Maxwells Drycleaning Limited v Masfen Holdings Limited HCAuckland CP 347-Sw/01

[2001] NZHC 910

IN THE HIGH COURT OF NEW ZEALAND
AUCKLAND REGISTRY CP 347-SW/01

BETWEEN MAXWELLS DRYCLEANING LIMITED
Plaintiffs

AND MASFEN HOLDINGS LIMITED
Defendant

Hearing: 18 and 19 September 2001

Counsel: K W Berman and M Rana for Plaintiff
B Hunt for Defendant

Judgment: 28 September 2001

JUDGMENT OF SALMON J

Solicitors:
KPMG Legal, DX CP 22001, Auckland
Beca & Co, DX CP 24019, Auckland

[1] These proceedings are brought in contract and under The Fair Trading Act 1986. The relief sought under both heads seeks orders which would have the effect of requiring the defendant to enter into a new lease with the plaintiff, or in the alternative, an enquiry into damages. At the commencement of the hearing the plaintiff filed, by consent, an amended statement of claim deleting Rhayader Industries Ltd as a plaintiff and making consequential amendments. An amended statement of defence was also filed. At the defendant’s request I reserved any costs issues arising from this late change.

[2] The plaintiff does not ask the Court to assess damages in the event of a finding that such are appropriate, but does ask that the Court should direct the approach to be taken for the calculation of damages and, if a loss of opportunity approach is adopted, the plaintiff wishes the Court to direct the percentage of probability to be applied to the calculation.

Background

[3] There is a relatively new shopping centre on the Kepa Road ridge in Auckland. One of the original tenants in that centre was Rhayader Industries Ltd (Rhayader). The directors of that company were Mr and Mrs Lowther, who guaranteed the lease. The owner of the shopping centre at that time was Kepa Developments Ltd. Kepa Developments and Rhayader entered into a six year lease commencing on 7 November 1995 and expiring on 6 November 2001. The lease contains no right of renewal. It does contain provision for a rent review on “each two yearly anniversary of the commencement date”. Rhayader conducted a drycleaning business. Mr Laurie Lowther, who was one of the guarantors of the lease, gave evidence that Rhayader traded under the name of Maxwells Drycleaning at that and six other locations in Auckland. In late 1999 the business was transferred to Maxwells Drycleaning Ltd. Mr and Mrs Lowther are directors of that company. The landlord was notified of the change. By that time the lessor was the defendant company which purchased the shopping centre somewhere between 1997 and the end of 1999.

[4] The first rent review was due in November 1997. No review was sought by the landlord. In 1999 the landlord requested an increase in rental to $663.53 per square metre. The tenant countered with the proposal of $550 per square metre and ultimately a compromise was reached at a figure of $575 per square metre.

[5] In early 2001 Mr Lowther received a call from a Ms Masfen of Retail Solutions (a leasing agent). The recollection of the content of that call differs considerably between the two participants. Ms Masfen says that she asked Mr Lowther what his intentions were on expiry of the lease and that he said he wanted to stay. She then responded that she would get Mr Seeto of Jones Lang Lasalle Ltd to make contact with him.

[6] Mr Lowther, on the other hand, says that whilst the conversation was brief he confirmed that his company wanted a new lease for a further six years. He says that Ms Masfen told him that a letter confirming agreement to a further six year term would follow. He said agreement had been reached that there would be a further six year lease on the same terms and conditions. That was denied by Ms Masfen. I will address that difference later in this judgment.

[7] The next event was a letter of 30 March 2001 sent by Jones Lang Lasalle, the property managers of Eastridge to Mr Lowther. Because of its importance I set the content of that letter out in full.

“SHOP 5 - LEASE RENEWAL - EASTRIDGE SHOPPING CENTRE

Further to your discussions with Belinda Masfen of Retail solutions, we understand that you have indicated your interest in signing a new lease for the above tenancy.

We advise that the Lessor is willing to offer a six year lease commencing 7 November 2001 at an annual rental of $32,704 per annum plus GST ($700 per square metre). The terms and conditions of the lease would remain the same as the existing lease.

Could we please have your reply by Thursday 12 April 2001 so that we may make necessary arrangements.”

[8] Mr Lowther replied on 3 April in the following terms:

“RE; Shop 5 Lease Renewal - Eastridge Shopping Centre

Further to our discussions on 2nd April 2001 regarding the aforementioned lease renewal, Maxwells is happy to enter into a new six year lease on the same terms and conditions.

We are concerned at your rental expectation of $700 per square metre and note that we are currently paying $575 psm and that the centre is beginning to have a few vacancies again. Drycleaning although a very stable business and good long term tenant, does have its limitations with regard to occupancy costs. Such occupancy costs at Eastridge are dangerously close to our threshold for this store, given fairly average trading levels in the past 18 months.

We would propose a new lease being entered into for a term of six years at a new rental of $600 psm.

Could we please have new lease documents under the name of Maxwells Drycleaning Ltd forwarded to Box 25 791 St Heliers at your earliest convenience.”

[9] Mr Lowther’s evidence was that he then heard nothing from the landlord or its agents, for some weeks. On 19 May he heard from another person in the drycleaning business that the plaintiffs would be losing their shop at Eastridge. He immediately telephoned Mr Seeto, of Jones Lang Laselle, on receiving that advise. He said Mr Seeto’s response was that he knew nothing about a lease to another drycleaner and that he would get on to the owner. He also says that at Mr Seeto’s suggestion he telephoned Ms Masfen who told him that she knew nothing about these things and that he should talk to Mr Seeto. Ms Masfen agrees that Mr Lowther rang her, but says that it was on 18 May when she was on her way to a wedding in Rotorua. She agrees that she told him to contact Mr Seeto, but said nothing more as she had no authority to disclose any information to him.

[10] Mr Seeto says that he received two calls from Mr Lowther prior to 22 May on each occasion asking what was happening with the lease. He says that on each occasion he told Mr Lowther that he did not know what the position was and that he would try to get a response from the owner. It seems probable then that Mr Lowther did ring Mr Seeto twice, the second time being after his conversation with Ms Masfen and that both conversations took place around 18 May.

[11] Mr Seeto wrote to Mr Lowther on 22 May in the following terms:

“SHOP 5 - LEASE RENEWAL - EASTRIDGE SHOPPING CENTRE

Thank you for your letter dated 3 April 2001 in respect of your counter-offer for the reviewed rental to be set at $600 per square metre.

We regret to advise that a new tenant has been secured to lease Shop 5 at the rental level sought by the Lessor. This is after taking into consideration your comments that an increase to $600 per square metre is already dangerously close to the threshold for the store.

Your contribution to Eastridge Shopping Centre has been appreciated and we trust that the association has also been beneficial to Maxwells.

As a consequence the final expiry of your lease remains at 6 November 2001.”

[12] The new lessee is Regal Drycleaners who are paying $650 per square metre for the premises.

[13] Not surprisingly, Mr Lowther was very upset to receive the advice in the letter of 22 May. He immediately sought legal advice and these proceedings resulted.

The Plaintiff’s Contentions

1. Contract

[14] Mr Berman, for the plaintiff, argued that the combined effect of the telephone discussion with Ms Masfen and the exchange of letters with Jones Lang Lasalle was sufficient to create a contract complete in all respects but for determination of the rental for the first period of the renewed lease. He submitted that once there was agreement that there would be a new lease the rent review provisions of the existing lease applied in all respects, and thus provided the rent fixing process. As an alternative he referred to the principles set out in Attorney-General v Barker Brothers Ltd [1976] 2 NZLR 495 (CA) and submitted that in the present case there was both a means and a standard for the establishment of the new rental. It was accepted on behalf of the plaintiffs that rent was a material term in an agreement to lease and that the agreement was required to be in writing.

[15] In Attorney-General v Barker Brothers Ltd the Crown had leased land from the respondents to be used as an airfield for a term of five years. The lease provided for a right of renewal for a further five years. With regard to renewal the lease had the following provision:

“The terms and conditions of any such lease shall be as agreed upon by the parties at the time, but the rent shall not be less than the amount paid hereunder.”

The lease also contained an arbitration clause which allowed any “difference or dispute arising as to any clause, matter or thing herein contained or implied or arising in any way in respect of this deed”, to be settled by arbitration.

[16] The Court of Appeal set out at pages 498 and 499, the following three general principles as guidelines in determining whether parties have an agreement that is sufficiently certain to be enforced.

[a] If it appears that the true intention of the parties was not to enter into a binding agreement until and unless certain unsettled terms of their bargain were settled by agreement between them then no contract can come into existence in the absence of such further agreement.

[b] If the Court is satisfied that the real intention of the parties was to enter into an immediate and binding agreement then the Court will do its best to give effect to that intention.

[c] Apparent lack of certainty will be cured if some means or standard can be found whereby that which has been left uncertain can be rendered certain.

[17] Counsel also relied on Money v Ven-Lu-Ree Ltd [1989] 3 NZLR 129 which concerned an agreement for the purchase of shares. In that case it was held that an agreement for sale at a valuation is capable of constituting a binding agreement even if the machinery established by the parties for the ascertainment of the price should, for some reason, fail.

[18] There are further passages from Attorney-General v Barker Brothers Ltd which are, in my view, relevant to this case. In the judgment of Richmond P at page 503 he said:

“I have referred earlier to the question whether it would be competent for the arbitrators to include in the renewed lease a further option for renewal. In my opinion it would not be competent for them to do this. It is well settled that in the absence of express provision to that effect a right of renewal does not carry with it a right to a further lease which itself contains an option of renewal.”

[19] By analogy that passage has relevance to this case. The first of six points weighing most with Cooke J was that the parties must have intended the option of renewal conferred on the Crown to be effective (page 504).

[20] As earlier indicated there is a dispute between the parties as to the effect of the conversation between Ms Masfen and Mr Lowther. Ms Masfen’s contention is that the purpose of the conversation was simply to ascertain whether Mr Lowther wished to stay on beyond the expiry of the lease. Her evidence was that she had no authority to enter into negotiations, let alone an agreement, in respect of a new lease and that having ascertained that Mr Lowther did wish to stay she told him that she would get Mr Seeto to make contact with him. Mr Lowther, of course, maintains that he and Ms Masfen reached a verbal agreement for a further six year lease on the same terms and conditions as the existing lease.

[21] I prefer Ms Masfen’s recollection as to the content of the conversation for the following reasons:

1. Mr Lowther was uncertain as to the time when the conversation took place. He thought it occurred probably in December 2000 or January 2001. He made no written record of the conversation. He acknowledged in cross-examination that he could not categorically say what was said in the conversation, but that at the end of the conversation he believed there was an agreement in place.

Ms Masfen on the other hand was able to produce a diary note to establish that the date of the conversation was 19 March 2001. The note did not record the result of the conversation. There was a note made, obviously before telephoning Mr Lowther which said, “Maxwells/phone - new lease, do they want one?”. Then an arrow down to a later note which said, “Follow up drycleaners (Maxwells)(Regal)”. The reference to Regal is important because, five days previously on 14 March Ms Masfen had written to Regal Drycleaning enclosing an agreement to lease of the Eastridge premises for consideration. It seems apparent that she regarded both Maxwells and Regal as possible future tenants.

2. Ms Masfen gave uncontradicted evidence of having no authority to enter into agreements.

3. Perhaps most importantly, to enter into an agreement with an existing tenant was actually against her interests because she received a greater commission if she introduced a new tenant. As already indicated, she was by that time, negotiating with Regal.

[22] I hold, therefore, on the facts that no agreement was reached in the conversation with Ms Masfen.

[23] As to the exchange of letters between Mr Lowther and Jones, Lang Lasalle, it is in my view perfectly clear that the 30 March 2001 was an offer of a new lease at a specified rental. That offer was not accepted, rather, it was the subject of a counter offer so far as rental was concerned.

[24] I reject the submission that the rent fixing procedure in the existing lease could have any relevance in the case of a new lease. The existing lease contained no right of renewal. All rights under it ceased upon its expiry. The rent review provisions were obviously intended to apply during the term of the lease and in particular, at the second and fourth anniversary of its commencement. It is not possible to read into the exchange of letters an intention to enter into an immediate and binding agreement because an essential term, i.e. the rental, had not been agreed, nor had the parties agreed upon a formula for the fixing of the initial rent.

[25] I accept that the proper approach to offer and acceptance is that outlined in NZ Shipping Co Ltd v A M Satterthwaite & Co Ltd [1975] AC 154 at 563:

“ . . . a mechanical analysis in terms of offer and acceptance may be less rewarding than the test whether, viewed as a whole and objectively, the correspondence shows a concluded agreement. On either approach the point of view of the reasonable man in the shoes of the recipient of each letter is of major importance.”

[26] Applying that test it is clear that a concluded agreement was not reached. Accordingly, the claim in contract must fail.

2. The Fair Trading Act Claim

[27] The plaintiff claims that the conduct of the defendant was misleading and deceptive in terms of The Fair Trading Act. The particulars of that conduct as set out in the statement of claim are as follows:

a. Between early 2001 and 22 May 2001 the defendant acted as if it would grant the plaintiff a new lease at a rental to be settled in accordance with the rental review processes.

b. By its letter of 30 March 2001 the defendant advised that “necessary arrangements” for the new lease would be made after 12 April 2001.

c. By its silence for seven weeks between 3 April 2001 and 22 May 2001, the defendant misled the plaintiff into believing “necessary arrangements” for the new lease were being made, whereas the defendant was negotiating with a rival business.

d. The defendant’s actions encouraged the defendant to believe that the normal practise was being followed of shopping centres giving a new lease to existing tenants.

e. The defendant’s seven week silence misled and/or was intended to mislead the plaintiff to rely on the defendant’s statement of intention to grant a new lease, whereas the defendant was engaged in undisclosed negotiations with a rival business.

[28] Mr Berman acknowledged that the plaintiff was under no obligation to offer a new lease to the defendant. He submitted, however, that the exchange of correspondence led the plaintiff to believe that it was in a rent negotiation. The plaintiff submitted that the failure to notify the true nature of the negotiations and the failure to correct any later wrong impressions falls within Fair Trading Act principles. Mr Berman submitted that silence or secrecy can constitute misleading or deceptive conduct and he relied strongly on Gregory v Rangitikei District Council [1995] 2 NZLR 208. In that case, in relation to proceedings under The Fair Trading Act McGechan J said at page 233:

“Certain legal principles are tolerably clear. Generally, the conduct must contain or convey a misrepresentation: Bonz Group (Pty) Ltd v Cooke [1994] 3 NZLR 216,229; Levi Strauss & Co v Kimbyr Investments Ltd [1994] 1 NZLR 332, 381. One can engage, however in conduct of a “misleading or deceptive” character by mere refusal or omission to act. Silence, through half truth, or omission to mention a subsequent material change, depending on circumstances, can suffice: Rhone-Poulenc Agrochimie SA v UIM Chemical Services Pty Ltd (1986) 68 ALR 77, 84-85; Smythe v Bayleys Real Estate Ltd (1993) 5 TCLR 454,464, per Thomas J. Actual intention to mislead or deceive is not necessary. A tendency in the action concerned will suffice. There must be, however, a misleading or deception (or a likelihood, in the sense of real possibility). Mere confusion, or wonderment, at a lower level, will not suffice. Whether action is misleading or deceptive is a question of fact, determined objectively in all the circumstances. Causation must be established. There must be a nexus between the conduct and the loss or damage alleged: Savill v NZI Finance Ltd at p 143; Goldsbro v Walker at pp 401, 402 per Richardson J.”

[29] In that case the Judge held that secrecy in itself was deceptive. Having created a clear impression that counsel would sell, if at all, by tender, it was deceptive and misleading for council to proceed to sell by private treaty without disclosure to tenderers. Council should have notified those concerned its intentions had changed.

[30] In this case Mr Berman submitted that the defendant created the clear impression:

1. That the plaintiff and the defendant were engaged in a rent negotiation to the exclusion of any other prospective tenant; and

2. That subsequent to the exchange of letters, the principle of there being a new lease had been settled.

He said that the first impression was created by withholding the truth of the matter, that is that the offer was a “like it or lump it deal”.

[31] The essential question in this case is whether the defendant has misled the plaintiff as to its intentions. There was no evidence sufficient to establish a normal practice of shopping centres giving a new lease to existing tenants. I do not accept that the seven week silence between 3 April and 22 May misled the defendant into thinking that the necessary arrangements were being made to grant him a new lease. It must have been clear to Mr Lowther that agreement had not been reached on the rent. It is surprising that he made no follow-up during that seven week period. There was nothing in Ms Masfen’s conversation with Mr Lowther to lead Mr Lowther to believe that a new lease would be granted. Nor did the defendant act as if it would grant the plaintiff a lease at a rental to be settled in accordance with the rent review processes. The failure to advise the plaintiff that the defendant was not prepared to negotiate in relation to rent could not itself create the impression that the parties were engaged in a rent negotiation. There was nothing in the plaintiff’s conduct to lead the defendant to believe that it was prepared to negotiate over the rent.

[32] The only “conduct” on which the plaintiff can rely is Ms Masfen’s enquiry, the exchange of correspondence and the seven week delay before the advice that the premises had been rented to another party. In my view those events taken together or on their own, could not constitute misleading or deceptive conduct. There was nothing in any of those events to lead to a reasonable anticipation that a new lease would be granted to the plaintiff other than at a rental of $32,704 per annum, plus GST.

[33] The defendants made the point that Mr Lowther’s letter of 3 April indicated an inability to pay more than $600 per square metre. The letter contains a clear statement that at the existing rental level of $575 per square metre occupancy costs were dangerously close to their threshold. In cross-examination Mr Lowther admitted that that was in fact not true and that he could have and would have paid more had he realised that it was necessary to do so in order to secure the lease.

[34] In my view Mr Lowther should not be surprised if, as is apparent from the Jones Lang Lasalle letter of 22 May, the defendant took him at his word in relation to the ability of the business to absorb a higher rental than that offered. I hold that there was no misleading or deceptive conduct on the part of the defendant.

Conclusion

[35] The plaintiff’s claim fails. The defendant is entitled to costs to be assessed on the basis of Category 2 Band B.

[36] As to the costs related to the late filing of the amended statement of claim, if the parties cannot agree they may lodge written submissions. It seems to me, however, that there can have been very little extra cost arising out of that late filing.