Drake City Ltd v Tasman-Jones
[2016] NZHC 899
•5 May 2016
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2015-404-002810 [2016] NZHC 899
BETWEEN DRAKE CITY LIMITED
Plaintiff/Respondent
AND
DAVID JONATHAN TASMAN-JONES First Defendant/Applicant
OMAR JOVANNY BARRAGAN MERCHAN
Second Defendant/Applicant
Hearing: 26 April 2016 Appearances:
A J Steel for Plaintiff/Respondent
S Keall for Defendants/ApplicantsJudgment:
5 May 2016
JUDGMENT OF VENNING J
This judgment was delivered by me on 5 May 2016 at 2.15 pm, pursuant to Rule 11.5 of the High
Court Rules.
Registrar/Deputy Registrar
Date……………
Solicitors: Beca & Co, Auckland
Vicki Ammundsen, Auckland
Copy to: A J Barker/A J Steel, Auckland
S Keall, Auckland
DRAKE CITY LTD v TASMAN-JONES [2016] NZHC 899 [5 May 2016]
[1] Drake City Limited (Drake) seeks summary judgment against the defendants as guarantors under a lease. The defendants protest the jurisdiction of the Court to hear the claim and have applied to have it dismissed.1 They rely on an arbitration clause in the lease.
[2] On the basis of the Supreme Court decision in Zurich Australia Insurance Ltd t/a Zurich New Zealand v Cognition Education Ltd counsel agreed the defendants’ application to dismiss the proceeding should be heard separate to and before the summary judgment application.2
Background
[3] On 21 September 2011 Victoria Quarter No. 1 Limited (Victoria Quarter) entered a deed of lease with BMTJ Limited (BMTJ) as lessee for restaurant premises within the Victoria Park Market complex. The defendants guaranteed the performance of BMTJ under the lease.
[4] On 10 April 2012 Drake became the registered proprietor of the property and took a reversion of the lease.
[5] On 17 September 2012 BMTJ, the defendants and Drake executed a variation to the lease relating to rental.
[6] On 1 January 2014 BMTJ fell into arrears with the rent payable under the varied lease.
[7] BMTJ was placed into liquidation by shareholders’ resolution on 14 March
2014.
[8] On 18 March 2014 the liquidators disclaimed the lease.
1 Although the application seeks the dismissal of Drake’s claim, during submissions Mr Keall accepted that a stay pending the outcome of the arbitration would be the appropriate relief if the defendants’ argument succeeded.
2 Zurich Australian Insurance Ltd t/a Zurich New Zealand v Cognition Education Ltd [2014] NZSC 188, [2015] 1 NZLR 383.
[9] Drake re-leased the premises to a new tenant and determined the existing lease on 1 January 2015.
[10] Drake issued these proceedings in November 2015 claiming rent and outgoings for the period 1 January 2014 to 1 December 2014.
The defendants’ case
[11] The defendants allege that BMTJ was induced to enter the lease (and they were induced to enter the guarantees) by misrepresentations from Victoria Quarter about the development and levels of occupancy of the Victoria Park development.
[12] The defendants also claim that Drake breached cl 32.1, the quiet enjoyment covenant in the lease, from April 2012 to the middle of 2013.
[13] The defendants seek to set-off the damages they say BMTJ sustained as a consequence of the misrepresentation and the breach of cl 32.1 against Drake’s claim for rent. As guarantors they are entitled to raise any defence a principal could have raised: Hyundai Shipbuilding and Heavy Industries Co Ltd v Pournaras.3 They argue that their claims raise a dispute which must go to arbitration in terms of the lease.
[14] The defendants rely on the Supreme Court decision in Zurich to support their
argument to stay the plaintiff’s claim for summary judgment.4
Issues
[15] The defendants’ application raises the following issues:
(a) the application of Zurich to the facts of this case;
(b)the effect of the sale of the freehold and consequent transfer of the reversion to Drake; and
3 Hyundai Shipbuilding and Heavy Industries Co Ltd v Pournaras [1978] EWCA Civ J0517-3,
[1978] 2 Lloyd’s Rep 502.
4 Zurich Australian Insurance Ltd t/a Zurich New Zealand v Cognition Education Ltd, above n 2.
(c) the effect of the disclaimer of the lease by the liquidators.
Zurich Australian Insurance Ltd t/a Zurich New Zealand v Cognition Education
Ltd
[16] In Zurich the Supreme Court addressed the approach the Court should take where an application for summary judgment was met with a challenge to jurisdiction on the basis of an agreement to arbitrate.
[17] In the High Court Associate Judge Bell, after reviewing relevant authorities, had held that, subject to three qualifications, the question of the Court’s jurisdiction was to be decided on the summary judgment basis: whether the plaintiff could show the defendant did not have a tenable defence to the plaintiff’s cause of action.5
Because the test for stay was the inverse of the test for summary judgment, it was convenient for the two matters to be heard together subject to the following qualifications:
(a) the Court should only give summary judgment if satisfied that there would be no benefit in requiring the parties to take the matter to arbitration;
(b)the Court has a discretion to refuse an application for summary judgment. While that would ordinarily be exercised only rarely there may be greater reason to exercise the discretion where arbitration had been agreed by the parties as the preferred method of dispute resolution; and
(c) international arbitrations might be treated differently.
[18] The Judge entered summary judgment. The Court of Appeal dismissed the appeal.6 The Supreme Court granted leave to appeal. The Supreme Court ultimately
rejected the proposition the applications were different sides of the same coin and
5 Cognition Education Ltd v Zurich Australian Insurance Ltd t/a Zurich New Zealand [2012] NZHC 3257.
6 Zurich Australian Insurance Ltd t/a Zurich New Zealand v Cognition Education Ltd [2013] NZCA 180, [2013] 3 NZLR 219.
upheld Zurich’s argument that the Court should take a narrow approach to the interpretation of art 8 of Schedule 1 to the Arbitration Act 1996 holding:7
… Under art 8(1), a stay must be granted unless the court finds that the arbitration agreement is null and void, inoperative or incapable of being performed or it is immediately demonstrable either that the defendant is not acting bona fide in asserting that there is a dispute or that there is, in reality, no dispute. It follows from this that an application for summary judgment and an application for a stay to permit an arbitration to take place are not different sides of the same coin. In principle, the stay application should be determined first and only if that is rejected should the application for summary judgment be considered.
[19] In coming to that conclusion the Supreme Court cited with approval the following passage from Lord Mustill’s decision in Channel Tunnel Group Ltd v Balfour Beatty Construction Limited:8
[22] In recent times, this exception to the mandatory stay has been regarded as the opposite side of the coin to the jurisdiction of the court under RSC Ord 14 to give summary judgment in favour of the plaintiff where the defendant has no arguable defence. If the plaintiff to an action which the defendant has applied to stay can show that there is no defence to the claim, the court is enabled at one and the same time to refuse the defendant a stay and to give final judgment for the plaintiff. This jurisdiction, unique so far as I am aware to the law of England, has proved to be very useful in practice, especially in times when interest rates are high, for protecting creditors with valid claims from being forced into an unfavourable settlement by the prospect that they will have to wait until the end of an arbitration in order to collect their money. I believe however that care should be taken not to confuse a situation in which the defendant disputes the claim on grounds which the plaintiff is very likely indeed to overcome, with the situation in which the defendant is not really raising a dispute at all. It is unnecessary for present purposes to explore the question in depth, since in my opinion the position on the facts of the present case is quite clear, but I would endorse the powerful warnings against encroachment on the parties’ agreement to have their commercial differences decided by their chosen tribunals, and on the international policy exemplified in the English legislation that this consent should be honoured by the courts, given by Parker LJ in Home and Overseas Insurance Co Ltd v Mentor Insurance Co (UK) Ltd (in liq) [1990]
1 WLR 153 (CA) at 158–159 and Saville J in Hayter v Nelson and Home
Insurance Co [1990] 2 Lloyd’s Rep 265 (QB).
[20] Mr Keall submitted that there was a dispute about the pre-contractual representations made on behalf of Victoria Quarter before BMTJ and the defendants
entered the lease and guarantees and also in relation to Drake’s alleged breach of
7 Zurich Australian Insurance Ltd t/a Zurich New Zealand v Cognition Education Ltd, above n 2, at [52].
8 Channel Tunnel Group Ltd v Balfour Beatty Construction Ltd [1993] AC 334 (HL) at 355–357 per Lord Mustill.
cl 32.1 after it took the reversion of the lease. He submitted that those disputes had to be determined at arbitration in terms of the lease and so Drake’s claim for summary judgment should be stayed because the defendants’ claims raised equitable set-offs against Drake’s claim for rent and outgoings.
[21] The underlying rationale for staying legal proceedings pending arbitration is to give effect to the parties’ agreement to have their commercial disputes referred to arbitration rather than determined by the Court.
[22] Whether proceedings should be stayed pending arbitration requires consideration of what the parties have agreed to in each case. In this case, the parties’ agreement is recorded by the terms of the lease, the relevant terms of which are:
Rent
1.1THE Tenant shall pay the annual rent by equal monthly payments in advance (or as varied pursuant to any rent review) on the rent payment dates. The first monthly payment (together with rent calculated on a daily basis for any period from the commencement date of the term to the first rent payment date) shall be payable on the first rent payment date. All rent shall be paid without any deductions or set-off by direct payment to the Landlord or as the Landlord may direct.
…
Arbitration
44.1UNLESS any dispute or difference is resolved by mediation or other agreement, the same shall be submitted to the arbitration of one arbitrator who shall conduct the arbitral proceedings in accordance with the Arbitration Act 1996 and any amendment therefore or any other statutory provision then relating to arbitration.
…
44.3THE procedures prescribed in this clause shall not prevent the Landlord from taking proceedings for the recovery of any rent or other monies payable hereunder which remain unpaid or from exercising the rights and remedies in the event of such default prescribed in clause 28.1 hereof.9
9 Clause 28.1 of the lease provides for cancellation.
[23] The guarantee provided that: “As between the Guarantor and the Landlord the Guarantor may for all purposes be treated as the Tenant …”.
[24] The effect of the relevant provisions of the lease, particularly cl 44.3, is to preserve Drake’s right as landlord to take separate legal proceedings for the recovery of any rent or other monies payable under the lease. That is what the parties expressly agreed to. In terms of the Supreme Court test in Zurich there is no dispute to refer to arbitration concerning Drake’s claim for rent and outgoings.
[25] The defendants’ claims of misrepresentation and breach of cl 32.1 are opposed and are currently unqualified. They are properly disputes which should be referred to arbitration in terms of cl 44.1. However, the fact those disputes should go to arbitration does not prevent Drake from taking these separate proceedings to recover rent and outgoings. The parties agreed that Drake was not prevented from doing so despite the reference to arbitration of other disputes under the lease. The commercial reason for such a clause is obvious. It is the same reason parties provide for no set-off clauses in relation to rent in leases.
[26] Indeed cl 1.1 of the lease in this case confirms that there is no right of set-off in relation to the disputes that the defendants now seek to rely on, at least as against the claim for rent. The complicating feature of this case on that aspect is that cl 1.1 only refers to rent. It does not refer to outgoings, so the claim for outgoings may not be excluded from set-off. The consequence of that is a matter for consideration at the summary judgment stage. For present purposes, the effect of cl 44.3 remains that Drake may pursue these proceedings and its application for summary judgment for rent and outgoings.
[27] Subject to the other issues discussed below that is sufficient to dispose of the current application.
What is the effect of Drake taking the reversion of the lease?
[28] There is a further problem for the defendants insofar as they seek to raise the pre-contractual representations of Victoria Quarter against Drake. Drake is the transferee of the reversion. Its entitlement to enforce the payment of rent against
BMTJ and to enforce the defendants’ guarantees arises under ss 232 and 233 of the
Property Law Act 2007, in particular ss 232(1)(a) and (c) and 233(1).
[29] The Court of Appeal for England and Wales has held that the effect of broadly similar statutory provisions is that on a transfer of reversion the new landlord may enforce the covenants under the lease free of any need to claim through the previous landlord and free of any burden under the lease that may otherwise have arisen from the actions of the previous landlord.
[30] In Edlington Properties Ltd v JH Fenner & Co Ltd a development agency entered a building agreement with Fenner. The agency agreed to construct a factory on a site and Fenner agreed to take a lease of the premises once built.10 The agency granted the lease after building the factory. The reversion was transferred to Edlington which subsequently brought proceedings against Fenner for arrears of rent which had accrued as due after the transfer. In response Fenner contended it was
entitled to set-off against Edlington’s claim for rental its own claim against the development agency for damages for allegedly constructing a defective factory. The Judge accepted Edlington’s submission that Fenner’s claim against the agency could not be invoked against Edlington.
[31] On appeal the Court confirmed that a tenant could not set off against rent falling due after the transfer of the reversion of a lease, a claim for damages arising out of a breach of lease by the original landlord. The right of a transferee of the reversion to recover rent was, both at common law and under statute, an incident of the ownership of the reversion. It was different from the right of an assignee of an ordinary debt or other chose in action. A tenant’s right to claim damages against a predecessor in title of the present landlord, whether or not it arose under a covenant in the lease, was a personal right which was not an interest in land.
[32] Lord Justice Neuberger (as he then was) put it this way:
[15] However, the right of a transferee of the reversion to recover rent is, both in common law and under statute, an incident of the ownership of the reversion (see eg City of London Corp v Fell [1993] 4 All ER 968 at 972–
10 Edlington Properties Ltd v JH Fenner & Co Ltd [2006] 3 All ER 1200, [2006] EWCA Civ 403.
973, [1994] 1 AC 458 at 464–465 per Lord Templeman). It is thus different from the right of an assignee of an ordinary debt or other chose in action. Unlike s 136, neither s 141 nor s 3 incorporates any reference to the right given by the old courts of equity to a debtor in relation to rights of set-off accrued before he had notice of the assignment.
…
[18] The notion that the benefit or burden of the covenant may run with the term or with the reversion is familiar and well established. However, as Mr Fancourt QC, who appears with Mr Peters for Edlington argues, the contention that a liability to pay damages from the accrued breach of covenant runs with the reversion (or with the term) is an entirely different notion, and it is one which appears to me to be contrary to principle. Indeed the contention is difficult to reconcile with the decision of Garland J in Duncliffe v Caerfelin Properties Ltd [1989] 2 EGLR 38. That decision, which is rightly accepted as correctly decided by Mr Lundie, and was also so treated by Buxton LJ in Muscat v Smith [2003] 1 WLR 2853 at [28] and [41], was to the effect that a transferee of the reversion could not be held liable by the tenant for breaches of a landlord's covenant committed by the transferor, even though the covenant in question bound the transferee, who would of course be liable for any breach of the covenant after the transfer. The decision was based on ss 141 and 142 of the 1925 Act, but it applies equally in a case such as this where the relevant provisions are ss 3 and 23 of the 1995 Act.
[33] In Duncliffe v Caerfelin Properties Ltd the Judge had distinguished between the continuing obligations on the landlord to observe the relevant covenant, and any accrued liability for past breaches by the previous landlord.11
[34] In the present case the rent and outgoings for which payment is sought fell due well after the assignment of the reversion to Drake.12
[35] Mr Keall suggested Edlington could be distinguished because Drake purchased the property with knowledge of the potential claim and then signed a variation of lease relating to the rental to take account of the dispute. During 2012
Drake, BMTJ and the defendants as guarantors signed a variation of the lease, which provided for a rent holiday for a term but then provided for rent to be paid at an increased rate. The terms of the variation are clear. There is no acknowledgement in the variation that Drake accepted any personal liability for pre-reversion representations by Victoria Quarter. Edlington is not distinguishable on the basis
suggested by Mr Keall.
11 Duncliffe v Caerfelin Properties Ltd [1989] 2 EGLR 38.
12 cf Muscat v Smith [2003] EWCA Civ 962, [2003] 1 WLR 2853.
[36] For completeness, I record that the same bar does not apply to the claim in relation to the alleged breach of cl 32.1 by Drake as landlord, but for the reasons given above, that does not assist the defendants as it is answered by cl 44.3.
What is the effect of the disclaimer?
[37] Mr Keall next submitted that as a result of the disclaimer by the liquidators the lease was brought to an end. Where the lease had been determined in that way he submitted the landlord could not sue for rent, but was restricted to a claim for damages representing loss of bargain damages, citing Morris v Robert Jones
Investments Ltd.13 On the basis of that authority Mr Keall submitted that any sums
due following the date of disclaimer are not correctly characterised as sums payable for rent as the lease had ended. As such, cl 44.3 did not apply as it related to claims for rent and other monies payable under the lease.
[38] Morris v Robert Jones Investments Ltd is distinguishable and has no application to the present case. Mr Morris had guaranteed the obligations of a tenant, Admail, under a certain sublease. Robert Jones Investments Ltd (RJI) became the sublessor. In October 1987 Admail assigned its interest in the sublease to another company, Limmershin Holdings Limited. Morris again guaranteed the obligations of that company. Limmershin sublet part of the buildings to other tenants. By agreement between the parties RJI collected the monies due from those subtenants and accounted to Limmershin. There were difficulties between the parties relating to the accounting. On 15 August 1991 RJI issued a notice under s 118 of the Property Law Act 1952 requiring Limmershin to pay arrears of rent and rates by 26 August 1991. No part of the claimed sum was paid by that date. On 28
August 1991 RJI wrote to Limmershin forfeiting its lease. RJI subsequently collected the rent from the subtenants and unsuccessfully sought to obtain further subtenants. RJI then sought to recover from Morris the difference between the amounts which it actually recovered for the balance of the term and the amounts it could have expected to receive if the lease had not been terminated. It was accepted RJI could not sue for rental after the lease was terminated. The lease had been
terminated, not disclaimed.
13 Morris v Robert Jones Investments Ltd [1994] 2 NZLR 275 (CA).
[39] In the present case there is a relevant statutory provision which deals with the effect of the disclaimer on the lease insofar as the defendants are concerned. Section
269(3) of the Companies Act 1993 provides:
(3) A disclaimer under this section—
(a) brings to an end on and from the date of the disclaimer the rights, interests, and liabilities of the company in relation to the property disclaimed:
(b) does not, except so far as necessary to release the company from a liability, affect the rights or liabilities of any other person.
[40] Importantly, while BMTJ’s liabilities under the lease were brought to an end,14 the obligations of other parties such as the defendants as guarantors in this case remained unaffected.
[41] In Hindcastle Ltd v Barbara Attenborough Associates Ltd Lord Nicholls discussed the effect of an almost identical provision in the United Kingdom Insolvency Act 1986.15 His Lordship identified the issue created by the apparent conflict in the statutory wording:16
… there is a recondite point which must be faced and resolved here as part of the process of interpreting the sections as a whole. It concerns what happens to the lease in this tripartite situation. The point may be stated shortly. A lease either exists, or it does not. If disclaimer has the effect of ending the lease, no further rent can become due, and so the guarantor and original tenant cannot be called upon. It is a contradiction in terms for rent to accrue for a period after the lease has ended. If, however, disclaimer does not end the lease, so that rent continues to accrue, what happens to the lease, bearing in mind that the insolvent’s interest in the property has been ended? …
The starting point for attempting to solve this puzzling conundrum is to note that the Act clearly envisages that a person may be liable to perform the tenant’s covenants even after the lease has been disclaimed. A vesting order may be made in favour of such a person: see section 182(3), and see also section 181(2)(b). The proper legal analysis has to be able to accommodate this conclusion. The search, therefore, is for an interpretation of the legislation which will enable this to be achieved as well as fulfilling the primary purpose of freeing the insolvent from all liability while, overall, doing the minimum violence to accepted property law principles.
14 Companies Act 1993, s 269(3)(a).
15 Hindcastle Ltd v Barbara Attenborough Associates Ltd [1997] AC 70 (HL).
16 At 88.
If the problem is approached in this way, the best answer seems to be that the statute takes effect as a deeming provision so far as other persons’ preserved rights and obligations are concerned. … The statute provides that a disclaimer operates to determine the interest of the tenant in the disclaimed property but not so as to affect the rights or liabilities of any other person. Thus when the lease is disclaimed it is determined and the reversion accelerated but the rights and liabilities of others, such as guarantors and original tenants, are to remain as though the lease had continued and not been determined. In this way the determination of the lease is not permitted to affect the rights or liabilities of other persons. Statue has so provided.
[42] There is no basis to distinguish that reasoning from application to the present case.17 I expressly adopt it. Even though the liquidators disclaimed the lease the liabilities of the defendants as guarantors remained as though the lease had continued and had not been determined. The disclaimer by the liquidators does not affect the obligations of the defendants as guarantors.
Conclusion
[43] For the above reasons there can be no dispute between the parties to the lease regarding Drake’s claim for rent and outgoings. The parties, including the defendants as guarantors, expressly agreed to exclude claims for rent and other monies payable by the tenant (and the defendants as guarantors) under the lease from reference to arbitration. As a consequence there is no dispute capable of reference to arbitration in relation to Drake’s claim for rent and other outgoings.
[44] The disputes the defendants seek to raise as to the misrepresentations and breach of cl 32.1 may be raised separately in arbitration but cannot prevent Drake pursuing these proceedings and its application for summary judgment.
Result
[45] The defendants’ application to have the present claim and application for summary judgment dismissed or stayed is itself dismissed.
17 United Kingdom Insolvency Act 1986, s 178, is in very similar wording to Companies Act 1993, s 269(3).
Costs
[46] The defendants are to pay costs to the plaintiff on an indemnity basis. Clause
6.1 of the lease provides:
THE Tenant shall pay … the Landlord’s legal costs (as between solicitor and client) of and incidental to the enforcement and attempted enforcement of the Landlord’s rights remedies and powders under this lease.
[47] The opposition to this application in the context of proceedings brought to recover rent and outgoings is an attempt by Drake to enforce its rights under the lease.
Directions for the summary judgment application
[48] In the event the defendants’ application was unsuccessful the parties agreed
directions should be made for the summary judgment hearing.
[49] The defendants are to file and serve a notice of opposition and any further affidavits in support of their opposition by 13 May 2016.
[50] Plaintiff is to file and serve affidavits in response by 27 May 2016. [51] Any reply by 3 June 2016.
[52] The Registrar is to allocate a fixture on the first available date after 8 June
2016 for the summary judgment hearing (half day allocated).
[53] Submissions to be exchanged in accordance with r 7.39.
Venning J
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