Hard to Find but Worth the Effort Quality Second Hand Books (Wellington) Ltd (in liq) v He

[2008] NZCA 509

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IN THE COURT OF APPEAL OF NEW ZEALAND

CA399/07
[2008] NZCA 509

BETWEENYONG QUAN HE, JUN YOU HE AND JUN NA HE

Appellants

ANDHARD TO FIND BUT WORTH THE EFFORT QUALITY SECOND HAND BOOKS (WELLINGTON) LIMITED (IN LIQUIDATION)

Respondent

Hearing:22 July 2008

Court:William Young  P, Chambers and Ellen France JJ

Counsel:P S J Withnall for Appellants

D G Smith and J Bassett for Respondent

Judgment:28 November 2008 at 3 pm 

JUDGMENT OF THE COURT

AThe appeal is allowed.

BThe judgments of the District Court and the High Court are set aside.

CThe appellants must pay the respondent $87,954.17.

DThe respondent must pay the appellants $43,385.40.

EThe appellants must pay the respondent interest on $87,954.17 at the prescribed rate from 1 August 2005 down to the date of this judgment.

FThe respondent must pay the appellants interest, down to the date of this judgment, on:

(a)$7,031.25 at 12 per cent per annum from 1 February 2005;

(b)$937.50 at the prescribed rate from 1 February 2005;

(c)$35,416.65 at the prescribed rate from 1 August 2005.

GThe respondent must pay the appellants costs in this Court for a standard appeal on a band A basis and usual disbursements.

HIf the parties cannot agree costs in the District Court and High Court, costs in those courts are to be fixed by the respective courts in light of:

(a)this judgment and the reasons therefor; and

(b)the way in which the parties’ cases were pleaded and argued in those courts.

IIn orders E and F, the “prescribed rate” means the rate, from time to time, as defined in s 62B of the District Courts Act 1947.

REASONS

William Young P and Ellen France J  [1]
Chambers J  [69]

WILLIAM YOUNG P AND ELLEN FRANCE J

(Given by Ellen France J)

Table of Contents

PARA NO

Introduction  [1]
Factual background   [4]
The pleadings  [14]
The District Court decision  [20]
The High Court decision  [29]
The competing contentions  [38]

DISCUSSION  [45]

The consequences  [57]
Costs  [63]

Introduction

[1]       This case concerns the effect of an unlawful distraint for non-payment of rent where the landlords (the appellants before this Court) later re-entered for non-payment of rent.

[2]       In the District Court, Judge Kelly found that the tenant (the respondent in this Court) was entitled to damages for the unlawful distraint.  The Judge made an award of the same amount to the landlords on their counterclaim for unpaid rent:  DC WN CIV 2005-085-632 21 August 2006.  The tenant appealed to the High Court.  Miller J, in allowing the appeal, concluded that the unlawful exercise of the right to distrain in this case was inconsistent with the later exercise by the landlords of the right to re-enter: Hard To Find But Worth the Effort Quality Second Hand Books (Wellington) Ltd (in liq) v He [2007] 3 NZLR 539.

[3]       The matter comes to this Court pursuant to leave to appeal granted to the landlords by Miller J on 25 July 2007.

Factual background

[4]       There is no dispute about the accuracy of Judge Kelly’s summary of the factual background made in the context of the trial in the District Court.  We largely adopt the Judge’s description at [1] to [18] of her judgment.

[5]       The landlords, Yong Quan He, Jun You He and Jun Na He, a father and sons, jointly own premises at 134 Cuba Street, Wellington.  They entered into an agreement on 28 May 2004 to lease the premises to the tenant, Hard to Find but Worth the Effort Second Hand Books (Wellington) Limited (now in liquidation).  The shares in the tenant company are held equally by Mark Baskind and Warwick Jordan on behalf of a trust.

[6]       It was a term of the agreement to lease that the parties would enter into a formal lease with convenants no more onerous than those in the Auckland District Law Society Commercial Lease Form (4ed 2002) (“the ADLS form”).  It was also agreed that Mr Baskind, as guarantor of the agreement to lease, guaranteed the obligations of the tenant and would sign the ADLS form as guarantor.

[7]       The tenancy began on 1 July 2004 and the tenant’s business began trading with Mr Baskind as the manager.  The shop was fitted out with stock.

[8]       The formal deed of lease was prepared and sent to the tenant’s solicitor.  There were discussions about the plan attached to the lease and who was to sign as guarantor.  Then, suddenly, in December 2004 Mr Baskind left New Zealand taking with him some equipment and cash belonging to the tenant.  The parties tried to negotiate terms on which to continue the business and the lease of the premises.  The rent due on 1 February 2005 was not paid.  There were then further discussions between Mr Jordan and the solicitors for the landlords prior to 8 February 2005.  Mr Jordan wanted to see if the lease could continue so that the business could keep on trading. 

[9]       On 6 February 2005, Mr Jordan told the acting shop manager to shut the shop and lock it.

[10]     On 8 February 2005, a warrant to distrain was issued by the landlords to their agent, Jian Huang.  Through Mr Huang, the landlords entered the leased premises and took away the following items belonging to the tenant: a computer, an EFTPOS machine, a cash register, and 80 books.

[11]     Next, on 9 February 2005, the solicitors for the landlords demanded the rent arrears be paid by 14 February 2005 and advised the tenant that if the rent was not paid by that date then the landlords would exercise the available remedies including termination of the tenancy.

[12]     On 22 February 2005, the landlords purported to terminate the lease and advised the tenants that they had re-entered.  The premises were not re-let until 1 August 2005.

[13]     Ultimately, the tenant was given some limited access to retrieve some stock and chattels.  It did retrieve some but not all of the stock and chattels.  There matters rested until the tenant issued the present proceedings. 

The pleadings

[14]     There were three causes of action.  The first cause of action was a claim for breach of the parties’ agreement by the exercise of the right of re-entry and of distraint before the expiration of 14 days after the non-payment of rent.  Damages for loss of stock valued at about $80,000 were sought. 

[15]     The second cause of action was for breach of statutory duty, namely, the Distress and Replevin Act 1908 (since repealed by s 366(b) of the Property Law Act 2007).  The particulars of this part of the claim related to the effect of the re-entry on the right to distrain, the failure to give notice, the non-compliance of the list of chattels with the requirements of the Third Schedule of the Distress and Replevin Act and the absence of any accounting. 

[16]     The third cause of action was based on conversion.

[17]     In response, the landlords pleaded that the tenant had refused to accept the deed of lease and that the subsequent rent remained unpaid.  Further, the landlords relied on Mr Jordan’s statement on 7 February that he was not paying any more money and was closing down.  Further, by facsimile, the landlords said that Mr Jordan had advised them of the resignation of the shop manager and that the company was going into liquidation.  The landlords also pleaded that the items distrained had not been sold. 

[18]     By way of a counterclaim, the landlords said:

(a)       the agreement to lease had not been signed;

(b)rental had not been paid after 1 February; and

(c)the premises had been vacated and left untidy. 

[19]     The landlords claimed rental up to the re-letting of the property on 1 August 2005 and legal fees.  In response to the counterclaim, the tenant said that the landlords had terminated the lease when they took possession on 8 February and their obligation to pay rent ceased at that point.

The District Court decision

[20]     Judge Kelly made a number of findings none of which are now challenged.  The first of these was that as at 8 February 2005 the parties’ relationship was governed by the agreement to lease.  The Judge concluded that there was an equitable lease on terms no more onerous than those in the ADLS form.  It followed that by implication (see cl 28 of the ADLS form), distress could not be exercised until the expiry of 14 days after the rent was due. 

[21]     Second, the Judge found there was no refusal by the tenant to sign the lease.

[22]     Third, Judge Kelly said that the landlords had consistently treated the lease as still being on foot right up to 22 February 2005. 

[23]     Fourth, the Judge found distraint was a breach of the condition of the equitable lease because the rent due on 1 February had not been outstanding for at least 14 days as at 8 February.  The distress was also unlawful because the landlords had not entered the premises in the ordinary way.  Further, the distress did not comply with the Distress and Replevin Act.  The landlords had distrained the chattels and the list of chattels did not meet the requirements of the Third Schedule of that Act.

[24]     Given these findings, the Judge said that the effect of the distress being illegal was that the distrainor was a trespasser.  The usual remedy, an action for damages, followed.

[25]     Judge Kelly noted that the tenant’s cause of action in relation to the chattels was based on conversion.  Although based in tort, the Judge said that the damages would be the same as for breach of contract or breach of statutory duty.  Damages were accordingly payable to the tenant.  The damages in lieu of unlawful distraint equalled the value of the chattels and the stock distrained.  There was also some element of aggravated damages.  That was because from 22 February, the landlords had operated the shop and sold some stock.

[26]     Taking a global view, the Judge said that the tenant was entitled to damages of $50,858.69 (inclusive of GST). 

[27]     On the counterclaim, Judge Kelly concluded that the landlords did not re-enter until 22 February 2004 and so re-entry was lawful.  Although that determined the lease it did not release the tenant from liability, so the tenant was liable for unpaid rent from 1 February 2005.  The damages figure was $50,858.69 (inclusive of GST).

[28]     Finally, the Judge determined that costs should lie where they fell because each party was entitled to full solicitor/client costs.

The High Court decision

[29]     Miller J dealt first with the tenant’s argument about the District Court Judge’s finding on re-entry.  Miller J upheld Judge Kelly’s approach to this aspect.

[30]     The Judge then turned to consider the issue before us, namely, the effect of the decision to exercise the right to distrain.  Miller J first rejected the tenant’s argument based on estoppel.

[31]     As to whether by levying distress the landlords had waived forfeiture for non-payment of the rent unpaid on 1 February, Miller J said at [27] that the authorities showed a “general rule” that by distraining for unpaid rent the lessor waives its right to terminate for non-payment of the same rent.  The Judge explained at [27] that this was because the two remedies “are inconsistent, so that to elect one is to waive the other”.

[32]     Miller J said at [29]:

The lessor waives a legal right or remedy only if it has elected another concurrent but inconsistent right or remedy and … inconsistency is a question of fact to be determined in the circumstances of each case.

[33]     The Judge acknowledged at [29] that distraint and forfeiture are not “invariably” inconsistent remedies and that any inconsistency “may depend on the sequence in which they are exercised”.

[34]     In terms of this case, Miller J said the two remedies were inconsistent.  His Honour explained why at [30]:

The [landlords] chose distraint as their first remedy, and then terminated the lease without completing that process.  The inconsistency arose because they could not terminate for non-payment unless some of the rent remained unpaid on termination.  On distraint, the outstanding rent must be taken to have been paid, at least for so long as they neither returned the distrained chattels nor sold and accounted for them under the Distress and Replevin Act.  On the facts, then, the [landlords] terminated for non-payment in circumstances where the right to do so had been waived, at least until distress was complete.  Until then they could not be heard to say that the rent was unpaid.

[35]     In this context, Miller J emphasised that the items distrained had not been sold or accounted for. 

[36]     Miller J then dealt with the quantum of the tenant’s damages.  Evaluating the evidence as to value, the Judge concluded that the tenant had made out its claim for damages for stock in the sum of $67,975.00.  As to the chattels, Miller J concluded a sum of $13,575.00 represented their value.  On top of these two sums, the Judge included $6,404.17 for electrical expenses and $2,639.70 for removal expenses.  The tenant agreed there should be a set-off for rent due until 22 February 2005.

[37]     Finally, Miller J said that the tenant was entitled to full costs under s 21 of the Distress and Replevin Act.  A further judgment was delivered on 3 October 2007 awarding costs of $56,917.19 to the tenant.

The competing contentions

[38]     The landlords’ case is that as a matter of law the exercise of distraint did not affect the underlying relationship of landlord and tenant in the way identified by Miller J.  The two remedies are not inconsistent.

[39]     In developing this submission, Mr Withnall said, first, the landlords had no intention from their own conduct of relinquishing any right to cancel by carrying out distraint.  They waited until the rent was 21 days in arrears before giving notice on 22 February.  They did not give or purport to give notice cancelling the lease on any other basis before then.

[40]     Second, Mr Withnall says no choice between inconsistent rights arose because there was no right to distrain on 8 February:  McDrury v Luporini [2000] 1 NZLR 652 (CA). There could be no election because both rights were not yet exercisable.

[41]     Third, exercising the right to distrain does not simultaneously amount to the landlords saying unequivocally they will keep the lease on foot.  In that sense, distraint does not have the same quality about it as does re-entry.

[42]     In response, Mr Smith for the tenant submits that the landlords’ intention in exercising distraint is irrelevant.

[43]     The tenant accepts that there could be no election between the two rights (distress and re-entry) because it was premature to distrain.  But, Mr Smith argues, the question remains: does the illegality in exercising the distress mean the landlords were not affirming the lease?  The tenant answers this question saying that even though not an election of rights, the carrying out of distraint is still an affirmation of the lease.  The tenant points to Miller J’s reliance on the fact the distrained goods have not been sold or accounted for.  That is important because the rent is presumed to have been covered by the exercise of distraint unless it is known otherwise.  Here the tenant points out, it has never known otherwise.

[44]     In this context, the tenant also argues (and supports the judgment on this other ground) that there was an estoppel.

Discussion

[45]     The nature of the remedy of distress was set out by this Court in Dovey Enterprises Ltd v Guardian Assurance Public Ltd [1993] 1 NZLR 540 at 545 in the following terms:

Distress is a self-help remedy for non-payment of rent.  It is to be exercised by a landlord with care and in compliance with the provisions of the Distress and Replevin Act.  It is a means by which the landlord can recover rent but, because it is a right arising out of the relationship of landlord and tenant, distress is inconsistent with termination of the relationship by forfeiture, and levying distress waives forfeiture for the non-payment of rent involved; Hill and Redman at para 2226, Hinde McMorland & Sim’s Land Law (2nd ed, 1986) at para 5.160, Matthews v Smallwood [1910] 1 Ch 777, 786 and Watkins v Lamb (Auckland, A1063/81, 22 April 1987, Smellie J).  Section 3(1) of the Distress and Replevin Act provides:

“3. Distress only on chattels of tenant or person in possession.  Distress on agisted stock – (1) No person shall distrain, or levy, for rent due in respect of any messuages or lands, the chattels (other than agisted stock) of any person save and except of the tenant or person in possession of the premises in respect of which such rent has accrued due.”

[46]     As the Court went on to say in that case, where there is a breach of the terms of a lease by non-payment of rent, the lessor may take steps to forfeit the lease or may treat the lease as continuing.  The two rights are inconsistent.  Hence, the Court said at 545:

[I]f by statements or conduct the lessor indicates unequivocally to the lessee that one course is or will be adopted, that will be regarded as a binding election resulting in the other being treated as waived or abandoned.  If with knowledge of the breach the lessor elects to continue to accept rent or otherwise to treat the lease as continuing the lessor cannot thereafter invoke that breach to terminate the lease.  Whether there has been a binding election is a question of fact for the particular case.  The elements of common law election were reviewed in Motor Oil Hellas (Corinth) Refineries SA v Shipping Corporation of India [1990] 1 Lloyd’s Rep 391. This Court dealt with them in a lease context in Amity Inns Ltd v R H & P L Papps Ltd (CA25/92, 20 July 1992).  The general principles governing a landlord’s election to forfeit or not are summarised in para 2226 of Hill and Redman; see also R v Paulson [1921] 1 AC 271, 282, Expert Clothing Service and Sales Ltd v Hillgate House Ltd [1986] 1 Ch 340, 359 and Inner City Businessmen’s Club Ltd v James Kirkpatrick Ltd [1975] 2 NZLR 636, 642.

[47]     The exercise of distress requires the existence of the landlord/tenant relationship at the time of the distress.  The Court in Dovey at 545 put it in this way:

Distress is prohibited on the goods of persons not tenants in possession of the premises at the time.  In this case therefore the respondent could not distrain for rent after having terminated the lease on re-entry.  The distress, as the Judge found, was unlawful.

Distress is inconsistent with termination of the landlord/tenant relationship by forfeiture and levying distress waives forfeiture for the non-payment of the rent involved.

[48]     However, as the parties agree, this is not a case of an election between two inconsistent rights.  That is because the effect of distraining prior to the expiry of the 14-day period is that the distress was unlawful from the outset.  As Karas (ed) “Distress” in Mackay (ed) Halsbury’s Laws of England (4ed 2007 Reissue) Vol 13 observes at [1076]:

In such a case the distrainer is a trespasser ab initio, and it is no defence that the goods have been applied in discharge of the rent.  As the distrainer has in himself no right to seize the particular chattels, he can confer no title to them upon a person to whom, under colour of the distress, they may purport to have been sold.

[49]     It follows that there was no right to choose to distrain which the landlords could elect.  This is the point made in McDrury v Luporini at [44].

[50]     Accordingly, the issue is whether, as Miller J found, the exercise of the two remedies was nonetheless inconsistent.  That was the position adopted by Courtney J in Griffiths v Akatea Developments Limited HC AK CIV-2007-404-3677 30 April 2008.  In that case the Judge concluded the distraint was invalid because the warrant purported to distrain for outgoings as well as for arrears of rent.  However, at [83], the Judge said that the fact that the distraint was invalid did not alter the effect of distraint as a waiver because “the invalidity of the distraint does not affect the quality of the act as an unequivocal election inconsistent with termination.”

[51]     This Court in Amity Inns Ltd v R H & P L Papps Ltd [2007] 3 NZLR 553 at 555 observed that:

An election may also be called for between alternative and inconsistent remedies.  This generally can be made at any time up to and even after judgment (see, for example, Thornton Hall Manufacturing Ltd v Shanton Apparel Ltd [1989] 3 NZLR 304 (CA) at p 308).

[52]     Here, however, we have concluded no inconsistency arises.  That is essentially because of the effect of the illegal distraint.  As the landlords had no right to the distrained goods, the rent remained outstanding.  The landlords’ tort does not remedy the tenant’s breach of the covenant to pay rent. 

[53]     One possibility is that the landlords’ actions gave rise to an estoppel.  However, for the reasons given by Miller J, we do not consider an estoppel arises in this case.  As the Judge said at [32]:

The [landlords’] solicitor stated in the letter of 9 February that they reserved their right to terminate the lease for non-payment of the same rent, so the [tenant] was not led to believe that they intended to keep it on foot.  Nor can the [tenant] point to anything done in the belief that the lease would continue; on the contrary, Mr Jordan advised by fax sent on 8 February that he proposed to put Hard to Find into liquidation.

[54]     The other possibility we need to clear away is one raised by Mr Withnall in his reply.  Namely, that if the landlords were entitled to cancel the lease on 22 February, cl 32 of the lease would apply.  Clause 32 applies where the lease is terminated and provides for the tenant to remove all the tenant’s fixtures, fittings and chattels and make good at the tenant’s expense all resulting damage.  If the fixtures and chattels are not removed within seven days then ownership may at the landlords’ election pass to the landlords or the landlords may remove them to a refuse collection centre.

[55]     However, the case was not pleaded on this basis and we are satisfied it would not be fair to allow the landlords now to rely on cl 32.  That is because the landlords have always denied that the ADLS form did constitute the terms of their relationship with the tenant.  This aspect can therefore be put aside.

[56]     Without the benefit of such a clause, the landlords’ obligation was clear.  They were bound to allow the tenant to retrieve their chattels.  As we have said, they did allow the tenant to remove some but not all of them.  They also imposed an unreasonable time limit on removal which stopped the tenant from removing all of the chattels.  By preventing removal of the balance, the landlords committed the tort of conversion.

The consequences

[57]     We turn then to consider the effect of our approach.  The landlords are entitled to rent for the month of February 2005.  Rent was payable in advance: see agreement to lease, Second Schedule cl 1.  They are also entitled to the February monthly payment in respect of the tenant’s fixtures and fittings, which was an associated arrangement: see agreement to lease, Special Conditions, cl 5.  (We shall call this “the chattels agreement”.)  For the period from 1 March to 1 August 2005, the landlords are entitled to damages.  In view of Judge Kelly’s finding that the landlords had reasonably mitigated their loss, those damages will equate with the rent which the landlords would have earned but for the tenant’s breach of the agreement to lease.

[58]     On the other side, the tenant is entitled to damages in respect of chattels converted and not returned.  The tenant did not seek damages for breach of the convenant of quiet enjoyment or the trespass.  Nor did it seek damages for the disruption to its business arising from the 8 February conversion: presumably that was because the tenant had closed its doors prior to that time.

[59]     As we have said, there was an issue before the District Court about the landlords selling the tenant’s books (and whether that had happened) but nothing turns on that now.  That is because the tenant has sued only for the value of the things it did not get back.  It is entitled to such damages.

[60]     The calculation of damages would then proceed as follows:

(a)The tenant is entitled to damages in the sum of $87,954.17 for conversion by the illegal distraint.  This is the figure awarded by Miller J minus the sum of $2,639.70 awarded for removal expenses.  We consider that Miller J’s assessment of the damages, which was not  itself challenged on appeal, reflects the correct approach to the assessment of damages.  That is with the minor qualification about the removal expenses.  Those were expenses the tenant was bound to incur, as it was its responsibility to remove the chattels once the lease had lawfully terminated.

(b)The tenant was liable for the February rent.  Miller J limited the rent claim to the period 1 February to 22 February, but the rent for the month of February was payable on 1 February.  The landlords are entitled to claim for that unpaid instalment.

(c)The tenant is also bound to pay damages for the period from 1 March to 1 August when the premises were un-let.  Judge Kelly did order the tenant to pay in respect of that period.  The Judge treated that as a requirement to pay rent but rent was not payable because the lease relationship was at an end by then.  However, as we have said, given the Judge’s finding of reasonable mitigation and given the absence of any evidence suggesting the landlords saved money as a result of not having a tenant, the damages would equate with the rent.  Damages, however, do not carry GST.  The landlords were not providing a service to the tenant in the 1 March – 1 August period.

(d)A similar position pertains under the chattels agreement.

(e)The calculation of what the tenant must pay, therefore, is as follows:

(a)       Rent for February 2005  $7,031.25

(inclusive of GST)

(b)Damages in respect of the tenant’s breach
of the agreement to lease
(1 March 2005 – 1 August 2005)  $31,250.00

(c)February payment under the chattels agreement          $937.50

(inclusive of GST)

(d)Damages under the chattels agreement  $4,166.65

TOTAL:$43,385.40

(The GST component of that figure is $855.42.)

[61] Miller J did not deal with interest: at [54]. In an attempt to get finality, we have dealt with it. With respect to the rent payment which was not made, we have utilised the contractual interest rate of 12 per cent per annum. It is not clear to us whether that default interest rate also applied to the chattels agreement. In the circumstances, we have simply provided for the interest rate under s 62B of the District Courts Act 1947. The prescribed rate under s 62B has changed during the period under review. At the start of the period it was 7.5 per cent per annum. From 1 July this year, however, the rate has increased to 8.4 per cent per annum. The parties can do the necessary calculations.

[62]     It is proper that interest on the February instalment under the chattels agreement should run from 1 February 2005, as that is the date on which the payment should have been made.  As to interest on the damages, we have provided for interest in terms of s 62B of the District Courts Act from 1 August 2005, the date on which the premises were re-let.

Costs

[63]     We see no basis for dealing with costs in this Court other than in accordance with the orthodox approach applicable to cases of this nature.  Before setting out the consequences of that, we need to explain why the two possible, alternative, approaches do not apply. 

[64]     First, s 21 of the Distress and Replevin Act provides that where any distress is made for any rent justly due, any irregularity or unlawful act afterwards done by the person undertaking the distress does not make the distress unlawful.  However, the party aggrieved may “by action recover satisfaction for damages”.  If the aggrieved party does so recover damages, that party “shall have full costs”.

[65]     It follows from our approach that s 21 is not applicable.  It is directed towards the situation where the initial exercise of distraint by a landlord is lawful but some later action alters the position. 

[66]     Second, cl 6.1 of the ADLS form provides for the landlords to recover solicitor/client costs.  However, we do not see why the landlords should recover those costs when they have always argued that the form did not constitute the terms of their relationship with the tenant.  The agreement to lease contains no such clause.

[67]     The landlords have essentially been successful on this appeal.  They have succeeded in having reduced slightly the amount they are required to pay the tenant and they have succeeded in having increased the amount the tenant owes them.  They should accordingly have costs at the normal rate on the appeal.

[68]     Costs in the High Court and in the District Court will need to be re-calculated in accordance with our decision and with our approach to s 21 of the Distress and Replevin Act.  We would hope though that the parties can agree on costs without the need to revert back to either court.

CHAMBERS J

Table of Contents

PARA NO

Introduction  [69]
Issues on the appeal  [71]
Factual and legal analysis  [75]
         The parties’ relationship  [75]
         The legal effect of what happened on 8 February 2005  [80]
         The legal effect of what happened on 22 February 2005  [83]
Remedies and costs  [89]
Answers to the issues contained in the notice of appeal  [90]
         Was Miller J right not to award the landlords damages in lieu of rent?       [90]
         Was Miller J right to increase the damages the tenant was entitled to?       [91]

Introduction

[69]     The background to this appeal is set out in the reasons of Ellen France J.  So are the essentials facts; I do not need to repeat them. 

[70]     I write separately solely because this case, in my view, became unnecessarily complicated in the lower courts.  In particular, the High Court seems to have treated the case as if the landlords on 8 February 2005 had “distrained”, albeit unlawfully, and had thereby elected to keep the lease on foot, an election from which they could not resile without completing the distraint process.  I prefer to see this case, on the other hand, as a simple case in conversion to which the landlords have no defence, the remedy of distress (which could be a defence to an action in conversion) not being available. 

Issues on the appeal

[71]     The landlords, in their notice of appeal asserted that Miller J had gone wrong in two respects. 

[72]     First, they asserted he had been wrong not to award them damages in lieu of rent with respect to the period from 22 February 2005 to 1 August 2005.  

[73]     Secondly, they asserted he had been wrong to increase the damages to which the tenant was entitled arising from the landlords’ wrongful conversion of the tenant’s chattels. 

[74]     In due course, I shall provide answers to both those complaints.  Before doing that, I want, however, to undertake a brief factual and legal analysis of what happened, on a chronological basis.

Factual and legal analysis

The parties’ relationship

[75]     The parties entered into an agreement to lease on 28 May 2004.  That agreement provided that the parties would enter into a formal lease on covenants no more onerous than those in the ADLS form.  The landlords’ solicitor did subsequently send a form of lease to the tenant: that form of lease was the ADLS form.  The tenant never signed it.  The tenant did, however, continue to pay rent. 

[76]     There can be no doubt that, from that time, either party could have obtained specific performance of the agreement to lease.  Had the landlords sought specific performance, the court would have ordered the tenant to execute the deed of lease in the ADLS form: see Hinde and others Hinde McMorland and Sim Land Law in New Zealand (looseleaf ed) at [11.042].  Pursuant to the doctrine of Walsh v Lonsdale (1882) 21 Ch D 9 (CA), the parties to the agreement for lease were to be treated as between themselves as if a formal lease had been executed and, if necessary, registered: Hinde at [11.043]. 

[77]     By these means, cl 28 of the ADLS form became a term of the parties’ relationship.  It provided that the landlord could distrain for rent only if rent remained “unpaid 14 days after due date”.  That varied the position which would otherwise have been implied by s 107(c) of the Property Law Act 1952.  Under that implied covenant, a landlord could distrain for rent as soon as rent was in arrear.  Section 68 of the Property Law Act permitted negativing or variation of covenants or powers implied under the Act. 

[78]     Clause 29 of the ADLS form permitted the landlord to re-enter the premises if rent was “in arrear 14 days after any of the rent payment dates”.  That too was a variation of the covenant implied under the Property Law Act: see s 107(b).  Under that paragraph, re-entry was not permitted until rent had been “in arrear for a period of 21 days”. 

[79]     Another clause, potentially of prime importance in this case, was cl 32.1 of the ADLS form, which read as follows:

REMOVAL OF TENANT’S FIXTURES, FITTINGS AND CHATTELS

32.1THE tenant may at any time before and will if required by the Landlord at the end or earlier termination of the term remove all the Tenant’s fixtures fittings and chattels and make good at the Tenant’s own expense all resulting damage and if not removed within 7 days after the date of termination ownership of the fixtures fittings and chattels may at the Landlord’s election pass to the Landlord or the Landlord may in a proper and workmanlike manner remove the same from the premises and forward them to a refuse collection centre.

The legal effect of what happened on 8 February 2005

[80]     On 8 February 2005, the landlords, through their agent, entered the leased premises and took away the following chattels belonging to the tenant: a computer, an EFTPOS machine, a cash register, and 80 books.

[81]     When the landlords did these things, they believed they were acting within their legal rights.  They apparently believed they could distrain as soon as the tenant was late in paying the rent.  In that regard, they purported to rely on the implied covenant in s 107(c) of the Property Law Act.  But, for the reasons given above, that covenant had been varied by cl 28 of the ADLS form: the remedy of distraint was not then available to them.  So, when the landlords, through their agent, entered the leased premises and took away some of the tenant’s chattels, they committed actionable wrongs.  They breached the covenant for quiet enjoyment of the leased premises.  They committed a trespass to land.  And, most importantly for present purposes, they committed the tort of conversion. 

[82] Notwithstanding these acts on 8 February, Judge Kelly found that the tenant was not excluded from possession of the premises until 22 February. The entry by the landlords’ agent had been fleeting. Her Honour found that the landlords “consistently treated the lease as still being on foot right up to giving notice terminating the lease on 22 February”: at [36]. That finding of fact was not in dispute before us.

The legal effect of what happened on 22 February 2005

[83] On 22 February, the landlords terminated the lease. They were entitled to take that course, owing to the rent being unpaid for more than 14 days. The termination of the lease brought to an end the tenant’s obligation to pay rent. The tenant remained, however, potentially liable to pay damages for the period until the landlords were able to re-let. The landlords did not re-let until 1 August. Judge Kelly found they had taken “reasonable steps to mitigate their loss”: at [71]. Again, that was not in dispute before us.

[84]     At the time of termination of the lease, the tenant still had a large number of chattels and fixtures in the premises.  What was the legal position with respect to them?  Clause 32.1 of the ADLS form provides a clear answer to that question.  I agree, however, with Ellen France J that the landlords should not now be able to call in aid that clause.  That is for two reasons. 

[85]     First, they never pleaded it, even in the alternative.  They chose to run their case in the District Court on the basis that the ADLS form did not constitute the terms of the parties’ relationship.  No doubt the reason for adopting that course was that, if the parties’ relationship was governed by the ADLS form, the landlords’ acts on 8 February were unlawful.  Having chosen to run their case in a particular way, they should not now be able to switch horses. 

[86]     Secondly, it is implicit in cl 32.1 that, within the seven day period after the date of termination, the tenant must be given a reasonable opportunity to remove its fixtures, fittings and chattels.  Had the landlords pleaded cl 32.1 by way of defence to the tenant’s action in conversion, the tenant would no doubt have counter‑attacked on the basis that the landlords had breached that implied term by not giving it sufficient time to remove the chattels.  That would have led to evidence and submissions focused on this point.  Although there was evidence relating to this topic, it was not tied to any specific pleadings.  It is too late now for us to work out what the result would have been had these matters been respectively pleaded on each side.

[87] If cl 32.1 is, therefore, unavailable to the landlords, they have no defence to the tenant’s complaint that, following termination, the landlords converted their remaining chattels. In this regard, I agree with what Ellen France J has said at [56].

[88]     I may add that the tenant’s cause of action in conversion was not well pleaded.  It was agreed before us, however, that the pleading was sufficiently wide, if liberally interpreted, to cover both the 8 February conversion and the late February conversion. 

Remedies and costs

[89]     I agree with what Ellen France J has said at [57]-[68] and have nothing to add.

Answers to the issues contained in the notice of appeal

Was Miller J right not to award the landlords damages in lieu of rent?

[90]     From the above analysis, it will be clear that I think His Honour was not right in his approach.  The essential error, in my respectful view, was His Honour’s finding there had been a distraint.  There was no distraint; there was an unlawful taking of goods.  The landlords’ 8 February actions cannot constitute an election as to remedy in respect of the tenant’s breach, as the time for election had not arisen.  The lease continued until 22 February 2005.  The landlords then lawfully terminated the lease.  By that time, they were entitled so to elect.  Their actions on 8 February were wrongful, but did not waive their rights under the lease.  The landlords, having terminated the lease on 22 February, were thereafter entitled to damages with respect to the period until they could re-let the premises. 

Was Miller J right to increase the damages the tenant was entitled to?

[91]     In essence, I consider His Honour was right to increase the damages awarded to the tenant.  Judge Kelly’s approach, with respect, had been wrong on this point.  The only point on which we have differed from Miller J is with respect to the tenant’s claim for removal expenses.  The judge gave no explanation for the inclusion of those expenses; it may be their inclusion derived from his finding that the lease had been wrongly terminated on 22 February. 

Solicitors:

Peter J Morahan, Lower Hutt for Appellants
Greg Dunning & Associates, Auckland for Respondent