Hamilton Accommodation Limited v Yi Ming Investment Limited
[2024] NZHC 1619
•19 June 2024
IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY
I TE KŌTI MATUA O AOTEAROA KIRIKIRIROA ROHE
CIV-2023-419-000072
[2024] NZHC 1619
UNDER Part 19 of the High Court Rules and s 253 of the Property Law Act 2007 IN THE MATTER
of an application for relief against cancellation
BETWEEN
HAMILTON ACCOMMODATION LIMITED
Applicant
AND
YI MING INVESTMENT LIMITED
Respondent
Hearing: 20 May 2024. Further submissions on 4 and 13 June 2024. Appearances:
D Delic for the Applicant
S Rawcliffe for the Respondent
Judgment:
19 June 2024
JUDGMENT OF GORDON J
This judgment was delivered by me on 19 June 2024 at 3 pm, pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar Date:
Solicitors:
SD Legal Ltd, Hamilton Harkness Henry, Hamilton
HAMILTON ACCOMMODATION LTD v YI MING INVESTMENT LTD [2024] NZHC 1619 [19 June 2024]
Introduction
[1] The applicant, Hamilton Accommodation Ltd (HAL), is the lessee of the Ascot Motor Lodge at 320 Te Rapa Road, Hamilton (property). The respondent, Yi Ming Investment Ltd (YMIL), is the owner of that property.
[2] YMIL has given notice of intention to cancel the lease. In response, HAL has made an application for relief against cancellation of the lease pursuant to s 253 of the Property Law Act 2007 (the Act).
[3]The issues are:
(a)Is HAL in breach of the lease? Specifically:
(i)Did HAL carry out alterations without YMIL’s consent?
(ii)Is HAL using the premises for a purpose other than the permitted use, by using the property as emergency accommodation?
(iii)Has the alleged breach of refusal to attend arbitration been remedied, given that HAL has now agreed to attend arbitration?
(iv)Are the legal fees claimed by YMIL unreasonable?
(b)Should the Court exercise its discretion to grant relief to HAL?
(c)If so, what conditions, if any, should attach to the relief?
Background
[4] Sarah Tu and James Tu are the co-directors of YMIL. They purchased the property in 1999, in their own names, and later transferred the property to YMIL on 5 November 2020.
[5] Mr and Ms Tu operated a motel business at the property from 2002 to 2003, before deciding to sell the business. On 20 June 2003 they entered a deed of lease agreement (lease) with Roger Dundang. The lease was later assigned to Davy Hill Ltd in June 2013.
[6] On 28 May 2020 Davy Hill Ltd entered into a sale and purchase agreement to sell its motel business to HAL. The co-directors of HAL are Patrick McGuire and Kim Nguyen. The sale and purchase agreement was conditional upon landlord consent to the assignment of the lease to HAL.
[7] Around 12 June 2020, Davy Hill Ltd contacted YMIL seeking approval to assign the lease to HAL. As part of the correspondence Davy Hill Ltd provided an email where HAL explained its plans to bring the motel up to industry standard, including renovating all the rooms on the inside. In the email, HAL also said “we can discuss this in more detail when we receive the landlord’s consent.”
[8] YMIL gave consent to the assignment and on 14 September 2020, Davy Hill Ltd assigned the lease to HAL. At the time of the assignment the final expiry date of the lease was extended to 19 June 2030. Sometime after 14 September 2020, HAL began works on the manager’s unit turning it into two units, altering the bathroom and adding a kitchenette. HAL did not explicitly seek the landlord’s consent nor did it obtain a building consent from the Hamilton City Council (Council) before undertaking the work. Mr McGuire says he did not ask for consent from YMIL because he believed that YMIL on consenting to the assignment had agreed that HAL was able to undertake work at the property. He says, further, that both HAL’s builder and plumber had advised that consent from the Council would not be required.
[9] On 8 December 2020, Ms Tu conducted a landlord inspection. She says that following the inspection she was concerned about the state of the property and arranged for WizeBuy, a building inspection company, to visit the property on 7 and 8 April 2021 and to prepare a report on the condition of the property (report). Through the report, Mr and Ms Tu became aware that:
(a)the property was being used for emergency accommodation;
(b)the interior of the units were in poor condition and there were fire safety issues and issues with the playground and swimming pool; and
(c)the manager’s unit had been significantly altered, by converting it into two units and adding a bathroom and kitchen.
[10] Ms Tu sent a copy of the report to HAL on 8 May 2021. In the email attaching the report Ms Tu noted her concern that, among other things, the manager’s unit had been significantly altered without YMIL’s consent, and seemingly without Council consent.
[11] On 10 August 2021, the parties attended a meeting. It was not a pleasant one. Mr McGuire alleges that the parties came to an agreement that HAL would provide either evidence that a building consent was not required or obtain a certificate of acceptance from the Council. He further says that landlord consent to the work was not in issue at that stage. Ms Tu’s position is that, as demonstrated by solicitors’ correspondence, the lack of landlord consent was always an issue.
[12] Further correspondence between the parties ensued. On 2 December 2021 Ms Tu contacted the Council and requested that they inspect the building work on the manager’s unit. The Council did so and issued a notice to fix dated 5 December 2021. The notice to fix advised that a building consent was required prior to construction. It further advised that if the notice to fix was not complied with by 8 February 2022 then YMIL would be deemed to have committed an offence and may be liable for a fine of up to $200,000 and a further fine of up to $20,000 for each day or part day of failure to comply.
[13] YMIL says that given the serious potential consequences, on 14 December 2021 it served HAL with a notice of intention to cancel lease pursuant to s 246 of the Act (first notice). The alleged defaults were: carrying out alterations without the landlord’s consent; carrying out alterations without obtaining a building consent; doing unconsented works that resulted in the landlord being served with a notice to fix; and putting insurance on the property at risk as a result of the notice to fix. The remedies specified were the removal of the non-compliant building work and
payment of compensation of $7,500 to cover the landlord’s legal costs (including landlord’s costs) by 14 January 2022.
[14] On 22 December 2021 the solicitors for YMIL wrote to the Council advising that the landlord had instructed the tenant to remove the non-compliant work and return the property to its original consented state. The letter said that the tenant had been asked to do this by 14 January 2022 and requested an inspection after that date to confirm the notice to fix had been complied with.
[15] A Council officer responded on 18 January 2022 saying that they had visited the property that day and nothing had been done. The email further said:
After my inspection I contacted the tenant, Patrick, who informed me that they do not intend to remove anything and we can prosecute if we want to, because it will be the owners who gets prosecuted.
[16] Following the first notice, the parties corresponded regarding attending arbitration to determine whether YMIL was entitled to cancel the lease. This was unable to be scheduled.
[17] Ms Tu also says YMIL, through its solicitor, kept having to seek extensions from the Council for compliance with the notice to fix. Ms Tu also says that although the Council had provided extensions to the timeframes for compliance with the notice to fix, it advised that it would only give an extension to June 2022. She says, accordingly, YMIL was effectively forced to agree to sign the documentation for a certificate of acceptance of the building work in June 2022 to avoid the risk of prosecution by the Council.
[18] The Council issued a certificate of acceptance on 13 December 2022. To obtain the certification the kitchenette was removed, the bathroom works were completed, the pipe work was removed and a door was reinstalled to return the unit to a single dwelling.
[19] Although the certificate was issued on 13 December 2022, YMIL did not receive notice of that until 23 December 2022 by way of a letter from Mr Delic, solicitor for HAL, responding to a second notice which I refer to next.
[20] A second notice of intention to cancel lease was served on HAL by YMIL on 14 December 2022 requiring remedy by 7 February 2023 (second notice). The second notice alleges further defaults as well as the defaults in the first notice as follows:
Default Clause breached Remedy required (a) Carrying out alterations to the premises without YMIL’s consent Clause 1.6 Not capable of being remedied (b) Carrying out alterations without obtaining a building consent in breach of the Building Act 2004, s 40 Clause 1.10 Obtaining a certificate of acceptance from the Hamilton City Council (c) Doing unconsented works that has resulted in YMIL being served with a notice to fix dated 5 December 2021 Clause 1.10 Council withdrawing the notice to fix (d) Having unconsented works at the premises that are in breach of the Building Act 2004 N/A Either by obtaining a certificate of acceptance or removing the non- compliant building work and converting the property back to its original consented state (e) Putting the insurance on the property at risk as a result of the issuing of the notice to fix Clause 1.4 Either by obtaining a certificate of acceptance or removing the non- compliant building work and converting the property back to its original consented state (f) Using the premises for a purpose other than the permitted use, being a motel or motor lodge Clause 1.4 Stop using the premises as emergency housing and return to the permitted use as a motel or motor lodge (g) Refusing to attend an arbitration when notified of a dispute Clause 3.8 Agreeing to attend an arbitration and agree either to the appointment of an arbitrator, or agree that AMINZ is to appoint an arbitrator (h) Failing to pay YMIL’s solicitor’s reasonable costs of the enforcement of YMIL’s rights and remedies under the lease as demanded on 14 December 2022 Clause 3.15 Paying $15,417.52 to YMIL’s solicitor’s trust account
[21] As a consequence of the issue of the certificate of acceptance, defaults (b) to (e) above have been remedied. Aside from obtaining a certificate of acceptance, Ms Tu says no other remedies have been performed.
[22] Mr McGuire says that HAL now consents to arbitration, and therefore default (g) above has been remedied.
[23] On 15 March 2023, YMIL served HAL with a notice of re-entry and cancellation of the lease on the basis that HAL had failed to satisfy the second notice. On 22 March 2023, HAL commenced the current proceeding seeking relief against cancellation of the lease.
Preliminary issue
[24] There is a preliminary issue which needs to be determined. Mr Delic submits that the first notice is invalid. The invalidity is said to arise because “James Tu and Sarah Tu” are named as the landlords in the first notice. However, by the date of the first notice (14 December 2021) YMIL was the landlord as the property had been transferred to it by Mr and Ms Tu on 5 November 2020.
[25] Mr Delic submits that under s 246 of the Act, only the lessor may exercise the right of cancellation and accordingly, it is the lessor who must issue and serve a notice of intention to cancel the lease on the lessee. Mr Delic says the operative notice is the second notice. He does not make any submissions on the implications if the Court were to determine that the first notice is invalid.
[26] Ms Rawcliffe, counsel for YMIL, says that YMIL relies on the failure by HAL to comply with the second notice. She notes there is no dispute as to the validity of the second notice.
[27] Ms Rawcliffe further submits that the first notice is valid and that YMIL could have relied on it to cancel the lease. But she submits even if it is not valid, it has no impact on the substantive issue as to whether HAL should be granted relief from cancellation.
[28] While I acknowledge that YMIL relies on the second notice, I consider a decision on the validity of the first notice does have some impact on the Court’s decision. That is because the conduct of HAL as tenant is one of the factors the Court considers when exercising its discretion as to whether or not there should be relief
from cancellation. In other words, even if the Court proceeds on the basis that the second notice is the one relied on, if the first notice is valid, I am of the view that the Court is able to consider the conduct of HAL in the period following the issue of the first notice up until the second notice was issued (as well as the conduct thereafter).
Statutory provisions
[29]The Act relevantly provides as follows:
6 Attorney or agent may act
(1)Anything that must or may be done by or to a person under this Act may be done by or to the person’s attorney or agent if it is within the attorney’s or agent’s authority.
(2)This section applies subject to sections 12, 353, and 359.
…
243 Sections 244 to 264 to be code
(1) A lease may be cancelled only in accordance with sections 244 to 252.
…
246Cancellation of lease for breach of other covenants
(1)A lessor may exercise a right to cancel a lease because of a breach of a covenant or condition of the lease (except the covenant to pay rent) only if—
(a)the lessor has served on the lessee a notice of intention to cancel the lease; and
(b)at the expiry of a period that is reasonable in the circumstances, the breach has not been remedied.
(2)The notice required by subsection (1)(a) must adequately inform the recipient of all of the following matters:
(a)the nature and extent of the breach complained about:
(b)if the lessor considers that the breach is capable of being remedied by the lessee doing or stopping from doing a particular thing, or by the lessee paying reasonable compensation, or both,—
(i)the thing that the lessee must do or stop doing; or
(ii)the amount of compensation that the lessor considers reasonable; and
(c)the consequence that, if the breach is not remedied at the expiry of a period that is reasonable in the circumstances, the lessor may seek to cancel the lease in accordance with section 244:
(d)the effect of section 247(1) and (2):
(e)the right, under section 253, to apply to a court for relief against cancellation of the lease, and the advisability of seeking legal advice on the exercise of that right.
247Defects that do not invalidate notice of intention to cancel lease
(1)The notice required by section 246(1)(a) is not invalid merely because the lessor—
(a)may not have specified that the breach is capable of being remedied by the payment of reasonable compensation; or
(b)may have specified an amount of compensation that is unreasonable; or
(c)may have specified that the breach would be capable of being remedied by the payment of reasonable compensation, but without specifying the amount that the lessor considers reasonable.
(2)None of the matters set out in subsection (1)(a) to (c) prevents a lessee from offering an amount that the lessee considers to be reasonable compensation for the breach.
(3)For the purposes of this section and section 246(2)(b), reasonable compensation for the breach may include reimbursement of the lessor’s reasonable expenses—
(a)in giving the notice required by section 246(1)(a); and
(b)in doing anything else that the lessor has reasonably done in relation to the breach.
[30] There is no suggestion that the first notice did not comply with the other requirements of s 246(2). It is simply the naming of James and Sarah Tu as the landlords that is said to invalidate the first notice.
[31] A case which is not entirely on all fours with the present case but which has some similarities is To v Chand.1 In that case Ms To applied for orders under the Act cancelling the lease of a property to the respondent. Ms To brought the proceedings as an agent for Tuan Tran, who owned the property. There was an affidavit affirmed
1 To v Chand [2023] NZHC 2459.
by Vinh Hgoc Nguyen stating that Ms To was the sister of Mr Tran and the wife of Mr Nguyen. Mr Nguyen deposed that Mr Tran authorised Ms To and Mr Nguyen “to carry out all processes” relating to the property.
[32] The Judge noted that there was a curious situation in that Mr Nguyen effectively acted for Ms To in her dealings with the property as agent for Mr Tran. The Judge, however, concluded that since there was evidence that Mr Tran authorised both Ms To and Mr Nguyen to act on his behalf in relation to the property, and because the tenant, Mr Chand, had dealt principally with Mr Nguyen in relation to the property as agent for the landlord, the Judge did not consider that anything turned on the fact that Mr Nguyen signed the lease agreement and the PLA notices on behalf of Ms To. The Judge was satisfied that both Ms To and Mr Nguyen were both valid agents for Mr Tran in relation to the property.
[33] The purpose of a notice under s 246 is to put a tenant on notice of the issues, to give them a chance to remedy the issues and to explain the consequences of what will happen if the issues are not remedied. The first notice did this and HAL understood the position. HAL did not, in fact, raise the issue as to the incorrectly recorded name of the landlord until July 2022, seven months later.
[34] At the time the first notice was served HAL knew that James and Sarah Tu were the landlords at the time the assignment documentation was signed.
[35] There is no specific evidence that YMIL had authorised the directors to be named as the individuals giving notice. However a company acts by its directors and I accept that Mr and Ms Tu could be named as the landlord giving notice by virtue of s 6 of the Act.
[36] I also note that s 247 of the Act provides that errors in a notice that might be seen to be more substantive than the error alleged in this case, are not sufficient to invalidate a notice.
[37] The first notice clearly and unambiguously communicated what was required by s 246 and the parties acted on it after it had been issued. HAL, as the recipient of
the first notice, would have understood that the landlord intended to cancel the lease if the defects were not remedied.
[38] I consider that the recording of the names of the directors of the landlord company who had been the previous landlords, rather than the landlord company itself, is not sufficient to invalidate the first notice. HAL was aware of the consequences of the first notice and chose not to comply with it. The first notice was valid.
[39] The judgment will proceed on the basis of the alleged defects in the second notice but will also take into account the conduct of HAL and YMIL in the period after the first notice was issued.
Law
[40] An application for relief against cancellation of lease for breach of condition may be brought by the lessee.2
[41]Section 256 of the Act provides:
256 Powers of court on application for relief
(1)In determining an application for relief against the cancellation, or proposed cancellation, of a lease, under section 253, a court may grant—
(a)the relief sought on any conditions (if any) as to expenses, damages, compensation, or any other relevant matters that it thinks fit; and
(b)an injunction restraining any similar breach in the future.
(2)The court may grant relief against the cancellation, or proposed cancellation, of a lease even though—
(a)the cancellation is for a breach of an essential term of the lease; or
(b)the breach is not capable of being remedied.
[42] It is well-established that s 256 confers a wide discretion subject to an assessment of proportionality. As Williams J held in Pike River Coal Ltd (in rec) v
2 Property Law Act 2007, s 253(1)(a).
O'Malley Farming Ltd, this is especially so if the cancellation is not for breach of covenant to pay rent:3
In non-rent cases the courts have traditionally taken a broad approach in which the essential justice of the case is transparently assessed in a proportionality exercise. The question asked is whether in all the circumstances, determination of the lease is a proportionate response to the lessee’s breach.
[43] A non-exhaustive list of factors relevant to this proportionality assessment was set out by Hammond J in Studio X Ltd v Mobil Oil New Zealand Ltd.4 The factors include:
(a)whether the breach was advertent, inadvertent, or entirely beyond the tenant’s control;
(b)whether the breach involves an immoral/illegal use;
(c)whether a tenant has made or will make good the breach of the covenant and is able and willing to fulfil his or her obligations in the future;
(d)the conduct of the landlord;
(e)the personal qualifications of the tenant;
(f)the financial position of the tenant;
(g)the position of third parties, if relevant;
(h)the gravity of the breach; and
(i)whether a breach has occasioned lasting damage to a landlord.
[44] The issue is essentially, whether or not the defaults in this case either on their own or in combination, are sufficient to justify the cancellation of the lease.
3 Pike River Coal Ltd (in rec) v O'Malley Farming Ltd HC Wellington CIV 2011-418-66, 14 October 2011 at [43].
4 Studio X Ltd v Mobil Oil New Zealand Ltd [1996] 2 NZLR 697 (HC) at 701.
Submissions
[45] Mr Delic submits that none of the asserted breaches either alone or cumulatively justify cancellation of the lease. Aside from the alleged breach of carrying out alterations without the landlord’s consent, he submits that the other accepted breaches are minor and able to be remedied. In relation to the use of the property for emergency accommodation he says that is not a breach of the lease. Accordingly, this case is an appropriate one for the Court to grant relief against the cancellation of the lease.
[46] Ms Rawcliffe contends that the reasons given by HAL for relief against cancellation do not outweigh YMIL’s position that the lease should not be restored. She says the breaches were committed deliberately and considering each individual breach, as well as all the breaches in combination and the position and attitude of HAL, the proportionality assessment favours the application for relief being declined.
[47] Alternatively, Ms Rawcliffe submits that if the Court were minded to grant relief against cancellation (and that is strongly opposed), the following conditions should be imposed:
(a)HAL must pay YMIL’s full costs;
(b)HAL must restore the alterations to the manager’s unit at the end of the lease;
(c)an arbitrator to be appointed by AMINZ to resolve any issues that remain in dispute; and
(d)the arbitration clause in the lease to be amended to provide that if agreement cannot be reached about appointment of an arbitrator within 10 working days then either party can contact AMINZ to appoint an arbitrator.
Default (a) – carrying out alterations without the landlord’s consent
[48] Mr Delic submits that this alleged default was included as an afterthought once the relationship between the parties had already broken down. He submits that YMIL’s real concern is with the consequences of the unconsented building work, rather than a lack of landlord consent. Now that a certificate of acceptance has been issued by the Council for the work, it would be wrong for YMIL to rely on this alleged breach to cancel the lease. Alternatively, Mr Delic submits that the breach was inadvertent.
[49] Ms Rawcliffe submits that carrying out significant alterations in the manager’s unit without consent in writing is clearly a breach of cl 1.6 of the lease, which provides:
No alterations without consent
1.6The Lessee shall not without the consent in writing of the Lessor first had and obtained undertake any additions or alterations to the premises. …
[50] Ms Rawcliffe submits that it was open to HAL to request retrospective consent from the landlord and offer to restore the property at the end of the lease, as was held reasonable in New Zealand Mint Ltd v Greys Avenue Investment Ltd.5 HAL did not do so. Ms Rawcliffe submits that even if retrospective consent was sought, it would be reasonable for YMIL to withhold consent under cl 2.4 of the lease given the lessee’s attitude carrying out the building work without Council consent. Clause 2.4 provides:
Reasonable consent
2.4If the Lessee at any time requests the consent of the Lessor pursuant to any clause in this lease which provides for the consent by the lessor then the lessor shall not unreasonably or arbitrarily withhold that consent.
[51] Finally, Ms Rawcliffe submits that on the basis of this default alone the factors in Studio X clearly favour declining the application for relief against cancellation.
5 New Zealand Mint Ltd v Greys Avenue Investment Ltd [2015] NZHC 2051 at [63]–[64].
Default (a) – discussion
[52] HAL relies on the following paragraph of Mr McGuire’s affidavit dated 22 March 2023. He says:
When [HAL] was negotiating the assignment of Lease with [YMIL], I offered to purchase the premises and also outlined my business plan with the improvement of the premises. My wife and I have many motels around Hamilton, one of which was previously owned by Mrs Tu, and we would undertake renovations and alterations in order to improve the facilities for guests and staff. On 12 June 2020, I stated to the landlord’s solicitor that “the outside is tidy and presentable but the interior needs to be introduced to this century.” I then listed various works that [HAL] will undertake. When Mrs Tu, who was the landlord at the time, agreed to giving consent to the assignment of lease, I assumed that it meant that she agreed with my business plan.
[53] The documentary evidence does not provide a basis for Mr McGuire’s assertion that he assumed that when Ms Tu gave consent to the assignment it meant she agreed with his business plan.
[54] First, there was no business plan produced in evidence by Mr McGuire. That raises a real doubt as to whether such a document in fact exists.
[55] Second, the email to YMIL’s solicitor dated 12 June 2020 that Mr McGuire refers to, similarly does not assist him. I start earlier in the email chain as set out in the following paragraphs.
[56] On 12 June 2020 the solicitor for the previous tenant who was seeking to assign the lease emailed the then solicitor for the landlord seeking consent for the assignment of the lease to HAL.
[57] The then solicitor for the landlord responded by email with a number of queries. It appears that Mr McGuire typed his responses into that email. One of the queries was as follows:
4.Our client would be interested in knowing how Mr. McGuire will bring up the condition to this motel to an industry standard. Could you please forward a brief business plan in this regard?
[58]In response, Mr McGuire said:
THE MOTEL HASN’T BEEN UPGRADED IN DECADES. IT IS OLD, TIRED AND SAD INSIDE.
THE OUTSIDE IS TIDY AND PRESENTABLE BUT THE INTERIOR NEEDS TO BE INTRODUCED TO THIS CENTURY.
EACH UNIT NEEDS TO BE PROGRESSIVELY RENOVATED. THE CARPETS NEED CHANGING, THE ROOMS NEED REPAINTING, THE DOORS NEED SPRUCING UP, THE KITCHENS AND BATHROOMS NEED A GOOD LOOK AT. WE WOULD CONSIDER PUTTING HEATPUMPS IN EACH UNIT AS THESE ARE NOW DEMANDED AND ALSO THE OLD STANLEY WATER-HEATERS NEED TO BE RE- CONSIDERED AS GAS CALIFONTS MAY BE A BETTER AND MORE ECONOMICAL ALTERNATIVE.
MY WIFE AND I UP-GRADED TE RAPA MOTOR INN WHICH WAS IN WORSE CONDITION THAN ASCOTT [sic]. WE HAVE SPENT OVER A MILLION DOLLARS THERE. WE OWN THE FREEHOLD THERE SO WE HAD MORE FREEDOM THAN IS AVAILABLE TO US IN A LEASEHOLD PROPERTY. WE BELIEVE THAT A SOUND AND SYMPATHETIC RENOVATION WILL MAKE THE MOTEL MUCH MORE ACCEPTABLE TO GUESTS AND GIVE THE PROPERTY LONG- TERM VALUE. WE CAN DISCUSS THIS IN MORE DETAIL WHEN WE RECEIVE THE LANDLORD’S CONSENT.
[59] In relation to the above response by Mr McGuire three points can be made. First, there is no evidence that at this point Mr McGuire sent a business plan to the landlord; second, the renovations mentioned are for the purposes of upgrading guest units (that is, there is no mention of alterations to the manager’s unit); and third, it is clear that Mr McGuire himself anticipated further discussions would be necessary having regard to his closing comment that the renovations could be discussed in more detail once the landlord had given their consent.
[60] There is no foundation in the correspondence for a belief that Mr McGuire had the landlord’s consent to make significant alterations to the manager’s unit. Mr McGuire’s conduct in going ahead with those renovations went beyond mere inadvertence. It was deliberate and was a clear breach of the terms of the lease.
[61] I further do not accept the submission that the issue of the landlord consent was an afterthought once the relationship between the parties had broken down. Ms Tu gives evidence that:
Due to all of the Covid restrictions I had not visited the Motel in a while so I arranged to visit on 8 December 2020. From this visit I could tell that there were lots of things that required repairs and maintenance so I arranged for WizeBuy to visit the premises on 7 and 8 April 2021 and prepare a report (Report) so that both the tenant and landlord knew what needed to be done. …
I sent a copy of the Report to the tenant on 8 May 2021… I also visited the premises on the same day…
One of the most concerning things that I noticed from the Report was that the Manager’s Unit had been significantly altered. A wall had been added splitting the Unit into two premises and a bathroom and kitchenette had also been added.
I was very shocked as the tenant had not asked me if it was ok to do these major alterations. I was also concerned as to whether the works had been done legally. Therefore in my email I also identified this issue.
[62]Ms Tu did so and in her email of 8 May 2021 there was the following:
Also the extended unit in the manager house has breached the rental agreement and without council permit.
[63] I consider it is clear that the issue of HAL’s failure to get the landlord’s consent to alterations was a concern from the outset.
[64] Mr Delic further submits that YMIL’s real concern was with the consequences of the unconsented building work rather than a lack of landlord consent. Clearly, the failure of HAL to obtain a building consent from the Council was a real concern for YMIL but in correspondence that concern was always coupled with a reservation of rights in relation to the lack of landlord consent.
[65] Mr Delic refers to a meeting between the parties with the legal representatives in attendance held on 10 August 2021. The then solicitor for HAL has sworn an affidavit. He says he left the meeting thinking that HAL had agreement on acceptance of the works provided HAL either produced evidence of advice that no building consent was required or obtained a certificate of acceptance from the Council. He says at no time was it ever stated that the landlord’s consent might not be forthcoming
even with confirmation that a building consent was not required or a certificate of acceptance obtained.
[66] However, that thinking by the solicitor does not seem to be consistent with YMIL’s documented position. Shortly after the meeting the solicitors for YMIL wrote to the solicitor for HAL and made it clear that the carrying out of renovations without the consent of the landlord was still an issue as well as the fact that consent had not been obtained from the Council.
[67] This is not a case such as New Zealand Mint Ltd v Greys Avenue Investment Ltd where, on being put on notice that there was no landlord consent, the lessee responded saying that it did not consider an application for landlord’s consent was required (explaining the reasons why) but that if the defendant took a different view, such consent was formally requested.6 In this case HAL has adopted an entirely different approach saying the landlord’s consent was impliedly given. There was no reasonable basis for that assertion. Further, the works undertaken in the manager’s unit were not minor and once the Council became involved, some of the work (including the kitchenette sink and stovetop) needed to be removed before the certificate of acceptance was issued by the Council.
[68] While the breach of failing to obtain a building consent from the Council has now been remedied by the issuing of a certificate of acceptance, I consider HAL’s conduct over that issue is relevant.
[69] It is apparent throughout the correspondence between the solicitors for the parties that HAL consistently asserted that building consent was not required for the work to the manager’s unit. References were made in correspondence on behalf of HAL to a licenced building practitioner who apparently held that opinion.
[70] However, equally consistently, the solicitors for YMIL requested HAL to seek advice from the Council. HAL did not do so. Ms Tu says the only way she could get the true position was by her asking the Council to inspect the premises. She says it
6 New Zealand Mint Ltd v Greys Avenue Investment Ltd, above n 5.
turned out everything that the tenant had told her was incorrect and that the works had required building consent before being done.
[71] HAL’s response to all of this placed YMIL in a difficult position. Following the inspection by the Council a notice to fix was issued against YMIL as the building owner. The Council advised that to remedy the contravention or non-compliance, they must:
(1)Remove all the mentioned non-compliant building work and convert the property back to its original consented state. Or,
(2)Apply for and obtain a Certificate of Acceptance from Hamilton City Council which needs to cover the kitchenette and additional bathroom and associated plumbing.
[72] The notice required compliance by 8 February 2022 or YMIL could face a fine of up to $200,000 and a further fine of up to $20,000 for each day after that.
[73] Ms Tu says, as building owners, they decided that they were sick of all of this and wanted the alterations removed. She says they had given the tenant so many chances to sort out the issue and it had not done anything. She said they had also spent a lot of money with their lawyer trying to get this sorted and they were very concerned as well about being prosecuted.
[74] It was as a consequence that Mr and Ms Tu instructed their solicitor to issue the first notice requiring the alterations to be removed by 14 January 2022.
[75] As I have already said, I consider that HAL’s conduct placed YMIL in a most difficult position. HAL was refusing to remove the works putting YMIL at risk of regulatory action and monetary penalties. YMIL was reluctant to provide retrospective consent to the work but that seemed to be the only way that the matter could move forward. So in the end it gave its consent.
[76] In terms of the Studio X factors, the failure to obtain landlord consent to the alterations to the manager’s unit was not inadvertent but deliberate. In conjunction with HAL’s failure to get a building consent, this exposed the landlord to penalties from the Council and potential issues with its insurer. Both breaches were within
HAL’s control. HAL has not made any attempt to obtain the landlord’s consent, nor has it indicated how the alterations might be dealt with at the termination of the lease.
[77] HAL claims it is an experienced motel operator and had undertaken renovations before. It should have known or taken proper advice about whether a building consent was required. YMIL has not done anything to contribute to these breaches.
Default (f) – using the premises for a purpose other than the permitted use
[78]This relates to the use of the property for emergency accommodation.
[79]Clause 1.4 of the Lease provides:
Permitted Use
1.4 The Lessee shall not (without the written consent of the Landlord) use the premises or any part thereof for anything other than a Motel or Motor Lodge without prior written consent from the landlord.
[80] Mr Delic submits that a motel is typically a place providing accommodation and parking, from the words “motor” and “hotel”, and emergency accommodation is within this definition. He notes that Mr McGuire’s evidence is that the previous tenant was providing emergency accommodation with the knowledge of YMIL. Mr Delic submits that YMIL is using what was an existing and known situation to assert a breach of lease. In the alternative, Mr Delic submits that if it is a breach, then it should be considered inadvertent as HAL simply continued an existing situation.
[81] Ms Rawcliffe submits that the reasoning in a determination by the Chief Executive of the Ministry of Business, Innovation and Employment (MBIE) under Part 3, subpart 1 of the Building Act 2004 is relevant and should be applied.7 Ms Rawcliffe submits that the determination relevantly involved a premises which was consented for use as a motel for years, and which was then used for emergency housing. The rooms housed one separate household or family who lived there for
7 Ministry of Business, Innovation and Employment (Building and Housing) Determination 2023/017, 19 June 2023.
extended periods of time as they did not have anywhere else to live. MBIE relevantly reasoned:
5.74.Based on the features of the units and the intended and actual uses of the building, I conclude that initially, when the building's construction was approved and the units were occupied by tourists and other transient guests, the classified use of the building was ‘community residential’ with the type ‘community service’.
5.75.However, I am of the view that by 24 January 2022 the classified use category for this building was Housing, Multi-unit dwelling (Clause A1, 2.0.3) because, at that time, the building contained more than ‘one separate household or family’. I expect that they practiced a significant degree of ‘self care and service’ by looking after themselves and each other. I note that assistance or care was being provided by the motel operator to the occupants but that it was not of a nature or type which is inconsistent with the classified use being ‘housing, multi-unit dwelling’.
[82] Applying this reasoning to the present case, Ms Rawcliffe submits that the use of the premises for long-term stays is not within the permitted use of cl 1.4. She submits this change of use results in a significantly increased pressure on the fixtures, fittings, and premises in general.
Default (f) – discussion
[83] The evidence on this issue is relatively limited. Mr McGuire says that when HAL purchased the lease from the previous tenant, the motel was already providing emergency housing accommodation. He says as far as he is aware, YMIL never raised this as an issue with the previous tenant.
[84] It is not clear from Mr McGuire’s affidavit whether or not the entire motel is used for emergency housing. More generally, he says the units can be booked for temporary lodging. In respect of emergency housing, his evidence is as follows:
Sometimes we have emergency housing guests booked a couple [sic] days in advance, but quite often we will get booked the day of their arrival. Usually, the guests will only be booked with us for a period of 7 days. By the end of the 7 days, sometimes the booking is extended for a period of up to three weeks as Ministry of Social Development will not pay for more than three weeks in a single stay.
Guests have access to room service and can be supplied extra towels, linen and the like. Additionally, the rooms are cleaned on demand and also once the guest checks out.
Guests that book units for emergency housing are treated and offered the same motel services just as any other motel guest would.
[85] Ms Tu does not respond directly to the statement by Mr McGuire that the previous tenant was providing emergency housing accommodation. She does say if she had known that HAL was going to use the premises for long term stays, she would not have agreed to the assignment of the lease. It could be inferred from that statement that Ms Tu was not aware of the previous tenant’s use of the property. However, the Court would have expected a more explicit response if she had no knowledge of the previous tenant’s use of the property. In the absence of cross-examination on this issue, it is not possible to make a factual finding as to whether or not YMIL was aware of the previous tenant’s use of the property, or indeed whether the previous tenant in fact used the property for emergency accommodation.
[86] Ms Tu notes that HAL has removed all signs from the property that indicate that it is operating as a motel or motor lodge. She accordingly infers that the property appears to be booked at all times for emergency housing.
[87] Ms Tu says she is very unhappy about this as she says it puts a significant amount of additional use on the buildings and facilities. She says that on the times she has visited, the rooms are always full with at least two adult occupants plus children. She says the rooms are full of belongings and they are more like extremely cramped houses than a motel room.
[88] Ms Tu refers to Mr McGuire’s evidence about the length of stay and says that stays of even seven days in a motel is uncommon for a visitor let alone stays of 21 days throughout the premises. She says she would like to see records showing whether or not there is an exclusive use arrangement and the length of time that guests are staying.
[89] An application under s 253 of the Act for relief against cancellation of a lease with somewhat similar facts, but also lacking in evidence in some respects, came before Downs J in Annie Enterprises Ltd v Cho.8 The respondent, Ms Cho, leased premises to the plaintiff, Annie Enterprises Ltd. The lease required the property to be
8 Annie Enterprises Ltd v Cho [2018] NZHC 2962.
used as a “motel and bed and breakfast business”. In her notice of intention of cancel the lease Ms Cho alleged that Annie Enterprises had used the property other than as required, by devoting its use to Work and Income New Zealand (WINZ) for emergency accommodation for its clients. Annie Enterprises accepted it allowed WINZ to use the property in that way but said that the arrangement did not constitute a change of use as a motel.
[90] The premises comprised a six-unit motel block and separate house which has two guest rooms. Annie Enterprises entered into an agreement with the Ministry of Social Development (MSD) that the motel units were to be available exclusively to WINZ for those needing emergency accommodation. The agreement provided that MSD may terminate with 30 days written notice. The agreement continued in force at the time of the hearing.
[91] The use came to Ms Cho’s attention after a neighbour complained to Ms Cho, who then required the tenant to provide written confirmation from Auckland Council as to whether or not the usage accorded with the property’s resource consent. The Council did so and the letter was produced in evidence. (There was no similar evidence in the instant case). The letter reads:
The Resource Consents were granted under the Auckland Council District Plan (Manukau section) in 2003 and 2011 respectively. The motel was approved as ‘Travellers Accommodation’ and as such must abide by the rule and definition as well as the conditions of consent on an ongoing basis.
WINZ clients are staying at the premises on a ‘transient basis’ as they are staying for a short period of time and then moving on, they are not permanently living at the premises and WINZ is paying a ‘daily tariff’ for their stay.
The use of the units by WINZ clients does not involve the use of the unit as a residential dwelling in the sense that it becomes the primary dwelling of the occupants on a permanent basis. The facility is already operating as a motel and if WINZ clients are not using the units, then these would be used by other visitors or travellers. The proposal does not involve a tenancy agreement or a boarding house arrangement.
[92] As in this case, the lease did not define what a motel is. The Judge referred to various definitions of motel as well as definitions in the Manukau District Plan (which was the relevant document when resource consents were obtained) and the definition
of visitor accommodation in the Auckland Unitary Plan (which applied by the time of the hearing).9
[93] The Judge noted that all of this, as well as experience, suggests a motel provides, in return for payment, typically brief, temporary accommodation, with associated parking.10
[94] The Judge then addressed the four arguments raised by Ms Cho. She first argued that the laundry and kitchen were for general communal use. The Judge disposed of that argument promptly as there was no evidence that the kitchen and laundry were used as a communal facility.
[95] Second, Ms Cho said the pattern of occupation had changed and with it, usage as WINZ clients tended to stay for weeks not days and are not motorists, travellers or tourists. Property wear and tear was more pronounced. Noise had increased as well. She said all of that harmed the motel’s reputation as a motel. The Judge addressed that argument saying that while WINZ records did not provide the precise length of its clients’ stays, most had been guests at the property between a matter of days and 12 weeks. There was no evidence that this pattern of use was inconsistent with hospitality industry standards. There was also no independent evidence or expert evidence that wear and tear was now different. Ms Cho said it was but in general terms only.
[96] As to the harm to the motel’s reputation, there was only hearsay evidence of one complaint. But as the Judge observed, injury to business reputation as a consequence of undesirable behaviour could not be established because there was no evidence about the motel’s reputation.
[97] Ms Cho’s third argument was that the use had changed because MSD clients were living at the property until relocated, unlike tourists, travellers or other guests who stayed for different reasons and stayed differently.
9 At [14]–[15].
10 At [16].
[98] However, as the Judge observed, guests may stay at a motel for many reasons. The Judge went on to say:11
... Often, guests will be on business or tourists. Others may need a place to stay because they are renovating, between homes, or confronted by challenging personal circumstances. Why people stay at a motel does not change it into something else, unless perhaps a sufficient number of guests behave in a manner incompatible with the maintenance of a motel over a sufficient period, thereby compromising its operation. So, this aspect is merely a reformulation of the second, an argument already rejected on the evidence.
[99] The fourth argument was that the arrangement with MSD was exclusive access and termination of the arrangement with only 30 days’ notice may leave the tenant with no viable business and no means to pay the landlord’s rent. As the Judge noted, WINZ clients have no greater licence than would any other guest at the property and MSD paid for the rooms on a daily tariff in the same way as would any other guest.
The Judge further said:12
[30] I am unpersuaded this exclusivity constitutes a change of use. Some motels seek to attract tour groups, employees of corporates or those working for other organisations, governmental or otherwise, as the primary source of their business. Consequently, these motels may sometimes be fully booked, and hence unable to accommodate individual guests. None of the cited definitions of motel place any emphasis on the ability of individuals to book a room whenever they want one, irrespective of availability. And, nothing about existing arrangements is inconsistent with these definitions, or my definition offered at [16].
[31] ... All this suggests exclusivity of access constitutes a different business model for a motel, not a change of use from one. Put another way, the motel is still used as a motel, but in a different manner.
[100] I prefer the reasoning of Downs J in Annie Enterprises to that in the MBIE determination relied upon by YMIL. There are many similarities between the two cases: the lease in this case does not define what a motel or motor lodge is; the occupants stay for more than a matter of days; there is no independent expert evidence regarding wear and tear in the instant case; nor is there any evidence as regards reputation. In other words, as was the case in Annie Enterprises, the motel is still used as a motel or motor lodge but in a different manner.
11 At [28].
12 Annie Enterprises Ltd v Cho, above n 8.
[101] Accordingly, I do not consider the use of the motel for emergency accommodation is a breach of the terms of the lease.
Default (g) – refusing to attend arbitration
[102] Mr Delic submits that there was no refusal to attend arbitration as alleged by YMIL. Instead, Mr McGuire agreed to the appointment of Mr Smith as arbitrator but subsequent circumstances meant that there was a delay resulting in Mr Smith becoming unavailable. He submits the delay has been contributed to or caused by YMIL’s failure to promptly engage with the arbitrator. Accordingly, this breach (if it is one) is minor and able to be remedied. HAL says it is willing to attend arbitration.
[103] Ms Rawcliffe submits that it was in fact HAL that failed to engage with arbitration. She says between October 2021 and 2022 YMIL made 16 requests asking HAL to attend arbitration. In an email on 28 October 2022, HAL advised YMIL through its counsel that “arbitration is not agreed to”.
[104] Further, Ms Rawcliffe takes issue with Mr Delic’s characterisation of this breach. She submits that it is a serious, deliberate breach which undermines the entire contractual relationship between the parties. Instead of resolving issues through arbitration, Ms Rawcliffe submits that HAL has allowed issues to progress until the point of litigation before agreeing to arbitration.
Default (g) – discussion
[105]Clause 3.8 of the lease contains an arbitration clause as follows:
Arbitration
3.8All disputes and differences between the parties shall be submitted to the arbitration of a single arbitrator if one can be agreed upon or two arbitrators (one to be appointed by each party) and their umpire (appointed by them prior to the arbitration) such arbitration to be carried out in accordance with the provisions of the Arbitration Act 1908 or any then statutory provisions relating to arbitration. This
clause shall not prevent the Lessor suing the Lessee for arrears of rent or other moneys payable by the Lessee.
[106] As soon as HAL failed to comply with the first notice, YMIL requested that the matter be referred to an arbitration for urgent determination. At that time there was agreement as to the arbitrator but there was a delay because of his other commitments and he subsequently became unavailable.
[107] Between October 2021 and October 2022, in solicitor’s correspondence on behalf of YMIL, there were 16 occasions requesting HAL’s attendance at an arbitration. Not only did HAL fail to engage with this process but, as Ms Rawcliffe points out, in October 2022 Mr Delic advised that HAL’s position was that it was not in breach, that YMIL’s claims could not succeed and that accordingly arbitration was not agreed to.
[108] That is a highhanded response to a difference in views. A difference in views between landlord and tenant is precisely what an arbitration process addresses. Effectively, HAL’s position has been that if it did not think there was a breach or a dispute then it did not need to attend an arbitration to have it dealt with. This is an outright disregard for the lease and the position of the landlord. As Ms Rawcliffe says, HAL has let the lease get to the point of cancellation and now seeks relief from the Court to remedy it.
[109] In terms of the factors in Studio X I consider HAL deliberately and explicitly refused to attend arbitration. The refusal to do so was a clear breach of the lease and the breach was entirely within HAL’s control.
[110] I also note the correspondence from Mr McGuire himself rather than through solicitors to Ms Tu on 28 April 2023 where he stated to her that arbitration is expensive and wrote: “We can afford these fees. What about you?”
[111] There was an earlier communication where Mr McGuire also contacted Ms Tu directly by email on 18 January 2022. He said:
We note that your rent is about $72,000 per year. Your senseless provocation will feed your Lawyers rice bowl and benefit you not the slightest. Remember that.
I enjoy fighting landlords and we destroyed the last one we dealt with.
[112] Mr McGuire then asserted that Ms Tu was “envious of our success” and concluded by saying: “Whatever your decision in future, we will enjoy the journey that follows and we will enjoy the expensive road that results”.
[113] I accept Ms Rawcliffe’s submission that the gravity of the breach is high as the refusal to enter into a process to resolve disputes undermines the contractual relationship. I consider YMIL did not contribute to the breach in any way and I do not accept the assertion on the part of HAL that YMIL caused the breach.
[114] HAL’s position now saying it will attend arbitration can be viewed cynically as an attempt to simply boost its ability to get relief.
[115] Given Mr McGuire’s attitude to date, the Court cannot be certain that HAL will cooperate in the future if relief against cancellation were to be given. The breach was a deliberate one and it is too late for HAL to now say it will attend arbitration.
Default (h) – failure to pay the YMIL’s solicitor’s reasonable costs
[116]Clause 3.15(a) of the lease provides:
Legal Costs
3.15(a) The Lessee shall pay the Lessor’s solicitors reasonable cost of and incidental to the preparation of the documentation relating to this lease, any extension, variation, surrender or renewal of this lease and any rent review and the Lessor’s legal costs (as between solicitors and client) of and incidental to the enforcement or attempted enforcement of the Lessor’s rights and remedies under this Lease.
[117] Mr Delic submits that the legal costs claimed are unreasonable. He says this is because the claim is for YMIL’s full solicitor’s costs over a period of almost two years without a detailed breakdown of what those costs are. He submits that HAL is
willing to engage in a process to determine reasonable costs, and once those are determined, HAL will pay them.
[118] Ms Rawcliffe submits that the costs claimed are the actual amounts invoiced by YMIL’s solicitors relating to the issues between the parties. She contends that HAL’s willingness to pay costs is a new development; prior to the issuing of the proceedings, HAL did not offer to cover any of the costs.
Default (h) – discussion
[119] Mr Delic is correct that none of the invoices issued by the solicitors for YMIL have detailed narrations. However, the Court has had the benefit of considering all the correspondence between the solicitors for the parties which evidences attendances by the solicitors for YMIL not only dealing with the solicitors for HAL but also responding to and addressing issues with the Council.
[120] As part of the second notice YMIL asked for legal costs to date. That amount was $15,417.52. Demand was also made by letter dated 14 December 2022. That is the amount that YMIL says is reasonable in terms of cl 3.15 of the lease. I note that there is no issue taken as to the application of that clause to the legal costs claimed.
[121] The sum of $15,417.52 represents attendances by YMIL’s current solicitors from shortly before 21 June 2021 when they wrote to HAL advising that they had now been instructed, up until 14 December 2022. Having regard to all the attendances that are apparent from the correspondence, I consider that the sum of $15,417.52 is reasonable for the attempted enforcement of the lessor’s rights and remedies under the lease. Accordingly, by refusing to pay YMIL’s reasonable solicitor costs, HAL is in breach of cl 3.15(a) of the lease.
Conclusion
[122] I have found that HAL has breached the terms of the lease with YMIL by: carrying out alterations to the premises without YMIL’s consent; refusing to attend an arbitration when notified of a dispute; and failing to pay YMIL’s solicitors’ reasonable
costs of $15,417.52 for the enforcement of YMIL’s rights and remedies under the lease.
[123]HAL’s use of the motel for emergency housing is not a breach of the lease.
[124] However, for all the reasons given in the judgment, cancellation of the lease is a proportionate response to the breaches I have found. In summary, I have not found any fault on the part of YMIL in relation to any of the breaches. In contrast, HAL’s failure to obtain YMIL’s consent to the alterations was deliberate and the breach was serious, exposing YMIL to regulatory penalties by the Council and potential exposure under its insurance policy. In relation to failure to obtain the building consent before work was undertaken, although a certificate of acceptance was ultimately issued by the Council, the Council required some of the alterations to be removed before the certificate was given.
[125] In relation to the failure to attend arbitration, I consider this breach to be of high gravity as HAL’s deliberate and explicit attempts to resist arbitration undermines the contractual relationship. The failure to pay YMIL’s reasonable solicitor costs is less serious but nevertheless adds to the overall negative conduct by HAL as exemplified by, for example, Mr McGuire saying that the Council can prosecute if they want because it will be the owners who get prosecuted (as recorded in an email from a Council officer on 18 January 2022). I consider HAL’s belated offers to attend arbitration and payment of YMIL’s reasonable solicitor costs after an extended period of refusing to remedy either is simply a cynical attempt to improve its case before the Court.
Result
[126] The application by HAL for relief against cancellation of the lease pursuant to s 253 of the Property Law Act 2007 is refused.
Costs
[127] YMIL, as the successful party (in terms of the ultimate result) is prima facie entitled to costs. As I did not hear submissions on costs, costs are reserved. If the
parties are able to agree costs, a joint memorandum is to be filed within 20 working days of the date of this judgment. If costs cannot be agreed, YMIL is to file and serve its memorandum five working days after the date for the joint memorandum. HAL is to file and serve its memorandum five working days after service of YMIL’s memorandum.
[128] Costs memoranda should not exceed five pages (excluding attachments). I will determine costs on the papers.
Gordon J
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