Master Design Furniture Limited v Veronica West Limited
[2023] NZHC 3831
•21 December 2023
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2023-404-270
[2023] NZHC 3831
BETWEEN MASTER DESIGN FURNITURE LIMITED
Applicant
AND
VERONICA WEST LIMITED
Respondent
CIV-2023-404-0318 BETWEEN
MASTER DESIGN FURNITURE LIMITED
Applicant
AND
DOONAN FAMILY TRUST
Respondent
Hearing: 10 August 2023 Appearances:
W M Alexander and A Cherkashina for the Applicants in both proceedings
B Prewett for the Respondents in both proceedings
Judgment:
21 December 2023
JUDGMENT OF ASSOCIATE JUDGE SUSSOCK
This judgment was delivered by me on 21 December 2023 at 11.30 am pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Solicitors:
Norling Law Limited, Auckland Kemps Weir, Auckland
Bankside Chambers, Auckland
MASTER DESIGN FURNITURE LTD v VERONICA WEST LTD [2023] NZHC 3831 [21 December 2023]
Introduction
[1] Master Design Furniture Limited has applied to set aside statutory demands served on it by the Doonan Family Trust (Doonan Trust) and Veronica West Limited.
[2] Master Design was the tenant of commercial premises in Veronica Street, New Lynn, Auckland (Premises). The respondents in each of these proceedings were the registered proprietors of the Premises for the following periods:
(a)The Doonan Trust was the registered proprietor from 1 October 2019 until 31 March 2021.
(b)Veronica West was the registered proprietor from 31 March 2021 until 9 February 2023.
[3] On or about 1 October 2019 Master Design and the Doonan Trust entered into an agreement to lease the Premises. Master Design and the Doonan Trust never signed a deed of lease, but all parties accept that the sixth edition of the ADLS Deed of Lease applies as if it was signed (Lease).
[4] The trustees of the Doonan Trust were Grant, Sheryl and Thomas Doonan. The directors of Veronica West are Grant Doonan, Joanne Eldrett and Sarah Hayward. Thomas Doonan says in his affidavit filed for the respondents that the directors of Veronica West are his children.
[5] Master Design submits that it has been in dispute with the Doonan Trust and Veronica West over various aspects of the Premises since the commencement of the Lease on 1 October 2019.
[6] In particular, Master Design claims that it is entitled to rent and outgoings abatements for the periods when it did not have access to the Premises to fully conduct its business when there were COVID-19 restrictions. Master Design says it has not reached an agreement with either Veronica West or the Doonan Trust as to what a fair
reduction in rent and outgoings ought to be as provided for by the Lease. As a result, Master Design says the amounts claimed in the statutory demands are disputed and the dispute should properly be determined by way of mediation/arbitration as provided for by the dispute resolution clause in the Lease.
[7] Master Design says further that it has reasonably arguable counterclaims that it must have the opportunity of having determined in the appropriate jurisdiction. Master Design submits that the Doonan Trust and Veronica West had full knowledge of the matters in dispute over the Premises prior to service of the statutory demands but nevertheless proceeded to serve the demands.
[8] The respondents say that Master Design’s purported entitlement to an abatement of rent and outgoings while Auckland was at COVID-19 Alert Level 3 is a relatively recent innovation that suffers from an air of unreality for the following reasons:
(a)Master Design’s default has persisted since September 2020 (when Auckland was not at Alert Level 3).
(b)Master Design did not say anything about COVID-19 in the correspondence relating to unpaid outgoings.
(c)Master Design’s default continued after 2 December 2021 when the COVID-19 Alert System was replaced by the Traffic Light Setting.
[9] In addition, the respondents say that the counterclaims raised are also a recent innovation. Whilst the underlying issues were referred to by Master Design in correspondence from time to time, the spectre of making counterclaims was first raised in December 2022. The respondents say it is notable that Master Design threatened to do so only “if this matter ends up in court”.
[10] Finally, the respondents say that in any event, Master Design is precluded from relying on its counterclaims to defeat the statutory demands because the Lease contains a no set-off clause.
[11] An issue has been raised by the respondents in relation to whether the reply affidavits filed on behalf of Master Design ought to be read.
[12] I start by considering the admissibility objections raised before recording the factual background. I then set out the legal principles applying to applications to set aside statutory demands and consider the following issues:
(a)Is it reasonably arguable that there is a genuine and substantial dispute as to whether the debts are owing?
(b)Does the no set-off clause in the lease prevent Master Design from relying on counterclaims?
(c)If not, is there evidence showing a real basis for the counterclaims asserted and that the quantum of those counterclaims arguably exceeds the debts demanded?
Admissibility of reply evidence
[13] The respondents object to the reply and updating affidavits of Anil Raju being read because they were filed considerably after the date directed by the Court with no explanation. In addition, the respondents submit that they are not strictly in reply, are repetitive, argumentative, bolstering and back fill matters rather than addressing new matters in opposition.
[14] I agree that it is important that parties comply with court timetables to ensure the process is fair. However, the affidavits were filed two months in advance of the hearing so there was sufficient time for the respondents to consider them. If there were new matters that the respondents believed needed to be addressed, then an application could have been made for leave to do so. No such application was made.
[15] Furthermore, in applications to set aside statutory demands the Court is not determining the final rights of the parties and does not need to approach admissibility issues in the same way as in ordinary proceedings.
[16] Although the reply affidavits are in some cases repetitive, they appear to be confined to matters in reply and largely rely on correspondence with the respondents that the respondents would have had access to. In these circumstances, I consider it is appropriate to accept these affidavits for consideration in the case.
Factual background
[17] On or about 1 October 2019, Master Design and the Doonan Trust entered into the Lease for the Premises from which Master Design operated its furniture business.
[18] The Premises was sold by the Doonan Trust to Veronica West on or about 31 March 2021, subject to the terms of the Lease with Master Design.
[19] There was various correspondence between the parties in relation to the Premises throughout the Lease, all of which is not before the Court. I refer to the correspondence relevant to the specific issues below but for the purposes of the factual background I focus on the period leading up to service of the statutory demands.
[20] On 3 November 2022, Joanne Eldrett at Veronica West emailed Master Design asking for urgent action as the Building Warrant of Fitness had expired and could not be renewed until Master Design completed certain steps. These steps included clearing the fire exit, engaging a fire engineer to confirm storage is safe and materials are not a fire hazard, and reducing the height of foam storage to no more than one metre until the fire engineer’s report is completed. Photos attached to the email showed stacks of wood, foam and material.
[21] On 4 November 2022, the manager of Master Design, Binesh1, replied to the email and attached photos showing a cleared fire exit. The email further records “the building gets flooded every time it rains” (enclosing a video to that effect) and that the garage door needs to be fixed as it did not open. The email also records that the building compliance officer had asked if someone was living upstairs, and that Binesh did not initially say anything but wanted it noted that “they are living upstairs.”
1 Binesh’s full name does not appear in the evidence. I refer to the parties by their first and last names (where possible) to avoid confusion and for consistency.
[22] On the same day, 4 November 2022, Joanne Eldrett replied saying that the storage of foam constitutes a very dangerous fire risk and is not allowed within the Building Warrant of Fitness use of building classification. Joanne Eldrett again says Master Design needs to employ a fire engineer to provide a report, and the foam storage must be reduced to one metre in height until the report is completed. In addition, the email said the wood was a tripping hazard and must be moved from the floor next to the fire escape. Joanne Eldrett did not address the issues raised about the flooding or the garage door.
[23] On 14 November 2022, Binesh at Master Design emailed saying he had received a call from Thomas Doonan regarding storage of the foam. Binesh reiterates his earlier email, stating that the building is leaking water from multiple places, that this had been happening since they moved in, and that nothing has been done despite several phone calls and emails. Binesh then suggests that Veronica West provide a 20 foot container for storage of the foam products.
[24] Grant Doonan’s evidence is that following Binesh’s emails he instructed a plumber who initially did not respond but who then attended the Premises on 6 December 2022.
[25] On 10 December 2022, Anil Raju (also known as Neil), the Chief Operations Officer of Master Design, emailed Grant Doonan and Joanne Eldrett saying:
Can you please confirm when will all the leaking of building will be repaired? Building wall from our office to end of building over 40 metres long towards club K9 is leaking when it rains and fire exit door overflows with rain water. You need to dig outside the wall and waterproof it from outside in order to prevent water leaking inside.
Front entrance overflows with water when it rains. One repair was done on roof on Thursday 8th of December 2022 and they couldn’t do other roof repairs as they had no Materials.
As per our previous email foam getting damaged and we requested a container for storage but our emails has been ignored and so far this year total cost is $60k and not counting last 2 years of damages $90k. We have chain of emails to proof this issue we have raised since we moved in. We have proof that Grants father Tom Doonan also ignored email from our lawyers Skeates law. The above cost is not including loss to Business due to damages of raw materials.
We dropped off a 40ft container to storage foam which will be delivered to off side for storage. This way if it rains there will be minimal damage $2k per event in case of over-flood. This cost will be passed on to you to pay.
Appreciate your time in this matter and hope to get a reply soon to resolve this issue. Please note best to communicate through email.
[26]On 12 December 2022, Anil Raju emailed Grant Doonan and Joanne Eldrett at
10.46 am saying that he was very disappointed with Thomas Doonan who had pushed himself into the Premises when all the doors were closed bringing the owner of Mag and Turbo with him, claiming he was a plumber when he was actually a roofer. Anil Raju noted that “it rained heavily from Friday and all weekend. Shop flooded again” and itemised the rugs and sofa legs damaged. Referring to an earlier email, he said it was lucky most of the foam was moved off-site on Friday. Anil Raju advises that the shop would have to close for two to three days due to the smell and noted the likely losses from that closure. Anil Raju asks the landlords to “please email me first in future if [they] need to access the property”. He also states that Thomas Doonan has harassed the staff by filming them and telling them to go. Mr Raju says this is affecting the staff’s mental health and that if they do not come to work, the landlords will be liable for any lost earnings suffered.
[27] Anil Raju sent a further email at 11.02 am confirming in writing that the tenants upstairs are living there and points out it is illegal to use the Premises as accommodation. Anil Raju asks the landlords to “sort this out ASAP” stating that the tenants use more water than Master Design.
[28]Later that day Joanne Eldrett emailed at 3.46 pm saying:
Re: your email dated 10th December 2022. Inspection today at 8 am.
Report from Inspection:
Building is dry apart from a couple of small leaks which may have been caused by an open window.
[29] The email says that there is evidence Master Design is manufacturing and asks it to please stop, saying “the building is only be used for ‘storage and retail of furniture and associated items.’” Joanne Eldrett said the building is a mess — attaching photos
and stating “[r]ent arrears (see attached). You have ignored all reminders. Please urgently pay outstanding amount of $43,074.04.” Only the photos are attached to the email in evidence; not the summary of rent arrears.
[30] On 10 January 2023, Joanne Eldrett sent an email giving Master Design notice of termination stating:
Your tenancy terminates on 9th February 2023 which is 20 working days’ notice. Please remove all your property from the premises by 9th February 2023.
[31] Grant Doonan’s evidence regarding termination is that after the three‑year term of the Lease expired on 1 December 2022, Veronica West decided to terminate Master Design’s periodic tenancy by notice.
[32] On 12 January 2023, Anil Raju sent a long email to Grant Doonan and Joanne Eldrett, referring to his previous email, noting that the shop is currently closed as staff members did not come to work as a result of Thomas Doonan’s harassment. Anil Raju says that “if this matter ends up in court then [Master Design] will counter[s]ue for all damages for last over 3 years as per emails and all loss of business due to staff not coming to work from 17 December 2022 and their wages”. He notes issues with the fire exit leading to locked side gate, a health and safety issue acknowledged but not acted on by the landlords, and to a resulting inability to trade Sundays. Anil Raju further notes that the landlords agreed to lease the Premises for manufacturing, that the real estate agent will be required to testify and that Master Design has emails to prove their electrician installed a three-phase power point for the manufacturing machines. The email finishes by saying that he will get Salesh Chand at Gilligan Rowe, Master Design’s accountants, to email on his return to the office in January to discuss Master Design’s losses and damages.
[33] On 17 January 2023, Gilligan Rowe sent a letter referring to the financial hardship Master Design has come under and asking for financial relief. The letter provides a summary of facts focusing on:
(a)the issue with the closure of the fire exit gate on Sundays resulting in an inability to open and a loss of income of $5,997 each week;
(b)water damage issues estimated to have happened at least 50 times costing approximately $3,000 on each occasion;
(c)that it was agreed the Premises would be used for manufacturing;
(d)that the roller door was broken in 2020 and has made access difficult, and is estimated to have cost the business $250 per week;
(e)that the business had to close down during COVID-19 lockdowns which resulted in significant loss of income over those periods despite minimal reductions in rent and government support;
(f)Thomas Doonan’s harassment between 14 to 17 December 2022 to the point where staff did not work between 17 December 2022 and 16 January 2023, with harassment continuing on 16 and 17 January 2023 and noting that Anil Raju has been in contact with his lawyer regarding continued harassment.
[34] The letter finishes by saying in light of the disruptions, harassment and hardships to the business, Anil Raju requests that all overdue rent and outgoings are written off up to January 2023 and asks the landlord to finalise the Lease allowing manufacturing to take place.
[35] On or about 23 January 2023, Veronica West served Master Design with a statutory demand relating to the period Veronica West owned the Premises between 31 March 2021 to 31 December 2022. The demand sought payment of $48,817.13 for alleged arrears of rent, outgoings and interest.
[36] On 3 February 2023, the Doonan Trust served Master Design with a statutory demand relating to the period the Doonan Trust owned the Premises between November 2019 to March 2023. The demand sought payment of $16,207.51 for alleged arrears for outgoings plus interest.
Legal principles applying to setting aside a statutory demand
[37] Failure to comply with a statutory demand is one of the mechanisms by which insolvency is established under pt 16 of the Companies Act 1993. A creditor may serve a statutory demand on a company in respect of any debt owed that is not less than the prescribed amount of $1,000.2 A company served with a statutory demand may apply to the court to set it aside but must do so within 10 working days of service.3
[38] The court’s power to set aside a statutory demand is provided by s 290(4) of the Companies Act:
(4)The court may grant an application to set aside a statutory demand if it is satisfied that—
(a)there is a substantial dispute whether or not the debt is owing or is due; or
(b)the company appears to have a counterclaim, set-off, or cross‑demand and the amount specified in the demand less the amount of the counterclaim, set-off, or cross-demand is less than the prescribed amount; or
(c)the demand ought to be set aside on other grounds.
[39] The Court of Appeal confirmed the principles a court should apply when exercising the s 290(4) discretion in Confident Trustee Ltd v Garden and Trees Ltd:4
[16]The general principles under s 290(4) are well settled:
(a)The onus is on the applicant seeking to set aside the statutory demand to show that there is arguably a genuine and substantial dispute as to the existence of the debt. The Court’s task is not to resolve the dispute but to determine whether there is a substantial dispute that the debt is due.
(b)The mere assertion that a dispute exists is not sufficient. Material short of proof is required to support the claim that the debt is disputed.
(c)If such material is available, the dispute should normally be resolved first in ordinary civil proceedings before any statutory demand is issued.
(d)If a counterclaim, cross-demand or set-off is suggested an applicant must establish that this is reasonably arguable in all the circumstances.
2 Companies Act 1993, s 289; and Companies Act 1993 Liquidation Regulations 1994, cl 5.
3 Companies Act 1993, s 290(2).
4 Confident Trustee Ltd v Garden and Trees Ltd [2017] NZCA 578 (footnote omitted) confirmed by the Court of Appeal in Demasol Ltd v South Pacific Industrial Ltd [2022] NZCA 480 at [26].
(e)It is not usually possible to resolve disputed questions of fact on affidavit evidence alone, particularly when issues of credibility arise unless such evidence is contrary to the available documents or earlier statements made by the parties.
[40] Master Design’s application is pursuant to both s 290(4)(a), that there is a substantial dispute whether or not the debt is owing, and s 290(4)(b), that it has a counterclaim.
Section 290(4)(a): A substantial dispute
[41] To succeed in an application under s 290(4)(a) the applicant must demonstrate a “fairly arguable” basis for the alleged dispute.5 The onus of establishing the dispute is on the applicant. In AAI Ltd v 92 Lichfield Street Ltd (in rec and liq) the Court of Appeal summarised the applicant’s task:6
What the applicant must show is that the dispute it raises has substance; the applicant must explain to the court what the dispute is; and the dispute so shown must be a real and not a fanciful or insubstantial dispute. The Court must bear in mind that it is operating in the summary jurisdiction, with the accompanying disadvantages that brings for any applicant. The Court must also keep in mind the requirement that what is intended to be a summary hearing should not be converted into a full-blown trial.
[42] The court is not required to accept without question a bare assertion of facts, or “whatever unvarnished statements may happen to be made on affidavit”,7 and the debtor company must point to evidence, short of proof, of its claim.
Section 290(4)(b): Counterclaim, cross demand or set-off
[43] Where an applicant is seeking to set aside a statutory demand on the basis of a set-off or counterclaim, and the quantum of the counterclaim is in dispute, the applicant must be able to point to evidence showing that it has a real basis for the claimed set-off or counterclaim.8 In Manchester Securities Ltd v Body Corporate 172108, the Court of Appeal held an applicant must show “clear and persuasive
5 Forge Holdings Ltd v Kearney Finance (NZ) Ltd HC Christchurch M149/95, 20 June 1995; and
United Homes (1998) Ltd v Workman [2001] 3 NZLR 447 (CA) at [32].
6 AAI Ltd v 92 Lichfield Street Ltd (in rec and in liq) [2015] NZCA 559, [2016] NZAR 1338 at [22] (footnote omitted) citing Re A Company [1991] BCLC 737 (Ch) at 740.
7 United Homes (1988) Ltd v Workman, above n 5, at [34].
8 Covington Railways Ltd v Uni-Accommodation Ltd [2001] 1 NZLR 272 (CA) at [11].
grounds” for a set-off, rather than mere assertion.9 In addition, the applicant must show that the amount of the set-off (or counterclaim as it is here) is equal to or more than the amount claimed in the statutory demand.10
[44] Because applications to set aside statutory demands are determined by the court in its summary jurisdiction, the principles developed for summary judgment apply by analogy.11 The following passage from the Court of Appeal’s decision in Krukziener v Hanover Finance Ltd is useful:12
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 … 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.
Is there a substantial dispute as to whether the applicant’s debts are due or owing?
[45]Clause 27.5 of the Lease provides:
If there is an emergency and the Tenant is unable to gain access to the premises to fully conduct the Tenant's business from the premises because of reasons of safety of the public or property or need to prevent reduce or overcome any hazard, harm or loss that may be associated with the emergency including:
(a)a prohibited or restricted access cordon applying to the premises; or
(b)prohibition on the use of the premises pending the completion of structural engineering or other reports and appropriate certifications required by any competent authority that the premises are fit for use; or
(c)restriction on occupation of the premises by any competent authority,
Then a fair proportion of the rent and outgoings shall cease to be payable for the period commencing on the date when the Tenant became unable to gain access to the premises to fully conduct the Tenant’s business from the premises until the inability ceases.
9 Manchester Securities Ltd v Body Corporate 172108 [2018] NZCA 190, [2018] 3 NZLR 455 at [27].
10 At [28].
11 At [34].
12 Krukziener v Hanover Finance Ltd [2008] NZCA 187, [2010] NZAR 307 at [26] (citations omitted).
[46] The respondents accept that the COVID-19 pandemic was an emergency for the purposes of cl 27.5 and that it is arguable that the reference to the Tenant being “unable to gain access to the premises” covers staff as well as customers and suppliers.13
[47] The respondents say that the trustees of the Doonan Trust and Veronica West provided Master Design with a full abatement at Alert Level 4 of the COVID-19 Alert System but not Alert Level 3. The respondents say that the sole basis on which Master Design disputes its debts is that it was also entitled to an abatement of rent at Alert Level 3. The respondents say the remaining issue is whether Master Design has discharged its burden of showing that, at Alert Level 3, it was “unable to access to the premises to fully conduct [its] business” and is entitled to an abatement.
[48] The respondents accept that Auckland was at Alert Level 3 at the following times:
(a)23 to 25 March 2020.
(b)27 April to 13 May 2020.
(c)12 to 30 August 2020.
(d)14 to 17 February 2021.
(e)28 February to 7 March 2021.
(f)21 September to 2 December 2021.
[49] But the respondents submit Master Design has not addressed the nature of Alert Level 3 restrictions in evidence or submissions. They say at Alert Level 3, unlike Alert Level 4, non-essential businesses were permitted to reopen and could trade with customers in a contactless manner. Thus, the respondents say that at Alert Level 3:
13 See Coffee Culture Franchises Ltd v Home Straight Park Trustees Ltd [2021] NZHC 577 at [28].
(a)Master Design and its employees were able to access the Premises.
(b)Master Design’s customers were not themselves able to access the Premises.
(c)However, Master Design’s customers could be served from the Premises.
[50] On the face of the Alert Level 3 restrictions, the respondents therefore submit that Master Design could conduct business and so it is incumbent on Master Design to establish that it was nevertheless materially restricted in doing so. Instead, the respondents say that Master Design relies solely on the assertion by Anil Raju in his affidavit that:
In relation to the rent owed, during all lockdowns Level 3 and 4, Master was closed due to the government imposed restrictions relating to COVID-19. Master did not have access to and was unable to operate business from the Leased Premises during these months.
[51] The respondents say that this assertion should be rejected as insufficient because it is pure assertion, unsupported by “any ‘material’ whatsoever” and contradicted by available documents.
[52] However, the affidavit of Grant Doonan itself attaches printouts from the Facebook page for Master Design recording that during Alert Level 3, appointments could be booked for one customer at a time and that payments could be made online.
[53] There are also emails recording the difficulties Master Design was having and there are emails providing evidence in February 2022 that the store was required to close because of COVID-19 infections amongst the staff including from Grant Doonan who had noticed the store was closed.
[54] Master Design is not required to prove its position is correct but must provide sufficient evidence that it is more than a mere assertion. The respondents make much of Master Design’s evidence that it was unable to access the Premises during Alert Level 3 when the respondents say it was clearly able to do so. In my view,
although Master Design’s evidence could have been worded more clearly, there is sufficient evidence to establish that it is reasonably arguable that Master Design was unable to fully operate its business.
[55] The correspondence annexed to the affidavit does not present a full picture but there is sufficient evidence of requests for reductions as a result of the COVID-19 crisis. This includes emails in January 2022 firstly from Anil Raju to Thomas Doonan stating:
Thanks for acknowledging that we couldn’t retail for over four months now due to covid restrictions and so for all of Auckland.
…
According to governments covid update it encouraged landlords and tenants to work together to get through this [crisis]. You have ignored all our past emails.
[56]Joanne Eldrett replied saying:
Please see attached ledger showing the rent arrears after the landlord contribution of 100% during level 4 lockdown in August and September 2021.
If you could organise payment of these outstanding rents as soon as possible.
[57] There was no acceptance by Master Design following this email that the landlord’s contribution was a fair reduction.
[58] On 12 January 2023, prior to issue of the statutory demand, Anil Raju emailed Joanne Eldrett and Grant Doonan, as detailed above in [33]. The email does not mention reductions as a result of COVID-19 but finishes by saying that Anil Raju would get Salesh Chand, to email on his return to the office in January 2023.
[59]The 17 January 2023 letter from Salesh Chand at Gilligan Rowe, stated that:
The Business had to close down during the covid lockdowns which resulted in a significant loss of income over those periods despite minimal reductions in rent and government support.
[60] The letter is drafted as a request for financial relief given the financial hardship of the company rather than expressly relying on cl 27.5 of the Lease. However, Master
Design simply needs to establish that it is arguable that there is a substantial dispute that the amount is owing.
[61] Master Design relies on Burgered Restaurants Auckland Limited v Chunilal where Gendall J set aside a statutory demand where there was a dispute over rent abatement for the period when COVID-19 restrictions were in place, stating:14
[46] Isolation and the close contact rules, according to the applicant, otherwise were not standard procedures for dealing with sick employees. These measures were newly-imposed it says and they have restricted the ability of staff to access the applicant’s leased premises to enable it to fully conduct its business. The applicant says this is precisely what cl 27.5 is designed for, which is to help relieve the burden of rent and outgoings during an emergency when parties such as the applicant cannot properly and fully conduct business and its income is significantly reduced as a result. The applicant notes too that there is no prescribed formula, either in the Lease or elsewhere, which provides clear details as to how an automatic rental or outgoings abatement is to be calculated, or what is to be a fair and reasonable proportion of such payments in all the prevailing circumstances. Clearly, it suggests, this is something that can only be determined by agreement between the parties or by mediation or arbitration. What the applicant maintains is clear is that if cl 27.5 is triggered, as it submits is the case here, then it is entitled to an abatement of some yet to be determined value. It follows, therefore, that what the respondents are endeavouring to claim in the statutory demand is clearly incorrect and at this stage is entirely uncertain. The applicant says this is a matter for arbitration or mediation in terms of cl 43.1 – 43.4 of the Lease if first the parties, as seems to be the case, cannot come to an agreement.
[47] No agreement has been reached on these issues. The applicant’s contention, as I note, is that the correct process to follow now is that mediation or arbitration is undertaken, given that cl 27.5 has been triggered, and there is uncertainty as to the amount of any rent and outgoings now due. I agree.
[62] Master Design further refers to Coffee Culture Franchisees Ltd v Home Straight Park Trustees Ltd where Associate Judge Bell held:15
[28] Clause 27.5 applies if there is an emergency and the tenant is unable to gain access to the premises to fully conduct the tenant’s business. It is helpful to consider the lease without an emergency and the access that the tenant would enjoy under normal circumstances. “Access” means that the tenant and those associated with it may enter, stay in the premises and leave. It must be remembered that the tenant itself is a company, an artificial entity without a physical presence. It would not make sense to say that access is restricted to the company and does not extend to the humans associated with it. The lease gives the tenant exclusive possession of the premises. With that, the tenant has the right to occupy the premises and the right to allow and bar entry to others. It can control access and has access itself. The permitted use
14 Burgered Restaurants Auckland Limited v Chunilal [2022] NZHC 1903 (footnote omitted).
15 Coffee Culture Franchisees Ltd v Home Straight Park Trustees Ltd, above n 13.
under the lease is a café and restaurant. To operate as a café and restaurant the tenant must be able to have access to the premises for its staff, for contractors such as cleaners, for suppliers and also for customers. If customers cannot access the premises, the business cannot operate. A requirement for access must be access to allow the business to operate. That covers suppliers, staff and customers. When cl 27.5 says "the tenant is unable to gain access to the premises to conduct the tenant's business", that means that those people cannot access the premises as they normally would but for the emergency.
[63] In this case, in the same way as for the café in Coffee Culture Franchises Limited, the tenant must be able to access the premises, including for customers. If customers cannot access the premises, the business cannot operate. The Facebook page suggests that customers could only access the Premises one by one. It is reasonably arguable that this does not amount to fully operating the business.
[64] Clause 27.5 provides that where the business was not able to “fully operate” a fair proportion of the rent and outgoings “shall cease to be payable”. There is no evidence that Master Design ever accepted that the reduction for COVID-19 was a fair proportion of the rent and outgoings. The fact that Master Design refused to pay amounts owing from as far back as 2020 supports its position that it does not consider that the amounts by which rent and outgoings were reduced was fair.
[65] There appears to be an additional issue as to whether Master Design is entitled to further abatement for the periods at which Auckland was at Alert Level 4 as cl 27.5 relates not only to rent but also to outgoings.
[66] Auckland was at Alert Level 4 from 25 March 2020 to 27 April 2020 and from 17 August 2021 to 21 September 2021. In those periods the landlords only reduced rent not outgoings. Clause 27.5 provides that a fair proportion of rent and outgoings ceases to be payable. If there is disagreement, it appears the parties are required by cl 43 to go to mediation and arbitration or bring ordinary proceedings.
[67] In circumstances where there is a right to an abatement in the Lease, rent has been paid for more recent periods and the COVID-19 issues were raised prior to service of the statutory demands, I consider that there is clearly a substantial and genuine dispute in respect of rent at Alert Level 3 and outgoings at both Alert Levels 3 and 4.
[68] Any reduction in rent pursuant to cl 27.5 of the Lease amounts to an abatement of rent and outgoings, rather than a set-off, so it would not be prevented by the no set‑off clause in the Lease as it affects the rent lawfully payable.
[69] In addition, Master Design queried the outgoings payable as the tenants upstairs were living in the property and yet Master Design considered they were paying 100 per cent of the outgoings.
[70] The respondents say that the invoices clearly record that Master Design was only invoiced for 66 per cent of the outgoings payable on the basis that Master Design occupied 66 per cent of the net leasable area of the Premises.
[71]The Lease provides at cl 3.1 that:
The Tenant shall pay the outgoings properly and reasonably incurred in respect of the property which are specified in the Trust Schedule. Where any outgoing is not separately assessed or levied in respect of the premises then the Tenant shall pay such proportion of it as is specified in the First Schedule or if no proportion is specified then such fair proportion as shall be agreed or failing agreement determined by arbitration.
[72] In addition, cl 3.2 provides that “the Landlord shall vary the proportion of any outgoing payable to ensure that the Tenant pays a fair proportion of the outgoings”. Clause 3.3 provides:
If any outgoing is rendered necessary by another tenant of the property… then that outgoing shall not be payable by the Tenant.
[73] The first schedule to the Lease records that the proportion of outgoings as referred to in cl 3.1 is 100 per cent. Although the respondents say Master Design was only paying 66 per cent of the outgoings based on the relative areas of each tenancy and that this was clear on the invoices, it appears that this was not a matter agreed between the parties. Clause 3.1 of the Lease makes it clear that where it is not agreed, any dispute is to be determined by arbitration.
[74] In these circumstances there is an additional genuine and substantial dispute in relation to the outgoings that was clearly raised prior to service of the statutory demands.
Doonan Trust statutory demand
[75] The amount owing to the Doonan Family Trust for the period 10 October 2019 to 31 March 2021 is for outgoings of $12,090.26 plus interest of $3,575.80. If the outgoings are not payable, then no interest can be due.
[76] It is not a situation where the amount of the statutory demand can be reduced to an uncontested amount as there is no formula for working out what would be a fair proportion, especially given the number of periods in which Auckland was at Alert Levels 3 and 4.
[77] In my view, therefore, the whole of the amount of the statutory demand issued by the Doonan Trust ought to be set aside on the basis it is reasonably arguable that there is a genuine and substantial dispute whether it is owing.
Veronica West statutory demand
[78] The statutory demand issued by Veronica West for the period 31 March 2021 to 31 December 2022 is for $29,616.19 in unpaid rent, $13,457.85 in outgoings plus interest of $5,743.09. I am conscious that the total rent payable per year was
$74,750.04, including GST until November 2021 before it was increased to
$78,533.52 from December 2021. The $29,616.19 in unpaid rent represents a significant portion of the total rent payable for 2022.
[79] In addition, the amounts owed to Veronica West are from March 2021 onwards during which there was only one period when Auckland was at Alert Level 3. Again, however I do not consider that I can reduce the amount payable to an uncontested amount as there is no formula available on which to do so and a fair proportion by which rent and outgoings ought to be reduced requires an understanding of the full factual position. That is not an exercise that can be undertaken in an application to set aside, it is a matter for arbitration or an ordinary proceeding.
[80] As a result the whole of the Veronica West statutory demand should also be set aside because again it is reasonably arguable that there is a genuine and substantial dispute as to whether the debts are due and owing.
[81]For completeness I discuss the counterclaims raised.
Does the no set-off clause prevent reliance on the counterclaims?
[82] The respondents rely on Browns Real Estate Ltd v Grand Lakes Properties Ltd to submit that the no set-off clause in the Lease prevents Master Design relying on any counterclaim.16 But in that case the no set-off clause required the lessee to pay the “rent and any other money required to be paid by the Lessee pursuant to this Lease, to the Lessor without demand from the Lessor and free of any deduction, withholding, set-off or reduction on any account”.17
[83] Here the no set-off clause, cl 1.1, only provides “[a]ll rent shall be paid without any deductions or set-off by direct payment to the Landlord or as the Landlord may be direct”. There is then a separate outgoings clause that does not contain a no set-off provision. The no set-off clause in cl 1.1 does not therefore prevent reliance on counterclaims to set-off against outgoings.
Counterclaims
[84]Master Design raises five counterclaims:
(a)the allegedly broken roller doors;
(b)the alleged wasted space;
(c)the locked gate preventing use of the fire exit door;
(d)the alleged water damage; and
(e)the breach of the covenant of quiet enjoyment.
16 Browns Real Estate Ltd v Grand Lakes Properties Ltd [2010] NZCA 425 at [17].
17 At [5] (emphasis added).
Allegedly broken roller doors
[85] Master Design alleges the roller door leading to the dispatch area was not working for the whole of the tenancy, making access difficult and costing the business
$250 per week.
[86] The 17 January 2023 Gilligan Rowe letter sent prior to issue of the statutory demands, summarises this matter saying: the roller door was broken in 2020 which made access difficult and it is estimated to have cost the business $250 per week. Emails were sent by Anil Raju in May, June and September 2020 raising the matter.
[87] The respondents submit that there is unrebutted evidence that when Thomas Doonan inspected the doors he found both the inwards goods and dispatch roller doors in working order and that Master Design did not subsequently raise any further issues regarding the roller doors until the conclusion of the Lease in 2023.
[88] I presume the respondents say the evidence of Thomas Doonan is unrebutted because they applied for Anil Raju’s reply evidence not to be read. However, as I have allowed the reply evidence in, the evidence is rebutted by Anil Raju. Mr Raju’s evidence is that one roller door was welded shut from the day Master Design moved into the Premises until the day it moved out. Photographs of the door welded shut are annexed to his affidavit.
[89] This is not a matter that can be determined in the context of an application to set aside a statutory demand. There is clearly a factual dispute between the parties which needs to be determined either in arbitration or ordinary proceedings, including any loss suffered as a consequence. For the purposes of this application to set aside, I cannot discount this as an available counterclaim.
Alleged wasted space
[90] Master Design submits that it was told at the time of executing the Lease that the rubbish bin could be stored on the driveway on the right-hand side of the Premises which Master Design had full access to. Master Design says it understood the Doonan Trust owned this driveway but subsequently learnt it did not. Master Design says that
its losses include the rent it has overpaid for an area inside which could not be used as it had little choice but to store the rubbish bin inside the Premises. This restricted its use and enjoyment of the Premises and created a health and safety hazard.
[91] Anil Raju’s evidence is that this issue was raised in correspondence with the landlord and that the loss ought to be the rent that Master Design has paid for the areas it is unable to utilise.
[92] This counterclaim does not feature in the correspondence annexed to the affidavits in the same way that the other counterclaims do and the extent of the loss is difficult to assess. Because of the view I have come to in relation to the debts themselves and the remaining counterclaims, I do not need to determine whether this counterclaim can be relied on.
Keys to the side gate
[93] Master Design says that since the commencement of the Lease it has been unable to operate its business on Sundays due to the failure of the respondents to provide it with a key to the gate on the left side of the Premises. The gate was locked every Sunday and prevented Master Design from trading because the fire exit door for the Premises is on the left side. In the event of a fire, all people inside the store would be unable to evacuate the Premises through the fire exit door as they could not pass through the locked gate to the fire safety assembly area, across the road from the Premises.
[94] Master Design provides evidence (including video evidence) that it has repeatedly requested a key to this gate, and that a key has not been provided.
[95] Master Design calculates its loss of income from the resulting inability to trade on Sundays as approximately $5,997.00 per week, $935,532 over the period of the Lease.
[96] The respondents say that the unrebutted evidence of Grant Doonan is that the gate in question is not part of the Premises and therefore Master Design does not have any rights to use that property and that this is sufficient to dispose of this counterclaim.
In any event the respondents say that the door referred to by Master Design does not have to be used as the sole and dedicated fire exit for the Premises. The respondents rely on evidence from Laurence Christiansen, a building compliance inspector, who for several years has been responsible for inspecting the Premises and issuing its Building Warrant of Fitness. Laurence Christiansen explains in his affidavit that:
[I]f all other final exit doors on the opposite side of 9 Veronica Street are kept clear – as they were, based on our inspections before Master Design Furniture Limited leased the premises – then the alternative means of escape from the building are deemed to be adequate.
[97] The respondents say that the Master Design’s assertions to the contrary as to the suitability of the fire exits from the Premises are irrelevant and do not give rise to disputed questions of fact.
[98] In Anil Raju’s reply affidavit, he attaches photographs of the alternative fire exit referred to in Laurence Christiansen’s affidavit. These photos show that the alternative exit requires a ladder and raises issues as to visibility of the fire exit from the retail space.
[99] Furthermore, Laurence Christiansen’s evidence for the respondents confirms that the gate in question is locked on Sundays contrary to the evidence given by Thomas Doonan that the gate is closed but not locked.
[100] It certainly appears that there are disputed facts in relation to the fire exits in the Premises. Again, this is not a matter that can be determined in the context of summary proceedings for the setting aside of a statutory demand. The loss claimed is significant and appears likely to be difficult to establish at the level claimed. However, even if a much-reduced loss could be established, it may still be sufficient to balance out any debt owing.
Alleged water damage
[101] There is significant evidence that the Premises has leaked throughout the Lease. This includes only a month prior to the statutory demand, on 12 December 2022, when Anil Raju wrote to Grant Doonan and Joanne Eldrett saying that the shop had flooded again “costing them 5 rugs at $599 each and 1 very big rug for $799 total
cost of $3794”. Anil Raju also advised that 53 wooden sofa legs were damaged, each costing $45 to replace amounting to $2,385.00. The email says that the shop stinks and that Master Design will have to close for two to three days to clean-up. Anil Raju calculates the loss of sales at four furniture sets per day with a retail price of $1,999.00 equating to a total loss of $7,996 per day. Mr Raju’s evidence is that this does not include the cost of wages for staff cleaning up the mess.
[102] The above email followed an earlier email on 10 December 2022, in which Anil Raju asked Grant Doonan and Joanne Eldrett to “please confirm when will all the leaking of the building be repaired?” The email says that the over 40 meters of the building’s wall leaks when it rains, that the fire exit door overflows with rainwater and the “[f]ront entrance overflows with water when it rains.” Anil Raju suggests that the landlords need to dig outside the wall and waterproof it from the outside in order to prevent water leaking inside. The email records that one roof repair was done on 8 December 2022 but that the other roof repairs could not be done due to a lack of materials. The email continues:
As per our previous email foam getting damaged and we requested a container for storage but our emails have been ignored and so far this year total cost of
$60,000 and not counting last two years of damages $90,000, we have chain of emails to prove this issue we’ve raised since we’ve been moved in.
[103] The email further records that Master Design dropped off a forty foot container to store foam so that if it rains there will be minimal damage of $2,000 per event in case of flooding. It does however state that the cost will be passed on to the landlords to pay. The pictures attached to Anil Raju’s updating affidavit include photos of allegedly damaged fabric and a photo of the room after it had been cleared of fabric. The photograph appears to show water damage around the walls and on the floor.
[104] Master Design estimates the losses as a result of the damaged fabric as amounting to approximately $95,603.97 including GST with handwritten calculations and a quote from a fabric supplier.
[105] In my view there is clearly a reasonably arguable counterclaim in relation to water damage and losses arising from flooding of the store. Again, the loss that has been suffered by Master Design is not a matter that can be determined on a summary
basis. This counterclaim alone could cancel out any amounts still owing in respect of rent and outgoings if Master Design establishes the fabrics and rugs were damaged as alleged, as well as losses suffered for the time during which the shop was required to be closed.
Breach of quiet enjoyment
[106] Master Design alleges that Thomas Doonan regularly visited the Premises uninvited and threatened and harassed the employees of Master Design. Master Design says that during these visits, Thomas Doonan also told customers present that Master Design did not want to pay rent and that these aggressive approaches caused Master Design to lose sales. It says that the harassment was so severe that from mid-December 2022 to 15 January 2023, the staff employed by Master Design occasionally refused to attend work.
[107] Master Design says that the loss suffered as a result of the inappropriate conduct of Thomas Doonan is at a minimum approximately $64,000. This includes:
$4,000.00 per week of wages during the four weeks that staff did not return to work (total of $16,000); lost income of $12,000 when Master Design was unable to operate because of the staff refusing to come to work; and a further $9,800.00 loss in sales from five customers.
[108] Thomas Doonan has denied the allegations and the respondents say the allegations are fanciful, lack any foundation and are based entirely on assertions by Anil Raju. Furthermore, they submit they are not supported by any evidential material, nor are they corroborated by members of staff who were allegedly threatened or harassed.
[109] However, there are several emails annexed to the affidavits referring to unannounced visits, filming of staff and threats being made, all prior to issue of the statutory demands. Furthermore, Anil Raju provides videos of Thomas Doonan attending the Premises which appear to show Thomas Doonan videoing staff members and refusing to leave when asked.
[110] The respondents say that the evidence that the shop could not open because staff refused to come to work in December 2022 and January 2023 is contradicted by contemporaneous documentary evidence showing that Master Design merely closed for the Christmas holidays.
[111] Although after notice of termination of the Lease, Anil Raju did raise the closure in the email to Joanne Eldrett on 12 January 2023 prior to service of the statutory demand. The email recorded that:
As per my previous email please note we are currently closed as all our staff members didn’t come to work after Tom Doonan’s harassment.
[112] Section 218 of the Property Law Act 2007 codifies into all leases coming into operation on or after 1 January 2008 certain covenants including that:18
The lessee and all persons claiming under the lease will be able to quietly enjoy the leased premises without disturbance by any person specified in section 218(2).
[113] Relevantly, persons specified by s 218(2) include the lessor. There is therefore a proper basis for the counterclaim if the factual disputes in terms of Thomas Doonan’s actions are determined in favour of Master Design. This potentially provides another fairly arguable counterclaim which needs to be determined in arbitration or ordinary proceedings.
[114] Again this is a factual dispute that is unable to be resolved in the context of an application to set aside statutory demands.
Conclusion
[115] I have no hesitation in finding that the statutory demands ought to be set aside. Disputes were clearly raised both in relation to the amounts owing and other losses suffered. The terms of the Lease require a fair reduction in rent and outgoings in respect of the pandemic where the business cannot fully operate and also allow any losses suffered to be set off against outgoings. The quantum of the losses suffered is
18 Property Law Act 2007, s 218, pt 2 of sch 3, cl 9.
not able to be determined in the context of these applications but it is fairly arguable that the quantum would exceed any amounts properly owing.
Result
[116] The applications to set aside statutory demands issued by Veronica West Limited dated 20 January 2023 and the Doonan Family Trust dated 3 February 2023 are granted.
Costs
[117] Master Design asked to be heard on costs if it was successful. I ask the parties to confer and only if agreement cannot be reached, for memoranda of no more than three pages (excluding schedules) to be filed on behalf of Master Design within 30 working days and the Doonan Family Trust and Veronica West, a further 10 working days.
Associate Judge Sussock
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