Roses Are Red Ltd v Board of Administration of the Methodist Church of New Zealand

[2009] NZCA 237

IN THE COURT OF APPEAL OF NEW ZEALAND

CA114/2008
[2009] NZCA 237

BETWEENROSES ARE RED LIMITED

Appellant

ANDBOARD OF ADMINISTRATION OF THE METHODIST CHURCH OF NEW ZEALAND

Respondent

Hearing:26 February 2009

Court:Hammond, Ellen France and Baragwanath  JJ

Counsel:B P Rooney for Appellant

N W Woods for Respondent

Judgment:8 June 2009 at 2.30 pm 

JUDGMENT OF THE COURT

AThe appeal is dismissed.

BThe appellant must pay the respondent costs in this Court for a standard appeal on a band A basis, plus usual disbursements.

REASONS OF THE COURT

(Given by Ellen France J)

Table of Contents

PARA NO

Introduction  [1]
Factual background   [7]
The approach in the High Court  [17]
Submissions  [30]
Discussion  [38]
Disposition  [55]

Introduction

[1]       Roses are Red Limited, the appellant, runs a retail florist business.  Under an agreement to lease, the appellant (“Roses are Red”) leased business premises in Papakura from the Board of Administration of the Methodist Church of New Zealand (“the Board”).

[2]       The lease period began in March 2007.  Disputes arose between the parties.  Their disagreements related to car parking spaces referred to in the agreement to lease and there were also issues about building work undertaken by Roses are Red without either building consent or the landlord’s consent and about the breaches by Roses are Red of liquor licensing requirements.

[3]       Matters came to a head in December 2007 when the Board served on Roses are Red a notice under s 118(1) of the Property Law Act 1952.  The notice alleged six defaults under the agreement to lease and required the defaults to be remedied within ten working days.

[4]       On 21 December 2007, Roses are Red applied for relief from forfeiture.  The Board opposed the application.  Interim relief was obtained on 7 February 2008.  After a substantive hearing on 20 February 2008, Lang J made an order granting continuing relief from forfeiture: HC AK CIV 2007-404-0080-40 21 February 2008.  The order was conditional on Roses are Red remedying certain breaches.  We understand those breaches were subsequently remedied.

[5]       Lang J ordered Roses are Red to pay costs on a 2B basis to the Board. 

[6]       The sole issue on the appeal relates to the costs order.  Roses are Red says that as it succeeded in its application for relief against forfeiture, Lang J should have awarded costs in its favour.

Factual background

[7]       The parties signed an agreement to lease in February 2007.  Under that agreement, Roses are Red agreed to take a lease of the premises for a four-year term commencing on 19 March 2007.  Roses are Red also has two rights of renewal of four years each.

[8]       The agreement to lease provided that the lease was to “otherwise be in the Auckland District Law Society [“ADLS”] 4^th Ed 2002(2) form”.  Although a formal deed of lease was prepared, at the relevant time it had not been signed by the Board.  This means the contractual arrangements were those in the agreement to lease and those in the ADLS’s standard form of agreement.

[9]       The tenant had the right to enter the premises before the commencement of the lease.  Roses are Red accordingly entered in February 2007 and commenced its fit-out.  The fit-out was necessary because the premises had been used as a mower repair shop and so were not suitable for a florist.  Roses are Red opened for business in April 2007.

[10]     The next formal developments occurred in July 2007.  On 18 July, the Board’s solicitors provided a draft deed of lease.  Next, in August 2007, there was an exchange of correspondence which canvassed the building works undertaken by the tenant.  The Board noted that Roses are Red had not obtained the Board’s consent to the alterations.  The Board also queried whether Roses are Red had obtained the necessary resource consents and building permits.

[11] Matters developed further in September 2007. The Board discovered that the local Council had written to Roses are Red on 6 June 2007 noting that building work had been undertaken without first obtaining the necessary building consent under the Building Act 2004. The Board wrote to Roses are Red on 14 September 2007 asking it to rectify the situation.

[12]     There were also issues over car parks in the vicinity of the premises.  The agreement to lease referred to six car parks.  The agreement gave the Board full access to these.  Roses are Red, however, proceeded on the basis that the car parks were included within the land it leased.  The Board’s position was that the car parks were not included.

[13]     The relationship between the parties continued to deteriorate and, on 18 December 2007, the Board served a notice on Roses are Red requiring it to remedy identified breaches of covenants under the lease.  The Board gave Roses are Red ten working days to remedy its defaults.

[14] On 21 December 2007, Roses are Red filed its application for relief against forfeiture. That day, the Board was advised by telephone by the Council that the Council was to issue a 10-day “Notice to Fix” in relation to the non-compliance with the Building Act.

[15]     The Board filed its notice of opposition to the application for relief against forfeiture on 29 January 2008.  The notice referred, amongst other matters, to ongoing breaches.

[16]     As we have said, on 7 February 2008, Roses are Red obtained interim relief.  The matter proceeded to a substantive hearing on 20 February 2008.

The approach in the High Court

[17]     The Judge considered each of the alleged breaches in turn and we summarise the critical findings below.

[18]     Lang J concluded that Roses are Red had breached the lease by:

(a)    not obtaining the Board’s approval to alterations and additions to the premises;

(b) not obtaining the requisite Building Act consents; and

(c)    trading without an appropriate liquor licence.

[19]     The Judge also found that the rates had not been paid when due but that breach had been remedied by late payment.  There was no suggestion that Roses are Red would be unable to pay rates in the future.

[20]     Of these breaches, the Judge considered that the failure to obtain appropriate building consents was the most serious because of its potential to cause difficulties for the Board should the tenant vacate the premises without remedying the matter.  However, the Judge accepted that the risk to the Board was theoretical because of Roses are Red’s ongoing commitment to its enterprise.  This assessment of the risk was subject to Roses are Red making good its promise to rectify.  Finally, the Judge found at [37] that the way in which the tenant’s representative had acted suggested a “somewhat cavalier” approach to the tenant’s obligations in this respect rather than any wilful conduct.

[21]     The failure to obtain the Board’s consent to the building work was rated at the lower end of the scale.  That was because the Judge considered that the Board must have had a reasonable idea of the work being undertaken as Roses are Red had acted openly.

[22]     The breach relating to non-compliance with liquor licensing requirements was not seen as one of great magnitude although the breach was ongoing at the time Lang J considered the matter.  The Judge said that Roses are Red had to stop selling liquor via its gift baskets and immediately take steps to remedy the matter.

[23]     The Judge also addressed the question of car parking but did not resolve this matter on a final basis.  Lang J said at [60] that whatever the position was in relation to the leasing of the car parks, Roses are Red had an independent obligation to provide the Board with full access to the parks.

[24] The Judge then dealt with the whether or not it would be disproportionate to allow the lease to be forfeit. On the one hand, Lang J said, there were breaches and some of them were “reasonably serious”: at [64]. On the other hand, the Judge placed weight on the tenant’s commitment to the business conducted at the premises and its expenditure on the improvements. It was also relevant that there was no suggestion of insolvency or inability to meet ongoing commitments.

[25]     The Judge was persuaded that so long as Roses are Red took the necessary steps to rectify the outstanding breaches, it would be disproportionate to allow the lease to be forfeit.  However, Lang J said at [68] that it would be wrong to “completely deprive” the Board of its rights under the lease, particularly where the breaches had not yet fully been remedied.  For that reason, Lang J made the relief against forfeiture conditional upon Roses are Red completing the necessary work to enable the appropriate building approvals or certificates to be issued in relation to the improvements. 

[26]     Turning then to costs, Lang J noted that cl 6.1 of the lease provided for the tenant to pay the landlord’s solicitors reasonable costs of and incidental to the enforcement or attempted enforcement of the landlord’s rights under the lease.  The Board sought indemnity costs in reliance on this clause.

[27] The Judge declined to award costs on an indemnity basis. Lang J said that if the Board considered it had a contractual right under cl 6.1, that could be enforced in the usual way by issuing proceedings against Roses are Red. However, the Judge considered that the Board precipitated the proceedings to some extent by issuing its notice of default just before Christmas. That left Roses are Red with limited options to remedy the issues. The Judge also considered there was no “obvious precipitating” event that prompted the Board to serve the notice when it did: at [75].

[28] That said, the Judge accepted that Roses are Red should be required to contribute to the Board’s costs. Lang J took into account that the Board was justified in issuing the notice on at least three bases and that the failure to comply with the Building Act was a “particularly serious” matter: at [76]. The Judge said at [77]:

I therefore propose to follow the conventional principle of this area of the law and to require Roses are Red to make a contribution towards the costs of the Board.  Those costs are to be calculated on the basis of the trial of the substantive proceeding and are to be assessed on a Category 2B basis.  The Board is also entitled to its disbursements.

[29]     In the order sealed on 5 March 2008, the Board received costs of $8,960 reflecting costs on a category 2B basis, ie $1,600 was the daily rate.  Of the total of 5.6 days, the two significant periods were the two days allocated to the opposition to the application and the two days allocated for preparation for the hearing.

Submissions

[30]     Roses are Red makes two primary submissions.  First, that the Judge has erred in approaching the matter on the basis that there is a formula which applies to costs in forfeiture cases, namely, that the landlord is entitled to costs because the tenant is seeking an indulgence.  Secondly, that as a matter of discretion, there was no reason to depart from the usual rule that costs follow the event.

[31]     On the first point, Roses are Red also says that there is, in any event, no universal rule that costs are awarded to the landlord in the cases dealing with relief against forfeiture.

[32]     In terms of the discretionary matters, Roses are Red submits that the Board precipitated matters by filing the default notice just prior to Christmas in circumstances where the Board had not made a formal decision to forfeit.  Roses are Red further says that only one of the breaches was in the more serious category.  Even in relation to that breach, the tenant had not acted wilfully but rather in a cavalier manner.  The various breaches all occurred in circumstances, Roses are Red says, in which the Board had some knowledge of what was occurring.  All of these events took place in circumstances where Roses are Red had otherwise been a model tenant.

[33]     Finally, Roses are Red submits that a large part of the argument at the hearing related to the issue of the tenant’s entitlement to seek relief against forfeiture after a default notice had been issued but before actual forfeiture.  The point arose because, at the time of the application for relief against forfeiture, the Board had not taken steps to determine the lease, whether by re-entry or the issuing of an action for possession.  The Board therefore contended that the tenant’s application was premature because the lease was not yet forfeit.  Lang J concluded that the Court did have a power to grant relief even though the Board had done no more than issue a notice under s 118(1) of the Property Law Act.  Roses are Red argues that its success on this point also tells against the award of costs.

[34]     The Board emphasises that what Roses are Red sought and was granted was an indulgence.  In any event, the Board submits that the Judge did not blindly apply any general principle and that the Judge’s approach was justified in the circumstances.

[35] The Board points to the tenant’s delay in remedying the breaches of the lease. In particular, the Board notes that there were delays in resolving the non-compliance with the Building Act. Further, the Board says that this was a case in which the tenant’s cavalier actions exposed the landlord to risk. Cross-examination of the tenant’s representative may have shown that what occurred was in fact the result of wilful action on the part of the tenant.

[36]     As to the suggestion that the landlord was precipitate, the Board points out that the tenant had earlier notice of the landlord’s concerns. 

[37]     Finally, the Board notes that in its application for relief against forfeiture Roses are Red sought a second order requiring the Board to execute a deed of lease.  That order was not pursued and so, to that extent at least, the Board has been successful.

Discussion

[38]     In Shirley v Wairarapa District Health Board [2006] 3 NZLR 523, the Supreme Court observed that an appellate court should not interfere in a costs decision unless satisfied that the Judge who made the order acted on a wrong principle, failed to take into account some relevant matter, took account of some irrelevant matter or was plainly wrong: at [15].

[39]     The Supreme Court in Shirley also endorsed the proposition that the discretion to award costs is to be exercised generally in accordance with what are now rr 14.2 to 14.10 of the High Court Rules.  Further, the Court said that what is now r 14.2(a) states the general principle that the party who fails with respect to a proceeding or an interlocutory application should pay costs to the party who succeeds.  In determining in Shirley whether or not the Judge had erred in awarding costs to the losing party, the Supreme Court adopted the approach in Forsterv Farquhar [1893] 1 QB 564 at 569 (CA) where Bowen LJ said:

We can get no nearer to a perfect test than the inquiry whether it would be more fair as between the parties that some exception should be made in the special instance to the rule that the costs should follow upon success.

[40]     In addition to the general principles applicable to costs awards as set out in Shirley, there are some further broader policy considerations that are relevant to awards of costs where a tenant seeks relief against forfeiture.  These considerations are as follows:

(a)Where an application for relief against forfeiture is made following a breach of a lease, the tenant is seeking an indulgence.  The tenant who has breached may well be in a somewhat different position from other “winners”. 

(b)In terms of cases like the present one which were decided under s 118(2) of the Property Law Act, the Court in granting relief has a discretion to grant relief on terms as to costs and other matters.  The Judge here did not make payment of costs a condition of relief but could have done so. 

(c)There is authority for the proposition that where, as here, the contract makes provision for payment of indemnity costs, there is an entitlement to costs on that basis: IBA Limited v Stanley’s Nightclub Limited [2007] NZCA 60 and Bishopv Financial Trust Ltd [2008] NZCA 170. The Board did not put its case before us on that basis but, nonetheless, such a provision may be a relevant consideration.

[41]     These further considerations will also be relevant in determining how to approach costs in cases like the present.  In some cases, it may be self-evident that it was unfair or unreasonable for a landlord unnecessarily to impose the need for a defended hearing and the costs award can reflect that.  For example, in Ponsonby Mall Trust Ltd v New Zealand Food Industries Ltd HC AK CIV 2005-404-3631 8 March 2006 at [18], a case relied on by Roses are Red, Asher J suggested that in situations where the landlord was seeking to obtain some sort of commercial or other advantage or was somehow pressurising the tenant so as to improve its position, the usual rule that costs follow the event would apply.  In other cases, it may equally be plain that it was fortuitous for the tenant to be granted relief against forfeiture in which case the tenant can expect to pay costs.

[42]     Applying these principles, we take first the submission from Roses are Red that the Judge erred by approaching the matter on the basis there was a general principle that the landlord is entitled to costs in forfeiture cases.  We are satisfied that Lang J did not approach this matter by the application of a formula.  Rather the Judge, having rejected the Board’s application for indemnity costs, approached the matter in terms of whether or not some award of costs in favour of the Board was nonetheless warranted in the circumstances of the case.   

[43]     We turn then to the second submission from Roses are Red, namely, that this was not a case in which it was appropriate to depart from the usual rule that costs follow the event.  We accept that there were a number of factors which meant that relief against forfeiture may have been seen as a likely outcome.  For example, this was not a case involving an insolvent or uncommitted tenant.  However, on the facts, we consider it was not unfair or unreasonable for the landlord to have maintained opposition to the application.  It follows that, in terms of the principles we have identified, this was a case where it was fairer as between the parties to depart from the usual rule that costs follow the event.  The following factors are relevant.

[44]     First, in terms of the most serious breach, the acceptance by Roses are Red of the need to remedy this matter and to obtain building consent came very late in the piece.  When the Board raised this issue with the tenant in August and September 2007 the initial reaction from Roses are Red was to deny that consent was needed and then to deny receiving the letter from the Council about non-compliance.  Roses are Red pointed out instead that the Council’s letter was addressed to one of its employees.

[45]     By 21 December 2007, when Roses are Red sought relief against forfeiture, Roses are Red still did not accept there had been a breach in this respect, or in any respect, although by this point it did accept building consent was required.

[46]     The Council’s “Notice to Fix”, with a deadline of 29 February, was received by the Board on 30 January 2008.  By then, the breach had not been remedied nor had the necessary steps been put in place to achieve that objective.

[47] There were then further delays on the tenant’s part, albeit some of those may have been explicable, in getting the necessary consultant engaged to provide a report to the Council, which was part of the process for obtaining the Building Act consents.

[48]     It was not until 19 February, the day before the hearing, that an affidavit from the representative of Roses are Red confirmed that the necessary property inspection had occurred (5 February) and a letter of intent sent to the Council (8 February).  On 19 February, the Council wrote extending the deadline on the notice to fix to 30 April.  This meant that there was still going to be a delay in remedying this breach and, indeed, at the date of the hearing the breach had yet to be remedied.  Not surprisingly, then, the Board opposed the application for relief against forfeiture and maintained its opposition to this point.

[49]     This leads into the second factor, namely, that it was reasonable for the Board to proceed to a hearing so that it could cross-examine the tenant’s representative. In this respect, in addition to the matters relating to the building consent, we note also that there was an ongoing breach of the lease in relation to the liquor licensing.  For example, as late as 19 February, Roses are Red was still selling liquor and indeed disputed at the hearing that there was any problem about continuing to do so.  While this breach did not have the same impact or potential impact on the Board, it was nonetheless indicative of the tenant’s attitude.  Further, in the affidavit filed on 19 February, the representative of Roses are Red confirmed that it had obstructed access to the car parks and did not make any assurances that it would refrain from doing so in future. 

[50]     Against this background, it was possible, given the approach of Roses are Red up to the day of the hearing, that the Judge might have concluded that its actions were wilful.  Such a finding would have been relevant to questions of proportionality.  Of course as it transpired, immediately the cross-examination commenced, the representative of Roses are Red accepted there was a breach in undertaking alterations without the landlord’s prior written approval and a breach arising from the non-compliance with the building code.  The approach taken in cross-examination presumably was relevant to the Judge’s assessment that Roses are Red’s approach was somewhat cavalier rather than wilful.

[51] Thirdly, the waters were muddied to some extent because of the overlay of the parties’ dispute about the car parking. As we have noted, the Judge did not finally resolve that issue. But, to the extent that it is dealt with, the Judge found in the Board’s favour. The Judge concluded that the Board was entitled to full access to the car parks. The Judge also indicated that the Board was on “strong ground” in asserting that the six car parks were outside the premises subject to the lease: at [57].

[52]     Finally, this is not a case where the landlord was seeking some commercial or other advantage.

[53]     It follows that there is no basis for appellate interference in the costs award made by the High Court.  The test for such intervention in Shirley has not been met.

[54]     It was reasonable for the landlord to continue to oppose the tenant’s application for relief.  The Board’s approach was successful also to the extent that the orders were conditional on the breaches being remedied and Roses are Red did not seek to pursue an order relating to the formal lease.  We do not consider anything turns on the fact that time was expended on the Board’s argument about whether or not the application for relief against forfeiture was premature.

Disposition

[55]     Accordingly, the appeal is dismissed.  In terms of costs in this Court, we make an order that Roses are Red pay the Board costs for a standard appeal on a band A basis, plus usual disbursements.

Solicitors:

James Keat, Auckland for Appellant
Rice Craig, Auckland for the Respondent