Green Road Cattle Company Limited v Southhead Holdings Limited
[2017] NZHC 1239
•8 June 2017
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2017-404-000944 [2017] NZHC 1239
BETWEEN GREEN ROAD CATTLE COMPANY
LIMITED Plaintiff
AND
SOUTHHEAD HOLDINGS LIMITED Defendant
Hearing: 29 May 2017 Appearances:
R J Macdonald and M P Cherrington for Plaintiff
B P Rooney for DefendantJudgment:
8 June 2017
JUDGMENT OF GILBERT J
This judgment is delivered by me on 8 June 2017 at 2.30 pm pursuant to r 11.5 of the High Court Rules.
..................................................... Registrar / Deputy Registrar
Solicitors/Counsel:
MBC Law Limited, Auckland
Brian Rooney, Barrister, Auckland
GREEN ROAD CATTLE COMPANY LTD v SOUTHHEAD HOLDINGS LTD [2017] NZHC 1239 [8 June 2017]
Introduction
[1] Southhead Holdings Ltd leased land to Green Road Cattle Company Ltd. Southhead claims that the parties agreed to surrender the lease with effect from
31 May 2017, the date it says the initial term of the lease expired. Southhead now seeks to re-take possession of the property.
[2] Green Road does not accept that there has been any agreement to surrender the lease and it maintains that the initial term of the lease will not expire until
31 May 2019. Further, it claims that upon the expiration of the initial term it may exercise five rights of renewal of two years each. On this basis, Green Road claims that the final expiration of the lease will not be until 31 May 2029 assuming it exercises all rights of renewal. Green Road also has a right of first refusal to purchase the property if Southhead wishes to sell it. Green Road wishes to preserve its rights under the lease and seeks an injunction to restrain Southhead from taking any steps to evict it from the property.
[3] The lease contains a dispute resolution process, being an initial meeting of the parties followed by mediation and then arbitration. Green Road has sought a meeting but this has been declined. The parties have not been able to agree on a mediator and no steps have yet been taken to initiate arbitration. Southhead has nevertheless cross-applied for a stay of this proceeding in reliance on the arbitration provision in the lease.
[4] After hearing submissions from counsel, it seemed to me that the appropriate outcome of these applications was obvious. After giving this indication, Mr Rooney proposed that the parties be given the opportunity to negotiate an interim position pending the outcome of the agreed dispute resolution process under the lease, including any arbitration. To enable these discussions to occur, Southhead gave an interim undertaking not to take any steps to re-take possession of the property or remove Green Road from it pending the Court’s determination of the present application. Unfortunately, the parties have not been able to reach agreement and the Court has been advised that a judgment is now required on these cross-applications.
Green Road’s application for interim injunction
[5] It is helpful to start by explaining some of the background before considering the competing contentions on the expiry date of the initial term of the lease and whether there has been an agreed surrender.
[6] Michael Nielson, who has been farming all his life, is the sole director of Green Road which carries on business as a dairy farm. In early 2016, he made enquiries of a local real estate agent about the prospect of leasing additional farmland. This is when he was introduced to Southhead’s property at 6 South Head Road, Parakai. Mr Nielson says that at that time the land was in run down condition; the fences were in ruins with wire having been pulled off most of the posts or broken; the raceways were full of large potholes; the pasture was almost non-existent and had reverted to fescue, dock and rushes; drains had not been maintained; and the land badly needed fertiliser. Nevertheless, Mr Nielson considered that the land had potential and he was interested in leasing it if appropriate terms could be agreed to enable him to remediate the property and obtain an acceptable return from it over time.
[7] After a period of negotiation, the lease was executed on 29 July 2016 in a standard form prepared for use by Federated Farmers of New Zealand. The terms reflected the need for Green Road to invest in the property to bring it up to a suitable standard for farming. It contains various covenants requiring Green Road to carry out various works on the property, including the application of fertiliser and cleaning out and maintaining ditches, drains and other water courses. The parties agreed to a concessionary rental during the initial term of the lease while Green Road invested in the property and five rights of renewal of two years each.
[8] The relevant provisions in the lease are set out below:
5.1 Term of Lease
The term shall commence on the Commencement Date and shall expire on the Expiration Date.
Clause 2.1 defines “Commencement Date” as being the date provided in cl 1.2 on which the term shall commence. “Expiration Date” means the date in cl 1.2 on which the term shall expire. Clause 1.2 reads:
1.2 Term (clause 5.1)
First Tranche: 10 Months. Commencing on 1st August 2016 and expiring on
31st May 2017. Second Tranche: 1st June 2017 till 31st May 2019.
The rental is $15,000 per annum plus GST until 31 May 2017 and $20,000 per annum plus GST until 31 May 2019.
1.4 Rental (clause 6.1)
$15,000 per annum plus GST for the first term till 31st May 2017. Thereafter
$20,000 per annum plus GST.
The rent is reviewable to a current market rental on the rent review dates which are specified in cl 1.6 as the “Renewal Dates”. The Renewal Dates are defined in cl 1.3 as 1/6/2019, 1/6/2021, 1/6/2023, 1/6/2025 and 1/6/2027.
[9] Mr Rooney argues that the initial term of the lease expired on 31 May 2017 but I do not accept this interpretation. In my view, it is clear from the quoted provisions that the initial term of the lease continues until 31 May 2019 and is in two tranches or parts, the first being from 1 August 2016 to 31 May 2017 and the second from 1 June 2017 to 31 May 2019. The broken period is simply to allow for a differential rental to be paid during the two parts of the initial term. The first right of renewal is not exercisable until 1 June 2019. This provides strong support for Green Road’s contention that this is when the initial term expires. It would not make sense if the initial term expired on 31 May 2017 because there is no right of renewal until 1 June 2019.
[10] Mr Rooney’s central submission regarding surrender is based on correspondence between the parties in March 2017. This correspondence was initiated by Mr Nielson complaining about the condition of the property and seeking to renegotiate the lease. Because Southhead’s opposition to Green Road’s application for an order preventing Southhead from re-entering the property is based
on an alleged surrender evidenced by this correspondence, it is necessary to examine it.
[11] On 9 March 2017, Mr Nielson sent an email to Lydia Yeung, the manager of Southhead. After describing the poor state of the property in some detail, Mr Nielson wrote:
At present we have resurrected or built new fences on half the property at a cost of $10,000 excluding my workers or my labour. We have tried to use as much of the existing fences as possible. We also had to spend another $4000 on an electric fence unit …
As our agreement stands it is not economic nor a good investment for me to continue spending my money repairing the damage done. I could easily spend $200,000 by the time I rebuild all the fences, race ways, drains, flood gate, pasture and fertiliser. On top of an annual lease of $20,000 for only a
10 year lease makes for a very bad investment for me which I will not do. In its current state the property is not farmable.
As I see it we have two options. Option one is we could not renew the lease next year and I’d need to be compensated for the materials and work I’ve done so far.
Option two is we renegotiate the lease. From my perspective I am happy to invest my money in repairing the above mentioned issues. However in return for my investment the least term needs to be of such a time that I can recoup the costs. As you can see with the neighbouring property the land is capable of being a very farmable property. This is the standard of farming I can bring it up to.
What I suggest we do is extend the term by 90 years in 10 year renewal blocks with a fixed lease of $20,000 annually. At this term I can afford to install mains power supply and install a water bore which combined will cost approx $100,000 due to the complexities of the geography and thermal water.
[12] The reference in option one to not renewing the lease “next year” is
obviously a mistake. The first renewal date is 1 June 2019.
[13] The following day, Mr Nielson sent another email to Ms Yeung sending her lab test results confirming the poor state of the soil. He stated:
As you can see in the attachment the fertility is extremely poor and you can tell it has not been fertilized as you had advertised. The biggest missing nutrient is Ca. Judging by these results it needs 10-15 tons immediately of lime otherwise it is not worth planting any grass or crop as it will not grow sufficiently to be economic.
…
I await your prompt reply to my previous email as I will not be applying any fertilizer or investing any money until I have secured a term long enough to make it a viable investment.
[14] Ms Yeung replied on 11 March 2017 saying that she had referred the correspondence to her solicitor and would respond after she had received advice. This drew the following immediate response from Mr Nielson:
I don’t see any point seeking advice from a solicitor. It’s very basic.
I’m happy to invest my money on improving the land as it has been run down and not in the fertile state you advertised it. In return we require a longer term of lease.
Otherwise we don’t renew the lease or seek to cancel the lease after this first year because the land is so badly run down it is not economic to farm it and requires so much money to put it right we can’t possibly recover our costs over the short term lease. We will remove all of the inputs and materials we have spent on it such as wire, posts, fencing materials and seek compensation for the fertiliser we have already put on.
I suggest we meet at greens road urgently this coming week and have a robust discussion.
[15] Ms Yeung replied on 11 March 2017 rejecting Mr Nielson’s complaints and pointing out that the agreed lease terms reflected the need for money to be spent on the property. She asked Mr Nielson “to be patient and honour your lease” and confirmed that Southhead would seek legal advice on its position.
[16] In his reply on 12 March 2017, Mr Nielson attempted to placate Ms Yeung but reiterated his desire for a meeting with her:
I can judge by your email you are somewhat upset. This is not my intention. I realise it is hard via email to judge the tone of what I’m saying hence why I would prefer to have a meeting in person.
Not honouring the lease agreement is my very least preference. Greens
Road has real potential.
What I’m saying is yes we knew the fences and races were bad and there is no power or water. I accept that and I can work with that. However the real big point on contention is the very poor fertility of the ground. That can't be fixed in a few days like fencing.
…
I would very much like to meet with you at Greens Road so I can show you about and explain to you.
…
And I would like to get an idea of where things are heading this week so I
can plan for the coming winter or not.
[17] Southhead relies on these emails from Mr Nielson on 9, 10, 11 and
12 March 2017 as constituting a request to surrender the lease. Southhead claims that Ms Yeung accepted that request in her reply on 20 March 2017:
I have sought advice from the directors of the company. We agree with your request to terminate the lease at the expiry date which is 31/5/17. Your request of a 90 year lease with a lower rent is not acceptable to us.
Please be advised that all improvements as to fence, wire and fertiliser should stay in the farm as set out in our lease.
We note the lease requires you for re-grassing prior to expiry of the lease however at this stage it’s entirely up to you whether you want to honour this clause.
Please let me know if you wish to leave earlier than 31/5/17 as I am flexible with that. (If you wish to leave one month earlier say 30/4/17 we are not fussed about it as long as you pay the monthly rent).
Thank you for the past few months work and we wish you doing well in the future.
[18] Mr Nielson responded later that day:
I didn’t request to terminate the lease. I said that was an option. To be clear there was no request to terminate and I won’t be leaving at the 31st of May. I have requested a meeting with you to which you didn’t respond.
I am now requesting an urgent meeting at greens road.
[19] Mr Nielson’s email dated 9 March 2017 did not constitute a request to surrender the lease. He identified two options. One was not to renew the lease when that right accrued. The other was to seek to re-negotiate it. The email of
10 March 2017 did not alter this position; Mr Nielson simply sought a prompt reply to his earlier email. While he threatened not to apply any fertiliser or invest further money in the meantime and this was arguably a repudiation of Green Road’s obligations under the lease, Southhead did not accept that repudiation and purport to cancel the lease in reliance on it. Instead, Ms Yeung asked Mr Nielson to “honour your lease” and Mr Nielson made it clear that he was not repudiating the lease when
he confirmed on 12 March 2017 that “not honouring the lease agreement is my very least preference” and adding that “Greens Road has real potential”. Green Road has continued to pay rent and this has been accepted. It is difficult to see how this correspondence could be construed as an offer by Green Road to surrender the lease from 31 May 2017. It follows that the purported acceptance on 20 March 2017 was ineffective to secure an agreement for surrender.
[20] For present purposes, it is only necessary for Green Road to establish that it has an arguable case that it is entitled to continued possession of the property under the lease. For the reasons given, I consider that Green Road’s entitlement to ongoing possession of the property under the terms of the lease is strongly arguable, if not unassailable. Southhead’s contrary contention that the initial lease term expired on
31 May 2017 and the lease was surrendered by agreement from that date is barely arguable, if at all.
[21] Green Road has long-term rights of occupation under the lease assuming it performs its obligations and exercises its rights of renewal. It also has a right of first refusal to purchase the property if Southhead wishes to sell it during the term of the lease. These are valuable rights concerning land which are not readily compensable by damages. I have no doubt that an interim order is appropriate to preserve the status quo pending determination of the substantive dispute between the parties.
[22] Mr Rooney submits that if the Court is inclined to make such an order, this should be in exercise of the Court’s power to grant an interim measure pursuant to art 17A of sch 1 of the Arbitration Act even though no arbitration has yet commenced.
[23] An interim measure is relevantly defined in art 17 as:
a temporary measure … by which a party is required, at any time before an
award is made in relation to a dispute, to do all or any of the following:
(a) maintain or restore the status quo pending the determination of the dispute;
(b) … refrain from taking action that is likely to cause, current or
imminent harm or prejudice to the arbitral proceedings;
[24] Article 17A confers power on an arbitral tribunal to grant an interim measure:
17A Power of arbitral tribunal to grant interim measure
Unless otherwise agreed by the parties, the arbitral tribunal may, at the request of a party, grant an interim measure.
[25] Article 9 of sch 1 confirms that the Court also has the power to grant an interim measure whether or not an arbitrator has been appointed to resolve a dispute covered by an arbitration agreement. This article relevantly provides:
9 Arbitration agreement and interim measures by court –
(1) It is not incompatible with an arbitration agreement for a party to request before or during arbitral proceedings, from a court an interim measure and for a court to grant such measure.
(2) For the purposes of paragraph (1), the High Court or the [District Court] has the same powers as an arbitral tribunal to grant an interim measure under article 17A for the purposes of proceedings before that Court, and that article and article 17B apply accordingly subject to all necessary modifications.
[26] In order to obtain an interim measure of the type sought here, an applicant must satisfy the Court of the following matters set out in art 17B(1):
(a) harm not adequately reparable by an award of damages is likely to result if the measure is not granted; and
(b) the harm substantially outweighs the harm that is likely to result to the respondent if the measure is granted; and
(c) there is a reasonable possibility that the applicant will succeed on the merits of the claim.
[27] For the reasons already given, I am satisfied that it is appropriate to grant an interim measure restraining Southhead from evicting Green Road from the land on the basis of the alleged expiration of the initial lease term and agreed surrender. Applying the requisite tests: there is a reasonable possibility that Green Road will succeed on the merits of its claim to an entitlement to possession of the property under the lease; indeed, it is most likely to succeed; harm not adequately reparable by damages is likely to result to Green Road unless the measure is granted; and the harm likely to be suffered by Green Road if the measure is not granted substantially outweighs the likely harm to Southhead if the measure is granted (so long as Green Road meets its obligations under the lease).
Southhead’s cross-application for stay
[28] Southhead applies for a stay of this proceeding on the basis of the parties’ agreement that any dispute concerning the lease should be determined by arbitration. Article 8 of sch 1 of the Act requires the Court to stay proceedings brought in a matter which is the subject of an arbitration agreement (unless the agreement is null and void, inoperative or incapable of being performed) so long as this is requested before the requesting party files its first statement on the substance of the dispute. The only other exception is where there is not in fact any dispute between the parties regarding the matter to be referred to arbitration.
[29] Green Road opposes a stay on the grounds that the lease does not require disputes to be referred to arbitration and neither party has referred the dispute to mediation or arbitration.
[30] The lease sets out in cl 14 how “any dispute concerning this Deed of Lease” is to be determined. The present dispute comes within this broad ambit. The first step is for the parties to meet. If that is unsuccessful, either party may require the other to participate in a mediation. If this is also unsuccessful the dispute is to be referred to arbitration by notice given by either party. I reject Green Road’s contention that the present dispute falls outside the scope of cl 14 of the lease and Southhead is not entitled to require that it be determined by arbitration. Article 8 is mandatory: the Court shall, if so requested, stay the proceedings. The fact that the arbitration has not yet been initiated is beside the point; the dispute is the subject of an arbitration agreement and falls within the scope of art 8. The stay must accordingly be granted.
Result
[31] I grant an interim measure pursuant to art 17A of sch 1 of the Arbitration Act
1996 maintaining the status quo pending determination of the dispute in the following terms. The defendant, its servants and agents are restrained from taking any action to evict the plaintiff from the land at 6 South Head Road, Parakai, Auckland so long as the plaintiff meets its obligations under the lease dated
29 July 2016.
[32] I make an order pursuant to art 8 of sch 1of the Arbitration Act staying this proceeding and referring the parties to arbitration in accordance with cl 14 of the lease.
[33] Costs are reserved.
M A Gilbert J
0
0
1