KEA FORESTRY LIMITED AND NARGUIZ HOVIK

[2024] NZHC 2821

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2023-404-3041

[2024] NZHC 2821

BETWEEN

KEA FORESTRY LIMITED

Plaintiff

AND

NARGUIZ HOVIK

Defendant

Hearing:

8 July 2024

Appearances:

AJ Steel for the Plaintiff

No appearance for the Defendant

Judgment:

30 September 2024

JUDGMENT OF ASSOCIATE JUDGE SUSSOCK

This judgment was delivered by me on 30 September 2024 at 4 pm pursuant to r 11.5 of the High Court Rules

Registrar/Deputy Registrar

Solicitors:

Hornabrook Macdonald, Auckland

KEA FORESTRY LTD v HOVIK [2024] NZHC 2821 [30 September 2024]

Introduction

[1]    Kea Forestry Ltd (KFL) seeks summary judgment of its claim against Narguiz Hovik, as guarantor of the performance of her former company, Your Healthy Gourmet Ltd (removed) (YHGL), pursuant to a lease of commercial premises in East Tamaki.

[2]    YHGL defaulted under the lease in late 2022 and was placed into voluntary liquidation in early 2023. KFL now seeks summary judgment from Ms Hovik of amounts due by YHGL as tenant and for losses incurred as a result of her company’s defaults. These amounts include: rent and outgoings for the period until a new lease was entered into; real estate commission for finding a new tenant; the difference in rent received from the new tenant; repair costs and consequential damages; and legal costs.

[3]    Ms Hovik filed a notice of opposition but no evidence in support. The notice of opposition did not dispute her status as guarantor, or breach of or cancellation of the lease, but pleaded that the bond was sufficient to cover the rental shortfall and denied other amounts were payable. Liability is not therefore contested, only quantum.

[4]    At the first call of the proceedings on 12 March 2024, Ms Hovik was granted leave to file evidence in opposition out of time and a timetable was set leading up to the hearing on 8 July 2024. Ms Hovik did not comply with those directions and has not filed any evidence or submissions in support of her opposition.

[5]    At the hearing on 8 July 2024, Mr Burt, who appeared for Ms Hovik at the first call on 12 March 2024, entered an appearance. After some discussion he confirmed that he did not have instructions from Ms Hovik to appear but had attended to assist the Court.

[6]    Leave may be granted to a party to be heard in opposition pursuant to r 12.9(3) of the High Court Rules 2016 where a party has not filed both a notice of opposition and affidavit in support but as Mr Burt did not have instructions to appear, it was not

appropriate to grant leave in this case. The summary judgment application, therefore, proceeded unopposed.

[7]    I issue this judgment as a final judgment on liability but an interim judgment on quantum as the interest awarded needs to be recalculated as a result of this judgment.

Background

[8]    YHGL signed a deed of lease on 6 August 2020 on the standard Auckland District Law Society form (6th ed, 2012(5)) for premises in East Tamaki, Auckland and several associated carparks to use as a food production and freezing facility. The lease commenced on 1 August 2020 and was for a term of four years, expiring 31 July 2024, with one right of renewal for a further four years.

[9]    The annual rental was $90,000 plus GST and outgoings (at 100 per cent), with a market rent review due on 1 August 2023. A three-month rent holiday was agreed and a bond of three months rental paid, amounting to $22,500.

[10]   At the time the lease was signed the freehold of the premises was owned by a third party. KFL became the registered proprietor on 30 October 2020.

[11]   YHGL began to fall into arrears with the payment of rent and outgoings in December 2022. Only $4,000 was paid in respect of the rent of $8,625 (including GST) due on 1 December 2022. The balance of $4,625 was later paid, but nothing further was received.

[12]   KFL  served  notices  on  YHGL  under   ss   245   and   246   of   the Property Law Act 2007 on 26 January 2023, copied to Ms Hovik as guarantor. The notices were accompanied by an offer to allow YHGL to surrender the lease on certain terms. Under the then prevailing COVID-19 extensions, the tenant had 30 working days to remedy the defaults (13 March 2023).

[13]   The notices went unremedied and the offer to surrender on terms was not taken up. Instead, Ms Hovik placed YHGL into liquidation on 22 February 2023. The

liquidators’ report cited lack of profitability and the flow on effects from COVID-19. KFL received nothing in the liquidation and YHGL was removed from the Companies Register on 27 September 2023.

[14]   KFL then engaged a real estate agent to secure a new lease, conditional upon the  termination  of  the  existing  lease.   Notice  of  cancellation  was   given  on    14 March 2023 and the new lease commenced 20 March 2023.

Summary judgment principles

[15]   KFL is seeking summary judgment of its claim  under  r  12.2(1)  of  the  High Court Rules. This rule provides that the court may give judgment against a defendant if the plaintiff satisfies the court that the defendant has no defence to a cause of action in the statement of claim or to a particular part of any cause of action.

[16]   The principles applying to an application for summary judgment are settled and were summarised by the Court of Appeal in Krukziener v Hanover Finance Ltd.1 The ultimate question is whether there is a “real question to be tried” that warrants the time and expense of a trial.2

[17]   The plaintiff has the overall onus. Where its evidence is sufficient to show there is no defence, the defendant will have to respond if the application is to be defeated.3

[18]   The Court will not normally resolve material conflicts of evidence or assess the credibility of deponents. But it need not accept uncritically evidence that is inherently lacking in credibility, as for example where the evidence is inconsistent with undisputed contemporary documents or other statements by the same deponent or where it is inherently improbable.4

1      Krukziener v Hanover Finance Ltd [2008] NZCA 187 at [26]–[27].

2      Pemberton v Chappell [1987] 1 NZLR 1 (CA) at 3.

3      MacLean v Stewart (1997) 11 PRNZ 66 (CA).

4      Eng Mee Yong v Letchumanan [1980] AC 331 at 341 (PC).

[19]   The Court’s assessment of the evidence is a matter of judgment. The Court may take a robust and realistic approach where the facts warrant it.5

Liability as guarantor

[20]   The fourth schedule of the lease sets out the terms of the guarantee and provides that the guarantee may be enforced by any person entitled for the time being to receive rent. KFL’s evidence confirms it purchased the premises from the original lessor in October 2020 and has been the party who is entitled to payment of rent under the lease since then. KFL can therefore enforce the guarantee.

[21]   KFL’s quantum claim is in respect of two broad categories - rent and outgoings for the period until cancellation of the lease and loss of bargain damages. I consider each of these categories below.

Outstanding rent and outgoings

[22]   Clause 29.1 of the lease provided that failure to pay rent or other moneys payable under the lease on the due date is a breach going to the essence of YHGL’s obligations under the lease. The clause further provided that YHGL shall compensate the landlord and the landlord shall be entitled to recover damages from YHGL for such breach and that the entitlement shall continue even where the lease has been terminated.

[23]   Prior to entry into the new lease on 20 March 2023, KFL’s evidence is that the amount of rent that was overdue was $22,536.29 (including GST) along with outgoings of $19,375.68, as calculated by KFL's General Manager in his affidavit in support.

[24]   In apparent recognition that the abovementioned rental amount is due, the defendant’s notice of opposition stated at [3](b) “After applying the bond there is no rent owing by my company”.

5      Bilbie Dymock Corp Ltd v Patel (1987) 1 PRNZ 84 (CA).

[25]   KFL accepts a bond of $22,500 is being held but submits that this amount should simply be credited against the quantum claimed. On KFL’s uncontested evidence, I accept that the overdue rent as at 19 March 2023 amounts to $22,536,29 as claimed.

[26]However, I do not accept that the outstanding outgoings as at cancellation were

$19,375.38 as claimed.    The outgoings claimed include body corporate levies of

$4,353.51 which do not appear to be included in the outgoings payable under the lease. In addition, it is arguable that the following items arose after the lease was cancelled:

(a)painting work of $4,945.00;

(b)electrical repairs of $2,402.71;

(c)roof repairs of $247.25; and

(d)the amount charged to secure and replace the window of $1,235.68.

[27]   These items are pleaded in the statement of claim as outgoings payable under the lease prior to cancellation but counsel for KFL attempted to reclassify three of these items, [26](b), (c) and (d) above, as damages claimed in the written submissions filed. The basis for doing so is not set out and there is no evidence to justify these items being repair costs, in contrast to repair claims for the chillers and other electrical works  (as  discussed  below).    I  therefore  exclude  the  body  corporate  levies  of

$4,353.51, the cost of painting work of $4,945.00, electrical repairs of $2,402.71, roof repairs of $247.25 and the amount charged to secure and replace the window of

$1,235.68.

[28]   Finally, in respect to the outgoings claimed, the “historical outgoings” calculated by Mr Munro double count the late payment fee for rates of $226.71 so the historical outgoings of $1,754.05 are reduced to $1,527.34.

[29]   The total awarded for outgoings is, therefore, reduced from $19,375.38 (including GST) to $5,964.52.

[30]   As KFL is registered for GST it ought to be able to claim GST on the outgoings back. The outgoings amount is therefore awarded on a GST exclusive basis of

$5,189.13 to prevent double recovery.

Loss of bargain damages

[31]   After cancelling the lease for breach, the landlord is entitled to sue for loss of bargain damages, including damages for the difference between the rent payable under the original lease and other sums that would have been recoverable under the lease and the rental value of the premises as at cancellation.6 The best evidence of “rental value” is what the premises were, as a matter of fact, able to be re-let for.7

[32]   Clauses 29.1 and 30.1 of the lease provide an entitlement to recover damages, regardless of the determination of the lease.

[33]   KFL seeks damages for loss of rental received, the costs incurred in securing a new tenant, and for repair costs and consequential damage. I consider each of these below.

Rental and real estate commission

[34]As part of the loss of bargain damages, KFL seeks damages of:

(a)$19,531.45 (including GST), being the difference between the rent KFL was entitled to under the lease with YHGL and the rent actually received under the new lease from 20 March to 20 May 2023; and

(b)the costs incurred in securing the new tenant, by way of real estate agent’s commission amounting to $23,563.50 including GST.

6      Morris v Robert Jones Investments Ltd [1994] 2 NZLR 275 (CA). Recently applied in Waddell v Jhaveri Holdings Ltd [2024] NZHC 1584 at [31]. See also Tobem Holdings Ltd v Kid Country Holdings Ltd (in liq) [2023] NZHC 98 at [55]–[56], citing DW McMorland and others Hinde McMorland & Sim Land Law in New Zealand (online ed, LexisNexis) at [11.241(c)], n 13. The lessee bears the onus of proving any failure to mitigate: Colwall Property Investment Ltd v Judd (2004) 5 NZ ConvC 194,067 at [9].

7      Cheng v Heise (1990) 1 NZ ConvC 190,656 at 16; and Innes-Jones v Spencer CA55/93, 15 September 1993 at 7.

[35]   The notice of opposition, originally filed but not pursued, raised an issue in respect of the rent reduction given to the new tenant. KFL submits that it was reasonable for KFL to have secured a favourable lease of the premises by granting a commercially orthodox rental holiday, noting that it was shorter than the three-month period afforded under the lease with YHGL. Mr Munro deposes for KFL that to secure the new lease KFL had to grant that rental holiday as an incentive.

[36]   No evidence has been filed to show that the negotiations with the new tenant were not at arm’s length or that there was any other reason why the reduction was not what was required by the rental market. In these circumstances, as in Epoch Chch Ltd v Cameron, the Court will allow the recovery of rent from the original tenant during a rent-free period negotiated with the new tenant.8

[37]   The rental under the new lease secured by KFL was $5,000 per annum more than the rent agreed with YHGL. This does not, however, assist Ms Hovik as KFL received no rental payments under the new lease from 20 March to 20 May 2023 and abated rental  payments  below  the  original  rental  from  20  May  up  to  and  past 1 August 2023 when the rent review was due under the lease with YHGL.

[38]   I am satisfied that damages should be awarded for the rental difference claimed but on a GST exclusive basis, as counsel acknowledged in submissions.

[39]   As to the real estate commission, the cost of re-letting has been recognised as recoverable as a consequence of breach and is necessarily awarded to restore the plaintiff to the position they would have been in, but for the breach.9 Rodney Hansen J held in CBO Motors Ltd v Concrete Properties Ltd in respect of a re‑letting commission:10

Recovery is necessary if the defendant is to be restored to the position it would have occupied if the plaintiff had not been in breach. It is unfortunate that the cost was incurred only shortly before the building was sold when (subject to the claim for diminution in value of the building) the defendant's right to recover future rent came to an end. But I do not see this as disentitling recovery.

8      Epoch Chch Ltd v Cameron HC Christchurch CIV-2007-409-2820, 5 March 2008 at [38].

9 At [39].

10     CBD Motors Ltd v Concrete Properties Ltd (2003) 5 NZCPR 22 (HC) at [62].

[40]   Ms Hovik’s notice of opposition suggested an award of the commission would be unfair because the lease was going to expire on 31 July 2024 and so a commission would have been incurred regardless of breach (presuming the right of renewal would not have been exercised). However, the lease had 7 months remaining at the time of cancellation.

[41]   I therefore accept that the real estate commission is appropriately claimed. Again, as this amount is awarded as damages it is recoverable on a GST exclusive basis.

Repair costs and consequential damages

[42]   KFL further pleads that as a result of the breach of the repair covenant in the lease, KFL suffered the following losses:

(a)refrigeration repair costs of $39,484.43 (including GST);

(b)electrical repair costs of $38,087.66 (including GST); and

(c)KFL was required to agree to a partial abatement of rent under the new lease, such that rent under the new lease was reduced to 30 per cent in June, July and August 2023, resulting in a loss of $14,342.54, as particularised below:

Due Date/Period	Rent Reserved	New Abated Rent	Balance Due
1 June 2023	8,625.00	(2,731.25)	$5,893.75
1 July 2023	8,625.00	(2,731.25)	$5,893.75
1–19 August 2023	5,286.29	(2,731.25)	$2,555.04
Total:	$14,342.54

[43]The repair covenant, cl 52.1 of the lease, provides:

52.1 During the term of this lease the Tenant undertakes to keep all Fixtures & Chattels in good working order and condition to undertake regular maintenance and repair of such Fixtures and Chattels to ensure that they are at all times in good order, condition and repair. The Tenant will do all things necessary to ensure that at the end or earlier termination of this lease the Fixtures & Chattels are returned to the Landlord in good order, condition and repair (fair wear and tear expected).

[44]   The Landlord’s Fixtures and Fittings listed in the fifth schedule included the blast chiller and freezer.

[45]   In Mr Munro’s affidavit for KFL, he deposes that this covenant was not complied with:

Upon re-entering the premises, it was found that the freezer and chiller were damaged and unable to be operated. The chillers had been poorly maintained and a number of dangerous modifications had been made, including alterations to control circuits. The systems lacked refrigerant and had extension cables used as fixed wiring and earthing conductors used as live conductors. It was left in a complete mess.

[46]   Where a lessee fails to meet their repair and reinstatement obligations on the termination of a lease, at common law the general rule is that the measure of damages is the cost of reinstatement.

[47]The authors of Hinde McMorland and Sim state:11

When the lessor brings a proceeding after the lease has terminated for breach of the covenant to yield up the premises in repair the measure of damages, under the rule in Joyner v Weeks, is the sum of money which it will take to put the premises into the state of repair in which the lessee ought, under the covenant, to have maintained them. To that sum may be added compensation for the loss of use of the premises whilst the repairs are being done.

(footnotes omitted)

[48]   KFL submits that the actual cost of the repairs constitutes the best evidence of what the relevant repairs would have cost a reasonable landlord and are thus recoverable as damages.12

11     DW McMorland and others Hinde McMorland & Sim Land Law in New Zealand (online ed, LexisNexis) at [11.126].

12     Telecom & CPS Community Credit Co-op Ltd v Heberg Pty Ltd [1993] ANZ ConvR 312.

[49]   No evidence has been filed by Ms Hovik disputing the amounts claimed. Although the amounts are significant, Mr Munro’s evidence that the chillers had been poorly maintained and a number of dangerous modifications made, including alterations of circuits, is uncontested.

[50]   I have considered the invoices provided, the evidence of Mr Munro and the correspondence with the new tenant and consider that KFL has established on a summary judgment basis that it is appropriate to claim for the invoices up until July 2023 but not the invoices in August 2023. August 2023 was six months after YHGL vacated the premises and more than four months after the lease was cancelled. Furthermore, there is no reference to a claim being made for these amounts in the correspondence with Ms Hovik or with the liquidator and cl 52.1 of the lease expressly excludes “fair wear and tear expected”.

[51]   As KFL is registered for GST, the repair costs awarded need to be exclusive rather than inclusive of GST. The total amount awarded for repair of the chillers is therefore confined to invoices 0383, 0382, 0384, 0385, 0397, 0419, 0420, 0429 and 0460 amounting to $27,337.56 (excluding GST).

[52]   In addition, I reduce the electrical repair costs awarded to half of those claimed. Although there is uncontested evidence from Mr Munro that there were issues with extension cables used as fixed wiring and conductors used as live conductors, the items listed on the electrical invoice extend significantly beyond those repairs. Rather than seek further evidence in circumstances where the correspondence with Ms Hovik prior to the hearing indicates a potential inability to pay, in any event, I simply reduce the amount awarded by half. Again, this amount is awarded exclusive of GST. The total amount awarded for electrical repairs is therefore $16,559.85.

[53]   KFL further submits that a secondary implication of the breach of the repair covenant was that KFL suffered a consequential loss in the form of a demand from the incoming tenant for an abatement of rental. KFL’s evidence is that an abatement of 70 per cent, from 20 May to 19 August 2023, while repairs were carried out, was reached as a commercial resolution, resulting in a loss of $14,342.54 (including GST).

[54]   The amount sought by the plaintiff is the difference between the rent actually paid ($2,731.25) and the rent that would have been paid by YHGL ($8,625 per month). This amount is properly awarded.

Pre-proceeding legal costs

[55]   KFL seeks legal costs associated with YHGL’s defaults incurred prior to the commencement of this proceeding as loss of bargain damages.

[56]   I deal with these together with the costs of these proceedings later in this judgment as claims for both sets of costs are made pursuant to cl 6.1 of the lease.

Interest

[57]Clause 5.1 of the lease provides that:

If the Tenant defaults in payment of the rent or other moneys payable under this lease for 10 working days then the Tenant shall pay on demand interest at the default interest rate on the moneys unpaid from the due date for payment to the date of payment.

[58]   The default interest rate payable is recorded in the lease as being 12 per cent per annum.

[59]   KFL seeks the payment of default interest on all amounts claimed, with the date from which interest should apply for those  amounts claimed as  a debt being  19 March 2023 and the date for the loss of bargain damages following cancellation being the date on which the proceedings were filed of 18 December 2023.

[60]   The right to claim default interest in cl 5.1 of the lease is only in respect of “rent and other moneys payable under [the] lease.” In The Gama Foundation v Fletcher Steel Ltd, the Court of Appeal confirmed that damages for breach of a lease are not amounts payable under the lease itself.13 Default interest is not therefore payable on those amounts claimed as damages. This means it is only the rent and outgoings outstanding prior to cancellation that attract default interest. I include a

13     The Gama Foundation v Fletcher Steel Ltd [2022] NZCA 314 at [10]–[11].

direction below for counsel for KFL to recalculate the default interest accrued on the rent and outgoings payable as determined in this judgment.

[61]   In addition, I do not consider default interest can be claimed in respect of costs claimed under cl 6.1 on a summary judgment basis as it is arguable that “reasonable costs” are not “moneys payable under [the] lease” as cl 5.1 requires.

[62]   At the hearing, counsel for KFL, Mr Steel, submitted that if default interest was not payable on loss of bargain damages or costs then he sought to make an oral application for interest under the Interest on Money Claims Act 2016.

[63]   The statement of claim currently claims interest at the contractual default rate from the due date for payment to the date of payment. The written submissions for KFL recorded that for ease of calculation KFL was content to seek interest on the loss of bargain damages from the date of filing the statement of claim (18 December 2023).

[64]   Section 25 of the Interest on Money Claims Act sets out mandatory requirements for any claim for interest under the Act but s 25(4) provides that a Court can “make or accept” an amendment to the statement of claim to ensure compliance with s 25.

[65]   In Chen v Huang, the Court of Appeal set out the correct approach to amendments to a statement of claim in respect of interest.14 The Court accepted that there can be late amendment provided the amendment is in the interests of justice, it will not significantly prejudice the other party, and it will not cause significant delay.15

[66]   The interest rate claimed if amendment is allowed is less than the contractual default interest rate currently pleaded. Ms Hovik has not appeared in opposition but I do not consider the interests of justice merit adjourning the proceeding to allow formal amendment and reservice. I am satisfied the criteria set out in Chen v Huang are met and the amendment should be made with the period for which interest is claimed on

14     Chen v Huang [2024] NZCA 38.

15     At [237] to [247] relying on Elders Pastoral Ltd v Marr (1987) 2 9PRNZ 383 (CA) at 385.

loss of bargain damages amended to the date of filing of the statement of claim to the date of payment.

[67]   Interest pursuant to the Interest on Money Claims Act is therefore payable for the following amounts, all exclusive of GST:

(a)damages for loss of rental income ($16,983.87);

(b)re-leasing costs ($20,490); and

(c)breach of the repair covenant: chiller repairs ($27,337.56) plus

$16,559.85 (electrical repairs) equalling $43,897.41.

[68]   I include a direction below for KFL to calculate interest on those amounts from the date of filing of the statement of claim.

Bond

[69]   KFL currently holds a bond of $22,500 which it accepts needs to be deducted from the total. The bond is described in the lease as being able to be returned to the tenant where the tenant has “met all covenants as per the Deed of Lease and there are no arrears in the rental or outgoings”. I consider that the bond ought to be deducted from the outstanding rent and outgoings first as contractual default interest is payable in respect of those amounts. I do so in the summary below.

Costs

[70]   KFL seeks awards of pre-proceeding and proceeding costs in accordance with cl 6.1 of the lease by which the parties agreed:

The Tenant shall pay the Landlord’s … legal costs (as between lawyer and client) of and incidental to the enforcement of the Landlord’s rights, remedies and powers under this lease.

[71]   Rule 14.6(4)(e) of the High Court Rules provides that the Court may award costs on an indemnity basis where the party claiming costs is entitled to costs under a contract. KFL relies on Black v ASB Bank Ltd in which the Court of Appeal held there

is room for robust judgment as to the costs considered reasonable in all the circumstances.16

[72]   KFL’s actual legal costs and disbursements are summarised in the evidence and in the schedule attached to KFL’s costs memorandum (which attaches copies of the relevant invoices). KFL seeks costs and disbursements up to the entry into the new lease of $4,604.22 (exclusive of GST) plus costs following that and of these proceedings of $10,685 plus disbursements of $1,572.69. KFL distinguishes between these two amounts as default interest was originally claimed on the first amount but not the second.

[73]   As set out above, I do not consider default interest is payable in respect of costs as “reasonable costs” are not “moneys payable under [the] lease” as that term has been interpreted.

[74]   I am satisfied, however, that all costs claimed fall within cl 6.1 and are reasonable so bringing them within r 14.6(4)(e) of the High Court Rules. Indemnity costs to a GST registered taxpayer are to be awarded exclusive of GST. I therefore award costs of $16,861.91.

[75]Interest on the costs awarded is to apply from this judgment until payment.

Result

[76]   KFL has established that Ms Hovik as guarantor has no arguable defence to liability under the  guarantee.  Summary  judgment  is  therefore  entered  against  Ms Hovik for liability with final orders for quantum to follow the filing of a further memorandum by KFL.

[77]   I set out below a summary of the interim position reached in respect of quantum:

16     Black v ASB Bank Ltd [2012] NZCA 384 at [81].

(a)Rent and outgoings under the lease of $22,536.29 (rent including GST) plus $5,186.54 (outgoings excluding GST) are awarded for a total of

$27,722.83. This is reduced by the bond payment of $22,500 for a total of $5,222.83 plus contractual default interest from the due date for payment to the date of payment.

(b)Damages of $81,371.28 (exclusive of GST) plus interest under the Interest on Money Claims Act from the date of filing of the statement of claim to the date of payment.

(c)Indemnity   costs   of   $16,861.91   plus   interest   under    the Interest on Money Claims Act from the date of this judgment to the date of payment.

[78]   KFL is to file a short memorandum by 18 October 2024 recalculating the interest payable for each category so final quantum orders can be made.

Associate Judge Sussock