Gan v Wilfred

[2013] NZHC 535

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

CIV-2013-409-000442 [2013] NZHC 535

BETWEEN  KAIWAN GAN AND JUZHEN YU Plaintiffs

ANDHARMON LYNN WILFRD First Defendant

ANDCAROLYN RUTH DARE-WILFRED Second Defendant

ANDANGELA MAREE SMALLEY Third Defendant

ANDLA FAMIA NO. 1 LIMITED Fourth Defendant

ANDLA FAMIA NO. 4 LIMITED Fifth Defendant

Hearing:         12 and 15 March 2013

Appearances: H C Matthews for Plaintiffs

MAJ Elliott for Defendants on 12 March 2013
H L Wilfred in Person with B Dudley as McKenzie Friend on
15 March 2013

Judgment:      15 March 2013

ORAL JUDGMENT OF CHISHOLM J

[1]      This application for interim relief is brought by the plaintiffs who are the owners of a Christchurch property known as Wigram Manor.  That property is used for accommodation, as a function centre, and for various other purposes.  The plaintiffs  seek  an  order  for  immediate  possession.    The  defendants  remain  in

possession.

GAN V WILFRD HC CHCH CIV-2013-409-000442 [15 March 2013]

[2]      When this proceeding was filed last week interim orders were sought on a without notice basis.  By minute I directed that the proceedings be served forthwith. I also scheduled an interlocutory hearing for 12 March 2013 and timetabled the steps that were to be taken in the meantime.

[3]      On 12 March 2013 Mr Elliott appeared for the defendants and sought an adjournment on the basis that the defendants wanted to provide further information. The proceeding was adjourned until today.  Two further affidavits have been filed by the defendant and one by the plaintiffs.  A payment of $10,000 that the defendants had agreed to make was duly made.

[4]      Today Mr Wilfred has appeared in person for the defendants.  He was assisted by the defendants’ accountant, Mr Dudley, as a McKenzie Friend.  Understandably Mr Wilfred has found this a somewhat difficult situation and I have done my best to accommodate him and explain the process.  He has conducted the case on behalf of the defendants with dignity and sincerity.   I might also add that Mr Matthews has also presented the plaintiffs’ case with skill.

[5]      Given the manner in which this proceeding has evolved Mr Matthews sought an order joining La Famia No. 1 Limited and La Family No. 4 Limited as fourth and fifth defendants respectively.   Joinder of those defendants is appropriate and there will be an order accordingly.

Background

[6]      On 7 July 2009 the plaintiffs entered into a lease with La Famia No. 2

Limited.  I will call that company “the No. 2 company” and I will describe the lease as the “head lease”.   It was for a term of five years with a right of renewal.  The annual rental was $150,000 per annum plus GST payable by monthly payments of

$12,500 plus GST.   The lease specifically provided that there was to be no sub- letting. There were no personal guarantees.

[7]      The first and third defendants are directors of the No. 2 company.  They are also directors of the fourth and fifth defendants who are “sub-lessees” (I use that

expression in a loose sense at this stage) of part of the premises.  These “sub-leases” were entered into in 2011. Although there is a conflict of evidence about whether the plaintiffs were aware of the sub leases, it is clear that there was no formal consenting by the plaintiffs to the sub-leases.

[8]      In mid 2012 rental began to fall into arrears and in September the plaintiffs issued  a  notice  of  breach.    Discussions  between  the  parties  led  to  Mr Wilfred providing a personal guarantee for $88,000.  This effectively ring-fenced the arrears at the time. Thus the problem was overcome for the moment.

[9]      Unfortunately, at the beginning of this year there was a default under the guarantee.   By 19 February 2013 the arrears under the lease stood at $130,000 (including the sum that had been personally guaranteed).  Mr Wilfred explained that in January business was dismal and the No. 2 company was in dire straits.

[10]     I should record that up to this time there had been open dealings and co- operation between the plaintiffs and defendants.  Indeed, there was a firm friendship between Dr Gan and Mr Wilfred.  Not surprisingly, that is not now the case.

[11]     On 20 February 2013 the No. 2 company went into voluntary liquidation and the liquidator disclaimed the head lease under s 269 of the Companies Act 1993. Mr Wilfred said that this came as a shock to the defendants who thought that the liquidator would support them in the steps they were trying to take to ensure that the business could continue to operate at Wigram Manor.   Be that as it may, the disclaimer brought the head lease to an end.

[12]     When the plaintiffs sought to re-enter the defendants challenged their right to do so and remained in occupation.  Correspondence records that the defendants were proceeding on the basis that there was no order for possession and the plaintiffs had no right to re-enter.   Within a short time this proceeding, seeking an order for possession, was issued.  Interim relief was also sought.

[13]     As I explained to Mr Wilfred during the hearing, applications for interim relief require the Court to ask itself three questions:  first, whether the plaintiffs have

an arguable case for interim relief; secondly, where the balance of convenience lies; and thirdly, (if those first two considerations favour interim relief) whether overall justice might indicate a different outcome.  I now consider those matters.

Is there is an arguable case?

[14]     Before addressing that issue I need to make it clear that this consideration is only in  the  context  of this  interim  application.    It  does  not  bind  a Judge  who ultimately hears the substantive claim.   Nor does it necessarily mean that the substantive outcome will be the same.  But a Judge in my position has to realistically assess, on the information currently available, whether the plaintiffs have an arguable case for possession.

[15]     If attention is confined (for the moment) to the head lease, there is clearly an arguable case for possession.  There has been default under the head lease and the outstanding rental is now in the region of $150,000.   The default is continuing. Moreover, the head lease has been disclaimed by the liquidator and is at an end.

[16]     But  this  is  not  necessarily  the  end  of  the  matter.    Section  269  of  the Companies  Act,  which  confers  the  power  on  a  liquidator  to  disclaim  onerous property, states:

...

(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 is necessary to release the company from a liability, affect the rights or liabilities of any other person.

Assuming for the moment that the first and fourth companies qualify as legitimate sub-tenants, I proceed on the basis that 3(b) means that their rights are not affected by the disclaimer. Thus, they live to fight another day.

[17]     Section 269 (5) of the Companies Act also provides that a person who has suffered loss or damage as a result of a disclaimer may apply to the Court for an order that the disclaimed property be delivered to or vested in that person.  In effect this is what the fourth and fifth defendants are seeking to do; to have the head lease vested in them, subject to modifications.

[18]     In the notice of opposition lodged by the defendants prior to the hearing on

12 March 2013 they indicated that they would be making application for relief under ss 258 and 259 of the Property Law Act 2007.  When granting the adjournment that day  I  indicated  to  Mr  Elliott  that  while  it  was  not  necessary  for  any  formal application to be before the Court today, I required an outline of the proposal that would be advanced in support of the application for relief.   That information has been provided.  (I will come back to it when considering balance of convenience.)

[19]    Sections 258 and 260 provide for the protection of a sub-lessee on the cancellation of a superior lease and the powers of the Court on such applications:

258     Protection of sublessee on cancellation of superior lease

(1)       If a lessor exercises, or is proposing to exercise, a right to cancel a lease because of a breach by the lessee of a covenant or condition of the lease, any interested person may apply to a court for relief in—

(a)      a  proceeding  brought  by  the  lessor  for  an  order  for possession of the land; or

(b)      a  proceeding  brought  by  the  interested  person  for  the purpose of seeking the relief.

(2)      A proceeding referred to in subsection (1)(b) must be brought—

(a)      before   an   order   for   possession   has   been   made   in   a proceeding referred to in subsection (1)(a); and

(b)      if the lessor has peaceably re-entered the land, not later than

3 months after the date on which the lessor re-entered the land.

(3)      Subsection (2)(b) is subject to section 259.

(4)       In this section and sections 259 and 260, interested person means, as the case requires,—

(a)      the sublessee; or

(b)      a mortgagee of the estate or interest of the sublessee; or

(c)      a receiver appointed in respect of that estate or interest.

260     Powers of court on application for relief by sublessee

(1)       On an application for relief made under section 258, the court may order the lessor to enter into a lease of the whole or any part of the land with the interested person.

(2)      An order under subsection (1)—

(a)      may specify a lease for a term—

(i)        beginning  on  a  date  not  earlier  than  the  date  on which the lessor peaceably re-entered the land or the date  on  which  the  cancellation  of  the  lease  took effect under an order for possession of the land in favour of the lessor; and

(ii)      expiring on or before a date not later than the date on which the original sublease would have expired; and

(b)       may be made on any conditions (if any) as to the execution of any instrument, payment of rent, expenses, damages, compensation, or the giving of security, or any other relevant matters, that the court thinks fit.

(3)       An order may be made under subsection (1) even though the lessee is not a party to the proceeding.

A number of issues arise about the application of these sections in this case.

[20]     First, s 258 only applies if a lessor exercises, or is proposing to exercise, a right to cancel a lease for breach.  The issue is whether or not this has occurred in this case.  The plaintiffs contend that this has not happened and that this is fatal to any application under s 258.  That seems to be a pretty formidable argument.

[21]     Secondly, there is the issue about whether the fourth and fifth defendants qualify  as  sub-lessees.    This  is  important  because  s 258  (4)  only applies  to  an “interested person” which is defined as a sub-lessee (the other alternatives do not apply).  The problem for the defendants is that sub-leasing was prohibited under the head lease, and there cannot be much argument that this was a legitimate prohibition:

Belgravia Insurance Co Ltd v Meah.[1]

[1] Belgravia Insurance Co Ltd v Meah [1964] 1 QB 436.

[22]     The issue then becomes whether the plaintiffs are estopped from relying on the  prohibition  or  have  waived  it  in  some  way.    On  the  information  currently available there  is  no  evidence of  estoppel.    While it  appears  that  the  plaintiffs received invoices from the fourth defendant for functions at Wigram Manor, this would be insufficient to establish an estoppel.  And, applying McDrury v Luporini,[2] it is difficult to see how a waiver could be established.   Apart from those matters, the fact that the sub-tenants, the fourth and fifth defendants, were only sub-leasing part of the premises might also present a problem.

[2] McDrury v Luporini [2000] 1 NZLR 652 at [19] and [21].

[23]     All of this indicates that the defendants have got a very uphill road if they are to establish a legal entitlement to relief under either s 258 and s 260.  Even if they are able to do so, relief is discretionary  Whether or not relief is granted is likely to hinge on the defendants’ proposal as to the future leasing of the premises.

[24]     The proposal is for a monthly rent of $8000 plus GST (which, I am told by Mr Matthews, is about 64% of the rental under the head lease of $12,500 plus GST per month).  Despite this lower rental the defendants are still expecting to rent the whole of the premises.   There is no proposal for immediate payment of arrears. Whether or not those arrears would be cleared by the time of a substantive hearing I cannot say, but if that is not the case the Court may well decide to exercise its discretion against relief.

[25]     Those factors lead to two conclusions.  First, adopting say an entirely clinical approach to the matter, the plaintiffs have an arguable case for possession, and a relatively strong one  at  that.    Secondly,  the defendants  face major problems  in obtaining relief. The plaintiffs have, therefore, surmounted the first hurdle.

Balance of convenience

[26]     This requires the Court to weigh relevant factors.

Adequacy of damages as a remedy

[27]     Generally speaking, if damages would provide the plaintiffs with an adequate remedy at the substantive stage, the Court will decline interim relief.   So the first issue is whether damages would provide the plaintiffs with an adequate remedy in this case.

[28]     While Mr Wilfred and Mr Dudley were optimistic in their affidavits about the future of the defendants’ business, the Court must take a realistic approach.  At the moment there are very large arrears of rental and the defendants acknowledge that they cannot meet current payments and clear the arrears.

[29]     I have to ask myself whether, if interim relief is refused and the position deteriorates,  an  award  of  damages  to  the  plaintiffs  would  provide  an  adequate remedy.  The problem is that, despite the best will in the world by Mr Wilfred and the other defendants, there is a very real prospect that the situation will deteriorate further and, at the end of the day, the defendants will not be in a position to meet an award of damages.

[30]     Thus I am not satisfied that damages would be an adequate remedy for the plaintiffs. This consideration favours the granting of interim relief.

Plaintiffs’ undertaking as to damages

[31]     The flip side of the coin is whether, if interim relief is granted, and the defendants suffer damage between now and the substantive hearing, the plaintiffs will be in a position to meet any damages that are awarded in reliance upon the plaintiffs’ undertaking as to damages.  In contrast to the defendants’ situation, which is unpredictable, there does not seem to be any question about the plaintiffs’ ability to meet an award of damages.   As I understand it there is a small mortgage on property which is likely to be worth as much as $2 million.

[32]     To recap to this point, damages are unlikely to provide an adequate remedy for the plaintiffs.  On the other hand, the undertaking as to damages should provide an adequate protection to the defendants if the substantive hearing goes their way.

Third parties

[33]     It appears that there are many forward bookings and it probably goes without saying that if the plaintiffs obtain an interim order for possession those bookings will be lost.   Mr Matthews suggested that when considering third parties I should also take into account the very substantial creditors of the No. 2 company who will probably receive nothing.  I do not agree.

[34]     As I see it, regardless of the order that I make today, the position of the unsecured creditors will remain the same.   In contrast the position of third parties will turn on whether interim relief is granted or refused.  If it is granted they will lose their bookings.   If it is refused the bookings will go ahead.   This consideration favours refusing interim relief.

The defendants’ proposal

[35]     In many ways this is the pivotal consideration.   What the defendants are proposing is a new lease for five years for the whole premises at a rental that is about

64% of the rental under the head lease.   However, the lease would be guaranteed. There is no immediate prospect of clearing arrears.   The proposal also requires maintenance work (which was extensively canvassed during the hearing) to be completed by the landlord.

[36]     As the defendants see the matter, their proposal is not only in their interests, but also in those of the plaintiffs.   Ongoing business at Wigram Manor would be preserved.    Given  the  workforce  that  will  now  be  coming  to  Christchurch,  the fortunes of Wigram Manor can only improve.   The plaintiffs will also have the benefit of a  guarantee.   And the plaintiffs should be prepared to  undertake the maintenance work now and meet a market rental that is more realistic by today’s standards.

[37]     The plaintiffs see the matter differently.  They are concerned that there is no certainty about the defendant’s ability to pay, and point to previous proposals that have failed.   To the extent that the defendants are requiring them to resolve maintenance items now, they point to the terms of the head lease.  Some of the items are the responsibility of the lessee.  Moreover, the head lease records that the lessee took the premises as they were.  The plaintiffs are also concerned that if they settle on a lower rent at this stage for the next five years the value of the property would be adversely affected.

[38]     It is not difficult to see where both parties are coming from.  Nor do I doubt the sincerity of both parties.  But, at the end of the day I have to make a judgment based on commercial reality.

[39]     The defendants are effectively asking the plaintiffs to enter into a new lease for another five years (which, I might say, is beyond the term of the head lease) at a reduced rental.  There are no immediate prospects of the rental arrears being paid. Moreover, if the plaintiffs decline to carry out the maintenance work the proposal cannot get off the ground. Added to that it is clear that these maintenance items have a direct effect on the profitability of the defendants’ operation.

[40]     In the end, while I sympathise with Mr Wilfred and the defendants, this is a situation where the plaintiffs’ stance must carry greater weight when it comes to the balance of convenience.  This comes on top of my concern that the defendants would be unable to meet a claim for damages if the plaintiffs ultimately succeeded.

[41]     In making that comment I am not overlooking Mr Wilfred’s indication that there are assets behind his family.  I do not doubt what he says.  The difficulty is that those assets are not on the table.

Status quo

[42]     Interim relief will often be provided to preserve the status quo.   In many cases, and this is probably one, different people might see the status quo in different ways.  However, it seems to me that the status quo here is that the head lease has

been disclaimed and the prospects of the sub-lessees being able to obtain relief are fraught.  Under those circumstances the status quo favours interim relief.

Conclusions as to the balance of convenience

[43]     Weighing all those matters the balance of convenience favours interim relief.

Overall justice

[44]     The final step is to consider whether interim relief would be in accordance with the concept of justice.  One aspect that has troubled me is that in reality it is likely that the decision I make today will also resolve the substantive issue.  This is not a particularly unusual situation, and is not one that automatically justifies refusal of relief.  At the same time it always causes Judges to hesitate and ask themselves whether this is really a case for interim relief.

[45]     Having given this matter due consideration I have concluded that overall justice favours the granting of interim relief.   Mr Wilfred, I cannot in all justice refuse the plaintiffs an interim order for possession.  I realise that this will come as a further blow on the top of many other setbacks you have had.  It is never a pleasant task to deliver decisions in commercial litigation where it is not difficult to see both sides.  But that is the responsibility of a Judge, and I am going to make an interim order for possession.

Outcome

[46]     There will be an interim order for possession.

[47]     Mr Wilfred, I am going to allow the defendants until 5 p.m. on Monday

18 March 2013 to vacate.  That is on the basis that there will be an orderly end to things.

[48]     There will be orders in terms of paragraphs 1.1 – 1.3 of the application for an interim injunction.  That order will lie in court until 5 p.m. on 18 March 2013.  Costs to the plaintiffs on the 2B scale.

[49]     Leave is reserved to any party to apply further should the need arise.

Solicitors:

White Fox & Jones, Christchurch,  [email protected]

Marcus Elliott, Christchurch,  [email protected]

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