Roman Catholic Bishop of the Diocese of Christchurch v RFD Investments Limited (in receivership) (in liquidation)
[2015] NZHC 2647
•28 October 2015
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
CIV-2014-409-560 [2015] NZHC 2647
BETWEEN THE ROMAN CATHOLIC BISHOP OF
THE DIOCESE OF CHRISTCHURCH Plaintiff
AND
RFD INVESTMENTS LIMITED (IN RECEIVERSHIP) (IN LIQUIDATION) Defendant
Hearing: 14 September 2015 Appearances:
SM Dwight and JM McMullen for the Plaintiff
SD Munro and JWC Nicholls for the DefendantJudgment:
28 October 2015
JUDGMENT OF DAVIDSON J
Introduction
[1] The Holy Cross Chapel was situated in Chancery Lane, Christchurch close to Cathedral Square. It was damaged but not destroyed by the Canterbury earthquakes in 2010 and 2011.
[2] The Roman Catholic Bishop of the Diocese of Christchurch was the registered lessee of the unit titles which contained the Chapel, for a term of
999 years. He seeks a declaration that his leasehold interest subsisted until the land and buildings which included the Chapel were compulsorily acquired by the Crown for the new Christchurch Convention Centre.
[3] The defendant company, RFD Investments Limited (In Receivership) (In Liquidation) (“RFD”) owned the building which included the Chapel, and the
stratum estate in freehold of the Bishop’s leasehold interest. The Receivers contend
THE ROMAN CATHOLIC BISHOP OF THE DIOCESE OF CHRISTCHURCH v RFD INVESTMENTS LIMITED (IN RECEIVERSHIP) (IN LIQUIDATION) [2015] NZHC 2647 [28 October 2015]
that the Bishop’s entire interest was limited to a share of the indemnity insurance that was paid out after notice of compulsory acquisition by the Crown meant the building would not be repaired. RFD says that the lease was frustrated by the notice of compulsory acquisition or the insurance payout, so the Bishop had no interest for the Crown to acquire.
The Bishop’s leasehold interest
[4] From 1959 a chapel was situated on land owned by the Bishop in freehold on
Gloucester Street in Christchurch.
[5] In November 1980, the Bishop entered into an agreement with IHL Holdings (“IHL”) under which he would transfer the freehold title into IHL’s name in return for the grant of a leasehold interest in a unit title. A new chapel would be built by IHL in Chancery Lane. The leasehold interest would be for a term of 999 years at a nominal rent (one dollar annually).
[6] In April 1987 the freehold interest was transferred to IHL’s nominees. On
17 August 1988, the Bishop entered into an agreement with the nominees, on the terms described above. The Bishop’s interest was held in “Unit A” on Unit Plan No. 52258 as a stratum estate in leasehold, governed by the Unit Titles Act 1972, under Identifiers CB30K/618 and CB30K/620.
[7] The new Holy Cross Chapel in Chancery Lane took its place in the ecclesiastical life of the central city, with its near neighbour Christchurch Cathedral.
The Canterbury Earthquakes
[8] The Holy Cross Chapel was substantially damaged but not destroyed. After the most destructive of these earthquakes in February 2011 much of central Christchurch was cordoned off, including Chancery Lane.
[9] Until 2013, RFD and its insurers contemplated that the Chapel could be repaired, as part of the RFD building. The premises were insured for replacement value in the names of the lessee and lessor, for their respective interests. The sum
insured was $7,800,000.00. A letter from CBRE (the property managers for RFD) to the Bishop dated 28 February 2012, said that while a timeframe for repair work had not been set, Cequent Projects Ltd had been employed to oversee the process.
[10] RFD by its Receivers, Grant Thornton, commissioned a report on the state of the Chancery Lane premises from Beca Carter Hollings & Ferner Ltd (Beca). That report was published on 23 March 2012. The report regarded the building as “likely to be reasonably repairable”, though this would entail “significant structural or other repair works”.
The Crown’s intention to acquire the land
[11] The prospect of repair was impacted on 14 August 2012, when the Christchurch Central Development Unit (CCDU) notified RFD of the Crown’s intention to acquire the RFD site, including the Holy Cross Chapel. The date of designation was 31 July 2012. The Crown intended the site to form part of the new Christchurch Convention Centre.
[12] The letter of 14 August 2012 recorded:
The Crown’s intention is to acquire the properties in areas that are needed for the anchor projects. The Minister for Canterbury Earthquake Recovery has the power to compulsorily acquire property. However his preference is for the Crown to purchase property on agreed terms. For this reason, the Crown, acting through CERA and the Crown’s Agent (The Property Group Limited) wish to know more about your property.
[13] A series of questions were then put to the property owner.
[14] Another document issued by CCDU was headed “Central City Tenancies Affected by Property Acquisition by the Crown”, which was prepared before the notice given on 12 August. That recorded that the process included advice of the Crown’s intention and “a formal notice of intention to take land will be sent to all affected landowners and anyone with a registered interest in the land in question.”
[15] CCDU then set out a number of options for dealing with properties subject to lease including an agreement with the landlord requiring delivery of vacant possession on settlement, so that the landlord would negotiate with the tenants in
relation to any leasehold interest. A second course was for the Crown to negotiate purchase subject to any existing lease arrangements and to negotiate direct with tenants. A third was for the Crown to compulsorily acquire all interests in a property, including freehold and leasehold.
[16] After the notice of intention to acquire was given in August 2012, correspondence demonstrates that repair was still contemplated and valuations were prepared before formal “Notice of Intention to Take Land for the Implementation of the Christchurch Central Recovery Plan in Canterbury District” was given to the Bishop and RFD, dated 3 December 2012, and signed by Mr Isaacs as Director of CCDU for the Minister for Canterbury Earthquake Recovery.
[17] The Notice records:
The Minister for Canterbury Earthquake Recovery proposes to take under the Canterbury Earthquake Recovery Act 2011 your interest in the land described in the Schedule of [sic] this notice.
[18] The Schedule to the Notice given to the Bishop referred to the “Lessee as contained in lease 772090.1” and explains the reasons for taking the land. It advised:
5.This notice relates to the taking of your interest in the land and not to your right to compensation. Under the Canterbury Earthquake Recovery Act 2011, you are entitled to compensation if your interest in the land is taken. You have the opportunity to make representations as to the nature of the claim for compensation and the amount of compensation payable.
[19] An accompanying letter confirmed the Crown’s preference to negotiate an Agreement for Sale and Purchase, and service of the Notice did not preclude negotiation. That letter also said that the underlying anchor project:
… for which your land has been designated has a timeframe which necessitates the acquisition of that land reasonably soon. Accordingly, if the Crown is unable to conclude a negotiated agreement with you, it will need to consider compulsorily acquiring your land.
[20] So service of the Notice was the first step in the process along with
publication of the Minister’s intent in The Gazette and The Press. The property
would not be compulsorily acquired until the Governor-General by proclamation declared that the land was taken in the name of the Crown.
The Receivers’ response to the Crown’s notices
[21] Faced with the December 2012 notice, RFD’s Receivers gave up pursuing the option to repair the building. This would have insurance and other implications for RFD and the Bishop.
[22] On 2 May 2013, lawyers for the Receivers wrote to the Bishop’s lawyers. They suggested that Clause 25(iii) of the Memorandum of Lease governed the parties’ relationship.1 That clause provided:
That if the Lessor shall be unable to obtain the necessary consents and permits referred to in sub-clause (i) of this Clause 25 and shall be unable to repair and reinstate as aforesaid, then and in such a case the Lessor shall pay to the Lessee a just and equitable part of the insurance moneys which have been received by the Lessor such part to be based on the proportion that the floor area of the demised premises bear to the rentable floor area of the whole building.
[23] The Receivers’ lawyers took this clause to embody the full extent of the Bishop’s leasehold interest, given the Crown’s intended acquisition. The only “compensation” which the Bishop would receive for his leasehold interest was limited to a proportion of the insurance moneys RFD received for the building itself, based on indemnity value. The Bishop was entitled to approximately 14% of the insurance payout, proportional to the Chapel’s size relative to the whole building.
The Receivers’ lawyers put it squarely:2
…there is no obligation on the Lessor to compensate the Diocese any further. Had it been intended that the Diocese, as tenant, had been entitled to further compensation over and above the insurance moneys by virtue of its registered interest in the land, then this would have been provided for in the lease.
(emphasis added)
[24] The purportedly terminal blow to the Bishop having any further interest came in this short statement:3
Further, our view is that the Lease is arguably no longer on foot by virtue of the damage caused, the provisions of the CCDU Blue Print, and the Lessor’s inability to rebuild or reinstate.
(emphasis added)
[25] While the word “arguably” suggests a tentative view, the colloquial reference to the lease being “no longer on foot” became the central issue at trial. RFD’s position is predicated primarily on the proposition that the lease was frustrated and the Bishop had no property interest to compensate.
[26] The shadow of a second argument was raised at trial as reflected in the passage of the letter from the Receivers’ lawyer referred to above.4 That second argument is that the lease implicitly provides that the Bishop’s interest came to an end with the insurance payout, as there was no reference to any further compensation being paid to the Bishop in these circumstances. Counsel for the Bishop, Ms Dwight, submits the lease here provides the answer, so the parties are diametrically opposed
as to whether there is room for the frustration to operate.
[27] The closing submissions for RFD fell largely on the lease having been frustrated. The doctrine of frustration only operates where the contract makes no provision for what should happen in the circumstances which have arisen.
[28] If RFD is wrong, either because the lease by its terms subsisted, or has not been frustrated, then the Bishop’s leasehold interest subsisted until the property was acquired by the Crown and he is entitled to compensation.
[29] RFD has paid the Bishop $193,078.00, some 14% of the $1,550,964.17 paid by Vero Insurance to RFD as the indemnity value of the entire RFD premises including Unit A. The insurance proceeds do not purport to account separately for the Bishop’s leasehold interest which has been valued for the Bishop (but not determined) as in excess of $950,000.00. The Bishop called evidence of value to
assist his case that he held a valuable property interest which was not exhaustively satisfied by a share of the indemnity insurance payment. The Bishop seeks the difference in value between what he has so far received from the insurance payment and the value of his interest, however that may be subsequently valued.
[30] The Crown has made a payment of $9,041,000.00 to RFD pursuant to an agreement for sale and purchase of the premises, including Unit A. That payment was based on the “as repaired” value of the premises less the insurance money received by RFD from Vero. The Bishop points out that RFD received the full “as repaired” value of Unit A, while the Bishop is said by RFD to be satisfied at law by a share of an indemnity insurance payout. If the Bishop is right, he had a compensatable interest at the time of the Crown’s acquisition, and is entitled to a portion of the $9,041,000.00.
[31] Put another way, if the Bishop is right, the Crown’s acquisition of his leasehold interest is still to be compensated. While Mr Munro for RFD says this case is premature and the compensation claims by RFD and the Bishop should be addressed first, the Crown cannot resolve these separate claims without the Court’s judgment. The Crown does not know which parties it is required to compensate.
The nature and extent of the Bishop’s interest, in the context of this case
[32] The outcome turns on whether the Bishop’s leasehold interest subsisted or was terminated under the lease, or was otherwise frustrated before the Crown acquired the premises. This turns on analysis of the Bishop’s interest and the events which occurred.
[33] It was common ground at trial that frustration can only operate where the relevant contract is silent about the position of the parties in the circumstances that occurred.5 The Bishop says that Clause 25 does not address his property interest at all, as it made only limited provision for the application of insurance moneys in the
circumstances which occurred. RFD pleaded its case and argued much of it on the
5 See generally Planet Kids Ltd v Auckland City Council [2013] NZSC 147, [2014] 1 NZLR 149; Ocean Tramp Tankers Corporation v V/O Sovfracht (The Eugenia) [1964] 2 QB 226, in which Lord Denning MR stated the canonical position.
basis of frustration, but to get to that point the lease must be silent as to what the parties should be taken to have intended in these circumstances.
[34] The titles record the stratum estate in freehold owned by RFD. The leasehold interest was created by a Memorandum of Lease, dated 17 August 1988. It conferred a stratum estate in leasehold in Unit A of the Unit Plan. Leases of unit titles were then governed by the Unit Titles Act 1972. This Act was repealed by the Unit Titles Act 2010.6 For present purposes the 2010 Act largely mirrors the 1972 Act. Unit title developments under the 1972 Act became unit title developments under the
2010 Act.7
[35] Section 18 of the 2010 Act authorises the creation of stratum estates when a unit plan is deposited:
Stratum estate created in unit
The deposit of a unit plan creates in each principal unit and each accessory unit a stratum estate in freehold or a stratum estate in leasehold or licence, as the case may be, that comprises—
(a) the fee simple estate or, as the case may be, the estate as lessee or licensee in the unit determinable in accordance with section 74 or subpart 2 of Part 4; and
(b) the beneficial interest in the fee simple estate or, as the case may be, the estate as lessee or licensee in the common property of the unit title development to which the owner of the unit is entitled under section 54(2); and
(c) the undivided share in the fee simple estate or, as the case may be, the estate as lessee or licensee in all the units to which the owner of the unit is contingently entitled under subpart 2 of Part 4.
(emphasis added)
[36] The substance of this section is identical to s 4(2) of the 1972 Act. Stratum estates include a beneficial interest in the common property to which their owner is entitled under s 54(2). Section 54 reads:
Ownership of common property
(1) The common property is owned by the body corporate.
6 Unit Titles Act 2010, s 218.
7 Section 219(2).
(2) The owners of all the units are beneficially entitled to the common property as tenants in common in shares proportional to the ownership interest (or proposed ownership interest) in respect of their respective units.
(3) Nothing in subsection (2) affects the interests among themselves of the owners of an individual unit.
[37] Through the body corporate the unit title owners are beneficially entitled to the common property as tenants in common. Where their interests are leased, s 18(b) operates to give the lessee that beneficial interest in the common property which s 4 defines:
common property means—
(a) all the land and associated fixtures that are part of the unit title development but are not contained in a principal unit, accessory unit, or future development unit; and
(b) in the case of a subsidiary unit title development, means that part of the principal unit subdivided to create the subsidiary unit title development that is not contained in a principal unit, accessory unit, or future development unit
[38] Common property was defined in s 3(1)(b) of the 1972 Act as “so much of the land as is not comprised in any unit”. Section 4 of the 2010 Act seems to be a more elaborate restatement of that provision.
[39] The fate of RFD’s contention that the Bishop’s lease was frustrated because the Chapel would not be repaired or rebuilt largely depends on the true nature and extent of the leasehold interest against which the allegedly frustrating events should be measured. If RFD is correct and the interest lay only within the physical confines of the Chapel, then there is superficial attraction in the argument that the lease terminated when the Chapel was damaged and would not be repaired or rebuilt. It would be more difficult to argue that the lease subsisted where there was only a right of occupation of the Chapel and no more extensive property interest.
[40] However, the leasehold interest extends beyond a simple right of occupation under, for example, a five year lease of commercial promises. That is a right to occupy, which may have value, but it is not an interest equivalent to that of the Bishop. His interest included the common property of the premises, not just the
physical Chapel. That interpretation is bolstered by authority. The Court of Appeal considered the concept of common property in Disher v Farnworth, a case under the
1972 Act.8 McKay J (giving judgment for the Court) stated the principle that
common property included the airspace above the property. The airspace was not part of any of the constituent units in the development.9 Since the 2010 Act adopts the same essential definition of common property as the 1972 Act (albeit in more words), Disher is good law. Just as an estate includes the airspace above the relevant land, it must extend into the ground beneath.10 The substratum is therefore common property within the meaning of s 54(2) of the 2010 Act and is owned by the unit title holders as tenants in common, proportionate to their respective shares in the development. As lessee of Unit A, the Bishop had a beneficial interest in the substratum as part of his leasehold stratum estate, in proportion to his interest in the whole premises. The Bishop’s interest did not under this lease include the airspace.
Construction of the Memorandum of Lease
[41] The leasehold contract defines the Bishop’s property interest. The doctrine of frustration only has room in which to operate if the lease is silent as to what the parties intended in the circumstances which applied.
[42] The Bishop argues that Clause 25 of itself is silent about subsistence of the lease, so the status quo should be taken to continue. RFD argues that in the absence of express wording to indicate that the lease is to subsist, then it must terminate. The clause reads:
(i) That in case the demised premises shall be damaged or destroyed by fire, earthquake, fire occasioned by an earthquake or other insurable cause howsoever arising then and in such case the lessor subject to the proviso following and to the obtaining of all necessary permits and consents shall forthwith with all reasonable speed repair and reinstate such damage or destruction but the lessor shall not be bound
8 Disher v Farnworth [1993] NZLR 390 (CA).
9 At 398.
10 The classical position is expressed in the maxim ‘Cuius est Solum, Ejus est Usque ad Caelum et Ad Inferos’. The maxim was referred to by Griffiths J as “a colourful phrase often upon the lips of lawyers since it was first coined by Accursius in Bologna in the 13th Century”: Bernstein of Leigh (Baron) v Skyviews & General Ltd [1978] QB 479 at 485. For authority of a different kind see Mitchell v Mosley [1914] 1 Ch 438 at 450; and see Bocardo SA v Star Energy UK Onshore Ltd [2011] 1 AC 380 at 398-399, [2010] UKSC 35 at [26]-[27], per Lord Hope DPSC.
to expend in any such reinstatement and/or repairs more than the amount of any insurance moneys which have been received by the lessor…Provided always that in effecting such repair or reinstatement the lessor may with the consent of the lessee alter the design of the demised premises and if the moneys received in respect of such insurance shall thereupon be insufficient to effect such repairs or reinstatement the lessor may if it thinks fit make good the deficiency and in that event the lessee shall upon demand forthwith re-imburse the lessor for the amount of that deficiency.
…
(iii) That if the lessor shall be unable to obtain the necessary consents and permits referred to in sub-clause (i) of this Clause 25 and shall be unable to repair and reinstate as aforesaid, then and in such case the lessor shall pay to the lessee a just and equitable part of the insurance moneys which have been received by the lessor such part to be based on the proportion that the floor area of the demised premises bears to the rentable floor area of the whole building.
[43] The necessary consents (referred to in Clause 25) were not obtained by RFD, nor were they sought. RFD led evidence to establish that had it applied for consent(s), they would have been refused. Mr Warwick Isaacs, a former director of CCDU, was called as a witness. Mr Isaacs was empowered to exercise the power of the Minister for the Canterbury Earthquake Recovery under s 176(1)(b) of the Resource Management Act 1991 (RMA). In this capacity, he was empowered to determine consent applications for work to be carried out on land subject to a
designation. An appeal lay against any decision to refuse consent to carry out work.11
[44] Mr Isaacs said that any application for consent to repair the Chancery Lane premises would have been refused, on the grounds that any earthquake-related repairs would have hindered the public work which was to follow. He gave various reasons for his counterfactual refusal:
a) Repairs would have increased the value of the Holy Cross Chapel property, thereby making the cost of acquisition (being a payment of compensation in this case) more expensive for the Crown;
b) Repairs may have made demolition of the building more complex and costly for the Crown;
11 Resource Management Act 1991, s 179.
c) Repairs would likely be permanent in nature and would have been inconsistent with the designation of the Holy Cross Chapel property under the District Plan;
d) The Holy Cross Chapel is earmarked for demolition and the Convention Centre Precinct will be built directly over the site. Works to repair the building would have potentially delayed commencement of construction of the Convention Centre Precinct which is subject to very strict timeframes.
Overall, the purpose of the Resource Management Act is to promote sustainable management of natural and physical resources. Repairing a building which was ear-marked to be demolished for a new use would not have supported that purpose, in particular it would not have been an efficient use of natural resources.
[45] Mr Isaac’s reference to the ‘District Plan’ is to the Christchurch City Council District Plan. That Plan had to be amended after promulgation of the Christchurch Central Recovery Plan (the Recovery Plan) on 31 July 2012. The Recovery Plan was a statutory document drafted by the Minister for Canterbury Earthquake Recovery
under the Canterbury Earthquake Recovery Act 2011 (CERA).12 The Recovery Plan
amended the District Plan to include the designations of land identified as required for proposed public projects.13 One such designation included Chancery Lane, which was to be subsumed within the Convention Centre Precinct.
[46] Mr Isaacs’ evidence related to the likelihood of RFD obtaining consent after
31 July 2012 (the date of designation). It seems logical that consent would have been refused. The reasons provided by Mr Isaacs are plausible on their face, although they were untested. Despite that, the Bishop argued that consent would have been granted, even after designation. While the Bishop correctly pointed out that a designation of premises is not necessarily a permanent state of affairs, it seems very unlikely that repair work would have been permitted on the Chapel, although refusal of consent was challengeable. Ms Dwight was right to refer the Court to authority for the proposition that Parliament cannot have intended that no physical work can be carried out on designated premises, given that such status might subsequently be
altered.14 That is true as a general proposition, but it does not advance matters here,
as whether consent would have been granted requires a case-specific study. Chancery
12 Canterbury Earthquake Recovery Act 2011, s 16.
13 Section 26.
14 Rotorua Regional Airport v Fischer [2010] NZRMA 105 and Resource Management Act 1991, ss 181 and 182.
Lane’s designation would not have been a blanket reason to refuse consent, but the coupling of designation with the other factors mentioned by Mr Isaacs means that consent was unlikely.
[47] I must first consider whether the lease made provision for what should happen in the circumstances of designation followed by the formal notice of intention to acquire and the indemnity insurance payout. RFD argued that the Bishop’s entitlement to a ‘just and equitable portion of the insurance money” in Clause 25(iii) limited his interest to a part of the insurance money that RFD received from Vero, calculated by the Chapel’s floor size relative to that of the whole building. Once that money was paid to the Bishop, RFD argued that termination was impliedly effected by Clause 25(iii) because it did not expressly state that the lease would subsist. RFD made a fleeting reference to the parties’ likely intentions at the time of contract, saying that they cannot have intended that the leasehold interest would subsist in the absence of express wording to that effect.
[48] Mr Munro sought to buttress RFD’s position by the submission that since an inability to obtain the necessary consents and permits was expressly contemplated by the lease, then such was a foreseeable event. Thus, in laying down a regime for what was to occur, he submitted the leasehold contract should be taken to be the regulator of the parties’ relationship, and the leasehold interest ended when that regime ran its course.
[49] Ms Dwight’s riposte was that a contract for a perpetual lease at a nominal rental given in exchange for transfer of a freehold title would likely include express provision for termination, if that was the common intention of the parties. It would be of potentially profound effect. Ms Dwight put the hypothetical question that if Chancery Lane was not within the red zone cordon and had continued to be used, although consents were not granted to repair the premises, could RFD have still tenably argued that the lease thereby terminated? The answer Ms Dwight advances is, of course, ‘no’.
[50] Mr Munro’s secondary argument that the common intention of the parties was that the lease terminated does not, in my view, reach its intended destination. To
rely on the absence of express provision that the lease subsists for the argument that it terminates is to advance termination as the default position. This cannot be correct as a general proposition. However, Mr Munro’s submissions reflect a narrower argument that the particular context suggested that the contract’s ‘silence’ implies termination. The reservation I have with this is reflected in his fully stated proposition that this perpetual lease for a nominal rent, given as quid pro quo for transfer of the freehold interest, terminates by implication. Mr Munro says the owner of this perpetual lease, the representative of a Church with a lineage back to St Peter, would not expect express contractual provision that the interest terminated. That lineage and the length and value of this leasehold interest to the Bishop, let alone third parties, suggest the Bishop would take a rather longer view of his property interests.
[51] It was an essential premise of Mr Munro’s argument that the principal purpose of the lease was that the Bishop would use the Chapel as a place for worship. Since the Chapel had been damaged and would not be repaired or rebuilt, that purpose had been defeated, and with it the lease. The parties could not have intended that the lease would subsist beyond the ability to use it for that purpose, so Mr Munro submitted. I do not agree. First, while the contemplated purpose of the lease was for a Chapel, it is incorrect to suggest that no other purpose was expressly contemplated. The leasehold use could change as provided by Clause 10, which reads:
… the purposes for which the demised premises are used may be changed from time to time by the Lessee if such change does not conflict with any business then being conducted in the remainder of the building.
[52] It does not follow that the parties must have intended that an inability to use the Chapel for that purpose of itself extinguished the leasehold interest. The leasehold interest allowed uses, other than ecclesiastical, over 999 years. The possibility of such is not fanciful.
[53] Further, and of more significance, the leasehold interest did not merely lie in the physical Chapel; it included a beneficial interest in the common property. Therefore, even if the Chapel had been totally destroyed, the land would have existed, to which the Bishop’s lease was capable of attaching. Even if the necessary
consents were not forthcoming and reinstatement of the Chapel was impossible, there would still have been property to which the Bishop’s lease could attach. If his interest subsisted in circumstances of the Chapel’s total destruction, then it must have subsisted here. It is entirely reasonable to impute to the parties the intention that this perpetual lease was not to terminate simply because one of its contemplated purposes was negated, particularly when a property interest would otherwise subsist for compensation. The property interest would be of value, demonstrated by the methodology used to assess compensation on an “as repaired” basis, reflected in the large sum already paid to RFD.
[54] Thus I reject the suggestion that the parties impliedly intended that the leasehold interest would terminate in the circumstances which engaged Clause 25(iii). The contract should not be taken as having tacitly concluded on the common understanding that the inability to obtain consent for repair work on the Chapel would terminate the lease. Rather, it is entirely logical and commercial to interpret Clause 25(iii) as simply providing the method by which the insurance money was to be allocated when indemnity cover was all that was available.
[55] Contrary to the submission for RFD, the lack of specific provision for termination indicates that the intention of the parties was for the Bishop’s leasehold interest to continue in the circumstances which applied. Reasonable people should not be taken to expect one of them to walk away from a contract for a valuable perpetual lease simply because a consent application is or would be refused and indemnity insurance paid. Reasonable people would not expect that an event which simultaneously signals the end of occupation of both the freeholder and the leaseholder should be visited in its commercial effect entirely on the leaseholder, to the benefit of the freeholder.
[56] I regard this interpretation of the contract as resting easily with the wording of Clause 25. The Bishop is entitled to a portion of the insurance money based on the Chapel’s size and reflects his interest in the physical Chapel and not his entire leasehold interest. That calculation says nothing of the value of the leasehold interest, whose value did not solely consist in the value of the Chapel, but was an interest in perpetuity at a nominal rent. It would be more than a stretch to construe
this clause as providing the method of compensation for the Bishop’s entire interest. There are no good grounds for conflating the physical Chapel with the leasehold interest, when their values and characteristics are different.
[57] I conclude that the lease should be interpreted as subsisting after the indemnity insurance payment, the acceptance of which was based on the fact of notified compulsory acquisition. This conclusion negates the doctrine of frustration having any application but if my interpretation of the lease is wrong and the lease is silent in these circumstances then I must address the argument that the lease was frustrated.
Frustration
The doctrine generally
[58] If the lease is “silent” as to the rights and obligations of the parties in these circumstances, RFD argues that the leasehold contract was frustrated. Mr Munro directed most of his submissions to the application of this doctrine.
[59] The frustrating events are said to be (a) the inability to obtain the necessary permits and consents to repair or reinstate the Chapel, and/or (b) the insufficiency of funds that RFD recovered from the insurance company to repair the Chapel.
[60] The doctrine of frustration was discussed by the Supreme Court in Planet Kids Ltd v Auckland City Council.15 The lead judgment, given by Glazebrook J, canvassed several of the theories which purport to identify the basis for the doctrine.
[61] The question is whether on the “true construction” of the contract it is “wide enough to apply to the new situation: if it is not, then it is at an end”.16 Whether a contract is sufficiently wide to govern the particular circumstances is gleaned from the Court’s interpretation of that contract. I have concluded that it is but if wrong in
that regard, one suggested method is to ask whether the reasonable person might
15 Planet Kids Ltd v Auckland City Council, above n 2.
16 Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696 (HL) per Lord Reid, at
720-1.
think the contract would be fundamentally different in the new circumstances.17
Where the contract makes no provision for the supervening event and where that event renders performance of the contractual obligations fundamentally different from those the parties had contracted for, then the contract may be frustrated. The reasonable person is hypothetical and represents the Court’s personification of justice, so in the end the determination about whether the circumstances have altered sufficiently to amount to frustration is a question for the Court’s judgment.18
[62] The Supreme Court provides guidance about when a finding of frustration might be made, by endorsing the approach of Rix LJ in The Sea Angel.19 The relevant factors are:20
(a) the terms of the contract; (b) its matrix or context;
(c) the parties’ knowledge, expectations, assumptions and contemplations, in particular as to risk, as at the time of the contract, at least to the extent that these can be ascribed mutually and objectively;
(d) the nature of the supervening event;
(e) the parties’ reasonable and objectively ascertainable calculations as
to the possibilities of future performance in the new circumstances.
[63] This has been described as the ‘multi-factorial’ approach.21 The listed criteria are still not dispositive of the determination, as the Court is empowered to exercise a residual judgment as to whether a proposed application of the doctrine accords with the demands of justice.22 The doctrine is flexible.23 I will return to the exercise of
this residual discretion later.
17 At 728 per Lord Radcliffe.
18 At 728, Lord Radcliffe describes this hypothetical creature as “the anthropomorphic conception of justice”.
19 Edwinton Commercial Corp v Tsavliris Russ (Worldwide Salvage and Towage) Ltd (The Sea
Angel) [2007] EWCA Civ 547, [2007] 2 Lloyd’s Rep 517.
20 Planet Kids, above n 2, at [60], citing The Sea Angel, above n 20, at [111].
21 At [8] per Elias CJ.
22 The Sea Angel, above n 20, at [112]-[113].
23 Planet Kids, above n 2, at [8] per Elias CJ.
Frustration of leases
[64] It is settled law that leasehold interests are susceptible to frustration.24 While leases endow their owner with an estate in land, contractual principles apply. In principle therefore, the doctrine of frustration applies to leases just as it does to other contracts. In practice however, the application of the doctrine to leases reflects the nature of the particular leasehold interest.
[65] The National Carriers case was a watershed moment for the application of frustration to leases. Until then, English law had refused to hold that a lease could be frustrated. One of the reasons was that leases were created by conveyance, granted an estate in land and so could not be impugned by operation of contractual doctrines.25 Although the House of Lords in National Carriers held that nothing in principle precluded the application of frustration to leases, various statements were made to the effect that leases would “hardly ever” be frustrated.26 The Lord
Chancellor held:27
No doubt the circumstances in which the doctrine can apply to leases are, to quote Viscount Simon L.C. in the Cricklewood case, at p. 231, "exceedingly rare." Lord Wright appears to have thought the same, whilst adhering to the view that there are cases in which frustration can apply, at p. 241. But, as he said in the same passage: "... the doctrine of frustration is modern and flexible and is not subject to being constricted by an arbitrary formula." To this school of thought I respectfully adhere. Like Lord Wright, I am struck by the fact that there appears to be no reported English case where a lease has ever been held to have been frustrated. I hope this fact will act as a suitable deterrent to the litigious, eager to make legal history by being first in this field.
[66] Consonant with those remarks was the speech of Lord Wilberforce, who said:28
In the second place, if the argument is to have any reality, it must be possible to say that frustration of leases cannot occur because in any event the tenant will have that which he bargained for, namely, the leasehold estate. Certainly this may be so in many cases - let us say most cases… But there may also be cases where this is not so. A man may desire possession and use of land or
24 National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675 (HL).
25 Cricklewood Property and Investment Trusts Ltd v Leighton’s Investment Trust Ltd [1945] AC
221, at 233.
26 National Carriers, above n 25, at 692 per Lord Hailsham of St Marylebone LC.
27 At 692.
28 At 694-5.
buildings for, and only for, some purpose in view and mutually contemplated. Why is it an answer, when he claims that this purpose is "frustrated," to say that he has an estate if that estate is unusable and unsaleable. In such a case the lease, or the conferring of an estate, is a subsidiary means to an end, not an aim or end of itself.
[67] His Lordship observed that in many cases the leasehold estate will simply be the legal instrument used to facilitate a particular purpose. In such cases, the wholesale undermining of that purpose by supervening events may frustrate the lease. It would be no answer to cite the existence of the estate in land as a reason for the continuation of the contract, where it was only granted to achieve a certain purpose. If the existence of an estate in land could always prevent frustration, then leases could never be frustrated.
[68] The ascertainment of the purpose of the leasehold contract is therefore important before considering the context in which frustration is considered. The narrower the commonly contemplated purpose at the time of contracting, the greater the prospect of the lease’s frustration.
[69] It is however relevant that an estate in land is created. Such an interest should not be easily extinguished. The need for certainty of property rights is a proper reason for interpreting the application of the doctrine of frustration conservatively. Long leases will be less easily frustrated than short leases. Frustration of a long lease constitutes a graver curtailment of property rights than frustration of a short lease, which will often be granted for a relatively fleeting purpose, and the undermining of which would be less disruptive of property rights. Even where there is a temporary impossibility of performance, the contract will not necessarily end. The length of the event rendering performance impossible or radically different will be highly
relevant.29 A short impediment or an impediment the extent of which is uncertain
may not terminate a long lease. After all, if the impeding event lasts for a relatively
short part of the lease’s duration, the parties’ obligations cannot be said to be
radically different if the event ends, and most of the lease term remains.
29 See GH Treitel Frustration and Force Majeure (3rd ed, Sweet and Maxwell, London, 2014) at
[5-036], [5-048], [5-050] – [5-051].
[70] Ultimately, whether the lease has been frustrated is a contextual judgment. The relationship of the allegedly frustrating event to the purport of the lease and the extent of the impediment it provides to performance will help determine the outcome.
RFD’s Case
[71] RFD says that “a supervening event has occurred” which has so significantly changed the nature of the lease that the parties ought to be discharged from further performance under the doctrine of frustration. That is to say that RFD should no longer have to perform its obligations to the Bishop, even though RFD’s own interest was coming to an end by one of the events said to frustrate the lease.
[72] RFD considers that the lease was frustrated prior to the point of compulsory acquisition, relying on one of two events:
(1)The notice of intention to acquire Chancery Lane, including the Chapel under the Canterbury Earthquake Recovery Act
2011, given on 3 December 2012, which it says meant the necessary permits and consents to repair the Chapel were unobtainable; or
(2)The settlement with RFD’s insurer, AAI Limited trading as Vero Insurance (Australia) on 15 October 2014 “which meant RFD had insufficient funds to make good the earthquake damage to the Chapel and no supplementary funds to make up the deficiency”.
[73] RFD proposed the following tests for determining whether the lease was frustrated:
(a) Did the event render performance of the lease impossible or radically different?
RFD says the issuing of the intention to take land under CERA which led to the inability to obtain permits and consents required to repair the Chapel, rendered performance of the lease impossible or radically different. The Bishop had the right to quiet enjoyment of the Chapel, while RFD had to maintain the walls and roof in good order and condition and repair all damage with reasonable speed. Without required permits and consents to repair the Chapel, performance under those clauses of the lease became impossible. Mr Munro said that by
13 November 2012 it had become sufficiently clear that it was unlikely that repairs could be effected and that RFD ended the engagement of Cequent Projects, and with that, any plan to reinstate or repair. By that time, it was clear that the Christchurch Convention Centre would go ahead and there would be no consent given to repair or rebuild.
(b) Did the event defeat the main purpose of the lease?
The main purpose of the lease was to provide the Bishop with quiet enjoyment of a chapel within Chancery Lane. In its damaged and unusable state and without the ability to repair, the main purpose of the lease was totally defeated. Mr Munro referred to the lease being registered over Unit A, Deposited Plan 52258 contained within Certificates of Title CB30K/618 and CB30K/620. He submits that the Bishop’s position under the lease included the right of RFD to demolish and rebuild Chancery Lane under Clause 28, and the Bishop was to be offered equivalent ground floor premises in a new building and if he did not accept those the lease would terminate. Here, Mr Munro submits that “if the main purpose of the lease was an interest in land, it would not have been logical for the parties to insert a clause allowing the lease to terminate simply because the Bishop did not elect to occupy premises in a new building on the same site”. Hence, it is submitted the parties placed primary emphasis on the lease of the Chapel itself rather than the land.
(c) Was it a fundamental assumption of the parties that the lease would subsist despite the happening of the event?
The lease contemplated that required permits and consents to repair or rebuild the Chapel may not be available as Clause 25(iii) required that in those circumstances the Bishop receive an equitable proportion of the insurance moneys. The lease does not expressly deal with the issue of whether despite that obligation to pay the Bishop, the lease subsisted. RFD “considers that there must have been an assumption the lease would not subsist”. This is because RFD paid the Bishop the money it might otherwise have used to repair or rebuild the Chapel. In those circumstances, as the “main purpose” of the lease was to provide the Bishop with quiet enjoyment of the Chapel and that could not be provided, “there is no reason for the lease to exist”.
(d) Was the risk of the event occurring allocated to one of the parties?
The lease only dealt with the risk of not obtaining permits and consents to the extent that Clause 25(iii) directed an equitable portion of insurance moneys be paid to the Bishop. The risk of what happens in those circumstances was not allocated to either party.
(e) Was the event foreseeable?
RFD says that because the lease specifically considered an inability to obtain permits and consents, then such was a foreseeable event. Other than Clause 25(iii) the lease “…does not direct what happens to the lease in the event permits and consents are unavailable”. It is that “failing to make sufficient provision in the lease” which leads to the doctrine of frustration becoming available, according to RFD.
[74] Mr Munro placed emphasis on the Judgment of Lord Denning where he said:30
It has frequently been said that the doctrine of frustration only applies where the new situation is ‘unforeseen’ or ‘unexpected’ or ‘uncontemplated’ as if that were an essential feature. But it is not so. The only thing that is essential is that the parties should have made no provision for it in their contract … cases have occurred where the parties have foreseen the danger ahead and yet made no provision for it in the contract.
Discussion
[75] I have concluded that Clause 25(iii) of the lease makes provision only for how the insurance money received is to be allocated. The reasons for that conclusion are also relevant in the context of frustration, and Mr Munro’s argument set out above. That is, a perpetual lease for a nominal rent is valuable not just to the extent of the physical use of the premises, but because it is a (virtually) perpetual and advantageous right. The consideration given by the Bishop when he transferred his own freehold interest was of sufficient commercial value to receive in return a new Chapel under a 999 year lease for $1 per year. It was a true stake in the ground. If RFD redeveloped, the Bishop would have an equivalent interest offered to him. He might reject that but it was for him to decide. He would give up his interest only if he chose to do so no doubt weighing up the decision on ecclesiastical and other grounds. Termination in those circumstances is logical,
[76] Against that background I must decide whether the obligations of the parties were so altered as to fundamentally undermine the contract and result in frustration. In doing so I have regard to the factors outlined by Rix LJ and adopted by the Supreme Court.31
[77] The designation of the premises by the CCDU was not necessarily a permanent state of affairs.32 While the designation turned out to be an accurate indication that the premises would be acquired by the Crown, that was not certain at
the time of designation or indeed at any point up until the Crown acquired the land.
30 Ocean Tramp Tankers Corporation v VO Sovfracht (The Eugenia) [1964] 2 QB 226, at 239.
31 The Sea Angel, above n 20, at [111], cited with approval in Planet Kids, above n 2.
32 The designation of premises may be altered or removed: Resource Management Act 1991 ss 181 and 182.
The inherently contingent nature of designation meant that it would have been speculative to say that the perpetual lease had been fundamentally altered or undermined at that point. If, for example, designation had been revoked and a subsequent consent application to repair the Chapel had been granted, the leasehold interest would have subsisted. It is incorrect for RFD to retrospectively say that designation effected frustration, because before the Crown acquisition, such a view would have been premature. The inquiry focuses on whether the specific events relied on by Mr Munro before compulsory acquisition frustrated the lease.
[78] I turn to the statutory scheme governing compulsory acquisition, provided by
CERA.33 Section 62 of that Act provides:
A person who suffers loss resulting [from the compulsory acquisition of land under this Act] is entitled to compensation from the Crown.
[79] The Minister then determines the amount of compensation in accordance with the principles in Part 5 of the Public Works Act 1981 (PWA).34 Section 60 of the PWA entitles the owner of land to compensation. The ‘owner’ of the land is defined in s 59 to include anyone in occupation of the land pursuant to a lease agreement. Here, the Receivers argue that the Bishop has suffered no loss as his interest had come to an end before the Crown exercised its powers under CERA.
[80] Ms Dwight puts the Bishop’s position regarding frustration this way:
53.1It would be inconsistent with the legislation which specifically provides for a lease to be able to claim compensation, and have its interested acquired by CERA. To hold otherwise would have the effect that potentially every lease within the designated area would be frustrated, making the provisions in the legislation redundant.
53.2The notices issued by CERA specifically referred to the Crown being able to acquire the lessee’s interest and CERA sought to negotiate direct with the Bishop for the acquisition of the leasehold interest.
53.3To argue that this frustrates the lease would mean in a case like this the Bishop, with an interest under what is effectively a perpetual lease, would get nothing and the receivers, whose interest as owner of the freehold is worth far less, would receive all the compensation.
33 Section 53 of the Canterbury Earthquake Recovery Act 2011 empowered the Crown to acquire the property.
34 Canterbury Earthquake Recovery Act 2011, s 64.
[81] There is substance in these submissions. In most cases, the Crown’s notice of intention to compulsorily acquire property will be preceded by designation of that property as being required for a public project. Many such properties will have leases attached to them. If designation of itself is sufficient to frustrate a lease, then no leasehold owner would be able to claim compensation under CERA. Section 59 would be redundant. Moreover, if compulsory acquisition was prefaced by the designation of some properties and was not so prefaced in respect of other properties, then only lessees in the latter category would receive compensation. The entitlement of a lessee to compensation for the loss of an interest would turn on whether the property was designated prior to being acquired, and thus a matter of chance. This approach to compensation would be untenable. The section contemplates no such qualification and interpreting it as such would create an arbitrary hierarchy of lessees when it came to compensation.
[82] Further, if designation or the notice of intention to acquire the property is held to be a frustrating event, a windfall profit would be granted to owners of the underlying freehold property. Extinction of the burdening lease would increase the value of the underlying freehold interest, which may have had little value during the lease’s life. Indeed, such leases have been described as of “equivalent value” to the freehold and as rendering the freehold reversion valueless.35 Such enrichment would be unjust and contrary to the demands of justice, the lessee being without fault, and without the lessor incurring any cost. I return to this fundamental premise. That
cannot be an accurate reflection of parliamentary intention under CERA.
[83] For completeness, I record Mr Munro’s argument that the lease was frustrated because RFD had insufficient funds available to repair the Chancery Lane premises. RFD had been insured up to the full replacement value of the premises but its insurer, Vero, reassessed its position after the Crown issued its notice of intention to acquire the premises. As of 24 April 2013 Vero offered RFD payment of
$1,170,000.00 in compensation for the material damage sustained by the building. This figure fell far short of that which was required to repair the property. RFD
claims that the insufficiency of funds for repair rendered the Chapel unusable, and so
35 Harman & Co Solicitor Nominee Company v Secureland Mortgage Investments Nominees Ltd
[1992] 2 NZLR 416 (CA), at 418.
frustrated the lease’s purpose. This argument resting on the indemnity insurance payment directly links to the argument that the notice of intention to acquire frustrated the lease. It would be formalistic to treat the arguments as separate.
[84] In summary, I reject the restricted construct of the purpose of the lease advanced by RFD. One purpose to which the lease was put was use as a Chapel. That does not mean that the entire purpose of the leasehold contract was for use as a Chapel. The leasehold interest was created in Unit A as a quid pro quo for the Bishop transferring property to RFD’s predecessor in freehold. This, presumably, was intended to relieve the Bishop of his duties and liabilities as freeholder and to pass on all such incidents of the freehold title to the lessor for the valuable consideration of a 999 year lease for $1.00 per year. That underlying agreement in his having an interest in property is a ‘purpose’ of the lease. Therefore, so far as land existed to which the interest could attach, that purpose would not have been entirely
frustrated.36 The situation would have been less than ideal, but nonetheless the
contract would not have been wholly undermined.
The demands of justice
[85] Finally, I return to the issue of my residual discretion in the application of the doctrine of frustration. It is not a doctrine constrained by rigidity. It is flexible and is not deaf to the demands of justice.37 Rix LJ says that:38
… the doctrine is one of justice, as has been repeatedly affirmed on the highest authority. Ultimately the application of the test cannot safely be performed without the consequences of the decision, one way or the other, being measured against the demands of justice.
[86] The requirements of justice can be used to smooth the doctrine’s rough edges if they emerge. That justice is the “ultimate measure” does not vest the Court with an unfettered discretion to make whatever decision it considers fair, but justice should
baulk at an outcome where a perpetual lease is extinguished because of designation
36 The learned authors of Megarry & Wade’s The Law of Real Property (8th ed, London, 2012), consider (at 18-013) that the tenancy could subsist in the vacant airspace if the buildings to which the lease had previously attached were destroyed. That proposition does not need to be relied on here and cannot be given the contract, as the leasehold interest included an interest in the common property, which was not destroyed.
37 Planet Kids, above n 2, at [8]; The Sea Angel, above n 20, at [122].
38 The Sea Angel, above n 20, at [112].
and notice of intention to acquire with a corresponding indemnity insurance payment in these circumstances. 39 The designation process began with an indication of the likelihood that the property would be acquired by the Crown, including leasehold interests. If designation was to be temporary, then its removal would likely have allowed RFD to obtain the necessary consent to repair the Chapel, and all would have been well. If designation and the notice of intention to acquire resulted (as it
did here) in the Crown’s acquisition of the premises, then the freehold and leasehold interests would both have been divested. The lessee should not be deprived of his interest and yet the freeholder preserve a right which becomes yet more valuable when unburdened by a lease through frustration. That would be inimical to the canons of justice, and it is a proposition that I am not prepared to endorse.
Conclusion
[87] The contract did not impliedly provide for termination of the lease in these circumstances of designation, and the payment of indemnity insurance. In the absence of an explicit statement that the lease would terminate in such circumstances, the parties’ intention must have been that the Bishop’s interest was to subsist. The termination of perpetual leases is not inherently likely to occur by implication, particularly as here where it would simply advantage the lessor who had no further obligations to the lessee as landlord.
[88] Frustration is only applicable if the contract was truly silent as to the subsistence of the lease. If it was silent, no event fundamentally altered the parties’ obligations sufficient to frustrate the lease. Perpetual leases will not readily be found to have been frustrated and provided that there remains property to which the lease can attach, particularly where such has value, the interest will subsist. Here, the designation of the premises as likely to be compulsorily acquired by the Crown for use as a Convention Centre (and the inability to get consent to repair the Chapel), was not of itself a permanent state of affairs and so could not frustrate a perpetual lease. The indemnity insurance payout simply reflected the Crown’s notice of intention to acquire and spelt the end of occupancy by RFD and the Bishop but not
the end of their respective property interests.
39 Planet Kids, above n 2, at [8].
Disposition
[89] The Bishop’s leasehold interest remained in existence and is compensatable.
[90] The terms of Orders needed to perfect this judgment are for reference back to the Court, if needed.
[91] Costs are reserved.
………………………………………..
Davidson J
Solicitors: Cavell Leitch Anderson Lloyd
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