Patel v Macleod

[2017] NZHC 990

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2016-404-1516 [2017] NZHC 990

BETWEEN

MANU PATEL, PAMELA PATEL AND

VINESH PATEL T/A GREENER CORNER

Applicants

AND

GRANT MACLEOD AND JACQUELINE MACLEOD AS TRUSTEES OF THE MACLEOD TRUST Respondents

Hearing:	12 April 2017
Counsel:	CC Mansell for applicants KM McMullen for respondents
Judgment:	16 May 2017

JUDGMENT OF FITZGERALD J [Application for indemnity costs]

This judgment was delivered by me on 16 May 2017 at 11 am, pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Date……………

Solicitors:           Martelli McKegg, Auckland (AW Johnson) Cavell Leitch, Christchurch

Patel v Macleod [2017] NZHC 990 [16 May 2017]

Introduction

[1]      The   respondents   (“the   Macleods”)   seek    $10,500,   plus   GST   and disbursements, in solicitor/client costs (on an indemnity basis) from the applicants (“the Patels”).  The Macleods say they incurred these costs in opposing the Patels’ ultimately discontinued  application  for  relief  against  forfeiture  of  a  commercial lease.   The Macleods say that they are entitled to these costs on the basis of a contractual clause to that effect in the underlying lease between the parties.

[2]      The Patels, however, say that costs should not be awarded to the Macleods. This is on the basis that the proceedings were discontinued following a settlement, and that the default position in such circumstances is that costs lie where they fall. Alternatively,  the Patels  say that it  was unreasonable for the Macleods to have incurred the costs that are now claimed, given the parties had entered into a prior settlement which resolved the matters in issue.  Finally, the Patels say that if costs are to be awarded to the Macleods, they should be calculated on a scale (2B) basis, as the contractual costs clause does not apply in the current circumstances.

[3]      There have been significant delays (not of the parties’ making) in costs being determined.   It seems that for a number of months in the latter part of 2016, the respondents were unaware of Duffy J’s minute dated 13 September 2016, in which Her Honour ordered that a hearing be allocated to determine the Macleods’ application  for  indemnity  costs.    Those  delays  are  unfortunate  and  regrettable,

particularly given the principle that costs ought to be determined expeditiously.1

Background

[4]      At  all  material  times,  the  Patels  had  operated  a  café/grocery  store  in Takapuna.  From August 2015, they leased their premises from the Macleods, who act as trustees of the Macleod Trust.   The lease agreement was a standard-form

ADLS deed.

1      High Court Rules 2016, r 14.2(g).

[5]      On 10 May 2016, the Macleods served the Patels with a notice of intention to cancel the lease.  This was on the grounds that the Patels had rent and outgoings in arrears (being the rent and outgoings for May 2016, due on 1 May 2016).2

[6]      During the subsequent 14-day notice period, the Patels managed to partially pay these arrears.  But they did not fully pay the arrears before the notice expired on

25 May 2016.   So on 26 May 2016, the Macleods re-entered the premises and changed the locks.  That same day, the Patels paid the balance of the outstanding rent and outgoings due.

[7]      The Macleods then engaged their solicitors to negotiate a temporary licence agreement with the Patels.  The Macleods’ aim was to allow the Patels to continue using the premises for a short-term period, whilst the Patels worked through their financial issues and found an alternative property. Although the negotiations resulted in a draft agreement being circulated, this agreement was never signed.  Instead, on

3 June 2016, the Patels engaged new solicitors, who advised the Macleods that they were considering a High Court application for relief against forfeiture.

[8]      Over the next few weeks, the parties attempted to negotiate a way forward. Rent due on 1 June 2016 was not paid, although the Patels paid various sums of money into their solicitor’s trust account on the basis that this money would cover the arrears and future rent payments.  But still no agreement was reached.  During this period, the Macleods raised further concerns that the Patels had breached other covenants  of  the  lease,  particularly  relating  to  code-compliance  certificates  in relation to fit out works that the Patels had carried out.

[9]      On 29 June 2016, the Patels filed an originating application in the High Court for  relief  from  forfeiture  for  unpaid  rent  and  breach  of  other  covenants.    The Macleods received notice of this on 30 June 2016.  A first call-over hearing was set

down, on an urgent basis, for 7 July 2016.

2      In an affidavit filed in support of the costs application, Mr Macleod deposes that there had been ongoing delays in the Patels paying the rent due under the lease.

[10]     After this, the parties managed to quickly come to a conditional agreement. By 1 July 2016, the Macleods had agreed to reinstate the Patels’ lease.  This was on the basis that payments would be brought up to date, and that the Patels would pay

50 per cent of the Macleods’ legal costs incurred up to 28 June 2016 (those costs

being in respect of preparing the proposed licence and the fresh lease).

[11]     On the morning of 4 July, the parties filed a joint memorandum in the High Court, advising that a conditional settlement had been reached and that the parties were expecting the Patels’ application for relief to be withdrawn at the call-over hearing on 7  July, with  no issues as to  costs.   The parties, however,  expressly reserved their right to proceed if the settlement did not eventuate.

[12]     At 3.29 that afternoon, the Macleods (through their solicitor) told the Patels (through  their  solicitor)  that  there  was  no  longer  any  reason  for  the  Patels’ application to remain live, given that all existing matters for satisfaction remained with the Patels (being the payment of the settlement funds).  The Macleods advised that if they did not hear back by 4.30 pm that day, the Macleods would “have no option but to go on record and oppose the application”.  The Macleods warned that should that happen, they would seek that the Patels pay for all costs incurred.

[13]     The Patels’ solicitor responded at 4.38 pm.  She confirmed that the Patels still intended to pay the settlement funds, but that there might be some delays due to issues sourcing the money.  She said that the Patels were speaking with an “investor” and that they expected to be in a position to make payment by 4 pm the next day (i.e.

5 July).  In terms of the Patels’ application for relief from forfeiture, she proposed the parties could mutually agree to extend the time for the Macleods filing their response.

[14]     At  5.55  pm,  the  Macleods’  solicitor  responded,  agreeing  to  a  further extension to the time by which the settlement funds were to be paid, provided that the funds were paid by 4 pm the next day (i.e. 5 July).  He stated that a notice of discontinuance of the application for relief against forfeiture should also be filed, given that completion of the settlement terms was within the Patels’ control.  The email concluded:

Our client has little option but to agree to a further extension to allow the outstanding $12,912.79 to be paid by no later than 4pm tomorrow and does so on the basis that a notice of discontinuance is executed immediately thereafter and filed before 5pm 5 July 2016.  If this is not completed by this time  our  client  intends  to  proceed  with  its  opposition  without  further reference and will seek indemnity costs.

[15]     The Patels’ settlement funds did not come through at the expected time. Instead, the Patels’ solicitor contacted the Macleods’ solicitor by email (at 4 pm,

5 July), explaining that the funds were delayed, as Mr Patel could not get in touch with the proposed investor.  The email noted that if Mr Patel could not obtain the funds from the investor, he would take steps to sell a truck the following morning, the proceeds of which would fund the settlement payment.  As to the Patels’ application  and  the  rapidly  approaching  call-over  hearing,  the  Patels’  solicitor offered to appear at the hearing on behalf of both parties and seek an extension on behalf of the respondents:

In terms of the application for relief from forfeiture, I suggest that I appear at the  call-over  on  Thursday  on  behalf  of  both  parties  and  seek  and adjournment for 1 week.  I can explain to the duty Judge that the parties have agreed that Respondent will file any response by Tuesday 12 July 2016. Given that the matter is heard under urgency, I don’t foresee any issues with us appearing on behalf of both parties (particular as the parties have already filed 2 joint memorandums).  Also, if the funds are received tomorrow, I can ask the Court to discontinue the proceedings with no issue as to costs at the call-over on Thursday.

[16]     The   Macleods’   solicitor   responded   with   an   email   expressing   their

dissatisfaction with this situation:

The ongoing delays are entirely unsatisfactory and illustrate that your clients are  simply  not  in  a  position  to  continue  with the lease  despite  what  is suggested in the application.  Our clients have bent over backwards to work with your clients and are fed up with the repeated reneging on settlement arrangements.  As a result unnecessary costs continue to accrue which will also need to be met by your clients.

We are finalising our instructions tomorrow morning in respect of our opposition and appearance and will confirm in due course.

[17]     The Macleods appear to have sent no further communications to the Patels until the morning of the call-over hearing (7 July), when a memorandum (dated

6 July) was filed (at 9 am), attaching a notice of opposition which had been sent to

the High Court for filing, and seeking a further five days for filing an affidavit in support.

[18]     Ultimately, the expected funds came through to the Macleods on the morning of the call-over hearing.  The Patels discontinued their application the following day (8  July).    And,  after  some  further  urgent  negotiations  relating  to  other  lease covenants, the Patels were able to take re-possession of the premises on 9 July 2016.

[19]     By that point, of course, the Macleods had incurred the costs of dealing with the  application  to  that  point,  including  preparing  (and  filing)  their  notice  of opposition to the Patels’ application and commencing preparation of the affidavit in support.  An invoice from Cavell Leitch to the Macleods for attendances in relation to the application records actual attendances as totalling $15,261.00, but legal fees for charging purposes being reduced to $10,500.00.   Together with disbursements

and GST, the invoice totals $12,954.86.3    It is this amount that the Macleods now

seek to recover.

The parties’ positions

The Macleods

[20]     As noted above, the Macleods seek an award of full solicitor/client costs in respect of the steps taken in responding to the application.  In short, they submit that clause 6.1 of the lease agreement entitles them to this. Clause 6.1 relevantly provides as follows:

6.1      Costs

... The tenant shall pay … the Landlord’s legal costs (as between lawyer and client) of and incidental to the enforcement of the Landlord’s rights remedies and powers under this lease.

[21]     The  Macleods  also  rely  on  the  general  proposition  that  a  party  who discontinues a proceeding should pay costs to the other party.4   They say the Patels’ application, and the resulting costs, could have been avoided had the Patels accepted

the agreement that was proposed in early June 2016.  They also point to the fact that

3      An affidavit breaking down the costs has been provided.

once the settlement had been agreed, with all steps to implementation being in the Patels’ control, the application should have been withdrawn. The Macleods note that even once settlement had been agreed, the Patels defaulted further in paying the settlement sums, such that, as at the date of the first call-over, it was reasonable and necessary for them to incur the costs of opposing the application for relief.

[22]     As an alternative to solicitor/client costs, the Macleods seek an award of costs on a 2B basis, with an increase of 25 per cent.

The Patels

[23]     The Patels oppose the Macleods’ application for costs.   They say that the Macleods’ actions in filing a notice of opposition were unreasonable in the circumstances, and submit that the usual position upon a mutual discontinuance is to make no costs order.   They also say that the Macleods are not entitled to solicitor/client costs under clause 6.1 of the lease agreement, as the costs of opposing the application for relief are not “costs of … and incidental to” the enforcement of the Macleods’ rights under the lease.

[24]     The Patels’ alternative submission is that costs should only be payable on a

2B basis, on the grounds that solicitor/client costs would be unreasonable.

Discussion

Can the presumption under r 15.23 be displaced?

[25]     As the Macleods have submitted, r 15.23 of the High Court Rules 2016 sets out that a party who discontinues a proceeding should pay costs to the other party. That  is  a  presumption,  however,  which  can  be  displaced  if  there  are  just  and equitable circumstances not to apply it.5     The following (non-exhaustive) set of principles applies to the consideration of whether the presumption has been displaced:6

(a)      As the general rule, the Court will not consider the merits of the respective cases unless they are so obvious that they should influence the costs issue.

(b)The  Court  will  consider  the  reasonableness  of  the  stance  of  both parties in the proceeding (ie whether it was reasonable for the plaintiff to bring and continue the proceeding, and for the defendant to oppose and continue to oppose it, up to the point of discontinuance).

(c)      Conduct  prior  to  the  commencement  of  the  proceeding  may  be relevant (for example, if any conduct by a defendant has precipitated the litigation), as may be the reason for discontinuing (for example, where a change of circumstances has made the proceedings unnecessary).

[26]     But the Patels say that r 15.23 is not engaged at all in this case.  They rely on the decision Ng v Pauatahanui GS Ltd to support this submission.7    There, the lessors had applied for orders seeking possession of the premises, forfeiture of the commercial lease, and compensation for breaches.   The lessee had opposed the applications.  Shortly before the hearing, counsel filed a joint memorandum advising that  the  parties  had  settled  and  proposing  consent  orders  to  dispose  of  the

proceedings.   The lessee then sought costs on the basis that the claim had been dismissed,  relying  on  r  15.23  and  also  claiming  to  be  the  successful  party. MacKenzie J ruled that r 15.23 was not applicable because the rule applies only to a unilateral discontinuance by a plaintiff, not where proceedings are dismissed by a consent order.8   He therefore considered it appropriate to apply the general rules as to costs, and noted that unless the outcome of the matter can confidently be predicted on the papers, the Court will generally not fix costs.  MacKenzie J did not consider it possible to make a determination of the merits and so made no costs order.

[27]     The key difference between Ng and the present case, however, is that the

Patels’  application  was  not  discontinued  by  consent  order.    It  was,  indeed,  a

7      Ng v Pauatahanui GS Ltd [2014] NZHC 3396.

unilateral  discontinuance.   And  although  that  unilateral  discontinuance  followed from the Patels’ (eventual) performance of the 4 July conditional settlement agreement, it was the Patels who kept the proceedings live after that conditional settlement agreement had been reached.  It was ultimately the Patels’ decision not to discontinue after settlement, together with their delay in performing the agreement’s terms, which prompted the Macleaods to file their notice of opposition.

[28]     I  am  therefore  satisfied  that  the  presumption  under  r  15.23  is  engaged. Further, I do not consider that it would be unjust or inequitable to apply the presumption in this case.  As noted, it was the Patels’ continued failure to perform the settlement in a timely way, along with Macleods’ concern about the impending call-over hearing, which prompted the Macleods to file their notice of opposition. I do not consider that it was unreasonable for the Macleods to file the notice of opposition when they did, even in light of the Patels’ solicitor’s offer to appear on the Macleods’ behalf.   Given the Patels’ delayed performance of the conditional settlement, it was not at all clear by 6 July 2016 that the settlement would in fact be fully performed.  This was also against the backdrop of the earlier defaults in rent and what seemed to be some real financial difficulties for the Patels at that time.  In those circumstances, it was not unreasonable for the Macleods to go on the record and preserve their position by filing a notice of opposition.

[29]     Because the r 15.23 presumption remains in play, and the parties not having agreed costs, I consider the Macleods have a prima facie right to costs in respect of the application.   I also note the Court of Appeal’s observations in Roses are Red Limited v Board of Administration of the Methodist Church of New Zealand, to the effect that where an application for relief against forfeiture is made following breach of a lease, the tenant is seeking an indulgence.9    The Court observed that in such circumstances, the tenant may well be in a somewhat different position from other “winners”.10     In a more recent Court of Appeal decision, however, the Court has emphasised that such principles should not be seen as establishing a “general rule”

that costs will usually be granted in favour of a lessor who has unsuccessfully

9      Roses are Red Limited v Board of Administration of the Methodist Church of New Zealand

[2009] NZCA 237.

opposed an application for relief against forfeiture made by a lessee.   Rather, a principled application of the rules relating to costs is required.11

[30]     Having considered the evidence in this matter, it does not strike me that this is  a  case  where  it  is  “self-evident”  that  the  Macleods’ actions  were  “unfair  or unreasonable” (which may be reflected in any costs award made).12    Accordingly, taking all of the foregoing matters into account, I am satisfied that the Macleods are entitled to a costs award in this case.   I note that this may well have been the outcome even if the matter had not settled, and the Patels had been successful on their application.

[31]     The next question, therefore, is what level of costs should the Patels pay?

What level of costs should the Patels pay?

[32]     In determining the level of costs the Patels should pay, I must answer the following questions:

(a)      Does clause 6.1 applies to Macleods’ opposition to an application for relief against forfeiture (and therefore give the Macleods a prima facie entitlement to indemnity costs)?

(b)If the Macleods are entitled to indemnity costs under clause 6.1, are the costs they claim objectively reasonable? This involves an assessment of: 13

(i)Whether  the  steps  taken  by  the  Macleods  in  opposing  the application for relief were reasonably necessary; and

(ii)      Whether the rates charged were reasonable.

11     Cunningham v Butterfield [2014] NZCA 213 at [57].

12     Roses are Red Ltd, above n 9, at [41].

13     Watson  &  Son  Ltd  v  Active  Manuka  Honey  Association  [2009] NZCA 595 at [35]; Tea Custodians (Bluestone) Ltd v Barnett HC Wellington CIV-2011-485-17, 6 December 2011 at [19].

Does clause 6.1 applies to Macleods’ opposition to an application for relief against

forfeiture?

[33]     As noted above at [20], clause 6.1 of the lease agreement gives the Macleods the right to solicitor/client costs “incidental to the enforcement of the landlord’s rights remedies and powers under this lease.”  The Patels, however, say that clause

6.1 does not apply.  They say that filing a notice of opposition was not “incidental to” the enforcement of the Macleods’ rights (as landlord).

[34]     A similar issue arose in NJG Holdings Ltd v Oliphant.14   The wording of the costs clause of that lease contract was identical to the one in the present case. Allan J held that defending a notice of forfeiture was “incidental to” the enforcement of the landlord’s rights, and so awarded solicitor/client costs to the landlord, as per the contract. The Judge reasoned:

[14]     The landlord forfeited the tenant's lease. In consequence, the tenant applied to the Court for relief against forfeiture. The application to the  Court  is  therefore  “incidental”  to  the  enforcement  of  the landlord's powers in that it arises by reason of that enforcement and as a consequence of it. The defence of the plaintiff's application by the first defendants is similarly “incidental” to the enforcement.

[35]     Brewer J reached the same conclusion, on similar facts (a tenant having been successful in its application for relief against forfeiture), in Maydanoz NZ Ltd v Poppelwell:15

[13]      The relief against forfeiture application arose because [the landlords] were exercising their rights under the lease. Therefore, defending that application is “incidental” to the enforcement of [the landlord’s] power under the lease because it arose as a consequence of that enforcement.

[36]     The Patels refer to AAA Storage Limited v Onehunga Primesite Limited and submit that Woodhouse J concluded that clause 6.1 did not extend to a landlord’s costs of opposing a tenant’s application for relief against forfeiture.16

[37]     It is correct that Woodhouse J observed that clause 6.1 applied only to the issuing of the Property Law Act notice by the landlord in that case.   However,

14     NJG Holdings Ltd v Oliphant HC Auckland CIV-2006-404-4749, 18 March 2007.

15     Maydanoz NZ Ltd v Poppelwell [2012] NZHC 2223.

16     AAA Storage Limited v Onehunga Primesite Limited [2015] NZHC 3028.

Woodhouse J does not, expressly at least, address the second aspect of clause 6.1, and whether the costs of defending the application for relief against forfeiture are costs “incidental” to steps to enforce a right under the lease.   Further and in any event, Woodhouse J concluded that:17

I  am  not  persuaded  that  the  landlord  is  entitled  to  recover  any  of  its solicitor’s costs for action taken after service of the notice.  The reasons are in large measure contained in the factual narrative and my analysis of it. Before the notice expired the tenant had paid more than the sum that was contractually overdue at the date of issue of the notice… The steps taken by or on behalf of the landlord after that date were not steps taken for the enforcement or attempted enforcement of rights, remedies or powers under the lease.

[38]     Woodhouse J therefore did not decline to award costs because he considered clause 6.1 did not apply to costs incurred after the issuing of the notice.  Rather, his reason for declining to award costs to the landlord was that the landlord had no right to enforce the lease at the time of the expiry of the Property Law Act notice.

[39]     Finally, in Roses are Red Limited, the underlying lease also contained clause

6.1 in respect of indemnity costs.   In setting out the principles applying to costs awards in cases such as this, the Court of Appeal observed that:18

There is authority for the proposition that, where, as here, the contract makes provision for payment of indemnity costs, there is an entitlement to costs on that basis.

[40]     And while Lang J in the High Court had declined to award indemnity costs,19 it is implicit in the Court of Appeal’s observation cited above that, in principle at least, clause 6.1 does entitle a landlord to indemnity costs in respect of the costs of defending an application for relief from forfeiture.

[41]     I am therefore content to adopt the reasoning give in NJG Holdings Ltd v Oliphant, Maydanoz NZ Ltd v Poppelwell and what I view as being implicit in the Court of Appeal’s observations in Roses are Red Limited.  Here, the Patels applied

for relief because the Macleods had exercised their right of forfeiture under the lease.

17 At [34].

18 At [40].

19     On the basis that the landlord in that case had precipitated the proceedings to some extent, by issuing default notices just before Christmas and thereby leaving the tenant with limited options to remedy the issues.

By opposing the Patels’ application, the Macleods were simply standing on their contractual right to forfeit.  Standing on that right is, in my view, incidental to the enforcement of it.

Were all the steps the Macleods took were reasonably necessary for opposing the application for relief?

[42]     For the reasons given above, I consider that it was reasonably necessary, in the circumstances, for the Macleods to file their notice of opposition and take steps to prepare the accompanying affidavit.

Were the rates charged were reasonable?

[43]     An  affidavit  from  the  Macleods’ solicitors  sets  out  that  the  actual  time recorded in respect of the application was $15,261.00 (plus GST and disbursements). But as noted, this sum was reduced to $10,500 (plus GST and disbursements of

$870.86, therefore totalling $12,954.86) following the solicitors’ consideration of what would be a fair and reasonable fee proportionate to the work involved.  The affidavit sets out that this sum is equivalent to 43 hours and 51 minutes work.

[44]     It nevertheless strikes me that the actual time and costs involved, even taking into account the discount on the face of the invoice, appears somewhat high.  There was certainly an amount of “to-ing and “fro-ing” between the parties’ solicitors in the days following the settlement, which no doubt contributed to the time incurred. But for the purposes of this costs award, I must be satisfied that the solicitor-client costs are objectively reasonable.

[45]     I have no difficulty in accepting the hourly rates that have been disclosed in the affidavit accompanying the Macleods’ application for costs.  I am also satisfied that the steps involved in the Macleod’s opposition of the application were appropriate.   However a total of approximately 44 hours for those steps is, in my view, a little on the high side.

[46]     A liable party on an indemnity costs award may seek a detailed vetting of the costs to be awarded.  That party has three options; requesting an order that the costs

be subject to taxation; agreeing to the costs being referred to a suitably qualified practitioner for review; or referring the invoices to the New Zealand Law Society for review under the Lawyers and Conveyancers Act 2006.20 However, while challenging the level of costs incurred by the Macleods, the Patels have not sought any such “detailed vetting”. I am also mindful of the delays that have occurred to date in fixing costs in this matter. In my view, it is not in either party’s interests, or the interests of justice, for the determination of costs to be delayed any further. As noted in Frater Williams & Co Ltd v Australian Guarantee Corp (NZ) Ltd, a Judge

will often be required to exercise “robust judgment” as to the costs considered

reasonable in all the circumstances. 21

[47]     I accordingly propose to (globally) reduce the costs claimed by the Macleods by a further $1000, to reflect what I consider to be a reasonable level of costs incurred in opposing the application.   This results in $9,500 solicitors’ costs, plus disbursements of $870.86, giving a total of $10,370.86.

[48]     I note that the Macleods have not informed me as to whether they (or the Macleod Trust) are GST registered.  Given that I am awarding costs at a level higher than regular scale costs, I am therefore required to proceed on the basis that the Macleods (or the Macleod Trust) are entitled to a GST input credit, and that their

costs award should therefore not include GST.22     The same principle applies to

disbursements.23

Result

[49]     The   Macleods   are   entitled   to   solicitor/client   costs   of   $9,500,   plus disbursements (GST exclusive) of $757.27.

Fitzgerald J

20     Andrew   Beck    (ed)     McGechan    on    Procedure     (online    looseleaf   ed,     Brookers)     at

[HR14.6.03(3)(e)].

21     Frater Williams & Co Ltd v Australian Guarantee Corp (NZ) Ltd (1994) 2 NZ ConvC 191,873 (CA) at 191,887.

22     New Zealand Venue and Event Management Ltd v Worldwide NZ LLC [2016] NZCA 282, (2016)

23 PRNZ 260 at [11]-[16].

23 At [17].