Paros Property Trust Limited v Smith
[2024] NZHC 523
•12 March 2024
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2019-404-002593
[2024] NZHC 523
BETWEEN PAROS PROPERTY TRUST LIMITED
Plaintiff
AND
TIMOTHY SMITH
First Defendant
TONI SHAW
Second Defendant
On the papers Counsel:
L McEntegart and A J Steel for Plaintiff First Defendant in person
No appearance for Second Defendant
Judgment:
12 March 2024
JUDGMENT OF VAN BOHEMEN J
[on costs]
This judgment was delivered by me on 12 March 2024 at 12:30 pm pursuant to r 11.5 of the High Court Rules 2016.
Registrar/Deputy Registrar
……………………………..
Counsel/Solicitors:
L McEntegart and A J Steel, Auckland Brown Partners, Auckland
Copy to: T Smith, Auckland
T Shaw, Auckland
PAROS PROPERTY TRUST LTD v SMITH [2024] NZHC 523 [12 March 2024]
[1] Paros Property Trust Ltd (Paros), the owner of the freehold interest in a townhouse at 54 Napier Street, Freemans Bay, Auckland (the Property) and the lessor under a memorandum of lease (the Lease) over the Property, seeks costs in relation to two hearings of this Court concerning the dispute between Paros and Mr Timothy Smith, a lessee of the Property, over rental payable under the Lease.
[2] Paros says it is entitled to indemnity costs under cl 14(b) of the Lease, which provides that the Lessee shall pay:
All costs, charges and expenses for which the Lessor shall become liable in consequence of or in connection with any breach or default by the Lessee in the performance or observance of any of the terms, covenants and conditions of the Lease.
[3]On that basis, Paros seeks costs of $196,853.54 (including GST) comprising:
(a)$152,270.93 for costs in relation to the first hearing held before Harland J on 14 - 17 June 2021;
(b)$31,889.50 for costs in relation to the second hearing held before me on 10 July 2023; and
(c)$12,693.11 for disbursements.
[4] Mr Smith submits that each party should bear its own costs in relation to the first hearing and but that, if Paros is awarded costs in relation to that hearing, costs should be awarded on a 2B basis. That would result in costs of $54,014. Mr Smith accepts he is liable for costs in relation to the second hearing but says these should also be awarded on a 2B basis. Paros and Mr Smith agree that 2B costs for the second hearing are $12,787.
[5] Mr Smith denies liability for disbursements for expenses incurred before the judgment of the Court of Appeal in which the Court allowed Mr Smith’s appeal of the first High Court decision.
Relevant background
[6] It is necessary to summarise the sequence of decisions that led to Paros’s claim for costs. For convenience, I distinguish between the first phase of the proceeding, which included the hearing before Harland J and the Court of Appeal’s hearing of Mr Smith’s appeal of that decision, and the second phase, which comprised the hearing before me on the questions remitted by the Court of Appeal.
First phase of proceeding
[7] In a judgment issued on 19 August 2021, Harland J upheld the validity of a rent review initiated by Paros and ordered Mr Smith to pay rental arrears of $237,625 plus interest and further rental as it fell due under the reviewed Lease.1 As a result of that rent review, Mr Smith was liable to pay rental of $81,375 per annum from 14 November 2018.
[8] The rent review was carried out on the basis of a valuation prepared in accordance with s 22 of the Public Bodies Leases Act 1969 rather than in accordance with the process set out in s 152(3) of the Municipal Corporations Act 1954, as provided for in the Lease.
[9] Harland J agreed with Paros that the Municipal Corporations Act did not apply because it had been repealed and, under s 231(2) of the Local Government Act 1974, leases entered into under the Municipal Corporations Act were deemed to be leases under the Public Bodies Leases Act.2
[10] Harland J also dismissed Mr Smith’s affirmative defences and counterclaims seeking damages based on his contention that the Lease had been determined by Paros’s refusal to allow Mr Smith to exercise the right to freehold under the lease, and that the lease was cancelled on acceptance of that repudiation.3
1 Paros Property Trust Ltd v Smith [2021] NZHC 2163 [First High Court decision]. Ms Toni Shaw, Mr Smith’s former partner, was second defendant in the proceeding. Because Ms Shaw ceased to participate in the proceeding, I refer to Mr Smith as the sole defendant and as solely liable for rental under the Lease and for any costs that may be ordered.
2 At [80]–[82].
3 At [62]–[75].
[11] In a decision dated 9 March 2022, Harland J ordered Mr Smith to pay costs to Paros of $54,014 plus disbursements as claimed by Paros.4 Harland J agreed that cl 14(b) enabled Paros to claim indemnity costs because Mr Smith did not engage in the rent review process or continue to pay the full amount of rental after he had purported to cancel the lease.5 However, Harland J considered that the costs claimed by Paros ($152,270.93, as Paros again claims) were unreasonable when compared to the amount at issue. Accordingly, Mr Smith was ordered to pay Paros’s costs on a 2B basis.6
[12] Following a hearing on 23 March 2022, in a decision dated 21 September 2022, the Court of Appeal upheld Mr Smith’s appeal against the First High Court decision in part.7 The Court of Appeal said its clear view was that the lease remained on foot and Mr Smith was not entitled to cancel it.8 However, it accepted Mr Smith’s submission that the rent review process adopted by Paros did not comply with the process prescribed by the Lease.9 Based on its own analysis of the Lease, the Court held that, because the Lease had been granted under the Urban Renewal and Housing Improvement Act 1945 and not the Municipal Corporations Act, s 231(2) of the Local Government Act did not apply.10
[13] Accordingly, Paros was not able to increase the rent under the Lease by giving notice in the manner contemplated by s 22 of the Public Bodies Leases Act, which requires a valuation prepared by one person appointed by the lessor. Rather, it was necessary to follow the process prescribed in s 152(3) of the Municipal Corporations Act, which required a valuation by three independent persons. The Court held that no such valuation had taken place and that the rent remained at the level applicable from 14 November 2011 to 13 November 2018: $31,000 per annum.11
4 Paros Property Trust Ltd v Smith [2022] NZHC 408 [Costs decision].
5 At [22]–[24].
6 At [30].
7 Smith v Paros Property Trust Ltd [2022] NZCA 447 [Court of Appeal decision].
8 At [8].
9 At [9].
10 At [155] and [162].
11 At [163].
[14] The Court of Appeal declined to take up the suggestion from Paros that it enter judgment for $86,500 – the amount due under the Lease if there had been no valid rent review, plus the further rent that had fallen due on 14 May 2022. It considered that it was preferable to allow the appeal and refer matters of quantum and ancillary relief back to the High Court.12
[15] The Court of Appeal set aside the First High Court decision on Paros’s claim for rent and remitted that claim to the High Court to determine the amount of rent payable.13 It dismissed Mr Smith’s appeal of the High Court’s rejection of Mr Smith’s counterclaims regarding the exercise of the right to freehold and cancellation of the Lease.14
[16] The Court of Appeal held that the success of Mr Smith’s appeal and the reference back to the High Court meant that the award of costs in the High Court would need to be revisited. It set aside the First Costs decision and directed that costs in the High Court would ned to be determined by that Court in light of the outcome before the Court of Appeal, and on remittal to the High Court.15
[17] In relation to costs on the appeal, the Court of Appeal observed that Mr Smith’s appeal had been successful in part, although that partial success stemmed from a legal issue identified by the Court rather than from any argument advanced by Mr Smith. The Court encouraged the parties to consider whether, in these circumstances, it might be sensible for costs to be permitted to lie where they fall.16 The parties later agreed to that result.
Second phase of proceeding
[18]In my judgment of 18 July 2023, I:17
(a)dismissed Mr Smith’s arguments that the review of the Lease had already taken place; that, if it had not taken place, the time for the
12 At [165].
13 At [174].
14 At [175].
15 At [171] and [177].
16 At [173].
17 Paros Property Trust Ltd v Smith [2023] NZHC 1873 [Second High Court decision] at [58]–[59].
review had passed; and that Paros was estopped from undertaking a new rent review; and
(b)ordered a review of the annual rental for the Property for the seven-year period commencing 14 November 2018 and ordered that the rental be determined by a valuation of the land in the manner provided for in s 152(3) of the Municipal Corporations Act.
[19] I also held that Paros was the successful party and entitled to costs on the hearing. I directed counsel for Paros and Mr Smith to submit memoranda on costs of the hearing on 10 July 2023 and costs in the first High Court hearing, having regard to the Court of Appeal’s directions.18
Outcome of rent review
[20] As reported in a memorandum dated 14 November 2023 from counsel for Paros, the outcome of the rent review process carried out in accordance with the Second High Court decision was that the annual rental for the seven-year period commencing on 14 November 2018 has been set at $61,625, inclusive of GST. On the basis of this figure, Mr Smith’s rental arrears as at the date of First High Court decision on 19 August 2021 were $178,375 rather than the $237,625 ordered by Harland J.
Questions for decision
[21]The questions for decision are:
(a)Is Paros entitled to costs on the first phase of the proceeding and, if so, what costs should be ordered?
(b)What costs should be ordered in relation to the second phase of the hearing?
(c)Is Paros entitled to the disbursements claimed?
18 At [64].
Is Paros entitled to costs on the first phase of the proceeding?
[22] It is well-established, as reflected in the principle stated in r 14.2(1)(a) of the High Court Rules 2016, that the party who fails with respect to a proceeding should pay costs to the party who succeeds.
[23] Counsel for Paros submit that there can be no question that Paros succeeded in relation to the first phase and the second phase of the proceeding.
[24] In relation to the first phase, counsel for Paros say that cl 14(b) of the Lease was engaged because Mr Smith was in breach of his obligation to pay rental due under the Lease and Paros’s legal costs were incurred in consequence of and in connection with that default. They also say that, despite the Court of Appeal ordering that a new rental be set for the period commencing on 14 November 2018, Mr Smith was still liable to pay rental of $31,000 from that date and failed to do so based on his contention that the Lease had been cancelled. They note that Mr Smith’s counterclaims based on alleged repudiation of the Lease by Paros and cancellation of the Lease by Mr Smith failed before Harland J and the Court of Appeal.
[25] I do not accept that Paros was the successful party in the first phase of the proceeding, given the outcome in the Court of Appeal.
[26] The first phase of the proceeding was based principally on a claim by Paros for recovery of rental of $81,375 per annum from 14 November 2018 said to be due under the rent review conducted on the basis of s 22 of the Public Bodies Leases Act.
[27] The outcome in the Court of Appeal on that claim was that Paros could not increase the rent by giving notice in the manner contemplated by s 22 of the Public Bodies Leases Act. The Court also held that, because no valuation had taken place in accordance with the process prescribed in s 152(3) of the Municipal Corporations Act, the rent remained at $31,000 per annum. Accordingly, Paros failed in its principal claim, which was premised on a valid rent review having taken place.
[28] While Mr Smith remained liable to pay rental of $31,000 per annum in accordance with the decision of the Court of Appeal, the Court declined to make any
finding as to the quantum of Mr Smith’s liability. The Court remitted that matter to the High Court.
[29] While Mr Smith’s affirmative defences and counterclaims based on alleged repudiation of the Lease by Paros and cancellation by Mr Smith failed, they were made in response to Paros’s claim for increased rent, which did not succeed. The “partial success” of Mr Smith’s appeal stemmed from a legal issue identified by the Court of Appeal — not a defence or counterclaim advanced by Mr Smith.19
[30] For these reasons, I am satisfied that neither Paros not Mr Smith was the successful party in the first phase. I do not consider that what happened in the second phase, and as a consequence of the second phase, alters that assessment. The second High Court decision simply set in place the process for the rent review that had yet to be undertaken. The result of that review is that the annual rent has been increased from $31,000 to $61,625 (inclusive of GST). Assuming all figures are inclusive of GST, the result is that the rental has almost doubled from the previous period but is considerably less than the $81,375 claimed by Paros under the purported rent review undertaken in August 2018.
[31] With regard to cl 14(b) of the Lease, I consider that the costs and expenses incurred by Paros in the first phase were incurred as a consequence of Paros’s contention that a valid review had taken place and that Mr Smith was liable to pay rental of $81,375 per annum and not because of Mr Smith’s refusal to pay rental at the level of $31,000 per annum.
[32] Accordingly, I do not accept that Paros’s costs and expenses in the first phase of the proceeding were incurred as a consequence of or in connection with any breach or default by Mr Smith in the performance or observance of the Lease.
[33] For these reasons, I do not accept that Paros is entitled to costs on the first phase of the proceeding. I am satisfied that costs in the first phase should lie where they fall.
19 Court of Appeal decision, above n 7, at [173].
What costs should be ordered in relation to the second phase of the proceeding?
[34] I have already held that Paros was the successful party in the second phase and is entitled to costs.20
[35] The proceeding was categorised by Associate Judge Andrew as category 2 for the purposes of costs.21 Counsel for Paros accepts that time should be calculated according to band B.
[36] On that basis, scale costs for the second phase come to $12,787 and, but for cl 14(b) of the Lease, would be ordered.
[37] Under r 14.6(4)(e) of the High Court Rules, the Court may order a party to pay indemnity costs if the party claiming costs is entitled to indemnity costs under a contract or deed. The question is whether Paros is entitled to indemnity costs under cl 14(b) of the Lease.
[38] Counsel for Paros submit that cl 14(b) applies because, in refusing to proceed with a rent review, Mr Smith adopted a position that constituted a default of their observance of Paros’s entitlement to conduct a rent review.
[39] I do not consider that this is an entirely accurate summary of the Lease or of what occurred.
[40]The Lease provides that:
(a)the yearly rental “shall be reviewed upon 14 November 2011 and every 7 years following that date” on the terms set out in the Lease; and
(b)the annual rental for each seven-year period is to be determined by:
… a valuation of the land only without taking account of any improvements on the land, in the manner provided for in Section 152(3) of the Municipal Corporations Act 1954 …
20 Second High Court decision, above n 17, at [62].
21 Paros Property Trust Ltd v Smith HC Auckland, CIV-2019-404-002593, 18 February 2020 (Minute of Associate Judge Andrew) at [7].
[41] The rental review is mandatory, therefore, and is not an entitlement of Paros. However, as found by the Court of Appeal, the rental review that was purportedly undertaken by Paros in August 2018 was not a valid review and so was ineffective. Mr Smith’s refusal to agree to that review had no bearing on that result except in the sense that his non-payment of the purportedly reviewed rental of $81,375 per annum led to the current proceeding.
[42] Nonetheless, following the Court of Appeal’s decision, it would have been open to Paros and Mr Smith to agree to a rent review in accordance with the above provisions of the Lease. However, as recorded by Campbell J in his minute dated 2 February 2023, while Paros agreed that the rent for the period from 14 November 2018 had to be reviewed under s 152(3) of the Municipal Corporations Act, Mr Smith disputed Paros’s ability to review the rent retrospectively to 14 November 2018.22 As a consequence, the second High Court hearing was set down for 10 July 2023. That is, it was the position taken by Mr Smith that necessitated the second hearing.
[43]As I recorded in the Second High Court decision:23
The reason for the hearing on 10 July 2023 was Mr Smith’s refusal to agree to a process to determine the rent because, as stated in his memorandum dated 8 February 2023, he considered that the review had already taken place.
(footnote omitted)
[44]As I also recorded in that decision:24
The consequences of [the Court of Appeal’s] rulings are plain; the previous rent review has been set aside; the judgment of and costs ordered in the High Court have been set aside; a new rental is to be determined. Those findings do not mean the previous review did not take place. Rather, the review was held to be ineffective and was set aside. Accordingly, there is to be a new review. It is futile of Mr Smith to argue that the rent review has been carried out and cannot be revisited.
(emphases added)
22 Paros Property Trust Ltd v Smith HC Auckland, CIV-2019-404-002593, 2 February 2023 (Minute of Campbell J) at [6].
23 Second High Court decision, above n 17, at [62].
24 At [47].
[45] As noted above, the rent review was mandatory under the Lease. The effect of the Court of Appeal decision was to set aside the review that Paros had purported to undertake in August 2018 and to require a new review to be undertaken in accordance with the process set out in s 152(3) of the Municipal Corporations Act. By refusing to agree to that review, Mr Smith was acting in default of the observance of the terms of the Lease. As a consequence, Paros incurred the costs of the second phase of the proceeding.
[46] I am satisfied, therefore, that cl 14(b) of the Lease applies and that Paros is entitled to indemnity costs in relation to the second phase of the proceeding. Given the protracted history of the proceeding, I am satisfied that Paros’s costs of $31,889.50 in relation to the second hearing, including the costs of second counsel, are reasonable.
[47] For these reasons, I am satisfied that the costs Mr Smith must pay for the second phase of the proceeding are Paros’s actual costs of $31,889.50.
Is Paros entitled to the disbursements claimed?
[48] Counsel for Paros prepared a schedule of the disbursements claimed and provided copies of relevant invoices.
[49] The majority of the disbursements — 12 of the 15 claimed — are for expenses incurred between 22 November 2019 and 19 August 2021. It is apparent that these costs were incurred in relation to the hearing before Harland J and the First High Court decision issued on 19 August 2021. They are costs incurred in the first phase. In accordance with my decision at [33] above, these costs lie where they fall.
[50] There is an entry dated 24 March 2022 for a sealing order fee of $50. It must relate to the First Costs decision issued by Harland J on 9 March 2022 or, possibly, to the hearing before the Court of Appeal on 23 March 2021. In either event, that cost was also incurred in the first phase. It too lies where it falls.
[51] There is an entry dated 30 June 2022 for printing and binding totalling $84.07. While the narration in the schedule states “Printing and binding for remitted aspects hearing”, these costs were incurred before the Court of Appeal decision remitting
Paros’s claim for rental back to this Court. I do not accept, therefore, that this is a cost incurred in the second phase. It too lies where it falls.
[52] The invoice for the remaining disbursement claimed is dated 20 July 2023 and is for a sealing order fee of $50. It must relate to the Second High Court decision issued on 18 July 2023. It is a cost of the second phase and is payable by Mr Smith.
[53] For the above reasons, I am satisfied that Mr Smith must pay Paros disbursements of $50.00.
Result and order
[54]For all the above reasons, I dismiss:
(a)Paros’s claim for costs in relation to the first phase of the proceeding; and
(b)all but one of Paros’s claims for disbursements.
[55] In relation to the second phase of the proceeding, I order Mr Smith to pay Paros its actual costs of $31,889.50 and disbursements of $50.
G J van Bohemen J
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