New Lynn Compliance Centre Ltd v Birdwood Custodians Ltd HC Auckland Civ-2011-404-1551
[2011] NZHC 1436
•6 September 2011
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2011-404-1551
BETWEEN NEW LYNN COMPLIANCE CENTRE LIMITED, BALA PRASAD AND MAHENDRA PRASAD
Appellants
ANDBIRDWOOD CUSTODIANS LIMITED Respondent
Hearing: 4 August 2011
Appearances: S Singh for the Appellants
DRF Gardiner for the Respondent
Judgment: 6 September 2011
RESERVED JUDGMENT OF ELLIS J
This judgment was delivered by me on 6 September 2011 at 12 noon, pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Solicitors: Shean Singh, PO Box 10018, Auckland 1446
N G Cooke, PO Box 47016, Auckland
Counsel: DRF Gardiner, PO Box 147488, Auckland
NEW LYNN COMPLIANCE CENTRE LIMITED V BIRDWOOD CUSTODIANS LIMITED HC AK CIV-
2011-404-1551 6 September 2011
[1] On 2 November 2008 there was fire at some commercial premises situated at
8 Drury Street, New Lynn. The premises were at that time occupied by the appellant, New Lynn Compliance Centre Limited (New Lynn Compliance), which operated a vehicle testing a compliance business there. The premises were leased to New Lynn Compliance by the respondent, Birdwood Custodians Limited (Birdwood).
[2] On 20 November 2008 Birdwood wrote to New Lynn Compliance terminating the lease. The letter said:
The fire at the premises has rendered the building untenantable. The structural integrity of the roof and surrounding structure is the main reason for this. Our client understands the building will take up to 6 months to fix. As a result, following clause 26.1 of the Lease the Lease is hereby terminated. This is of course without prejudice to any other rights our client has under the lease.
[3] The letter also referred to specified outstanding rental amounts, including arrears of outgoings. Legal action was threatened if payment of those amounts was not made by 27 November 2008.
[4] Eventually, Birdwood brought proceedings against New Lynn Compliance for (inter alia) the arrears of outgoings. As well as contending that it had no liability for the outgoings, New Lynn Compliance counter-claimed against Birdwood, seeking damages for the alleged conversion or wrongful restraint of the chattels, stock and vehicles that had remained at the Drury Street premises after the fire.
[5] After an evidentiary hearing spanning six days (with submissions being filed subsequently) Judge Sinclair found against New Lynn Compliance on both the arrears and the conversion issue on 22 February 2011.1 New Lynn Compliance now
appeals her decision in each respect.2
[6] I address each of the two issues in turn.
1 Birdwood Custodians Ltd v New Lynn Compliance Centre Ltd DC Auckland CIV 2009-090-152, 22
February 2010.
2 Judge Sinclair found in favour of New Lynn Compliance on certain other issues but they are not material to the present appeal.
Outgoings
[7] The appeal relating to the arrears of outgoings raises, in the first instance, a legal question about the scope of the requirement to pay outgoings on the property under the lease. Then, to the extent that the lease is interpreted against New Lynn Compliance‟s position, there is a further question about whether it was nonetheless orally agreed that only the amount actually paid by New Lynn Compliance was required.
[8] The original Deed of Lease was entered into between New Lynn Compliance and the previous owner of 8 Drury Street (a Mr Davis) on 19 March 2004. Birdwood purchased the property from Mr Davis in June 2006 and at that point Birdwood became the landlord under the lease.
[9] The Lease is in the ADLS standard form, Fourth Edition, 2002.
[10] Insofar as the outgoings are concerned the lease provided that:
The Landlord leases to the Tenant and the Tenant takes on lease the premises and the shared use of the carparks (if any) described in the First Schedule together with the right to use:
(a) The Landlord‟s fixtures and fittings contained in the premises. (b) The common areas of the property.
[11] The “premises” are defined in the First Schedule to the lease as:
All that part of the Landlord‟s property known as 8 Drury Street, New Lynn comprising the 8 Drury Street warehouse and apartment as shown hatched on the attached diagram.
[12] The attached diagram and the cross-hatching make it clear that it was only the buildings situated at 8 Drury Street that were the subject of the lease. The total area of 8 Drury Street was 2,451 square metres whereas the floor area of the leased “premises” was 840 square metres.
[13] The limited scope of the tenancy is further emphasised in cl 17.1 which states:
The tenancy shall relate only to the premises and the car parks (if any) and the Landlord shall at all times be entitled to use, occupy and deal with the remainder of the property without reference to the Tenant and the Tenant shall have no rights in relation thereto other than the rights of use herein provided.
[14] As to the rent, the first Schedule in the lease required New Lynn Compliance to pay $4,563.34 plus GST on a monthly basis. As to outgoings, cl 3.1 provided:
The 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.
[15] The First Schedule specifies:
Proportion of outgoings: (clause 3.1) 100%.
[16] Then it states:
OUTGOINGS (clause 3)
1. Rates or levies payable to any local or territorial authority.
2. Charges for water gas electricity telephones and other utilities or services, including line charges.
3. Rubbish collection charges.
4. New Zealand fire Service charges and the maintenance charges in respect of all fire detection and fire fighting equipment.
5. Insurance premiums and related valuation fees and any insurance excess in respect of a claim but not exceeding $500 (clause 23).
6. Service contract charges for air conditioning, lifts, other building services and security services.
7. 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).
8. The provisioning of toilets and other shared facilities.
9. The cost of ground maintenance i.e. lawns, gardens and planted areas including plant hire and replacement, and the cost of repair of fences.
10. Yard and car parking area maintenance and repair charges but excluding charges for structural repairs to any car parking area of the building.
11. Body Corporate charges for insurance premiums and related valuation fees and management administration expenses.
12. Management expenses.
13. The costs incurred and payable by the Landlord in supplying to the territorial authority a building warrant of fitness and obtaining reports as required by Section 45 of the Building Act 1991.
[17] It is not in dispute that during the period that Birdwood was the landlord, New Lynn Compliance paid monthly outgoings of approximately $220 a month. Nor is it disputed that this comprises approximately one-third of the total outgoings payable in relation to the 8 Drury Street property. But New Lynn Compliance maintains that it was only ever required to pay outgoings on that portion of the property that was in fact the subject of the lease, namely the “premises” as defined. As the measurements recorded above indicate, these “premises” comprised approximately one-third of the land contained within the relevant certificate of title, that is one-third of the whole property.
[18] There is a dispute about whether during the two year period within which Birdwood was the landlord, Birdwood had ever made it clear that it required payment of the full amount. However, it is not disputed that no formal written demand by Birdwood was made in that respect prior to the letter of 20 November to which I have already referred.
[19] In my view, a proper interpretation of the lease document does require the payment of the full amount of outgoings by New Lynn Compliance. While I accept that the tenancy relates only to the “premises”, the critical provision is cl 3.1.
[20] The first sentence of cl 3.1 requires New Lynn Compliance to pay the outgoings (in respect of the “property”, rather than the “premises”) which are specified in the First Schedule. That is plainly a reference to the 13 kinds of outgoings listed in that schedule, as I have set out above. It is notable that
approximately half of the outgoings specified relate only to the “premises” (that is the buildings), rather than to the wider “property”.
[21] I accept that the next part of cl 3.1 appears to contemplate that certain outgoings will be separately assessed or levied in respect of the “premises” and, where that does not occur, that there may be a pro rata apportionment of those outgoings as specified in the First Schedule. In the present case, however:
(a) there has been no separate assessment; and
(b)the proportion of outgoings specified as payable in the First Schedule is 100 per cent.
[22] The conclusion that the lease requires (albeit inelegantly) the tenant to pay
100 per cent of the outgoings listed in the First Schedule is inescapable.
[23] New Lynn Compliance‟s contention that there was nonetheless a separate agreement or understanding with Birdwood that only the payment of one third of the outgoings (approximately $220 per month) was required was fully dealt with by Judge Sinclair. In rejecting that contention, the Judge relied on:
(a) her assessment of the credibility of the respective witnesses;
(b)the absence of any evidence to support New Lynn Compliance‟s assertion that there had also been an arrangement with the previous owner of the Drury Street property whereby only one third of the outgoings was payable;
(c) the fact that the sales brochure prepared by Bayleys Real Estate prior to the sale of the property to Birdwood expressly referred to the tenant being responsible for paying 100 per cent of the outgoings.
[24] I accept Mr Gardiner‟s submission that I should be cautious about second- guessing Judge Sinclair‟s credibility findings. It is trite that, although not completely immune on appeal, credibility remains an area for appellate restraint. And in the
present case, not only did Judge Sinclair support her assessment by reference to objective evidence, but her findings are also borne out by common sense. As I have noted, a good proportion of the outgoings listed in the First Schedule are referable to services that are provided only in relation to or for the benefit of the tenanted “premises”. The proposition that the landlord nonetheless (separately) agreed that New Lynn Compliance should only have to pay a proportion of those outgoings defies logic. There is no basis upon which I should differ from Judge Sinclair‟s conclusion.
[25] The appeal in relation to New Lynn Compliance‟s liability for the full amount of the outgoings must be dismissed accordingly.
Termination of lease and retention/removal of chattels
[26] That part of the appeal relating to the counter-claim for conversion is based on New Lynn Compliance‟s contention that the company was denied entry to the Drury Street premises from the time that they were advised that the lease had been terminated. Any such denial of entry would necessarily have prevented New Lynn Compliance from removing its chattels and stock and would, if unlawful, constitute a platform for a claim of conversion.
[27] It is accepted by Birdwood that entry was denied from 17 December 2008, when it seems New Lynn Compliance‟s insurance assessor (Mr Knowles) telephoned Mr Guttenbeil about obtaining access, but was told that because Mr Guttenbeil was about to go on holiday access would not be possible until 10 January. Mr Guttenbeil did not in fact return until 12 January and when he phoned Mr Guttenbeil on 14 and
15 January, Mr Knowles was told he would need to speak to Birdwood‟s lawyers about access. The locks were changed on 14 January and entry was not permitted until the last week of March 2009.3 Although access was granted for that week, New Lynn Compliance did not attend the premises until the last day during that period
and therefore only managed to remove most, but not all, of their chattels. Further
3 It appears that during this time Birdwood was attempting to use access as a bargaining chip to obtain payment of the arrears and to compel New Lynn Compliance to remove a considerable amount of rubbish from the premises. New Lynn Compliance‟s obligation to remove the rubbish was also considered by Judge Sinclair and was resolved (partly) in favour of New Lynn Compliance.
access was denied by Birdwood between 31 March until 15 November 2009 when, following payment of $15,000 into court by New Lynn Compliance, it recovered the few chattels then remaining at the premises.
[28] I am not, however, prepared to differ from Judge Sinclair in her finding that there was no lock-out prior to 17 December 2008. Again, her finding in this respect rested in large part on her assessment of the respective credibility of the relevant witnesses. There is no objective evidence to support New Lynn Compliance‟s position on access prior to 17 December.
[29] Having reached that point on the facts, this aspect of the appeal raises a legal question about whether Birdwood‟s denial of access from 17 December 2008 was unlawful. In turn, that issue requires consideration of:
(a) whether notice was required to terminate the lease; and
(b)what period of time, following termination, is allowed for the lessee to remove its chattels from the premises.
[30] In the event that a claim for conversion is established, a question of damages then arises.
[31] Clause 26.1 of the lease is central to the first two issues. That clause is
headed “Total Destruction” and states:
If the premises or any portion of the building of which the premises may form part shall be destroyed or so damaged:
(a) as to render the premises untenantable then the term shall at once terminate; or
(b) in the reasonable opinion of the Landlord as to require demolition or reconstruction, then the Landlord may, within 3 months of the date of damage give the Tenant 1 month written notice to terminate and a fair proportion of the rent and outgoings shall cease to be payable as from the date of damage.
Any termination pursuant to this clause shall be without prejudice to the rights of either party against the other.
[32] As to the time for removal issue, it is cl 32.1 that is relevant. That clause provides:
The Tenant may at any time before and will if required by the Landlord at the end or earlier termination of the term remove all the Tenants fixtures fittings and chattels and make good at the Tenant‟s own expense all resulting damage and if not removed within 7 days after the date of termination, ownership of the fixtures fittings and chattels may at the Landlord‟s election pass to the Landlord or the Landlord may in a proper and workmanlike manner remove the same from the premises and forward them to a refuse collection centre.
[33] The first issue raised by the appellant in relation to these clauses is whether, in the circumstances of this case, Birdwood was only entitled to terminate the lease under cl 26.1(b). If that is so, then a month‟s notice (dating from 20 November) would be required and Birdwood‟s (admitted) refusal of access to New Lynn Compliance from 17 December would have been in breach of cl 32.1. The question of wrongful retention of New Lynn Compliance‟s chattels could then arise.
[34] Mr Singh‟s submission was that termination without notice under cl 26.1(a) was not permitted because in order for the premises to be “untenantable” they must effectively have been totally “destroyed”. I cannot accept that submission. A building may be untenantable even though it remains standing. It may be untenantable because damage to it has rendered it unsafe or unsanitary even though it might appear on the surface to be largely intact.
[35] Notwithstanding my rejection of Mr Singh‟s submission on the meaning of “untenantable” there is in my view some underlying merit in New Lynn Compliance‟s position.
[36] That is because there is in my view an important distinction to be drawn between cls 26.1(a) and (b). It seems to me that subclause (a) exists for the benefit of the tenant. Tenantability is the fundamental prerequisite to a continued tenancy from a lessee‟s perspective, not from a lessor‟s. Thus where the leased premises are rendered “untenantable” by damage or destruction then the tenant is entitled to terminate the tenancy immediately and is prima facie not liable for any further rent. It might be expected that a state of untenantability will often be evidenced by the fact that the tenant ceases to occupy the premises concerned.
[37] There is support for my view that untenantability under the lease is to be judged from the lessee‟s perspective when the consequences of the opposite conclusion (namely that untenantability is a wholly objective state, determinable by the lessor) are considered.
[38] This can best be demonstrated by reference to Judge Sinclair‟s finding (at [42] of her judgment) that the premises were rendered untenantable at the time of the fire, namely on 2 November 2008 and that the lease therefore terminated on that day. If untentanability is to be ascertained objectively, then that finding can be justified. But the unfairness of its operation can clearly be seen in the present case, where it is accepted that Birdwood had initially expressed a view to New Lynn Compliance that it might be able to stay on notwithstanding the fire. Birdwood‟s letter advising of termination was not in fact written until 20 November 2008.
[39] The consequences of these facts, coupled with Judge Sinclair‟s finding that the premises were objectively rendered untenantable on 2 November and that the lease therefore terminated on that date, would be that New Lynn Compliance had (under cl 32.1 of the lease) seven days from 2 November to remove its chattels from the premises, even though they had been led to believe after that date that the lease might continue and, indeed, were not told until 20 November that it had terminated. In other words, on the learned District Court Judge‟s analysis, New Lynn Compliance did not know that they were required to remove their chattels from the premises until after the expiry of the seven day period for doing so. That simply cannot be right.
[40] By contrast, it is subclause (b) that logically applies when the tenant remains in “residence” and it is the landlord who wishes to terminate following damage to part or all of the building. One month‟s notice is then required and a fair proportion of the rent and outgoings shall cease to be payable from the date of the relevant damage.
[41] It follows that I do not consider that, following damage to a leased premises, cl 26.1(a) can be properly interpreted as affording a landlord the choice about whether to terminate the lease on notice or not. The only “choice” involved relates
to the decision made by the tenant about whether, following damage to the leased premises, those premises remain tenantable and he or she can remain in occupation. It might well be expected that that choice would be exercised reasonably. But if, following significant damage to the premises, a tenant perversely chooses to stay on (and therefore to continue to pay some or all of the rent) then the landlord nonetheless retains a choice to terminate on notice under cl 26.1(b) if he is of the (reasonable) opinion that demolition or reconstruction is required.
[42] It follows that in my view New Lynn Compliance was entitled to one month‟s notice of termination under cl 26.1(b) and that under cl 32.1 it was then entitled to a further seven days to remove chattels and stock from the premises. The termination letter was written on 20 November 2008, giving New Lynn Compliance until
27 December 2008 for that purpose. Birdwood do not dispute that access was denied to New Lynn Compliance from 17 December 2008 until March 2009.
[43] It follows that the effective retention of the chattels and stock by Birdwood during that time was without colour of right and, technically, a conversion of them. I did not understand Mr Gardiner to take issue with that proposition in the event that I were to find that the necessary facts existed.
[44] A question of damages then necessarily arises.
Damages
[45] Notwithstanding her finding that there had been no conversion of New Lynn Compliance‟s chattels, Judge Sinclair helpfully considered this question fully in her judgment. Because the Judge‟s findings in this respect now assume some importance, I set them out in full below:
[87] New Lynn Compliance claims damages under the following heads: (a) The sum of $128,657.77 being the value of chattels the use of
which were denied by the actions of Birdwood between
20 November 2008 and 30 March 2009.
(b) The sum of $146,644 for the loss of income. (c) $12,000 for hireage of equipment.
(d) The sum of $9,745.48 for repairs to damaged chattels and/or those not returned.
[88] In view of the District Court limit the claim was reduced to a maximum of $200,000.
[89] I turn first to comment on the claim for loss of value of the chattels. A schedule of plant and machinery had been prepared for the purpose of the company‟s insurance claim. New Lynn Compliance had an insurance policy for material damage with an indemnity limit of $100,000. The replacement cost of the plant and machinery were assessed at $221,157.77. The company‟s insurers offered a settlement sum of $92,500 (including cleaning costs) for the items needing to be replaced/cleaned. In some cases, this value was less than half of the replacement cost.
[90] New Lynn Compliance claims the sum of $128,657.77 as being the value of the remaining chattels by deducting the sum of $92,500 from the figure of $221,157.77. It of course does not follow that the replacement cost equates to the value of the items and regard must be had to their age and state of repair. No evidence was given in this regard.
[91] Importantly, New Lynn Compliance was only temporarily deprived of these chattels. The proper approach to any damages claim in these circumstances would be to assess the impact of the deprivation of those chattels on the turnover of its business for the relevant period. (Griffiths v Akatea Developments Limited and Adsett High Court Auckland CIV 2007-
404-3677 30 April 2007 Courtney J).
[92] As a second head of damage New Lynn Compliance claims the sum of $146,644 for loss of income for the four month period to the 31 March
2009. Mr Patel a chartered accountant gave evidence on behalf of New
Lynn Compliance. He arrived at this figure by taking the gross income described as being for “compliance and mechanical fees” contained in the Statements of Financial Performance for the financial years ending 31 March
2007 and 2008, dividing that sum by 24 to arrive at monthly amount and then multiplying that figure by 4 ($36,661 x 4=$146,644). I consider this
approach to be flawed for the following reasons:
(a) No allowance has been made for the direct costs involved in earning this income. Mr Patel identified on item (being the cost of tyres) during the course of his evidence but had not undertaken any proper analysis.
(b) Mr Patel accepted that the business is cyclical. In these circumstances it is not appropriate to simply adopt the mathematical approach proposed by Mr Patel and it is necessary to particularly consider the income earned in the prior comparable months (November to March).
(c) No consideration has been given to the income earned in the period from 1 April 2008 to the date of the fire.
(d) No account has been taken of the income earned for the period after the company set up at Portage Road to 31 March 2009. Mr Prasad gave evidence that Portage Road operated through
this period as a small mechanical shop and that the compliance work did not commence until 1 April 2009.
[93] The balance sheets prepared by Mr Prasad for both the 2007 and
2008 financial years were patently incorrect and this was properly acknowledged by Mr Patel. Mr Cameron McGregor a chartered accountant
who gave expert evidence for Birdwood, raised a number of issues and was
of the view that the statements of financial position for the two years were also unreliable.
[94] Evidence was given that new Lynn Compliance had a business interruption policy in place at the time of the fire. In September 2009 the company‟s insurers advised that the claim had been assessed “on the limited information provided” in the sum of $5,175 (GST inc). The letter went on: We are aware that you have some issue with the BI loss however, despite many requests no additional information has been submitted to support the amounts claimed.” A copy of the claim and supporting documents were not produced however this settlement figure further calls into question the company‟s calculation of loss. The sum of $5,175 (GST inc) was eventually accepted by New Lynn Compliance in full and final settlement of its insurance claim and credit would also have to be given for this payment.
[95] New Lynn Compliance claims the sum of $12,000 for monies paid to
Automotive Equipment for equipment hired. The invoice is dated 30
November 2009 and is stated to be “to pay for the last 12 months rent to buy
2 hoists and 1 large compressor and dryer with air lines”. In view of the
reference to „rent to buy‟ it is questionable whether this was indeed a
hirage [sic] cost. Furthermore, there was no evidence that this amount had in fact been paid.
[96] Finally, New Lynn Compliance claims the sum of $9,745.48 for the loss of an air compressor and accessories, repairs to customers‟ vehicles left in the Premises following the fire, and to a hoist. An invoice for the repair work to the machinery was produced and also a quote for the work to the cars. There was no evidence in either case that this work had been carried out and paid for. Mr Prasad gave evidence that these cars which had been left were already “slightly damaged.” There was no evidence that the alleged damage in fact occurred in the period following the fire. Lastly, no evidence was given as to the age and condition of the air compressor or purchase of the new one.
[46] No further evidence was sought to be adduced by the appellant on appeal. Rather, Mr Singh valiantly attempted to rectify the defects identified by Judge Sinclair by annexing a recalculated schedule of damages in his submissions. But such rectification is not possible. It did not address many of the problems identified by the learned District Court Judge with whom, on this issue, I agree wholeheartedly.
[47] My own view is that it is most unlikely that any loss suffered by New Lynn Compliance as a result of Birdwood‟s wrongful retention of some of their chattels for a relatively limited time was more than de minimis. In any event, responsibility for the absence, before both me and Judge Sinclair, of an adequate evidentiary basis for any kind of fair attempt at quantification lies with New Lynn Compliance.
[48] I am not prepared to refer the matter back to the District Court for some form of account or inquiry and nor did I hear submissions on my ability to do so. I merely record that it is far from clear to me whether my power under r 20.19(1) of the High Court Rules to refer a matter back to the District Court for rehearing would give me the ability to refer back in the present circumstances. It seems wrong in principle that an appellant could be permitted to rectify a first instance evidentiary failure in that way.
Conclusion
[49] Notwithstanding my finding in favour of the appellant in relation to the interpretation of cl 26 of the lease, there is no basis upon which I can assess its loss or make an award damages. New Lynn Compliance‟s appeal in that respect is therefore dismissed, as is its appeal relating to the arrears of outgoings, for the reasons given between [7] and [24] above.
[50] I am, however, minded to let the costs of the appeal lie where they fall.
Rebecca Ellis J
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