Fox Ears Limited v Westcity NZ Pty Limited
[2024] NZHC 1913
•12 July 2024
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2023-404-2122
[2024] NZHC 1913
BETWEEN FOX EARS LIMITED
Plaintiff
AND
WESTCITY NZ PTY LIMITED & WESTCITY NZ NOMINEES PTY LIMITED
First Defendants
COLLIERS REAL ESTATE MANAGEMENT LIMITED
Second Defendant
Hearing: 8 July 2024 Counsel:
SLL Gallagher for the Plaintiff
M A Keil for the First Defendants I Davies for the Second Defendant
Date of Judgment:
12 July 2024
JUDGMENT OF ASSOCIATE JUDGE BRITTAIN
This judgment was delivered by me on 12 July 2024 at 10 am.
Pursuant to r 11.5 of the High Court Rules.
…………………..
Registrar/Deputy Registrar
Solicitors:
Righteous Law, Auckland Keil & Associates, Auckland
Robertsons Barristers & Solicitors
FOX EARS LTD v WESTCITY NZ PTY LTD [2024] NZHC 1913 [12 July 2024]
Introduction
[1] The plaintiff, Fox Ears Ltd (Fox Ears), was formerly the tenant of a premises in a shopping mall operated by the first defendants, Westcity NZ Pty Ltd and Westcity NZ Nominees Pty Ltd (Westcity). Fox Ears operated a Health 2000 franchise from the premises.
[2] The term of the lease was seven years commencing on 19 May 2019. Fox Ears vacated the premises on about 1 December 2019. On 2 December 2019, Westcity entered into a new lease with the franchisor, Health 2000 Retail Ltd (Health 2000).
[3] In this proceeding, Fox Ears alleges that its lease was surrendered by operation of law on 2 December 2019. Fox Ears has sued Westcity to recover a security deposit that Fox Ears paid to Westcity at the commencement of the lease, of $23,805.90. Fox Ears also claims damages for the value of its fitout of the premises and chattels left in the premises when it vacated, alleging that Westcity has been unjustly enriched by the value of those assets.
[4] Westcity says that the security deposit was applied to the amounts due under the lease for the period ending on 1 December 2019. Westcity says that Fox Ears remains liable for any unpaid rent until the term of the lease expires on 18 May 2026.
[5]Westcity has applied for security for costs in respect of the claim by Fox Ears.
Legal principles
[6] The Court has a discretion to grant an application for security of costs under r 5.45(2) of the High Court Rules 2016 if it would be just in all the circumstances to do so. That discretion is, however, only engaged if the threshold test in r 5.45(1) is met. For presents purposes, that will be if the Court is satisfied there is reason to believe that the plaintiff will be unable to pay the costs of the defendant if the proceeding is unsuccessful.1
1 Rule 5.45(1)(b).
[7] The Court may draw a reasonable inference that a party will be unable to meet costs from credible evidence of surrounding circumstances.2
[8] Exercise of the Court’s discretion under r 5.45(2) requires a balancing of the interests of plaintiff and defendant, as summarised by the Court of Appeal in A S McLachlan Ltd v MEL Network Ltd:3
[15] The rule itself contemplates an order for security where the plaintiff will be unable to meet an adverse award of costs. That must be taken as contemplating also that an order for substantial security may, in effect, prevent the plaintiff from pursuing the claim. An order having that effect should be made only after careful consideration and in a case in which the claim has little chance of success. Access to the Courts for a genuine plaintiff is not lightly to be denied.
[16] Of course, the interests of defendants must also be weighed. They must be protected against being drawn into unjustified litigation, particularly where it is over-complicated and unnecessarily protracted.
[9] The following additional principles, extracted from the case law, are relevant to the balancing exercise in this application:
(a)While the Court will endeavour to assess the merits and prospects of success of the plaintiff’s claim, there are limits in the ability to do so at a summary stage of the proceeding.4
(b)If the defendant’s conduct has caused the plaintiff’s impecuniosity, that may be a factor against security for costs.5
(c)Delay in applying for security for costs may be a factor against security for costs.6
2 See Concorde Enterprises Ltd v Anthony Motors (Hutt) Ltd (No 2) [1977] 1 NZLR 516 (SC) at 519.
3 A S McLachlan Ltd v MEL Network Ltd (2002) 16 PRNZ 747 (CA).
4 McNaughton v Miller [2022] NZCA 273 at [19].
5 Highgate on Broadway Ltd v Devine [2012] NZHC 2288, [2013] NZAR 1017 at [23](a).
6 Jo v Johnston [2013] NZHC 552 at [18].
[10] If the applicant persuades the Court to exercise its discretion and order security for costs, the Court is then required to determine the amount of security and whether a stay should be ordered pending provision of the security.7
Has the threshold been met?
[11] On 31 October 2019, Fox Ears’ director, Nan Jiang (Ms Jiang) sent an email to Westcity’s agent, Colliers Real Estate Management Ltd (Colliers, the second defendant). The email stated:
This is a very difficult email for us to draft. I am very sorry to tell you we can't make the shop work anymore. This shop is not making any money for us, but instead, it has drawn too much of our time and it has become a burden to us.
On top of that, we have decided to move to Australia, as you might have seen from the news the other day, the business environment of NZ is not going well.
[12] Later, but on a date unknown, Ms Jiang sent a letter to the directors of Westcity, again expressing that Fox Ears had ceased to operate because of financial difficulties. Ms Jian provided a taxpayer summary for Fox Ears which recorded accumulated losses of approximately $372,000.
[13] On 19 April 2022, Westcity served a statutory demand on Fox Ears demanding payment of rent of $235,593.55. Fox Ears did not apply to set aside the statutory demand, and Westcity commenced a liquidation proceeding.
[14] In an affidavit sworn on 24 March 2023 filed in the liquidation proceeding, Ms Jiang confirmed that Fox Ears had “transferred the shop” to Health 2000 due to “financial difficulties”. Ms Jiang was given leave to represent Fox Ears in the liquidation proceeding, because Fox Ears did not have sufficient funds to engage a lawyer.
[15] On 5 July 2023, Associate Judge Sussock dismissed the liquidation proceeding, on the ground that the debt relied on by Westcity was the subject of a genuine dispute.8 Associate Judge Sussock noted that there was no dispute that Fox Ears did not have
7 Busch v Zion Wildlife Gardens Ltd (in rec and in liq) [2012] NZHC 17 at [2].
8 Westcity NZ Pty Ltd v Fox Ears Ltd [2023] NZHC 1720.
any funds.9 The judgment records that Ms Jian did not want Fox Ears to be liquidated because she wished to utilise the company’s tax losses.
[16] Ms Jiang has sworn an affidavit dated 5 March 2024 in opposition to the application for security for costs. Her evidence regarding the reasons why Fox Ears vacated the premises in 2019 has shifted. She now says that it was due to Westcity’s repudiation of the lease. There is no mention of Fox Ears’ financial difficulties.
[17] I reject Ms Jiang’s latest evidence on that matter. It is inconsistent with her earlier sworn evidence in the liquidation proceeding, and the contemporaneous documents from 2019 and early 2020, when Fox Ears vacated the premises.
[18] In her affidavit sworn on 5 March 2024, Ms Jiang goes on to say that Fox Ears has “had the opportunity to grow since 2021”. However, Fox Ears has elected not to put any current financial information before the Court. There is no evidence that Fox Ears has acquired any assets or is trading.
[19] Fox Ears sought leave to adduce late evidence, which I granted, which confirms that Ms Jiang and another person have recently sold a property at 9 Ware Place, Pakuranga Heights, producing net proceeds of $837,897.00. However, there is no evidence as to Ms Jiang’s intentions in respect of her share of the net proceeds. This does not amount to evidence that Fox Ears is able to meet an adverse costs order.
[20] I am satisfied that the threshold for security for costs has been met. There is reason to believe that Fox Ears has no capacity to meet an adverse costs order.
The merits of Fox Ears’ claims
[21] In the liquidation judgment, Associate Judge Sussock had no hesitation in finding that there was a genuine and substantial dispute as to whether the lease had been surrendered. I agree that it is arguable that the lease was surrendered, for the following reasons:
9 At [31].
(a)On about 28 November 2019, Westcity entered into a new lease with Health 2000. Correspondence produced by Westcity confirms that the negotiations were undertaken between Colliers and Health 2000.
(b)When Ms Jiang learned of the new lease, she communicated with Colliers requesting confirmation that the Fox Ears lease had been surrendered.
(c)On 23 January 2020, Colliers issued an invoice to Fox Ears for one day’s rent for 1 December 2019. The invoice was addressed to “vacating tenant”.
(d)Colliers’ statement of account for the Fox Ears tenancy has an entry on
31 March 2020 “Lease Surrender Health 2000”, recording the application of the security deposit to reduce Fox Ears’ account to a nil balance.
[22] Although it is arguable that the Fox Ears lease was surrendered by operation of law on 2 December 2019, it does not necessarily follow that Fox Ears has a strong claim for a return of the security deposit, for two reasons. First, the account statement kept by Colliers states that the security deposit was applied to outstanding charges under the Fox Ears lease incurred before 2 December 2019. If those charges were properly incurred, then Westcity had a right to do so.
[23]Secondly, cls 10.6 to 10.8 of the lease provide:
Repudiation
10.6 In the event that the Lessee's conduct (whether acts or omissions) constitutes a repudiation of this Lease (or of the Lessee's obligations under this Lease) or constitutes a breach of any Lease covenants, the Lessee covenants to compensate the Lessor for the loss or damage suffered by reason of the repudiation or breach.
Damages
10.7 If the Lessor terminates this Lease under clause 10.1 or the Lessee repudiates this Lease under clause 10.6 then the Lessor will be entitled to recover damages from the Lessee in respect of repudiation or breach of covenant for the damage suffered by the Lessor for the term of this Lease which would have subsisted but for such termination or repudiation.
Proceedings
10.8 The Lessor will be entitled to institute legal proceedings claiming damages against the Lessee in respect of the entire term including the periods before and after the Lessee has vacated the Premises and before and after the abandonment, termination, repudiation, acceptance of repudiation or surrender by operation of law whether the proceedings are instituted before or after such conduct.
[24] If Fox Ears vacated the premises due to financial difficulties, then this amounted to a repudiation of the lease and constituted a breach of Fox Ears’ covenants under the lease, entitling Westcity to damages. Clause 10.8 of the lease confirms Westcity’s right to sue Fox Ears for damages in respect of the entire term of the lease, including for the unexpired lease term after Westcity accepted a repudiation or surrender by operation of law.
[25] Therefore, the starting point is that Westcity is entitled to damages for the period from 2 December 2019 to 18 May 2026. This right to damages is not unfettered. Westcity must act reasonably to mitigate its losses. Conventionally, this requires a landlord to take all reasonable steps to obtain a new tenant.
[26] The evidence is that the lease to Health 2000 commenced on 2 December 2019 and terminated on about 1 March 2021. After that, there is evidence that Westcity allowed the premises to be used by a community group at no cost. There is no evidence as to the position since 2022. There is presently insufficient evidence available to enable the Court to determine:
(a)whether Westcity has acted reasonably in re-letting the premises;
(b)the rent that Westcity has received for the premises from 2 December 2019 to present; and
(c)the rent that Westcity will receive from present to 18 May 2026.
[27] Although it is not possible to assess the quantum of Westcity’s counterclaim, there is a reasonable prospect that it will exceed the security deposit.
[28] I do not consider that the claim by Fox Ears for unjust enrichment improves Fox Ears’ position. There is no evidence of the value of the fitout or the chattels, or that Fox Ears was prevented from removing chattels. The evidence that is available suggests that Fox Ears consented to Health 2000 acquiring Fox Ears’ rights in respect of the fitout and chattels in the premises.
[29] Although the evidential picture is not complete, correspondence produced by Westcity relating to the negotiation of the lease between Westcity and Health 2000 refers to:
(a)Health 2000 purchasing stock, fixtures and fittings from Fox Ears; and
(b)a request from Health 2000 for a clause in the lease acknowledging that Westcity would not take any action to recover any of Fox Ears’ property from Health 2000.
[30] Ms Jiang’s affidavit sworn on 24 March 2023 filed in the liquidation proceeding refers to the transfer of the shop to Health 2000. Ms Jiang has not produced any documents to record the terms of that arrangement. In her letter to Westcity’s directors referred to in [12] above, Ms Jiang said “… I negotiated and transferred the shop back to our head office, and this was transparent and Colliers was well aware of this.”
[31]Overall, I assess the prospects of success for Fox Ears as poor.
Other discretionary factors
[32] This is not a case where Westcity’s alleged conduct is the cause of Fox Ears’ impecuniosity. Fox Ears’ business was a financial failure, which led Fox Ears to vacate the premises early.
[33]There has been no delay in Westcity’s application for security for costs.
[34]I conclude that this is an appropriate case for security for costs.
Quantum
[35] During the hearing, I discussed with counsel the likely interlocutory steps that will be required, and what an award of costs would be for those steps on a 2B basis. Allowing for three procedural conferences and discovery, 2B costs would be $15,296. I consider that staged security for costs of $15,000 is appropriate. Counsel for Fox Ears did not take any issue with my assessment.
[36] Regarding the terms of security, counsel for Westcity confirmed that an undertaking by Ms Jiang to meet any adverse costs order, together with appropriate security, would be satisfactory to Westcity. I asked counsel for Fox Ears to take instructions from Ms Jiang. Counsel did so and confirmed that Ms Jiang is not prepared to give an undertaking. Therefore, security should be by a payment into Court.
Orders
[37] I order the plaintiff to pay $15,000 into Court as security for the first defendants’ costs for all steps in the proceeding to the conclusion of discovery, on the basis that there are no opposed interlocutory applications.
[38]This proceeding is stayed pending payment of the security into Court.
[39] I grant leave to the first defendants to seek a revision of the amount of security if there is a defended interlocutory application. The application can be brought by a memorandum of counsel.
[40] I grant leave to the first defendants to apply for further security for all steps post the close of pleadings. The application for revision can be brought by a memorandum of counsel.
[41] My preliminary view is that the plaintiff should pay the first defendants’ costs on the application for security on a 2B basis, together with disbursements. If counsel are unable to agree on costs, then:
(a)the first defendants may file a memorandum as to costs, of no more than three pages, by 26 July 2024;
(b)the plaintiff may file and serve a memorandum as to costs, of no more than three pages, by 9 August 2024; and
(c)I will then determine costs on the papers.
Associate Judge Brittain
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