Portofino Takapuna Ltd v Bye
[2017] NZHC 1580
•10 July 2017
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2016-404-1697 [2017] NZHC 1580
UNDER section 261 of the Property Law Act 2007 IN THE MATTER
of a refusal to grant renewal of a lease
BETWEEN
PORTOFINO TAKAPUNA LTD Plaintiff
AND
GEOFFREY CHARLES BYE, CHRISTINE MARY BYE AND RICHARD BOYD GUISE AS TRUSTEES OF THE KAISER TRUST Defendants
Hearing: 31 October 2016 Appearances:
P Moodley for the Plaintiff
S Dench for the DefendantsJudgment:
10 July 2017
JUDGMENT OF WOODHOUSE J
This judgment was delivered by me on 10 July 2017 at 10:00 a.m. pursuant to r 11.5 of the High Court Rules 2016.
Registrar/Deputy Registrar
……………………………………
Solicitors / Counsel:
Mr P Moodley, Brookfields, Solicitors, Auckland
Mr S Dench, Barrister, Auckland
Ms S Tait (defendants’ instructing solicitor), Conveyancing Centre, Solicitors, Auckland
PORTOFINO TAKAPUNA LTD v BYE, BYE AND GUISE AS TRUSTEES OF THE KAISER TRUST [2017] NZHC 1580 [10 July 2017]
[1] The plaintiff (Portofino) operates a restaurant in premises it leases from the defendant trustees (the Trust). On 27 June 2016 the Trust gave notice to Portofino purporting to terminate what it contended had become a monthly tenancy. Portofino applies for relief and the Trust applies for an order for possession.
[2] By consent, there were orders restraining the Trust from terminating or
cancelling Portofino’s use and occupation of the premises pending further order.
Introduction: the broad issues
[3] Portofino became lessee of premises owned by the Trust pursuant to a deed of assignment of lease dated 7 October 2008 (the assignment). At the date of the assignment the lease had been renewed for a term of six years commencing on 1
April 2007 and terminating on 31 March 2013. The lease contained one further right of renewal for a term of “4 years (less one day)”, with the right of renewal required to be exercised by notice given at least three months before 31 March 2013. Portofino did not give notice of renewal in accordance with the lease. Portofino contends that, pursuant to a variation of the lease recorded in the assignment, the current term of six years in force when it took the assignment was extended to 30
March 2017 and, in consequence, notice of renewal was not required in respect of the four year term that had been provided for in the lease.
[4] The first main issue concerns interpretation of the assignment. For the purposes of interpretation, the provisions of the assignment have to be read in conjunction with the provisions of the lease, but the critical provision is the following contained in the assignment:
EXPIRY DATE OF CURRENT TERM: 30 March 2017
[5] Portofino contends that these words, when read in conjunction with other relevant provisions of the lease and the assignment, plainly record a variation by extending the term that was current at the date of assignment from 31 March 2013 to
30 March 2017.
[6] The Trust contends that the critical provision in the assignment is simply an incorrect restatement, in the assignment, of one of the original provisions in the lease; that, on construction of the assignment and the lease, there is an obvious clerical error in the assignment. Accordingly, the Trust submits, the correct interpretation is different from the literal interpretation, and the Trust is entitled to an order correcting the clerical error.
[7] The Trust further contends that, if it is wrong in the construction it contends for, it is entitled to an order rectifying the assignment on the grounds that the provision in the assignment does not record the intention of the parties when they entered into the assignment.
[8] If Portofino is correct in its argument, and if the Trust is not entitled to rectification, no further issues arise. The Trust did not argue that, if the current term did not expire until March 2017, the Trust was nevertheless entitled to issue the notice of termination in June 2016.
[9] If Portofino is wrong in its argument on interpretation, or if the Trust is entitled to the order for rectification, Portofino seeks alternative orders for relief under s 264 of the Property Law Act 2007: either an order that the Trust renew the lease or an order that it enter into a new lease on the terms contained in the lease and the assignment. The Trust opposes that application and seeks an order for possession. The Trust gave evidence of what it contends were numerous defaults by Portofino and over an extended period which, it submits, are such that Portofino is not entitled to exercise of the Court’s discretion in its favour.
[10] I have concluded that Portofino is correct in its argument that the lease was varied by extending the expiry date of the current term to 30 March 2017 and that the Trust is not entitled to an order for rectification. In consequence, it is unnecessary to consider the evidence and issues that would arise on Portofino’s application for relief and the Trust’s application for an order for possession.
The relevant terms of the lease
[11] The original deed of lease, dated 28 November 1997, was between The North Shore City Council and One Red Dog Takapuna Ltd. One Red Dog Takapuna Ltd subsequently changed its name to Jaedon Holdings Ltd and I will refer to the company as “Jaedon”. The Trust purchased the premises occupied by Jaedon in
1999.
[12] The terms defined in the first schedule which are of relevance to the question of interpretation of the assignment, are the following:
Initial Term: 10 years
Commencement Date: 1 April 1997
Termination Date: 31 March 2007
Renewal Terms: 1 term of 6 years and 1 term of 4 years (less one day)
Final Expiry Date: 31 March 2017
Annual Rent: …
$106,037.64 (plus GST)
[13] The words in bold are in bold in the original. They are used as defined terms
(as made clear by clause 1.2 in the second schedule of the lease).
[14] Clause 3.1, a provision relating to the right of renewal, is as follows:
3. RIGHT OF RENEWAL
3.1 Preconditions: If:
3.1.1Written notice: at least three months prior to the Termination Date the Lessee gives the Lessor written notice of the Lessee’s wish to renew the lease; and
3.1.2 Compliance by Lessee: the Lessee has complied with all of the obligations of the Lessee under this lease;
then the Lessor shall at the cost of the Lessee renew this lease for the Renewal Term commencing on the day
following the Termination Date in accordance with this section.
…
The relevant terms of the assignment
[15] The assignment is dated 7 October 2008. The parties (in the order recorded) are Jaedon as assignor, Portofino as assignee, the shareholders and directors of Jaedon (who were also guarantors under the original lease), Toni Balulovski and Marjanco Kotevski (the then directors of Portofino) as guarantors, and the trustees of the Trust as landlord.
[16] The parties used the standard form deed of assignment of lease published by what is now Auckland District Law Society Inc.; in this case the fourth edition of
2006.
[17] The principal operative clauses, so far as relevant, are as follows:
1.THE ASSIGNOR assigns to the Assignee all the Assignor’s estate and interest in the Premises and the Lease as set out in the First Schedule.
…
5.THE ASSIGNOR, the Assignee, the Landlord and the Guarantor all acknowledge that the Lease expires on the Expiry Date of Current Term set out in the First Schedule and the rent is the Annual Rent set out in the First Schedule.
6.THE LANDLORD consents to the assignment but without prejudice to the Landlord’s rights and power and remedies under the Lease. If any Lease Variations are specified in the First Schedule the Landlord, the Assignor, the Assignee and the Guarantor agree that as from the Date of Assignment the Lease is varied as set out in the Lease Variations.
[18] The first schedule relevantly provides:
FIRST SCHEDULE
PREMISES:All those parts of the ground floor building in Hurstmere Road, Takapuna, Auckland comprising Principal Units B, C and D on Unit Plan 181347 and being more particularly described in the Lease.
CARPARKS:
DATE OF LEASE: 28 November 1997
RIGHTS OF RENEWAL: 1 term of 6 years and 1 term of 4 years (less one day)
ANNUALRENT: Premises: $143,238.00 plus GST per annum Carparks: $ - plus GST per annum Total: $143,238.00 plus GST per annum
EXPIRY DATE OF CURRENT TERM: 30 March 2017
BUSINESS USE: Licensed Restaurant and Bar
DATE OF ASSIGNMENT: 1 October 2008
RESTRAINT OF TRADE PERIOD: - RESTRAINT OF TRADE RADIUS: - LEASE VARIATIONS: See Fifth Schedule
As will be apparent, the italicised words are the words of primary focus referred to in the introduction. I will refer to this provision as the critical provision.
[19] The fifth schedule, referred to at the end of the first schedule in respect of “lease variations”, is an addition to the standard form document. It relevantly provides:
The parties agree that the covenants, conditions and agreements contained in the Lease shall be varied as follows:
…
2.That a further right of renewal be incorporated in the Lease for the 6 term [sic] being due to commence on the 1st day of April 2017 and end on the 31st day of March 2023 with the rental to be reviewed during any renewed term on the first says of April 2017, 2019 and
2021.
3.That in the event that the lease is renewed, the Final Expiry Date for the Lease is 31 March 2023.
…
Relevant principles for interpretation of the contract
[20] This is not a case which requires detailed consideration of the approach to contractual interpretation. In respect of the general approach it is sufficient to record
the summary of principles in the majority judgment of the Supreme Court in Firm
PI 1 Ltd v Zurich Australian Insurance Ltd, as follows:1
[60] Given the issues in the case, it is not necessary that we discuss the approach to contractual interpretation in any detail. It is sufficient to say that the proper approach is an objective one, the aim being to ascertain “the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract”. This objective meaning is taken to be that which the parties intended. While there is no conceptual limit on what can be regarded as “background”, it has to be background that a reasonable person would regard as relevant. Accordingly, the context provided by the contract as a whole and any relevant background informs meaning.
[61] The requirement that the reasonable person have all the background knowledge known or reasonably available to the parties is a reflection of the fact that contractual language, like all language, must be interpreted within its overall context, broadly viewed. Contextual interpretation of contracts has a significant history in New Zealand, although for many years it was restricted to situations of ambiguity. More recently, however, it has been confirmed that a purposive or contextual interpretation is not dependent on there being an ambiguity in the contractual language.
…
[63] While context is a necessary element of the interpretive process and the focus is on interpreting the document rather than particular words, the text remains centrally important. If the language at issue, construed in the context of the contract as a whole, has an ordinary and natural meaning, that will be a powerful, albeit not conclusive, indicator of what the parties meant. But the wider context may point to some interpretation other than the most obvious one and may also assist in determining the meaning intended in cases of ambiguity or uncertainty.
[21] The Court later considered the relevance of the commercial purpose of the contract under consideration.2 The following observation of Sir Kim Lewison was cited:3
In the course of the last five decades the court has increasingly sought to elucidate the commercial purpose of the contract under consideration, and as between competing interpretations to select that meaning which best serves the commercial purpose of the contract, as perceived by the court.
1 Firm PI 1 Ltd v Zurich Australian Insurance Ltd [2014] NZSC 147, [2015] 1 NZLR 432 (footnotes omitted) per McGrath, Glazebrook and Arnold JJ.
2 Zurich, above n 1, at [77]-[79].
3 Sir Kim Lewison The Interpretation of Contracts (5th ed, Sweet & Maxwell, London, 2011) at
42.
[22] Following reference to observations in decisions of the House of Lords regarding interpretation consistent with commercial common sense, the Court said:4
There are some dangers in this approach, as we note when we discuss the parties’ commercial absurdity arguments. But despite this, we accept that in interpreting commercial contracts the courts should have regard to their commercial purpose and to the structure of the parties’ bargain, to the extent that they can reliably be identified.
[23] On the question of commercial absurdity, the Court said:
[88] Where contractual language, interpreted in the context of the contract as a whole, has a natural and ordinary meaning, the courts will generally give effect to that as they “do not easily accept that people have made linguistic mistakes, particularly in formal documents”. The “primary source for understanding what the parties meant is their language interpreted in accordance with conventional usage”. It requires a “strong case” to persuade a court that something must have gone wrong with the language. Professor David McLauchlan, who has been one of the principal academic proponents of a liberal contextual approach to contractual interpretation, nevertheless accepts that:
… most issues of interpretation that cross a practitioner’s desk can be advised upon and solved by a reading of the words in the context of the document as a whole. There will usually be no answer to the solution derived from giving the words their ‘ordinary’ or conventional meaning.
[24] The Court accepted that if a literal interpretation would produce a commercially absurd result, a different interpretation may be justified.
[89] But if consideration of the relevant background forces a court to the conclusion that something has gone wrong with the contractual language, it is not required “to attribute to the parties an intention which they plainly could not have had”. Just as the courts have accepted that understanding the commercial purpose of a commercial contract is relevant to its interpretation, so have they accepted that that if a particular interpretation produces a commercially absurd result, that may be a reason to read the contract in a different way than the language might suggest. However, it has also been accepted that a court is not justified in concluding that a contract does not mean what it seems to say simply because the court considers that, so interpreted, the contract is unduly favourable to one party. There is an obvious tension between these two positions, and it will often be difficult to determine whether particular cases fall within one category or the other.
[25] The Court also expressed the need for caution.
4 Zurich, above n 1, at [79] (footnote omitted).
[90] Moreover, there is reason to be cautious in this area because commercial absurdity tends to lie in the eye of the beholder. As Lord Hoffmann observed in Chartbrook:5
“It is, I am afraid, not unusual that an interpretation which does not strike one person as sufficiently irrational to justify a conclusion that there has been a linguistic mistake will seem commercially absurd to another[.]”
Assessments of commercial purpose or commercially absurd consequences will be influenced by factors such as the background and experience of the court. In Skanska Rashleigh Weatherfoil Ltd v Somerfield Stores Ltd, Neuberger LJ, although acknowledging the importance of a contextual approach to contractual interpretation, noted that the parties have control of the language of negotiated commercial contracts and went on to say:6
“[22] Particularly in these circumstances, it seems to me that the court must be careful before departing from the natural meaning of the provision in the contract merely because it may conflict with its notions of commercial common sense of what the parties may must or should have thought or intended. Judges are not always the most commercially-minded, let alone the most commercially experienced, of people, and should, I think, avoid arrogating to themselves overconfidently the role of arbiter of commercial reasonableness or likelihood. … ”
…
[93] All this means that where contractual language, viewed in the context of the whole contract, has an ordinary and natural meaning, a conclusion that it produces a commercially absurd result should be reached only in the most obvious and extreme of cases.7
[26] Mr Dench, for the Trust, after citing Zurich at [60] referred to questions relating to the extent to which the Court may take account of pre-contractual negotiations and post-contractual conduct. The Trust places reasonably substantial weight on evidence of both.
[27] In respect of pre-contractual negotiations it will suffice to cite the central part of the discussion of the issue by Professor Burrows in Law of Contract in New
5 Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] 1 AC 1101 at [15] per Lord
Hoffmann.
6 Skanska Rashleigh Weatherfoil Ltd v Somerfield Stores Ltd [2006] EWCA Civ 1732 per
Neuberger LJ. Richards and Leveson LJJ agreed with Neuberger LJ’s judgment.
7 See Lord Grabiner “The Iterative Process of Contractual Interpretation” (2012) 128 LQR 41 at
50.
Zealand.8 Following discussion of the opinions of four of the Judges, Professor
Burrows referred to the opinion of Tipping J as follows:9
Tipping J considered that evidence derived from negotiations which is capable of shedding objective light on meaning is relevant and admissible. Tipping J explained this approach as follows:10
Although subjective evidence would be relevant if a subjective approach were taken to interpretation issues, the common law has consistently eschewed that approach. The common law focuses strongly on the agreement in its final form as representing the ultimate consensus of the parties. Hence it is regarded as irrelevant how the parties reached that consensus. To inquire into that process would not be consistent with an objective inquiry into the meaning of a document which is generally designed to be the sole record of the final agreement. A party cannot be heard to say – never mind what I signed, this is what I really meant.
In the light of the different approaches of the Judges in the Supreme Court it might appear that this chapter is not yet closed, and the future of the exclusionary rule is not yet fully settled.
However, in the cases since Vector, it has been the approach of Tipping J which has been adopted most often. So while declarations of subjective intent remain inadmissible, there is an acknowledgement that pre-contractual negotiations may sometimes be admissible if they provide objective evidence of the meaning to be attributed to the terms of the contract.
[28] The question whether evidence of the conduct of the parties after the making of a contract is admissible was discussed by the Supreme Court in Gibbons Holdings Ltd v Wholesale Distributors Ltd.11 Blanchard J reserved his position on the point whilst acknowledging the strength of the arguments in favour. The remaining Judges (Elias CJ and Tipping, Anderson and Thomas JJ) all supported the admissibility of evidence of subsequent conduct to construe a contract. There was, however, a disagreement on whether the conduct must be that of all the parties to the contract. Tipping and Anderson JJ considered that it had to be, but Thomas J considered that the conduct of one party alone could be relevant, at least if that conduct was
inconsistent with the interpretation that party was arguing before the Court.12 I
8 John Burrows, Jeremy Finn Stephen and Todd Law of Contract in New Zealand (5th ed, LexisNexis, Wellington, 2016) at [6.2.1(g)].
9 At 188 (footnotes omitted).
10 Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5, [2010] 2 NZLR 444 at [20].
11 Gibbons Holdings Ltd v Wholesale Distributors Ltd [2007] NZSC 37, [2008] 1 NZLR 277.
12 See the discussion and citations to relevant passages in Burrow Finn and Todd, above n 8, at
[6.2.1(h)].
proceed on the basis that the conduct in question must be objective conduct from which the Court may safely draw conclusions and of all the parties.
The relevant background facts
[29] This section of the judgment records my findings of fact based on relevant and admissible evidence of the background circumstances leading to the parties signing the deed of assignment on 7 October 2008.
[30] Portofino was incorporated on 27 June 2008. At the date of incorporation all the shares in Portofino were owned by Portofino Restaurants Holdings Ltd (Portofino Holdings). It was incorporated for the purpose of seeking to purchase the business of Jaedon that was operated from the premises owned by the Trust. Mr Kotevski and his wife worked as chefs at one of the Portofino Group restaurants. In
2008 the owner of the Portofino Group offered Mr and Mrs Kotevski a franchise proposal to open a new Portofino restaurant in Takapuna. Mr and Mrs Kotevski agreed with Mr and Mrs Balulovski to become business partners for that purpose and became directors of Portofino. They later became shareholders.
[31] Portofino secured a loan of $2.65 million, with interest at 10 per cent per annum, from another Portofino Group company.
[32] In July 2008 Portofino agreed to purchase the restaurant business operated by Jaedon at the premises owned by the Trust. The purchase price was $730,000. In the usual way, Portofino then sought the Trust’s agreement to assignment of the lease. The first correspondence in this regard appears to be an email from John Algie, the real estate agent for Jaedon, to Stephanie Tait, the solicitor for the Trust, dated 1 July 2008. Mr Algie advised that Portofino Group intended to completely refurbish the restaurant “to a whole new level” and recorded an estimated cost of
$1.2 million.
[33] Mr Algie also recorded proposed variations of the lease, and other matters, which amount to pre-contractual negotiations on behalf of Portofino. After reference to Mr Algie’s email, Ms Tait produced correspondence with the solicitor for Portofino Group, although on behalf of Portofino, which records matters under
negotiation and some matters that were agreed. It is convenient to note at this point that none of this evidence in my judgment provides useful evidence of the meaning to be attributed to the provisions of the assignment which are in issue. Although, in the next paragraph, I make some further comment on the evidence of Ms Tait, I do not intend to summarise the content of these communications.
[34] Ms Tait, in respect of matters leading up to execution of the assignment, produced copies of correspondence between her and the solicitor for Portofino, Peter Macky, between 9 July 2008 and 13 August 2016. The communications record proposed variations to the lease which, in large measure, were agreed and were incorporated in the assignment. The point of this evidence for the Trust appears to be that there is no record of a request that the current six year term, which had commenced on 1 April 2007, should be extended from expiry on 31 March 2013 to expiry on 30 March 2017. The absence of evidence of negotiations on this point does not, in my judgment, assist in any way in interpreting the meaning of what is recorded as having been agreed. Moreover, the correspondence produced in evidence ended on 13 August 2016, but the assignment was executed almost two months later. Ms Tait also referred to “the occasional verbal communications I had with Mr Macky and the agent”. That observation adds nothing to what may be gleaned from the correspondence produced.
[35] Ms Tait also recorded her understanding of what had been intended – “nothing more … than the simple addition of a further right of renewal”. Ms Tait’s evidence of her subjective belief is not an aid to interpretation. Ms Tait then said that she “would be very surprised if either of the other lawyers involved thought differently” from her. She then proceeded to record arguments in support of her position and speculated as to the intention of the draftsperson, the solicitor for Jaedon. This evidence is inadmissible and should not have been recorded in the affidavit.
[36] The trustee who was primarily responsible for negotiations leading to the assignment, and in respect of matters that subsequently led to this proceeding, was Geoffrey Bye. Mr Bye said that he had not been asked to agree to extend the current term. That is not evidence of subjective intention on the part of the Trust, but it is
evidence relating to negotiations of a nature essentially the same as Ms Tait’s evidence – evidence of an absence. I have concluded that this evidence does not assist. But, if I am wrong in that regard, I am unable to place weight on the evidence. This is because of what Mr Bye recorded in an email to Mr Kotevski of 12
January 2016, when the parties were negotiating a renewal of the lease which the
Trust considered had come to an end in 2013. Mr Bye said:
You will recall, that when One Red Dog sold to you, we extended the lease at that time to accommodate your request.
[37] It is arguable that this, on the face of it, is confirmation – or an admission – of what Portofino contends. Mr Bye, when questioned about this statement, said, in essence, that it was poorly worded by him, by which I understood him to mean that he intended to refer to the additional right of renewal, recorded as a variation in the assignment, for six years from 2017. It is unnecessary to determine precisely what Mr Bye meant, and I am not questioning his credibility. I have referred to this, which in strict terms amounts to post-contractual conduct, as an illustration of the reason for my general conclusion that a substantial amount of the evidence directed to interpretation, and this includes evidence for Portofino in that regard, is unhelpful.
[38] To put these matters into perspective, and for the avoidance of doubt, I note that there is evidence from Mr Kotevski directly contrary to the evidence of pre- contractual negotiations from Ms Tait and Mr Bye. He said:
Portofino would not have entered into the deed of assignment and expended these large sums in 2008, if it understood that the Trust was able to assert a non-renewal of the lease at any point before 1 April 2017. Portofino also wanted to ensure that it had a long lease to enable it to sell the restaurant business and assign the lease if it wished to do so, or if it received an offer to do so.
[39] Because this also is subjective evidence of intention it too is to be left to one side.
Post-contractual conduct
[40] There was reasonably extensive evidence which could be classified as evidence of post-contractual conduct. This evidence was bound up to an extent with
evidence for both parties relating to alleged breaches of the lease, primarily the Trust’s complaints of persistent defaults by Portofino, but also Portofino’s evidence in response and evidence of what Portofino contended were serious defaults by the Trust.
[41] In respect of the primary question of interpretation of the assignment, and as I indicated in the introduction, it is unnecessary to traverse the evidence of each party in respect of defaults, but the fact that there were these concerns, and particularly concerns strongly expressed by Mr Bye on behalf of the Trust, has some bearing on an assessment of the relevance, and if relevant the weight to be put on, evidence of post-contractual conduct which may bear on interpretation.
[42] The Trust is the party which relies on evidence of post-contractual conduct. This is evidence that Portofino, through Mr Kotevski, over an extended period – between approximately November 2014 until 10 June 2016, when Portofino’s solicitors informed Ms Tait that there was no contractual need for a renewal – negotiated for renewal of the lease. This was a renewal, to be effective from 1 April
2013, in accordance with the provision in the original lease for a third right of renewal of four years from 1 April 2013.
[43] The evidence establishes clearly the fact of negotiations by Portofino with the Trust for a renewal. In addition, there is no evidence from Mr Kotevski, or otherwise on behalf of Portofino, of an explicit assertion to the Trust that a renewal was not required until the letter from Portofino’s solicitor of10 June 2016.
[44] It is also relevant that a deed of renewal was in fact drafted by Ms Tait in December 2015 and was sent to Portofino for execution. On 4 May 2016 Portofino’s solicitors advised Ms Tait that the deed had been signed for Portofino. The deed of renewal was never executed on behalf of the Trust.
[45] This evidence has required careful consideration, but in the end I have concluded that it does not assist on the question of interpretation (or indeed the Trust’s application for rectification which I will consider separately later in this judgment).
[46] The Court is asked by the Trust to draw an inference from Portofino’s conduct, which in large measure was the conduct of Mr Kotevski, in 2013 and following, that the parties to the assignment executed in 2008 did not intend to extend the current term.
[47] I am not satisfied that I can safely draw that inference, even as an aid to interpretation.
[48] Mr Kotevski, as a witness, was somewhat taciturn. But he was a credible witness. He explained why he negotiated for a renewal, and in the end signed the renewal. In my judgment these explanations must be taken into account. They do not amount to subjective evidence of intention when the assignment was entered into, but evidence of the reasons why he acted in a particular way much later.
[49] Mr Kotevski said that he thought a new lease may have been required, when the question of renewal was raised by Mr Bye in about August 2013, because of shareholding changes. I accept that evidence. Mr Balulovski and his wife had ceased to be shareholders and directors. It will be recalled that Mr Balulovski entered into the assignment as one of the guarantors for Portofino along with Mr Kotevski. I am also satisfied that Mr Kotevski, having been told by Mr Bye that a renewal was required, was uncertain about the true legal position. Mr Kotevski, I am satisfied, concluded that the best way forward, and in circumstances where there were the disputes between landlord and tenant about alleged defaults, was to sign a renewal – which the Trust remained willing to enter into until around June 2016 – which would produce the same result as a contention that there was the variation of the current term through to March 2017. And it would mean that the lease was between the people currently involved in the business.
[50] Although Portofino did not positively assert, until 10 June 2016, that a renewal was not required, it also did not at any point expressly acknowledge that it should have earlier informed the Trust of an intention to renew. That is a finding of fact taking account of evidence of unrecorded discussions between Mr Kotevski and Mr Bye, as well as the correspondence. And this is to be contrasted with the email from Mr Bye to Mr Kotevski of 12 January 2016, referred to above at [36].
[51] There are some emails from Mr Kotevski to Mr Bye in which he refers to the lease having expired. Mr Kotevski said that he was speaking of the lease having expired because that is what he was being told. He said that he was only a chef, and had not consulted the lease and the assignment to confirm whether or not the lease had expired (notwithstanding his subjective belief about the original intention). English is not Mr Kotevski’s first language and his facility in written English is not good. This is apparent from his emails which are not always easy to follow.
[52] Mr Kotevski’s reasons for pursuing a renewal of the lease were summarised
in the following paragraph of his original affidavit:
Mr Bye, on behalf of the Trust, suggested that we document changes via a renewal of the Lease. Although I thought that the lease had already been extended until 2017, I did not argue with Mr Bye and agreed to the renewal of lease document, because I definitely wished to obtain a renewal of the lease and did not wish to cause any problems.
[53] I accept that evidence. It perhaps encapsulates at least one of the important reasons why I have concluded that the evidence of the post-contractual conduct of Portofino does not assist in interpretation. The inference proposed by the Trust which I earlier referred to cannot be safely drawn.
[54] My conclusion that the post-contractual conduct in this case is not relevant to the issues to be decided is reinforced by some further considerations which demonstrate that the conduct arose in circumstances quite different from those that existed when the parties negotiated the terms of the assignment. By around August
2013, when Mr Bye first said that the lease had expired, the relationship between the parties had soured, with each side considering that the other had not met its obligations. The perspectives on each side had changed. There is evidence to suggest that each side, although for quite different reasons, was somewhat hedging its bets as to whether the other party was or was not bound to an existing lease. The tone of the ongoing negotiations, about defaults as well as renewal, varied to a reasonable extent from negative to positive. In relation to the Trust, this is seen in correspondence over the period of almost three years from 2013 to the purported cancellation in 2016 in which, on some occasions, the Trust indicated that it had had
enough and on others the Trust was quite willing to enter into the renewal that it considered was required.
Interpretation
[55] The question to be determined is whether, pursuant to the assignment, the parties agreed to extend the current term from an expiry date of 31 March 2013 to an expiry date of 30 March 2017. The words at the heart of this are those that have been highlighted and which I refer to as the critical provision – “EXPIRY DATE OF CURRENT TERM: 30 March 2017”.
[56] The starting point is the words used by the parties construed in the context of the lease and the assignment. As the Supreme Court said in Zurich, if the language at issue, construed in the context of the contract as a whole, has an ordinary and natural meaning, that will be a powerful, albeit not conclusive, indicator of what the parties meant. I am satisfied that the words do have an ordinary and natural meaning, when construed in the context of the contract as a whole, and that is the meaning contended for by Portofino. In my opinion, the words, construed in the context of the contract as a whole, do not allow for any reasonably arguable alternative. I disagree with the Trust that it is apparent that “something has gone wrong with the language” or that Portofino’s interpretation results in parts of the assignment being contradictory.
[57] The critical provision in this case can be construed having regard to the original terms of the lease, recorded above at [12] and [14] and a substantial part of the assignment, recorded above at [17]-[19]. It is not necessary to consider any other provisions of the lease, except to make some preliminary and general observations arising out of the fact that the parties were dealing with a lease, an assignment of it, and an intention, which is not in issue, that there should be some variations of the lease. The parties, in this broader context, were dealing with standard form documentation for a commercial lease. The deed of assignment used the fourth edition of the standard form produced by the Auckland District Law Society (as it was at the time). It is a document used frequently by conveyancing lawyers. There were three different lawyers representing different interests – Ms Tait for the Trust,
Mr Macky for Portofino, and Phillips Fox for Jaedon. In the absence of any evidence to the contrary, and there is none, it is to be assumed that each of the lawyers was competent to advise his or her clients on the documents and themselves understand the meaning of the expressions used. That ability would extend to a ready understanding of the meaning of terms which were defined in the lease and which, as I will explain, have a bearing on the meaning of the critical provision.
[58] The analysis of meaning can probably start at different points, but I consider it is convenient to start with the operative clause 5, recorded above at [17], but which I will reproduce:
THE ASSIGNOR, the Assignee, the Landlord and the Guarantor all acknowledge that the Lease expires on the Expiry Date of Current Term set out in the First Schedule and the rent is the Annual Rent set out in the First Schedule.
(emphasis added)
[59] This plainly is a reference to the critical provision which is in the first schedule. The defined expression Expiry Date of Current Term – defined by the addition of a date – is a defined term for the purposes of the assignment and deliberately used twice – in the operative clause 5 and in the first schedule.
[60] Expiry Date of Current Term does not mean the date beyond which there can be no renewal. This is made sufficiently clear by clause 3 in the fifth schedule. Clause 2 of the fifth schedule makes provision for a further right of renewal of six years from 1 April 2017. Clause 3 follows on from that provision by providing:
That in the event that the Lease is renewed, the Final Expiry Date for the
Lease is 31 March 2023.
(emphasis added)
[61] Clause 3 uses a defined expression from the lease – the words emphasised – Final Expiry Date in the lease. The Final Expiry Date is 31 March 2017 compared with, and perhaps to state the obvious, the new Final Expiry Date recorded in the fifth schedule of the assignment of 31 March 2023.
[62] A preliminary conclusion at this point is that the Final Expiry Date in the lease was varied from 31 March 2017 to 31 March 2023.
[63] It follows, in my opinion, that Expiry Date of Current Term recorded in schedule 1 of the assignment – the critical provision – is not a slightly inaccurate recording of the Final Expiry Date recorded in the lease.
[64] Expiry Date of Current Term is a new defined term appearing in the assignment. It is not a defined term in the lease. Its purpose – the intention of the parties – is to refer to something other than Final Expiry Date.
[65] The conclusion at this point is that the ordinary and natural meaning of Expiry Date of Current Term is that the stipulated date – 30 March 2017 – is the end date of the term of the lease in force at the date the assignment came into effect.
[66] The date for the critical provision is 30 March 2017, not 31 March 2017. In my judgment this is not an error, but an objective indication of an intention to extend the current term of six years by adding the further available term of four years to it.
30 March 2017 appears clearly enough to have been inserted having regard to the precise provision in the lease for the second right of renewal. This is defined as “4 years (less one day)”. That would take the renewal, if exercised, to 30 March 2017. Again, this is to be contrasted with Final Expiry Date in the lease of 31 March 2017. The draftsman, in the critical provision, and through him the parties, are referring to something different from Final Expiry Date in the lease.
[67] Mr Dench submitted for the Trust that the critical provision in the first schedule is, or was intended to be, simply a restatement in the assignment of unaltered provisions contained in the lease, inserted in schedule 1 of the assignment, pursuant to operative clause 1, as part of the definition of what was being assigned. Provisions recorded in the first schedule, preceding the critical provision, include particulars clearly taken directly from the lease – the date of the lease and a record of the two rights of renewal for six years and four years (less one day). Mr Dench submitted that, if the critical provision has the meaning contended for by Portofino, the preceding reference to rights of renewal of six years and four years would be
inconsistent with Portofino’s contention. As I understood the submission, it was that the reference to the rights of renewal of six years and four years would not be there if the parties had intended to extend the current term through to 30 March 2017.
[68] I do not agree. The four defined expressions at the commencement of the first schedule – Premises, Carparks, Date of Lease and Rights of Renewal – are simply matters of record taken from the lease. And they could not have operative effect in relation to rights of renewal because the right of renewal for the six year term, provided in the lease, had already passed – it had been exercised by Jaedon before the assignment was entered into. The next entry in the first schedule refers to Annual Rent. This is not a matter of record taken from the lease; it is a statement of the rent payable at the date of the assignment.
[69] The matters referred to by Mr Dench do not alter the meaning of the critical provision. The critical provision, as with Annual Rent, is a statement of a provision in force at the date of assignment.
[70] The remaining consideration is the fact that the final provision in the first schedule is “Lease Variations: see Fifth Schedule”. In my opinion this does not mean that the critical provision is not intended as a record of a variation of the lease, or that it gives rise to ambiguity. Operative clause 6 in the assignment makes express provision for Lease Variations to be specified in the first schedule. The critical provision is a variation of the lease for the reasons now recorded at some length. It is recorded in the schedule which made express provision for the recording of lease variations. This is a standard form. The parties wished to record further lease variations. It may reasonably be assumed from the structure of the assignment as a whole, and the standard form provisions on the first page of the assignment, that all of the variations could not be recorded in the first schedule. A “Fifth Schedule” was therefore produced. The first page of the assignment refers to four schedules only. The first schedule is referred to in operative clauses 1, 5 and 6, and, as will be seen from those clauses, each of those operative clauses in fact deals with different things, as indicated in part in the discussion of Mr Dench’s submission. Operative clauses 2, 3 and 4 refer to the second, third and fourth schedules. These schedules appear on the same page as the first schedule and occupy the second half of the page.
They are standard form provisions recording the agreement between assignor and assignee, the covenants of the guarantor, and a restraint of trade provision between the assignor and its shareholders and the assignee. There is no reference to a fifth schedule in the standard form operative clauses on the first page. The first reference to it, at the end of the first schedule, is through words added to the standard form.
[71] In my judgment there is no inconsistency in recording, in the first schedule, a variation of the current term by extending that term to 30 March 2017, while also having a new schedule to record other variations. There was no need to record the critical provision as a variation because operative clauses 5 and 6 record an express agreement between, amongst others, Portofino and the Trust, that the “Expiry Date of Current Term” is the date set out in the first schedule and clause 6 expressly provides for variations to be recorded in the first schedule.
[72] It remains to consider whether any of the objective and admissible facts of the circumstances leading to the assignment either support the conclusion I have reached based on the two contractual documents, or require a different interpretation because the background circumstances indicate that the intention of the parties, objectively assessed, was different from the intention derived from the ordinary and natural meaning of the words.
[73] The relevant background circumstances, confined to those recorded in my earlier discussion, do not contain any indication of a contrary meaning. It is probably unnecessary to go beyond that conclusion, but I will nevertheless make some brief observations as to why I consider the relevant background circumstances support the conclusion in the preceding discussion.
[74] What the parties were dealing with in the assignment was, in substance, a new lease for Portofino although, as a matter of law, it was an assignment of the existing lease. Portofino, as the Trust knew, had spent a substantial sum buying the business from Jaedon and was intending to spend a larger sum in a completely new fit-out to establish a new restaurant for a new business. It may be seen as being commercially advantageous for Portofino to secure a longer initial term than the one that it would have had if it had taken the assignment without variation of the length
of the current term. There is some direct evidence which, to an extent, supports that general assessment. The initial term for Jaedon, when it took a lease, for the operation of a restaurant and bar, was 10 years. Without a variation of the current term, the initial term for Portofino would be less than five years. A longer initial terms commits the tenant for a longer period, but it is apparent that there may be commercial advantages in that as well as a degree of security because of the conditions applying if the lessee sought to exercise the right of renewal. The conditions are contained in clause 3.1 of the lease, recorded above at [14].
[75] There is no objective evidence to indicate that an extension of the current term would not make commercial sense for the Trust. Having regard to the provisions of the lease as a whole, and the assignment with an extension of the current term to 2017, it can be taken to indicate material commercial advantage for the Trust. It got a commitment for nine years rather than five, coupled with the guarantees, but with the provisions of the lease for rent increases, which were every two years, and the provisions of the lease providing for termination by the Trust for breach, remaining in place. There does not seem to be any obvious commercial disadvantage to the Trust in agreeing to an extension of the current term.
[76] For all of these reasons I am satisfied that the critical provision, assessed objectively having regard to the relevant provisions of the two documents as a whole and the relevant background, does mean that the current term of the lease was varied from one which would have ended on 31 March 2013 to one which was to end on 30
March 2017. Subject to consideration of the Trust’s application for an order for rectification, Portofino is entitled to appropriate relief.
Rectification
[77] Mr Dench, in his oral submissions, submitted that the appropriate rectification would be amendment of the critical provision to read: either “EXPIRY DATE OF CURRENT TERM: 31 March 2013” (which was stated to be the preferred option); or “FINAL EXPIRY DATE: 30 March 2017”.
[78] Mr Dench cited the decision of this Court in Westland Savings Bank v Hancock as a statement of the requirements for rectification.13 A restatement of the principles by Wylie J in Queen Elizabeth the Second National Trust v Green Growth No 2 Ltd was approved on appeal by the Court of Appeal.14 The statement is as follows:
While there is no need for a concluded binding contract antecedent to the agreement sought to be rectified, a party seeking rectification must show that:
(a) the parties had a common continuing intention in respect of a particular matter and the agreement sought to be rectified;
(b) the common continuing intention was objectively apparent;
(c) the intention continued up to the time of execution of the agreement sought to be rectified; and
(d) by mistake, the agreement did not reflect the common continuing intention.
[79] The burden lies on the Trust as the party seeking rectification. Having regard to the conclusions I have reached on the question of interpretation, it is not established that there was a common continuing intention that was objectively apparent and that was contrary to the natural and ordinary meaning of the words as used in the document.
[80] However, on a question of rectification, unlike interpretation, oral evidence is admissible to seek to prove that the intention of the parties expressed in the contract does not represent their true intention. There is evidence from Mr Bye that it was not the Trust’s intention to extend the current term to 2017. But there is also evidence from Mr Kotevski, which I accept, that that was the intention. I do not need to reject Mr Bye’s evidence. The difficulty for the Trust is that it has not
established that there was a common continuing intention up to the time of execution
13 Westland Savings Bank v Hancock [1987] 2 NZLR 21 (HC) at 29-30.
14 Queen Elizabeth the Second National Trust v Green Growth No 2 Ltd [2014] NZHC 3275, (2014) 15 NZCPR 785 at [107]; approved in Green Growth No 2 Ltd v Queen Elizabeth the
Second National Trust; citing Swainland Buildings Ltd v Freehold Properties [2002] EWCA Civ
560, [2002] 2 EGLR 71; Dundee Farm Ltd v Bambury Holdings Ltd [1978] 1 NZLR 647 (CA); and Westland Savings Bank v Hancock, above n 13. The summary of Gibson J in Swainland Buildings Ltd was adopted by Lord Hoffman in Chartbrook Ltd v Persimmon Holdings Ltd [2009] UKHL 38, [2009] AC 1101 at [48].
of the assignment. This conclusion is sufficient to dismiss the application for rectification. Two further points should nevertheless be made.
[81] The first additional point is that what must be established is a common continuing intention of the parties to the contract. The only evidence that I have heard is evidence from two of the parties, the Trust and Portofino (and here including the Portofino guarantors as a single party with Portofino). Jaedon, and its shareholders, was a further critical party to the contract. And, as earlier recorded, it was in fact Jaedon’s lawyers who drafted the assignment. There is no evidence of the intention of Jaedon at all, other than what may be gleaned from the words of the documents construed in the context and against the relevant background. That brings the matter back to the conclusion I have already reached when dealing with interpretation.
[82] The other point arises from the Trust’s submission that rectification should be effected in one of the two alternative ways noted above: by amending the critical provision either to read “EXPIRY DATE OF CURRENT TERM: 31 March 2013”, which Mr Dench submitted was the preferable form of rectification, or “FINAL EXPIRY DATE: 30 March 2017”. These alternatives mean quite different things, as made clear by the discussion directed to interpretation. The fact that the Trust, as the applicant for rectification, has presented alternatives in this way, and notwithstanding a preference for one of them, is not a sound foundation for a conclusion that the agreement did not reflect a common continuing intention of the parties different from what was recorded. The uncertainty does not arise from interpretation but from the argument for rectification. And the point is given some emphasis in that the second alternative, said by the Trust to represent the true common intention, is inconsistent not only with the Final Expiry Date recorded in the original lease of 31 March 2017, but also with the new final expiry date through variations in the assignment, not in dispute, of 31 March 2023.
[83] For these reasons the Trust has not established that it is entitled to an order for rectification.
Overall conclusion on interpretation
[84] For the reasons set out in the interpretation section, and the conclusions reached in relation to admissible and helpful evidence in the preceding sections, I am satisfied that the critical provision is to be interpreted as contended for by Portofino. The intention of the parties, objectively assessed, was to vary the current term of the lease to extend its end date from 31 March 2013 to 30 March 2017. Given this conclusion, and for reasons outlined in the introduction, the Trust’s purported notice of termination issued on 27 June 2016 on the basis that Portofino was in occupation as a monthly tenant, was invalid.
[85] It is unnecessary, also for reasons noted in the introduction, to consider Portofino’s alternative applications for relief and the Trust’s application for an order for possession.
[86] Portofino is entitled to remain in possession subject, of course, to the provisions of the lease and the assignment as interpreted in this judgment.
[87] There are orders accordingly.
Costs
[88] The usual rule in relation to costs is that they follow the event. Subject to any submissions the Trust may wish to make to the effect that there are special circumstances justifying a different result on costs, there is an order that the Trust pay Portofino’s costs to be assessed on a 2B basis, together with reasonable disbursements.
[89] The Trust is to file a memorandum within one month of the date of delivery of this judgment advising either:
(a) that it does not wish to challenge an order for costs in favour of Portofino on those terms, in which case the indicative order will become final and any issues as to quantum on a 2B basis and in
respect of disbursements are to be referred for determination by the
Registrar in the first instance; or
(b)that the Trust wishes to challenge an order for costs in favour of Portofino on the basis indicated, in which case submissions to that effect are to be filed and served within one month of the date of this judgment and any response for Portofino is to be filed and served
within a further three weeks.
Woodhouse J
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