SGAH Investments Limited v Mei Enterprises Limited
[2022] NZCA 103
•1 April 2022 at 9 am
| IN THE COURT OF APPEAL OF NEW ZEALAND I TE KŌTI PĪRA O AOTEAROA |
| CA432/2021 [2022] NZCA 103 |
| BETWEEN | SGAH INVESTMENTS LIMITED |
| AND | MEI ENTERPRISES LIMITED |
| Hearing: | 21 March 2022 |
Court: | Kós P, Woolford and Dunningham JJ |
Counsel: | M Singh and P S Kim for Appellant |
Judgment: | 1 April 2022 at 9 am |
JUDGMENT OF THE COURT
AThe appellant’s application to adduce further evidence is granted.
BThe appeal is allowed to the extent provided in [30] of this judgment.
CThere is no order for costs.
____________________________________________________________________
REASONS OF THE COURT
(Given by Kós P)
The question before us is whether a Judge has erred in exercising her discretion to grant relief to a tenant against a landlord’s refusal to renew the lease.[1] The subject property is a small suburban supermarket in Manurewa, South Auckland. There is no doubt the tenant (Mei, the respondent) has “behaved very badly” and engaged in “inexcusable conduct”.[2] It did so by refusing to pay any rent at all from March to November 2020, allegedly in support of a specious claim that the landlord (SGAH, the appellant) had given an oral promise to extend the lease to 2044. But in November 2020 it cleared its arrears. The landlord nonetheless refused to renew.
[1]SGAH Investments Ltd v Mei Enterprises Ltd [2021] NZHC 1588 [Judgment appealed].
[2]At [57] and [75].
Was the tenant’s behaviour so bad that statutory relief should be denied it under s 264 of the Property Law Act 2007? And if not, what relief should be given the tenant?
Background
The facts are set out in some detail in the judgment appealed. We will summarise the key events.
The tenant took an assignment of lease by consent in February 2014, paying a related company of the landlord $840,000 for the superette and Lotto agency business and lease at 1/140 Finlayson Avenue, Manurewa.[3] The lease was slightly unusual, being for renewable two-year terms, with a final expiry date of 23 September 2024. Renewal rights were exercised in 2016 and 2018.
[3]The agreement for sale and purchase was entered into in June 2013.
In December 2019 the tenant issued proceedings in the High Court claiming that in October 2013 an agent of the vendor and landlord promised orally to grant an extension of the lease “for as long as the [tenant] wanted”.[4] Inexplicably, this wholly remarkable, entirely uncommercial variation was not recorded in writing. In due course the demand crystallised as an extension to 2044.[5]
[4]That is, subsequent to entry into the (conditional) sale and purchase agreement.
[5]To state the obvious, the landlord and business vendor were related companies. They valued the business with a 10-year lease at the agreed 2013 sale price of $840,000 (of which only about 10 per cent was stock in trade). At the end of the 10 years the landlord could resume possession and resell the business a second time if it wished. And at the end of that second 10-year lease, do so again — now running through to 2044. The idea that it would concede those two substantial economic opportunities for no extra consideration whatever defies sense. The fact it plans to redevelop the premises in 2024 merely reinforces the underlying economic reality that it would have had to have lost its wits to agree to the consideration-free 20‑year extension asserted by the tenant.
In March 2020 the tenant began to withhold rent and outgoings in support of a campaign to compel the landlord to accept the asserted extension. Other, aggressive acts were engaged in: demands for refund of past rental and outgoings payments (which it sought to set off against its current obligation), the issue of a trespass notice, and a separate proceeding against one of the landlord’s shareholders in relation to the unrelated sale and purchase of a liquor store business to another company controlled by Mr Zhong, the director of the tenant.
In May 2020 the landlord served a statutory demand under s 289 of the Companies Act 1993, and notice of cancellation of lease under ss 245 and 246 of the Act, on the tenant. The latter gave 30 days in which to rectify default, absent which cancellation might then be effected under s 244 of the Act.
In June 2020 the tenant gave notice of intention to renew the lease. In July 2020 the landlord applied to liquidate the tenant based on its default. In August it notified the tenant of its refusal to renew based on the tenant’s rental default and other alleged breaches.[6]
[6]The landlord gave a further such notice in September 2020, which then gave rise to the timing issue referred to at [16] below.
In October the landlord made the application for possession which underlies the present appeal. In response the tenant (acting in person through Mr Zhong) applied to wind up the landlord, sought to restrain counsel for the landlord from acting, and laid a complaint with the Law Society.
In November 2020, an hour before the hearing of the landlord’s application to liquidate the tenant, the tenant paid its arrears in rent, outgoings and default interest, in full. The following month it discontinued its application to wind up the landlord and applied for relief against non-renewal under ss 261–264 of the Act.
At the same time however Mr Zhong sought to join the landlord and members of its shareholders’ family in the separate proceedings referred to at [6] above. That proceeding was dismissed on a defence summary judgment application in March 2021.[7] A successor proceeding covering similar ground was then commenced by Mr Zhong and the company referred to at [6] above. After they discontinued against several defendants, indemnity costs were awarded by Lang J.[8]
Judgment appealed
[7]Zhong v Bains Brothers Ltd [2021] NZHC 583.
[8]Zhong v Bains Brothers Ltd [2022] NZHC 14.
Duffy J reviewed the s 264 authorities, in particular Ponsonby Mall Trust Ltd v New Zealand Food Industries Ltd, observing:[9]
In cases where a commercial lessor’s refusal to renew has been sparked by a tenant’s rent arrears, the Court will typically grant relief against a refusal to renew once the arrears are paid. This approach is based on the principle that where a commercial lessor was prepared to include a right of renewal in the lease at the outset, once any outstanding rent arrears are corrected and there is no risk of ongoing rental arrears it makes little difference to a lessor who the tenant is.
[9]Judgment appealed, above n 1, at [33], citing Ponsonby Mall Trust Ltd v New Zealand Food Industries Ltd (2005) 7 NZCPR 48 (HC) at [46]–[47] and [50].
However, she noted that in exceptional cases relief might yet be refused when there has been significantly bad tenant conduct. An example given was Sibrad Co Ltd v Kanters, which involved a number of ongoing breaches that had not been fully remedied, and went beyond simple non-payment: “there were elements of nuisance, disturbance and damage caused to the lessor’s adjacent land”.[10]
[10]At [37], referring to Sibrad Co Ltd v Kanters (2008) 9 NZCPR 356 (HC).
Here, despite the tenant having “behaved very badly” and engaged in “inexcusable conduct” (which the Judge nonetheless ultimately did excuse), relief would be granted. The tenant had paid a substantial sum for the business, which depended on continuation of the lease. It had not been in breach before March 2020, and two prior requests had been actioned “without consequence”.[11] The non-payment had arisen in the context of a single dispute as to an extension of term in which the tenant had been wrong in withholding payment on the basis of rights of set-off. This was now recognised. The arrears had been cleared, solvency did not seem to be in issue and the tenant had undertaken to pay going forward.[12]
[11]At [57].
[12]At [49]–[79].
The Judge concluded:[13]
[The tenant] has wrongly used the rent under the lease as a weapon to win its battle for something else. I consider it would be wrong to rely on this conduct alone as a reason for refusing relief. If [the tenant] persists with such conduct and continues to withhold rent after being granted relief matters may then move to the point where in a subsequent application for forfeiture based on a new refusal to pay rent [the tenant] would be refused relief. At some point in time aberrant bad conduct by a lessee in a commercial lease setting, (including wilful refusal to pay rent for ulterior purposes) may justify a Court refusing to grant the lessee relief against forfeiture by the lessor. But we are not at this point yet. However, [the tenant] would do well to keep in mind it has come close to the tipping point, despite this being the first such occasion.
Accordingly, relief against non-renewal was granted under s 264.[14]
Four preliminary points
[13]At [80].
[14]At [81]. See also at [2].
The proceeding here was brought initially by the landlord, seeking an order for possession under s 244 of the Act. The tenant responded with an application for relief against non-renewal of the lease under ss 261–264 of the Act. The first preliminary point, that the tenant’s application was out of time, was resolved by the Judge against the landlord and is not challenged here.[15]
[15]At [8]–[32]. The Judge held that time ran from the landlord’s later notice.
Secondly, two particulars of tenant breach relied upon below — failure to maintain and unauthorised sub-letting — are still pursued, but with less fervour. The Judge said that even if made out, they were insufficient to deny relief.[16] The landlord accepts before us that they “are not determinative”, but says they “demonstrate a pattern of disregard” by the tenant. Neither alleged breach is sufficiently proved. Nor, had they been, would they individually or collectively have justified denial of s 264 relief. That issue must come down to the tenant’s failure to pay rent for nine months.
[16]At [47]–[48].
Thirdly, the landlord applies to adduce further evidence before us of events subsequent to the hearing before the Judge. It is in the nature of updating evidence, and Mr Strauss, for the tenant, was not particularly exercised about its receipt. We grant the application.[17]
[17]Court of Appeal (Civil) Rules 2005, r 45.
Fourthly, counsel agree this is an appeal against a discretionary decision, rather than a general appeal to which the rehearing principles in Austin Nichols & Co Inc v Stichting Lodestar apply.[18] It follows that a higher threshold for appellate intervention applies — in effect a review standard. As a matter of public policy, to encourage prompt resolution of such disputes and to discourage marginal appeals protracting the dispute, a degree of appellate deference applies. The discretionary decision must be wrong, fundamentally, in one or more of these four respects: the Judge made an error of law or principle, failed to take into account some relevant matter, took into account an irrelevant matter, or was plainly wrong.[19] Otherwise the first instance decision should stand and this Court ought not interfere with it.
Was the tenant’s behaviour so bad that statutory relief should be denied it under s 264 of the Property Law Act 2007?
[18]Austin, Nichols & Co Inc v Stichting Lodestar [2007] NZSC 103, [2008] 2 NZLR 141 at [3]–[5].
[19]Kacem v Bashir [2010] NZSC 112, [2011] 2 NZLR 1 at [32].
Mr Singh, for the landlord, submits first that the tenant had lost its right of renewal by having rent unpaid at the time it gave notice of renewal in June 2020. Renewal could only be exercised under cl 35 of the lease if the tenant was not in breach at the time the notice was given.
Secondly, he submits there is no presumption in favour of relief where the tenant is in breach by non-payment. The nature of the breach and its correction are simply matters to weigh in the round in considering relief. The Judge had proceeded on the basis there was such a presumption, and erred in doing so.
Thirdly, weighing the factors relevant to relief, the combined actions of the tenant in withholding rent and outgoings for nine months, commencing proceedings against the landlord seeking extension of the lease to 2044 (and then failing to prosecute that proceeding), refusing the landlord’s attempts at resolution, issuing letters of demand and threatening debt collection for “fictitious debts” allegedly owed by the landlord, paying the outstanding rent and outgoings only one hour before a liquidation hearing, commencing retaliatory proceedings to liquidate the landlord, and joining the landlord into further sets of vexatious proceedings, are not the actions of a clean-handed tenant warranting “equitable relief”.
The Judge had held that the tenant had acted “very badly”, and that it’s conduct was “inexcusable”, but ultimately granted relief due to the prejudice the tenant would otherwise suffer. Mr Singh submits that there must be a minimum standard of behaviour between commercial parties and a point at which a landlord is justified in refusing to deal with a vexatious tenant whose lease had come to an end any further. The prejudice suffered by the tenant was a consequence of its own actions.
Discussion
We do not consider a case has been made reaching the high threshold for appellate reversal of the Judge’s exercise of discretion. In short, the Judge has not been shown to have made a material error of law or principle, failed to take into account some relevant matter, taken into account an irrelevant matter, or reached a conclusion that is plainly wrong.
First, Mr Singh’s first proposition, to the effect that the tenant had lost its right of renewal by having rent unpaid at the time it gave notice of renewal in June 2020, does not assist him. It is not disentitling; rather it is a circumstance anticipated by s 261(1)(c) of the Act.
Secondly, we do not think the Judge erred by proceeding upon a presumption in favour of relief. Rather, the judgment talks about the typicality of relief where the breach is economic and has been corrected.[20] Thus stated, the observation is correct. Whether the relief sought by the tenant is against cancellation of an extant lease[21] or non-renewal of an expiring one (where there was a right of renewal),[22] the Court is likely to grant relief where the non-renewal is inadvertent or the breach (giving rise either to cancellation or non-renewal) is inadvertent, non-persistent and has been fixed as soon as possible before the hearing.[23] The underlying premise is that the parties have entered an economic relationship measured by place, duration and money, and duration will not be abridged save in exceptional circumstances where money has been paid and the breach rectified.
[20]Judgment appealed, above n 1, at [33] and [75].
[21]Property Law Act 2007, s 253.
[22]Sections 261 and 264.
[23]Stylo Medical Services Ltd v Hum Hospitality Ltd [2020] NZHC 2969 at [29].
Thirdly, in this appeal we are not dealing with a case of continuous and unremedied breach, such as in Sibrad or Bedford Investments Ltd v Alder & Co Ltd.[24] In Sibrad the breaches were substantial and unremedied, related to the state of the farmland leased and had flow-on effects to the landlord’s own adjacent farm. In Bedford the breaches took the form of persistent late payment of rent. Ninety per cent of payments were late (by between one and 110 days), seven cheques were dishonoured, the landlord was constantly required to pursue payment, and the tenant’s whole solvency had to be questioned.[25] In both cases relief against non‑renewal was declined. But they are not this case, albeit the non-payment cannot be said to be inadvertent. Rather it was deliberately done, in support of the tenant’s claim of extension.
[24]Sibrad Co Ltd v Kanters, above n 10; and Bedford Investments Ltd v Alder & Co Ltd (2006) 7 NZCPR 420 (HC).
[25]Bedford Investments Ltd v Alder & Co Ltd, above n 24, at [28].
The extreme behaviour of the tenant and Mr Zhong means they might well be entities a sensible commercial landlord (knowing of their dealings with this tenant) would want to avoid doing business with. But this landlord did do business with them, in 2014, and a related company of the landlord obtained a substantial payment for the associated business premised upon 10 years’ occupation. The material breach here — non-payment — while deliberate and extended, was singular, premised upon a disputed right that was misconceived (but not struck out or shown to be made in bad faith), and has been rectified. But for non-payment, as the landlord’s representative accepted, the lease would have been renewed. It would be altogether disproportionate to that breach to sanction a reduction in tenure from 10 to six years. The Judge was entitled to reach that conclusion within an exercise of discretion, and the prerequisites for appellate reversal are not made out.
Finally, we observe that the relief granted by the Judge was in at least practical effect conditional on due performance. While the events of 2020 were not so grave as to deny relief against non-renewal, any further relief against forfeiture or non-renewal in the event of another serious breach is unlikely. The Judge gave that warning in the passage of her judgment we quoted at [15] above. We endorse it.
What relief ought to have been granted?
The Judge ordered the landlord enter into a new lease expiring on 23 September 2024, otherwise upon the same terms as the original lease.[26] The effect of that was to grant, in effect, two renewals: one in 2020 (which had been refused) and one in 2022 (which has not yet arisen). In this respect we consider the Judge has erred by granting relief beyond what was warranted and effectively varying the terms (and term) of the lease. The appropriate relief would have been to order the renewal of the lease, in its current form, to take effect from 23 September 2020. The appeal will be allowed to that extent. That means the tenant will again need to give notice of renewal for the final two-year term, beginning on 23 September 2022.
Result
[26]Judgment appealed, above n 1, at [83].
The appellant’s application to adduce further evidence is granted.
The appeal is allowed to the extent provided in [30] of this judgment.
In the circumstances, we make no order for costs.
Solicitors:
Glaister Ennor, Auckland for Appellant
JC Legal, Auckland for Respondent
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