Fruitful Endeavours Ltd v Chancery Ltd HC Auckland CIV 2004-404-4705

[2005] NZHC 1262

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2004-404-004705

IN THE MATTER OF

BETWEEN

the District Courts Act 1947

FRUITFUL ENDEAVOURS LTD

First Appellant

AND

GRANT DAVID MITCHELL

Second Appellant

AND

CHANCERY LTD

Respondent

Hearing:

14 February 2005

Appearances: Raynor Asher QC for Plaintiff

Andru Isac for Defendant Judgment:    14 February 2005

JUDGMENT OF HARRISON J

SOLICITORS

Karyn O’Loughlin (Auckland) for Plaintiff Fitzherbert Rowe (Palmerston North) for Defendant

COUNSEL

Raynor Asher QC (Auckland)

FRUITFUL ENDEAVOURS LTD And Anor V CHANCERY LTD HC AK CIV-2004-404-004705 [14 February 2005]

Introduction

[1]    Fruitful Endeavours Ltd (FEL) and its covenanting principal, Mr Grant Mitchell, appeal against a decision of Judge Roderick Joyce QC delivered in the District Court at Auckland on 6 August 2004. The Judge entered summary judgment in favour of Chancery Ltd against FEL and Mr Mitchell for $62,428.52 together with contractual interest at 13.05% and costs.

[2]    FEL’s appeal raises a novel issue. It is whether or not Chancery’s consent as lessor in granting a third party contractor extended access to premises leased but earlier vacated by FEL amounted to an interference with FEL’s right of quiet enjoyment and, if so, whether its consent amounted to repudiatory conduct justifying cancellation of the lease.

[3]    Additionally FEL’s appeal raises a question about whether or not there was a sufficient factual foundation for Judge Joyce to enter summary judgment given allegations of factual conflict and uncertainty.

Background Facts

[4]    I shall deal first with the background facts. In my judgment those that are both undisputed and truly relevant fall within a relatively narrow compass. Furthermore, I am satisfied that they provide an adequate evidentiary basis for determining whether Chancery is entitled to summary judgment.

[5]    On 16 July 2001 the parties entered into a deed of lease for Unit A203 in Building A in the Chancery Square development in Chancery Street, Auckland. Chancery is the registered proprietor. FEL and  Mr Mitchell,  as covenantor, agreed to operate a retail jewellery shop from Unit A called Jewels and Gems. The  lease was for a term of eight years. The annual rental was $70,601 plus GST, payable monthly in advance together with operating expenses. Default interest was specified at 5% per annum above Chancery’s banker’s overdraft rate.

[6]    The First Schedule to the lease described FEL’s business use as “the retail sale and display of jewellery and associated products…”. Chancery reserved a right of access to carry out repairs and renew or replace services in adjacent premises (clause 17). FEL agreed to “keep the premises open for business during  usual trading hours and fully stocked with appropriate merchandise for the efficient conduct of [its] business” (clause 18.3). Chancery had a right of re-entry for FEL’s breach of any covenant (clause 29(b)). Additionally FEL was entitled to a standard right of quiet enjoyment in these terms (clause 34):

[FEL] paying the rent and performing and observing all the covenants and agreements herein expressed and implied shall quietly hold and enjoy the premises throughout the term without any interruption by [Chancery] or any person claiming under [Chancery].

[7]    Sadly FEL’s business was unsuccessful. In June 2003 it closed its shop and vacated the premises. Of itself this act constituted a breach of its obligations. Nevertheless, Chancery agreed not to re-enter providing that FEL continued to meet its rental and operating expenses. Chancery’s letter to FEL dated 3 June 2003 recorded:

In order that we may assist you by attempting to locate a replacement tenant for the premises please arrange for all Jewels and Gems signage to be removed along with any non-fixed shelving and counters. Please leave the balance of the shop fitout intact. It would be of assistance if you would drop off a key to us along with any alarm code information.

As discussed we will now bring the leasing opportunity to the attention of our leasing agents.

[8]    Correspondence and communications between the parties in 2003 appear to have been characterised by co-operation and goodwill, notwithstanding FEL’s default. Both apparently agreed to work together for the common purpose of finding a replacement tenant. I am satisfied that FEL obtained a benefit from Chancery in that it was allowed to maintain the lease on foot. Consequently it would be able to assign the benefit to a new tenant. In submissions today Mr Raynor Asher QC, who represented FEL and Mr Mitchell but did not appear for them in the District Court, played down the nature and extent of this concession. Nevertheless, I am satisfied that it had a tangible value.

[9]    FEL’s shop remained vacant throughout the rest of 2003. I can only assume that despite the best efforts of both parties they were unable to find a replacement tenant in the interim. On 15 December 2003 Chancery provided FEL’s key to a building contractor which was undertaking fit-out work on office premises immediately above. The contractor, Aspec, intended to install some services. Chancery did not seek or  obtain  FEL’s  prior  approval.  On  23 December  2003 Mr Mitchell visited. He found the premises unlocked and occupied by Aspec. He also assumed that it was using FEL’s premises for storage of building equipment and material. Later that evening Mr Mitchell revisited the premises. He found them locked with a new key. On 24 December he visited again. The result was the same. He was unable to obtain entry.

[10]   On 6 January 2004 FEL’s solicitors wrote to Chancery outlining the circumstances of Mr Mitchell’s three visits to the premises. The solicitors concluded with these assertions:

The lease entered into between you and our client contains a covenant of quiet enjoyment. Your actions in allowing contractors to occupy the  premises for the benefit of another tenant constitutes a breach of the lease. This breach may amount to repudiation of the lease allowing our client to cancel the lease.

Your repudiation of the lease is further supported by the inability of our client to now access the premises, and amounts to re-entry by the landlord. Our clients obligations under the lease are therefore at an end effective from the date of repudiation and re-entry, being 23 December 2003.

[11]   On 13 January 2004 Chancery’s solicitors replied. They explained the circumstances of Aspec’s occupation. They denied any breach of the contract or intention to re-enter. Materially they stated:

It seems that while the contractor had access to the premises it did store  some materials there overnight. This was without the knowledge of the lessor. Further, it seems that the contractor lost the key of the premises and for security purposes installed a new lock. Again this was without the knowledge of the lessor. When your client visited the  premises  on December 24 and expressed dissatisfaction with the contractor’s actions, the contractor took immediate steps to clear the premises and we are instructed this was done by December 25. Since that, the key has been located and the original lock has been replaced. Access is accordingly available to your client. Prior to your letter, your client took no steps to communicate with the lessor concerning this matter. Had it done so, the lessor would have taken immediate action to address the position with the contractor.

[12]It is also appropriate to record the solicitor’s concluding statement that:

We are instructed to advise that our client is somewhat disappointed with the approach which your client now seeks to take in terms of your letter as our client has at all times sought to assist your client in finding a solution to its position. In the circumstances our client  now reserves  its rights arising out of your client’s closure of the premises for business purposes.

Additionally they asserted that FEL and Mr Mitchell had “contrived to seek some benefit” from what had occurred.

[13]   FEL has failed to pay any rental to Chancery since 31 December  2003.  On  6 May 2004 Chancery applied to the District Court at Auckland for summary judgment for rental and other arrears. FEL responded with a statement of defence and counterclaim seeking judgment for $32,881 being the value of its chattels stored at the premises and which it alleged Chancery had converted in December  2003.  The counterclaim did not feature in FEL’s subsequent statement of defence filed to Chancery’s amended statement of claim; nor does it feature in the judgment under appeal.

[14]   However, Mr Andru Isac, who appeared for Chancery in both Courts, reports that at the hearing in the District Court FEL’s counsel advised that it would abandon its counterclaim if Chancery’s originating claim was successful. I have some difficulty in following the rationale for this course. I can only construe it as notice of withdrawal of FEL’s counterclaim. Otherwise the company would have reserved its rights to pursue its counterclaim and if successful to set it off against Chancery’s judgment.

District Court

[15]   Judge Joyce summarised the relevant background circumstances. He referred extensively  to  evidence  given  in  affidavits  by  Mr Kroon   for   Chancery   and Mr Mitchell for FEL. He noted the essence of FEL’s defence that, based on the facts as then known, Chancery was arguably in substantial breach of the covenant of quiet enjoyment. Accordingly the case was unsuitable for summary judgment.

[16]   The Judge placed weight on what he described as “a significant factor that is inescapable”, namely that FEL was not using the premises. He was clearly unimpressed by Mr Mitchell’s conduct when visiting the premises in December 2003, describing him as “leaping all too quickly and conveniently to self-serving conclusions”. He observed that the route of direct contact with Chancery would certainly have led to a different result.

[17]   Judge Joyce focused primarily on the question of whether or not there was evidence that Chancery’s conduct constituted a foundation for FEL’s cancellation of the contract. He was satisfied that there was no factual basis for this defence, observing, among other things, that Chancery’s conduct “exposed it to no  greater risk of consequence than an award of nominal damages”. He could not find any evidential foundation for an argument that Chancery had repudiated its obligations; that is, that it had made clear beyond reasonable doubt an intention no longer to perform its side of the bargain.

Decision

[18]   This morning Mr Asher has mounted a sustained challenge to the judgment on a number of fronts. His primary submission is that Chancery’s  conduct  in handing over control of FEL’s premises to a third party for up to 10 days amounted to a substantial breach of its covenant and thus a derogation of its grant. He focused on Chancery’s alleged interference with FEL’s right of quiet enjoyment, describing what happened as intolerable. Mr Asher submitted that the District Court Judge applied a subjective rather than an objective test, giving undue weight to Chancery’s expressions of its own intention not to terminate.

[19]   Mr Asher further submitted that, if the Judge had applied an objective test, Chancery’s actions would be seen as sufficiently serious to amount to a re-entry. In this respect he argued that the learned Judge understated clear evidence about the nature and extent of Aspec’s occupation. Accordingly, FEL should have an opportunity to ventilate all the facts at trial and establish the severity of Chancery’s breach. Mr Asher acknowledged the parties’ common ground that Chancery had allowed Aspec to occupy for at least three or four days but referred to the prospect

that FEL could prove the duration of occupation for most of December. He also emphasised Mr Mitchell’s evidence about the presence of building material and equipment stored there.

[20]   I can deal first with Mr Asher’s last point. I am prepared to accept for these purposes that FEL may be able to prove that Aspec had occupation of or access to its premises for up to 10 days. I am also prepared to accept Mr Mitchell’s evidence that he saw building material and equipment stored at his premises on 23 December. But on my view of the case these facts, even if proven, would not affect the result. The issue is more fundamental.

[21]   The legal principles are well settled. I do not understand Mr Asher to  disagree with my identification of two consecutive questions for  determination. First, was there arguable evidence of Chancery’s breach of FEL’s right of quiet enjoyment? To constitute a breach, Chancery’s actions must amount to a substantial interference with FEL’s right of possession; that is, its ability to use the premises in the ordinary way. What is substantial is a question of fact and degree related specifically to these circumstances (Southwark London Borough Council v Mills [1999] 3 WLR 939 (HL) per Lord Hoffman at 945). Furthermore, the interference must be more than temporary inconvenience; it must go further and prevent FEL from using its premises for the purposes for which they were devised.

[22]   Second, if the interference is substantial and constitutes a breach of FEL’s rights, can it be objectively construed as evidence of Chancery’s intention to repudiate its obligations and terminate the lease (s 7(2) Contractual Remedies Act 1979)? Or has Chancery’s breach, if it occurred, substantially reduced the benefit or increased the burden of the lease for FEL (s 7(4)(b))?

[23]   In my judgment this appeal must fail at the first or threshold stage. Contrary to Mr Asher’s submission, I am not satisfied there is evidence that Chancery breached its contractual obligation to give quiet enjoyment in the manner mandated by the authorities. Judge Joyce did not apparently make a specific finding on this point. He was content to rest his judgment on the second stage of cancellation. But I

infer that he did not regard Chancery’s conduct as constituting a substantial interference.

[24]   I accept that Chancery interfered with FEL’s right to vacant possession; and in law its permission to Aspec to enter the premises may have constituted a trespass. But, decisively in my judgment, Aspec’s actions did not interfere with FEL’s ordinary use of the premises. That is the commercial purpose of the covenant of  quiet enjoyment. I repeat again that whether it is breached is a question of fact and degree. FEL had elected six months earlier to cease trading. With Chancery’s consent it had willingly surrendered possession in June 2003. Mr Mitchell does not suggest that he visited the premises in December 2003 for the purpose of recommencing business. It appears that it was more in the nature of a routine check on security. There is no evidence that Aspec’s presence with Chancery’s approval prevented or impeded FEL from carrying on its agreed business use, namely retail sale and display of jewellery, when it was not then actually using the premises. In  my judgment, there can be no substantial interference with a right when its beneficiary has no intention of exercising it at the relevant time.

[25]   Additionally, what happened over those 10 days was of a temporary nature. There is no evidence that Aspec’s occupation was permanent. It was undertaking work on adjacent premises. I am prepared to assume it was storing some material  and equipment in FEL’s premises for that purpose. But, considered objectively,  there is no factual basis for inferring that Chancery allowed Aspec access with the intention of depriving FEL of its rights or itself exercising a right of re-entry. All the signs are to the contrary, particularly its agreement to assist FEL in finding a replacement tenant.

[26]   However, if I am wrong, I am satisfied that Chancery’s breach, if it occurred, was not such as to give FEL a right to cancel. With great respect to Mr Asher, the evidence of Chancery’s conduct does not approach the level sufficient to establish a repudiation; that is, of an intention to refuse to perform its obligations. Applying an objective test, I am satisfied that Chancery was, as noted, allowing Aspec access to install services to adjacent premises, which would itself be lawful if it had engaged the contractor for that purpose.

[27]   Alternatively, Aspec’s presence and activity over the relevant 10 day period neither substantially reduced the benefit nor increased the burden of the lease to  FEL. The focus at this stage is on the nature and extent of the consequences of Chancery’s breach, assuming it occurred. In my judgment an appropriate practical measure of substantiality in these circumstances is FEL’s right to damages. At best its entitlement would be, as Judge Joyce observed and Mr Asher acknowledged, minimal or nominal. FEL has apparently abandoned its counterclaim. There is no evidence that Chancery converted its chattels. I can only infer that they are available to FEL now in the same form that they were on 23 and 24 December 2003. In the interim neither the company nor Mr Mitchell has taken any steps to recover them.

[28]   Accordingly, I dismiss the appeal by FEL and Mr Mitchell. I record that it was not necessary for me to call on Mr Isac in oral argument, but I appreciate the care with which he prepared his written synopsis. I also record my appreciation for Mr Asher’s thoughtful argument in support of the appeal.

[29]   Costs must follow the event and will be fixed according to category 2B. (Subsequent to my oral delivery of this judgment, Mr Isac has filed a brief memorandum identifying Chancery’s contractual right to solicitor/client costs (clause 6) and requested that I amend the judgment accordingly. However, I am not prepared to take that step without hearing from Mr Asher but I record that, as I dealt with the issue in a cursory fashion at the conclusion of my judgment, I would consider an application by Chancery to recall favourably. I assume that counsel will be able to resolve this issue between themselves.) Chancery is also entitled to its reasonable travelling and accommodation disbursements.

Rhys Harrison J