Peegeecee Ltd v Parkview on Hagley Ltd

[2019] NZHC 258

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

I TE KŌTI MATUA O AOTEAROA ŌTAUTAHI ROHE

CIV-2018-409-000676

[2019] NZHC 258

UNDER

the Property Law Act 2007

IN THE MATTER

of an application for cancellation of lease

BETWEEN

PEEGEECEE LIMITED,

RJSN PROPERTIES LIMITED, SULLIVAN ENTERPRISES (2007) LIMITED,
AB HOLDINGS (2007) LIMITED, KESWICK ENTERPRISES LIMITED, L&M HOLDINGS (2008) LIMITED, RUSSELL MACKIE AND SUZANNE MACKIE (T/A HAGLEY PARKVIEW PARTNERSHIP),

TRAVELLERS INN LIMITED, JAYA INVESTMENTS LIMITED,

ANKUR INVESTMENTS LIMITED AND M & A LIMITED
Applicants

AND

PARKVIEW ON HAGLEY LIMITED

Respondent

Hearing:

4, 5 February 2019

Appearances:

P Sills for the Applicants

G K Riach and M Hughes for the Respondent

Judgment:

27 February 2019

JUDGMENT OF OSBORNE J

on Property Law Act applications

PEEGEECEE LIMITED, v PARKVIEW ON HAGLEY LIMITED [2019] NZHC 258 [27 February 2019]

Introduction

[1]    There is a building where Riccarton Road meets Hagley Park in Christchurch. It is known as Parkview on Hagley. It contains units owned by the various applicants (and others) under the Unit Titles Act 2010. The owners, under a deed of lease entered into in 2007, lease their units to the respondent, Parkview on Hagley Ltd (Parkview), a company incorporated for the purpose of managing the units as hotel units.

[2]    On 23 August 2018, the applicants (being most of the unit owners) issued a notice under s 246 Property Law Act 2007 (the PLA notice), giving notice of their intention to cancel the lease upon the expiry of 10 working days should identified (alleged) breaches not be remedied by Parkview.

[3]    Parkview has remained in possession of the applicants’ units since the PLA notice was issued.

[4]    In this proceeding, the applicants seek an order requiring Parkview to relinquish possession of their units. Parkview opposes the application. It makes a cross-application (should the Court find there to have been breaches justifying cancellation) for relief against cancellation under ss 253 and 256 Property Law Act. The applicants oppose the cross-application.

Outcome

[5]    In this judgment, the Court determines that Parkview has committed breaches of the lease which justified cancellation. In particular, Parkview breached obligations to provide to the applicants audited accounts pursuant to cl 16.2 of the lease and to make available for inspection by the applicants, proper books of account and recordings relating to transactions conducted in the course of the hotel business pursuant to cls 16.3 to 16.4 of the lease.

[6]    The Court determines that other breaches alleged by the applicants were either not breaches or did not justify cancellation of the lease.

[7]    The Court then determines that it is appropriate to grant Parkview relief against cancellation on terms.

[8]    Finally, the Court determines that there are costs and disbursements payable by Parkview to the applicants in relation to the proceeding.

Background

[9]    Ultimately, the rights of the parties are to be determined pursuant to the terms of the lease as a matter of contract law, informed by the provisions of the Property Law Act.

[10]   That said, there are matters of background which influenced or flavoured evidence given for the parties. That background provides explanation for positions taken by the parties over recent years and has a relevance to the Court’s exercise of its discretion in relation to relief. But it is instances of specific conduct rather than the background which determines whether there were relevant breaches of the lease.

The number of hotel units

[11]There are three types of premises within the Parkview on Hagley building.

(a)First, there are on the ground floor two commercial units owned and operated independently of the hotel business.

(b)Secondly, there is a manager’s unit (usually described as unit 312) which was fitted out in two parts, separated by a locked door, with one half (a two-bedroom unit) having been effectively put back into the hotel letting pool (in this judgment called “unit 314”). This manager’s (double) unit is the subject of its own lease, expressly for manager’s purposes and not for hotel letting.

(c)Thirdly, there are the remaining units which comprise the hotel letting pool. They number (including unit 314) 40.

[12]   Arvand Saluja provided the evidence for the applicants. He described himself as the representative of the owner of Travellers Inn Ltd (Travellers). He deposed that Travellers Inn owns 28 of the hotel units and that three companies associated with the shareholder of Travellers Inn own an additional six of the units. Travellers Inn also owns the two commercial units on the ground floor and owns (with a lease to Parkview) the manager’s unit.

[13]   Mr Saluja’s list of (40) units in the hotel pool included unit 312, the description commonly given to the manager’s entire unit.

[14]   In the way the litigation was commenced, nothing appeared to turn on the precise number of hotel units.

[15]   The evidence for Parkview was given by Brian Curtis, a director of Parkview. Mr Curtis did not in his affidavit evidence deal in detail with the number of units but referred to there being “some 40 different units which are still studio units but of varying sizes”.

[16]   Shortly before the hearing, expert evidence was provided on behalf of the applicants by Wilhelmus Ruepert, in relation to hotel industry matters. Mr Ruepert’s affidavit referred to there being a total hotel room count of 39, without comment as to Mr Saluja’s reference to 40 units.

[17]   Mr Curtis was vigorously cross-examined by Mr Sills upon the basis that the manager’s second unit ought not to have been treated by Parkview as part of the hotel pool and therefore ought not to have been allocated a share of rental income (as had been happening). Mr Sills put a proposition to Mr Curtis in cross-examination:

Well, I’m going to put it to you, Mr Curtis, that you have deliberately behind the backs of the owners let half of unit 312 as a part of the pooling exercise and in doing so are denying the actual owners of units income on their properties.

[18]   Mr Curtis said that that was incorrect. He explained that he and his wife (on purchasing the shares in Parkview on Hagley Ltd) had taken over a system which included that unit as part of the pool. Without there having been any forewarning that

an issue of this nature might arise, he added in his evidence that there was actually a letter somewhere that he could probably dig out relating to the unit being in the pool at the time.

[19]   Mr Curtis was able to locate a copy of the letter overnight. It was a letter sent by the Curtis’s predecessor to all unit owners regarding “unit 314” explaining the inclusion of unit 314 in the letting pool.

[20]   I was satisfied by Mr Curtis’s answers in evidence that there was no intended lack of candour let alone a deliberate “going behind the backs” on the part of Mr Curtis. I am satisfied that Mr Curtis acted at all times with integrity in relation to what was appropriately to be included in the pool.

[21]   In any event, the inclusion of unit 314 in the letting pool was not a ground of the applicants’ PLA notice. Even had an incorrect use of unit 314 been established, it could not have justified cancellation of the lease in the absence of the notice relating to the alleged breach.

Travellers Inn and associated entities

[22]   Travellers Inn and its associated entities own 34 of the units in the hotel pool. That group of companies is in turn related to the VR Group of hotels and resorts. Mr Saluja deposed that the Chief Financial Officer of the VR Group acts also for the Travellers Inn Group. The group has gradually been acquiring units in the hotel, with some nine additional units purchased between December 2017 and June 2018.

[23]At some point Mr Saluja was elected chairman of the Body Corporate.

[24]   There is evidence that the VR Group’s CFO began pursuing access to Parkview’s financial records as to receipts and expenses as early as February 2016. I return below at [64] to Parkview’s failure to make the records available for inspection.

[25]   From late 2017, Travellers Inn was making an unconditional offers (with no right of due diligence) to Parkview for the purchase of their hotel business, initially for $700,000 and later for $1,000,000 ($300,000 below an offer received shortly

before from another party). The Travellers Inn offer was subsequently increased to

$1,400,000 but that offer was ultimately withdrawn in June 2018.

[26]   In the meantime, in February 2018 the Body Corporate (under Mr Saluja’s chairmanship) gave Parkview a notice of dispute. It alleged breaches of Parkview’s duties in relation to audited accounts, access to financial records, and the obligation to use reasonable endeavours to conduct the business properly.

[27]   The Body Corporate subsequently (on 23 August 2018) served through its barrister, Mr Sills, its PLA notice.

[28]   Mr Curtis in his evidence explained that the nature of the involvement of Travellers Inn and the VR Group caused him concern for two reasons.

[29]   First, in the light of the Body Corporate’s demand for access to Parkview’s relevant financial records, Mr Curtis was concerned that entities which were essentially competitors in the accommodation business would be obtaining Parkview’s business information. Some but not complete information was provided to representatives of the VR Group through Parkview’s accountant. In May 2018 the Body Corporate’s accountant (Andrew Hastie of Nexia New Zealand), sought access to identified financial information for the period from 1 April 2015. He similarly was not provided with all the requested information.

[30]   Mr Curtis has explained that Parkview had received advice (from its solicitors) that the information requested was not required to be supplied under the lease. He asserted in relation to the auditing of accounts that the necessary aspects of the business operation (rather than the overall accounts of Parkview) had been audited and by an independent chartered accountancy firm, PKF Goldsmith Fox (PKF), who had provided review certificates in each of the last three years. Mr Curtis recorded that until now (the serving of the PLA notice) no objection had been taken as to the form of the audit.

[31]   It was clear from Mr Curtis’ evidence that, given the nature of the Travellers Inn and the VR Group’s businesses, he was extremely reluctant to provide them with

access to any financial information of Parkview beyond what was strictly required under the lease.

[32]   The second concern identified by Mr Curtis (beyond the disclosure of financial information) was that he perceived the real motivation behind this proceeding as an attempt by the VR Group to wrest control of the management of the hotel from Parkview without paying for it. Mr Curtis noted in particular the remaining (24 year) term of the lease, the evidence of a market view as to the value of the business (through the unconditional offers received) and the fact that Parkview itself has listed the business for sale at $1,950,000.

[33]   I was satisfied, having heard Mr Curtis in cross-examination, that the approach he has adopted in dealing with requests made by the Body Corporate had been influenced by a desire to protect Parkview’s commercial interests against the prospect that the VR Group and Travellers Inn might use information obtained in their right as owners of units to advance broader commercial aims including the acquisition of the hotel business itself. That concern is understandable given the history of the relatively recent acquisition of units (while Travellers Inn was questioning the hotel performance) and the attempts (shortly before the Body Corporate embarked on a notice of dispute and PLA notice steps) to purchase the hotel business.

[34]   These matters become relevant in the consideration of relief.1 But whatever the basis of Mr Curtis’ concerns, the right of the Body Corporate to cancel the lease must flow from a strict interpretation and application of the lessor’s rights under the lease (which I find below) were materially breached.

The Riccarton Road roadworks

[35]   Anyone who has lived in Christchurch over the last few years is likely to be aware of the high level of lengthy disruption which occurred outside the hotel at the intersection of Riccarton Road with Hagley Park. And of the disruption that continued as roadworks moved from that immediate location further west along Riccarton Road. Mr Curtis has adduced evidence as to the works having commenced in September

1      Below at [115] – [125]

2016. The works were originally intended to last a year but became protracted and intensified again in April 2018. Exhibited newspaper reports from the time refer to business owners in the locality hurting financially from the works, with some claiming to have lost half their turnover and at least two businesses closing. In mid-2018, the work continued along Riccarton Road, closing further parts of Riccarton Road itself and the intersecting Harakeke Street. In order to reduce daytime disruption during the lengthy periods of works, significant night-time work was undertaken.

[36]   Parkview’s position is that the roadworks had a very significant impact on the hotel business. The applicants disagree with that view – they assert that there has been poor performance of the hotel operation through breach of Parkview’s obligations to use reasonable endeavours in relation to the hotel operation.

[37]   Mr Saluja put the owners’ concerns at the forefront of his evidence in his first affidavit, observing:

Matters have come to a head now because of the losses being sustained by the [applicants] given a significant reduction in rental income per unit…

[38]That evidence led to an exchange of detailed and competing evidence.

[39]   Mr Saluja, without qualifying himself as an expert, referred to the financial information he had available and concluded that there had been a noticeable decline of business between April and July 2018. He took issue with Parkview’s claims that the business had been impacted upon significantly by roadworks, claiming that the “main roadworks” had been completed November 2016. He also set out his conclusion that Parkview is operating at 19 per cent to 40 per cent below the median performance (based on revenue per available room) for a 4.5 star hotel.

[40]   Mr Curtis, through his evidence, presented different details and a different picture as to the extent of interruption through the roadworks. He identified some matters of detail beyond those referred to by Mr Saluja. These included that the works were generally timed to take place overnight on a road which is known as one of the busiest streets in Christchurch, and that demolition and other construction works shook the whole Parkview building structure between 8.00 pm and 6.00 am. Mr Curtis

proceeded to analyse the financial data referred to by Mr Saluja, concluding that it was evident that (contrary to Mr Saluja’s assertions) the trading revenue had actually increased overall in 2018 when compared to 2017. In the course of Mr Riach’s cross- examination of Mr Saluja, it became evident that part of Mr Saluja’s analysis was based on an incomplete approach to comparison of unit numbers.

[41]   Parkview, with its evidence in opposition, filed also an affidavit of Robert Pringle, a motelier who qualified himself as an expert. He has local knowledge in that he operates a separate motel business farther west on Riccarton Road. He deposed that there was a “huge suffering” of businesses along Riccarton Road during the roadworks. He referred also to a number of other factors and trends which have impacted significantly on accommodation businesses over recent years, including unregulated peer to peer accommodation, the lack of venues in Christchurch for large events, and the emergence of four new motels on Riccarton Road itself (increasing numbers by approximately 65 units in those businesses alone).

[42]   The applicants provided the affidavit of Mr Ruepert, as their expert, shortly before the hearing. He provided an analysis of the financial information concluding that Parkview had traded consistently below the average of 3-4 star hotel rooms over the period from January 2016. He stated that he accepted that the roadworks of the scale undertaken and “over several months” would have a negative impact on the trading of Parkview but concluded that he was “not convinced” that this scale of impact could reasonably be explained only by the roadworks. The very way in which Mr Ruepert responsibly stated his position indicated the inherent difficulty of reaching reliable conclusions as to the cause of Parkview’s recent levels of performance on the basis of the information before the Court.

[43]   That uncertainty informs the conclusions I reach as to certain of the alleged breaches.2

2 Below from [77].

Duty to provide audited accounts

The lease provision

[44]Clause 16.2 of the lease provides:

16.2      Audited Accounts: Within 90 days of expiry of each Operating Year the Lessee shall provide audited accounts to the Lessor which include statements of rental for the expired Operating Year, a statement reconciling the resultant rental payable by reference to the applicable Operating Year against payments made on account of rental during that Operating Year and a statement of the F F & E Reserve. Such accounts shall be certified by the Lessee’s auditors who shall be chartered accountants in private practice of recognised standard and competence.

What Parkview provided

[45]   For the three financial years ending 31 March 2016, 31 March 2017 and 31 March 2018, Parkview provided to the owners a one-page statement headed “Independent Accountant’s Report”. The reports were each subtitled:

Reasonable assurance report relating to the accuracy and validity of income and expenses of the trading activities of Parkview on Hagley

[46]   Within the report it was stated that the engagement had been conducted in accordance with SAE 3100 to provide reasonable assurance that Parkview has complied with three reporting obligations (as referred to in cl 16.2 of the lease), relating to:

(a)furniture, fittings & equipment fund;

(b)owner income; and

(c)owner expenses.

[47]   Each report concluded that, in the opinion of PKF, Parkview had complied in all material respects with the reporting obligations to the owners in that particular year.

[48]   Neither counsel nor the parties provided explanation at the hearing of the PKF reference to “SAE 3100”. It was agreed that I might clarify that from information in the public domain. The External Reporting Board (XRB) identifies SAE 3100

(revised) as a standard issued on 9 March 2017 by the New Zealand Auditing and Assurance Standards Board (of XRB).3 Pursuant to s 12 Financial Reporting Act 2013, XRB publishes Auditing Standards, generally beginning with the initials “ISA(NZ)” (short for International Standard on Auditing (New Zealand)). XRB also issues standards on assurance engagements identified as “SAE” (short for Standard on Assurance Engagements).

Discussion – “audited accounts”

[49]   In the absence of any other assistance in the lease document, the expression “audited accounts” in cl 16.2 is to be given its plain meaning.

[50]   The first obligation of the lessee is to provide to the lessor its accounts. By “accounts”, the context plainly indicates that the financial statements of the lessee are required.

[51]   Secondly, the accounts which are provided have to be “audited”. That clearly means that they are to have been subjected to scrutiny by an auditor according to a recognised auditing standard and the accounts provided by the lessee are to be accompanied by the auditor’s appropriate certificate as to conclusions.

[52]   By virtue of the more detailed provisions of cl 16.2, the Parkview financial statements which are audited are also to include statements of the three identified categories, namely:

(a)rental for the expired Operating Year;

(b)a statement reconciling the resultant rental payable by reference to the applicable Operating Year against payments made on account of rental during that Operating Year; and

(c)a statement of the Fixtures, Fittings and Equipment Reserve (“F F & E Reserve”).

3      Pursuant to s 12(b) Financial Reporting Act 2013.

[53]   Under cl 16.2, the auditor appointed by the lessee (and certifying the accounts) is required to be a chartered accountant in private practice of recognised standard and competence.

[54]   The “independent accountant’s report” provided by PKF (in relation to each of the 2016, 2017 and 2018 years) did not meet the requirements of cl 16.2. First, all that has been provided is a form of certificate rather than the financial statements themselves. Secondly, those financial statements as produced would have needed to include the three sub-categories of statement required by cl 16.2. Finally, the certificates provided by PKF do not contain any confirmation that an audit has been conducted by reference to a particular auditing standard.

[55]   Under cl 16.2, it is Parkview’s obligation to provide the audited accounts to the Body Corporate within 90 days of the expiry of each Operating Year (that is, by 29 June in each year).

Estoppel

[56]   By its notice of opposition, Parkview asserted that the applicants were estopped by their conduct from relying on any of the breaches alleged in the PLA notice.

[57]   In his submissions, Mr Riach referred to settled authority in relation to estoppel, particularly in a lease context. It is recognised that a lessor who delays the issue of statutory notice for an unreasonable length of time, and accepts rent in the meantime, may be estopped from proceeding on such a notice. What the Court in essence examines is whether the lessor has acquiesced in the breach in such a way that would be unconscionable for the lessor to be allowed to proceed to forfeiture.4

[58]   If as I find, the PKF reports in 2016, 2017 and 2018 did not comply with the requirements of the lease, the estoppel issue raised for Parkview is whether the passage of time after each “independent accountant’s report” constitutes such an acquiescence in the breach that it would be unconscionable for the applicants to proceed as they have under the Property Law Act.

4      McDrury v Luporini [2000] 1 NZLR 652 (CA) at [45].

[59]The applicants point to two particular matters as cutting across any estoppel.

[60]   First, the applicants refer to the fact that Mr Hastie from May 2018 unsuccessfully pursued financial information. That included requests for the 2016, 2017 and 2018 audited accounts. On this basis, the applicants were plainly entitled, when Parkview refused to provide such accounts, to proceed with a PLA notice at least in relation to the 2018 year. They had clearly put Parkview on notice that they required the audited accounts for that year, even if some issue may have arisen as to their entitlement to issue a PLA notice based on the absence of audited accounts for earlier years.

[61]   Secondly, the applicants invoke a provision in the lease which provides that no waiver or failure to act by the applicants in respect of any breach by Parkview will operate as a waiver of another breach. While that clause deals specifically with waiver rather than estoppel, it tends to reinforce the appropriateness of focussing on the applicants’ entitlement to enforce their entitlement to insist on provision of at least the 2018 audited accounts even if arguable estoppels or waivers existed in relation to earlier years.

Conclusion

[62]   The applicants have established that Parkview was in breach of the lease in failing to provide its audited accounts for the year ending 31 March 2018. The applicants were entitled to issue a PLA notice in relation to at least that breach.

[63]   There may be issues as to an estoppel – at least an estoppel against issuing a PLA notice – in relation to the 2016 and 2017 years given the applicants’ earlier lack of challenge to the form of financial information provided. But that estoppel would not operate to disentitle the applicants from insisting that the historical financial information still be provided. It is information of fundamental importance to ensure that each party receives what it is entitled to under the lease. Equity will not deny the applicants the right to that information even should Equity deny the applicants the right to proceed in relation to the particular years involved by a PLA notice route.

Lessee’s duty in relation to accounting records and books

The lease provisions

[64]   Clauses 16.3 and 16.4 of the lease make provision for accounting records and books. They provide:

16.3      Accounting Records and Books: the Lessee shall keep proper books of account and recordings relating to all transactions conducted in the course of the Business and those books together with all supporting data including sales receipts, bank deposit records and tax returns shall be kept available for at least 30 months from expiry of the applicable Operating Year.

16.4      Confidentiality: The Lessor shall not disclose to any person any statement, account or other piece of information provided by the Lessee to the Lessor or made available for inspection by the Lessor pursuant to this Clause 16 except as strictly required for the purpose of or in connection with the verification of the rental paid or payable by the Lessee provided that the Lessor may disclose for the sole purpose of the sale of the Premises, the financial information provided by the Lessee to any potential purchasers of the Premises or their financial advisers PROVIDED HOWEVER that the Lessee is able to provide to the Apartment Owners a monthly report as provided for in clause 16.1 hereof.

What the applicants sought

[65]   When the applicants retained Mr Hastie to look into accounting matters, they were content at that point to have him inspect the accounting records on their behalf. In addition to the audited financial statements, he sought a range of documents covering trial balance and general ledger reports, bank statements, all source invoices (for sales and expenditure), GST reports, budgets, room rates, rental statements and monthly reports of rent payable. Parkview made an arrangement for its financial information to be made available to Mr Hastie for inspection at Parkview’s solicitor’s offices in June 2018. Mr Hastie reported back to Mr Saluja on 6 July 2018. At the same time as reporting that he had not been provided with any audited accounts, he noted numerous categories of accounting documents which he had requested by which were not made available for inspection. He recorded (with reference to cls 16.3 and 16.4) that:

Harmans argue that information we requested is confidential under clause 16.4 and that they do not have to provide accounting records & books under 16.3 but rather just keep these.

[66]   It was following that exchange that the applicants on 23 August 2018 had their PLA notice issued.

[67]   The PLA notice identified in relation to Parkview’s records and books the following breach:

Maintaining Records and Books

Clause 16.3 requires Parkview to keep proper books of accounting records relating to all transactions. Those books and all supporting data are to be kept available for at least 30 months from expiry of each applicable Operating Year.

The Lessors have seen no evidence of compliance with clause 16.3 and consider Parkview to be in breach. By way of email dated 18 May 2018 Andrew Hastie of Nexia New Zealand emailed the lawyers acting for Parkview requesting access to certain information commencing with the financial year 1 April 2015 – 31 March 2016. Under clause 16.3 information for that financial year needs to be retained until September 2018. IRD accounting requirements stipulate that the information should in fact be kept for 7 years.

The following information that had been requested by Mr Hastie has not been made available.

(a)Audited Accounts

·No audited accounts for the years ended 31 March 2018, 31 March 2017 and 31 March 2016;

·The audied (sic) accounts for each year would include statements of rental, a statement reconciling the rental payable against payment made on account of rental and a Statement of F F & E Reserve.

(b)Rental Payable Statements

The following accounting documents have not been provided:

·Trial Balance;

·General Ledger;

·GST Returns;

·Budgets & Management Reports;

·Room Rate information;

·Confirmation that no assignment of lease had occurred;

·Monthly reports showing the lessee’s calculation of rent payable for the last 30 months for rooms under lease of the lessor or on an individual hotel basis.

Parkview’s position

[68]   Parkview’s position in relation to its maintaining records and books under the lease was succinctly identified by Mr Curtis in one paragraph:

The lease … provides that we are to maintain records. These had been maintained and …made available to the owners and their agents for inspection (as far as the lease requires).

Construction of cl 16.3 and 16.4 obligations

[69]   In essence, the applicants’ complaint is that Parkview breached an obligation to make available for inspection by the Body Corporate all Parkview’s proper accounting records and books. Parkview does not challenge the applicants’ evidence that Mr Hastie was denied access to a significant number of financial records. It is therefore necessary to identify the extent of the Body Corporate’s entitlement under the lease to determine whether what Parkview has provided fell short of its obligations.

[70]The manner in which the parties’ obligations have been defined in cls 16.3 and

16.4 is somewhat unusual. On its initial appearance, cl 16.3 appears to deal with what must be done in relation to the holdings of books and accounts and records whereas cl

16.4   appears to focus on an obligation to keep records confidential. But, properly construed, the two clauses provide a sequential regime:

(a)Parkview must keep proper accounting records and books;

(b)those records must be kept available for at least 30 months from expiry of the applicable operating year;

(c)the Body Corporate is entitled to inspect the records produced and kept by Parkview under cl 16.1 – 16.3; and

(d)the Body Corporate must not disclose any statement, account or other piece of information provided to it by Parkview under c 16 (subject to the exceptions and provisos contained in cl 16.4).

Breach of entitlement to inspect

[71]   Parkview had signalled to Mr Hastie a rejection of any entitlement on the part of the Body Corporate to inspect records (as against a mere obligation on the part of Parkview to keep records). Such a distinction was unjustified in terms of the lease.

[72]   Nevertheless Parkview allowed Mr Hastie (as the Body Corporate’s agent for this purpose) to inspect some records. Parkview remained in breach of its duty to permit inspection in that a range of records covered by cl 16 was not made available. Material categories of documents which the Body Corporate has not been able to inspect included items as fundamental as GST returns. The ambit of the material to be made available for inspection by the Body Corporate is intended to be wide and comprehensive, not limited. That is indicated by the wording of cl 16.3 which requires the keeping of proper books of account and recordings relating to:

…all transactions conducted in the course of the Business …

with the books to be accompanied by:

…all supporting data including sales receipts, bank deposit records and tax returns…

[73]   The doctrine of estoppel cannot assist Parkview in relation to the express request to provide documents for inspection by Mr Hastie. If (which is not established) the Body Corporate had given any earlier representation that access was not required in earlier years, the Body Corporate was entitled to re-assert its entitlement under the lease on reasonable notice. Mr Hastie’s request for access was such reasonable notice.

[74]   In its PLA notice, the Body Corporate identified as a breach of the lease Parkview’s failure to make requested documents available to Mr Hastie. The breach was not remedied either then or subsequently, Parkview maintaining its previous position as to not being required to make the documents available for inspection by the Body Corporate.

[75]   Parkview’s conduct over its financial information was clearly driven in part by a fear that confidential information might become available to a potential purchaser (such as the VR Group). It is through the confidentiality provisions of cl 16.4, that Parkview may protect its interests, not by purporting to restrict the Body Corporate’s rights of inspection as agreed under the lease.

Lessee’s duty in relation to the operation of the business

The lease provision

[76]   Clause 6.5 of the lease establishes an overarching duty on the part of Parkview in relation to the operation for business:

Operation of Premises: The Lessee shall use all reasonable endeavours to operate and manage the Premises and the business in a proper, businesslike and profitable manner consistent with the management and operation of a hotel with ancillary facilities of a similar nature and standard.

The alleged breach

[77]   By its PLA notice, the Body Corporate alleged that Parkview was in breach of cl 6.5. The notice recorded that in particular:

(a)The average monthly revenue from the operation of the hotel has declined 43% in recent months with no apparent explanation for the significant reduction;

(b)Expenses incurred by Parkview are high and do not reflect a reduction in expenses caused by a reduction in use of the rooms – as is indicated by the drop in revenue;

(c)Insufficient efforts to sell direct, in order to save commission – the hotel website has not been working for several months.

[78]   Mr Ruepert, the applicants’ expert, in his affidavit filed shortly before the hearing identified a number of matters in commenting on steps being taken by Parkview to operate the business. Several of those did not fall within the matters particularised in the PLA notice. In this judgment I have disregarded those complaints as Parkview was not put on notice to remedy them.

[79] The complaints of breach (under cl 6.5) which I have considered are those particularised in the PLA notice (set out at [77] above).

[80]   In relation to each of those three alleged areas of breach, the applicants’ evidence falls well short of establishing a breach of an obligation to use reasonable endeavours. There is conflicting, credible evidence of the two experts as to the impact of matters outside the control of Parkview upon the business operation. Neither was cross-examined. The applicants have not demonstrated on the balance of probabilities that an inferior performance as perceived by Mr Ruepert was caused by a lack of endeavour on the part of Parkview. For Parkview, Mr Riach also highlighted the fact that, while the PLA notice made an allegation of declining revenue “in recent months”, those (winter) months were reasonably explicable as lower-earning months in the ordinary course. Furthermore, Mr Ruepert’s analysis of declining income encompassed a much longer period than referred to in the PLA notice (some 35 months), an allegation (as to length of time) which was not put to Parkview by the PLA notice.

[81]   In their evidence in support of the application, the applicants offered little narrative evidence to support the PLA notice proposition that Parkview’s expenses had not shown a reduction following their reduced use of rooms. In his supporting affidavit, Mr Saluja stated simply:

“Expenses incurred by Parkview had been high and do not reflect a reduction in expenses caused by a reduction in use of the rooms – as is indicated by the drop in revenue”.

[82]Mr Curtis’ answer to that general proposition was that:

“… many of the expenses are fixed costs which do not decrease simply because occupancy levels have reduced”.

[83]   In reply to that evidence, Mr Saluja produced a copy of the Buyer Created Tax Invoice issued by Parkview in September 2018 in which it was stated that 20 per cent of expenses are fixed while 80 per cent are variable.

[84]   The evidence adduced for the applicants as to a reduction in revenue not being met by a corresponding reduction in expenses did not satisfy me on the balance of probabilities that Parkview had breached cl 6.5. Any meaningful and reliable analysis of the financial data produced became difficult once the applicants’ focus moved from the “recent months” referred to in the PLA notice to the period of almost three years

referred to in Mr Ruepert’s evidence. In his cross-examination of Mr Curtis, Mr Sills succeeded in demonstrating (and having Mr Curtis accept) that at least 80 per cent of hotel costs are variable costs. But of itself that did not demonstrate that the probable reason for the decline in revenue not being matched by a proportionate decline in expenses was attributable to a failure by Parkview to act in a businesslike manner. A much more detailed analysis of particular expenses (especially the large expenses) and suggested ways in which they might have been reduced would have been required than was made available through the limited evidence adduced for the applicants.

[85]   In his evidence, Mr Curtis impressed as a businessperson who understood the expenses of the hotel operation and was genuinely interested in avoiding unnecessary expense. To the extent that some differences of approach were apparent in the evidence of Mr Saluja and Mr Curtis, I was not satisfied that they reflected an unbusinesslike attitude on the part of Mr Curtis. A difference of approach was illustrated in relation to the employment of cleaning staff. Mr Saluja’s evidence appeared to indicate a focus on keeping wages to minimum wage levels. Mr Curtis’ answers as to his willingness to attract employees at higher pay rate reflected a different approach but not one which any evidence properly adduced established to be “unbusinesslike.”

[86]   The applicants have not satisfied the Court that any disproportionate drop in revenue over the recent months before the issuing of the PLA notice was attributable to a breach by Parkview of its cl 6.5 obligation.

[87]   The applicants’ most particular allegation of a breach of cl 6.5 by Parkview was that Parkview had made insufficient efforts to sell direct in order to save commission. In particular it was asserted in the PLA notice that the hotel website had “not been working for several months”.

[88]That particular allegation, as it was developed, had two aspects.

[89]   The second aspect was identified in Mr Saluja’s affidavit under the introductory words “insufficient efforts to sell direct, to save commission”. Mr Saluja

gave examples of an inability to make a booking for certain rooms in September and an incorrect reservation summary in relation to the same attempted booking.

[90]   Mr Curtis responded to those allegations in detail. He deposed that there was a period of a “few weeks” when the website developed a fault. That evidence has not since been challenged and Mr Saluja’s assertion that the period was “several months” has not been established. Mr Curtis further noted that the attempted booking had been for “three standard rooms” whereas there was not three standard rooms available.  Mr Saluja’s subsequent ability to book three rooms was because he ended up booking three executive penthouse suites, which were available.

[91]   In his reply evidence, while replying to other parts of Mr Curtis’ evidence in detail, Mr Saluja did not reply on these matters.

[92]   I am satisfied that the brief period when Parkview’s website was not working properly was a glitch only, and that the suggestion of a breach of lease through booking difficulties was unjustified.

[93]   That leaves in the PLA notice the particular detail relating to “insufficient efforts to sell direct in order to save commission”. Mr Saluja did not in his evidence in support elaborate on that particular. Mr Curtis in his evidence recorded Parkview’s practice of receiving most of its hotel bookings through websites which attract commission by acting as online travel agents. Mr Curtis deposed that those websites are:

…vital to be involved with as they are becoming so popular with prospective guests due to the immediate comparisons available.

[94]   In the applicants’ evidence, the single (implicit) criticism of Parkview’s adoption of online travel agents came in the reply evidence of Mr Ruepert filed shortly before the hearing.

[95]Mr Ruepert deposed:

Online Travel Agents generally charge commissions between 13% - 18% of booked revenue. Hotel operators every so often adopt a strategy to mostly rely on OTAs to generate business instead of applying their own sales and

marketing efforts, even though this generally comes at a higher expense. Operators can pass on commission-expenses to the owners but no other sales and marketing expenses (as is the case with the Parkview Hotel) are more inclined to adopt such strategy.

[96]   Significantly, Mr Ruepert did not suggest that Parkview’s adoption of online travel agents was unbusinesslike in the sense that it would cut across the profitability of the hotel operation itself. In this regard, the apparently implicit criticism intended by Mr Ruepert’s evidence reflected an incorrect understanding of Parkview’s obligation to use best endeavours to be profitable under cl 6.5 of the lease. Clause 6.5 is concerned with the profitability of the hotel operation. That is required to be the focus of Parkview under cl 6.5. The evident concern of the applicants, outlined in Mr Ruepert’s reply evidence and in this PLA notice, lies in the fact that through Parkview utilising online travel agents there may be less net return to the unit owners. But it is not the profit ultimately available to the unit owners that is the concern of cl 6.5.

[97]   The applicants have not established a breach of cl 6.5 in relation to the methods adopted by Parkview to sell hotel accommodation.

Duty to maintain a fixtures, fittings and equipment reserve (F F & E Reserve)

The lease provision

[98]   The lease, by cl 12, provides for the establishment of a reserve to cover the repair, maintenance and replacement of the owners’ fixtures, fittings and equipment. Clause 12.5 provides for the holding and investment of the F F & E Reserve.

12.5 Investment powers: The lessee is authorised to invest the F F & E Reserve on interest bearing deposit with any registered bank. The F F & E Reserve shall be held on trust for the Apartment owners by the Lessee.

What Parkview did

[99]   For a period after he took ownership, Mr Curtis advanced funds from the F F & E Reserve to related interests but at the same time paying a higher interest rate than was obtainable from Parkview’s bank. Mr Curtis corrected this approach around August 2016, at which time he wrote to owners. He apologised for the practice previously adopted and confirmed that investment of the F F & E Reserve would thereafter be with Parkview’s bank in accordance with cl 12.5. It since has been.

The Body Corporate’s complaint

[100]By its PLA notice, the Body Corporate referred to the requirement under cl

12.5 for the F F & E Reserve to be invested with a registered bank. The PLA notice alleged that Parkview has failed to meet its obligations under cl 12.5.

Discussion

[101]   Parkview’s breach of cl 12.5 was remedied some two years before the PLA notice was issued. To the extent that breaches had earlier occurred (through unauthorised payments), it is correct to state that those breaches were no longer capable of remedy. That said, there is no suggestion that any loss accrued to the unit owners through the mis-investment. Parkview’s subsequent treatment of the F F & E Reserve has been in accordance with the lease. The historical breach does not justify forfeiture.

Duty to account for the F F & E Reserve

The lease provision

[102]   Clause 12.3 of the lease requires Parkview to include a statement of all credits and debits from the F F & E Reserve with the accounts furnished in accordance with cl 16.2.

What Parkview provided

[103]   Parkview’s practice has been to provide to every owner in the monthly report to that owner, details of F F & E Reserve debits and credits relating to that owner’s unit/s. Parkview have not had a practice of providing an overall F F & E Reserve statement of debits and credits. Accordingly, even had Parkview been complying with its annual obligation (under cl 16.2) to provide audited accounts, it would not at the time have been in a position to include with those amounts the statement of the F F & E Reserve.

Body Corporate’s complaint

[104]   By the PLA notice, the Body Corporate complained that Parkview was in breach of its obligation under cl 12.3 (and thereby also under cl 16.2).

Parkview’s response

[105]   After the PLA notice was issued, Parkview’s solicitors provided to Mr Sills an overall statement showing credits and debits from the F F & E Reserve for the years ending 31 March 2017 and 31 March 2018, together with spread-sheeted statements to reflect an individualised owners’ shares of the Reserve.

[106]   Parkview’s practice of making individualised F F & E Reserve statements to owners did not meet the requirements of cls 12.3 and 16.2. The owners are entitled to an overall statement of credits and debits from the F F & E Reserve. That statement has to be one of the statements included in the audited accounts for each Operating Year. I am satisfied, having heard Mr Curtis in cross-examination, that he had held a genuine belief that the individualised approach to F F & E Reserve reporting was sufficient, just as his breach of the provision of audited accounts under cl 16.2 was not a wilful ignoring of Parkview’s obligations. The breach is capable of remedy and I find below does not of itself or with other breaches justify forfeiture.

Cleaning costs

[107]   By the PLA notice, the Body Corporate asserted that Parkview had acted in breach of its lease obligations by providing cleaning services to the hotel through a related company (rather than providing the cleaning services in-house).

[108]   The Body Corporate’s contention involves the proposition that the lease “makes it clear” that the lessor is not to profit from premises outgoings (which includes certain cleaning costs).

[109]   I was not taken to any provision in the lease which clearly precludes Parkview from having general room cleaning (as against cleaning of towels and related items) undertaken by a separate service provider.

[110]   The applicants have not satisfied the Court that there has been a breach of the lease through Parkview’s cleaning arrangements.

Remaining complaints in the PLA notice

[111]   In this judgment, I have addressed the applicants’ complaints as contained in the PLA notice to the extent that they have been developed by Mr Sills in submissions. I have not overlooked the fact that other complaints (that is other than discussed above) were identified in the PLA notice. Those other complaints are not addressed in this judgment because they were not pursued in submissions.

The application for possession and cross-application for relief

[112]   The applicants seek an order for possession of the leased units pursuant to s 244(1)(a) Property Law Act.

[113]Parkview’s significant breaches of lease (being the breaches under cls 16.2 –

16.5 including that relating to the statement of the F F & E Reserve) have not been remedied. Although Parkview initially took issue with the 10 working day period identified for remedy in the PLA notice, I am satisfied that that was a reasonable period in the circumstances. Parkview has not suggested that it could not have complied within the 10-day period with its cl 16 obligations as I have found them to exist. Instead, it had taken the view (wrongly as I have found it to be) that its obligations in relation to audited accounts and the availability of records for inspection were different to those asserted by the Body Corporate.

[114]   In these circumstances, the applicants have made out the case for an order for possession of the land comprised in the lease subject only to the Court’s power to grant relief against cancellation under s 253 of the Act.

[115]   Section 253 of the Act entitles Parkview, as lessee in this proceeding brought by the applicants for an order for possession of the land, to seek relief against cancellation.

[116]   The breadth of the Court’s discretion to grant relief (other than in a case of breach of a covenant to pay rent) was considered by the Court of Appeal in McIvor v Donald.5 In that case, Somers J in delivering the Court’s judgment, said:6

The legislature has not seen fit to lay down rules as to the exercise of the wide discretion it has conferred on the Court and the undesirability of the Court attempting to do so was emphasised in Hyman v Rose…

Many of the subsequent reported cases are no more than instances of the exercise of the discretion but some point to features of general importance. Thus relief is normally granted to one who has made good the breach and is able and willing to fulfil his obligations in the future … but when there are wilful breaches relief will not readily be given…

[117]   There are a number of well-recognised considerations which the Courts have taken into account in exercising the Court’s discretion. Helpful authorities include Studio X Ltd v Mobile Oil New Zealand Ltd; Neglasari Farms Ltd v Brakatin Holdings Ltd; and Detour Clothing Ltd v Star Five Ltd.7

[118]Factors which may be taken into account include:

(a)whether the breach was advertent or deliberately committed;

(b)conversely, whether the breach was caused by inadvertence or was entirely beyond the tenant’s control;

(c)whether the breach involves an immoral/illegal use;

(d)whether the tenant has made or will make good the breach of the covenant and is able and willing to fulfil his obligations in the future;

(e)the conduct of the landlord;

(f)the personal qualifications of the tenant;

(g)the financial position of the tenant;

(h)any third party interests;

(i)the gravity of the breach;

5      McIvor v Donald [1984] 2 NZLR 487 (CA).

6      McIvor, above n 5, at 494.

7      Studio X Ltd v Mobile Oil New Zealand Ltd [1996] 2 NZLR 697 (HC); Neglasari Farms Ltd v Brakatin Holdings Ltd (2011) 11 NZCPR 643; and Detour Clothing Ltd v Star Five Ltd [2017] NZHC 1172, (2017) 18 NZCPR 862.

(j)whether the breach has caused lasting damage to the landlord; and

(k)proportionality.

[119]   I recognise the above list as containing the type of considerations which will often need to be brought into account. That said, I adopt the observation of Heath J in Detour Clothing that the need for a proportionate response to any breach (identified at

[118] above as item (k)) underpins the exercise of the Court’s discretion.8

[120]          In this case, having had the benefit of assessing Mr Curtis’s motivations and integrity through testing cross-examination, I am satisfied that relief should be granted with conditions imposed pursuant to the Court’s powers under s 256(1) of the Act.

[121]          The reasons which make relief appropriate in this case may be stated in relatively brief terms. In one sense, the breaches of cl 16 of the lease were deliberate in that Parkview refused to provide the audited accounts and to make available inspection of records in the form which the applicants had justifiably demanded. But I am satisfied by Mr Curtis’s evidence that the breaches came about through a misapprehension of the correct construction of the requirements of the lease. It was clear from Mr Curtis’s answers that if the Court identifies in cl 16 more onerous obligations than those previously accepted by Mr Curtis, he will arrange future compliance. The sincerity of Mr Curtis’s evidence in that regard is reinforced when one comes to consider the issue of proportionality. The historical performance of the hotel operation is whatever it has been. The information to be provided to the lessees under cl 16 of the lease is the means by which the lessees can reasonably verify the basis upon which their income has been calculated. Provided the applicants are given the means, through Parkview’s complying with its cl 16 duties, to retrospectively verify the previous calculation of their income, the purpose of cl 16 will have been achieved – the applicants will be able to make demand for any shortfall of payment. The demand for such payment would be in relation to a breach other than the breaches identified in the current PLA notice.

8      Detour Clothing, above n 7, at [44], citing Pike River Coal Ltd (in rec) v O’Malley Farming Ltd

(2011) 6 NZ Conv C 95-559 (HC) at [44].

[122] If relief against cancellation of the lease were not to be granted, Parkview would forfeit the value of its lease interest, the value of which on the evidence adduced (as set out at [25] above) was appreciably over $1 million when Travellers Inn was making its offers in 2018.

[123]          To allow forfeiture of the lease for breaches which are remediable and fall short of being “wilful” would be a disproportionate consequence.

[124]          While the breaches have yet to be remedied, the legitimate interests of the applicants can appropriately be protected by the conditions which the Court will impose.

[125]          The Court has been considerably assisted in relation to the conditions by a draft form of order which Mr Sills provided in the course of his submissions. Mr Sills provided the draft without prejudice to his primary submission that the Court should make an order for possession and should refuse the cross-application for relief. Mr Sills, through the draft order, responsibly addressed the question of what orders would reasonably protect the applicants’ position in the event the Court were to grant relief against forfeiture.

Costs

[126]          The applicants have established their entitlement to possession. Parkview has succeeded on its application for relief against forfeiture, a matter of indulgence.

[127]          The Court of Appeal in Cunningham v Butterfield, recognised that there is no general rule that costs will be granted in favour of a lessor who has unsuccessfully opposed an application for relief against forfeiture.9 Analysis is required of the facts giving rise to the litigation, taking into account the conduct of the parties and whether one of them has contributed to its costs or engaged in other conduct that should influence costs decisions.10 Parkview’s most fundamental breaches in this case were of its accounting and audit obligations under cls 16 and 12.3 of the lease. Parkview was incorrect in the interpretation of those lease provisions and maintained that

9      Cunningham v Butterfield [2014] NZCA 213, (2014) 22 PRNZ 521 at [52] – [57].

10 At [57].

position through to the hearing. While Mr Curtis referred to having legal advice in relation to the interpretation issues, no such advice was produced in evidence. Even the plain meaning of the lease provisions in question makes it difficult to envisage that any well-reasoned explanation lay behind such advice. On the other hand, the responsible approach taken by Mr Sills (for the applicants) in producing, without prejudice, a draft set of orders which would address the accounting and audit deficiencies, indicates that the applicants were adopting a realistic and reasonable approach to resolving issues.

[128]          My tentative conclusion is that in this case, it is the applicants who should have costs and disbursements. I will nevertheless reserve costs as counsel invited me to do. The orders made below will apply in the event the parties are unable to agree on costs.

Orders

[129]I order:

(a)The application for an order for possession of land is dismissed;

(b)The cross-application for an order granting relief against cancellation of the deed of lease dated 6 November 2007 is granted on the following conditions; namely that within 30 working days from the date of this order, the respondent is to:

(i)have completed a full set of financial statements of its business for the year ended 31 March 2018, to include statements of rental for that year, a statement reconciling the resultant rental payable by reference to that year against payments made on account of rental during that year, and a statement of the F F & E Reserve (“the 2018 financial statements”);

(ii)have the financial statements certified by its auditors who shall be chartered accountants in private practice of recognised standard and competence;

(iii)provide to the lessor a copy of the audited accounts; and

(iv)make available for inspection by the lessor all books of account and recordings relating to all transactions conducted in the course of the business (as defined in the lease), subject to the confidentiality provisions of cl 16.4;

(c)In the event that the preparation of the 2018 financial statements or the auditing thereof identify any inaccuracy either in financial conclusions previously reported to the lessor or financial accounting previously made to the lessor in relation to the year-ending 31 March 2018, the respondent shall complete in relation to each of the years ending 31 March 2015, 31 March 2016 and 31 March 2017 each of the steps required in relation to the year-ending 31 March 2018 in the order at [129](b) above, such steps to be completed within 30 working days after the date on which the lessor makes the 2018 (audited) financial statements available to the lessor;

(d)The respondent shall make good to the unit owners any shortfall of payment identified through the auditing of financial statements in accordance with the orders at [129](a) – [c] above, such payment to be made within five working days after the date on which the relevant financial statements have been certified by the lessee’s orders. The payment shall include default interest calculated in accordance with cl

3.5 of the lease calculated from the date on which any short-paid sum ought to have been paid down to the date of payment of the shortfall;

(e)Leave is reserved to the parties to apply for further direction in the event of any uncertainty or disagreement as to the implementation of these orders, with any such application to be made by memorandum filed and served and supported, if necessary, by affidavit evidence of the subject- matter;

(f)Leave is reserved to the applicants to have the application for possession restored for hearing in the event the respondent does not comply with any part of these orders; and

(g)The costs of the application and cross-application are reserved. In the event costs issues are not resolved by agreement, the applicants are to file and serve a memorandum (five page limit) within 10 working days and the respondent is to file and serve its response memorandum within five working days thereafter (five page limit). In the event a memorandum for costs is not filed within 10 working days, the Court’s order (without further direction) will be that there is no order for costs or disbursements.

Osborne J

Solicitors:

Hornabrook Macdonald, Auckland Counsel: P Sills, Barrister, Auckland Harmans Lawyers, Christchurch