Lawrence Riverside Limited v C P Holdings Limited HC Auckland CIV 2006-404-4739

[2010] NZHC 2230

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2006-404-4739

BETWEEN  LAWRENCE RIVERSIDE LIMITED First Plaintiff

ANDB R LAWRENCE AND B H LAWRENCE Second Plaintiffs

ANDC P HOLDINGS LIMITED First Defendant

ANDCAPITAL HOSPITALITY HOLDINGS LIMITED

Second Defendant

ANDB R LAWRENCE AND B H LAWRENCE Counterclaim Defendants

Hearing:         17 November 2010

Appearances: Mr G A Keene for Plaintiffs

Mr I Williams for Defendants

Judgment:      13 December 2010 at 4 p.m.

JUDGMENT OF ASSOCIATE JUDGE J P DOOGUE

This judgment was delivered by me on

13.12.10 at  4 pm, pursuant to

Rule 11.5  of the High Court Rules.

Registrar/Deputy Registrar

Date……………

Counsel:

Mr G A Keene, 45b Epsom Avenue, Auckland

Mr I Williams, 70 Shortland Street, Auckland

LAWRENCE RIVERSIDE LIMITED AND ANOR V C P HOLDINGS LIMITED AND ORS HC AK CIV-

2006-404-4739  13 December 2010

Background

[1]      These proceedings were commenced in 2006.  They relate to the first plaintiff leasing a Rotorua motel “Lakewood” for a five year period commencing February

2003.  Because the background has already been discussed on previous occasions in judgments by other Judges to which I will refer shortly, I propose to make only brief reference to the circumstances of the litigation.

[2]      The lease of the premises by the first plaintiff was a disaster for it and for the second plaintiffs who owned the first plaintiff.  Their misfortunes can be traced back to the fact that the plumbing in the motel building was defective and there were episodes of pipes bursting and flooding the accommodation areas with consequences on their income and on the goodwill of their business.  The defendant proprietors and lessors of the motel, while initially not accepting any responsibility for the defects but at the same time insisting on receiving the rent owed under the lease, have since accepted that there were breaches of the lease because of the plumbing defects.

[3]      Notwithstanding the admittedly unsatisfactory state of the premises which the plaintiffs have brought to the attention of the defendants, the defendants claimed in March 2005 to be entitled to an increase in the rent for the motel and they invoked the rent review process.   The second plaintiffs, because of apparent naivity about business and legal matters, failed to take any steps to oppose an increase in the rental and the matter proceeded by default.   As a result the rent rose from $150,000 per annum to $194,750 — an increase of approximately 30 per cent.  The first plaintiff paid rent for a period at the increased rate.  Belatedly, they obtained legal advice and consideration was given to trying to revoke the arbitrator’s determination that an increased rent should be paid, but this was in vain.  By August 2005 the first plaintiff was unable to meet monthly rental payments.  In August 2006 it applied to the High Court for an injunction to prevent the first defendant re-entering and terminating for non-payment of rent.  The injunction was granted and one of the conditions was that the plaintiff pay reduced rent of $9,000 per month.

[4]     Unfortunately, the plaintiffs have not successfully managed their legal proceedings.  There have been two trial dates scheduled, both of which have had to be vacated.  The proceeding is now listed for a trial in November 2011 which will be some six years on from when these events occurred.   Mr Keene for the plaintiffs attributed this largely to a lack of means on the part of the plaintiffs, and difficulties in getting legal aid.

[5]      To return to the narrative, the injunction was discharged in February 2008 because it was clear that there was no prospect of the plaintiffs being able to stay in possession of the motel and run it as a viable business.  They vacated the premises on 8 March 2008.  The plaintiffs also sought leave from Venning J to amend their pleadings but that was declined.  The proceedings were initially set down for trial for

29 October 2007 and under the default arrangements contained in the High Court rules the setting down date was 40 working days prior to that date, with the result that the proceedings have been set down since approximately August or September of 2007.   Therefore any amendments to the proceedings require the leave of the Court.   In January 2010, however, the plaintiffs surprisingly sought to file an amended   proceeding   without   leave   of   the   Court,   notwithstanding   that   the proceedings had been set down in 2007 and that Venning J had expressly disallowed leave to amend in February 2008.

[6]      The amended pleading was filed not long before the trial was scheduled for its second fixture in April 2010.   An urgent hearing took place before Wylie J to determine whether on this second occasion the plaintiffs should be granted leave to amend their proceedings and the Judge declined to make the orders sought.   In September of this year the latest application to amend the pleadings was filed which had annexed to it a draft amended statement of defence.  Since that application was filed, still further changes have been proposed, which the plaintiffs’ counsel outlined in the synopsis of argument that he filed for the hearing before me.

[7]      In the draft amended statement of defence four affirmative defences were raised as follows:

a)       The plaintiffs pleaded a breach of contract in that the defendants, when invoking the rent review mechanism under clause 2.1 of the second schedule to the lease, specified a figure for the new rent that could not have been considered by the landlord to be the current market rent as at the review date.

b)The plaintiffs alleged an estoppel by representation.  This was based upon  the  defendants  sending  a  valuation  report  from  a  registered valuer to the plaintiffs, which is said to have contained a number of representations including that the figure contained in the registered valuers report was a reasonable assessment of the current market rent for the property (when in fact it was not), and the further implied representation that the valuer in coming to his figure had duly taken into account the defects in the premises, namely the defective water services and piping.

c)       The plaintiffs alleged a general estoppel by representation based on unconscionability having regard to all the circumstances (namely, the false representations and the actual or constructive knowledge of the first defendant that the proposed rent was manifestly above the current market rent).

d)The plaintiffs alleged an implied term that a rent review could not increase the rent “grossly and manifestly above the current market rent”.

[8]      In the course of preparing his submissions, counsel for the plaintiffs advised that he would seek further amendments:

a)       Advancing a defence that the defendants, in extracting a rent increase while they were seriously in breach of their obligations to replace the defective pipes, were acting in contravention of an asserted principle that a party cannot take advantage of its own wrong.

b)That the first defendant’s actions, in attempting to “increase the rent excessively”  through  the  rent  review  mechanism,  amounted  to  a breach of an implied term of good faith.

c)       That the rent increase of March 2005 should be disallowed to avoid the defendants being unjustly enriched.

[9]      The defendants oppose the making of the orders on grounds which I will deal with later, including that the plaintiffs have already unsuccessfully sought leave to make amendments of substantially the kind which they now raise again.

[10]     To  conclude  this  brief  statement  of  background  it  is  necessary  to  make reference to the rent review clause contained in the lease which the parties signed and which commenced on 10 September 1999.  The rent review provision provided as follows:

2.1      THE annual rent may be reviewed by the Landlord as follows:

(a)       The Landlord shall commence a review by not earlier than  three (3) months prior to a review date or at any time up to the next following review date giving written notice to the Tenant specifying the annual rent considered by the Landlord to be the current market rent as at that review date.

(b)If, by written notice to the Landlord within twenty eight (28)  days after receipt of the Landlord’s notice, the tenant disputes that the proposed new annual rent is the current market rent then the new rent shall be determined in accordance with clause 2.2. BUT the new rent shall not be less than the annual rent payable during the period of twelve (12) months immediately preceding the relevant review date.

(c)If the tenant fails to give such notice (time being of the  essence) the Tenant shall be deemed to have accepted the annual rent specified in the Landlord’s notice.

Principles governing the exercise of the discretion to permit an amendment to the pleadings

[11]     There  is  no  dispute  that  because  the  proceeding  has  been  set  down  for hearing, the plaintiffs require leave before amending their statement of defence to counter-claim:  r 7.18(2) of the High Court Rules.  In determining the application to

amend the plaintiffs’ pleadings, I intend to be guided by the decision of Fisher J in Fordham v Xcentrex Communications Ltd[1] which decided that the ultimate object is to exercise the discretion in a way that will achieve justice, although there first must be some material on which the Court can exercise its discretion in favour of the applicant.  The Court can then consider whether the delay in applying to amend has been reasonably caused, whether a substantial ground of defence had been disclosed,

and whether the plaintiffs would suffer irreparable injury if the judgment were to be set aside. In the end, however, it is the justice of the case tailored to the particular circumstances which must prevail.[2]

[1] Fordham v Xcentrex Communications Ltd (1996) 9 PRNZ 682 (HC). 

[2] At 685.

[12]     Venning  J  adopted  the  Fordham  approach  when  deciding  an  earlier application in this proceeding[3] - He said:

Although the fixture for October 2007 was vacated the case remains set down awaiting hearing. As the case is set down leave is required for the plaintiff to amend the pleadings and to join Mr and Mrs Lawrence as plaintiffs: r 438AA. The Court has a discretion whether to grant leave or not. The object of the exercise of the discretion is to achieve the interests of justice. The onus is on the applicant. The Court must consider whether a substantial ground for claim has been made out: Fordham v Xcentrex Communications Ltd (1996) 9 PRNZ 682.

[3] HC Auckland CIV-2006-404-004739, 8 February 2008 at [21] per Venning J.

[13]     I intend to adopt what Venning J said in his judgment.

[14]     There is a further hurdle that the plaintiffs must clear if they are to have leave to amend the statement of defence and statement of defence again.   Rule 7.52 provides:

7.52     Limitation as to second interlocutory application

(1)A party who fails on an interlocutory application must not apply again for the    same or a similar order without first obtaining the leave of a Judge.

(2)       A Judge may grant leave only in special circumstances.

[15]     The learned authors of Sim’s Court Practice[4] in their commentary to the rule say:

This rule gives the court a residual discretion to allow a second application where a first has failed from a substantial defect in the evidence.

[4] Sim’s Court Practice (online looseleaf ed, LexisNexis) at [HCR7.52.1].

[16]     The  above  extract  would  appear  to  provide  an  example  of  the  type  of situation which the rule is designed to cover.   But it is not restricted only to the circumstances which the commentary instances.[5]

[5] See for example Hargreaves v Radio Network Ltd HC Christchurch CIV-2002-409-725, 16 March

2010 at [49], where Chisholm J considered that the desirability of reconsidering an interlocutory issue in light of a new precedent that was not available at the time of the first application would have constituted “special circumstances” in terms of r 7.52.

[17]     In  my  view  the  policy  of  the  rule  is  based  upon  an  analogy  with  the requirement for finality in litigation.  That doctrine does not strictly apply because the parties are not bound by an issue estoppel any previous order declining to permit amendment would be interlocutory in nature.    It would also seem to be directed towards the need for the issues in a case to be settled promptly as part of the case management objective of defining the issues for the purposes of trial or to foster settlement.  As well it reflects the need for the Court to control its processes so that the Court’s resources are not taken up with unnecessarily duplicated interlocutory applications.  If firm control is not maintained, repetitive applications will result in unnecessary cost and delay to other parties to the proceedings.  To that end, the rules do not prohibit outright the making of a second application concerning the same subject matter, but instead subject it to the requirement for Court consent.

[18]   I would expect that the rule would be applied where, because of an understandable mistake, a particular aspect of an order was not sought or a ground which might support the making of the order was overlooked.  I do not consider that, in general terms, it is designed to give a party a “second bite of the cherry”.

[19]     The wording of the rule would not seem to restrict its application to any particular circumstances in which it is necessary for a second application to be made. But the scope of the rule is not unlimited.  For example, while it might not literally be ruled out by the words of the rule, it would be difficult for an application to succeed where the essential ground is that counsel who was in possession of the facts when the first application was made has since come up with a further legal argument in support of the application that had only occurred to him or her since.  Reduced to

its essentials, that is the ground here.  I agree with the statement in Civil Procedure: District Courts and Tribunals that:[6]

This rule is not intended to provide a disgruntled applicant with a second opportunity to argue an unsuccessful application: Kiwi Co-Operative Dairies Ltd v Capital Dairy Products Ltd (1989) 1 PRNZ 622 at 627–628.

[6] Civil Procedure: District Courts and Tribunals (online looseleaf ed, Brookers) at [HC7.52.01]. 

[20]     The second aspect of rule 7.52 which has relevance here is the need for there to be “special grounds” present before a Judge can make an order.  I agree with the following passage from Civil Procedure: District Courts and Tribunals:

“Special circumstances”, therefore, are something abnormal, uncommon or out of the ordinary (but not, necessarily, extraordinary or unique): Kidd v van Heeren (1997) 11 PRNZ 422 (CA) at 424.

[21]     With that preliminary discussion I turn to the individual orders sought.   In each case the plaintiffs seek orders allowing them to amend their pleadings.

First proposed amendment to statement of defence — Landlord proposing a rent increase that the landlord could not have genuinely believed or considered was in line with market rent

[22]     The starting point in considering this proposed amendment is the wording of the rent review clause in the third edition of the standard commercial lease, which was adopted in this case. Mr Keene referred to a passage from a 2003 Law Society Seminar where it was stated:[7]

The   third   edition   [of   the   Auckland   District   Law   Society   Standard Commercial Lease] requires the landlord to specify the rent “considered by the landlord”, to be “the current market rent” as at the review date.  This may open the way for a challenge if the landlord specifies a rent that bears no relationship to a current market rent, particularly where these words are taken in conjunction with the potential for an obligation of good faith to be implied on the part of the landlord as set out below.

[7] New Zealand Law Society Seminar: Commercial Leases (2003) at 49.

[23]     As I understand it, the plaintiffs argue that the contract requires that if the lessor does not put forward a rent figure which he honestly believes approximates the market rent, then it will be open to the lessee to disregard any change to the rent that may be determined in the rent review process that the lessor invokes.

[24]     Mr Keene resisted the suggestion that arriving at such a meaning depended upon the Court reading into the contract an implied term.  I cannot agree.  The very quotation  that  he  relied  upon  from  the  law  society  seminar  recognised  that  an implied term of good faith was required.

[25]     The implied term that is argued for here is based upon the submission from

Mr Keene that:[8]

[I]t is fundamental to rent review clauses of the kind in the lease that the purpose of the rent review is to enable a landlord to keep pace with inflation and other market forces, so that the rental for a property keeps in touch with the market.   Counsel submits that it is implicit in the wording of the rent review clauses that any rent increase, whether  or not the tenant  objects within the required time, must be reasonably in line with the market, such that any increase that lifts the rent to a level grossly and manifestly above the market, is in conflict with the purpose of the rent review propositions.

[8] At para 4.17 of his submissions.

[26]     A  pleading  of  this  kind  has  already been  considered  by  Wylie  J  in  his judgment[9] and, in the end, was rejected by him when he said:[10]

In regard to the third to fifth affirmative defences, as Venning J noted in his judgment  of  8 February  2008  at [27]–[29],  there  can  be  no  basis  or requirement for the implication of the terms which the first plaintiff seeks to introduce. They are directly contrary to the express provisions of the lease, and their implication would create considerable commercial uncertainty. The lease is straightforward and it is a standard commercial document. The affirmative defences are in effect the same issues as were considered by Venning J in February 2008. In my view, the defendants are seeking to re- visit Venning J’s judgment, and notwithstanding that they initially appealed that judgment and then failed to prosecute that appeal.

[9] HC Auckland CIV-2006-404-004739, 15 February 2010 at [37](c) and (e) per Wylie J.

[10] At [39](d).

[27]     I, too, am of the view that the interpretation of the rent review clause which the plaintiffs contend for is not necessary to give business efficacy to the lease agreement.   A lessee who receives a notice from the lessor of a proposed rental increase is faced with a choice.  The lessee can either do nothing, negotiate with the lessor for a different figure or allow the arbitration process to run its course (with the lessee contesting the figure that the lessor seeks before the arbitrator or simply leaving matters to the arbitrator to determine).  A consideration of the rent review process does not provide any basis for imposing a requirement that one of the two

parties who have formed an arm’s length contractual relationship should be entitled to expect that the other party will be mindful of his interests and protect him from excessive rent demands.

[28]     Mr Ian Williams for the defendants submitted that there was persuasive authority disallowing the implication of the very type of term which the plaintiffs proposed to plead.   He referred to Amalgamated Estates Ltd v Joystretch Manufacturing Ltd.[11]     In that case Templeman LJ held as follows, addressing an identical argument to that now addressed:[12]

The first point made by Mr de la Piquerie for the tenant is that there must be an implied term that the landlord will only specify a bona fide and genuine pre-estimate of the open market rental value. That appears to me to be an unnecessary and unworkable proposition. If a landlord puts forward a preposterous figure for rent, the tenant can always serve a counternotice. It would be ludicrous if the court were obliged to decide whether the landlord’s figure was a bona fide and genuine pre-estimate in order to decide whether the landlord’s request for an increased rent was valid or wholly void. The court does not exist to punish a landlord for being greedy, especially as the definition of “greed” varies from Shylock to Portia and from landlord to tenant.

[11] Amalgamated Estates Ltd v Joystretch Manufacturing Ltd (1981) EGDC 84.

[12] At 92.

[29]     In that same case Lawton LJ held against the implication of a term such as this for policy reasons, observing:[13]

… disputes would inevitably follow as to what was a bona fide and genuine pre-estimate of the rent. There would be no certainty at all and the lease must have intended the procedure in the proviso to deal with such uncertainties as there were.

[13] At 89.

[30]     I respectfully adopt the foregoing reasoning.  I am persuaded that the chances that the Court would adopt such an implied term are negligible.   The proposed amendments to the pleadings would not introduce matters of substance.

[31]     A further reason why leave should not be granted is that substantially similar amendments have already previously been sought.   As well as putting similar arguments to Wylie J, substantially the same matters were addressed to Venning J who noted:

[26]      The difficulty with the proposed pleading is that it is contrary to the express terms of the contract and established law.  A term will only be implied to a contract where it is necessary for business efficacy or the other criteria set out in Devonport Borough Council v Robbins [1979] 1 NZLR 1 (CA) or it is necessary for the construction of a contract: Vickery v Waitaki International Ltd [1992] 2 NZLR 58.

[27]There are express and detailed provisions of the lease agreement providing for the machinery to fix a rent increase. The lessee has rights under those provisions to object to a proposed increase. If the lessee fails to do so then the proposed rent becomes the contractual rent. There is nothing left to arbitrate or negotiate about. The effect of  Mr Keene’s  submission  on  behalf  of  the  plaintiff  for  the amendment is that a tenant could ignore the express provisions of the lease, not engage in the process provided for by the lease and then years later seek to vary the rental increase (subject to waiver) on the grounds  that  it  was  above  the  market  rent  because  it  was  not supported   by   a   reasonable   valuation.   There   is   no   basis   or requirement for the implication of such terms which are directly contrary to the express provisions of the lease. They would only create uncertainty.

[28]The parties expressly set out the procedure to increase the rent in the lease. That was the bargain they made. It is not possible to imply a term  that  would  effectively  negate  those  express  terms: Commissioner of Inland Revenue v Mitsubishi Motors New Zealand Ltd [1994] 2 NZLR 392, 398. It is not necessary to imply the terms for business efficacy or to enable the construction or application of the contract. Nor can there be any obligation on the landlord to advise the tenant of the tenant’s rights under the lease. The lease is a document both landlord and tenant are party to.

[32]     Wylie J summarised the proposed pleading before him in the following way:

a)That the first defendant, and their valuer, represented that their assessment of the increased market rental payable in respect of the motel property was “a fair market rent”, and that this representation induced the first plaintiff to abandon its right to object to the rent increase.

…

c)        That there was an implied term in the lease that any increase in rental      that resulted in the new rental being substantially above a fair  market  rental  would  be  invalid  whether  or  not  the  tenants objected to the same.

[33]     I consider that the amendment that is now sought is also caught by r 7.52 in that it is an application for “the same or a similar order” and that leave is therefore required.

[34]     In the light of that conclusion it is necessary to consider whether the Court should grant leave.  That in turn requires an enquiry as to whether there are “special circumstances” which justify the making of such an order.

[35]     The only ground that Mr Keene was able to rely upon to explain why the present application was not made to Wylie J when he heard applications to amend the statement of defence was that the earlier application was made under pressure of time.  For instance, on 10 February 2010 Wylie J directed that the application under r

7.13(5) was to be filed by 5 pm that night.

[36]     However, the real difficulty was not in framing the terms of the amendment. That had already been done by 28 January 2010 when the plaintiffs had filed a draft amended statement of defence.  Even that does not give the full picture because it cannot be overlooked that these proceedings started in 2006.  By the time the draft second amended statement of defence was filed, between three and four years had gone by.  Mr Keene placed considerable stress on the fact that the defendants had experienced obstacles in retaining counsel because of their inpecuniosity.   They eventually made an application for legal aid but that process was not straightforward either.  Nonetheless, by the time the draft amended statement of defence was filed, more than adequate time had gone by for counsel to consider the issues and frame the defence.  The fact that the Lawrences were in receipt of legal aid does not seem to me to constitute a special reason why their counsel should be given a second opportunity to re-couch the allegation concerning the restrictions that the lessor was subject to arising out of the wording of the rent review process.   The evidence overall suggests that counsel’s thinking as to what the best way to express the intended defence has evolved and altered and that the second defendants want to have an opportunity to now re-present the defence which has been brought as a result of their counsel’s reconsideration.

[37]   The case is one where the Court is asked to grant leave to amend notwithstanding the fact that the proceedings have been set down as long ago as late

2007.   I do not consider it would be a proper exercise of the discretion under r 7.52 to grant leave.

[38]     Mr Keene submitted that because the matter will not come to trial until November of next year no harm could be done by permitting the plaintiffs to make the amendments which are sought.  His focus was on the distance out to trial.  But I do not consider that that is the only aspect of the matter that needs to be considered.

[39]     The advantages in having the pleadings in a case settled at an early stage include the benefit that finalising the pleadings allows the true issues to emerge between the parties.   This in turn enables them to focus on settlement.   Further changes to the pleadings at this late stage can only defer the point where the defendants’ advisers will be able to provide them with the required assessment of the merits of the plaintiffs’ claims.   Settlement of these long outstanding proceedings must be viewed as a stronger imperative in this case than run of the mill cases for the reason that the events go back some five years (and it will be six years by the time the trial is reached).  The defendants have been required to get ready for trial on two occasions only to have the trials adjourned at the instance of the plaintiffs.  Fairness in this matter is not confined to a consideration of the interests of the plaintiffs.  The position of the defendants must also be considered.   I decline to allow the first amendment.

Second and third proposed amendments — Estoppel by representation

[40]     The plaintiffs assert that an estoppel by representation occured at the time of the rent review process. Mr Keene submitted[14]  that, by words and/or conduct, the defendants clearly and unambiguously represented:

[14] At paragraph 4.8 of his written submissions.

(a)that  it  had  appointed  a  competent  valuer  to  prepare  a  valuation report,

(b)that the valuer had been properly briefed as to: (i)  the existence of a serious pipe defect,

(ii)      that significant flood damage had resulted,

(iii)     that there was a dispute between landlord and tenant as to who was responsible to repair the defective pipes,

(iv)      that in the absence of any plans to rectify the pipe defect, pipe   failures were likely to continue with at times serious flooding.

(c)       that the resulting valuation report was a competently and accurately prepared report which indicated the true current market value of the property, taking proper account of the current condition of the property etc.

[41]     The first matter that I consider in terms of the Fordham authority is whether the proposed pleading discloses a substantial ground of defence.

[42]     In Halsbury’s Laws of England,[15] the principle is described in the following terms:

[15] Halsbury’s Laws of England (4th ed, reissue, 2003) vol 16(2) Estoppel at [951] (footnotes omitted).

951.     Meaning of ‘estoppel’.

‘Estoppel’ has been described as a principle of justice and of equity which prevents a person who has led another to believe in a particular state of affairs from going back on the words or conduct which led to that belief when it would be unjust or inequitable (unconscionable) for him to do so. The  person  making  the  statement,  promise  or  assurance  is  said  to  be estopped from denying or going back on it; ‘estopped’ means ‘stopped’.

[43]     In a succeeding paragraph it is said:

957.     Common law estoppel by representation.

Where a person has by words or conduct made to another a clear and unequivocal representation of fact, either with knowledge of its falsehood or with the intention that it should be acted upon, or has so conducted himself that another would, as a reasonable person, understand that a certain representation of fact was intended to be acted upon, and the other person has acted upon such representation and thereby altered his position, an estoppel arises against the party who made the representation, and he is not allowed to aver that the fact is otherwise than he represented it to be.

[44]     Of course the plaintiffs do not have to establish in regard to their present application that it is certain that the defence of estoppel is or will succeed at trial. They have to show that the defence is one of substance and not just an academic possibility.  I do not consider that, even viewed in that light, the proposed defence is one of substance.  It does not raise a genuine issue between the parties.  I am able to make that comment because whether or not the defence exists does not require the

Court to make findings of fact. The defence is based upon the wording of clause 2.1 which I set out at [10]. Whether or not the defence is arguable depends upon whether the insertion into the party’s lease of clause 2.1 amounted to a clear or unequivocal representation of fact.

[45]     Where the parties have reduced their contract to writing their intention is to be ascertained by applying the usual contractual canons of construction.  The Court will not permit that party to depart from the contractual meaning by invoking the doctrine of estoppel by representation.  A consequence of permitting such a practice would be that a party to a contract could outflank an interpretation that he/she regarded  as  undesirable  by  submitting  that  the  contractual  language  should  be viewed  as  a  series  of  representations  on  which  to  found  a  remedy based  upon estoppel.   Such an approach would violate the requirement of developing the law in a coherent way as a whole.

[46]   I therefore conclude that the supposed defence resting on estoppel by representation is not a viable one and the Court ought not to grant leave to amend the proceedings to add it to the range of defences which the plaintiffs plead in answer to the counter-claim.

Fourth proposed amendment — Implied term implicit in wording of rent review clauses

[47]     The basis upon which Mr Keene submitted that an implied term could be added into the contract has been quoted above at [25] and is repeated here:

4.17Counsel submits that it is fundamental to the rent review clauses in the lease that the purpose of the rent review is to enable a landlord to keep pace with inflation and other market forces, so that the rental for a property keeps in touch with the market.  Counsel submits that it is implicit in the wording of the rent review clauses that any rent increase, whether or not the tenant objects within the required time, must be reasonably in line with the market, such that any increase that lifts the rent to a level grossly and manifestly above the market, is in conflict with the purpose of the rent review provisions.

[48]     A  pleading  of  this  kind  has  already  been  rejected  by  Wylie  J  in  his judgment[16] and I have already referred to the passage from Venning J at [31] of my judgment which applies equally in this circumstance.  I consider that there is no basis or requirement for the implication of such a term.

[16] At [39](f).

[49]     I decline to allow this amendment.

Fifth proposed amendment — Lease contained implied term of good faith

[50]     Under this heading, the plaintiffs revisit the valuation report obtained for the rent review and the failure (as the plaintiffs see it) of the report to refer to problems with the water pipes and the resulting damage.  It is said that the market rent was proposed by the first defendant which “the first defendant must have known having regard to all the circumstances, that [it] was grossly and manifestly above an appropriate level of rent for the premises”.

[51]     I consider that on the state of authorities in New Zealand the position is as described in Burrows, Finn and Todd:[17]

There has, however, been resistance to implying an obligation of good faith into contracts generally, particularly commercial contracts where the parties have  spelt  out  their  obligations  in  detail,  and  where  a  “good  faith” requirement would not sit comfortably with those detailed express terms. Some also believe that the very concept of “good faith” is too uncertain to be useful.

[17] Burrows, Finn and Todd Law of Contract in New Zealand (3rd ed, LexisNexis, Wellington, 2007) at 178.

[52]     The learned authors go on to recognise the arguments that can be advanced in support of a “good faith” implied term.  However, on the state of authorities, it is unlikely that  the  Court  would  be  prepared  to  imply such  a  term  into  contracts generally; implication of such terms is limited to relational contracts.  So far as I am aware, no such term has been applied in the case of a detailed commercial lease of the kind under consideration in this case.

[53]     My conclusion therefore is that the proposed defence is not one of substance for which leave ought to be granted under r 7.18.  Further, the essence of the defence

has been considered in earlier applications and I do not consider that any grounds exist for special leave to be granted for the filing of the amended pleading.   I decline to permit the amendment.

Sixth proposed amendment — Party to a contract cannot take advantage of his own wrong

[54]     The  argument  for  the  plaintiffs  is  that  the  lessor  was  in  breach  of  its contractual obligation to replace the defective water pipes and to reinstate the flood damage that had been caused by the defective water pipes.  The lessor, it is said, was “wrong” not to remedy the problem.  It was wrong to allow a situation where there were no plans made of any kind to remedy the problem and until the problem was remedied, the rental value of the premises were affected substantially.  The expert evidence is that in its unrepaired state, a market rental for the premises was in the vicinity of $132,000.  It is then said:

For a landlord to be entitled to receive a rental of $194,750 per annum in such circumstances, is fundamentally abhorrent to any sense of justice.

[55]     The principle upon which the plaintiffs seek to rely was explained in Cheall v Association of Professional Executive Clerical and Computer Staff[18]  where in his speech, Lord Diplock, after referring to the New Zealand Shipping case,[19] said:[20]

In the course of the speeches, which are not entirely consistent with one another, reference was made by all their Lordships to the well known rule of construction that, except in the unlikely case that the contract contains clear express provisions to the contrary, it is to be presumed that it was not the intention of the parties that either party should be entitled to rely upon his own breaches of his primary obligations as bringing the contract to an end, i.e. as terminating any further primary obligations on his part then remaining unperformed. This rule of construction, which is paralleled by the rule of law that a contracting party cannot rely upon an event brought about by his own breach of contract as having terminated a contract by frustration, is often expressed in broad language as: “A man cannot be permitted to take advantage of his own wrong.” But this may be misleading if it is adopted without defining the breach of duty to which the pejorative word “wrong” is intended to refer and the person to whom the duty is owed.

[18] Cheall v Association of Professional Executive Clerical and Computer Staff [1983] 2 AC 180.

[19] New Zealand Shipping Co v Societe des Ateliers et Chantiers de France [1919] AC 1.

[20] At 188–189

[56]     I am not  persuaded  that the principle has  any application in  the present circumstances.  The plaintiffs seek to prevent the defendants claiming what they are

entitled to under the contract.   As  I understand it, the position here is that the defendant is seeking to recover rent to which it is undoubtedly entitled — at least up until  the  point  where  any  cancellation  of  contract  occurred.    But  equally,  the plaintiffs are entitled to obtain vindication of their contractual rights — which in the circumstances take the form of a claim for damages for breach of contract on the part of the defendants for not maintaining the premises.   It may be that the plaintiffs would have the right to set-off their damages against any debt that they owed to the defendants in respect of unpaid rent.  But by claiming the unpaid rent it could not be said that the defendants are taking advantage of their own wrong.  If anything, they are seeking to recover what they are entitled to under that contract, notwithstanding that they may be in breach of some aspects of it.  It is true that there are certain types of contractual obligation where performance of the obligations on each side is interdependent with or concurrent with performance of obligations owed by the other party so that, in general terms, a party who was in breach cannot compel the other

party to the contract to perform.[21]   But in the case of the present lease, the defendants

are no more prevented from suing because they were in breach than the plaintiffs are from cross-claiming for breaches committed when they themselves, the plaintiffs, were in breach of their obligation to pay rent.

[21] Bahramitash v Kumar [2006] 1 NZLR 577 (SC) at [16].

[57]     My conclusion is that the proposed pleading does not have any application to the circumstances of this case and therefore there is no proper foundation for it to be sustained if any amendment to the pleadings was granted.

Seventh proposed amendment — Unjust enrichment

[58]     The  plaintiffs  also  wish  to  advance  a  defence  of  unjust  enrichment  in response to the claim for rent, which is brought by way of counter-claim.

[59]     Unjust  enrichment  occurs  in  circumstances  where  a  breach  of  some obligation owed to the claimant has occurred, which has resulted in the other party becoming unjustly enriched.   It has not been spelt out what obligation owed to the plaintiffs has been breached by the defendants.   I understand that the objective of pleading an unjust enrichment is to recover the increased rental payments which

resulted from the rent review process.  But if the lessor had a contractual entitlement to put the rent review process in motion, and if the plaintiffs are unable to attack any aspect of the steps leading to the fixing of a higher rent as being a breach of contract, then there has been no breach of duty to justify a conclusion that there had been an unjust enrichment calling for some restitutionary remedy.    The respective entitlements of the parties can and will be decided in the context of their contract.  If the plaintiffs can demonstrate that the defendants had no contractual right to the increased rent, then that provides them with a complete answer to the defendants’ claim.   What they cannot do is to attempt to outflank the result of applying the contract that the parties entered into by invoking concepts such as unjust enrichment. There is no other possible basis for unjust enrichment that I am aware of.

[60]     My conclusion, therefore, is that the plaintiffs are unable to demonstrate that this cause of action has any realistic prospects of succeeding and in those circumstances it would be wrong to exercise the discretion to grant leave to the plaintiffs to amend their statement of defence.

Eighth proposed amendment — Default interest

[61]     The plaintiffs seek leave to introduce a further defence to the effect that they are not liable for default interest or any interest on the unpaid rent.  The form of the pleading gives as the ground for this defence that the Court should conclude that it would not be “just and equitable” for the Court to allow a claim for interest.  But in the section particularising the defence, it is stated that the reason for the claim is that the plaintiff itself was in breach of its obligations under the contract to maintain the premises in a proper condition and that the breach of that agreement and the resulting damage and destruction to business as a result of the burst water pipes caused loss to the defendants.  There is a further reference made to the fact that if any interest is to be charged to the account of the plaintiffs it should be pursuant to the Judicature Act

1908.

[62]     I now examine whether the defence pleaded raises matters of substance.  In the first place, the parties have agreed that interest is payable under their contract and

that provision is enforceable just as any other contractual provision is.   The contractual rights are not abrogated by the fact that proceedings have been commenced and the commencement of litigation does not displace the contractual entitlement in any way.

[63]     The next point is that it would seem to be likely that the lessees have a right to set-off against rent damages owed arising from a cross-claim of the kind described in Grant v NZMC Ltd[22]  by way of equitable set-off.   If the set-off proved to be available, reducing the amount of the rent payable, calculations would be required to work  out  whether  and  to  what  extent,  after  allowing  for  such  reductions,  the plaintiffs were late in paying their  rent  and therefore liable for default  interest. Whether the lessee in this case can avail itself of a right of set-off must be considered in the light of any relevant contractual provisions.  Clause 1.1 of the second schedule

of the lease which governs tenants’ payments states:

All rent  shall  be  paid  without any deductions  by direct payment  to the

Landlord or as the Landlord may direct.

[22] Grant v NZMC Ltd [1989] 1 NZLR 8 (CA).

[64]     It has been held the right to set-off may be excluded by clear words, but it has been also held that a covenant to pay rent “without any deduction” is not sufficiently clear to have this effect.[23]    I therefore conclude that there is a viable argument available to the lessee that it can set-off against the rent damages for breach by the lessor of its obligations to maintain the property.  The exact effect that allowing such a set-off would have on the calculation of interest on unpaid rent is not a matter that

needs to be explored further in this judgment.  But there is a defence of substance available to the lessee under this head.  Therefore whether or not the plaintiff should be entitled to amend their defence to include defences available against the payment of contractual interest will be decided on other discretionary considerations.

[23] Connaught Restaurants Ltd v Indoor Leisure Ltd [1994] 1 WLR 501 (ECA) at 509–511.

[65]     I consider that leave should be granted for the plaintiffs to argue the question of default interest.   It is correct that to grant such relief will raise a new issue of whether the plaintiffs are entitled to claim an equitable set-off as a defence to the claim for unpaid rent.  But the defendants have admitted the breach of contract upon

which the defence would be based in that they accept responsibility for the loss and damage ensuing from the failure of the water services in the motel building.   It is true that some complex calculations may need to be undertaken in order to analyse which party was indebted to the other, and to what extent, at different points throughout the time when the plaintiffs were in possession of the motel.   But identifying the components of the loss suffered by the plaintiffs would seem necessarily to involve a month-by-month-type calculation in any event.  It would not seem that the grant of leave to amend will make any great difference in that regard. In any case, while the amendment is sought at an egregiously late point in the proceedings, it does raise matters of substance and there is time for the parties to prepare this aspect of the case before trial.  I appreciate that granting the amendment will mean that the damages figures will have to be considered yet again by the defendants, their counsel and advisers with additional cost being incurred.  It is a pity that the plaintiffs did not concentrate on this essential issue much earlier instead of putting effort into trying to find additional but unconvincing heads of claim.   I therefore  grant  leave  for  the  plaintiffs  to  file an  amended  statement  of  defence incorporating this issue.

Summary

[66]     In conclusion, I refuse to grant the plaintiffs leave to amend their statement of defence in relation to their first through to their seventh proposed amendments.  In relation to their eighth proposed amendment, I grant the plaintiffs leave to file an amended statement of defence incorporating paragraph 34 of the draft amended

statement of defence.

J.P. Doogue

Associate Judge