to preferring its commercial relationship with KiNZ and the AKA. Nor do I accept that Signature Developments’ right to protect its own interests absolved it from its contractual obligation to seek and obtain Mr Downer’s consent to the assignment of the ATL and its more general legal obligation to consult Mr Downer as fully as possible when considering the assignment of the ATL.
[83] For all these reasons, I am satisfied that Signature Developments failed to carry out its obligation to seek and obtain Mr Downer’s consent to the assignment of the ATL. I also consider that failure was itself a breach of cl 26 of the ASP that crystallised
24 Shaw v Foster [1872] LR 5 HL 321. Ms Amaranathan also cites Whiteleigh Holdings (New Zealand) Ltd (in receivership) v Whiteleigh Pacific Resources Ltd (1987) 8 NZCPR 598 (HC), referring to Shaw v Foster.
on the date of the assignment of the ATL. For that reason, Mr Downer has met the threshold requirement in s 37(1)(b) of the CCL Act.
[84] In addition, and even if Signature Developments had not been obliged to seek and obtain Mr Downer’s consent, it is clear that Signature Developments would have been in breach of cl 26 because KiNZ would not be the tenant at settlement because of the assignment of the ATL. Therefore, Mr Downer has also met the threshold requirement in s 37(1)(c) of the CCL Act.
Did the parties agree expressly, or must they be taken to have impliedly agreed, on the signing of the ASP that the performance of cl 26 was essential to Mr Downer?
[85] The ASP does not state in cl 26 or elsewhere that the clause is an essential term or that its performance is essential to Mr Downer. However, as Blanchard J held in Mana, no particular form of words is necessary, even for express agreement, as long as the parties have agreed that adherence to the clause is being treated by them as essential.25
[86] Mr Downer emphasised in his evidence the importance to him that KiNZ was the tenant and AKA the guarantor and referred to the references to KiNZ in the email exchanges he had with Mr Chand and Mr Prosser. For his part, Mr Prosser sought to downplay the significance of the identification of KiNZ and AKA in the Colliers’ information memorandum and said Mr Downer’s questions to him in the lead up to the conclusion of the ASP did not focus on this issue. However, the Supreme Court in Mana made it clear that the question of essentiality requires an objective contextual appraisal that disregards what a party may have said were its intentions.26 The Court of Appeal and the Supreme Court in Mana also confirmed that evidence of intentions as stated in pre-contract negotiations is not admissible, although regard may be had to the surrounding circumstances when the contract was made.27
[87] As to the nature of the contact, as Ms Amaranathan says, the contract was for the sale of land and a building. However, this was not just any land or any building.
25 Above n 6, at [24].
26 Above n 6, at [25].
27 James Developments Ltd v Mana Property Trustee Ltd [2009] NZCA 483, at [30]; Mana Property
(SC), above n 6, at [25].
It was land that had been identified as meeting the criteria for a purpose-built facility designed and intended to be operated as an ECE centre for up to 35 years.
[88] In his evidence, Mr Prosser explained the criteria that Signature Developments uses when seeking a site for an ECE centre and said the site at 144 Kitchener Road met those criteria. Mr Prosser said that the potential tenant is only one factor in what is likely to attract potential investors in a sustainable early childhood business. However, in terms of selling a proposed ECE centre with a term of 15 years and two 10-year rights of renewal, it is obvious that the identity and quality of the tenant will be a very important consideration because the calibre and reputation of the tenant will have a significant impact on the viability of the centre and the security of the investment in the centre.
[89] That was acknowledged by Mr Chand in his initial approach to Mr Downer in October 2017. Mr Chand knew of Mr Downer’s focus on long-term, low risk investments from his previous involvement with Mr Downer and emphasised that KiNZ was a “great tenant” and that the investment “does tick the boxes.”
[90] It is also apparent from the Information Memorandum that Mr Chand sent Mr Downer which emphasised:
(a)The experience of KiNZ in providing “quality early childhood education and full day care at its four early learning centres in Auckland”; and
(b)The history and size of the AKA, KiNZ’s parent and guarantor, in providing “quality early childhood education since 1908” and being “New Zealand’s largest Kindergarten Association.”
[91] The Information Memorandum also said KiNZ was an “exceptional tenant” which was “backed by over a century of history. It is also apparent from the email exchanges between Mr Downer and Mr Chand and Mr Prosser that all three of them recognised that the tenancy of KiNZ was a major consideration in the investment.
[92] As to the clause itself, as observed above, the language of c 26 is emphatic and without qualification or conditions. It is also precise: it does not, for example, say that the property will be subject to the tenancy of an experienced and reputable operator of ECE centres. It identifies KiNZ by name and says KiNZ will be the tenant on the terms set out in the ATL between Signature Developments and KiNZ. That is reinforced by the ATL which is referred to in the clause and which prohibits any assignment of the ATL or of the lease before the commencement of the tenancy. The clear intention of the two contracts was to provide certainty to the future purchaser of the Pukekohe centre so that they knew what they were buying into.
[93] It is also relevant that Signature Developments itself did not know when it entered into the ATL and the ASP that KiNZ might have a change in focus, as Mr Prosser said in his evidence in chief, and that Signature Developments struggled to find a replacement for KiNZ. In other words, there could be no guarantee that a quality tenant could be found to replace KiNZ.
[94] Taking these considerations into account, I am satisfied that, more probably than not, Mr Downer would have declined to enter into the ASP unless it had been agreed that clause 26 and its identification of KiNZ as tenant were essential. Accordingly, I am satisfied that Signature Developments and Mr Downer agreed expressly, or must they be taken to have impliedly agreed, on the signing of the ASP that the performance of cl 26 was essential to Mr Downer.
[95] The fact that KiNZ could have assigned the tenancy on the day the lease commenced does not alter this conclusion. Under the ASP, Signature was out of the picture once the ASP settled. It could not bind either KiNZ or Mr Downer about the future occupation of the centre. However, cl 26 of the ASP, combined with the ATL to which the clause referred, gave as much certainty to Mr Downer as Signature Developments was able to deliver.
If cl 26 was essential, was there sufficient and substantial performance of cl 26?
[96] For the reasons identified by Blanchard J, I am doubtful that substantial performance of an essential term avoids the right to cancel the contract under s 37(2)(a). However, it is not necessary for me to decide the point on which the
Supreme Court did not reach a concluded view. I do not consider that Signature Developments substantially performed cl 26 of the ASP.
[97] For the reasons set out above, under cl 26 Signature Developments was required to consult Mr Downer and obtain his approval if it was intending to consent to an assignment of the ATL so that KiNZ would not be the tenant. It did not consult Mr Downer and it did not obtain his approval. The fact it found another tenant which it assessed to be suitable and equivalent to KiNZ did not absolve it of the requirement to obtain Mr Downer’s approval of the proposed replacement tenant.
[98] For these reasons, I am satisfied there was not sufficient and substantial performance of cl 26.
If cl 26 was breached, did the assignment of the ATL to Pukekohe Educare substantially reduce the value of the ASP to Mr Downer?
[99] There is no need to answer this question because I have held that cl 26 was breached, was essential and was not substantially performed. Mr Downer was entitled, therefore, to cancel the ASP regardless of whether or not the assignment of the ATL to Pukekohe Educare substantially reduced the value of the ASP to him. However, for the sake of completeness, I record my conclusions on this part of Mr Downer’s claim.
[100] Mr Lenihan submits that the assignment of the ATL to Pukekohe Educare substantially reduced the value of the ASP to Mr Downer in the following ways:
(a)Mr Downer lost the benefit of s 241 of the PLA which provides that the assignor of the lease remains liable to the landlord for the payment of rent and the observance and performance of the covenants of the lessee. Had KiNZ been the tenant on settlement and then assigned the lease, KiNZ would have liable under s 241 for the payment of Pukekohe Educare’s rent and the observance and performance of the lease covenants by Pukekohe Educare;
(b)Mr Downer lost the right to approve the new tenant. Had KiNZ been the tenant on settlement and then assigned the lease, KiNZ would have needed to obtain Mr Downer’s consent to the assignment and
Mr Downer would have been able to ensure that the incoming tenant was financially secure and capable of meeting the lessee’s obligations under the lease. In his evidence Mr Downer says he would have been able to use KiNZ’s need to obtain his consent as leverage to secure his commercial position, for example, by way of an increased rental, as he has done in previous similar circumstances.
(c)Mr Downer was asked to accept as tenant a company about whose financial situation he was provided with no information. The information about the Educare Group was essentially irrelevant because the Educare Group did not undertake to guarantee Pukekohe Educare’s performance, unlike AKA which had committed to guarantee KiNZ’s performance under the lease. To the extent that the position of the Educare Group may be relevant, the net assets figure of approximately $7 million at July 2018 shown in the Educare-All Entities Financial Report stands in marked contrast with AKA’s net assets figures of $29.6 million at June 2018 and $27.5 million at June 2019 shown in AKA’s annual report for 2019. The Educare-All Entities Financial Report also shows that $5.2 million of Educare’s assets are made up of related party receivables and that $3.3 million of the assets are from shareholder advance accounts.
[101] Ms Amaranathan submits that the assignment of the ATL to Pukekohe Educare did not substantially reduce the value of the ASP to Mr Downer because the benefits he would have received from having Pukekohe Educare as a tenant were not substantially different from those he would have received from having KiNZ as a tenant. Ms Amaranathan says:
(a)While Mr Downer may not have lost the right to keep KiNZ on the hook under s 241 of the PLA, that loss was not substantial because there was no evidence of KiNZ’s financial position, KiNZ was a limited liability company, and AKA’s was liable as guarantor applied only where KiNZ was the tenant under cl 16.7 of the ATL.
(b)Mr Downer’s ability to extract commercial leverage through withholding his consent to an assignment was speculative given Mr Downer’s obligation under the PLA not to withhold his consent unreasonably and the stipulations of the PLA on what amounts to unreasonable withholding.
(c)The bank guarantee of Pukekohe Educare’s performance that was provided at the assignment of the ATL was in accordance with the requirements of the ATL and similar in substance to that provided by the AKA. Both were limited to the equivalent of 12 months’ rental and the evidence of Michael Nimot, a registered valuer, was that a bank guarantee was superior to a guarantee from AKA.
(d)While Pukekohe Educare itself was new, the Educare Group was well- established and operated approximately 18 ECE centres which contrasted very favourably with KiNZ which have only four ECE centres at the time the ASP was concluded.
(e)If Signature Developments had not consented to the assignment of the ATL, Mr Downer would have been in a much worse position because KiNZ had no intention of fitting out the Pukekohe centre or obtaining the other necessary approvals once it had decided to assign its interest in the centre, and the lease period was not contingent on the completion of the Tenant’s Works. Mr Downer would have then been faced with having to settle the purchase of an incomplete centre with an absent tenant and no operating business. By contrast, Pukekohe Educare had demonstrated its commitment by completing the fit-out, obtaining all the other necessary approvals and had begun operating and receiving revenue by the end of February 2019.
(f)The sale of the Pukekohe centre in May 2019, with Pukekohe Educare in place and operating the centre, at a significant increase above the price that Mr Downer had contracted to purchase it shows that there had been no loss in value as a result of the assignment of the ATL.
[102] While making no judgements about the calibre, experience or creditworthiness of the Educare Group or Pukekohe Educare, I am satisfied that the assignment of the ATL to Pukekohe Educare did substantially reduce the value of the ASP to Mr Downer.
[103] The loss of the benefit of s 241 of the PLA is significant. The liability of an assignor of a lease remains for the duration of the lease. It would have been of significant value to Mr Downer to know he could call on KiNZ and on the AKA if Pukekohe Educare should default on rent or its other obligations as lessee. While there is no evidence about KiNZ’s financial position, and while AKA may not have been legally obliged to stand behind its subsidiary, I agree with Mr Downer that the reputational implications for a long-established charitable institution such as the AKA would make it unlikely that AKA would allow its subsidiary to default on its legal obligations. It is also relevant that the loss of the benefit of s 241 applied only to the Pukekohe centre and not to the Pokeno centre, the lease of which commenced only six weeks before its assignment, or to the Orewa centre owned by interests controlled by Mr Hunt and his wife.
[104] For similar reasons, I consider the loss of the ability to withhold consent to the assignment of the lease to the Pukekohe centre was significant. Mr Downer acknowledges that there are constraints on a landlord’s ability to withhold consent to an assignment of a lessee’s interest. However, in the context of a specialised facility such as an ECE centre, with a long-term lease and where the pool of likely tenants is limited, securing a landlord’s consent to an assignment is not assured, notwithstanding the stipulations of the PLA regarding the withholding of consent. A landlord would be on strong grounds in refusing consent to an assignee that was not considered to be a solid tenant with a low risk of default. In addition, the right to withhold consent confers some commercial leverage, notwithstanding the stipulations of the PLA.
[105] I agree that Mr Downer was not provided with adequate information about the new tenant. Indeed, he was not provided with any financial information about Pukekohe Educare. The only financial information he was given was about the Educare Group, which has not committed to guarantee the performance of its subsidiary, unlike AKA. The contrast Mr Lenihan draws between the financial strength and history of the AKA as compared with that of the Educare Group is stark and persuasive, both in terms of involvement in early childhood education and
financial strength, notwithstanding Educare Group’s greater experience in ECE centres.
[106] I agree that the bank guarantee provided by Pukekohe Educare is substantially the same as that provided by AKA. In the circumstances of this tenancy, however, I do not accept the evidence of Mr Nimot that a bank guarantee is superior to that offered by AKA, given AKA’s financial position and long history of involvement in early childhood education. It is also relevant that Signature Development’s effective owner, Mr Hunt, has retained the benefit of a guarantee from the AKA under the terms of the assignment of the Orewa lease.
[107] I do not accept that if Signature Developments had not consented to the assignment of the ATL to Pukekohe Educare, Mr Downer would have had to settle the purchase of an incomplete ECE centre with an absent tenant. While I agree with Ms Amaranathan that the commencement of the lease was not contingent on the completion of the Tenant’s Works, if KiNZ was unwilling to complete the fit-out, it must be assumed it would also have been unwilling to sign the lease. That itself would have given Mr Downer strong grounds for cancelling the ASP for breach of cl 26 because there would be no tenant in place at settlement.
[108] I do not regard the increase in the purchase price for the Pukekohe centre to be significant or relevant in assessing the value of what all parties agreed was a long-term investment.
Consequence of findings, including interest
[109] Because Mr Downer was entitled to cancel the contract, he is entitled to a refund of his deposit of $466,000 plus interest from 21 February 2018, the date he paid the deposit.
[110] Mr Lenihan submits that Signature Developments should be ordered to pay ordinary interest calculated in accordance with the Interest on Money Claims Act 2016 from 21 February 2018 to 29 May 2019, the date the Pukekohe centre was sold, and compound interest from 30 May 2019 to the date of payment. Mr Lenihan says Signature Developments should be required to pay compound interest because Signature Developments has had Mr Downer’s money for over two and a half years,
has sold the Pukekohe centre at a profit on the price Mr Downer agreed to pay, made only a single approach to Mr Downer to settle dispute and forced an elderly man to go to Court to recover his deposit.
[111] I agree that Signature Developments acted poorly towards Mr Downer in not telling him of KiNZ’s wish to assign the ATL and in consenting to the assignment without seeking or obtaining Mr Downer’s approval. Their behaviour was high- handed and inconsiderate of the interests of a serious investor who had made a considerable contribution towards Signature Developments achieving its commercial goals. However, it is apparent from the correspondence that Signature Developments was acting in accordance with legal advice, albeit incorrect advice, and was acting in its commercial interests. It was not acting in bad faith. For these reasons, I do not consider it appropriate to order payment of compound interest for the period since the sale of the centre.
[112] Because the ASP was dated 19 December 2017, it was entered into before the coming into force of the Interest on Money Claims Act, which, in accordance with s 2 of that Act, came into force on 1 January 2018. In accordance with s 24(1)(a) of the Act, the Court may not award interest under Part 1 of the Act. In accordance with s 24(1)(b)(i) of the Act and cl 4 of the Interest on Money Claims Regulations 2019, the maximum rate of interest is 5 per cent per annum.
Result
[113]For all the above reasons I find that:
(a)Signature Developments Ltd breached cl 26 of the agreement for sale and purchase of the early education centre at 144 Kitchener Rd, Pukekohe that it entered into with Mr Downer by consenting to the assignment of the agreement to lease that it had entered into with Kindergarten New Zealand Ltd without seeking and obtaining the approval of Mr Downer;
(b)It was also clear that Signature Developments Ltd would have been in breach of cl 26 at settlement of the agreement for sale and purchase
because Kindergarten New Zealand Ltd would not have been the tenant of the centre as required by cl 26;
(c)Signature Developments Ltd and Mr Downer agreed when signing the agreement for sale and purchase that performance of cl 26 was essential to Mr Downer and there was not sufficient and substantial performance of cl 26, with the consequence that Mr Downer had the right to cancel the agreement for sale and purchase in accordance with s 37(2)(a) of the Contract and Commercial Law Act 2017;
(d)The assignment of the agreement to lease of the centre to Pukekohe Educare Ltd substantially reduced the benefit of the agreement for sale and purchase to Mr Downer with the consequence that Mr Downer had the right to cancel the agreement for sale and purchase in accordance with s 37(2)(b) of the Contract and Commercial Law Act 2017;
(e)Signature Developments must repay Mr Downer the sum of $466,000, being the amount of Mr Downer’s deposit, plus interest at 5 per cent per annum from 21 February 2018, being the date Mr Downer paid the deposit, until the date of payment.
Costs
[114] Mr Lenihan has asked to address the Court on costs if Mr Downer should be successful. Accordingly, I direct counsel to file memoranda of no more than 5 pages. Mr Lenihan should file and serve his memorandum by 15 October 2020. Ms Amaranathan should file and serve her reply by 30 October 2020.
G J van Bohemen J
Appendix of acronyms used in this judgment
ADLS Auckland District Law Society
AKA Auckland Kindergarten Association
ASP Agreement for sale and purchase dated 19 December 2017
ATL Agreement to lease dated 16 June 2017
CCCCode Compliance Certificate issued in accordance with ss 92- 95 of the Building Act 2014
CCL Act Contract and Commercial Law Act 2017
CPUCertificate of Public Use issued in accordance with s 363A of the Building Act 2004
ECE centre Early childhood education centre KiNZ or KINZ Kindergarten New Zealand Ltd PLA Property Law Act 2007
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