Paros Property Trust Limited v Smith

[2022] NZHC 408

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2019-404-2593

[2022] NZHC 408

BETWEEN

PAROS PROPERTY TRUST LIMITED

Plaintiff

AND

TIMOTHY ERIC BRUCE SMITH

First Defendant

TONI ADRIANNE SHAW

Second Defendant

Hearing:	On the papers
Judgment:	9 March 2022

COSTS JUDGMENT OF HARLAND J

This judgment was delivered by me on 9 March 2022, at 3:30 pm Pursuant to Rule 11.5 High Court Rules

Registrar/Deputy Registrar  Date:………………..

Counsel/Solicitors:

L McEntegart, Waterloo Tower Chambers, Auckland A Steel, Chancery Street Chambers, Auckland Brown Partners, Auckland

Copy to:

First Defendant; and Second Defendant

PAROS PROPERTY TRUST LTD v SMITH [2022] NZHC 408 [9 March 2022]

Introduction

[1]                 The substantive judgment for this matter addressed a dispute between the plaintiff landlord and defendant lessees over the interpretation of a clause in their lease which provided a right to freehold the property in certain circumstances. Paros Property Trust Ltd (Paros), the plaintiff, claimed for arrears of rent. The defendants claimed the lease had been determined by Paros’ refusal to allow them to exercise the right to freehold contained in cl 23, and that the lease had been cancelled upon acceptance of that repudiation.

[2]                 Judgment was delivered on 19 August 2021.1 I found that the defendants had not given Paros valid notice under cl 23, nor was there an agreement to vary the cl 23 process in relation to the notice to freehold. Further, I found that Paros had not repudiated or breached the lease and rental arrears were therefore payable by both defendants to Paros.2 Costs were reserved.3

[3]                 The parties have not reached agreement on costs and Paros and Mr Smith have filed memoranda. The second defendant, Ms Shaw, has not filed any memorandum in relation to costs.

[4]                 Paros seeks indemnity costs from the defendants pursuant to the lease, as well as disbursements. Mr Smith has appealed the judgment,4 and requests this Court to reserve determination of the issue of costs pending the appeal. Further, he submits that an award of indemnity costs to Paros would be unreasonable, but accepts costs on a 2B basis are appropriate, subject to two adjustments to Paros’ proposed schedule of the costs that would be payable on that basis.

[5]The issues for me to determine are:

(a)Should costs be reserved pending the appeal?

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

2 At [20].

3 At [107].

4      Notice of appeal filed 13 September 2021.

(b)If not, should costs be awarded on an indemnity or 2B basis; and if the latter, should the adjustments sought by Mr Smith be allowed?

Issue 1: Should costs be reserved pending the appeal?

[6]                 Mr Smith’s appeal does not automatically operate as a stay of this proceeding, requiring me to reserve this decision.5 Nor is there any principle of law requiring a Judge to reserve costs pending the outcome of another aspect of the same proceeding, let alone an appeal.6 However, the Court does have discretion to do so.7

[7]                 I consider the principles applying to the stay of execution of a judgment are also relevant here. The Court must balance “the successful litigant's rights to the fruits of a judgment and “the need to preserve the position in case the appeal is successful”.8 Factors relevant to this balancing exercise include, among others, the merits, public interest and bona fides of the appeal; the effect of a stay on the successful party and third parties; whether the appeal will be rendered nugatory by the lack of a stay; and the overall balance of convenience.9

[8]                 I am not persuaded that this is an appropriate case to reserve costs pending the outcome of the appeal. Regrettably, this decision on costs has not been able to be completed before now which has benefitted the defendants in any event. There are no relevant matters of public interest that needs to be considered and in my view, some finality about the costs issues is required at this point rather than later. In my view, the balancing exercise is therefore tipped entirely in favour of Paros’ rights to the fruits of the judgment. For these reasons, I decline to reserve costs and proceed to determine them.

5      High Court Rules 2016, r 20.10; and Court of Appeal (Civil) Rules 2005, r 12(1)(a).

6      Cousins & Associates v FM Custodians Ltd [2013] NZCA 99 at [17].

7      Brookby Quarries Ltd v Manukau City Council HC Auckland CIV-2007-404-6082, 8 February 2008 at [37].

8      Keung v GBR Investment Ltd [2010] NZCA 396, [2012] NZAR 17 at [11].

9 At [11].

Issue 2: Should costs be awarded on an indemnity or 2B basis?

Costs generally

[9]                 Costs are awarded at the discretion of the Court.10 As a general principle, the party who fails should pay costs to the party who succeeds.11 An award of costs should reflect the complexity and significance of the proceeding12 and be assessed by applying the appropriate daily recovery rate to the time considered reasonable for each step reasonably required in respect of the proceeding.13 The determination of costs should be predictable and expeditious.14

The parties’ positions

[10]              Paros seeks indemnity costs from the defendants, jointly and severally, pursuant to cl 14(b) of the lease, which provides:

In addition to the rent or other moneys reserved by the lease, 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.

(Emphasis added.)

[11]              Paros submits that the actual costs it incurred between 1 September 2019 and 18 June 2021 to recover rent due under the lease in the proceeding were $152,270.93 (incl GST).15 The costs are summarised in Schedule 1 attached to Paros’ submissions, with copies of invoices also attached. Schedule 2 to Paros’ submissions shows in further detail a breakdown of the work done by counsel. Of this, $79,760 is attributable to the involvement of senior counsel with the balance attributable to junior counsel and the solicitors on the record, the latter to a lesser extent.

10     High Court Rules 2016, r 14.1.

11     Rule 14.2(1)(a).

12     Rule 14.2(1)(b).

13     Rule 14.2(1)(c).

14     Rule 14.2(1)(g).

15     Paros is not registered for GST, so recovery of costs and disbursements is sought on a GST inclusive basis.

[12]In relation to Schedule 2, Paros submits:

(a)each attendance was necessary and the cost of such attendances were reasonably incurred;

(b)the time spent in respect of each step was necessary and reasonable;

(c)the work was apportioned appropriately between counsel, given the significance and complexity of the various tasks;

(d)the hourly rates of counsel are reasonable, given their experience, reputations and abilities; and

(e)the overall fee charged in respect of the attendances was fair and reasonable.

[13]              Costs on a scale 2B basis would amount to $62,379. Counsel for Paros sets out that calculation in Schedule 3 to its submissions, noting:

(a)The proceeding was categorised as category 2 by Andrew AJ;16

(b)Paros seeks certification for second counsel;

(c)Costs in respect of Mr Smith’s unsuccessful second application for a judicial settlement conference and in respect of a conference convened to address Mr Smith’s deficient discovery were not determined, but were reserved.17

[14]              Finally,  Paros  seeks  disbursements  amounting  to  $12,509.04.    These are itemised in Schedule 4.

[15]              Mr Smith opposes an award of indemnity costs because he submits cl 14(b) of the lease only pertains to costs incurred in steps taken to pursue arrears under the lease,

16 Case Management Review Minute dated 18 February 2020 at [7].

17     Minutes of Bell AJ dated 27 May 2020, and Andrew AJ, dated 18 June 2020.

but does not extend to litigation concerning the proper interpretation of the lease itself. He submitted that if Paros’ claim for arrears had been the sole issue requiring determination, it could have been dealt with relatively inexpensively as a claim for summary judgment.

[16]              Mr Smith accepts that 2B scale costs are appropriate. However, he highlights two matters in Schedule 3 to Paros’ memorandum with which he disagrees. He submits that:

(a)Paros has claimed duplicate attendances by claiming Items 2 and 3 for each defendant. He submits the defence/counterclaim did not differ materially in any respect as between each defendant and should not have required separate attendances.

(b)These were proceedings of average complexity and the attendance of second counsel was not warranted.

Legal principles

[17]Rule 14.6 applies. The relevant parts of it are:

14.6     Increased costs and indemnity costs

(1)       Despite rules 14.2 to 14.5, the court may make an order—

…

(b) that the costs payable are the actual costs, disbursements, and witness expenses reasonably incurred by a party (indemnity costs).

…

(4)       The court may order a party to pay indemnity costs if—

…

(e) the party claiming costs is entitled to indemnity costs under a contract or deed…

[18]              In Frater Williams & Co Ltd v Australian Guarantee Corporation (NZ) Ltd,18 the High Court had determined that it was not to award reasonable indemnity costs per se, even though the contract provided for such an award. The Court of Appeal held:19

I respectfully agree with the test posed by Robertson J so long as it is understood that the word "reasonable" does not import a discretion in the usual sense. The ANZ Banking case supra established that in principle one party may contractually bind itself to pay the other party's full solicitor-client costs. In such a case the Court must decide what tasks attract a costs indemnity on a proper construction of the contract, whether the task undertaken in the instant case was one of those contemplated in the contract, whether the steps taken were reasonably necessary in pursuance of that task, whether the rate at which they were then charged was reasonable having regard to the principles normally applicable to solicitor-client costs, and whether any other principles drawn from the general law of contract would in whole or in part deny the claimant its prima facie right to judgment. These are all matters of objective assessment.

(Emphasis added)

[19]              Accordingly, if a party has contracted to pay indemnity costs, the Court has no discretion to determine that an award of indemnity costs would be unreasonable. However, the Court can determine whether the amount of indemnity costs claimed is objectively reasonable. As explained in Watson & Son Ltd v Active Manuka Honey Association:20

It is clear in principle and on authority that once it is established that the indemnity is applicable in the circumstances and that, properly construed, it includes solicitor-client costs, no discretion remains available other than on public policy grounds or as part of an assessment by the court as to whether the amount of the solicitor - client costs is objectively reasonable…

(Emphasis added)

Does clause 14(b) of the lease enable indemnity costs to be claimed?

[20]              The first question is whether, in terms of cl 14(b), the litigation costs were a liability for Paros incurred “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”.

18     Frater Williams & Co Ltd v Australian Guarantee Corporation (NZ) Ltd (1994) 2 NZ ConvC 191,873 (CA).

19     At 191,887.

20     Watson & Son Ltd v Active Manuka Honey Association [2009] NZCA 595 at [35].

[21]              As outlined above, the first issue I was required to decide was the correct interpretation of the notice that needed to be given under cl 23 of the lease (the right to freehold clause). As I said at the outset of my judgment:

[10]      … Clause 23 provides the lessee with an option during the 12-month period prior to a rent review to purchase the lessor’s fee simple estate in the land if the lessee has not been in breach of the lease. This is done by the lessee giving the lessor notice to that effect, a valuation being obtained which is paid for by the lessee, and the lessor then being obliged to offer to sell the land to the lessee at a price equivalent to the amount of the valuation.

[11]The rent review in this case was due on 14 November 2018.

[12]      Between December 2017 and February 2018, Mr Smith approached Paros regarding the freehold. What happened over this period and subsequently is contested and will be analysed in more detail later in this judgment; however, it is enough to note that Mr Smith formed the view that the process to freehold he suggested was correct, that Paros’ agent agreed to it, and that Paros did not follow this process. Mr Smith considered Paros’ failure to follow the process to be a breach of the lease and he gave notice purporting to cancel the lease on 30 August 2018. As can be seen, this was prior to the rent review date. Because Mr Smith contends that he validly cancelled the lease, he took no steps in relation to the rent review process provided under the lease, which provided an opportunity for the amount of the rent proposed for the next seven years to be challenged.

…

[14]  In August 2019, a rent review notice was served on both Mr Smith   and Ms Shaw advising that the annual rent would be $81,375 per annum. A notice under the Property Law Act 2007 for the unpaid rent was also issued.

[22]              Clause 23 of the lease enabled the option to freehold to be exercised in a particular way but only if “the lessee has not been in breach of this lease”. There was no suggestion during the hearing that the defendants were in breach of the lease. Rather, the argument centred on whether the notice to freehold had been validly given. There was a dispute about who ought to have caused the valuation to be obtained for freeholding purposes and how notice was to be given under cl 23. Because I found against the defendants, I next found that their purported cancellation of the lease was not legally justified. The argument then turned to the amount of rental that was payable and by whom.

[23]              When these matters are considered, it is at least arguable that cl 14(b) of the lease does not apply, at least to the argument about the interpretation of cl 23 because it provides a positive benefit to the lessee (a right to freehold) if certain conditions are

met; namely the option must be exercised during the twelve-month period prior to the rent review date and the lessee as well must not have been in breach of the lease. There was no suggestion that the defendants were in breach of the lease so as to invalidate the right to freehold process. However, once Paros served the rent review notice on the defendants in August 2019, because Mr Smith considered he had validly cancelled the lease, he did not engage in that process or continue to pay the full amount of the rent.21 It seems to me, therefore, by not paying the full amount of the rent, the defendants were in breach of the performance or observance of the lease for the purposes of cl 14(b).

[24]              For these reasons and despite the fact that an interpretation issue was involved in these proceedings, I find that cl 14(b) of the lease enables Paros to claim indemnity costs against the defendants.

[25]              There is still, however, the question of the reasonableness of these costs, which I now address.

Are the solicitor-client costs objectively reasonable?

[26] A reasonable fee is one that “would be regarded as acceptable in a costs revision under the Law Practitioners Act” (now the Lawyers and Conveyancers Act 2006).22 The fee must be reasonable by reference to the particular lawyer involved, and the significance and complexity of the case.23

[27]In Black v ANZ Bank Ltd the Court held:24

[80]      Assessing whether the indemnity costs claimed under a contract are reasonable involves the Court making an objective assessment of these matters:

(a)what tasks attract a costs indemnity on a proper construction of the contract;

(b)whether the tasks undertaken were those contemplated in the contract;

21     Although he did make a payment of $6,500 he described as “ex gratia” on 12 September 2019.

22     Frater Williams, above n 22, at 191,887; affirmed in Watson & Son Ltd, above n 24, at [35].

23     Bradbury v Westpac Banking Corp (2008) 18 PRNZ 859 (HC) at [209] and [210].

24     Black v ANZ Bank Ltd [2012] NZCA 384.

(c)whether the steps undertaken were reasonably necessary in pursuance of those tasks;

(d)whether the rate at which the steps were charged was reasonable having regard to the principles normally applicable to solicitor/client costs; and

(e)whether any other principles drawn from the general law of contract would in whole or in part deny the claimant its prima facie right to judgment.

[81]      Normally… it will not be feasible for the Court to make a detailed assessment of the reasonableness of the indemnity costs claimed under a contract. That is the reason for this Court’s observation in Frater Williams that the Court’s assessment of the fee note(s) leaves “room for robust judgment as to the costs considered reasonable in all the circumstances”.25

[28]              I agree with the approach taken by Gendall AJ (as he was then) in Tea Custodians (Bluestone) Ltd v Barnett when he assessed whether the costs charged in that case were reasonable by reference to scale costs.26 He held:27

… in order to determine whether costs are reasonable, where there is no breakdown of hours, a necessary approach will be to compare the claim against  scale   costs.  As  noted   above,  the  total  costs   claimed   here  are

$12,347.34. Mr Wass submitted that scale costs on this proceeding would  be

$8,648.00. Applying the principle that scale costs are designed to represent roughly two-thirds of average actual costs, that indicates that the plaintiff's actual costs are within the range of what is considered reasonable for a case such as this.

(Emphasis added.)

[29]              As in Tea Custodians, in this case there is no precise breakdown of hours for senior counsel to enable me to compare it to the items included in the scale costs. As in that case, in my view, it is appropriate to take into account the principle that scale costs are designed to  represent  roughly  two-thirds  of  the  average  actual  costs.  A comparison with the scale costs using this methodology would produce indemnity costs of around $93,568.50 (or $88,191 without second counsel).

[30]              Despite counsel for the plaintiff’s submission that the attendances listed in Schedule 2 were necessary and reasonably incurred, and that the work was carried out

25     At 191,887.

26     Tea Custodians (Bluestone) Ltd v Barnett HC Wellington CIV-2011-485-17, 6 December 2011 at

[19] and [20].

27     At [21], citing Apatu v Apatu HC Napier CIV-2007-441-823, 3 November 2011 at [32].

and appropriately apportioned between counsel with appropriate levels of experience given the significance and the complexity of the tasks, it is difficult to see how the total costs claimed when compared to the amount in issue is reasonable, I conclude that it is not. In my view, it is appropriate for costs to be awarded in this case on a 2B basis.

Adjustments

[31]              In relation to second counsel, in SKP Inc v Auckland Council, Gault J observed:28

Allowance for second counsel is not automatic. It requires specific allowance. The key question is whether the nature of the proceeding was such as to justify requiring the losing party to contribute to the winning party’s costs in having a junior counsel present.29 There will usually need to be some unusual feature to the litigation to warrant allowances for second counsel.30

[32]              In my view, this was not a case that justified the involvement of second counsel at all stages. The attendances in relation to some aspects of this case were more appropriately undertaken by second counsel, and I acknowledge that part of the argument before me was presented by second counsel. Overall, however, I am not persuaded that this was a case that justified the level of involvement and cost for second counsel that the schedule outlines.

[33]              In relation to the duplicate claim, Mr Smith and Ms Shaw filed separate statements of defence and counterclaim. Though largely the same in substance, these statements were ordered and worded differently, and required slightly different responses. Ms Shaw also raised the existence of a Deed of Delegation and Indemnity permitting Mr Smith to exercise her rights under the lease, which Paros responded to. I am satisfied Paros is right to claim costs of replying to each defendant’s statement of defence, item 3.

28     SKP Inc v Auckland Council [2020] NZHC 2215 at [5].

29     Nomoi Holdings Ltd v Elders Pastoral Holdings Ltd (2001) 15 PRNZ 155 (HC) at [21]; and Tao v Strata Title Administration Ltd [2016] NZHC 1821 at [52].

30     Tao v Strata Title Administration at [52]. See also ZYXCBA Developments Ltd v Auckland Council

[2015] NZHC 2224 at [16].

[34]              However, the defendants’ counterclaims, and Paros’ statements of defence in response, are essentially identical. Paros may only claim costs for one of these statements, item 2 .

Result

[35]              I order that the defendants pay costs to Paros in the sum of $54,014 and disbursements as outlined  Schedule  4  to  counsel  for  Paros’ memorandum  dated 2 September 2021.

Harland J