Frema Properties Limited v Shelf Company no.5 Limited

[2020] NZHC 1994

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2019-404-002669

[2020] NZHC 1994

BETWEEN

FREMA PROPERTIES LIMITED

Appellant

AND

SHELF COMPANY NO. 5 LIMITED

First Respondent

SHANE GALPIN and BALLU KHAN

Second Respondents

Hearing:

29 April 2020

[Final submissions received 13 May 2020]

Counsel:

V Purusram for Appellant K F Gould for Respondents

Judgment:

10 August 2020

JUDGMENT OF EDWARDS J

This judgment was delivered by me on 10 August 2020 at 12.00 pm pursuant to r 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Solicitors/Counsel:

Victorian Lawyers, Auckland DMG Solicitors, Auckland

K F Gould, Auckland

FREMA PROPERTIES LTD v SHELF COMPANY NO. 5 LTD [2020] NZHC 1994 [10 August 2020]

[1]    The appellant, Frema Properties Ltd (Frema), was the former owner of a property in Waiuku which it leased to Shelf Company No. 5 Ltd (Shelf). The lease was guaranteed by the second respondents, Mr Galpin and Mr Khan. Shelf did not pay any rent and vacated the property in 2012. Some 10 months later, Frema sold it to a third party with vacant possession.

[2]    In 2017, Frema sued Shelf in the District Court seeking to recover unpaid rent and other outgoings. The claim was declined in the District Court on the basis that the lease had not been cancelled and Frema did not reserve its rights to receive rent on the sale of the property. Applying s 233 of the Property Law Act 2007, the Judge held that Frema’s rights under the lease ended upon the transfer of the property.1

[3]    Frema now appeals from that judgment. The appeal is brought eight days out of time due to delays in serving the respondent. There is a reasonable explanation for this delay and the respondent does not oppose the grant of leave. Leave to bring the appeal is accordingly granted. The appeal is by way of rehearing, and the principles in Austin, Nichols & Co Inc v Stichting Lodestar apply.2

Key events

[4]    Frema purchased the property in Waiuku in March 2011 and entered a lease with GK Accounting (Counties) Ltd which subsequently changed its name to Shelf.

[5]    The lease was for a term of three years with two rights of renewal of three years each. It commenced on 6 October 2011, and Shelf took possession on that date. Clause 28 of the Lease provides as follows:

DEFAULT

Cancellation

28.1THE Landlord may (in addition to the Landlord’s right to apply to the Court for an order for possession) cancel this lease by re-entering the premises at the time or at any time thereafter.

(a)if the rent shall be in arrear 10 working days after any of the rent payment dates and the Tenant has failed to remedy that

1      Frema Properties Ltd v Shelf Company No 5 Ltd [2019] NZDC 22063.

2      Austin, Nichols & Co Inc v Stichting Lodestar [2007] NZSC 103, [2008] 2 NZLR 141.

breach within 10 working days after service on the Tenant of a notice in accordance with section 245 of the Property Law Act 2007;

(b)in case of breach by the Tenant of any covenant or agreement on the Tenant’s part herein expressed or implied (other than the covenant to pay rent) after the Tenant has failed to remedy that breach within the period specified in a notice served on the Tenant in accordance with section 246 of the Property Law Act 2007;

(c)if the Tenant shall make or enter into or endeavour to make or enter into any composition assignment or other arrangement with or for the benefit of the Tenant’s creditors;

(d)in the event of the insolvency bankruptcy or liquidation of the Tenant; or

(e)if the Tenant shall suffer distress or execution to issue against the Tenant’s property goods or effects under any judgment against the Tenant in any Court for a sum in excess of five thousand dollars ($5,000);

and the term shall terminate on such cancellation but without prejudice to the rights of either party against the other.

[6]    There were disputes between the parties which are unnecessary to canvass in this judgment, save to say that it is accepted that neither Shelf, nor its guarantors, met their rental or financial obligations under the lease.

[7]    On 13 June 2012, Shelf vacated the property. Frema was unable to meet the outgoings, or find another tenant, and accordingly on 7 April 2013, it entered into an agreement for sale and purchase of the property. The sale was on the basis of vacant possession and Frema did not reserve any rights in relation to the lease. The sale settled on 24 May 2013.

[8]    Frema issued proceedings against Shelf on 25 August 2017. The sole issue in dispute was whether Frema’s failure to cancel the lease prior to sale, or reserve its rights to recover rent and outgoings, precluded it from recovering those sums from the respondents.

Statutory scheme

[9]    The Judge considered that because Frema had not cancelled the lease in accordance with cl 28, it could no longer pursue the payments. The Judge’s decision turned on the application of s 233 of the Act. That section provides:

233     Benefit of lessee's covenants to run with reversion

(1)If the reversion expectant on the lease ceases to be held by the lessor (whether by transfer, assignment, grant, operation of law, or otherwise), the rights to which this section applies—

(a)run with the reversion; and

(b)may be exercised by the person who is from time to time entitled to the income of the land, whether or not the lessee has acknowledged that person as lessor (that is, with or without attornment by the lessee).

(2)Subsection (1) applies unless a contrary intention appears from the lease or from another circumstance.

[10]   Section 233 applies to the rights under a lease listed in s 232 of the Act. Those include the right to receive the rent payable and the right to enforce any guarantee of performance of the covenants under the lease.

[11]   Section 234(1) of the Act provides that a person who is entitled to exercise a right under s 233(1) may exercise that right even though the basis for doing so first arose or accrued before the time at which that person became so entitled and is the only person entitled to exercise that right.

[12]   In Paramoor 9 Ltd v Pacific Dunlop Holdings (New Zealand) Ltd, the predecessor to s 233 was interpreted to mean that after assignment of a reversion, the original lessor lost its right to sue for breach of covenants.3 This approach was applied to ss 233 and 234 in Patel v Digital Printing Group Ltd.4 The effect of s 233 was summarised by Heath J in that case as follows:

[43]     Section 233(1) applies when the landlord parts with the reversion expectant on the lease. Once that is done (whether by transfer, assignment,

3      Paramoor 9 Ltd v Pacific Dunlop Holdings (New Zealand) Ltd (1990) 1 NZ ConvC 190,449. And see: Elizabeth Toomey New Zealand Land Law (3rd ed, Thomson Reuters, Wellington, 2017) at [8.15.08].

4      Patel v Digital Printing Group Ltd (2008) 10 NZCPR 30 (HC).

grant, operation of law or otherwise) the rights set out in s 232(1) run with the reversion and are exercisable only by the person “from time to time entitled to the income of the land”. The prima facie rule identified in s 233(1) is subject to any contrary intention appearing “from the lease or from another circumstance”: s 233(2).

[13]   In Patel, the original lessors had commenced proceedings to recover arrears of rent prior to the date of settlement on the sale and purchase of the property. There was an apportionment of entitlements to rent and other outgoings by reference to the proposed settlement date. Heath J held that the proper interpretation of the agreement for sale and purchase meant that the original lessors were entitled to sue for rent in arrears up to the date of settlement, and the new owners were entitled to all income from the land after settlement had been completed.5

[14]   The scope of what is required to establish a “contrary intention” in s 233(2) was considered in Mitre 10 (New Zealand) Ltd v Thistle Dome Holdings Ltd.6 The original lessor in that case had served an arbitration notice in relation to the covenant of repair prior to settlement of the sale of the property. A contrary intention did not appear from the lease, and so the issue concerned the meaning of “from another circumstance” in s 233(2).

[15]   Brown J said that the phrase should bear “its normal meaning of an incident or occurrence” and that the circumstance must be capable of manifesting a contrary intention.7 Furthermore, in the context of a lease dispute, the contrary intention had to be mutual as between the original lessor and assignee. His Honour expanded on that as follows:

[69] Nevertheless I accept Mitre 10’s proposition that contrary intention in the context of s 233(2) is not established solely by unilateral statements or conduct on the part of a lessor/vendor. I consider that it is necessary to show that such contrary intention is shared, explicitly or implicitly, by the assignee/purchaser. At the least some endorsement or acknowledgement on the part of the assignee/purchaser is required. It may be that such endorsement need not take the form of a binding contract but there must be at least some acknowledgement which affirmatively demonstrates that the assignee/purchaser does not demur from what the lessor/vendor proposes.

5      At [53] and [54].

6      Mitre 10 (New Zealand) Ltd v Thistle Dome Holdings Ltd [2015] NZHC 3289, [2016] 2 NZLR 846.

7      At [61] and [62].

[16]   Brown J found no evidence of a shared contrary intention, and so the case fell outside s 233(2).

[17]   In Turrall v Jackson, Associate Judge Smith held that s 233 does not apply when the lease has been cancelled.8 The Judge said:

[140] I conclude that s 233 was not intended to apply to situations where the lease between the vendor and the vendor’s tenant has been cancelled before the sale to the purchaser. The section, and s 234(1) are directed at the situation where, at the time of the sale by the owner of the land, there exists a “reversion expectant” on a lease. No such reversion expectant exists in a case where the lease has been cancelled some months (or years) before the sale transaction.

Did the lease come to an end?

[18]   Judge Dawson determined that the lease had not been cancelled in accordance with cl 28 and so it continued in force at the time of the transfer. However, there was no analysis of whether the lease had been surrendered by operation of law.

[19]   The doctrine and underlying principles behind a surrender of lease by operation of law (otherwise known as an implied surrender) are succinctly summarised in Hinde on Commercial Leases as follows:9

Surrender by operation of law, or implied surrender as it is sometimes called, “operates where the owner of a particular estate, such as a tenant for years, is a party to some transaction that would not be valid if his estate continued to exist”. The doctrine is based upon estoppel: the circumstances must be such that it would be inequitable for the parties to rely on the fact that no formal surrender was executed or lease surrender instrument registered. Express words of surrender are not required provided the conduct of the parties is inconsistent with the continuance of the lease. Although a surrender by operation of law does not depend upon the subjective intention of the parties, it does require “some unequivocal act which has the effect of estopping the parties from asserting that the lease is still extant”. Inaction on the part of the landlord, for example not demanding rent, will not of itself constitute an unequivocal act giving rise to an estoppel.

[20]   The lessor’s conduct can be considered cumulatively in establishing acceptance of a surrender.10 Re-entry after a lessee has quit the premises will generally

8      Turrall v Jackson [2018] NZHC 2370, (2018) 20 NZCPR 1.

9      DW McMorland and others Hinde McMorland & Sim Land Law in New Zealand (online ed, LexisNexis) at [11.261].

10     Goertzen v All Traffic Management Services Ltd [2016] NZHC 2162, (2016) 18 NZCPR 309 at [28].

be enough to show that the landlord was accepting an implied abandonment of the lease. And, an actual re-letting to another lessee who goes into occupation will also amount to acceptance of surrender, effective from the time of such re-letting.11

[21]   There is no dispute in this case that Shelf surrendered the lease by abandoning the premises. The question is whether that surrender was accepted. I consider it was. Ms Free said in evidence that she found the property and offices empty in June 2012. She then used the services of a real estate agent to find another tenant. That suggests Frema accepted that the lease had come to an end and was looking to re-let. Even more significantly, on 7 April 2013, Frema sold the property with vacant possession. Considered together, there could be no doubt that Frema regarded Shelf’s abandonment of the premises as bringing the lease to an end. Objectively assessed, those circumstances constitute an unequivocal acceptance of Shelf’s surrender of the lease.

[22]   The legal effect of an implied surrender is that the lease merges into the reversion and is extinguished.12 By the time the property was sold, there was no lease in force. Accordingly, there was no reversion expectant in existence at the time of sale and s 233 does not apply. But even if the conclusions regarding surrender are wrong, I consider the circumstances relating to the abandonment of the lease are relevant in considering whether a “contrary intention” applies for the purposes of s 233(2). That issue is considered next.

Was there a contrary intention?

[23]   As already noted, s 233(2) provides that s 233(1) applies unless a “contrary intention appears from the lease or from another circumstance”. The lease does not evidence a contrary intention, so the question is whether that intention appears from another circumstance.

[24]   I consider sale of the property with vacant possession evidences a contrary intention. That factor distinguishes this case from those where s 233 has been found

11     Benjamin v Wareham Associates (NZ) Ltd, above n 8, at 190,642. And see: New Zealand Motor Bodies Ltd v Emslie [1985] 2 NZLR 569 at 602.

12     Campbell v Napier City Council [2000] 1 NZLR 392 (CA) at [10].

to apply. Section 233 is concerned with a contest between the rights of the original lessor and the assignee in relation to breaches of covenants that took place prior to sale. That contest does not exist in this case as the assignee did not take assignment of the lease when it purchased the property.

[25]   The fact that the sale was with vacant possession is also sufficient to meet any mutuality requirement in my view. There is no ambiguity or dissent as to the existence of that intention as between Frema and the purchaser. Both parties agreed that the sale was not subject to a lease.

[26]   That conclusion is confirmed by consideration of the rationale underpinning  s 233. In Re King (Deceased), Diplock LJ described the rationale in relation to s 141 of the Law of Property Act 1925 (UK), but it applies equally to s 233.13 He said:14

… The effect of the section so construed is to enact a simple, rational and just rule of law. The measure of damages for breach of a covenant in a lease which runs with the land—the only kind of covenant with which the section is concerned—is the diminution in the value of the reversion consequent on the breach and is sustained by the person entitled to the reversion. If on an assignment of the reversion the benefit of such covenants, including the right to exercise remedies in respect of existing breaches, is transferred from the assignor to the assignee, justice is done to all three parties concerned. The assignor suffers no loss, for the sale price of the reversion will take account of the value of the rights of action or other remedies against the tenant for antecedent breaches of covenant which are transferred to the assignee; the assignee will be able to enforce these remedies against the tenant; the tenant will remain liable for the diminution in value of the reversion caused by his breaches of covenant whenever committed. Any other solution would lead to complication and injustice, particularly where there is a continuing covenant to keep in repair which, as in the present case, overlaps a covenant to reinstate within a limited time.

[27]   In this case, the purchasers of the land did not “receive a diminution in the value of the reversion consequent on the breach”, so there is no need to empower them to recover that loss. And, on the other side of the equation, the vendor, namely Frema will suffer loss, because the sale price of the reversion did not “take account of the value of the rights of action or other remedies against the tenant for the antecedent breaches of covenant which are transferred to the assignee”.

13     Re King (Deceased) [1963] 1 All ER 781 (CA).

14     At 798.

[28]   If the circumstances relating to the abandonment of the lease are added to the mix, there is ample  evidence  to infer  a contrary intention within the meaning of     s 233(2). The result is that s 233(1) does not apply, and the section does not prevent Frema suing for unpaid rent in this case. The appeal must be allowed.

Result

[29]The appeal is allowed.

[30]   The parties are invited to submit memoranda on whether judgment for the outstanding rent may be entered in this Court, or whether the proceeding should be remitted back to the District Court. That memoranda should be filed and served within five working days of receipt of this judgment.

[31]   If costs cannot be agreed, the parties may submit memoranda of no more than three pages in length within 15 working days of the delivery of this judgment. Costs shall be determined on the papers.

Edwards J