Lee v AIL Investments Limited

[2017] NZHC 661

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2016-404-2952 [2017] NZHC 661

IN THE MATTER

of an appeal under s 72 of the District

Courts Act 1947 against a judgment of the
District Court

BETWEEN

GRAEME LANSLEY LEE AND ANDREW MALCOLM KERSLAKE Appellants

AND

AIL INVESTMENTS LIMITED Respondent

Hearing:	6 April 2017
Appearances:	N Campbell QC and J C Adams for Appellants N A Farrands for Respondent
Judgment:	10 April 2017

JUDGMENT OF LANG J

[on appeal against a decision of the District Court]

This judgment was delivered by me on 10 April 2017 at 3.30 pm, pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Date……………

LEE AND KERSLAKE v AIL INVESTMENTS LIMITED [2017] NZHC 661 [10 April 2017]

[1]      This appeal relates to a lease of business premises situated in Mt Wellington, Auckland (the premises).  The respondent, AIL Investments Limited (AIL), was the lessor of the premises, and the lessee was a company called Affiliated Industries (NZ) Limited (AINZ).  The appellants, Mr Lee and Mr Kerslake, were directors of AINZ and guaranteed AINZ’s obligations under the lease.  The lease was for a term of six years from 28 February 2007.

[2]      In  early  May  2009,  a  company  called  Sligo  Properties  Limited  (Sligo) entered  into  possession  of  the  premises  and  began  paying  the  rental  that  was formerly being paid by AINZ.  Sligo subsequently vacated the premises in or about August 2012.  AIL then sought to recover outstanding rental and outgoings for the remainder of the term of the lease from the appellants as guarantors of AINZ’s obligations under the lease.    It  also sought to  recover those sums  from Sligo’s director, Ms Carol Hancock.

[3]      The appellants defended the claim in the District Court on the basis that the lease between AIL and AINZ had come to an end when Sligo took possession of the premises.  They contended that at this point a new lease came into existence under which Sligo rented the premises directly from AIL.  For that reason they submitted they had no further liability as guarantors under the original deed of lease.

[4]      Judge Cunningham disagreed.  In a decision delivered on 2 November 2016, she held that the lease between AIL and AINZ remained in existence notwithstanding the fact that Sligo acquired physical possession of the premises in 2009 and paid the rent from that time until it vacated the premises.1   The appellants appeal against that decision.

[5]      The circumstances in which Sligo came to take possession of the property assume considerable importance in determining whether the lease came to an end when Sligo entered into occupation of the premises.  For that reason it is necessary

to describe in some detail how this occurred.

1      AIL Investments Ltd v Lee [2016] NZDC 20368.

The circumstances in which Sligo came to take possession of the premises

[6]      Ms Hancock was an employee of AINZ, and at some stage prior to April

2009 she had purchased one-third of the shares in AINZ from the appellants.  She subsequently agreed to purchase the company’s business.  She formed Sligo as the vehicle through which she would own the business.

[7]      The agreement relating to the sale of the business required AINZ to assign to Sligo  its  interest  as  lessee  under  the  lease.    Through  its  director,  Mr  Michael Malcolm, AIL had indicated that it would consent to the proposed assignment.

[8]      On 4 May 2009 Mr Kerslake instructed his solicitor, Mr Norris, to prepare a deed of assignment under which AINZ assigned its interest as lessee under the lease to Sligo.  Mr Norris duly prepared a draft deed of assignment and the appellants and Ms Hancock signed it.  Mr Norris then sent the deed to AIL’s solicitor, Mr Sargent, for execution by AIL as landlord.   Mr Hancock subsequently signed the deed on AIL’s behalf, but Mr Sargent did not return the deed to the other parties.

[9]      The deed provided for Ms Hancock to guarantee Sligo’s obligations under the deed of assignment.  Importantly for present purposes, the deed in the form that it was  sent  to  Mr  Sargent  also  contained  a  clause  under  which AIL released  the appellants from their obligations as guarantors under the deed of lease.  Mr Kerslake had raised that as a possibility with Mr Malcolm before the deed of assignment was prepared.  On 8 June 2009, however, Mr Norris sent an email to Mr Sargent advising that  Mr  Malcolm  and  the  appellants  had  agreed  that  the  clause  releasing  the appellants from their obligations as guarantors was to be deleted from the deed of assignment.

[10]     As I have already observed, the expiry date of the lease as recorded in the deed of lease was 28 February 2013.  In the deed of assignment, however, the expiry date of the lease was shown as being 28 February 2011.  Mr Kerslake said that he intended this to be an offer to AIL to vary the term of the lease by bringing the expiry date of the lease forward by two  years.   However, there was never any discussion between Mr Malcolm and the appellants, or between their respective solicitors, about the proposed variation.  The Judge accepted Mr Malcolm’s evidence

that he never noticed the expiry date contained in the deed of assignment, and he had never agreed on AIL’s behalf that the term of the lease would be reduced by two years.

[11]     Ms Hancock did not see the original deed of lease prior to the point at which Sligo began to occupy the premises.   She had always understood that the lease expired in February 2011.   The Judge accepted that Ms Hancock did not become aware of the expiry date recorded in the deed of lease until February 2011, when she told Mr Malcolm that Sligo would be vacating the property on 28 February 2011. At that point Mr Malcolm told her the lease did not expire until 28 February 2013.  The following month Mr Malcolm gave Ms Hancock a copy of the first two pages of the lease confirming this fact.

[12]     Ms Hancock said her understanding that the lease expired on 28 February

2011 was crucial to her decision to take an assignment of the lease.  She would not have entered into the transaction if she had known the lease did not expire until

28 February 2013.

[13]     The  draft  deed  of  assignment  remained  with  Mr  Sargent  and  was  never returned to either Mr Norris or to Sligo’s solicitors.  On 21 July 2009 Mr Norris sent the following letter to Mr Sargent:

Further to my correspondence on 8 June 2009 and our subsequent telephone discussions, I note that the Deed of Assignment of Lease is yet to be returned to the writer.

Please note that your client’s delay in providing Landlord’s consent to the

Assignment of Lease is delaying the settlement being completed.

My clients instruct that if there are any financial consequences as a result of your client’s delay they will look to your client to reimburse them any loss they suffer as a result of the delay.

I trust this action will not be necessary and the Deed of Lease will be signed as a matter of urgency.

[14]     Mr Sargent responded by facsimile on 27 July 2009 in the following terms:

We refer to your fax of 21 July which we have discussed with our client. Whilst all arrears of outgoings have been met there are a couple of issues that have arisen during the course of the tenancy that need to be resolved

with your client.   We understand that our client will be liaising with your client over these issues with the intention of achieving result.  We note your various comments however we consider that our client is acting in an appropriate manner having regard to the issues.

[15]     From this point on there appears to have been no further correspondence between solicitors, and none of the parties appears to have given further thought to the fact that Mr Sargent had not returned the deed of assignment.  Sligo remained in occupation of the premises until August 2012 notwithstanding the fact that the deed of assignment described the assigned lease as ending on 28 February 2011.

The Judge’s decision

[16]     The fact that Mr Sargent never delivered the deed of assignment to the other parties prompted the Judge to conclude it was ineffective as a deed because it failed to satisfy the requirements of s 9(1)(c) and (9) of the Property Law Act 2007.  These require a deed to be delivered to all parties bound by it, or to persons authorised to accept the document on behalf of the parties bound by it.

[17]     The Judge also concluded that the differing beliefs held by Ms Hancock, Mr Kerslake and Mr Malcolm regarding the date of expiry of the assigned lease precluded her from granting AIL’s application for an order rectifying the deed of assignment.  For the same reason she found the deed of assignment was not binding on any of the parties to it, and there was no binding contract between AIL and the appellants to assign the lease.   AIL’s claim against Ms Hancock as guarantor of Sligo’s obligations under the deed of assignment of lease failed as a result.

[18]     Having concluded that the deed of assignment was ineffective, the Judge said:2

[71]      The date of expiry of a lease is a crucial component of a lease between landlord and tenant.   There was no contractual arrangement with Sligo and or Ms Hancock other than a month by month lease as between the plaintiff and Sligo.  Ms Hancock indicated Sligo wished to leave in February

2011, possibly earlier.   That means one month’s notice was given at this

time.

…

[79]      The position of all three defendants is that there was an informal lease between the plaintiff and Sligo.   I accept that submissions for the reasons set out above.

[19]     The Judge then rejected the appellants’ argument that the lease between AIL and AINZ had been surrendered either by operation of law or by implication.  After setting out the appellants’ argument, the Judge considered the situation that arose in Wildeboer v Carter, an authority relied upon by the appellants in support of their

argument.3    In that case a tenant had vacated leased premises during a renewed term

of the lease.  The landlord arranged for new tenants to occupy the premises and pay rent,  but  not  for  the  full  length  of  the  renewed  term.    Having  reviewed  the authorities, Penlington J accepted the tenant’s  argument that the lease had been surrendered by operation of law.

[20]     Judge Cunningham concluded that the appellants had failed to satisfy her that AIL had accepted that the lease was at an end.   In doing so she distinguished Wildeboer v Carter on the facts.   The Judge’s conclusions are encapsulated in the following passages from her decision:4

[87]      In this case, the proposed assignment of lease was part and parcel of a desire by Messrs Kerslake and Lee to sell the business which was not doing well.   A sale would mean they no longer had to pay rent for the premises.   The proposed assignment to Ms Hancock or her nominee was clearly for the benefit of an existing tenant (AI (NZ) Ltd) and Messrs Kerslake and Lee.

[88]     That can be contrasted with a situation where the lessee vacates the premises and the landlord re-lets them.  In Wildeboer Penlington J found that when the landlord re-let the property to a third party, the landlord voluntarily and unequivocally accepted the tenant’s quitting of the premises and there was a surrender by operation of law from the time of re-letting.  Importantly His Honour said at p. 18:

… There was no evidence that the re-letting … was on account of

[the tenant].

[89]     I  find  that  in  this  case,  the  landlord  allowed  Sligo  to  go  into occupation for the benefit of the tenant (AI (NZ) Ltd).

[90]     Moreover  this  sale  was  a  transfer  of  business  to  an  existing shareholder of the tenant (AI (NZ) Ltd).  Ms Hancock had been managing the business of AI (NZ) Ltd for some time before the sale to her occurred.

3      Wildeboer v Carter, (1995) 3 NZ ConvC 192,022 (HC).

[91]     This situation is different to other cases where the tenant packs up and leaves the premises empty and the landlord re-lets the premises to a third party unknown to the vacating tenant.

[92]    Very soon after the Assignment document was received by the plaintiff’s solicitor, Messrs Kerslake and Lee were told Mr Malcolm would not agree to release them as guarantors.  They accepted that was the case as this was recorded in writing in the letter from Mr Norris dated 8 June 2009.

[93]     Messrs Kerslake and Lee knew their obligations under the personal guarantee they gave when they signed the Deed of Lease in April 2007 continued.

The argument on appeal

[21]     For  the  appellants,  Mr  Campbell  QC  argues  that  the  Judge  erred  in concluding that the lease between AIL and AINZ was not impliedly surrendered when Sligo began to occupy the premises in April 2009.  He submits that it followed as a matter of law that the lease was surrendered unless AIL gave AINZ notice that the re-letting of the premises to Sligo was on account of AINZ.  AIL did not give notice of that fact to AINZ.

Decision

[22]     As both counsel acknowledge, the concept of implied surrender, or surrender by operation of law, is well established in the law of landlord and tenant.  When a lessor of premises re-lets those premises to a third party, this will usually constitute an implied surrender of the lease to a surrender by operation of law.  The principle goes back to the principles enunciated in Walls v Atcheson,5    an authority cited by

Penlington J in the following passage in Wildeboer:6

The effect of a reletting by the landlord after the tenant has quit the premises was dealt with as far back as in Walls v Atcheson (1826) 3 Bing 462; 130 ER

591. That case is the authority for the proposition which is stated in 27(1) Halsbury 4 ed., para 527:

“If … after the tenant has quitted the premises, the landlord relets them to another tenant who goes into occupation, a surrender is effected from the time of reletting, unless the landlord gives notice to the tenant that the reletting is on his account.”

[23]     The requirements for surrender in this context were discussed in Benjamin v

Wareham Associates (NZ) Limited, in which McGechan J said:7

Surrender by operation of law takes place through delivery of possession by lessee, and acceptance of possession by the lessor, with intention on both sides thereby to determine the lease. The process often is said to be based upon reciprocal estoppels by representation, whether by word or conduct: eg Steve Christenson and Co v Furs and Fashions (1971) NZLR 129, 133. There is no need for express words of surrender, but conduct must take place in a context of mutual intention. An intention by lessee alone to surrender the lease is not sufficient. Return of keys by a lessee is not sufficient in itself. There must be associated conduct on the part of the lessor, in relation to receipt of keys, establishing acceptance the lease concerned is at an end. Questions of fact, and within that degree, inevitably arise. The onus of proof rests on a lessee seeking to establish acceptance by the lessor the lease is surrendered: Relvok Properties Limited v Dixon (1972) 25 P&CR 1, 5, 6. Equivocal conduct will not suffice. Thus merely attempting to relet (Oastler v  Henderson (1877)  2  QBD  575);  entry  to  carry  out  necessary  repairs; occasional use of parts; or change of locks for security reasons (Relvok Properties Limited v Dixon supra), have been regarded as not in themselves amounting to surrender by operation of law where the lessor's intention was to  keep  the  lease  on  foot  meantime.  By  contrast,  an  actual  reletting  to another lessee who goes into occupation amounts to acceptance of surrender, effective from the time of such reletting, unless the latter is expressed to be on the lessee's account.

[24]     As this passage demonstrates, the principles relating to implied surrender rest on notions of reciprocal estoppels by representation.  Furthermore, as McGechan J put it, conduct must take place in a context of mutual intention.   An intention to surrender by one party alone is not sufficient.  Both parties must intend the lease to be at an end.  Viewed objectively, the actions of both parties must be such that each is estopped from denying the continued existence of the lease.  Not surprisingly, the issue of whether or not a lease has been surrendered will often be a question of fact and degree.

[25]     In the present case the appellants rely heavily on the Judge’s conclusion that AIL entered into a new informal lease with Sligo. This underpins their argument that the lease must have terminated by operation of law.   Logic suggests, however, an inconsistency between the Judge’s conclusion that AIL entered into a new lease with Sligo and her subsequent conclusion that the existing lease was never surrendered. If the existing lease had never been surrendered and the deed of assignment was

ineffective, the lessee of the premises continued to be AINZ.   In that event Sligo

7      Benjamin v Wareham Associates (NZ) Ltd (1990) 1 NZ ConvC 190,638 (HC) at 190,642.

would have no legal or beneficial interest in the premises, and it must have occupied them as a bare licensee.   For that reason one of the Judge’s conclusions must be incorrect.

[26]     The circumstances in which a lessor permits a third party to take possession of leased premises will generally be highly relevant to the issue of whether the lessor thereby intends the lease to come to an end.  Most of the cases concern situations in which a lessee vacates premises, leaving the lessor to mitigate its loss by re-letting the premises.  In such cases there is generally no difficulty in establishing that both parties intended the original lease to be at an end.  This case does not fall into that category.

[27]     In the present case, as Mr Kerslake accepted in cross-examination, AINZ vacated the premises when it agreed to assign its interest as lessee under the existing lease to Sligo.   AIL permitted Sligo to occupy the premises on the same basis. Furthermore, the letter from Mr Norris to Mr Sargent on 8 June 2009 demonstrates that at that stage both parties were proceeding on the basis that the original lease and guarantees remained on foot.  That situation continued through until at least the next month, when Mr Norris wrote to Mr Sargent requesting the return of the deed of assignment.  There was therefore no mutual intention that the lease would come to an end when Sligo took possession of the property.  Rather, the mutual intention at that time, and thereafter, was that the existing lease was to remain on foot.

[28]     It is also noteworthy that AIL and Sligo never negotiated the terms on which a new lease might be granted.   Rather, both proceeded throughout, as did the appellants, on the basis that Sligo was to take an assignment of AINZ’s interest as lessee under the existing lease.

[29]     The only other act that might point to AIL’s acceptance of surrender is the fact that from 29 May 2009 AIL invoiced and received rent from Sligo rather than AINZ.   That fact is not, however, inconsistent with the position as all parties understood and intended it to be.  They all knew and intended that Sligo would pay rent as AINZ’s assignee.

[30]     I have therefore concluded, albeit by a slightly different route to that taken by the Judge, that AIL is not estopped from denying the continued existence of the lease.    As  a  result,  the  lease  was  not  surrendered  either  by  implication  or  by operation of law.  AINZ remained the lessee and the appellants remained liable as guarantors.

[31]     The problem that the appellants now face has essentially arisen from the fact that they allowed Sligo to take possession of the premises before the deed of assignment had been signed and returned to all parties.   AINZ had the ability to retain control of the premises until the deed had been signed and delivered but elected not to do so.   In all probability, however, neither AIL nor the appellants would have had any reason to consider the consequences of non-delivery of the deed.  They no doubt proceeded on the basis that Sligo had taken over possession of the premises as AINZ’s assignee, and that the appellants remained as guarantors under the lease.

Result

[32]     The appeal is dismissed.

Lang J

Solicitors/Counsel:

Neil Campbell QC, Auckland
J Thompson, Takapuna