Kkeshav International Ltd v Heaton Holdings Ltd
[2020] NZHC 1513
•30 June 2020
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
I TE KŌTI MATUA O AOTEAROA ŌTAUTAHI ROHE
CIV-2020-409-120
[2020] NZHC 1513
BETWEEN KKESHAV INTERNATIONAL LIMITED
Applicant
AND
HEATON HOLDINGS LIMITED
Respondent
Hearing: 22 June 2020 Appearances:
K M Graham for Applicant J Moss for Respondent
Judgment:
30 June 2020
JUDGMENT OF ASSOCIATE JUDGE LESTER
This judgment was delivered by me on 30 June 2020 at 4.30pm pursuant to Rule 11.5 of the High Court Rules
Registrar/Deputy Registrar 30 June 2020
KKESHAV INTERNATIONAL LIMITED v HEATON HOLDINGS LIMITED [2020] NZHC 1513 [30 June 2020]
Background/summary
[1] Kkeshav International Ltd (the tenant), applies to set aside a statutory demand issued by Heaton Holdings Ltd (the landlord), for unpaid rental relating to two leases.
[2] The first of the leases (Lease 1), is dated 23 September 2009 and relates to a building used as a supermarket by the tenant in Colombo Street, Christchurch. The amount claimed in the statutory demand claimed in respect of Lease 1 is $8,625 including GST.
[3] The supermarket premises received some damage in the February 2011 Canterbury Earthquake Sequence, the exact nature and extent of which is in dispute.
[4] The tenant took an assignment of Lease 1 by a Deed of Assignment dated 8 September 2011. At that time, the current term of Lease 1 expired on 10 June 2012.
[5] Lease 1 was renewed pursuant to a Deed of Renewal of Lease dated 7 August 2012 for a further three year term.
[6] Towards the end of that three year term, pursuant to a Deed of Variation and renewal of lease dated 30 April 2015, Lease 1 was renewed this time for a six year term commencing 10 June 2015 expiring 9 June 2021.
[7] The second lease (Lease 2), is dated 12 May 2017. The amount of rent claimed in the statutory demand in respect of Lease 2 is $4,312.50 including GST. Lease 2 is a storage building on the same site as the supermarket.
[8] Both leases are on Auckland District Law Society (ADLS) forms, albeit different editions, but in respect of the material clauses there is no difference. Counsel were agreed the clauses that were material to the present dispute are as follows:
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.
…
Partial Destruction
27.1IF the premises or any portion of the building of which the premises may form part shall be damaged but not so as to render the premises untenantable and:
(a)the Landlord’s policy or policies of insurance shall not have been invalidated or payment of the policy moneys refused in consequence of some act or default of the Tenant; and
(b)all the necessary permits and consents shall be obtainable.
THEN the Landlord shall with all reasonable speed expend all the insurance moneys received by the Landlord in respect of such damage towards repairing such damage or reinstating the premises and/or the building but the Landlord shall not be liable to expend any sum of money greater than the amount of the insurance money received.
…
27.3Until the completion of the repairs or reinstatement a fair proportion of the rent and outgoings shall cease to be payable as from the date of damage.
…
Essentiality of Payments
29.1 FAILURE to pay rent or other moneys payable hereunder on the due date shall be a breach going to the essence of the Tenant’s obligations under the Lease. The Tenant shall compensate the Landlord and the Landlord shall be entitled to recover damages from the Tenant for such breach. Such entitlement shall subsist notwithstanding any determination of the lease and shall be in addition to any other right or remedy which the Landlord may have.
…
Arbitration
44.3 THE procedures prescribed in this clause shall not prevent the Landlord from taking proceedings for the recovery of any rent or other monies payable hereunder which remain unpaid or from exercising
the rights and remedies in the event default prescribed in clause 28.1 hereof.
[9] There are a number of factual disputes between the parties relating to the nature and extent of the earthquake damage to the supermarket and the reason why repairs have not yet been undertaken. In short, the tenant alleges the landlord is in breach of the obligation in cl 27.1 to use the insurance moneys to fix the earthquake damage “with all reasonable speed” (the tenant accepting that the landlord’s insurance claim was not resolved until some time in 2014).
[10] The landlord says because the damage to the supermarket was minor and cosmetic, and because it was not impacting on the tenant’s ability to trade, the tenant was happy to defer the completion of repairs until the end of the present term to avoid disruption to trading.
[11] The tenant says the issue of earthquake damage came to a head in early 2019. The tenant, which imports food and unloads it from containers on site, is subject to inspection by MPI in respect of food hygiene related matters. The tenant has produced inspection reports from MPI requiring, amongst other things, repairs to cracked concrete pads on which shipping containers were kept before being unloaded. There are further factual disputes around the concrete pads. Those disputes concern whether the MPI reports were brought to the landlord’s attention, and more fundamentally, whether the concrete pads were in fact tenant’s improvements which were not the landlord’s responsibility.
[12] The tenant says that as a result of the concrete pads not being repaired, and as a result of the other earthquake damage to the supermarket which put off customers, it moved to new premises towards the end of 2019.
[13] A further dispute between the tenant and landlord relates to the circumstances in which the 2015 renewal of Lease 1 was for a period of six years. The tenant says it was requested to enter a six year renewal, in effect to assist the landlord with its financing so that it could present to its bank a lease for a six year term (the right of renewal in the lease being for three years). The tenant’s solicitor, prior to the six year renewal, expressed the tenant’s reservations about committing to a six year term and
sought that there be a term that after the three year term originally envisaged by Lease 1, the tenant could give three months’ notice to vacate.
[14]The email response direct from the landlord was as follows:
From: Jim Glass & Sheryn Gillard Glass [mailto: [email protected]]
Sent: Monday, 16 February 2015 5:05 p.m.
To: Jerome Williamson
Subject: Re: Lease Hi Jerome
The six year term is critical for us as we will need to borrow money to rebuild a property destroyed in the earthquake and the bank likes six years. Raj has knowledge of a countryman of his who got into some commercial difficulties leasing the same building and we resolved that by changing the agreement. We do not view leases as set in stone when they are obviously not working for the tenant however that sentiment cannot be included in the lease for obvious reasons. I would like to point out that the present rental was set by valuation with the provision that the two heat pumps we installed at the time were not to be considered when establishing the rental.
[15] The tenant says that through leaving the premises towards the end of 2019, all it was doing was giving effect to what it says was the assurance contained in the above email.
[16] The statutory demand, which is the subject of this application, was issued on 24 February 2020 relating to rent due under Lease 1 on 10 February 2020, and under Lease 2 (the storeroom) on 1 February 2020.
[17] It is common ground that both leases have now been brought to an end, that occurring no later than 6 April 2020, as either the tenant had a right to cancel (which it has exercised), or its wrongful exercise of that right to cancel was a repudiation for which the landlord has cancelled.
[18] That somewhat lengthy summary of the facts is necessary to explain the key issues in the application.
[19] The tenant says the premises have been subject to unrepaired damage since the time of the February 2011 earthquake sequence and as it has paid full rent throughout. The tenant says it is entitled to claim a retrospective abatement of rental pursuant to
cl 27.3 of the Leases. The tenant has had a rental abatement assessment undertaken by a registered valuer that puts the rental abatement for the tenant’s entire period of occupation of the supermarket at approximately $80,000 excluding GST.
[20] While the landlord denies that any abatement is necessary because the premises remained tenantable and fully utilised by the tenant, it says the dispute over the retrospective abatement (which has been referred to arbitration), does not relieve the tenant of its obligation to pay rent pending resolution of that issue.
Statutory demand principles
[21] The statutory demand principles were not in dispute with Mr Moss, counsel for the landlord, accepting Mrs Graham’s (counsel for the tenant) summary of the principles which I adopt.
[22] The legal principles concerning applications to set aside statutory demands are well known. The general approach by the Court of Appeal in AAI Limited v 92 Lichfield Street Ltd (in rec and liq) includes:1
As to s 290(4)(a)
(a)The applicant must show that there is arguably a genuine and substantial dispute as to the existence of the debt.
(b)The mere assertion that the dispute exists is not sufficient. Material short of proof is required to support the claim that the debt is disputed.
(c)If such material is available, the dispute should normally be resolved other than by means of proceedings in the Court’s Companies Act jurisdiction.
As to s 290(4)(b)
(d)Alternatively, an applicant must establish that any counterclaim, cross demand or set-off is reasonably arguable in all the circumstances.
…
[23] The discretion under s 290(4)(c) – whereby the court finds the demand ought to be set aside on other grounds – is a residual discretion which enables the court to do justice between the parties. As Tipping J indicated in Commissioner of Inland
1 AAI Limited v 92 Lichfield Street Ltd (rec and liq) [2015] NZCA 559, [2016] NZAR 1338 at [19].
Revenue v Chester Trustee Services Ltd, the exercise of the discretion comes down to the court’s judgment as to whether the creditor’s prima face entitlement to liquidate the company is outweighed by some factor making it plainly unjust for liquidation to occur.2
[24] An applicant must show the dispute it raises has substance that it is real and that it is not fanciful or insubstantial.3 The application operates within the summary jurisdiction, with strict time periods and accompanying disadvantages for applicants. If a substantial dispute is found to exist, it is not the court’s task to revoke it, as an application to set aside a demand is a summary hearing which “should not be converted into a full-blown trial”.4
The key issue
[25] The key issue in this case is whether the combined effect of the obligation to pay rent without any deduction or set-off and the fact that arbitration does not prevent the landlord from recovering rent (cl 44.3 of the leases) means that the tenant is obliged to pay the disputed rent pending the determination of its abatement claim. The tenant did not, but for the abatement claim, argue that the rent claimed in the statutory demand had not fallen due. The tenant did not purport to cancel the lease until after the rental period covered by the demand.
[26] I am satisfied that the tenant is obliged to pay the rental and I now set out those reasons.
Lease 2
[27] It will have been noted that the claim for abatement only relates to Lease 1, the supermarket. No claim for abatement is made in respect of Lease 2.
2 Commissioner of Inland Revenue v Chester Trustee Services Ltd [2003] 1 NZLR 395 (CA).
3 Lawyers and Conveyancers Act (Lawyers: conduct and Client Care) Rules 2008, r 2.3;
McWilliam Consulting Group Ltd v Keith Ussher Architecture Services Ltd [2012] NZHC 33.
4 3I Innovation Ltd v Black Magic Design Studio Ltd [2020] NZHC 1173; BC202061028; citing
AAI Ltd v 92 Lichfield Street Ltd, above n 1, at [22].
[28] The tenant says the value of its retrospective abatement claim in respect of Lease 1 is greater than the amount claimed in the statutory demand for Leases 1 and 2. Mrs Graham for the tenant accepts that in respect of Lease 2 the tenant is raising a counterclaim and she could not really resist Mr Moss’ submission that the no set-off clause was a barrier to the counterclaim being raised against the rent due under Lease 2. That was a realistic acknowledgment by Mrs Graham, given the effect of Browns Real Estate Ltd v Grand Lakes Properties Ltd.5
The abatement argument
[29] Mrs Graham’s argument was that before the no set-off provision in cl 1.1 of the leases apply, the correct level of rental has to be determined. The submission is the rent payable under the lease has to be determined in accordance with the lease provisions and it is that rent so determined that is payable without any deduction or set-off. Accordingly, the submission is the abatement issue comes first.
[30] I do not accept that argument. In seeking to raise a retrospective abatement, in my view, the true nature of the tenant’s claim is for a set-off. The tenant complains the landlord breached the obligation to promptly repair and as a result the tenant seeks to recover rent it now says was overpaid. If Mrs Graham’s argument was otherwise valid, in my view, it would only be valid to the extent that the monthly rental subject to the statutory demand should be abated.
[31] This is consistent with the approach taken by Associate Judge Gendall (as he then was) in Aladdins Motor Inn Ltd v Bowcorp Holdings Ltd.6 In Aladdins the tenant sought to retrospectively raise an abatement to resist a statutory demand issued for rent and other sums payable under the lease. There, the lease contained a covenant the rent would be paid “free of any deductions” but did not go on to provide the rent should be paid free of any set-off.7
5 Browns Real Estate Ltd v Grand Lakes Properties Ltd [2010] NZCA 425, (2010) 20 PRNZ 141.
6 Aladdins Motor Inn Ltd v Bowcorp Holdings Ltd HC Palmerston North CIV-2011-454-412, 16 December 2011.
7 At [4].
[32]In Aladdins, the arbitration clause provided:8
No reference to arbitration shall be deemed to suspend rental or other payments due under this lease and all payments otherwise due shall be made pending the result of such arbitration.
[33] Associate Judge Gendall considered that the above clause, by necessary implication, removed the right to set-off saying “Where matters are submitted to arbitration, payment of rent must continue. This significantly is not merely the lessor’s right to claim rent later.”9
[34] His Honour considered the above clause put the case into the category of a “pay now, argue later” as in Browns Real Estate Ltd. Accordingly, his Honour was treating the tenant’s wish to bring into account the historical abatement claim as amounting to a set-off. His Honour said:10
In those circumstances, I am satisfied that the applicant cannot claim an equitable set-off, cross claim or counterclaim here against rent or payments otherwise due under the lease pending the determination of the dispute by arbitration.
[35]His Honour’s approach was endorsed on appeal.11
[36] Accordingly, I am satisfied the tenant is not able to rely on the claim for historical retrospective abatement as an answer to the rent claimed in the statutory demand, as to do so amounts to the tenant claiming a set-off against rent which has fallen due. On this issue, Browns Real Estate Ltd stands squarely against the tenant.
[37] In respect of the rent subject to the statutory demand, the tenant’s argument would be that the monthly rent claimed should abate in respect of Lease 1 by whatever the appropriate monthly abatement figure would be. Such is not a claim to recover historical abatements not paid (a set-off), but rather a claim that the rental presently claimed by the landlord needs to abate to reflect the unrepaired earthquake damage.
8 At [5].
9 At [29]. Emphasis as per original judgment.
10 At [32].
11 Aladdins Motor Inn Ltd v Bowcorp Holdings Ltd [2012] NZCA 532.
[38] The tenant has not quantified the dollar amount by which the current monthly rental would abate, but adopts a figure of 7.4 per cent for the period outside the design of and completion of remedial work. Of the $8,625 due on Lease 1, 7.5 per cent is
$646.87.
[39] I am not satisfied that the fact a tenant claims an abatement against the current rent reduces the rent payable by the tenant in the face of clauses 1.1, 29.1 and 44.3. The scheme of the leases is that the payment of rent is an essential requirement. Rent is to be paid without any deduction. The tenant seeks a deduction by raising a disputed abatement. The landlord is not to be deprived of the benefit of the no deduction – no set-off clause, by the assertion of a right to an abatement, even if such is referred to arbitration. If Mrs Graham’s submissions were correct, the tenant’s claimed abatement would prevail until arbitration. I consider that proposition inconsistent with the scheme of the lease as a whole. I do not see any basis to treat a disputed abatement claim any different from any other disputed tenant claim.
[40] I have not overlooked Mrs Graham’s submission that when cl 44 refers to the landlord taking proceedings, a statutory demand is not a proceeding. I consider, however, the significance of cl 44.3 is that it confirms that an arbitration to resolve a disputed abatement does not impact on the tenant’s obligation to pay rent. Why should the situation be any different because the landlord has issued a statutory demand rather than entered into an arbitration?
[41] Those findings are sufficient to deal with the application to set aside the demand, but Mr Moss raised a further issue related to the history of renewals. Mr Moss submitted that when a lease contains an option to renew, the exercise of that option ordinarily involves the creation of a new lease.12
[42] With there having been a renewal in June 2012, only about nine months after the tenant took an assignment of the lease, Mr Moss submitted that any right to a retrospective abatement the tenant may have had, only applied to the period from the assignment in September 2011 to the renewal as at June 2012. That submission was
12 Referring to David Brown “Leases” in Elisabeth Toomey (ed) New Zealand Land Law (Thomson Reuters, Wellington, 2017) at 8.13.10.
based on the fact that the supermarket premises were not further damaged by earthquake or otherwise after the June 2012 renewal. This submission relies on the wording of cl 27.1. It is said the words “shall be damaged” means damaged after the commencement of the lease. I agree.
[43] The rental for a premises is determined by the state of the premises at the commencement of the lease, or otherwise by any commitments the landlord has made in respect of those premises.
[44] Mr Moss said any claim for retrospective abatement in respect of the period prior to June 2012 would be statute barred. Mrs Graham suggested the circumstances may mean that statements by the lessor would keep the tenant’s ability to claim the historical abatement alive, for the purposes of limitation, but if that is so, that emphasises that the claim for retrospective abatement is a claim the tenant has under previous contracts that existed for each term of lease that were replaced by new contracts upon each renewal. Such reinforces the view that I reached, that the tenant in seeking to bring into account the retrospective abatement is in reality, claiming a set-off.
[45] For completeness, I mention two authorities relied on by Mrs Graham. The first was Robt Jones Investments Ltd v R G Caie Ltd.13 In that case, the plaintiff/landlord sought summary judgment against a tenant and guarantors for rent. The tenant operated a storage and warehouse depot. A large roller door, which gave access to a storage in the warehouse, became jammed in a partly open position. The tenant immediately advised the landlord of the breakdown and required the landlord to fix the roller door. It took some months for the repairs to be carried out. The tenant said that because the premises had been made insecure by the damage to the roller door, approximately 50 per cent of the warehouse area was unavailable. The tenant sought an abatement for the period from the date of damage to the date of repair.
[46] The landlord had the benefit of a no set-off clause requiring the rent to be paid “without deduction or set-off of any kind”.14 The defendants sought a stay of the
13 Robt Jones Investments Ltd v R G Caie Ltd HC Wellington CP69588, 22 November 1988.
14 At 2.
summary judgment proceedings relying on an arbitration clause in the lease. The Judge decided the application for summary judgment by concluding there was no good reason why all issues between the parties should not be referred to arbitration including the abatement of rent.
[47] While I can understand why the tenant is relying on that case here, his Honour did not explain why the tenant was not entitled to the benefit of the no set-off clause. Given Browns Real Estate Ltd15 is binding on me and is clear authority for the pay first, argue later, the approach in Robt Jones appears to be a decision on its own facts.
[48] The second decision is Auckland Council v Cosdo Equity Ltd.16 In this case, the applicant Council sought relief against the proposed cancellation of its lease of commercial premises by Cosdo. The Council had stopped paying rental, claiming an abatement, while the landlord contended that it was entitled to cancel the lease for non-payment of the agreed rent. The court was exercising the jurisdiction under s 256 of the Property Law Act 2007 which gives the court the discretion to grant relief against cancellation or proposed cancellation subject to such conditions as it seeks fit. The issue before the court was whether the Council was entitled to the relief and if so, on what conditions.
[49] Duffy J in that case referred to the no set-off cases. Her Honour said that abating the rent is not the same as a set-off, which was prohibited by the lease. Her Honour said that if the right of abatement were to be treated as legally the same as a set-off, the abatement provision would be unworkable. The key point of distinction between the Cosdo decision and the present case is that in Cosdo, the Council had not paid the rent in question. Ultimately, relief against the proposed cancellation was granted on a condition that the abated rent would be paid into a trust account pending the outcome of arbitration.
[50] Because the abatement asserted by the Council in Cosdo was not retrospective, it did not fall fowl of the no set-off provision. Further, given the broad jurisdiction the court was exercising, her Honour did not need to determine the precise meaning of
15 Browns Real Estate Ltd v Grand Lakes Properties Ltd, above n 5.
16 Auckland Council v Cosdo Equity Ltd [2014] NZHC 1900.
the contractual provisions, rather her focus was on putting in place a commercial and practical way of protecting the parties pending arbitration.
Conclusion
[51]The application to set aside the statutory demand is declined.
[52] In respect of the amount claimed for Lease 2 (the store room), the amount claimed for that tenancy is payable by virtue of the no set-off clause – the only claim being raised being the historical abatement for Lease 1.
[53] In respect of Lease 1, the true nature of the historical abatement is a claim to a set-off. The tenant is seeking to recover amounts it says it overpaid and to set-off that amount is against the current rent. Abatement is not available in respect of any part of the rent subject to the statutory demand, as no damage has been caused to the premises during the current term of the lease, such as to trigger the abatement clause.
Costs
[54] Costs are reserved for memoranda if the parties cannot agree. Costs should follow the event.
[55] Landlord’s submissions on costs to be filed within 10 working days of the date of this judgment, if they cannot be agreed, being no more than four pages in length.
[56] The tenant’s response is to be filed within a further five working days, again no more than four pages in length.
Associate Judge Lester
Solicitors:
Cavell Leitch, Christchurch
Trollope & Co Lawyers, ChristchurchCopy to counsel:
J Moss, Barrister, Christchurch
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