Maydonoz NZ Ltd v Poppelwell

[2012] NZHC 1026

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2011-404-8144 [2012] NZHC 1026

BETWEEN  MAYDANOZ NZ LTD Plaintiff

ANDIAN RONALD POPPELWELL AND DOROTHY POPPELWELL TRADING AS THE POPPELWELL PARTNERSHIP Defendants

Hearing:         21 March 2012

Counsel:         D L Schnauer for Plaintiff

S H N Chan for Defendants

Judgment:      17 May 2012

JUDGMENT OF BREWER J

This judgment was delivered by me on 17 May 2012 at 2:00 pm pursuant to Rule 11.5 High Court Rules.

Registrar/Deputy Registrar

SOLICITORS

Schnauer & Co (Auckland) for Plaintiff

McVeagh Fleming (Auckland) for Defendants

MAYDANOZ NZ LTD V POPPELWELL TRADING AS THE POPPELWELL PARTNERSHIP HC AK CIV-

2011-404-8144 [17 May 2012]

Introduction

[1]      The plaintiff operates a Turkish food takeaway business from premises in Oneroa, Waiheke Island.   The defendants own those premises.   In June 2010 the defendants leased the premises to the plaintiff.  The business relationship between the  plaintiff  and  the  defendants  has  not  been  good.    Mr Ramadan,  one  of  the plaintiff’s  principals,  seems,  from  my  observation  of  him,  to  be  a  fiery  and intractable person.   Mr Poppelwell, the power behind the landlord, does not strike me as a man who is unused to getting his own way.

[2]      Up until November 2011, perhaps the major cause of dispute between the plaintiff and the defendants was the plaintiff’s refusal to pay operating expenses at a rate higher than the estimated amount contained in the initial Agreement to Lease. A new source of friction at that time was a changed requirement by the defendants’ insurers as to the type of fire extinguisher to be kept at the premises.  The plaintiff took the view that it was for the defendants to pay the cost of purchasing and installing the newly required  fire extinguisher.     The defendants,  after correspondence, arranged for an installer to visit the premises to supply and install the new fire extinguisher.   Mr Ramadan refused to allow that to happen once he ascertained that the plaintiff would be required to pay for it.

[3]      This seems to have been the ultimate casus belli for the defendants.  On or about 21 November 2011, the defendants issued a default notice under s 246 of the Property Law Act 2007.  It related to the absence of the required fire extinguisher.  It told the plaintiff that if it did not provide the fire extinguisher within 10 working days of the date of the notice the defendants would terminate the lease and re-enter the premises.

[4]      A few days later, on 25 November 2011, the defendants served a further default notice on the plaintiff.  This related to unpaid operating expenses.  The sum demanded was $2,805.41.   Again, the notice said that failure to pay this amount would result in termination of the lease and the defendants re-taking possession of the premises.

[5]      The plaintiff’s response to both notices was to instruct The North Shore Law Practice  to  represent  it.    The  North  Shore  Law  Practice  wrote  a  letter  to  the defendants  dated  5 December  2011.     It  sought  information  and  negotiation. Mr Poppelwell for the defendants says that this letter never reached them.  It had the wrong address on it.

[6]      On  13 December  2011,  the  defendants  re-entered  the  premises  and  took possession of the same.

[7]      Thereafter, Mr Schnauer was instructed by the plaintiff.   He took vigorous steps to retrieve the situation for his client.  He had the disputed sum paid into his trust account and he arranged for the purchase of the fire extinguisher.  He offered the money and a promise of the fire extinguisher to the defendants immediately. Spirited email correspondence with Ms Poppelwell, employed by the defendants’ property  manager,  ensued.[1]      Ms Poppelwell’s  concern  was  that  unless  the  fire extinguisher   was   installed   before   the   plaintiff’s   business   started   again,   the defendants’ insurance would not operate.  The evidence of the Poppelwells and an

insurance broker is that the absence of the fire extinguisher would mean that the premises would not be covered by the insurance company against damage by fire.

[1] I infer that Ms Poppelwell is a daughter-in-law of the defendants.  In her evidence – and I had already inferred it – she confirmed she has a law degree.

[8]      In a letter dated 15 December 2011 and headed “without prejudice except as to costs”, Ms Poppelwell, for the property manager, set out a list of conditions upon which the defendants would allow the plaintiff to resume occupation of the premises. A copy of that letter was in the plaintiff’s bundle of documents.  Ms Poppelwell was cross-examined on its contents for a short time until Mr Chan for the defendants objected, pointing to the reservation endorsed at the head of the letter.  The law is that  parties  other  than  lawyers  who  are  negotiating  resolution  of  a  dispute  can

reserve their position regarding being held accountable for offers made.[2]   However,

[2] Evidence Act 2006, s 57.

if no objection is made and cross-examination on such a document proceeds, the privilege can be regarded as waived.   In this case no objection was raised to the inclusion of the letter in the plaintiff ’s bundle of documents and cross-examination

was not objected to until after the letter had been put to the witness and counsel had

begun to refer to its contents.   The test to be applied is whether, in all the circumstances, the conduct of the defendants is inconsistent with maintaining the confidentiality of the privileged material in a way that could lead to injustice if the privilege is upheld.[3]    There is a sense of injustice in letting the plaintiff prepare its case in reliance on that document, and not pointing out to it at an earlier stage that it is  a  communication  for  which  privilege  is  claimed.  Here,  there  was  waiver  by

inactivity.    However,  nothing  turns  on  the  point.    The  correspondence  which precedes the letter shows the efforts being made by the plaintiff and the flavour of the defendants’ position.  I have not put any separate weight on the letter.

[3] Ophthalmological Society of New Zealand Inc v Commerce Commission [2003] 2 NZLR 145 at

[38]; Body Corporate 169791 v Auckland City Council HC Auckland CIV-2004-404-5225,

14 November 2007, per Robinson AJ.

[9]      On  22 December  2012,  the  plaintiff  obtained  an  interim  injunction  from Peters J permitting it to re-occupy the premises and resume its business.[4]    The fire extinguisher was provided on the day of re-occupation and, in accordance with Peters J’s order, $2,000 was paid into the defendants’ solicitors’ trust account.

[4] Maydanoz NZ Ltd v Poppelwell HC Auckland CIV-2011-404-8144, 22 December 2011.

Issues

[10]     There are two (and possibly three) issues I have to determine: (1)      Was the first default notice valid?

(2)       Was the second default notice valid?

(3)If either or both of the default notices were valid, should I grant the plaintiff relief against forfeiture pursuant to s 253 of the Property Law

Act 2007?

The first default notice

[11]     Whether or not the first default notice is valid depends upon the construction of two provisions in the lease.[5]   The plaintiff relies on one.  The defendants rely on the other.

[5] The initial Agreement to Lease was superseded by a Deed of Lease dated 25 June 2010. It is this

document which the parties plead as being relevant, and I will refer to it hereafter as “the lease”.

[12]     The plaintiff puts its reliance on the  following provision included in the schedule of outgoings under cl 3 of the lease:

4.New Zealand Fire Service charges and the maintenance charges in respect of all fire detection and fire fighting equipment.

[13]     The plaintiff submits that there is nothing in the lease requiring the plaintiff as tenant to pay for new fire fighting equipment.  In the plaintiff’s submission it is for  the  defendants  as  landlord  to  provide  whatever  fire  fighting  equipment  is required and the plaintiff is liable only to pay the charges in respect of it.

[14]     The defendants put their reliance on cl 24.1(a) of the lease:

THE Tenant shall not carry on or allow upon the premises any trade or occupation or allow to be done any act or thing which:

(a)       shall  make  void  or  voidable  any  policy  of  insurance  on  the property;...

[15]     The defendants submit that at the time they issued the default notice it was clear that if the plaintiff continued to carry on its business without the newly required fire  extinguisher  then  the  defendants’  fire  insurance  policy  would  be  void. Therefore, the plaintiff was in default of cl 24.1(a) and the remedy stipulated in the default notice (the installation of the new fire extinguisher) was the least restrictive available to the defendants.   They could have stipulated for the plaintiff to cease trading until the fire extinguisher requirement was satisfied.

[16]     Neither party can refer me to any authority directly on point.  My researches have not found any either.  I revert to first principles: the lease is a contract between

the parties.   It must be interpreted in accordance with the natural meaning of its provisions to give proper effect to the bargain made by the parties.[6]

[6] Melanesian Mission Trust Board v Australian Mutual Provident Society [1997] 1 NZLR 391 at

394-395.

[17]     The primary financial obligation of a tenant to a landlord is to pay the rent. However, leases stipulate commonly other payments  for which a tenant will be liable.  Those which relate to the cost of maintaining the rented property, including insurances, are called outgoings.  One reason for not including them in the rental is because they can fluctuate in amount, frequency or occurrence.   Under the lease between the parties the outgoings can be payable on demand or by monthly instalments reasonably estimated by the landlord.  Once a year the actual outgoings are calculated and overpayment or underpayment reconciled.

[18]     The outgoings are listed in the First Schedule to the lease.  They cover the expenses commonly associated with owning and occupying a building, including maintaining the building and its service component.   However, where payments would cross the line between maintenance and replacement, the latter is generally stipulated by exception to be the landlord’s responsibility.   So, paragraph 7 of the Schedule provides:

Cleaning maintenance and repair charges including charges for repainting, decorative repairs and the maintenance and repair of building services to the extent that such charges do not comprise part of the cost of a service maintenance contract, but excluding charges for  structural repairs to the building (minor repairs to the roof of the building shall not be a structural repair).

[19]     Paragraph 9 of the Schedule, on the other hand, provides:

The cost of ground maintenance i.e. lawns, gardens and planted areas including plant hire and replacement, and the cost of repair of fences.

In this category, therefore, the tenant has to pay the cost of replacing plants, not the landlord.

[20]     The plaintiff is correct that the clauses in the lease agreement relating to outgoings do not require the tenant to replace the fire fighting equipment, but only to

pay the costs of maintaining it.   But that does not preclude another clause from creating that obligation. The issue is whether cl 24.1 does that.

[21]     Just  as  the  payment  of  rent  by  a  tenant  to  a  landlord  is  a  fundamental obligation under a lease, so too is the undertaking by a landlord that the tenant will be permitted to use the premises for the purposes stipulated in the lease.  In this case the business use stipulated was “Turkish takeaways”.  There is no suggestion that the plaintiff at any time used the premises differently or that its manner of use went beyond that contemplated by the defendants when the terms of the lease were agreed.

[22]     The interpretation of cl 24.1 for which the defendants contend would mean that a change in their insurer’s requirements could override the plaintiff ’s right to use the premises in the way the parties had agreed when the lease was entered into.  I accept that providing a new type of fire extinguisher is a relatively minor thing.  But for the defendants’ submitted interpretation to be correct it would have to extend also to more major requirements.

[23]     In my view, the lease agreement conferred on the plaintiff the right to use the premises for its Turkish takeaway business.  It was up to the defendants to arrange insurance cover compatible with that use.[7]   It did so.  But then the insurer stipulated an upgrade to the fire fighting equipment.  This was not the result of any change of use by the plaintiff.  In my view it was the responsibility of the defendants to supply and  install  the  new  fire  extinguisher  and  for  the  plaintiff  to  pay  the  cost  of maintaining it.

[7] I note that in the First Schedule to the lease, immediately beneath “Business Use: Turkish

Takeaways”, is a description of the landlord’s insurance. This includes cover for fire.

[24]     I hold that the first default notice was invalid.

The second default notice

[25]     The plaintiff attacked the second default notice initially on two grounds:

(a)      The amount claimed cannot be justified under the lease.   In other words, the defendants have asserted that an amount is owed for operating expenses without being able to establish that it is; and

(b)That the defendants, in any event, got their arithmetic wrong.   The notice claimed more money than even the defendants’ evidence asserted was due.

[26]    At the hearing before me the plaintiff abandoned the second ground of challenge.   It seems that if there was an arithmetical error it was in favour of the plaintiff.  I need not consider this ground further.

[27]     The plaintiff based its case on the first ground on what it described as soaring operating costs over the first 15 months of the lease term.  The start point was the estimates in the initial Agreement to Lease.  The plaintiff focuses on three categories of expenses:

Wastewater (312% increase)    Cleaning (199% increase)

Management (65% increase)

[28]     The plaintiff referred to what it considered to be inconsistencies in demands by the defendant for these items and submitted that the plaintiff was justified in not paying them.

[29]     The defendants submit, and their evidence is, to this effect:

(a)      Wastewater costs: regardless of the increase, the amount charged to the plaintiff is correct (invoices from Watercare correctly reconciled with the individual water meter);

(b)Cleaning costs: these went up because of an increase in the number of times the premises were cleaned each week (necessary because of increased foot traffic) and because a new cleaning contractor charged

commercial cleaning rates rather than the domestic rates charged by the previous contractor;

(c)      Management costs: management fees are calculated at 6% of the plaintiff’s rental.  It is not an apportioned expense.  On this basis the difference between the estimated fees and those charged following an increase in rent in 2011 is at most 19%.

[30]     I turn back to the lease.  The initial Agreement to Lease is dated 1 June 2010. In the First Schedule there is a table headed “Estimated Outgoings for [the premises] as at 1/11/2009”.   It contains figures for each of the three categories referred to above. At the bottom is the following disclaimer:

The figures provided to you in this worksheet are an estimate and not a quote for  the  12  month  period  beginning  from  1/11/2009.     We  have  used reasonable  endeavours  to  reach  figures  that  we  consider  are  likely  to represent the outgoings for the period in respect of this unit.  However, in the event  that  the  outgoings  exceed  those  estimates,  we  will  be  entitled  to recover the shortfall from you.

[31]     The lease itself is dated 25 June 2010.   This is the document which the plaintiff pleads is the operative lease.  The defendants accept this in their statement of defence.

[32]     The lease does not contain the table of outgoings.  However, the table was

clearly the basis for the parties’ assessment of what the outgoings were likely to be.

[33]     Outgoings are listed in the First Schedule. They include:

2.        Charges for water ...

7.        Cleaning ... charges ...

12.      Management expenses.

[34]     The contractual provisions regulating the charging of outgoings are contained in 3.1-3.9 of the Second Schedule. The relevant clauses are:

3.1THE  Tenant  shall  pay  the  outgoings  properly  and  reasonably incurred in respect of the property which are specified in the First Schedule.  Where any outgoing is not separately assessed or levied

in respect of the premises then the Tenant shall pay such proportion thereof 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.

3.2THE Landlord may vary the proportion of any outgoing payable to ensure that the tenant pays a fair proportion of the outgoing.

...

3.5THE outgoings shall be payable on demand or if required by the Landlord by monthly instalments on each rent payment date of such reasonable amount as the Landlord shall determine calculated on an annual basis. Where any outgoing has not been taken into account in determining the monthly instalments it shall be payable on demand.

3.6AFTER the 31st March in each year of the term or such other date in each year as the Landlord may specify, and after the end of the term, the Landlord shall supply to the Tenant reasonable details of the actual  outgoings  for  the  year  or  period  then  ended.    Any  over payment shall be credited or refunded to the Tenant and any deficiency shall be payable to the Landlord on demand.

[35]     A further term relevant to this issue is at 46 of the Second Schedule:

Proportion of outgoings in the First Schedule is 100% of the area attributed to Unit B2 plus GST.   The Tenant agrees to pay a 1/52nd amount of the estimated outgoings to the Landlord weekly.  The Landlord will have a wash up annually of the actual operating expenses with the estimated outgoings paid. The weekly estimated outgoings for the first year of the lease is $83.00 plus GST.

[36]     The defendants’ evidence is to the effect that the outgoings charged to the

plaintiff related properly to the premises.  I accept that evidence.

[37]     The defendants were entitled to charge varying amounts so long as they were reasonable. The lease is clear on this point.

[38]     The onus is on the plaintiff to prove on the balance of probabilities that they were not reasonable. The plaintiff has not discharged that onus. All it can point to is fluctuations in charges and charges considerably in excess of the estimates.   The evidence of the defendants explains these matters.

[39]     The plaintiff refused to pay outgoings higher than the estimates despite a clear contractual obligation to pay reasonable increases.

[40]     The defendants were entitled to issue the second default notice.  I rule that it was valid.[8]   Accordingly, the defendants were entitled to re-enter the premises and, subject to relief being granted, to cancel the lease.

Whether or not relief against forfeiture should be granted

[8] If I had ruled that the second default notice was defective in that the sum demanded was not wholly justified then I would have had to have considered whether it was saved by s 247(1)(b) of the Property Law Act 2007 (notice not invalid merely because compensation amount unreasonable).  I heard argument on that point and on 30 March 2012 counsel for the plaintiff filed a memorandum addressing it. In view of my ruling I do not need to consider it further.

[41]     Section 253 of the Property Law Act 2007 (the Act) permits the plaintiff, as lessee, to seek relief against the cancellation of the lease.

[42]     There are no criteria for the granting of relief set out in the statute.   The discretion is wide.   However, cases decided under the 1952 Act[9]  are regarded as useful by Judges because they provide practical relevant guidance.[10]

[9] Property Law Act 1952, s 118.

[10] See, for example, Grant v Hannay (2010) 11 NZCPR 283 at [32]-[33].

[43]     In Studio X Ltd v Mobil Oil New Zealand Ltd, Hammond J set out a number of factors identified by the Courts which should be considered in the exercise of the discretion:[11]

[11] Studio X Ltd v Mobil Oil New Zealand Ltd [1996] 2 NZLR 697 (HC) at 701.

Whether the breach was advertent or deliberately committed. In such a case there are sound reasons why in the normal case relief should not be given: why should a lessor be compelled to remain in a relation of neighbourhood with a person in deliberate breach of his obligations?

Conversely, whether the breach was caused by inadvertence or was entirely beyond the tenant's control.

Whether  the  breach  involves  an  immoral/illegal  use.  It  must  be wrong in principle for a lessor to be forced into improper or illegal relations, possibly even exposing the lessor himself to some form of legal sanction.

Whether a tenant has made or will make good the breach of the covenant  and  is  able  and  willing to  fulfil  his  obligations  in  the future.

The conduct of the landlord.

The personal qualifications of the tenant.    The financial position of the tenant.

Sometimes the position of third parties has had to be considered. For instance the position of a contracting purchaser of the interest.

The gravity of the breach.

Whether a breach has occasioned lasting damage to a landlord.

There is a proportionality concern. Under this head there has to be concern whether whatever damage is said to have been sustained by the landlord can truly be said to be proportionate to the advantages she will obtain if relief is not granted. Generally speaking, and at a greater level of abstraction, there has to be a concern with keeping an even hand. After all a lease is both an interest in land and a contract and a Court ought not to estreat an entire interest of that character simply because (for instance) the tenant fails to repair (at a cost of $50) a window the tenant's son happened to put a cricket ball through.

[44]     The factors in this list that go against granting relief in this case are:

(a)      The cause of the breach: The plaintiff had a clear obligation under the lease to pay outgoings.   Its refusal to pay more than the original estimate  is  not  justified.    I accept  Ms  Poppelwell’s  evidence  that Mr Ramadan kept changing solicitors while she was attempting to negotiate a solution.   I accept her evidence that she engaged with successive solicitors rigorously, in an effort to resolve the operating expenses issue but that she was unsuccessful.   On the other hand, I accept that Mr Ramadan felt he had a genuine grievance over the escalating expenses.

(b)The financial position of the plaintiff: Mr Ramadan’s affidavit casts doubt upon the financial stability of the plaintiff ’s business and hence its ability to meet its obligations in the future.  However, I note that rental has never been in arrears and I note that the amount of the demanded operating expenses was paid into the solicitor’s trust account, and that the fire extinguisher was purchased and installed.

(c)       There are further breaches of the lease alleged. These are:

The installation  of  an  incorrect  type  of  extractor  fan  with consequent disturbances (noise and odour) of the right to quiet

enjoyment of other tenants.

Unauthorised signage.

The unauthorised changing of locks.

Fitting  out  the  kitchen  to  a  design  not  approved  by  the defendants.

[45]     Some of these matters may no longer be operative in the sense of being continuing disputes.   However, the matter of the extractor fan might be.   Relief against forfeiture should not be given if other breaches extant would result in further default notices.

[46]     On the other arm of the balance is the fact that the above breaches (if that is what they are) seem readily remediable.

[47]     The great point in favour of granting relief is proportionality.   This is the plaintiff’s livelihood.   Mr Ramadan and his wife have put all their savings and considerable sums into this business and would lose everything if they were evicted.

Decision

[48]     In  my  view,  the  latter  consideration  outweighs  all  of  the  former.    I  am prepared to grant the plaintiff relief against cancellation.   However, I will impose conditions[12]  to ensure that all of the plaintiff’s obligations under the lease as at the date of delivery of this judgment are complied with.

[12] Section 256 of the Act confers the jurisdiction.

[49]     The  plaintiff’s  application  for  relief  against  cancellation  of  the  lease  is

granted subject to the following conditions:

(a)      The plaintiff will, within two weeks of the date of delivery of this judgment, pay to the defendants’ solicitors the sum of $2,805.41 (to which  can  be  credited  the  $2,000  paid  already  pursuant  to  the direction of Peters J).

(b)Any other arrears of operating expenses or rental as at the date hereof must  be  paid  within  two  weeks  of  the  date  of  delivery  of  this judgment.

(c)      The plaintiff must agree with the defendants on the appointment of an arbitrator  (as  per  cl 44.1  of  the  lease)  to  resolve  any  dispute  or difference extant as at the date of delivery of this judgment other than a matter to which cl 44.3 applies.  Such agreement must be reached by the date falling two weeks after the date of delivery of this judgment. This condition is for the benefit of both parties and may be varied by them by written agreement.

(d)The fire extinguisher must remain in place and is to be maintained by the  plaintiff  in  accordance  with  the  lease  as  though  it  had  been supplied by the defendants (but see the provision as to costs below).

[50]     Leave is reserved to the defendants to apply to this Court for further orders in the event that any of these conditions is not met.

Costs

[51]     This  is  a  case  where  costs  need  to  be  considered  carefully.    I  invite memoranda from counsel; they are to be filed within 14 days.  The cost of buying and installing the fire extinguisher should be identified as the plaintiff is entitled to

be credited for it.

Brewer J