Precinct Properties Holdings Limited v OMV New Zealand Limited
[2017] NZHC 2926
•28 November 2017
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
I TE KŌTI MATUA O AOTEAROA TE WHANGANUI-Ā-TARA ROHE
CIV-2017-485-476 [2017] NZHC 2926
BETWEEN PRECINCT PROPERTIES HOLDINGS
LIMITED Plaintiff
AND
OMV NEW ZEALAND LIMITED Defendant
Hearing: 6 November 2017 Counsel:
R J Gordon and N J G Smith for the Plaintiff
A M Stevens and E P P Maclaurin for the DefendantJudgment:
28 November 2017
JUDGMENT OF ASSOCIATE JUDGE SMITH
[1] This is an application by the defendant (OMV) for a stay of the proceeding.
[2] The plaintiff (Precinct) has applied for summary judgment on its claim for recovery of rent said to be owing under a lease of certain commercial space on the 9th and 10th floors of Deloitte House, on Brandon Street, in Wellington (the Lease). OMV says that it was prevented from occupying the leased premises (the premises) for a significant period after the Kaikoura earthquake on 14 November 2016, and that the premises became “untenantable” in terms of one of the clauses in the Lease. On 2
February 2017 it gave notice purporting to terminate the Lease, relying on this clause.
PRECINCT PROPERTIES HOLDINGS LIMITED v OMV NEW ZEALAND LIMITED [2017] NZHC 2926 [28
November 2017]
[3] Later, OMV advanced further grounds that were said to justify the cancellation, including alleged misrepresentations by Precinct as to the earthquake rating of the building in which the premises were located.1
[4] OMV says that it is entitled (i) to have its “untenantable” claim, and the validity of its cancellation of the Lease, determined by an arbitrator under a provision in the Lease and (ii) to have Precinct’s claim to recover rent stayed until that has occurred. In accordance with the decision of the Supreme Court in Zurich Australian Insurance v Cognition Education,2 OMV says that its stay application should be heard and determined before Precinct’s claim for the rent.
[5] Precinct says that the purported cancellation of the Lease was invalid, and that OMV remains liable for rent from at least the date on which it could have re-occupied the premises (13 March 2017). It says that the arbitration clause in the Lease does not apply to a claim by the lessor for rent, and that there is accordingly no issue that must be referred to arbitration under the arbitration clause.
[6] I now give judgment on OMV’s stay application.
Background
[7] The Lease commenced in 2009, and was renewed in 2012 and 2015. After the most recent renewal, the Lease was due to expire on 30 November 2020.
[8] The Lease contained the following provisions referring to the payment of rent:
Rent
1.1 THE Tenant shall pay the annual rent by equal monthly payments in advance (or as varied pursuant to any rent review) on the rent payment dates. The first monthly payment (together with rent calculated on a daily basis for any period from the commencement date of the term to the first rent payment date) shall be payable on the first rent payment date. All rent shall be paid
1 There are alleged to have been misrepresentations made by Precinct at the time of the most recent renewal of the Lease. OMV alleges that it was then told that that the building was 100% of NBS (New Building Standard). It says that the building has subsequently given a lower rating as a result of “existing structural issues” that were identified after the earthquake. OMV notes that these representations gave it a right to terminate the Lease under ss 37 and 28 of the Contract and Commercial Law Act 2017 (dealing respectively with misrepresentation and mistake).
2 Zurich Australian Insurance v Cognition Education [2015] 1 NZLR 383 at [52].
without any deductions by direct payment to the Landlord or as the Landlord may direct.
[9] Under the First Schedule to the Lease, rent was payable for the premises monthly, on the first day of each month.
[10] By Deed of Partial Surrender, Variation and Renewal of Lease dated 27
November 2015, OMV partially surrendered the Lease from 31 December 2015. Certain space OMV had occupied on level 8 of Deloitte House no longer formed part of the premises. The Deed set out the rent that would be payable for the remaining space (on levels 9 and 10), saying that payment would “continue to be payable in advance without deduction or setoff in equal calendar monthly instalments …”.
[11] As a result of the Kaikoura earthquake on 14 November 2016, damage was caused to the Deloitte House building. Although there was no damage to the premises, on 17 November the whole building was closed until further notice.
[12] On 2 February 2017, OMV emailed Precinct purporting to give notice terminating the Lease under the following clause in the Lease (cl 26(a)):
26 IF the premises or any portion of the building of which the premises may form part shall be destroyed or so damaged:
(a) as to render the premises untenantable then the term shall at once terminate or
…
[13] On 10 February 2017, Precinct found out that the premises could be reoccupied. OMV was notified of this by Precinct on 13 February. Re-occupation was possible from 13 March. By this time, however, OMV had already committed to a lease of other commercial space in central Wellington.
[14] Precinct has required OMV to pay rent falling due from 13 March 2017. OMV
has refused to pay, contending that the Lease was validly terminated.
Precinct’s summary judgment application and its amended claim
[15] In its statement of claim and application for summary judgment filed on 8 June
2017, Precinct asked only for a declaration that the premises had not been rendered untenantable, and costs. There was no specific claim made for recovery of rent.
[16] On 20 July 2017, Precinct filed an amended statement of claim, in which it added a claim for $258,243.36 for unpaid rent payments allegedly due on 13 March
2017, and on the first days of April, May, June and July 2017. Credit was given for the period of the compulsory closure of the premises prior to 13 March 2017.
[17] On 25 September 2017, I granted leave to Precinct to file the amended statement of claim, and also an amended application for summary judgment, which had been filed on 15 September 2017. The amended application asked for judgment for the unpaid rent (in addition to the existing application for a declaration), and costs on an indemnity basis. I adjourned the hearing to 6 November 2017, and gave directions for the filing of additional affidavits and submissions.
The arbitration clause in the Lease
[18] Clause 44 of the Lease materially provided:
44.1. UNLESS any dispute or difference is resolved by mediation or other agreement, the same shall be submitted to arbitration of one arbitrator who shall conduct the arbitral proceedings in accordance with the Arbitration Act
1996 and any amendment thereof or any other statutory provision relating to arbitration.
…
44.3. THE procedures prescribed in this clause shall not prevent the Landlord from taking proceedings for the recovery of rent or other monies payable hereunder which remains unpaid or from exercising the rights and remedies in the event of such default prescribed in clauses 28 and 29 hereof.
The law applicable to the stay application
[19] Article 8(1) of the First Schedule to the Arbitration Act 1996 provides:
8 Arbitration agreement and substantive claim before court
(1) A court before which proceedings are brought in a matter which is the subject of an arbitration agreement shall, if a party so requests not later than when submitting that party’s first statement on the substance of the dispute, stay those proceedings and refer the parties to arbitration unless it finds that the agreement is null and void, inoperative, or incapable of being performed, or that there is not in fact any dispute between the parties with regard to the matters agreed to be referred.
[20] In the leading case of Zurich Australian Insurance v Cognition Education, the
Supreme Court held that:3
Under art 8(1), a stay must be granted unless the court finds that the arbitration agreement is null and void, inoperative or incapable of being performed or it is immediately demonstrable either that the defendant is not acting bona fide in asserting that there is a dispute or that there is, in reality, no dispute.
Submissions for OMV
[21] Mr Stevens submits that the issue of whether the premises had become untenantable, and whether OMV validly cancelled the Lease, are matters that must be referred to arbitration under cl 44.1 of the Lease. If the Lease has been validly cancelled, there could be no action by the lessor for recovery of rent to which cl 44.3 of the Lease might apply. The issue of the validity of the cancellation must therefore be determined first, and Precinct’s claim stayed while that issue is referred to arbitration.
Submissions for Precinct
[22] Mr Gordon acknowledges that, at least for the purposes of the stay application, OMV should be regarded as having acted bona fide in asserting that there is a dispute. Nor does he suggest that the Court could find that there is, in reality, no dispute. Rather, he submits that, from the beginning, Precinct’s claim has been a claim for the recovery of rent, to which cl 44.1 of the Lease does not apply.4
[23] Mr Gordon submits that, on the proper interpretation of the Lease, every dispute over whether the Lease has been terminated is a matter for the Court and not the arbitrator, so long as the lessor is pursuing recovery of rent or other monies payable
under the Lease.
3 Zurich, above n 2, at [52].
4 Because such claims are excluded from the ambit of cl 44.1 by cl 44.3.
Discussion and conclusions
[24] Mr Gordon relied on the decision of Venning J in Drake City Ltd v Tasman- Jones.5
[25] In Drake City, the guarantors of the lessee (then in liquidation) claimed that they were entitled in equity to set off against the landlord’s claim for rent and outgoings certain unquantified damages claims arising from alleged misrepresentations made relating to the development where the leased premises were located, including the levels of occupancy. They also claimed that the landlord had breached the covenant for quiet enjoyment in the lease. There was no dispute that the rent claimed was the amount payable under the lease.
[26] The lease in Drake City included a no set-off clause that read as follows:6
All rent shall be paid without any deductions or set-off by direct payment to the Landlord or as the Landlord may direct.
[27] Venning J considered that the fact that the guarantors had raised disputes falling within the arbitration clause did not prevent Drake City from taking separate proceedings to recover the outstanding rent and outgoings under the lease. His Honour noted that the parties had agreed that the landlord would be entitled to issue a court claim for recovery of unpaid rent notwithstanding the reference of other disputes under the lease to arbitration. He further noted that the commercial reason for clauses like cl 44.3 was obvious – they were used for the same reason parties to leases include clauses providing that there should be no set-off from the amount payable for rent.
[28] The “no set-off” clause in Drake City applied only to the landlord’s claim for rent; it did not preclude the tenant from asserting a set-off in opposition to a claim by the landlord for outgoings. But Venning J did not consider that should affect the result of the guarantors’ stay application. His Honour simply noted that that would be a “consideration at summary judgment stage.”7 His Honour concluded that the parties’
express agreement to exclude claims for rent under the lease from the ambit of cl 44.1
5 Drake City Ltd v Tasman-Jones [2016] NZHC 899.
6 At [22].
had the consequence that there was no dispute capable of reference to arbitration in relation to Drake City’s claim for the rent and other outgoings.8
[29] Mr Stevens submits that the answer to the “stay or no stay” question is provided by Hi-Tech Investments Ltd v World Aviation Systems (Australia) Pty Ltd.9 In that case, Associate Judge Abbott had to construe a clause that was identical to cl 44 of the Lease.
[30] In Hi-Tech there was a dispute over the amount of rent that was due under the relevant lease. It provided for rent to be reviewed on a regular basis, and on 27
September 2005, in accordance with that process, the landlord sent the tenant a notice specifying an increase in rent. The tenant took the view that the increase was reasonable, and it responded by increasing its monthly payments. On 11 November
2005, the landlord sent a facsimile to the tenant claiming a further increase in rent. The tenant responded disputing the landlord’s right to amend the rent, on the basis that the rent review process had concluded with the tenant’s acceptance of the increase on
27 September. There was a similar incident on 19 March 2006. The landlord then sought to recover the difference in rent between the claimed increase and the increase of 27 September. The tenant applied to stay the proceeding, on the basis that the dispute should be referred to arbitration under the arbitration clause in the lease.
[31] Associate Judge Abbott came to the following conclusion on the meaning of the word “payable” in cl 44.3 of the lease:10
[23] Counsel for [the landlord] endeavoured to persuade me that any issue as to the rent that was payable was merely an element in proving its claim for a debt due. However, taking the facts of the present case, this could mean showing that the notice of 27 September 2005 (which was given and acted upon as part of the rent review mechanism) is not binding. It seems to me that any challenge to the rent review mechanism must go beyond merely recovery of rent that is payable.
[24] For these reasons, I construe clause 44.3 as allowing proceedings for recovery of rent or other monies for which liability has been established under the lease or (if necessary) by the arbitration procedures of clause 44.1.
8 At [43].
9 Hi-Tech Investments Ltd v World Aviation Systems (Australia) Pty Ltd HC Auckland, CIV-2006-
404-3579, 13 October 2006.
10 At [23] and [24].
[32] On the basis of Hi-Tech, Mr Stevens submits that if the Lease has in fact been validly terminated, as OMV claims, OMV will not be liable to pay any rent due under it. In those circumstances Precinct’s claim is not a claim for the recovery of rent “for which liability has been established”, but a claim that the provisions in the Lease under which rent would have been payable are still binding, in response to a claim by the lessee that they are not.
[33] Mr Gordon says that all that is required by cl 44.3 is that the rent would be payable under the Lease if the Lease were in force. He seeks to distinguish Hi-Tech on the basis that it was a dispute as to the quantum of rent payable, and that no such dispute exists in the present case.
[34] I think the commercial purpose of cl 44.3 was that stated by Venning J in Drake City, namely to reflect the “pay now, argue later” intention of a typical “no set-off, no deductions” clause. In leases containing such clauses the landlord’s cashflow is protected by the continued payment of rent while the disputed issue is being arbitrated (or litigated if there is no arbitration clause in the lease).
[35] As Associate Judge Abbott observed in Hi-Tech, it is open to the parties to decide that some matters should be referred to arbitration while others should be resolved by the Court.11 In this case, as in both Drake City and Hi-Tech, the parties agreed that any claim for rent by the landlord could be made by recovery action in court, and need not be referred to arbitration. And I think it is implicit in the decision of Venning J in Drake City that it does not matter that a landlord’s claim to recover rent or outgoings may be disputed by the tenant. In that case, the guarantors’ claims to an equitable set-off against the landlord’s claim for outgoings would not have been precluded by the “no set-off clause”, and would presumably have been within the ambit of the cl 44.1 arbitration clause, but Venning J nevertheless considered that the claim for the outgoings was not a claim that the parties had agreed would be referred to arbitration. It was covered by cl 44.3, and therefore was not within the scope of cl
44.1.
[36] Quite apart from the decision of Venning J in Drake City, I think it must be the case that cl 44.3 can apply regardless of whether the landlord’s claim is disputed by the tenant. Clause 44.3 states that “the procedures prescribed in [cl 44] shall not prevent [a proceeding by the landlord to recover rent or other monies payable under the lease]”, but “the procedures” prescribed in cl 44 will apply only if there is already a “dispute or difference” between the parties.12
[37] Looking at cl 44 more broadly, I think any construction which limited cl 44.3 to situations where there was no bona fide argument for the tenant would in my view unjustifiably water down the intended effect of cl 44.3. As Venning J observed in Drake City, the broad intent of cl 44.3 was to “mirror”, or give practical effect to, the typical “no set-off or deductions” clause, and I think staying the present claim for rent while OMV’s arguments are referred to arbitration would undermine that intention.
[38] Mr Stevens submits that the principal dispute here is a dispute over whether the Lease has been cancelled, and that, as in Hi-Tech, that dispute goes beyond a mere claim for the recovery of rent. As such, it is not a claim in respect of which the tenant’s liability “has been established” (to borrow from the wording of the Associate Judge in Hi-Tech).
[39] It seems to me that Hi-Tech is distinguishable from this case. Associate Judge Abbott was there concerned with a dispute over what rent or other monies were required to be paid under the lease, and there is no such dispute in this case. The issue here is whether OMV has a defence to Precinct’s claim for rent, whether under cl 26(a) of the Lease or because it was entitled to cancel for misrepresentation or mistake. To my mind the expression “rent or other monies payable hereunder” in cl 44.3 was intended to serve only to identify particular kinds of claims that a landlord might bring in Court notwithstanding cl 44.1. It was not intended to address the question of whether the amounts claimed were in fact payable, in the sense that the tenant would have no defence to them.
[40] I think that must be so, because cl 44.3 was intended to apply in circumstances where there was known to be a dispute or difference between parties that had not yet
been resolved by a third party decision-maker (court or arbitrator). In that context, the references in cl 44.3 to the monies remaining unpaid, and to “such default”, must be construed as references to allegations by the landlord, and not as preconditions to the landlord’s entitlement to access the subclause.
[41] On the facts in Hi-Tech I do not think it surprising that the Associate Judge found that the dispute had to be referred to arbitration under cl 44.1. But if and to the extent the learned Associate Judge intended to go further and hold that cl 44.3 was intended to allow only undefended claims by a landlord for rent and outgoings (so that any defence raised by a tenant would have to be referred to arbitration before the landlord could proceed to take recovery action in Court), I would respectfully disagree with him. If there was no dispute at all, the landlord’s claim would not be caught by cl 44.1 anyway, and there would be no need to invoke cl 44.3. And if there was a dispute and the parties went to arbitration, the landlord’s claim for rent would presumably be determined in the arbitral proceeding. If the landlord obtained an arbitration award for the rent there would no longer be any dispute or difference over the tenant’s liability for the rent, and again there would be no need for cl 44.3.
[42] OMV’s contention that the Lease has been validly cancelled might not be caught by the “no deductions or set-off” clause in this case, but that was also the position with the guarantors’ claim to an equitable set-off against the landlord’s claim for outgoings in Drake City, and Venning J allowed the claim for summary judgment
to proceed (including the claim for outgoings). If there is an issue here at all, I think it must be whether, for the purposes of the application of cl 44.3, there is any relevant distinction between a tenant’s claim that it has a set-off for damages which would extinguish the claim for rent (so that no rent is payable), and a tenant’s claim that no rent is payable because the tenant has validly cancelled the lease.
[43] I think it could be difficult in practice to apply a distinction of that sort, where a tenant’s equitable set-off claim might well be accompanied by a claim that the tenant has validly cancelled the lease. I think it unlikely the parties would have intended that the additional factor (claimed cancellation by the tenant) would require the landlord’s claim – which otherwise could have been pursued in court – to be referred to arbitration.
[44] Nor do I think the parties could have intended that some determination should be made (presumably by the landlord) that a claim by the tenant should have primacy over the landlord’s claim for rent, so that the tenant’s claim has to be referred to arbitration before the landlord could proceed under cl 44.3. In many situations the only real matter in dispute is likely to be the tenant’s claim, and requiring the landlord’s claim for rent to be referred to arbitration in that situation would defeat the purpose of cl 44.3.
[45] For the foregoing reasons I accept Mr Gordon’s submission that, as long as the lessor is pursuing recovery of rent or other monies identified in the Lease as being payable by the tenant, the claim may be brought in court. It follows that the application to stay the proceeding must be refused.
[46] For completeness, I mention that I do not think it matters that Precinct’s claim, as originally formulated, sought only a declaration on the issue of whether or not the Lease had been validly terminated. With the amendment made to the statement of claim and the application for summary judgment, the claim is clearly now a claim for rent payable under the Lease. Whether or not the claim as originally formulated was a claim that should have been referred to arbitration under cl 44.1 does not affect that position. Precinct has consistently sought to proceed in this Court; it has never elected to refer the rent claim to arbitration.
Result
[47] OMV’s application for a stay of the proceeding is dismissed.
[48] Precinct’s application for summary judgment remains to be heard at 10.00 am on 4 December 2017.
[49] Ordinarily, Precinct would be entitled to costs on OMV’s unsuccessful stay application. But there may be costs issues arising out of the amendments made by Precinct to its statement of claim and its application for summary judgment. (On OMV’s view, the claim as originally formulated was not a claim for rent or other monies payable under the Lease, and it had to be referred to arbitration under cl 44.1. On Precinct’s view, the claim was in essence always a claim for unpaid rent.) Given
the proximity of the date of hearing for the summary judgment application, I will reserve the question of costs on the stay application for further submissions to be made by counsel at the summary judgment hearing. I will give my decision on costs on the
stay application with my decision on the summary judgment application.
Solicitors:
MinterEllisonRuddWatts for the Plaintiff
Izard Weston, Wellington for the Defendant
Associate Judge Smith
2