Linco Properties Limited v Townhouse Motel Limited
[2020] NZHC 2404
•16 September 2020
IN THE HIGH COURT OF NEW ZEALAND TIMARU REGISTRY
I TE KŌTI MATUA O AOTEAROA TE TIHI-O-MARU ROHE
CIV-2020-476-000016
[2020] NZHC 2404
UNDER the Property Law Act 2007 BETWEEN
LINCO PROPERTIES LIMITED
Plaintiff
AND
TOWNHOUSE MOTEL LIMITED
First Defendant
AND
THE ESTATE OF BARRY MERVYN HILL
Second Defendant
AND
LISA MARGARET HILL
Third Defendant
Hearing: 24 August 2020 Counsel:
A N Riches and C Mo for Plaintiff T J Jackson for Defendants
Judgment:
16 September 2020
JUDGMENT OF ASSOCIATE JUDGE PAULSEN
This judgment was delivered by me on 16 September 2020 at 12.30 pm pursuant to Rule 11.5 of the High Court Rules
Registrar/Deputy Registrar Date:
LINCO PROPERTIES LTD v TOWNHOUSE MOTEL LTD [2020] NZHC 2404 [16 September 2020]
The application
[1] This is an application for summary judgment by the lessor of a registered lease of motel premises to recover rental and outgoings. The first defendant is the current registered lessee. The second and third defendants are sued under a guarantee of the first defendant’s obligations.
[2] The defendants assert they have raised a dispute as to what is a fair market rental for the premises. They oppose summary judgment on the basis this proceeding should be stayed to allow for arbitration of the dispute.
The facts
[3] The plaintiff is the registered proprietor of 29 Evans Street, Timaru which is known as the Townhouse Motel. The premises are subject to registered lease 5416707.2 (the Lease).
[4]Since 21 July 2010, the first defendant has been the registered lessee.
[5] Barry Mervyn Hill and Lisa Margaret Hill guaranteed the first defendant’s obligations under the Lease by a deed of covenant of 21 July 2010.
[6] Mr Hill died last year. The second defendant is named as the Estate of Mr Hill, which is unsatisfactory. Mr Hill’s personal representative should be named as the second defendant. For reasons I shall come to later in this judgment, at the present time the identity of Mr Hill’s personal representative is unknown.
[7]The material terms of the Lease include:
Premises:The motel premises known as Townhouse Motel situated at 29 Evans Street, Timaru
Term: 35 Years from 20 November 2002
Commencement of Lease: 20 November 2002
Amount of Rental Payments: $65,000 per annum (plus GST) payable
on the twentieth day of each month in advance, the first payment to be made on
20 November 2002 and thereafter monthly
Rent review/dates: 20 November 2004 and thereafter two yearly intervals
Final expiry date of Lease: 19 November 2037
Business use: Moteliers and Travellers accommodation
Rates: Payable by Lessee
Interest rate on Lessor payments: Clauses 1.04 and 3.04 – Lessor’s bank’s
best customer overdraft rate plus a margin of two (2) cents per centum per annum.
[8]From 20 April 2017 the rental payable under the Lease was agreed to be
$7,943.15 (including GST) per month.
[9] The first defendant has had difficulty making payments of rental and outgoings under the Lease. At the time of filing this proceeding the following amounts were outstanding:
Rental 20 October 2019 $7,943.15 Rental
20 December 2019
$7,943.15
Rental
20 March 2020
$7,943.15
Rental
20 April 2020
$7,943.15
Rental
20 May 2020
$7,943.15
Rates due 13 May 2020
$11,676.48
Water rates due 20 May 2020
$201.76
Total rental, rates and outgoings payable
$51,593.99
[10] From around December 2019, there was correspondence between the parties’ solicitors. The first defendant wished to sell the Lease and the motel business but considered the rental was too high preventing buyer interest.
[11]This proceeding was commenced on 22 May 2020.
[12] On 11 June 2020, the defendants’ solicitors wrote to the plaintiff’s solicitors purporting to raise a dispute in terms of cl 3.10 of the Lease. The particulars of the dispute were stated to be:
… the fact that the rental no longer represents a fair market rental for the property.
[13] Concerning the plaintiff’s application for summary judgment, in the same letter the defendants’ solicitors stated:
… we regard the failure to invoke the arbitration provisions as sufficient basis for a stay of proceeding in respect of … summary judgement [sic] for rent arrears.
The second defendant
[14] Mr Jackson has represented all defendants and he argued the summary judgment application on behalf of all defendants. Following the hearing, I noted that the second defendant is not correctly named. Despite a direction from the court, Mr Jackson has not identified the second defendant. At a teleconference convened on 15 September 2020, Mr Riches submitted that in the circumstances I should, if I was satisfied it was appropriate, issue judgment on the application for summary judgment against the first and third defendants. Mr Jackson did not oppose that approach. I propose to deal with the matter in that manner.
The defendants’ submissions
[15] While the defendants contend this proceeding should be stayed, no application for a stay has been filed. An application should have been filed. The plaintiff has not taken this point. I therefore deal with the defendants’ assertion that the proceeding should be stayed on its merits.
[16] The defendants submit that art 8 of sch 1 of the Arbitration Act 1996 is engaged requiring the imposition of a stay. It provides:
8 Arbitration agreement and substantive claim before court
(1)A court before which proceedings are brought in a matter which is the subject of an arbitration agreement shall, if a party so requests not later than when submitting that party’s first statement on the substance of the dispute, stay those proceedings and refer the parties to arbitration unless it finds that the agreement is null and void, inoperative, or incapable of being performed, or that there is not in fact any dispute between the parties with regard to the matters agreed to be referred.
(2)Where proceedings referred to in paragraph (1) have been brought, arbitral proceedings may nevertheless be commenced or continued, and an award may be made, while the issue is pending before the court.
[17] The defendants place particular reliance upon cls 1.02 and cl 3.10 of the Lease. I set these out in full below:
1.02 Rates, Insurance Premiums and Taxes
THE Lessee will in each year upon demand by the Lessor pay to the Lessor the rates in respect of the demised premises and the premium or premiums for insurance to full replacement value of the demised premises against loss or damage by fire, earthquake and usual extraneous risks (including storm, tempest, water damage and malicious damage by burglars) and in respect of public risk insurance applicable to the premises and for loss of rents (with any amount payable to the Lessor) to such amount and upon such conditions as from time to time may be reasonably approved by the Lessor) and against any other loss or damage of any kind whatsoever which the Lessor may from time to time reasonably require which shall where the demised premises form part only of the Lessor’s land and building or buildings thereon be deemed to be the same proportion of the total insurance premium and rates levied each year in respect of the Lessor’s land and building or buildings of which the demised premises form part as the rental hereby reserved bears to the total rental value of the said building or buildings in that year PROVIDED ALWAYS that the Lessor shall have the option of requesting that the name of the Lessee be placed on the rating roll as occupier of the demised premises and assessed for rates accordingly in lieu of assessment of the Lessor AND if the name of the Lessee shall be placed on the rating roll then the Lessee shall duly and punctually pay all rates assessed against the Lessee in respect of the demised premises at the times when the same become due and payable AND the expression “the total rental value of the said building or buildings” in this clause means the total rental payable in respect of such parts of the building or buildings as are let and in respect of any part or parts of the said building or buildings which are not let the fair market rental thereof and any dispute as to the fair market rental shall be determined by arbitration in accordance with Clause 3.10 hereof.
…
3.10Arbitration
3.10.1If a party has any dispute with the other party in connection with this Lease:
(i)That party will promptly give full written particulars of the dispute to the other.
(ii)The parties will promptly meet together and in good faith try and resolve the dispute.
3.10.2If the dispute is not resolved within seven (7) days of written particulars being given (or any longer period agreed to by the parties) the dispute will be referred to mediation.
3.10.3A party must use the mediation procedure to resolve a dispute before commencing any other dispute resolution proceedings.
3.10.4The mediation procedure is:
(i)The parties will appoint a mediator and if they fail to agree the mediator will be appointed by the president of the New Zealand Law Society or the president’s nominee.
(ii)The parties must co-operate with the mediator in an effort to resolve the dispute.
(iii)If the dispute is settled, the parties must sign a copy of the terms of the settlement.
(iv)If the dispute is not resolved within 40 business days after the mediator has been appointed, or within any extended time that the parties agree to in writing, the mediation must cease.
(v)Each party must pay a half share of the costs of the mediator’s fee and costs including travel, room hire, refreshments etc.
3.10.5The terms of settlement are binding on the parties and override the terms of this Lease if there is any conflict.
3.10.6The terms of settlement may be tendered in evidence in any mediation or legal proceedings.
3.10.7The parties agree that written statements given to the mediator or to one another, and any discussions between the parties or between the parties and the mediator during the mediation period are not admissible by the recipient in any arbitration or legal proceedings.
3.10.8Either party may commence arbitration proceedings if mediation ceases as above.
3.10.9If the dispute is referred to arbitration:
(i)The arbitration will be conducted by one arbitrator appointed by the parties.
(ii)If the parties cannot agree on an arbitrator within seven (7) days the appointment will be made by the president of the New Zealand Law Society or the president’s nominee.
(iii)The arbitration will be conducted in accordance with the Rules in Schedules 1 and 2 of the Arbitration Act 1996.
3.10.10Neither party will unreasonably delay these dispute resolution procedures.
3.10.11These dispute resolution procedures do not apply to:
(i)Any dispute arising in connection with any attempted renegotiation of this Lease; or
(ii)An application by either party for urgent interlocutory relief.
3.10.12Pending resolution of any dispute the parties will perform this Lease in all respects including performance of the matter that is the subject of dispute.
[18] Mr Jackson refers to The Law Connection Ltd v Roche, as authority that under art 8 of sch 1 the court must order a stay of a proceeding if: 1
(a)There is a dispute and the subject matter of the proceedings is the subject matter of an operative arbitration agreement; and
(b)The request [for arbitration] is made either before or when the party submits its first statement on the substance of the dispute.
[19] The defendants have, Mr Jackson submits, raised a genuine dispute as to the fair market rental payable under the Lease which is a dispute that concerns the subject matter of the summary judgment application. That dispute, he says, engages cl 13.10 of the Lease and should be determined by arbitration.
[20] He further submits the defendants are not required to show they have an arguable defence that can withstand the plaintiff’s application for summary judgment. It is sufficient the defendants are acting bona fide and have raised a dispute that cannot immediately and obviously be dismissed as untenable.2
[21] Much of the focus of Mr Jackson’s argument concerned cl 13.10.11(i) of the Lease which provides that the dispute resolution procedures do not apply to “Any dispute arising in connection with any attempted renegotiation of this Lease”. Mr Jackson argues the rental payable under the Lease is “essentially one term” and there is no basis to exclude from the operation of cl 13.10 the renegotiation of a
1 The Law Connection Ltd v Roche [2013] NZHC 1742 at [19].
2 Zurich Australian Insurance Ltd v Cognition Education Ltd [2014] NZSC 188, [2015] 1 NZLR 383 at [34].
discrete term or only part of the Lease. On this argument, the words “renegotiation of this Lease” refer to substantially the entire lease.
[22] Mr Jackson submits that cl 3.10.11(i) should be interpreted in a manner that recognises the importance of party autonomy as to the means of resolving their disputes without recourse to the courts.
[23] He refers to cl 1.02, which he says is a resolution mechanism for all disputes as to fair market rental payable under the Lease. He contends cl 1.02 should be determinative of this application or, at least, considered consonant with the defendants’ submission that disputes as to fair market rental are not a renegotiation of the Lease.
Discussion
The request for a stay
The correct approach
[24] The leading authority is Zurich Australian Insurance Ltd v Cognition Education Ltd.3 The Supreme Court determined the issue whether art 8 of sch 1 requires the court to consider if there is an arguable defence to the plaintiff’s claim sufficient to resist summary judgment before ordering a stay of proceedings.4 The court held:5
Under art 8(1), a stay must be granted unless the court finds that the arbitration agreement is null and void, inoperative or incapable of being performed or it is immediately demonstrable either that the defendant is not acting bona fide in asserting that there is a dispute or that there is, in reality, no dispute. It follows from this that an application for summary judgment and an application for a stay to permit an arbitration to take place are not different sides of the same coin. In principle, the stay application should be determined first and only if that is rejected should the application for summary judgment be considered.
3 Above n 2.
4 Anthony Willy and Terry Sisson Arbitration (2nd ed, Thomson Reuters, Wellington, 2018) at 43.
5 Zurich Australian Insurance Ltd v Cognition Education Ltd, above n 2, at [52].
[25] In making the evaluation whether there is a dispute referable to arbitration the court said:6
If it is clear that the defendant is not acting bona fide in asserting that there is a dispute, or it is immediately demonstrable that there is nothing disputable at issue, there is not in reality any “dispute“ to refer to arbitration. In these circumstances, a stay could properly be refused and summary judgment would be available. By contrast, in other situations falling within the broad test (that is, the “no arguable defence“ test applied on summary judgment), there will be what can properly be described as “disputes“ even though they are ultimately capable of being determined by a summary process.
[26] I therefore take a two-step approach. First, despite the absence of a formal application, I shall determine the defendants’ request for stay of this proceeding. In this regard, I consider the defendants have the onus to establish there is an agreement to arbitrate and the existence of a dispute that is within it. If that onus is discharged it is for the plaintiff to show that the matter is one which should not be referred to arbitration.7 Only if I am satisfied that the proceeding should not be stayed, do I need to consider, at the second stage, whether the plaintiff is entitled to summary judgment.
No grounds for a stay
[27]I am satisfied that this proceeding should not be stayed as:
(a)there is no dispute between the parties for the purpose of cl 13.10; and
(b)the arbitration clause is inoperative in the circumstances of this case.
Absence of a dispute
[28] In Methanex Motunui Ltd v Spellman, Fisher J said in relation to the meaning of the word “dispute” for the purposes of the Arbitration Act:8
The next word, and it is one that is particularly significant in the present case, is “dispute”. At least in respect of existing disputes, useful dictionary definitions of “dispute” appear to include “argument or quarrel” (Collins English Dictionary, meaning 5) and “controversy, debate” (Concise Oxford
6 At [36].
7 Hill v Taupo County Commissioner [1964] NZLR 348 at 349.
8 Methanex Motunui Ltd v Spellman [2004] 1 NZLR 95 (HC) at [76]. The definition was affirmed by the Court of Appeal in Methanex Motunui Ltd v Spellman [2004] 3 NZLR 454 (CA) at [59].
Dictionary). Both appear to contemplate a situation in which two or more individuals have a relationship of conflict due to their expression and maintenance of conflicting views or positions. The provision for entry of an arbitral award as a judgment pursuant to art 35(1) of the First Schedule to the Act implies that the dispute between the parties must be one in respect of which an arbitration award would be of legal consequence. For there to be an existing dispute it also seems necessary that a nexus be formed between the different views or positions of the disputants by means of direct or indirect communication between them and that the difference of view or position be maintained in a way which continues to be of significance between them. That seems implicit in the dictionary definitions cited. It follows that for the purposes of the Act there will be a “dispute . . . between them” when two or more individuals express and maintain in relation to each other conflicting views or positions the resolution of which will or may be of legal consequence.
[29] For there to be a dispute for the purposes of the Arbitration Act the resolution of the difference between the parties must be one which will or may have legal consequences. Here, assuming the plaintiff and the defendants do have conflicting positions on what is a fair market rental, the resolution of that issue will have no legal consequences upon the defendants’ obligation to pay the amounts for which the plaintiff seeks summary judgment and cannot, for that reason, be a basis to stay this proceeding.
[30] The first defendant’s obligation to pay rental is created by the Lease. The parties agreed that the rental payable from 20 April 2017 was to be $82,885 per annum plus GST ($7,943.15 per month including GST). That remains the current rental payable under the Lease. Under cl 1.01, the first defendant is obliged to pay the rental free of any deduction or set-off. Under cl 4.05.1 the failure by the first defendant to pay rental is a breach that goes to the essence of its obligations under the Lease. There is nothing in the Lease which permits the first defendant to withhold rental on the basis that it exceeds a fair market rental.
[31] The concept of “current market rent” is relevant in the context of a rental review under cl 3.11 of the Lease, but no rental review has been commenced, a rental review does not relieve the first defendant of the obligation to pay rental and any difference between the parties as to the current market rental is determined by procedures under cl 3.11 and not by arbitration under cl 3.10 of the Lease.
[32] I asked Mr Jackson to identify any legal consequence, whether arising by the terms of the Lease or the general law, that might flow from a determination at
arbitration of what is a fair market rental. He referred only to cl 1.02, which, as noted earlier, he submits is a “general disputes resolution mechanism that comes into effect where disputes as to fair market rental arise”. I do not accept that submission. The concept of fair market rental in cl 1.02 has no significance beyond the assessment of rates, insurance premiums and taxes payable by the lessee. Mr Jackson did not identify any other legal consequence that might flow from a determination of an arbitrator.
The arbitration clause is inoperative
[33] I am also satisfied that cl 3.10 is inoperative in the sense that the dispute is non- arbitrable due to cl 3.10.11(i) which relevantly provides that cl 3.10 does not apply to “[a]ny dispute arising in connection with any attempted renegotiation of this Lease”.
[34] The defendants’ stance they are not attempting to renegotiate the Lease, is subverted by Mr Jackson’s written submission that:
On the plain meaning of the lease term at issue this is not renegotiation of the lease; it is a dispute as to part of it. Whether that dispute leads to renegotiation, either by rent review process pursuant to clause 3.11 or more general fair market rental (clause 1.02 – referred to below) depends on the outcome of the arbitration.
[35] Mr Jackson’s reference to the rental review process in cl 3.11 is abstruse. The fixing of the rental following the process in cl 13.11 is not a renegotiation of the Lease but the performance of its terms. Furthermore, as noted, a rental review is determined by the process set out in cl 3.11 and not by arbitration under cl 3.10. That leaves only Mr Jackson’s submission that the arbitration might lead to a “renegotiation” of a fair market rental. That is exactly the consequence that cl 13.10.11(i) intends to avoid.
[36] I do not accept Mr Jackson’s submission that the defendants are not attempting to renegotiate the Lease because the rental payable is only one term or a part of the Lease. Clause 3.10 would have no work to do if it only applied to attempts to renegotiate substantially the whole of the Lease. The words “renegotiation of this Lease” would commonly be understood to include an attempt to renegotiate particular terms. Importantly, by the terms of the Lease, the payment of rental goes to the essence of the lessee’s obligations. Furthermore, if Mr Jackson’s submission was to be accepted it would follow that all other terms of the Lease could be individually
challenged on the same basis. No commercial contract could proceed on such an uncertain footing.
[37]It follows there is no basis for a stay of this proceeding.
Summary judgment
[38] It is therefore necessary for me to consider the plaintiff’s application for summary judgment.
Relevant principles
[39]Rule 12.2(1) High Court Rules 2016 provides:
12.2 Judgment when there is no defence or when no cause of action can succeed
(1) The court may give judgment against a defendant if the plaintiff satisfies the court that the defendant has no defence to a cause of action in the statement of claim or to a particular part of any such cause of action.
[40] The principles of summary judgment have been summarised by the Court of Appeal in Krukziener v Hanover Finance Ltd:9
The principles are well settled. The question on a summary judgment application is whether the defendant has no defence to the claim; that is, that there is no real question to be tried: Pemberton v Chappell [1987] 1 NZLR 1 at 3 (CA). The Court must be left without any real doubt or uncertainty. The onus is on the plaintiff, but where its evidence is sufficient to show there is no defence, the defendant will have to respond if the application is to be defeated: MacLean v Stewart (1997) 11 PRNZ 66 (CA). The Court will not normally resolve material conflicts of evidence or assess the credibility of deponents. But it need not accept uncritically evidence that is inherently lacking in credibility, as for example where the evidence is inconsistent with undisputed contemporary documents or other statements by the same deponent, or is inherently improbable: Eng Mee Yong v Letchumanan [1980] AC 331 at 341 (PC). In the end the Court's assessment of the evidence is a matter of judgment. The Court may take a robust and realistic approach where the facts warrant it: Bilbie Dymock Corp Ltd v Patel (1987) 1 PRNZ 84 (CA).
9 Krukziener v Hanover Finance Ltd [2008] NZCA 187, [2010] NZAR 307 at [26].
Grounds of defence
[41] The only matter the defendants advance in their notice of opposition is that the proceeding should be stayed. I have rejected that and there is no impediment to summary judgment.
[42] For completeness, in her affidavit the third defendant asserts that in early 2017 it had been agreed that no rental review would be implemented for five years. I understand this is intended as a challenge to the agreement made that from 20 April 2017 the rental payable under the Lease was to be $7,943.15 (including GST) per month.
[43] Mr Jackson did not argue that this was a basis to refuse summary judgment and he was correct not to do so. It is fanciful to suggest the plaintiff would make such an agreement. The plaintiff denies there was any such agreement. There is no context provided for such a generous concession. Certainly it could not have been made due to a change in market conditions as the first defendant’s evidence is that the downturn in the market occurred “a short time after the rent increase”. The assertion is also contrary to the terms of the Lease and a document signed by Mr & Mrs Hill on 6 March 2017 providing for the current rental to take effect from 20 April 2017.
[44] I am satisfied that the defendants have no arguable defence to the matters set out in the statement of claim.
Interest
[45] In accordance with cl 3.04 of the Lease, the plaintiff has sought interest on unpaid amounts at its bank’s best customer overdraft interest rate plus a margin of two per centum. In the statement of claim, interest is sought both before and after judgment at 18.9 per cent per annum. However, at the hearing, I noted there was an absence of evidence concerning the interest rate. Mr Jackson did not object to the plaintiff providing evidence of its bank’s current overdraft interest rate. Such evidence has been filed and no objection is taken to it.
[46] The evidence is that the plaintiff banks with the ANZ and that its overdraft interest rate over the relevant period was 19.95 per cent per annum. On this basis the plaintiff could have claimed interest at the higher rate of 21.95 per cent per annum. However, in light of its pleading the plaintiff seeks interest at the lower rate set out in the statement of claim. I am satisfied as to its entitlement to interest.
The further evidence
[47] On 15 September 2020, a further affidavit of the third defendant was filed purporting raise new matters. Those matters are allegations that the plaintiff has, in breach of cl 1.06.1, unreasonably refused to give consent to an assignment of the Lease to a prospective purchaser of the business and has also failed to mitigate its losses because it will be paid upon an assignment of the Lease.
[48] I am not prepared to admit this further evidence to which the plaintiff has had no opportunity to reply. In any event, the affidavit raises no arguable defence to the claim.
[49] The plaintiff has not refused consent to an assignment of the Lease. On the face of the correspondence attached to the third defendant’s affidavit, the plaintiff’s position is that it will consider any proposal for assignment of the Lease and is seeking satisfactory information as to the suitability and solvency of the proposed assignee.
[50] If there had been an unreasonable refusal to an assignment of the Lease, that might be the basis of a counterclaim but is not a defence to the plaintiff’s claim for rental and outgoings in any event.
[51] The point raised concerning mitigation is entirely misconceived. The plaintiff’s claim is in debt. It is not a claim for damages. The debts for which it seeks judgment became payable months before an assignment of the Lease was sought. No issue of mitigation can possibly arise.10
10 White and Carter (Councils) Ltd v McGregor [1962] AC 413; [1961] 3 All ER 1178; Seon Developments Ltd v Roger (1994) ANZ ConvR 315, 2 NZ ConvC 191,664; Turall v Jackson (2018) 20 NZCPR 1.
Conclusion
[52] The plaintiff has satisfied me that it is entitled to summary judgment. Summary judgment can be entered against the first and third defendant. Judgment cannot be entered at the present time against the second defendant for reasons stated above.
[53] The application for summary judgment against the second defendant shall be adjourned to be brought on when the identity of the second defendant has been disclosed.
Result
[54] There shall be summary judgment in favour of the plaintiff against the first and third defendants in the sum of $51,593.99 as set out in paragraph [9] above.
[55] The plaintiff is entitled to interest on those amounts as claimed in the statement of claim.
[56] The plaintiff is entitled to costs against the first and third defendants on a 2B basis and disbursements as fixed by the Registrar.
[57] The application for summary judgment against the second defendant is adjourned to be brought on for hearing on two-day’s notice.
O G Paulsen Associate Judge
Solicitors:
Saunders & Co, Christchurch Quentin Hix Legal Limited, Timaru
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