One Three Four Limited v J R F Holdings Limited

[2013] NZHC 938

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

CIV 2012-409-504 [2013] NZHC 938

BETWEEN  ONE THREE FOUR LIMITED Plaintiff

ANDJ R F HOLDINGS LIMITED Defendant

Hearing:         4, 5, 6, 7 March 2013

Counsel:         K W Clay and J J Ching for Plaintiff

D M Lester and R S Brown for Defendant

Judgment:      1 May 2013

JUDGMENT OF HEATH J

This judgment was delivered by me on 1 May 2013 at 4.00pm pursuant to Rule 11.5 of the High Court Rules

Registrar/Deputy Registrar

Solicitors:

Beadle Ching, PO Box 1535, Christchurch Meares Williams, PO Box 660, Christchurch Counsel:

K W Clay, PO Box 2217, Christchurch

D M Lester, PO Box 9344, Christchurch

ONE THREE FOUR LIMITED V J R F HOLDINGS LIMITED HC CHCH CIV 2012-409-504 [1 May 2013]

CONTENTS

Introduction  [1] The Lease   [4] Relevant contractual terms  [9] The insurance arrangements  [16] Competing contentions  [19] Construction of the Lease  [24] The insurance policy  [30] The insurable interest  [34] Value of the Lease  [50] Result       [66]

Introduction

[1]      One Three Four Limited (134) owns a property at 134 Victoria Street, Christchurch.  At material times, JRF Holdings Ltd, then known as H Fisher & Son Ltd (Fishers), was its tenant.1     In October 2011, following damage suffered as a result of earthquakes in February and June 2011, the building leased by Fishers was demolished, at the direction of the Canterbury Earthquake Recovery Authority.

[2]      134 was covered for loss caused by the demolition, through an insurance policy it had effected with IAG New Zealand Ltd (IAG), trading as NZI.  At issue in this proceeding is whether 134 is entitled to receive the whole of the proceeds of that insurance policy or whether they must be apportioned, in some way, between 134 and Fishers.   The possibility of apportionment arises out of significant monetary contributions made by Fishers to improve the building, before occupation.   134 claims that those improvements are fixtures, owned by it.  Fishers’ position is that it is entitled to receive some monetary compensation, given the early termination of the lease.

[3]      IAG accepts liability under the policy.  The amount payable is $1,450,000. IAG has retained the amount in issue, pending determination of this proceeding. Until that time, it does not know if it will obtain a valid discharge for any payment made.

The Lease

1      134 also owned a contiguous parcel of land in Knox Lane. Although reference is made to that land in some of the insurance documents, it was not part of the property leased to Fishers.

[4]      The lease between 134 and Fishers was negotiated at arm’s length.   Both parties were represented by solicitors.   There was no imbalance in their ability to negotiate appropriate commercial terms.

[5]      Initially, there were discussions about whether Fishers could acquire the land and  buildings  from  134.    That  option  was  rejected  by 134.    Subsequently,  the directors of 134 (Mr Merritt) and Fishers (Mr Fisher) entered into negotiations for a lease of the premises.  Those discussions began sometime in early 2006.

[6]      The contractual relationship between landlord and tenant is recorded in two separate agreements.   An Agreement to Lease (the Agreement) was signed on 26

June 2006.  A Deed of Lease (the Lease) was later executed, on 18 September 2009. The Agreement was annexed to the Lease, and formed part of its terms.

[7]      Specific provisions were inserted into the rent review provisions of the Lease so that adjustments could be made in the event that contributions to improvements were made by Fishers.2   The idea was that Fishers would pay a discounted rental for its occupation, on the basis that the improvements would become the property of

134.3

[8]      The Agreement and the Lease reflected the commercial  dynamics of the bargain struck between 134 and Fishers.  In broad outline:

[a]      Fishers was granted a lease for a term of four years, with three rights of renewal of four years each.  That meant that Fishers had the right to occupy the property, or otherwise deal with its lease, until at least

2020.4

[b]      Fishers agreed to contribute a significant amount of money to upgrade the building to  the standard required  for an  art gallery in  central

Christchurch.

2      Clause 48 of the Lease, set out at para [14] below.

3      Clause 14 of the Agreement, set out at para [11] below.

4      Subject to a redevelopment clause: see para [8][e] below.

[c]     In consideration of Fishers’ intended contribution towards the improvements, 134 agreed to receive a discounted rent, calculated in accordance with a formula set out in the Lease.5

[d]      Fishers promised that, on termination of the Lease, it would make no claim for compensation in respect of the moneys it had advanced to pay for the improvements.6

[e]      134 had the right to give two years notice of its intention to terminate the lease to carry out redevelopment work on the site.   That could only be done within the “final term arising pursuant to the third right of renewal”.  That meant that the maximum period of occupation that Fishers might lose would be two years.7

[f]      In the event of destruction of the building (or damage sufficient to render  it  un-tenantable)  the  Lease  was  to  terminate,  “without prejudice to the rights of either party against the other”.8   The basis on which such “rights” might arise was not articulated.

Relevant contractual terms

[9]       The lease documents contemplate three types of termination:

[a]      The first (inherent in any landlord/tenant relationship) was for breach of a condition of the Lease (including the terms of the annexed Agreement), whether for non-payment of rent or otherwise.9

[b]      The  second  arose  in  a  circumstance  in  which  the  building  was demolished through no fault of either party.10

5      See cl 48 of the Lease, set out at para [14] below.

6      See cl 14(b) and (c) of the Agreement, set out at para [11] below.

7      See cl 18 of the Agreement, set out at para [13] below.

8      See cl 26.1 of the Lease, set out at para [12] below.

9      Generally, see ss 243–264 of the Property Law Act 2007.

10     See cl 26.1 of the Lease, set out at para [12] below.

[c]       The third was following the issue of notice by 134, for redevelopment purposes.11

[10]     For the purposes of the lease documentation, the works required to undertake the  upgrade  were  labelled  “future  improvements”.     That  term  was  defined extensively by cl 12 of the Agreement:

12.      Definitions:

“Future Improvements” means the design and construction of future improvements and additions to the Premises that will be suitable for the Tenant’s purposes, as specified in plans and specifications to be prepared by Sheppard & Rout, Architects, Christchurch and being approximately in accordance with the Preliminary Plan attached.  The Future Improvements will include:

(a)       Lower  by 2/3rd   the  concrete  block fence  (that  runs from on  the boundary with Vics back to the front of the building).   Prior to confirmation of clause 13(a), the parties will discuss whether the said fence must be completely removed.

(b)       Remove shrubs and all costs relating to clearing the frontal areas that are raised, including the block of trees which run along the frontal boundary of the section to make a clear driveway into the section.

(c)       If required, clear or lower the height of the old concrete sign-base at front, to a level compatible with the new building foundation.

(d)       The marking and numbering of the proposed car-parks 1 – 12 and one-way arrows through to the exit on Knox Street and Bealey Avenue.

(e)       All  structural  work,  glazing,  wall  linings  and  concreting  of  the floors.

(f)       Replace the existing side smoked-glass windows with clear back to the side door and replace the single door with a double door.

(g)       Grind and polish the existing concrete floors in the retail showroom areas.

(h)       Existing  lighting  in  the  showroom  area  needs  upgrading  to  a

standard reasonably consistent with the Tenant’s fit-out.

(i)        Upgrading of toilets to a reasonable standard: to be assessed and agreed between landlord and tenant.

(j)        Outside security, lighting and planting.

11     See cl 18 of the Agreement, set out at para [13] below.

(k)       Improve gutter above self-opening doors to prevent blockages in storms.

(l)        Install under floor heating (connected to a night store) in concrete pad in the new addition to the Premises.

(m)      Provide reasonable heating and air-conditioning to balance of gallery area.

(n)      Store must be altered back to bare shell.

(o)       Prepare front area (adjacent to Victoria Street) to make suitable for resurfacing and install car-stop barrier (pipe 600mm high or reasonable alternative) along roadside.   To  be  discussed prior to confirmation  of  clause  13(a):  lockable  gate  /  barrier  (to  provide tenant with ability to control access to premises).

(p)     Provide to tenant’s specification new internal staircase and refurbishment of upstairs office and lounge, with extension over the present verandah area, and divided into two.

(q)      Install glass overhang one metre wide along main courtyard.

(r)       If physically possible, levelling of the concrete floor in the storage area.

[11]     Clause 14(b) and (c) of the Agreement deals with the apportionment of the cost of completing the improvements and ownership of them:

14.      Future Improvements: contributions to costs and ownership:

...

(b)       The  Landlord  must  pay  the  sum  of   $158,000.00  plus  GST contribution for any costs relating to the Future Improvements and the Tenant must pay for any costs, in excess of the said $158,000.00 plus GST, which relate to the Future Improvements.  Upon provision of  invoices to the landlord  relating to the  Future  Improvements, issued by contractors of the Tenant and approved by Shepherd & Rout, the Landlord must immediately pay its said contribution.  The Landlord’s contribution will be paid by contribution from Merritt Fairweather Limited as to the sum of $108,000.00 plus GST and

$50,000.00 plus GST from Tony Merritt or his nominated entity.

(c)       The landlord will own all of the Future Improvements.  The Tenant is not entitled to compensation  for  any Tenant  contributions to the Future Improvements upon expiry or termination of the lease notwithstanding that the Tenant may have contributed to the cost of the Future Improvements.

(emphasis in italics added)

[12]     While cl 14(c) dealt generally with “expiry or termination” of the Lease, cl 26.1 was directed to the more specific topic of termination due to total destruction of the building:

DAMAGE TO OR DESTRUCTION OF PREMISES Total Destruction

26.1IF 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 given 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.

(emphasis added)

[13]     Clause 18 of the Agreement explained the circumstances in which 134 was entitled to terminate the Lease for redevelopment purposes:

18.      Termination rights for redevelopment purposes

18.1This termination right applies only to the final term arising pursuant to the third right of renewal of four (4) years specified in this agreement to lease.

18.2Should the lessor require the building or the premises or any part of them for redevelopment purposes and vacant possession of the premises is necessary for those redevelopment purposes, then the lessor may, by written notice to the lessee, terminate this lease by specifying a date of termination to be effective not less than twenty four (24) months after the date of service of such notice on the lessee.  Upon the expiration of such notice this lease shall determine, but without prejudice to the rights of either party in relation to any prior breach of this lease, and the rental and operating expenses shall cease to accrue from the date of termination.  The lessee shall not be entitled to any compensation or damages arising from such termination.

18.3     “Redevelopment  purposes”  means  a  determination  made  by  the

lessor to:

(a)       demolish the building or the premises or any part of them to carry out redevelopment of the building or the premises or on the land on which the building is situated or any contiguous title.

18.4No account shall be taken of the termination rights contained in, or other contents of, this clause on any determination of rental on either rent reviews or extensions of this lease.

(emphasis added)

[14]     While the rent review clause uses the term “improvements”, cl 17 of the Agreement makes it clear that cl 48 encompasses “future improvements”, as defined. Clause 17 of the Agreement and cl 48 of the Lease state:

17.      Tenant’s Future Improvements to be Discounted in any Rent

Review

17.1Any rent review, during the term or renewed terms, shall not take account of:

(a)       the Future Improvements to the Premises (identifiably paid for by the Tenant); or

(b)      any subsequent improvements to the Premises, or tenant’s

fit-out, identifiably paid for by the Tenant.

48.      Tenant’s improvements to be discounted in any Rent Review

48.1    Notwithstanding anything contained herein, any rent review, during the term or renewed terms, shall not take account of:

(a)       the improvements to the Premises (identifiably paid for by the Tenant); or

(b)      any improvements to the Premises, or Tenant’s fit-out identifiably paid for by the Tenant.

(c)       any  renovation  or  redevelopment  of  the  courtyard  area (between the building and title car-parks), identifiably paid for by the Tenant, whether completed as part of the improvements  or  subsequently,  shall  not  be  taken  into account in any rent review calculations during the term of the lease or any renewal of same.

48.2For  the  purposes  of  clarification  of  Clause  48.1  the  parties acknowledge and agree:-

(a)       that just prior to the commencement date of the Lease and pursuant to the Agreement to Lease between the parties both the Landlord and the Tenant contributed to the costs of improving the Premises, which included the matters referred to but not limited to those set out in Clause 48.1.

(b)      that  the  amount  expended  by  the  Tenant  under  Clause

48.2(a) is 77.50% of the total value of the improvements carried out in relation to the premises and

(c)      that  the  amount  expended by the  Landlord  under Clause

48.2(b) is 22.50% of the total value of improvements carried out in relation to the premises.

48.3   That notwithstanding anything contained in Clause 2 herein and pursuant to Clause 48.1.2 the parties agree that the Tenant shall only be liable to pay 22.50% of the increase in the current market rent determined pursuant to Clause 2 at the relevant rent review date, and calculated in accordance with Clause 48.2.1.

48.4    For the purposes of clarification the method of calculation of the rental payable per annum by the Tenant as to the rent review date shall be as follows:-

A = B + (C – B) x 22.50%

Where  A is the total amount payable by the Tenant pursuant to a rent review as at the relevant rent review date;

B is the assessment of rental as at the date of rent review of the premises in the state that it was prior to improvements by the Landlord and the Tenant; and

C is the assessment of rental at the date of rent review of the premises in state as at the commencement date of the Lease after all improvements were completed by the Tenant and the Landlord.

48.5    The parties acknowledge that the excerpt from the Agreement to Lease attached hereto in the Fourth schedule defines some of the future improvements completed by the Tenant and the Landlord.

48.6    The parties acknowledge that attached hereto in the Fifth schedule are the plans and pictures of the premises in the state that it was prior to the improvements completed by the Landlord and the Tenant.

[15]     Although the Agreement capped 134’s contribution to the improvements at

$158,000 plus GST,12  the amount paid by it escalated well above that.   The best evidence of the respective contributions can be found in the financial statements of each company:

[a]       Fishers:          $648,756 (75%)

[b]      134:                $218,000 (25%)

12     Clause 14 of the Agreement, set out at para [11] above.

Those proportions are not dissimilar from those used for rent review purposes.13

The insurance arrangements

[16]     Anthony Runacre & Assoc Ltd (Runacres) acted as insurance brokers for both Fishers and 134.  Mr Brand represented Fishers, while Mr Spooner performed the same role for 134.

[17]     The precise sequence of the contractual arrangements involving IAG are summarised in a letter from its solicitors dated 4 July 2012.  Both parties agree with the outline provided.  It states:

...

Policy period to 1.12.07

2.1      [134] had a policy with Vero for the building at 134 Victoria Street.

[134’s] broker client number was C13530.

2.2      On 31 May 2007, Runacres cancelled [134’s] Vero policy for the

building.

2.3On 31 May 2007, Runacres arranged a new policy for the building with [IAG] for [Fishers].  The policy was to expire on 1 December

2007.   [Fishers’] broker client number was C12052.   The policy

number was 15-6987565-BPK.  The policy noted [Fishers’] interest in  the  building  by  way  of  the  endorsement.    Plant,  machinery, fixtures & fittings, including computer systems and leasehold improvements were separately insured for a replacement value of

$300,000.14

Policy period to 18.02.08

2.4      The 15-6987565-BPK policy renewed on 1 December 2007.

2.5On 1 December 2007, [Fishers] reduced the cover for gross profits under this policy.

2.6On 22 December 2007, [Fishers] deleted all cover for Auckland under this policy.

2.7On 18 February 2008, [Fishers] deleted cover for material damage to the building.

2.8The  15-6987565-BPK  policy  continued  after  these  changes  in respect of the other [Fishers] assets.

13     See cl 48.2(b) and (c) of the Lease, set out at para [14] above.

14     See para [18] below.

Policy period to 1.12.08

2.9On 18 February 2008, Runacres arranged a new policy for the building for [134], expiring 1 December 2008. Although the Runacres invoice correctly referred to [134’s] client number, C13530, it mistakenly used the [Fishers] policy number 15-6987565- BPK. Runacres should have allocated a new number for [134].

Policy period to 1.12.09

2.10The policy renewed on 1 December 2008.  Again, Runacres referred to [Fishers’] policy number but described [134] as the insured.

Policy period to 1.12.10

2.11 It appears that at some point in 2010, IAG realised that the policy needed to have a new number, specific to [134]. IAG allocated a new number, 15 7302044 BPK. IAG’s records show that the inception date for [134] was 1 December 2009.

2.12A renewal on 1 December 2009, however, Runacres continued to refer to the policy using [Fishers’] policy number.   It is clear that what was being renewed was [134’s] policy over the building, noting [Fishers’] interest by way of the endorsement.

[ Fisher ’s] policy

2.13On 2 November 2010, IAG sent a renewal offer to [Fishers].   It referred to policy number 15-R987565-BPK.   It offered material cover for stock and liability cover.

2.14     We understand that [Fishers] did not renew this policy. Policy period to 1.12.11 – the policy responding to the claim

2.15At renewal in 2010 of [134’s] policy, Runacres continued to refer to the [Fishers’] policy number.  NZI’s renewal offer dated 2 November

2010, however, referred to the correct policy number for [134].

[18]   In the policy that became effective on 31 May 2007,15 the following endorsement was included, at the request of Mr Brand, on behalf of Fishers, and with the concurrence of Mr Spooner, for 134:

AT [134] VICTORIA STREET & KNOX LANE CH. CH:

1.        BUILDINGS             REPLACEMENT  VALUE

$1080000.00

INDEMNITY $1000000

15     See para 2.3 of IAG’s solicitor’s letter, set out at para [17] above.

IT IS HEREBY NOTED & AGREED THAT THIS BUILDING IS OWNED BY ONE THREE FOUR LTD & THAT H. FISHER & SON ARE THE TENANT.  IT IS HEREBY NOTED & AGREED THAT H. FISHER & SON AS THE TENANT HAVE PAID FOR AND DONE SUBSTANTIAL RENOVATION OF THIS BUILDING AND THEIR INTEREST AS SUCH IS INSURED UNDER THIS POLICY.

The insurance policy for the Victoria Street building continued to contain that endorsement at the time that the building was demolished.

Competing contentions

[19]    Mr Clay, for 134, contends that, on termination of the lease following destruction of the premises by demolition, it became entitled to ownership of all of the improvements.  That position is based on the proposition that termination under cl 26.1  brings  cl 14(c)  into  play,  thereby  preventing  Fishers  from  making  any

compensation claim for its financial contribution to the improvements.16

[20]     Mr Lester, for Fishers, has two distinct responses to that argument.  The first is based on the endorsement that first appeared in the insurance policy effected on 31

May 2007.  That remained in place until the lease was terminated by the demolition of the building in October 2011.   Fishers contends that the endorsement noted a proprietary interest in the lease which it retained at the time of demolition, with the consequence that some apportionment is required between the respective interests of

134 and Fishers, under those policies.17

[21]     The second argument is that cl 14(c) does not apply in a case to which cl 26.1 refers.  It is submitted that the reference in cl 26.1 to any “termination” under that clause being “without prejudice to the rights of either party against the other” puts that type of termination outside the scope of cl 14(c).  Mr Lester submits that there has been a “partial failure of consideration” which entitles Fishers to relief.  That is because it did not gain the benefit of the total term of a reduced rent.

[22]     If the argument based on the primacy of cl 26.1 were upheld, Mr Lester contends that an equitable or restitutionary remedy should be imposed to ensure that

16     The relevant parts of cll 14 and 26.1 are set out at paras [11] and [12] above.

17     See para 2.3 of the letter of 4 July 2012 from IAG’s solicitors, set out at para [17] above.

Fishers is justly compensated for the payments it made to improve the value of 134’s

property.

[23]     In response, Mr Clay does not accept that there is any cause of action based on the insurance policy.   He contends that Fishers has no interest to which the endorsement can relate.  Nor, Mr Clay submits, does cl 26.1 apply.  His contention is that cl 14(c) is referable to any form of “termination”, other than that contained in the “redevelopment” provisions of cl 18.18

Construction of the Lease

[24]     The  starting  point  for  analysis  is  identification  of  the  principles  of interpretation of a lease in a case such as this.  In Melanesian Mission Trust Board v Australian  Mutual  Provident  Society,  Lord  Hope  of  Craighead,  for  the  Privy Council, said:19

The approach which must be taken to the construction of a clause in a formal document of this kind is well settled.  The intention of the parties is to be discovered from the words used in the document.   Where ordinary words have been used they must be taken to have been used according to the ordinary   meaning   of   these   words.      If   their   meaning   is   clear   and unambiguous, effect must be given to them because that is what the parties are taken to have agreed to by their contract.  Various rules may be invoked to assist interpretation in the event that there is an ambiguity.  But it is not the function of the Court, when construing a document, to search for an ambiguity.  Nor should rules which exist to resolve ambiguities be invoked in order to create an ambiguity which, according to the ordinary meaning of the words, is not there.  So the starting point is to examine the words used in order to see whether they are clear and unambiguous.   It is of course legitimate to look at the document as a whole and to examine the context in which these words have been used, as the context may affect the meaning of the words.  But unless the context shows that the ordinary meaning cannot be given to them or that there is an ambiguity, the ordinary meaning of the words which have been used in the document must prevail.

[25]     In Gibbons Holdings Ltd v Wholesale Distributors Ltd,20 the Supreme Court was  required  to  interpret  a  lease.    There  is  no  discussion,  in  any  of  the  five

judgments  delivered,  of  the  principles  articulated  by  Lord  Hope  in  Melanesian

18     Clause 18 of the Agreement is set out at para [13] above.

19     Melanesian Mission Trust Board v Australian Mutual Provident Society [1997] 1 NZLR 391 (PC) at 394–395.

20     Gibbons Holdings Ltd v Wholesale Distributors Ltd [2008] 1 NZLR 277 (SC).

Mission Trust, a decision that was specifically directed at a lease or a standard form contract.  In Gibbons, the issue was whether a reference to the term “the lease” was intended to embrace both the term of the original lease and a new lease.   More particularly, the question was whether the provisions of the lease confirmed that the arrangement was intended to operate as a whole, with the purpose of a two-day hiatus between one ending and the other commencing being to avoid the need for an assignment of the head lease.

[26]     The Supreme Court took the view that the arrangements were intended to operate as a coherent whole.   The members of the Court came to that view notwithstanding what Tipping J described as “considerable semantic force” in the interpretation  which  had  found  favour  with  a  dissenting  Judge  in  the  Court  of

Appeal.21     Leaving to one side the issue of subsequent conduct for interpretation

purposes, not relevant in this case, Gibbons makes it clear that a purposive approach to construction of a lease is appropriate,22 notwithstanding what might be considered the stricter approach evidenced by the Privy Council’s decision in Melanesian Mission Trust.23    The Supreme Court’s approach is consistent with that taken generally to the interpretation of contracts, in this country.24

[27]     Based  on  the approach  taken  in  Gibbons, I consider that  the underlying commercial  dynamics  of  the  transaction25   are  relevant  to  the  question  whether cl 14(c) is a dominant or subservient provision (in relation to termination as a result of destruction of the building) or, whether they can be read in a way that gives effect

to each.

21     Ibid, at para [48]; see also Gibbons Holdings Ltd v Wholesale Distributors Ltd [2006] 2 NZLR

27 (CA) at para [63] (Chambers J).

22     Ibid, at paras [7] (Elias CJ), [24] and [25] (Blanchard J), [49] (Tipping J), [72] (Anderson J) and

[97] (Thomas J).

23     See para [24] above.

24     Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] 2 NZLR 444 (SC) paras [4] (Blanchard J), [19] (Tipping J), [64] and [78] (McGrath J); cf paras [119]–[130] (Wilson J). See also Trustees Executors Ltd v QBE Insurance (International) Ltd (2010) 16 ANZ Ins Cas 61-874 (CA) (William Young P, Glazebrook and O’Regan JJ) at paras [31]–[33]; in particular, at para [32], referring to the majority of Judges in Vector adopting the earlier approach of the House of Lords

in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896

(HL) at 912–913. The Court said: “the language the parties have used must be read in the context of the document as a whole and the surrounding circumstances. Under that approach, the wider background and circumstances should always be considered, even if there is no ambiguity or other interpretive difficulty with the words used by the parties”.

25     For a summary of the underlying purpose of the arrangement, see para [8] above.

[28]     Clause 14(c) applied “upon expiry or termination of the lease”.  On a strict interpretation of cl 14(c), any form of termination of the lease results in ownership of the future improvements by the landlord, with Fishers not being entitled to any compensation for what it expended to help to pay for them.26     In contrast to the inflexible consequence of a termination to which cl 14(c) refers, cl 26.1 reserves whatever rights one party may have against the other.   So, if Fishers were not

entitled to compensation for the future improvements, it may still be able to identify a separate right or interest in the insurance money that can be enforced through cl 26.1.

[29]     In my view, cl 14(c) and cl 26.1 can be read together in a manner that gives each  effect.    Under cl 14(c) ownership  of the  improvements  passes  to  134  and Fishers promises not to seek compensation for the moneys it contributed towards their cost.  However, applying cl 26.1, it remains open for Fishers to assert a right to a portion of the insurance proceeds to compensate it for loss of the remainder of the term of a lease negotiated on beneficial rental terms to it.  Can it demonstrate such a “right”?

The insurance policy

[30]     While a landlord may have an interest claimed by a tenant noted on a policy of insurance for the building, the mere fact that an interest has been noted does not necessarily mean that there is an insurable interest to which the policy will respond. In each case, it is necessary for a tenant to establish an actual interest and to ascribe a monetary value to it.

[31]     As a matter of fact, I find that Mr Merritt did not know that the policy was, for a short time, in the name of Fishers.  Further, I find that he was unaware of the endorsement on the extant policy, in Fishers’ name.   Nevertheless, as Mr Merritt accepted in evidence, Mr Spooner had authority, as an authorised representative of

134’s insurance broker  (Runacres), to  finalise the terms  of its  policies.    In  the ordinary course of a broker’s business, entering an endorsement of the type noted in

favour of Fishers was within its apparent authority.

26     Clause 14(c) is set out at para [11] above.

[32]     I do not consider that the fact that the policy was, for a short time, in the name of Fishers, as opposed to 134,27  makes any difference to the analysis.   The policy makes it clear that the building was owned by 134.  At no time did Fishers have an interest in the freehold.   Nor did it have either a freehold or a leasehold interest in the Knox Lane land, to which the policy and the endorsement also refer.28

The principal purpose of the policies is to protect 134’s interests and to indemnify it against any loss caused by damage to the land and buildings.

[33]     While 134 (through its sole director, Mr Merritt) did not itself consent to the endorsement being entered on the policy document, it is bound by the acts of its agent.  It follows that the endorsement provides a basis for a finding that Fishers has an insurable interest.   If any issues arise as a result of the agent’s actions, they remain to be resolved as between 134 and Runacres.

The insurable interest

[34]     Although Fishers’ claim to a share of the proceeds of the insurance policy was put on different legal bases, I am satisfied that there is a “right”, exercisable by Fishers in terms of cl 26.1 of the Lease, to claim a portion of the insurance policy proceeds to compensate it for loss of the remaining term of the lease.   In other words, the issue turns on the value of the unexpired term of the lease to Fishers, as opposed  to  any  ability,  on  Fishers’  part,  to  recover  moneys  that  it  contributed towards the future improvements.

[35]     Fishers’ claim to a right to some of the proceeds of the insurance policy is grounded in the assertion that it lost the benefit of the lease it had negotiated.  The closest authority to what occurred appears to be Beacon Carpets Ltd v Kirby,29  a decision  of  the  Court  of  Appeal  of  England  and  Wales.    That  case  involved demolition of a commercial building following a fire.   A question arose about a tenant’s entitlement to claim part of the insurance moneys otherwise payable by the

insurer to the landlord.

27     See paras 2.1–2.9 of the letter from IAG’s solicitors, set out at para [17] above.

28     See para [18] above.

29     Beacon Carpets Ltd v Kirby [1984] 2 All ER 726 (CA).

[36]     Under  a  lease  dated  24  June  1972,  Mr  Kirby  and  Mr  Butterworth  (the landlords) had let premises to Beacon Carpets Ltd for a term of 14 years, from 1

June 1972.  The lease provided that the tenant would pay to the landlord, in addition to the rent otherwise payable, “a sum or sums of money equal to the amount which the Lessor’s may expend in effecting or maintaining the insurance of the demised premises against loss or damage by fire, explosion and other perils together with a sum sufficient to cover two years rent thereof and architect’s and surveyor’s fees to be incurred in connection with the reinstatement of any loss or damage”.    The landlords agreed to keep the premises insured against loss or damage and, “in case of destruction of or damage to the demised premises or any part thereof” promised “with all convenient speed [to] expend or lay out all moneys received in respect of such insurance in rebuilding or reinstating in a good and substantial manner the demised premises so destroyed or damaged”.

[37]     Having set out those basic facts, Browne-Wilkinson LJ, giving the principal judgment of the Court of Appeal, explained what subsequently occurred that had given rise to the litigation:30

The landlords insured the premises in the sum of £30,000 plus £3,000 to cover two years' rent and architects' and surveyors' fees. The policy named

'the insured' as the landlords and the tenants 'for their respective rights and interests'. It was common ground at the hearing that the premises had been substantially  underinsured,  the  proper  sum  necessary  to  reinstate  the

premises in the event of total loss being a little over £50,000.

The premises were destroyed by fire on 16 July 1977. The total sum paid by the insurance company at a later date was £31,484, of which £2,000 was paid and applied in demolishing the shell of the building, £3,000 was on account of loss of rent and the balance of £26,484 was the sum available for reconstruction.

[38]     In August 1977, the landlords instructed architects, who applied for planning permission. This was declined on the grounds that the premises might be needed for road widening. A fresh application was made for a smaller building and permission was granted After negotiations, the tender was reduced to £52,000, in October 1978.

[39]     As the architects’ plans included special features requested by the tenant, the landlords felt that the tenant should bear part of the cost of reconstruction. On 31

30     Ibid, at 728–729.

October 1978, the chairman of the tenant, Mr Cross, wrote to the landlords, suggesting the possibility that the tenant might surrender its lease and agree reasonable compensation with the landlords  because the premises would be too small, even if reconstructed. This was discussed at a meeting on 7 November 1978. The tenant later offered to surrender the lease to the landlords, on payment of a sum of £15,000 to the tenants.

[40]     The landlords did not accept this offer and held the tenant to the terms of its lease. The tenant replied, saying that if the landlords did not wish to take a surrender on reasonable terms it would start looking for a suitable assignee of the lease who would be seeking a purpose-built building primarily suitable to the tenant’s business rather than for general industrial purposes, which would cost the landlords much more to reconstruct.

[41]     Meanwhile, negotiations with the insurers were taking place up until October

1979. Apart from a sum of £2,000 used on demolition and £3,000 on account of rent, no insurance moneys had been paid over when the writ and statement of claim were filed. The balance of the insurance money was paid over eventually and put into a joint account in the names of the parties’ solicitors. This was held in that account until the tenant’s solicitors released monies to the landlords, subject to retention on deposit in joint names of the sum of £13,000 representing approximately one half of the funds.

[42]     On 20 March 1980, the tenant surrendered the lease to the landlord.   The surrender took the form of an assignment and surrender to the landlords “to the extent that the term of years granted by the ... Lease may merge and be extinguished in the reversion immediately expectant thereon”.   However, the surrender and assignment  did  not  act  as  an  accord  and  satisfaction  in  respect  of  claims  and demands made in proceedings that had already been brought in the High Court.

[43]     The essence of the tenant’s case on appeal was that, because the landlords were in breach of covenant in never having applied insurance moneys to rebuilding, the tenants had lost the value of the residue of their term, with the building on site, in the form in which it had stood at the time of their occupation.  The sum claimed, to

be paid out of the insurance proceeds, was the value of the residue of the term of the lease.  In that case, of course, the parties had turned their minds expressly to the need for insurance to respond to their respective interests.31

[44]     Browne-Wilkinson LJ upheld the tenant’s claim to a portion of the insurance proceeds.      He  began  his  analysis  by  considering  the  respective  rights  of  the landlords and their tenant:32

What were those rights? The basic right of both the landlords and the tenants was to have the insurance moneys applied in rebuilding for their respective benefit: see Mumford Hotels Ltd v Wheler [1963] 3 All ER 250, [1964] Ch

117 and Re King (decd) [1963] 1 All ER 781 at 795, [1963] Ch 459 at 492 per Upjohn LJ. Due to the unusual way in which the parties have dealt with

the matter, they have managed to reach a position where they have by their

own acts released the right to have the moneys applied in rebuilding without agreeing how the moneys are to be dealt with. In the circumstances, it is

perhaps  not  surprising  that  the  legal  result  of  their  unusual  actions  is

uncertain.

Not without hesitation, I have come to the conclusion that the moneys belonged to the landlords and the tenants in shares proportionate to their respective interests in the property insured. It seems to me that the only explanation for the parties' conduct is that, once it was clear that the tenants did not want to occupy the building if rebuilt, both parties assumed that it would not be rebuilt and were, in default of agreement, treating the insurance moneys as standing in the place of the building which would otherwise have been replaced. If this analysis is correct, the tenants would have had the value of their term of years and the freeholders would have had the rent. On this approach, the decision in Re King is irrelevant, since that case deals only with rights in insurance moneys once the prime purpose of rebuilding has been wholly frustrated by the actions of a third party and does not affect the case where the parties are treating the insurance moneys as standing in the place of the building.

...

Applying those principles to the present case, it is impossible to hold that the insurance moneys belonged wholly to the landlords or to the tenants. Although the tenants, indirectly, paid the premiums, it was the landlords' obligation to apply the insurance moneys in reinstatement; therefore the policy was directly in support of discharging the landlords' obligations and they must have an interest. On the other hand, the tenants indirectly paid the premiums and the basic duty to repair lay on the tenants. Therefore, in my judgment,  the  tenants  must  also  have  an  interest. The  apportionment  of obligations between landlord and tenant in this case is quite different from that in Re King and adopting the approach of Upjohn LJ leads to the conclusion that both have an interest in the insurance moneys.

31     Ibid, at 728–729. The relevant extract is set out at para [37] above.

32     Ibid, at 732–733.

....

(emphasis added)

[45]     Both Lawton and Slade LJJ agreed with Browne-Wilkinson LJ’s approach. In giving a separate judgment, Slade LJ referred to an earlier decision of the Court of Appeal, in Re King (decd), Robinson v Gray.33    That authority was also mentioned by Browne-Wilkinson LJ.34    In King, even though the insurance policy was in joint names, the majority of the English Court of Appeal held that the tenant did not have

a joint interest in the insurance proceeds.

[46]     Slade LJ, in Beacon, emphasised that although there had been a difference of opinion in King as to the outcome, that was based on the view formed by the respective Judges of what the true intentions of the parties in that case had been.35

On the basis that there had been an agreement to protect any right of the tenant through   the  insurance  moneys,  Slade   LJ   adopted  what   was  said   by  Lord Denning MR in his dissenting judgment in Re King:36

The reason for [joint names] seems to me obvious. It was to ensure that both landlord and tenant were insured under the policy, each in respect of his interest in the property. The tenant was insured in respect of his interest as leaseholder. The landlord was insured in respect of his interest as freeholder.

[47]     I have discussed Beacon at some length because, in my view, it provides the legal foundation on which the claim to apportionment can properly be based.  It has the advantage of an approach which gives meaning to both cl 14(c) and cl  26.1, on termination of the Lease.   Further, it recognises the note of Fishers’ interest as an endorsement on the policy.

[48]     On the facts of this case:

[a]       Demolition of the building, as a consequence of the natural disaster, altered         the              underlying            commercial     dynamics    of    the    lease

arrangement.37     134 stood to be compensated for its insured loss,

33     Re King (Decd), Robinson v Gray [1963] 1 All ER 781 (CA).

34     In particular at 732–733, part of which is reproduced at para [44] above.

35     Beacon Carpets Ltd v Kirby [1984] 2 All ER 726 (CA) at 734–735.

36     Re King (Decd), Robinson v Gray [1963] 1 All ER 781 (CA) at 790.

37     See para [8] above.

which included the value of the improvements.   It has the option to use insurance moneys to rebuild, to the same or an improved quality. It also has the ability to lease the rebuilt structure at a commercial (rather than discounted) rent for the balance of the term that Fishers would otherwise have enjoyed.   On the other hand, Fishers simply lost the benefit of a long-term lease at a rental below market value.

[b]      Although Mr Merritt, as director of 134, was unaware that the interest had been noted on the policy, he and his counsel accept that it was inserted by 134’s authorised agent and that 134 is bound by that.  The endorsement indicates that the policy was intended to cover Fishers’ interests as well as those of 134.

[c]      While  the  endorsement  on  the  policy  related  specifically  to  the interests acquired by Fishers in relation to payments for the renovation,38 those words should not be read too narrowly.   The purpose of inserting them was to protect the financial interests of Fishers arising from the money it had expended on future improvements.  It was the expenditure of those moneys that secured

the beneficial terms on which it rented the property.   The agreed rental contributed to the value of the lease that Fishers’ lost. Consequently, the loss of the benefit of the remaining term of the lease is an interest to which the insurance policy should respond.

[49]     I conclude that the parties intended that the policy would respond to cover any loss suffered by Fishers as a result of a termination of the lease of the type to which cl 26.1 specifically refers.   In my view, this is the type of “right” to which

cl 26.1 was intended to refer.39

38     See the terms of the endorsement set out at para [18] above.

39     Clause 26.1 is set out at para [12] above.

Value of the Lease

[50]     The next question concerns assessment of the value of the balance of the lease.

[51]     Fishers began to trade from the Victoria Street premises in late 2006.  The evidence suggests that an opening function for the new gallery, after completion of all improvements, took place around December 2006.  Mr Fisher’s evidence was that significant cost over-runs in relation to the improvements for which Fishers paid and an unassociated difficulty arising out of an allegation over the authenticity of a particular painting sold by the gallery created economic problems for his company.

[52]     To address those difficulties, the gallery was reduced in size and sub-letting arrangements  were  entered  into  with  two  companies.    The  sub-leases  began  to operate from around mid 2009.   Later, Mr Fisher had discussions with another person about the possibility of sub-leasing back the premises and the kitchen to enable a restaurant to be established. That proposal did not proceed.

[53]     The effect of damage caused by the September 2010 and February 2011 earthquakes in Christchurch was to increase the value of rental space available in the area immediately outside that part of the central business district that was cordoned off after the February 2011 earthquake.  The reason why market rents increased was because of the need for businesses within that zone to find new premises close to those from which they previously operated.

[54]     Mr Fisher referred to discussions he had had with Mr Colin Foggo, a director of Commercial Toys Ltd.  They took place in March 2011.  There were discussions about the possibility of a sum of $120,000 plus GST per annum being paid by way of rent in respect of the showroom at the front of the building and an office area upstairs.

[55]     Mr Fisher also referred to an approach from Mr Hennie Murray after the February 2011 earthquake.  At the time of that earthquake, Mr Murray was operating two bars in Manchester Street, both of which were severely damaged and had to be

relocated.  Mr Murray also owned a restaurant business in another part of the city that had been destroyed in the February 2011 earthquake.   That too required re- location.  Mr Fisher says that Mr Murray made a “verbal offer” to him to take over the head lease for $500,000.

[56]     Mr Fisher was unable to conclude any transaction with either Mr Foggo or

Mr Murray.

[57]     By this time, Fishers was under considerable financial pressure, not assisted by some personal difficulties faced by Mr Fisher himself.   Mr Fisher came to the view that the head lease should be sold.

[58]     Further negotiations took place with Mr Foggo.   This time they concerned acquisition of the head lease for $225,000.   Mr Fisher decided to enter into an assignment of the lease to Commercial Toys Ltd, even though he genuinely believed the lease was worth more than that.   That contract did not proceed as a result of destruction of the building, following the June 2011 earthquake.  The assignment of the head lease was treated as having been frustrated by the effects of the earthquake.

[59]     On the valuation issue, I heard evidence from Mr Barry Hadlee, on behalf of Fishers, and Mr John Cregten, on behalf of 134.   I accept that each witness was qualified to express opinions on this issue and I acknowledge that each undertook his task responsibly and independently.

[60]     In undertaking his analysis, Mr Hadlee referred to the discussions that Mr Fisher said he had had with prospective sub-tenants  or purchasers of the head lease. In reliance on that evidence, Mr Hadlee calculated a value of between $400,000 and just under $1,000,000, depending on the selection of the annual loss of net rental.

[61]     By way of check, Mr Hadlee performed a calculation by reference to the

77.5% of the improvements that he had been instructed that Fishers had made, by reference  to  the  replacement  value  of  the  property  for  insurance  purposes  of

$600,000 at the commencement of the head lease, an increase of that sum to $1.4 million.  He calculated that 77.5% of the differential of $850,000 was $658,750.

[62]     Mr Cregten formed the opinion that Fishers did have a valuable leasehold interest.   He took the view that the value was best measured by reference to the actual sale price of the head lease: $225,000.  That was the amount for which Fishers had agreed to sell the head lease to Commercial Toys Ltd.  That value, Mr Cregten opined, represented the market value of the benefits gained by Fishers from the way in which the lease was structured.

[63]   I prefer Mr Cregten’s approach.   While Mr Hadlee’s calculations are understandable, in the context of assumptions on which he was asked to act, I am not prepared to depart from a valuation that is based on what Fishers did, in fact, sell the lease  for  at  a  time  immediately  prior  to  the  June  2011  earthquake.    Had  the earthquake not intervened, Fishers would have received $225,000 for the head lease, with no ability to claim more from anyone.

[64]     I reject Mr Fisher’s evidence that he could have obtained more for the lease. He had been in various types of negotiations for some time and had had the opportunity to test the market.   His personal reasons for wanting to enter into a contract for sale do not affect the position.  I also refer to Mr Murray’s evidence.  He denied having made a firm offer to buy the head lease for $500,000.  I am satisfied that a sale at that price was never viable and was unachievable.

[65]     It follows that, in my view, the value of the remaining term of the head lease should be assessed at $225,000.

Result

[66]     To give effect to my conclusions, I make the following orders:

[a]      I decline to make the declarations sought by 134 in its Amended Statement of claim.  Judgment is entered in favour of Fishers on that claim.

[b]       On Fishers’ counterclaim, I make the following orders:

[i]       I  make  a  declaration  that  Fishers  has  an  interest  in  the insurance policy entered into between 134 and IAG to the extent of $225,000.

[ii]      134  must  pay  to  Fishers  the  sum  of  $225,000  out  of  the insurance proceeds once received by it.

[c]      Leave to apply for further directions is reserved, in case of any unexpected developments with implementation of the orders.   This will include any questions of interest that might arise out of any late payment of Fishers’ share of the proceeds, after 134 receives them from IAG.

[67]     Fishers has been successful in establishing a right to some of the insurance moneys.   Costs are awarded in its favour on a 2B basis, together with reasonable disbursements.  Both are to be fixed by the Registrar.  I certify for second counsel.

[68]     I thank counsel for their assistance.

P R Heath J

Delivered at 4.00pm on 1 May 2013