Honey Bees Preschools Limited v 127 Hobson Street Limited
[2014] NZHC 2942
•25 November 2014
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2014-404-722 [2014] NZHC 2942
BETWEEN HONEY BEES PRESCHOOLS LIMITED
Plaintiff
AND
127 HOBSON STREET LIMITED Defendant
Hearing: 13-15 October 2014 Counsel:
S S Khan and C M Fisher for the Plaintiff
R M Dillon for the DefendantJudgment:
25 November 2014
JUDGMENT OF BROWN J
This judgment was delivered by me on 25 November 2014 at 4 pm, pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Solicitors: Fortune Manning, Auckland
Queen City Law, Auckland
HONEY BEES PRESCHOOLS LTD v 127 HOBSON STREET LTD [2014] NZHC 2942 [25 November 2014]
[1] Honey Bees Preschools Ltd’s (the Lessee) proposed childcare facility in the premises of the defendant (the Lessor) at 127 Hobson Street, Auckland encountered unexpected delays in securing the issue of a licence from the Ministry of Education. Although a deposit of rent in advance was paid in escrow in accordance with an Agreement to Lease dated 28 August 2012 (the Agreement), it was not until
20 December 2013 that the Lease was executed. In the meantime no payments in the nature of rent or outgoings were made.
[2] The deposit, which was released to the Lessor on execution of the Lease, was treated by the Lessee as discharging the initial rental instalments due on the rent payment dates of 20 January, 20 February and 20 March 2014. However the Lessor, who considered that the deposit had been “spent” in the period prior to the Lease, issued a notice of intention to cancel the Lease for non-payment of the initial three instalments.
[3] This prompted the Lessee to seek an injunction in the current proceeding to restrain cancellation of the Lease on the grounds that the Lessor’s notice was defective. The Lessor counterclaimed for a quantum meruit in respect of the alleged occupation of the premises by the Lessee prior to the execution of the Lease for the period from 11 September 2012 to 19 December 2013.
The issues
[4] The validity of the Lessor’s notice of intention to cancel the Lease turns on two issues:
(a) What amounts of rent were payable on the initial three rent payment dates? (the quantum issue); and
(b)Was the Lessee in default in failing to make the initial rental payments on the first three rent payment dates? The answer to this question hinges on the way in which the deposit was to be treated (the deposit issue).
[5] The Lessor’s counterclaim introduces a third issue:
(c) Whether the Lessor is entitled to a quantum meruit in respect of the period from 11 September 2012 to 19 December 2013 during which no rent was paid.
What amounts of rent were payable on the initial three rent payment dates? (The quantum issue)
[6] The Lease provided for an annual rent of $145,600 plus GST payable by monthly instalments of $12,133.33 plus GST. Clause 51.1 in the Further Terms in the Third Schedule provided for a “rent holiday” as follows:
Rent Holiday
51.1 The rental for the first 14 months of the lease shall be reduced by
50% to $72,800 plus GST per annum.
[7] Clause 1.1 of the Second Schedule stated:
Rent
1.1 The Tenant shall pay the annual rent by equal monthly payments in advance (or as varied pursuant to any rent review) on the rent payment dates. The first monthly payment (together with rent calculated on a daily basis for any period from the commencement date of the term to the first rent payment date) shall be payable on the first rent payment date. All rent shall be paid without any deductions or set-off by direct payment to the Landlord or as the Landlord may direct.
[8] In the definition of “Rent Payment Dates” in the First Schedule the following words were deleted:
The day of each month commencing on the day of 20
They were replaced by the following words:
One month from the date of this Deed and the same day of each month thereafter.
[9] The record contained a significant amount of evidence concerning the negotiations which culminated in the Lease. Given the proper approach to the interpretation of the Lease (addressed below) it is appropriate that I record how it transpired that such evidence was received.
[10] Mr Anthony Gilbert of Affiliated Business Consultants Ltd had been engaged by the Lessor to find a suitable tenant for the premises. When it became apparent that a licence would likely be issued for only 24 children there was a significant renegotiation between the Lessor and the Lessee which was facilitated by Mr Gilbert, who acted as a go-between.
[11] Mr Gilbert was subpoenaed by the Lessee and was called as its first witness. It soon became apparent that Mr Gilbert had a file of email communications with the parties which had not been provided to counsel and hence were not included in the common bundle of documents. In order to afford counsel the opportunity of considering those materials the hearing was adjourned part way through the first afternoon. On the following morning the parties produced, by consent, a reasonably extensive folder of Mr Gilbert’s communications which was exhibit 3.
[12] That string of communications disclosed that the definition of “Rent Payment Dates” appeared in the first draft of the Lease which was prepared by Fortune Manning, supplied by Mr James of the Lessee to Mr Gilbert and forwarded by Mr Gilbert to Mr Parbhu on behalf of the Lessor. Although amendments were made to various clauses in the negotiations which followed, no change was made to the definition of “Rent Payment Dates”.
[13] However, as Mr Dillon rightly submitted, the principles relating to the construction of contractual documents are as stated in Investors Compensation Scheme Ltd v West Bromwich Building Society.1 Lord Hoffmann’s summary of the principles included the following:
(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.
(2) The background was famously referred to by Lord Wilberforce as the ‘matrix of fact’, but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have
1 Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 All ER 98 (HL)
adopted in New Zealand in Boat Park Ltd v Hutchinson [1999] 2 NZLR 74 (CA).
affected the way in which the language of the document would have been understood by a reasonable man.
(3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. …
(4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax (see Mannai Investments Co Ltd v Eagle Star Life Assurance Co Ltd [1997] 3 All ER 352,
2 WLR 945.)
(5) The ‘rule’ that words should be given their ‘natural and ordinary meaning’ reflects the commonsense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in Antaios Cia Naviera SA v Salen Rederierna AB, The Antaios [1984] 3 All ER
229 at 233, [1985] AC 191 at 201:
‘... if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business common sense, it must be made to yield to business common sense.’
[14] There was a suggestion in the Lessor’s closing submissions that the contextual approach to interpretation applied if and only if the Court considers that the natural and ordinary meaning of the words used was not what the parties intended. I agree with Mr Khan that that submission is not in accord with the most recent state of authority: see Firm PI 1 Limited v Zurich Australian Insurance
Limited t/a Zurich New Zealand:2
[61] … Contextual interpretation of contracts has a significant history in
New Zealand, although for many years it was restricted to situations of
2 Firm PI 1 Limited v Zurich Australian Insurance Limited t/a Zurich New Zealand [2014] NZSC
147 at [61]. See also Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5, [2010] 2
NZLR 444 at [23] per Tipping J; Ansley v Prospectus Nominees Unlimited [2004] 2 NZLR 590 (CA) at [36].
ambiguity. More recently, however, it has been confirmed that a purposive or contextual interpretation is not dependent on there being an ambiguity in the contractual language.
(citations omitted)
[15] The rationale for that approach is helpfully explained by Tipping J in Vector:3
[23] The proposition that a party may not refer to extrinsic evidence “to create an ambiguity” is at least potentially misleading. It does not mean context is irrelevant unless there is a patent ambiguity. Context is always a necessary ingredient in ascertaining meaning. You cannot claim to have identified the intended meaning without reference to context. Hence it is always permissible to go outside the written words for the purpose of identifying the context in which the contract was made and its objective purpose. While there are no necessary preconditions which must be satisfied before going outside the words of the contract, the exercise is and remains one of interpretation. Subject to the private dictionary and estoppel exceptions to be mentioned below, it is fundamental that words can never be construed as having a meaning they cannot reasonably bear. This is an important control on the raising of implausible interpretation arguments. Furthermore, the plainer the words, the more improbable it is that the parties intended them to be understood in any sense other than what they plainly say.
[24] In some recent cases it has been suggested that contractual context should be referred to as a “cross-check”. In practical terms this is likely to be what happens in most cases. Anyone reading a contractual document will naturally form at least a provisional view of what its words mean, simply by reading them. That view is, in a sense, then checked against the contractual context. This description of the process is valid, provided the initial view is provisional only and the reader is prepared to accept that the provisional meaning may be altered once context has been brought to account. The concept of cross-check is helpful in affirming the point made earlier that a meaning which appears plain and unambiguous on its face is always susceptible to being altered by context, albeit that outcome will usually be difficult of achievement. Those attempting the exercise unsuccessfully may well have to pay for the additional costs caused by their attempt.
(citations omitted)
[16] The present issue involves a reconciliation of the standard terms in clause 1.1 of the Second Schedule4 with the definition of Rent Payment Dates in the First Schedule.5
[17] Mr Dillon argues that, while clause 1.1 requires monthly payments in advance, an exception was made to that requirement only in respect of the first
3 Vector, above n 2 at [23]-[24].
4 At [7] above.
5 At [8] above.
payment, it being deferred from 20 December 2013 to 20 January 2014. Consequently he submits that all monthly payments (after the first payment) were required to be made in advance. The specific payment dates which such an interpretation would require would be:
First payment 20 January 2014
Second payment 20 January 2014
Third payment 20 February 2014
Fourth payment 20 March 2014
[18] In support of this interpretation, in addition to the requirement that payments be made in advance, Mr Dillon placed reliance on the words in the second set of parentheses in clause 1.1, namely:
(together with rent calculated on a daily basis for any period from the commencement date of the term to the first rent payment date).
His argument was that the second rental instalment came within that description and consequently for that further reason the second rental instalment was also payable on the first Rent Payment Date, namely on 20 January 2014.
[19] The first sentence of clause 1.1 specifies two requirements for the equal monthly rental payments: first, they are to be payments in advance; secondly, they are to be paid “on the rent payment dates”. Those dual requirements would be satisfied if, employing the formula which was deleted in the definition of “Rent Payment Dates” in the First Schedule, the Lease had provided:
The 20th day of each month commencing on the 20th day of December 2013.
Had the lease so provided then the “first rent payment date” (referred to in the second sentence of clause 1.1) would have been 20 December 2013.
[20] However the definition of Rent Payment Dates does not so provide. The first
Rent Payment Date is to be “one month from the date of this Deed”, namely
20 January 2014. The Rent Payment Dates subsequent to that first date are to be on
“the same day of each month thereafter”.
[21] I consider that the plain meaning of the definition of Rent Payment Dates is that the first rental instalment is to be paid on 20 January 2014 (being one month from 20 December 2013, the date of the Lease) and that the remaining instalments are to be paid on consecutive months on the same date of the month, that is the 20th, from 20 February 2014 onwards. When “cross-checked” with the context of the Lease including the surrounding clauses in the Lease which I will discuss below, the
correct interpretation is that only one payment was due on 20 January 2014.
[22] Mr Kahn made the point that the invoice rendered by the Lessor to the Lessee and emailed on 7 February 2014 was for only one month’s rental, observing that that was consistent with the Lessee’s position. However the Lessor subsequently issued a fresh statutory notice under cover of Mr Dillon’s letter of 7 March 2014 which asserted that there were then three months rent outstanding, two of which were due for payment on 20 January 2014.
[23] The consequence of the interpretation which I place on the Lease is that it does not satisfy the dual requirements in the first sentence of clause 1.1 because the specific definition of Rent Payment Dates contradicts the requirement that the payments be made in advance.
[24] In my view the specific identification of the rent payment dates has the consequence that the general requirement that rent be paid in advance is implicitly amended. The particular definition in the First Schedule, referring as it does to the first date being one month from the date of the Deed and referring then to other payment dates being on the same day of each month “thereafter”, precludes the Lease being read as requiring payments in advance.
[25] That interpretation is supported by the application of clause 47.1 in the
Second Schedule of the Lease which relevantly states:
DEFINITION AND INTERPRETATION
47.1 In this lease:
…
(s) If any inserted term (including any Further Term in the Third Schedule) conflicts with the covenants in the First, Second and Fourth Schedules, the inserted term will prevail.
(t) Whenever words appear in this lease that also appear in the First Schedule then those words shall mean and include the details supplied after them in the First Schedule.
[26] I consider that the amended definition of “Rent Payment Dates” in the First Schedule is an inserted term within the meaning of clause 47.1(s) with the consequence that the specified payment timetable prevails over the requirement in clause 1.1 of the Second Schedule that rental instalments be paid in advance.
[27] Furthermore the phrase “Rent Payment Dates” is a definition which appears in the First Schedule and, by dint of clause 47.1(t), the same phrase in clause 1.1 must be read as it is defined in the First Schedule. The consequence is that the “Rent Payment Dates” are not payment dates in advance.
[28] I recognise that the interpretation which Mr Dillon seeks to place upon the words in the second set of brackets in clause 1.1 is literally available. However I do not consider that that phrase can reasonably bear the interpretation for which he contends, given the reasons stated above.
[29] In any event I agree with Mr Kahn that that phrase was intended to cover the situation where the Lease commenced more than one month before the first rent payment date in which event there would be additional days to account for in the first rent payment.
[30] I do not consider that it would be a proper interpretation to invoke that phrase so as to achieve a double rental payment on the first rent payment date on 20 January
2014 and thereby convert to an advance payment regime what the amended definition of “Rent Payment Dates” provides to be an in arrears payment regime. In the present case the rent payable in respect of the “period from the commencement date of the term to the first rent payment date” is the first rental instalment. No additional sum is payable referable to that one month period.
[31] Hence the answer to the quantum issue is that the amounts of rent (GST
inclusive) payable on the initial three rent payment dates were as follows:
20 January 2014 $6,976.66 20 February 2014 $6,976.66 20 March 2014 $6,976.66
Whether those sums were actually to be remitted by the Lessee to the Lessor turns on the answer to the deposit issue.
Was the Lessee in default in failing to make the initial rental payments on the first three Rent Payment Dates? (the deposit issue)
[32] The Agreement provided for a deposit by the Lessee of $41,687.00 (GST inclusive), being three months rental in advance, to be paid to the Public Trust upon signing of the Agreement. The lessee duly paid that amount to the Public Trust.
[33] A variation (“Variation”) of the Agreement was executed on 11 September
2012. It contained a reference to the deposit in the context of an amendment made to
the term “Commencement Date” in the Agreement to Lease:
Once MOE confirm the number of granted licences.
Rent Holiday from 11th Sep 2012 through to 31st Dec 2012
Deposit covers Rent from 1st Jan 2013 through to 31st Mar 2013
Rent Holiday for April 2013, Dec 2013 and Jan 2014. (3 months)
Subject to the MOE issuing a licence, and the final licence number not being less than 45 children.
[34] As noted above6 the Lessee did not remit any actual payments to the Lessor on the 20th day of January, February or March 2014 but treated the deposit as having been applied in discharge of those rental instalments. Because the Lessor considered that the deposit had already been exhausted and hence was not able to be applied
towards the payment of the rent due on those three dates, it gave notice of intention to cancel the Lease for non-payment of the rental instalments due on those three
dates.
6 At [2] above.
[35] The Lessor’s case was that, notwithstanding that the Lease was not executed until 20 December 2013, in fact, subject to agreed rent holidays, rent was payable from 11 September 2012. Pointing to the Variation, the Lessor argued that the deposit was “spent” as applying to the rent which it claimed was payable from
1 January 2013 to 31 March 2013.
At what point did the obligation to pay rent commence?
[36] The difference between the parties on the question of the date on which the obligation to pay rent commenced turned on the issue whether the Agreement was conditional on the grant of a licence to the Lessee by the Ministry of Education. In answering this question I have again applied the contractual interpretation principles discussed above.
[37] The Lessor contended that rental and outgoings became payable from the date of the Variation, namely 11 September 2012. The Lessor contended that the Agreement was not conditional on a Ministry of Education licence being obtained but was only subject to what was referred to as the Ministry of Education “measure”, that is the physical measurement of the premises by the Ministry of Education to determine the permissible number of child spaces.
[38] The Lessor’s case was explained in detail in Mr Parbhu’s brief at paragraphs
10 and 11:
10. My understanding of this variation was that from the 10th of September 2012 both rental and outgoings were payable. However actual rent payments were going to be received after the rental deposit is consumed and the scheduled rental holidays outlined in the agreement to lease were exhausted. I also understood that the amount of rent payable would be based on the final licence capacity the MOE measures the space for. For example if the MOE measure was for 45 children, then the rental would be 45 x $56 per week and if the measure was 50 it would be 50 x $56 per week. The rental holidays were agreed to, so that Jason James could prepare the space, and obtain the licence from the MOE. The lease was never subject to getting a MOE Licence, but was subject to the building having a minimum measure of 45 child spaces, as per the original agreement to lease, recorded in the due diligence provision. The original agreement to lease also recorded that the deposit was to be applied in advance of rental due.
11. The risk of obtaining a licence was always with the Tenant. The only risk to the landlord was the number of children that the premises would be licensed for, which would modify the rent payable. The agreement
allowed the Tenant to cancel if an appropriate license could not be obtained, but that did not alter the commencement date. The commencement date was related to the MOE “measure” of the number of children the premises would bear. The dates given in the variation were not an illustration. They showed how long I was prepared to wait for rent to commence, while the Plaintiff got its business organised. In effect they had to be up and running by 1 May
2013, when rent holidays and deposit expired (but for some further relief over the first Christmas season). As it happened MOE confirmed the
measure as at May 31. … This was consistent with our intent.
[39] The reference to the Ministry of Education confirmation was to an email dated 16 December 2013 from the Ministry of Education to Mr Parbhu which confirmed that as at 31 May 2013 the combined outdoor and indoor space at
127 Hobson Street measured for 50 children. It was in that email that the Ministry of
Education advised that approval had been given for a probationary licence for
24 child spaces for children over two years.
[40] Mr Parbhu’s position was reiterated a number of times in the course of cross- examination. For example, the following exchange took place with reference to the wording of the amendment in the Variation to the term “Commencement Date”:
Q. I put it to you that that whole clause is subject to the Ministry of
Education granting a licence?
A. No it’s to do with the measure, all the way through this document; it can’t be to do with the Ministry of Education licence because I can’t be a party of that because I have no control on that. I can only contract or agree to things that I have control of.
[41] The Lessee’s contention that the obligation to enter a lease and pay rent arose only when the Ministry of Education agreed to issue a licence was based upon a number of statements in the Agreement and in the Variation. The definition of Commencement Date in the Agreement (prior to its amendment in the Variation) contained the phrase:
subject to Ministry of Education issuing a licence, and the final licence number not being less than 45 children.
It also contained the following clause:
8.AGREEMENT UNCONDITIONAL: The agreement will become unconditional when Ministry of Education has determined the final licence number and the licence has been issued.
[42] There was no amendment to clause 8 in the Variation. However the substituted definition of “Commencement Date”7 contained references to the Ministry of Education issuing a licence and to confirmation by the Ministry of Education of granted licences.
[43] In my view the plain interpretation of both the Agreement and the Variation was that the obligation to enter into the Lease was conditional upon the Ministry of Education granting a licence to the Lessee. Although somewhat curiously expressed, I accept Mr James’ explanation that the sequence of dates specified in the Variation were for illustrative purposes only. He explained that he had originally tried to illustrate the application of the rent holiday and deposit by recording them as Month
1, Month 2, and so on but that that became too difficult and so he resorted to the use of example dates. He made the point that it was obvious from the face of the Variation that the dates were not “real” because the Variation was signed on
11 September 2012 but the example dates commenced on that date. Nevertheless it was apparent that the grant of a Ministry of Education licence (and hence the obligation to pay rent) was some distance away.
[44] Quite apart from the terms of the documents themselves, the parties’ subsequent agreement by an exchange of emails put beyond debate the issue of rental liability in the period prior to the execution of the Lease.
[45] On 22 August 2013 the Lessee sent an email to the Lessor which relevantly stated:
Hi Dennis,
Can you please confirm our agreement on rent, rent holiday, outgoings and over 3 licences?
1) No rent or outgoings are owed prior to the date the ministry issue a licence.
…
4) Once the ministry has issued a licence I will be liable for half the rent for the first 14 months, after this time full rent.
7 At [33] above.
…
Kind Regards, Jason James
[46] The Lessor’s first response dated 29 August 2013 relevantly stated:
Hello Jason
…
I have slightly changed the wording to your email, could you please send a return email confirming agreement to what I have said.
I confirm acceptance of the following:
1.From the issue of the ministry of education licence date building outgoings shall be payable on a monthly bases which shall be an amount made up of annual outgoings liability monthly division from the commencement of the lease plus the outgoings going forward – the reason for organising this is to assist in the cash flow of settling outstanding building outgoings and meeting current building outgoings.
2.All accumulated power and water costs to date shall be payable. For level 5
…
4.There is a lot confusion about what rent holidays were committed to and what was not, so for the purpose of a compromise and a way forward it is agreed that from the date of the issue of the ministry of education licence, for a period of 14 months half the payable rental will be paid to provide cash flow benefits for both parties. This of course will be adjusted as the childcare licence increases.
…
Thanks
Dennis Parbhu
[47] It was Mr James’ evidence that upon receipt of that email he visited Mr Parbhu on 5 September 2013 and among other things sought clarification concerning paragraph 4 of Mr Parbhu’s email. During the course of that meeting Mr Parbhu reopened the email and added to paragraph 4 the following additional sentence:
This therefore clarifies that no demand would be made for any prior rental liability if any for the period prior to the actual issue of the licence.
Mr Parbhu then resent the email on 5 September 2013 as the email string in evidence suggests.
[48] While, in the course of cross-examination, Mr Parbhu initially denied that there had been an initial email which was subsequently amended, his original email was produced by the Lessee as exhibit 11.
[49] By an email dated 6 September 2013 the Lessee acknowledged the Lessor’s
email and confirmed its agreement with its terms.
[50] It was the Lessor’s position that this exchange was silent on the issue of the deposit for the reason that the parties accepted that the deposit had already been “spent” as provided for on the Lessor’s interpretation of the Variation.
[51] Indeed in his closing submissions Mr Dillon placed some emphasis on the point that the deposit was one of three payments for which no provision was made in the Lease itself, the other two being a payment of $10,000 towards outgoings incurred between September 2012 and December 2013 and the premium payment of
$90,000 plus GST. The submission stated:
47. It is respectfully submitted that two of these three payments (outgoings and deposit) relate to payments for use and occupation prior to the commencement of the Lease. All three of them were only relevant to arrangements made by the parties outside the Lease (the lease premium is not referred to in the formal document). It is respectfully submitted that this is why they are not mentioned in the Lease. They have nothing to do with the payments due under the Lease.
[52] However the Agreement stated that the deposit was paid as being “three months rental in advance”. If the deposit was referable to rental but rental did not become payable until the Lease was executed, then it must follow that the deposit could only be applied in discharge of the rental obligation arising under the Lease.
[53] It is consistent with that analysis that at no time was demand made by the Lessor for release of the deposit by the Public Trust prior to the execution of the Lease. On 23 December 2013 Mr Parbhu sent to Mr Gilbert a document recording that the Agreement was unconditional and that Affiliated Business Consultants was authorised to release the funds held by the Public Trust after deduction of its commission. If the position had been as the Lessor contended then it is to be
expected that a demand for release of the deposit would have been made during the period 1 January to 31 March 2013.
[54] Two further points were made by the Lessor with reference to the deposit. It was first said that the Lessor did not have the benefit of the bulk of the deposit because Mr Gilbert’s company deducted his commission from the amount held in escrow. However the fact that the amount of the deposit to which the Lessor was entitled from the Lessee was used to discharge the Lessor’s obligation to its agent does not affect the Lessee’s entitlement to have the deposit treated as payment of the initial rental obligation.
[55] Secondly, in reliance on the third sentence in clause 1.1 of the Second Schedule the Lessor argued that, notwithstanding the deposit, the Lessee was required to remit actual payments from the outset. However I consider that it is clear that the application of a sum paid as a deposit for rent in advance in discharge of the rental obligation does not constitute a deduction or set off within the meaning of those terms in clause 1.1.
Is the Lessor is entitled to a quantum meruit in respect of the period from
11 September 2012 to 19 December 2013 during which no rent was paid.
[56] The Lessor’s claim for judgment by way of a quantum meruit for the occupation of the premises for the period 11 September 2012 to 19 December 2013 was detailed in its affirmative assertion in paragraph 8 of the statement of defence and counterclaim:
It denies paragraph 8 of the claim and says that the deposit was paid to the Defendant for rent while the Plaintiff was in possession of the premises, prior to the commencement of the lease. In the alternative, that the Plaintiff has had the use and benefit of the premises for the period 28 August 2012 until 19 December 2013 and owes the Defendant rent calculated on a quantum meruit basis for that period (16 months), less the sum of $41,687 received in reduction of that quantum meruit. It further says that an appropriate rental for the aforesaid period is the sum of $12,133.33 plus GST per calendar month, being a sum the Plaintiff agrees as an appropriate rent for the use and benefit of possession of the premises. The quantum meruit claim is accordingly 16 x $13,953.33 (being the GST inclusive rent figure) =
$223,253.27 - $41,687 - $181,566.27 (GST inclusive).
[57] In its closing submissions the Lessor contended that the quantum meruit issue can be characterised as a form of unjust enrichment. It contended that the three elements of unjust enrichment clearly exist, namely:
(a) Receipt of a benefit by the Lessee;
(b) A corresponding detriment to the Lessor; and
(c) No legally recognised reason for the enrichment (consequent on the effects of the full final Lease).
[58] In its reply submissions the Lessee took objection to the characterisation of the claim in this way, contending that the counterclaim was in quantum meruit and that no amendment to the pleadings had been sought to include a claim in unjust enrichment.
[59] I consider that the Lessee takes too narrow an approach. In Morning Star (St Lukes Garden Apartments) Ltd v Canam Construction Ltd, an authority cited by the Lessee, the Court of Appeal considered the underlying basis of a quantum meruit claim:8
[40] Historically, a quantum meruit claim was treated as being based upon an implied contract. Today a quantum meruit claim is generally seen as being a restitutionary claim. As such, it is said to be based upon unjust enrichment principles. So Winkelmann J in [Villages of New Zealand (Pakuranga) Ltd v Ministry of Health] at [76] said:
I am also of the view that it is to cast the cause of action in quantum meruit too narrowly to require evidence of a clear request for services. The insistence upon evidence of a request is out of step with a recognition that the quantum meruit cause of action like other claims for restitution at common law, is solidly based upon principles of unjust enrichment, rather than upon a notion of implied contract. The implied contract theory for claims for restitution at common law has now been laid to rest. In Westdeutsche Landesbank Girozentrale v Islington Borough Council [1996] AC 669, Lord Browne Wilkinson said:
Subsequent developments in the law of restitution demonstrate that this reasoning is no longer sound. The
8 Morning Star (St Lukes Garden Apartments) Ltd v Canam Construction Ltd CA 90/05, 8 August
2006 at [40]-[41].
common law restitutionary claim is based not on implied contract but on unjust enrichment: in the circumstances the law imposes an obligation to repay rather than implying an entirely fictitious agreement to repay … In my judgment, your Lordships should now unequivocally and finally reject the concept that the claim for moneys had and received is based on an implied contract. I would overrule Sinclair v Brougham on this point.
[41] According to Goff & Jones The Law of Restitution (6th ed 2002) at
[1-016], the principle of unjust enrichment:
…presupposes three things. First, the defendant must have been enriched by the receipt of a benefit. Secondly, that benefit must have been gained at the plaintiff’s expense. Thirdly, it would be unjust to allow the defendant to retain that benefit. These three subordinate principles are closely interrelated, and cannot be analysed in complete isolation from each other.
[60] The Court noted that not all commentators agree that the principle of unjust enrichment underlies a quantum meruit claim, noting in particular the views of Grantham and Rickett that the principal application of quantum meruit is as a response to a promissory obligation.9 By contrast, proponents of the unjust enrichment approach argue for an extended concept of “benefit” or for a “deeming” benefit. The Court of Appeal concluded:10
[50] We will not attempt to resolve the doctrinal dispute here. It is sufficient to say that there is general agreement that a plaintiff will be able to establish a quantum meruit claim where the defendant asks the plaintiff to provide certain services, or freely accepts services provided by the plaintiff, in circumstances where the defendant knows (or ought to know) that the plaintiff expects to be reimbursed for those services, irrespective of whether there is an actual benefit to the defendant.
[61] The evidence traversed at some length the state of preparedness of the premises for the Lessee’s proposed childcare facility, in particular the issues concerning the structural capacity of the deck for a sandpit and the obtaining of the Fire Service approval which it appears was a precondition for the grant of the
Ministry of Education licence.
9 Ross Grantham and CEF Rickett Enrichment & Restitution in New Zealand (Hart Publishing, Oxford, 2000).
10 Morning Star, above n 8, at [50].
[62] However in my view the claim in quantum meruit is answered by reference to the requirement that the defendant to such a claim must know or ought to know that the plaintiff expects to be reimbursed for services provided.
[63] There is nothing in the evidence prior to the execution of the Lease which suggests that the Lessor expected to be paid a rental for the premises in the period prior to the execution of the Lease. That that was the parties’ joint position is demonstrated by the additional sentence which was added to paragraph 4 of the email resent by Mr Parbhu in 5 September 2013.11 I agree with the Lessee’s submissions that that unambiguous statement is entirely inconsistent with a counterclaim advanced on the basis that the Lessee must have had an expectation of
paying rent prior to the actual issue of the licence in December 2013.
[64] The Lessee also draws attention to an email from Mr Parbhu to Mr Gilbert dated 20 December 2013 which was directed to the subject of back-dated outgoings and the rent holiday under the Lease. In the course of that email Mr Parbhu stated:
I think this is more than fair, particularly because you have had the opportunity to set up your business all on free time and some.
Mr Kahn naturally placed reliance on the reference to “all on free time”.
[65] I further note that, even once the dispute had clearly crystalised, the Lessor did not immediately contend that rental was payable for the entire period the subject of the counterclaim. Rather its position appeared to be that the use of the premises throughout that period had been offset by the deposit alone. That position is reflected in the Queen City Law letter of 24 February 2014 in which, after drawing attention to the provision in the Variation relating to the deposit,12 the letter stated:
Our client has allowed your client the benefits of the premises since August
2012. That use has been paid for. The new Lease terms must now be honoured.
Your client is trying to spend the same money twice.
11 At [47] above.
12 At [33] above.
[66] While I recognise that the time that was taken to obtain the Ministry of Education licence was longer than either the Lessee or the Lessor envisaged, on the evidence in this case the circumstances do not sustain a claim for a quantum meruit.
Relief
[67] In its opening submissions the Lessor presented a careful submission on the question of bad faith which was directed to the availability of the equitable relief sought by the Lessee. In response to my questions Mr Dillon filed a helpful memorandum which considered the applicability of the bad faith submission to the various possible permutations of outcome in the claim. As that memorandum reflected, in the circumstances where I have found that the Lessee succeeds on both the quantum and deposit issues, any question of bad faith is irrelevant because the rent has been found to have been paid.
[68] The relief sought in the statement of claim comprised an injunction restraining the Lessor from cancelling the Lease on the basis of the Property Law Act notice served on 19 March 2014 and an injunction restraining the Lessor from cancelling the Lease for non-payment of rent (which obligation the Lessee considered was discharged by the release of the deposit).
[69] It was my understanding from the Lessor’s opening submissions that, in the event that the Lessee was successful on the quantum and deposit issues, then it was not necessary for the Court to grant an injunction because the Lessor accepted that the Lease remained on foot. Indeed, as the Lessee’s closing submissions record, Mr Dillon stated in his opening that the Lessor would not seek to cancel the Lease and re-enter the premises even if the defendant was wholly successful in this proceeding. In its closing submissions the Lessor stated that an injunction was not required because the Lessor accepted that the Lessee had paid the sum required into Court instead of to the Lessor.
[70] In those circumstances I apprehend that it will suffice to grant declarations in terms of the findings on the quantum and deposit issues. However I invite the parties to file a memorandum within ten working days either confirming that such relief will suffice or advising if injunctive relief is still required and, if so, why.
[71] If the parties are unable to agree on costs then the Lessee is to file a costs memorandum by 19 December 2014 and the Lessor is to file a response by
30 January 2015. Without predetermining the issue but in the event it is of assistance to the parties, my preliminary view is that the Lessee is entitled to costs on
a 2B basis.
Brown J
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