James Ward Trustee Company Limited v Sinclair

[2024] NZHC 1613

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2023-404-2968

[2024] NZHC 1613

UNDER

Section 244(1)(a) of the Property Law Act 2007

IN THE MATTER OF

An application for an order for possession of land for the purpose of cancelling registered lease 7914385.4

BETWEEN

JAMES WARD TRUSTEE COMPANY LIMITED

Applicant

AND

WARREN GRAEME SINCLAIR

Respondent

Hearing:	17 June 2024
Appearances:	S R J Hamilton for Applicant G D Simms for Respondent
Judgment:	19 June 2024

JUDGMENT OF O’GORMAN J

[Application for orders terminating lease and granting possession]

This judgment was delivered by me on 19 June 2024 at 4 pm pursuant to r 11.5 of the High Court Rules 2016.

Registrar/Deputy Registrar

…………………………………

Solicitors/counsel:

S R J Hamilton, Auckland Construct Legal, Auckland Wynn Williams, Auckland

JAMES WARD TRUSTEE COMPANY LIMITED v SINCLAIR [2024] NZHC 1613 [19 June 2024]

[1]    The applicant, James Ward Trustee Company Ltd (James Ward), is the head-lessee/sublessor of apartment 1502, storage unit 04 and car parks 97–98 within Scene Three (the Property). James Ward seeks an order for possession of the Property and for cancellation of its sublease to the respondent, Warren Sinclair (document identifier 7914385.4). James Ward also seeks orders that Mr Sinclair pay all monies owing under the sublease (including any arrears of rent and outgoings, plus interest) up to the date of cancellation, along with orders for costs.

[2]    The application is made in reliance on s 244(1)(a) of the Property Law Act 2007 (PLA). Under s 244(3), if the lessor applies to a court for an order for possession of land for the purposes of cancelling a lease, the cancellation takes effect on the making of the order or any later date that may be specified in the order.

[3]Mr Sinclair initially opposed the application on the following grounds:

(a)the default notice dated 6 March 2023 did not meet PLA requirements;

(b)the evidence of the lease was deficient;

(c)the evidence of the rent payable and non-payment was deficient; and

(d)relief against forfeiture should be granted because Mr Sinclair intends to pay all amounts validly due and is in the process of making a payment proposal.

[4]    On the day of the hearing, the issue became one solely of relief against forfeiture (all other aspects were admitted in cross-examination). On the evening of Friday 14 June 2024, the respondent’s counsel filed two further affidavits to substantiate a pending ability to pay, associated with the sale of a company of which Mr Sinclair is the sole director and shareholder. Two affidavits were filed to update the Court on this development. The first was from Mr Sinclair, and the second was from another person who is part of the group of investors intending to make the purchase and investment. Both affidavits exhibited draft agreements for the intended acquisition. Mr Sinclair explained that his delay in filing and serving this material

was because he hoped that the documentation would be finalised and executed. Although this was not possible, both witnesses gave evidence that they have reached agreement on further amendments, and they expect final versions of the agreements to be executed this week, with payment to be made shortly thereafter.

[5]    Accordingly, the issue for determination is whether relief should be granted on conditions that allow a short period for payment to be made.

Background

[6]    On 22 January 2018, Mr Sinclair became the registered sublessee of the Property, following his purchase of that interest during December 2017.

[7]    Under cl 1 of that sublease, rent is payable in advance on the first day of each quarter, to be paid in cleared funds without deduction or set-off. Clause 18 of the sublease permits the lessor to re-enter the apartment and determine the lease if there is a default that is not remedied within 28 days of receiving a notice of default from the lessor.

[8]    As referred to below, Mr Sinclair has had earlier issues of failing to pay his rent on time. The current rent arrears have arisen from 2 August 2022. Mr Sinclair has failed to pay quarterly rent of $10,802.28 since that date.

[9]    On 6 March 2023, the solicitors acting for James Ward, Construct Legal, issued a notice of intention to cancel the lease under s 245 of the PLA (the Notice). Paragraphs 1 and 2 of the Notice advised Mr Sinclair that he was in default of his obligations to pay rent, and the extent of the default at that point was $32,406.84. The calculation was particularised. The Notice advised that, if the breach set out in para 1 was not remedied within 30 working days of service, then the lessor would be entitled to determine/cancel the lease and re-enter the property in accordance with cl 18 of the lease and s 244 of the PLA. Paragraph 6 of the Notice advised Mr Sinclair of his right to apply for relief against cancellation and to seek legal advice.

[10]   The Notice was served on Mr Sinclair on 15 June 2023 and expired unremedied on 28 July 2023. James Ward commenced this proceeding in November 2023.

Legal principles

[11]   A lease may only be cancelled in  accordance with ss 244–252 of the PLA.1  A lessor may cancel a lease because of a breach of the covenant to pay rent, provided that the requisite notice of intention to cancel is given and the breach is not remedied within the specified time.2

[12]   A lessor may apply to the Court for an order for possession of land for the purposes of cancelling a lease.3 Once the lessor has made such an application, the Court may make an order for possession and cancel the lease under s 251(1) of the PLA. Under s 251(2) of the PLA, the Court may order the lessee to pay the rent up to the date of cancellation (or any later date on which possession is given back to the lessor), order reasonable compensation, and impose any other terms the Court thinks fit.

[13]   A lessee may apply to the Court for relief against cancellation under s 253 of the PLA. Under s 256(1), the Court may grant relief on any conditions that it thinks fit concerning expenses, damages, compensation, or any other relevant matters.

[14]   Traditionally, there has been a distinction drawn between relief when the breach concerns non-payment of rent, as opposed to breaches of any other covenant.4 The following principles apply for a breach of the covenant to pay rent:5

(1)    Where the breach consists solely of a failure to pay rent, there is a presumptive right to relief on payment of the arrears and costs. It is only in exceptional circumstances that relief is to be denied if the debt is paid in full.

(2)    This is because it is inequitable that the benefit of the lease should be lost to a tenant who has restored to the landlord all that the landlord is entitled to under the lease. The ability to forfeit the lease and take possession is regarded by the Court as security for payment.

(3)    Where, however, it is clear the tenant is hopelessly insolvent, the Court will not grant relief as a general rule.

1      Property Law Act 2007, s 243(1).

2      Section 245.

3      Section 244(1)(a).

4      Pike River Coal Ltd  (in  rec)  v  O’Malley  Farming  Ltd  HC  Wellington  CIV-2011-485-66,  14 October 2011 at [41]–[43].

5      Mulholland v Waimarie Industries Ltd (2009) 10 NZCPR 590 at [23] (citations omitted).

(4)    Mere suspicion of insolvency is not enough to outweigh the presumptive right to relief on payment of rental and costs.

[15]In QT Hospitality Ltd v Oxford Holdings Ltd, Asher J held that:6

[I]t will only be in the most extraordinary circumstances that relief against forfeiture will be refused in the event of non-payment of rent when the rent has been brought up to date or can with certainty be brought up to date.

[16]   This principle was reaffirmed in Wood Bay Enterprises Ltd v Wise, where Gilbert J said that:7

It has long been established that the right of forfeiture for non-payment of rent is security for the payment of rent. In all but exceptional circumstances, for example where a tenant is hopelessly insolvent, a tenant will be entitled to relief against forfeiture or cancellation of a lease upon payment of the rent.

[17]   In Mono F Ltd v First CBD Company Ltd, van Bohemen J denied relief in circumstances where the lessee hoped to be in a position to pay arrears if further money came in from a car insurance claim and sale of a residential property, but there was no documentary evidence to substantiate those expected receipts. The Court commented as follows:8

The counterpart to the first of the above principles, of course, is that the presumptive right to relief does not arise where the arrears and costs remain unpaid and there is no realistic prospect that they will be paid.

[18]   That the lessee has been a bad payer in the past is not, without more, a ground for refusing relief.9

[19]   The  lessee’s  insolvency  is  not,  of  itself,   a   basis  for   refusing  relief.   In QT Hospitality Ltd v Oxford Holdings Ltd, Asher J said:10

6      QT Hospitality Ltd v Oxford Holdings Ltd (2007) 8 NZCPR 817 at [16].

7      Wood Bay Enterprises Ltd v Wise [2012] NZHC 1136 at [22].

8      Mono F Ltd v First CBD Company Ltd [2017] NZHC 2052 at [18].

9      DW McMorland and others Hinde McMorland and Sim Land Law in New Zealand (looseleaf ed, LexisNexis) at [11.243] and fn 29 and 30, referencing (among others) Newbolt v Bingham (1895) 72 LT 852 at 854; Re Brompton Securities Ltd (No 2) [1988] 3 All ER 677 at 681; and QT Hospitality Ltd v Oxford Holdings Ltd, above n 6, at [23].

10 QT Hospitality Ltd v Oxford Holdings Ltd, above n 6, at [17]–[19] (emphasis added).

Something more is required, which satisfies the Court that there is no realistic chance that the next rental commitments can be met. I consider that it was in this sense that Henry J used the phrase “hopelessly insolvent” in the Inner City Businessmen’s Club v James Kirkpatrick Ltd case. I propose approaching the exercise of the discretion in this case from the point of view that the rent having been brought up to date, the Court should be satisfied that there is no realistic chance that the next rental commitments can be met, before refusing to provide relief.

[20]   In summary, the general principle is that the Court will usually grant relief on payment of all of the arrears of rent and costs, even if the lessee has in the past been a bad payer.11 In exercising the Court’s discretion, the lessee’s potential insolvency is a highly relevant consideration, but suspicion of insolvency is not, on its own, sufficient grounds for refusing relief.12

Analysis

[21]   James Ward is highly sceptical of the late evidence filed shortly before the hearing, exhibiting draft documents, on which yet further promises for payment are based. In his affidavit of 2 February 2024, Mr Sinclair made similar promises of payment, which did not occur. This undermines any confidence that can be placed on his latest promises.

[22]   The present situation is not the first time that Mr Sinclair has fallen well behind on his rental payments:

(a)On 1 April 2021, Mr Sinclair paid $67,000 to catch up with overdue rentals payable at that time, over a period of some 18 months.

(b)Mr Sinclair made a similar payment on 2 August 2022 of $56,802.72 for unpaid rent, over a period of about 15 months.

[23]   Accordingly, Mr Sinclair has a poor payment record and James Ward has no confidence that Mr Sinclair will continue to pay rent in accordance with his sublease obligations, even if he once again comes up to date as a condition of granting relief.

11     Re Brompton Securities Ltd (No 2) [1988] 3 All ER 677 at 681.

12     Yoo v Dominion Income Property Fund Ltd HC Auckland CIV 2005-404-3239, 13 July 2005 at [12].

[24]   James Ward is no longer willing to tolerate any breaches by Mr Sinclair. It accordingly seeks orders for possession of the Property and termination of the lease, so James Ward is no longer exposed to these ongoing problems.

[25]James Ward is not Mr Sinclair’s only creditor:

(a)On 21 August 2023, Campbell J granted damages against Retyred (2020) Ltd and Mr Sinclair in the sum of $1,645,262.39 and awarded solicitor/client costs.13 That judgment was granted as a formal proof determined on the papers. Accordingly, the plaintiff in that proceeding is a substantial creditor of Mr Sinclair. Mr Sinclair asserted in cross-examination that this judgment is being challenged but he was vague on this.

(b)Mr Sinclair is currently facing 68 criminal charges filed by the Inland Revenue Department related to business conducted through four companies, two of which have been removed from the New Zealand Companies Register and one of which is in liquidation. The maximum penalty on each of the charges is five years’ imprisonment or a fine of up to $50,000 or both. Mr Sinclair says he is defending these charges, and the hearing is not likely to take place until 2026.

(c)Mr Sinclair was a company director of NZ Modular Homes Ltd, which was placed into liquidation on 24 April 2023. The liquidators’ final report notes that there was a potential claim against the company director, but that funding was not secured to pursue this.

[26]   Taking into account the above liabilities and the amounts owed to James Ward, the applicant submits that Mr Sinclair is hopelessly insolvent so relief should be denied for that reason, even if he paid what is owing to James Ward.

13     Sahar Ehsani Investment Ltd v Retyred (2020) Ltd [2023] NZHC 2258.

[27]   There are four categories of liability for which James Ward seeks judgment. As set out below, I have made timetable orders for James Ward to quantify those amounts, falling into four categories:

(a)Mr Sinclair is liable for unpaid rent to 1 August 2024 of $86,418.24. The next invoice for rent will be issued on 2 August 2024 for the period ending on 1 December 2024 and then every three months after that in the amount of $10,802.28 for each quarter.

(b)Under cl 2 of the sublease, Mr Sinclair is liable to pay operating expenses. James Ward has entered into a management agreement with a company called Nesuto Ltd, which has invoiced Mr Sinclair for the outgoings. Arrears in this category currently total $22,145.27.

(c)Under cl 22 of the lease, any payment made by James Ward of sums that the lessee ought to have paid shall bear interest at the “default interest rate” (five per cent above a specified overdraft interest rate), computed from the date the liabilities were incurred until payment. James Ward intends to make this calculation and file that information quantifying interest payable for the overdue rental and outgoings.

(d)Clause 2(d) of the lease provides that Mr Sinclair is liable for the cost of legal or other services arising from or relating to any default under the lease or the enforcement or exercise or attempted enforcement or exercise of any of the lessor’s rights and remedies under the lease (including costs as between solicitor and client). On the basis of this clause, James Ward seeks a full indemnity for solicitor/client costs in this proceeding.

[28]I accept the submissions of James Ward that:

(a)there is no presumptive right to relief because Mr Sinclair had not already paid the arrears and costs by the time of the hearing; and

(b)Mr Sinclair faces obvious insolvency difficulties.

[29]   Putting to one side the payments he hopes to receive under the arrangements addressed in the affidavits of 14 June 2024, Mr Sinclair appears to be insolvent. The Court in its discretion must assess the prospects of payment under those documents. The evidence falls well short of showing with any certainty that Mr Sinclair will be able to meet his payment obligations. However, the situation is not as dire as there being “no realistic prospect” that the arrears will be paid.

[30]   Mr Sinclair has produced not only his own evidence, but also an affidavit from one of the potential purchasers/investors, confirming that the amendments to the draft documents have now been agreed and execution of the documents is expected this week, with funds to be paid shortly thereafter. The documentation refers to two tranches of payment. The first expected payment will be more than sufficient to meet all of the existing liabilities to James Ward, including interest and solicitor/client costs. Counsel for Mr Sinclair has said that they intend to give directions to the purchaser under the sale and purchase agreement to make payment of any amounts ordered in this judgment directly to the solicitors acting for James Ward.

[31]   A different agreement refers to a second tranche of investment payments that might be made, subject to further due diligence steps still to be taken in the coming months. While this second tranche of payment is much more speculative, this provides some support for Mr Sinclair’s assertion that he hopes to be in a position to meet all valid debts soon (i.e., within the coming months he will not be insolvent).

[32]   I am conscious that issues of voidability might arise with Mr Sinclair paying the arrears that he owes to James Ward. On the other hand, it is also in the interests of Mr Sinclair’s creditors to preserve the value of the leasehold interest, which depends on those payments being made.

[33]   I acknowledge that a poor payment history alone does not justify refusal of relief.14

14 See [18] above.

[34]   As for James Ward’s scepticism that payment will be made, this is catered for by imposing payment as a condition of granting relief. If no payment is forthcoming, then James Ward will achieve the orders that it seeks of possession of the Property and forfeiture of the lease. If payment is made, then James Ward will be secured by the ability to seek forfeiture for any new defaults of non-payment of rent and outgoings. In part to address those concerns, counsel for Mr Sinclair also suggested that the Court could order (in its discretion) pre-payment of two rent instalments, which I have done below.

[35]   Taking all of these matters into account, I consider it appropriate to grant relief against forfeiture, on condition that all the amounts that are owed to James Ward (falling in the four categories referred to above) are paid in full by 5 pm on 15 July 2024. I will quantify the specific amounts payable, under the timetable set out below.

Orders

[36]   The application by Mr Sinclair for relief against forfeiture is granted upon the following conditions:

(a)By 5 pm on 15 July 2024, payment is to be made into the trust account of the solicitors acting for James Ward (they must first confirm the relevant account number) of:

(i)all rental due and owing up to 1 August 2024;

(ii)two prepayments of rental, being a total of $21,604.56 for the quarter ending on 1 December 2024 and the subsequent quarter;

(iii)all operating expenses due and owing as at 15 July 2024; and

(iv)interest and solicitor/client costs in an amount to be confirmed separately under the timetable set out below.

(b)Mr Sinclair is to instruct the purchaser to make the above payments directly from the purchase price payable under the sale and purchase agreement referred to in his affidavit of 14 June 2024.

(c)Mr Sinclair’s solicitors are to advise the Court and  counsel  for  James Ward when the sale and purchase agreement has been executed.

[37]   For the avoidance of doubt, if Mr Sinclair fails to make the payments required under the above conditions by 15 July 2024, then he will not have satisfied the conditions upon which relief against forfeiture has been granted. The consequence will be (without further order of the Court) that James Ward is entitled to take possession of the Property and to forfeiture of the lease in the terms sought in paras 1.1 and 1.2 of its originating application dated 30 November 2023.

[38]   I make timetable orders for the  amounts  payable  to  James  Ward  under para [36](a) above to be quantified as follows:

(a)James Ward is to file and serve a memorandum by 5 pm on Monday 24 June 2024 calculating the amounts payable, including interest and solicitor/client costs, with any supporting evidence.

(b)Mr Sinclair has until 5 pm on Monday 1 July 2024 to file and serve any documents in reply.

(c)I will issue a minute as soon as possible thereafter confirming my determination of the amounts payable under [36](a).

O’Gorman J