Paros Property Trust Limited v Smith

[2023] NZHC 1873

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2019-404-002593

[2023] NZHC 1873

BETWEEN

PAROS PROPERTY TRUST LIMITED

Plaintiff

AND

TIMOTHY SMITH

First Defendant

TONI SHAW

Second Defendant

Hearing:

10 July 2023

Appearances:

L McEntegart and A J Steel for Plaintiff First Defendant self-represented

No appearance for Second Defendant

Judgment:

18 July 2023

JUDGMENT OF VAN BOHEMEN J

This judgment was delivered by me on 18 July 2023 at 3:30 pm pursuant to r 11.5 of the High Court Rules 2016.

Registrar/Deputy Registrar

……………………………..

Counsel/Solicitors:

L McEntegart, Auckland A J Steel, Auckland Brown Partners, Auckland

PAROS PROPERTY TRUST LIMITED v SMITH [2023] NZHC 1873 [18 July 2023]

[1]    In a judgment dated 21 September 2022, the Court of Appeal remitted to this Court the claim by the plaintiff, Paros Property Trust Ltd (Paros), for the rental payable by the defendant, Timothy Smith, under a memorandum of lease (the lease) for a townhouse at 54 Napier Street, Freemans Bay, Auckland (the property).1 The purpose of the remittal is to determine the amount of rental payable by Mr Smith to Paros.2

[2]    Paros submits that the Court should supervise the implementation of the rent review process provided for in the lease and, for that purpose, should set a timetable for the appointment of:

(a)independent valuers by each of Paros and Mr Smith; and

(b)a third valuer by the two independent valuers appointed by Paros and Mr Smith.

[3]    Mr Smith submits that there should be no review of the rent.  In summary,  Mr Smith’s reasons are that:

(a)under the lease, the rent had to be reviewed on 14 November 2018;

(b)Paros has already conducted a rent review, albeit one that has been set aside by the Court of Appeal, and there is no right under the lease to conduct a further rent review;

(c)time was of the essence for the completion of the rent review;

(d)it is not reasonable for Paros to review the rent more than five years after the commencement of the rental term; and

(e)Paros is estopped from undertaking a further review.

1      Smith v Paros Property Trust Ltd [2022] NZCA 447.

2 At [174].

Relevant background

[4]    The property is one of 30 terraced townhouses built by the Auckland City Council in the early 1970s in a development known as “Freemans Close”. The development was part of an urban renewal scheme in the area carried out under the Urban Renewal and Housing Improvement Act 1945 (URHI Act).

[5]    Under the initial arrangements for the development, Auckland City Council retained freehold title to the land and leased out the townhouses and shares of a common area under 99 year leases commencing on 14 November 1972. The leases set an annual rental for the first 21 years of the lease commencing 14 November 1972 and provided that the rental for the subsequent 21 year periods commencing 14 November 1993, 14 November 2014 and 14 November 2035 and for the final 15 years of the term were 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 … .

Municipal Corporations Act valuation process

[6]    Section 152(1)(b) of the Municipal Corporations Act relevantly provided that, where Council land was leased for a term not exceeding 21 years, the lessee could, prior to the expiration of the term, have a new lease for a further term not exceeding 21 years at a rent to be fixed by valuation of the land and improvements.

[7]Section 152(3) of the Act provided:

Every valuation under paragraph (b) of subsection one of this section shall be made by three independent persons, one to be appointed by the Council, one by the lessee, his executors, administrators or assigns, and the third by those two appointed persons. The valuation fixed by any two of those persons shall be final, and where no two of them reach the same decision the decision of such third person shall be final. …

Auckland City Council sells freehold interest

[8]    In the 1990s, Auckland City Council sold its freehold interest in the land on which the townhouses were built to private interests.

Lease terms varied

[9]In December 2004, the leases were varied to provide the following:

(a)The 99 year lease term was deleted and substituted by a term of 32 years commencing on 14 November 1972 with a further term of 21 years commencing 14 November  2004  and  renewable  thereafter  every  21 years in perpetuity.

(b)The annual rental from the date of the variation to 13 November 2011 was set at $3,508 and the variation of lease provided that:

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.

(c)A new cl 23 provided the lessee with an option to purchase the freehold interest  in  the  property  during   the   12-month   period   prior   to 14 November 2011, and during the 12 month periods prior to each subsequent rent review date, in accordance with the procedure prescribed in the clause.

Paros acquires freehold interest in property

[10]   In December 2008, Paros purchased the freehold interest in the property on behalf of the Paros Property Trust. At that time, there was a further 17 years to run on the current lease term (expiring 13  November 2025),  with  rent  renewals  due on  14 November 2011 and 14 November 2018.

[11]   Subsequently, the rent was reviewed in accordance with the lease and the rental for the period commencing 14 November 2011 was set at $31,000 per annum.

Mr Smith and Ms Shaw acquire leasehold interest in property

[12]   In August 2015, Mr Smith and Toni Shaw, Mr Smith’s former wife, purchased the leasehold interest in the property. Mr Smith subsequently took up residence in the property and assumed responsibility for the lessees’ performance of the lease.

Mr Smith purports to give notice of intention to acquire freehold interest in property

[13]   On 26 April 2018, Mr Smith gave what he considered to be valid notice of his intention to acquire the freehold interest in the property under cl 23 of the lease.     Mr Smith included with the notice a remittance for the preparation of a valuation by a valuer he had identified for the preparation of the valuation. Mr Smith considered that these arrangements had been agreed with an agent acting for Paros.

[14]   On 27 April 2018, the agent for Paros advised Mr Smith that Paros did not accept that Mr Smith’s notice complied with the lease because cl 23(b) envisaged the lessor causing a valuation to be made at the lessee’s cost. Further communication between Mr Smith and Paros did not result in agreement on the appropriate procedure.

Paros purports to give notice of rent review

[15]   On 13 August 2018, Paros gave notice to Mr Smith for the rent review due on 14 November 2018. The notice advised that, because the Municipal Corporations Act had been repealed, the applicable legislation was Section 22 of the Public Bodies Leases Act 1969. Under that section, a rent review is to be carried out on the basis of a single valuation obtained by the lessor. The notice advised that the valuer retained by Paros considered that the annual rental for the property was $81,375.00 per annum.

Mr Smith purports to cancel lease and rejects rent review notice

[16]   On 30 August 2018, Mr Smith purported to give notice cancelling the agreement to lease based on Paros’s alleged breach of cl 23(b) of the lease.

[17]   By letter dated 12 October 2018, Mr Smith advised Paros that “the former lessee” did not agree with the rent review notice. The letter stated that the rent review process was irrelevant from the date of the notice “concluding” the lease because of lessor repudiation and breach.

Paros applies to High Court for declaration that lease is valid

[18]   On 1 November 2018, Paros applied to the High Court for a declaration that the lease remained on foot and had not been validly cancelled.

[19]   By judgment issued on 16 July 2019, Peters J declined to make either declaration for reasons which related, in part, to the fact that Ms Shaw was a joint lessee and was not a party to the proceeding.3

Paros commences proceeding for recovery of rent

[20]   In  November  2019,  Paros  commenced  the  present  proceeding  against  Mr Smith and Ms Shaw seeking payment of rent from 14 November 2018.

[21]   In his statement of defence, Mr Smith denied liability and alleged that he had validly exercised the right to obtain the freehold interest in the property, Paros had breached cl 23 of the lease and he had validly cancelled the lease on behalf of himself and Ms Shaw.

[22]   By judgment dated 19 August 2021, Harland J entered judgment in favour of Paros against Mr Smith and Ms Shaw in the sum of $237,625 for rental to that date and subject to adjustment for further rental falling due and unpaid, plus interest.4

[23]In her judgment, Harland J held that:5

(a)Mr Smith had not given valid notice under cl 23 of the lease;6

(b)there had been no agreement to vary the cl 23 process;7 and

(c)Paros had not breached or repudiated cl 23 so cancellation of the lease by Mr Smith was not legally justified.8

3      Paros Property Trust Ltd v Smith [2019] NZHC 1657.

4      Paros Property Trust Ltd v Smith [2021] NZHC 2163.

5 At [102].

6      Smith v Paros Property Trust Ltd, above n 1 at [87]. The Court recorded, at [42], that Ms Shaw was no longer a party to the proceeding and that Mr Smith effectively stood in the shoes of the lessees.

7 At [116].

8      At [127] – [131].

[24]   Harland J also held that the rent review process was governed by s 22 of the Public Bodies Leases Act rather the process set out in the Municipal Corporations Act, as submitted by Mr Smith.9

[25]   Harland J subsequently ordered Mr Smith and Ms Shaw to pay costs to Paros of $54,014 plus disbursements as claimed by Paros.10

Mr Smith appeals to Court of Appeal

[26]   Mr Smith appealed Harland J’s decision, arguing that the lease had been validly cancelled and that, if the lease had not been cancelled, the full amount of rent claimed by Paros and awarded by the High Court was not recoverable because the rent review notice was not given in accordance with the process prescribed in the lease.

[27]By judgment dated 21 September 2022, the Court of Appeal held that:11

(a)Mr Smith’s notice of his intention to acquire the freehold interest in the property was not in accordance with the process in cl 23 of the lease;

(b)the process in cl 23 had not been varied by agreement; and

(c)Paros had not repudiated the lease or breached any express or implied term of the lease that justified cancellation of the lease by Mr Smith.

[28]   However, the Court of Appeal held that the lease had been made under the URHI Act and not the Municipal Corporations Act and did not invoke or depend on the latter Act for its validity.12

[29]The Court stated:

[163]    It follows that 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

9 At [82].

10     Paros Property Trust Ltd v Smith [2022] NZHC 408.

11     Smith v Paros Property Trust Ltd, above n 1, at [87], [116] and [127] – [131].

Note: The Court recorded, at [42], that Ms Shaw was no longer a party to the proceeding and that Mr Smith effectively stood in the shoes of the lessees.

12 At [162].

Leases Act.   Rather, it was necessary to follow the process prescribed in     s 152(3) of the Municipal Corporations Act. That process required a valuation by three independent persons. No such valuation had taken place. The rent remained at the level applicable from 14 November 2011 to 13 November 2018: $31,000 per annum.

[30]   Accordingly, the Court of Appeal allowed Mr Smith’s appeal in relation to the rent payable. The Court did not accept the suggestion from Paros that the appeal be allowed only as to quantum. Nor did the Court accept Paros’s application for a direction fixing a final quantum of judgment for rental arrears by way of a review under the process in s 152(3) of the Municipal Corporations Act, stating:13

… we consider that it is preferable simply to allow the appeal, and refer these matters of quantum and ancillary relief back to the High Court.

[31]Under the heading “Result”, the Court of Appeal further stated:

[174] The appeal from the entry of judgment on the respondent’s claim for rent is allowed. The High Court judgment on that claim is set aside. The claim is remitted to the High Court to determine the amount of rent payable.

The task before this Court

[32]   The hearing before me on 10 July 2023 was set down solely to determine Paros’s claim for rent, with costs in the High Court to be determined in the light of Paros’s claim.14

[33]   Despite the terms of [174] of the Court of Appeal’s judgment, this Court is not in a position to determine the amount of rent payable under the lease. Without valuation evidence, the most the Court can do is to oversee a process by which the property is valued and the rental set in accordance with that valuation as provided for in the lease.

[34]   In memoranda and written submissions filed before the hearing, counsel for Paros, Mr McEntegart and Mr Steel, argued that the procedure in s 152(3) of the Municipal Corporations Act constituted a submission to arbitration and that, accordingly, the rental for the property should be determined by arbitration. At the

13 At [165].

14     Paros Property Trust Ltd v Smith HC Auckland CIV 2019-404-2593, 9 February 2023 (Minute of Campbell J).

hearing, however, they withdrew that suggestion and proposed that the Court should oversee the appointment of three independent valuers in accordance with the process in s 152(3) of the Municipal Corporations Act.

[35]   Subject to addressing Mr Smith’s submissions, I agree with Paros’s revised submission. The Court of Appeal set aside the earlier rent review because it was not carried out in accordance with the process in s 152(3) of the Municipal Corporations Act. It is necessarily implicit in the Court of Appeal’s remittal of the rental back to this Court, and it follows from the lease, that the rental is to be reviewed and determined in accordance with that process.

[36]   Mr Smith’s principal contention is that no rent review should be carried out for reasons discussed more fully below.  However,  at  the conclusion  of the  hearing, Mr Smith confirmed that, if his position was not accepted and the Court made orders for the appointment of valuers in accordance with the process in s 152(3) of the Municipal Corporations Act, he would cooperate with that process.

[37]   However, before any such process can be directed, the Court must first be satisfied that a rent review can properly be carried out. Most of the hearing was directed to that question.

Submissions of Paros and Mr Smith

[38]   Mr McEntegart submits that it is clear that a rent review can and is to be carried out. That was the clear consequence and expectation of the Court of Appeal when it set aside the High Court’s judgment on the rent review and remitted the setting of a revised rental to this Court.

[39]   Mr McEntegart refers to Tournament Parking Ltd v The Wellington Company Ltd where Miller J reviewed the relevant authorities and summarised the principles applicable to rent review provisions.15 Mr McEntegart says that, in accordance with Miller J’s analysis, time was not of the essence for the rent review under the lease, Mr Smith did not make time of the essence and the review is being carried out within

15     Tournament Parking Ltd v The Wellington Company Ltd (2010) 11 NZCPR 779 (HC).

the current term and within a reasonable time. In addition, Paros is not estopped from carrying out the review. There has been no inducement by Paros to Mr Smith that could be taken as indicating a rent review would not be undertaken and no steps have been taken by Mr Smith in reliance on that purported undertaking to his detriment.

[40]   Mr  Smith  submits  that,  under  the  lease,  the  rent  for  the  period  from  14 November  2018  had  to  be  reviewed  “upon”  the  review  date;  that  is,  on   14 November 2018, and there is no provision in the lease for the rent to be reviewed on any other date.

[41]   Mr Smith also says the rent review has already taken place; it led to notices of increased rent, demands for payment of the increased rental and trials before the High Court and Court of Appeal. It also triggered an obligation to pay on the lessee, a judgment sum, interest and costs in excess of the rental paid by Mr Smith.

[42]   Mr Smith says the circumstances of the present case are different from those in Tournament Parking, which involved commercial parties and a lease that did not provide a rent review date but provided for the rent to be reviewed during the term of the lease. Mr Smith also says that time is of the essence in the current lease because of the interrelationship between the rent review clause and the clause providing for the exercise of the option to freehold the property. Mr Smith says the rent review is only effective when the right to freehold expires.

[43]   If these submissions are not accepted, Mr Smith says that the rent review had to take place within a reasonable time of 14 November 2018 and that five years is wholly unreasonable. Mr Smith also invites the Court to draw adverse inferences from Paros’s decision to insist on the procedure in the Public Bodies Leases Act and seeks to make something of the fact that, according to Mr Smith, Paros followed the procedure in the Municipal Corporations Act when it reviewed the rent in 2011.

[44]   Mr Smith also says Paros is estopped from undertaking a new rent review because it breached the promise in the lease to undertake a valid rent review and enforced the consequences against him. He says that conducting a rent review outside

the terms without the offer of arbitration, discussion or negotiation was unconscionable behaviour.

Analysis

[45]   Mr McEntegart is correct. It is a clear consequence of the Court of Appeal’s decision and remittal of the case back to this Court that a valid rent review will be undertaken in accordance with the lease.

[46]   Mr Smith’s arguments about the consequences of the rent review undertaken in 2018 take no account of the rulings of the Court of Appeal stated at the beginning of its judgment:16

A. The appeal against the entry of judgment on the respondent’s claim for rent is allowed. The High Court judgment on that claim is set aside. The claim is remitted to the High Court to determine the amount of rent payable.

…

D. The costs order in the High Court is set aside. Costs in the High Court will be determined by that Court in the light of the outcome before this Court and on remittal to the High Court.

[47]   The consequences of those 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.

[48]   The lease does not provide that the rent review for the current rental period had to be carried out by 14 November 2018. The use of “upon” in the clause providing for the rent review cannot have so strict a meaning. I am satisfied that, in the context of that clause, it means “at the time of” or “on the occasion of”. It does not mean the rent review had to be undertaken or completed by the review date.

16     Smith v Paros Property Trust Ltd, above n 1.

[49]   I agree with Mr McEntegart that the analysis of Miller J in Tournament Parking is relevant and applicable to the present case. Miller J reviews New Zealand and overseas authorities on rent review provisions and states conclusions in general terms that are clearly apposite to the current lease. Based on Miller J’s analysis and conclusions, I summarise the applicable principles as follows:

(a)There is a presumption that time is not of the essence in rent review provisions.17

(b)That presumption can be displaced if the agreement to lease expressly provides that time is of the essence or if the parties intended that it should be so.18

(c)Time is of the essence where the lease prescribes a procedure and timetable under which one party is deemed to have accepted the other’s proposal if it fails to serve a notice within time.19

(d)A lessee may make time of the essence of a rent review whenever a stipulation as to time that is not already of the essence has been breached or if the lease is silent as to time and a reasonable period has elapsed.20

(e)The Court may also find that a lessor was obliged to review the rent within a reasonable time.21

(f)The Court may also find that the lessor is estopped from reviewing the rent where there has been some inducement by the lessor coupled with detrimental reliance by the lessee.22

17     Tournament Parking Ltd v The Wellington Company Ltd, above n 15, at [31] – [36].

18 At [44].

19 At [45].

20 At [52].

21 At [53].

22 At [57].

[50]   Applying those principles to the present lease, it is clear that the lease itself does not make time of the essence. It simply provides that a rent review will be taken “upon” the commencement of the relevant rental period. I have already discussed how “upon” should be interpreted.

[51]   I do not accept that there is any interrelationship between the review provision and the right to freehold the title that makes time of the essence. The only interrelationship is that the right  to  freehold  must  be  exercised  within  the  last  12 months of the current rental period and the new rent takes effect from the following day. If the right to freehold is exercised in accordance with the lease, then a rent review is unnecessary and, if undertaken, will have no effect. If the right to freehold is not exercised in accordance with the lease, the lessee cannot exercise the right to freehold for a further six years irrespective of whether and when a rent review takes place. There is nothing in the two provisions or in their interrelationship that makes time of the essence for the rent review.

[52]   For these reasons, I do not accept that the lease provides or that the parties intended that time would be of the essence in the rent review.

[53]   In addition, the lease does not prescribe a procedure or timetable under which one party is deemed to have accepted the other’s proposal if it fails to serve a notice within time. The only procedure prescribed is that for the appointment of valuers as provided for in s 152(3) of the Municipal Corporations Act. No timeframes are prescribed.

[54]   Mr Smith did not make time of the essence in his communications with Paros. His response to the notice of the review in August 2018 was to inform Paros that he did not agree with the notice and that the rent review process was irrelevant.

[55]   In assessing what is a reasonable time, it is clearly relevant that Paros instituted, even before the expiry of the previous rental period, a rent review it believed to be lawful. That position was apparently validated by the High Court’s decision. The fact the Court of Appeal later held that Paros and the High Court were wrong does not mean we should ignore what Paros had done before the Court of Appeal’s decision

when assessing the reasonableness of Paros’s actions. Nor does it provide any basis for concluding that Paros had deliberately chosen to follow an unlawful procedure, whatever process was followed in 2011.23

[56]   Given the history of the interactions between Paros and Mr Smith and having instituted what it considered to be a valid review in August 2018, Paros could not reasonably have taken any further steps to review the rent until the Court of Appeal had issued its decision. The Court of Appeal’s decision was issued on 21 September 2022. On 6 October 2022, counsel for Paros filed a memorandum in this Court about how the questions remitted to this Court should be dealt with. There can be no doubt that Paros has acted within a reasonable period in seeking the determination of the rental.

[57]   Mr Smith vigorously resisted Paros’s actions to which he refers in his estoppel arguments. There is no evidence of any reliance by Mr Smith on those actions and so no evidence of Mr Smith acting to his detriment in such reliance. In addition, Paros’s actions have been considered by the Court of Appeal which then ordered that the question of the rental be remitted to this Court for determination. In these circumstances, there is no basis for holding that Paros is estopped from seeking a rent review.

Result

[58]   For all these reasons, I dismiss all of Mr Smith’s arguments and hold that there is no reason not to proceed with a review of the rent for the property for the period commencing 14 November 2018 in accordance with the lease.

23 The Court of Appeal refused leave to Mr Smith to adduce evidence of what had happened in 2011. Accordingly, it was not appropriate for Mr Smith to try to introduce that evidence before this Court. However, as the Court of Appeal noted, what happened in 2011 is of no relevance to the question of the procedure to be followed in 2018. Smith v Paros Property Trust Ltd, above n 1, at [167] – [169].

Orders and directions

[59]I order that:

(a)There is to be a review of the annual rental for the property at 54 Napier Street, Freemans Bay, Auckland for the seven-year period commencing 14 November 2018;

(b)The rental 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 s 152(3) of the Municipal Corporations Act 1954.

[60]For that purpose, I make the following directions:

(a)Paros and Mr Smith shall each appoint an independent person to undertake the valuation and shall serve and file notices of those appointments by 1 August 2023;

(b)The persons appointed by Paros and Mr Smith shall jointly appoint a third independent person to undertake the valuation and Paros and   Mr Smith shall jointly file a notice of that appointment by 15 August.

[61]   I note that it is not open to Paros or to Mr Smith to object to the person appointed by the other unless they have direct evidence that the appointee is not truly independent. The fact a valuer may have been retained previously by one of the parties or by others in the real estate industry does not disqualify them from appointment. The interests of each of the parties are protected by the process in s 152(3) of the Municipal Corporations Act.

Costs

[62]   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.24 For the reasons given above, Mr Smith’s position has not been upheld and the position taken by Paros has been upheld. As such, Paros is the successful party and is entitled to costs on that hearing.

[63]   There is also the question of costs in the earlier High Court stage of the proceeding. The Court of Appeal set aside the costs order made by Harland J and directed that costs in the High Court are to be determined in this Court in light of the outcome before the Court of Appeal upon remittal to this Court.25

[64]   Given that the rent review process is to begin, I see no reason to delay a resolution of these two questions. Unless the parties wish to agree these matters between themselves, I direct counsel for Paros and Mr Smith to submit memoranda of no more than 8 pages on costs of the hearing on 10 July 2023 and costs in the earlier High Court stage of the proceeding as follows:

(a)Any memorandum from counsel for Paros is to be filed and served by 8 August 2023.

(b)Any memorandum from Mr  Smith  is  to  be  filed  and  served  by  22 August 2023.

[65]   These questions will be decided on the papers unless the parties request otherwise, or the Court considers a hearing would assist.

G J van Bohemen J

24     Paros Property Trust Ltd v Smith HC Auckland, CIV 2019-404-2593, 8 February 2023 (Memorandum of Timothy Smith).

25     Smith v Paros Property Trust Ltd, above n 1, at [177].