Shelf Company no.5 Limited v Frema Properties Limited

[2019] NZHC 423

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2018-404-002038

[2019] NZHC 423

BETWEEN

SHELF COMPANY NO.5 LIMITED

First Appellant

SHANE GALPIN and BALLU KHAN
Second Appellants

AND

FREMA PROPERTIES LIMITED

Respondent

Hearing:

6 March 2019

Counsel:

KF Gould for Appellants

VTS Purusram for Respondent

Judgment:

13 March 2019

JUDGMENT OF DOWNS J

This judgment was delivered by me on Wednesday, 13 March 2019 at 1 pm pursuant to r 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Solicitors/Counsel:

DMG Solicitors, Auckland. Victorian Lawyers, Papakura. KF Gould, Auckland.

SHELF COMPANY NO.5 LTD v FREMA PROPERTIES LTD [2019] NZHC 423 [13 March 2019]

The appeal

[1]                  Shelf Company No 5 Ltd1 appeals a decision of the District Court refusing to strike-out a claim made by Frema Properties Ltd2 for unpaid rent (and other outgoings).3 A Court may strike out a proceeding when it discloses no reasonably arguable cause of action.4 The Supreme Court has said “it is inappropriate to strike out a claim summarily unless the court can be certain that it cannot succeed.”5

The dispute

[2]                  Shelf leased premises from Frema in 2011. The lease was guaranteed by the second appellants, Mr Galpin and Mr Khan. The lease was to run until October 2014. Frema issued monthly invoices to Shelf. Shelf paid none. Halfway through 2012, Frema discovered the property was empty. Shelf had gone. Frema had difficulty paying outgoings without tenants, so sold the property in 2013. The property was sold with vacant possession, but it appears the lease was never formally cancelled.

[3]                  This precis is indicative of the limited evidence in the record. Neither the lease nor sale and purchase agreement are in evidence. For reasons that will become apparent, this vacuum is decisive.

The claim

[4]                  In 2017, Frema filed a statement of claim in the District Court to recover unpaid rent and outgoings. Frema contended privity of contract and estate existed until the sale; so, it could recover from Shelf. Shelf responded that having sold the property to a third party, there was no longer privity of estate between it and Frema. Unpaid rent or outgoings was a matter between Shelf and the new owner. By selling the property, Frema had assigned the lease.

1      Shelf.

2      Frema.

3      Frema Properties Ltd v Shelf Company No 5 Ltd [2018] NZDC 18108.

4      High Court Rules 2016, r 15.1.

5      Couch v Attorney-General [2008] NZSC 45, [2008] 3 NZLR 725 at [33].

The District Court decision

[5]                  The District Court accepted Frema’s position. Judge C J McGuire considered it “common ground” the plaintiff did not assign the lease to the purchaser; rather, the lease was cancelled before the sale.6 The Judge considered the cases cited by Shelf did not support its position that once sale occurred, Frema’s rights were extinguished.

The arguments

[6]                  Shelf submits Judge McGuire erred by reference to the cases discussed shortly. It says it is common for landlords in Frema’s position to expressly reserve their rights in relation to a lease when selling the property.

[7]                  Frema contends the cited cases all involve a clear transfer of the lease as well as the property; here, the property was sold with vacant possession.

Analysis

[8]The right to receive rent is governed by s 233 of the Property Law Act 2007:

Benefit of lessee’s covenants to run with reversion

(1)   If the reversion expectant on the lease ceases to be held by the lessor (whether by transfer, assignment, grant, operation of law, or otherwise), the rights to which this section applies—

(a)run with the reversion; and

(b)may be exercised by the person who is from time to time entitled to the income of the land, whether or not the lessee has acknowledged that person as lessor (that is, with or without attornment by the lessee).

(2)   Subsection (1) applies unless a contrary intention appears from the lease or from another circumstance.

6      The passage from Hinde McMorland and Sim Land Law in New Zealand the Judge relied on does not, as the Judge seems to imply, provide abandonment of the premises by the tenant and re-entry by the landlord constitutes automatic cancellation. It instead notes when the premises are abandoned, the landlord can elect to re-enter and treat the abandonment as “grounds for cancellation”. It is unclear whether this lease was cancelled.

[9]Section 234(1) provides:

When rights arising from covenants may be exercised

A person who is entitled under section 233(1) to exercise a right to which that section applies—

(a)may exercise that right even though the basis for doing so first arose or accrued before the time at which that person became so entitled; and

(b)is the only person entitled to exercise that right.

[10]              On the plain wording of these, after assignment of the reversion, the original lessor loses the right to sue for breach of covenants.7 This approach was taken by Master Towle in Paramoor Nine Ltd v Pacific Dunlop Holdings (New Zealand) Ltd (under the equivalent Property Law Act 1952 provisions), which also concerned a landlord seeking to recover unpaid rent after it had sold the property.8 The Master concluded:9

The factual situation in this instance is incontrovertible in that the plaintiff has assigned all its rights to the reversion to Tapper [the purchaser]. I believe therefore that it has no longer any right to bring the claim against the defendant for the outstanding rent, even though the statement of claim makes it clear that the period covered includes breaches by the then tenant by the non payment of rent and outgoings for some months before the actual assignment to Tapper. I cannot speculate upon how the consideration figure of $1,050,000 paid by Tapper on the transfer was calculated but it is clear that the transfer to him of the plaintiff's rights to the reversion was made without condition.

[11]              Similar too is Patel v Digital Printing Group Ltd.10 The Patels sued Digital Printing Group for unpaid rent the day before settlement of the sale of their property. Digital Printing Group said the Patels could not maintain their claim because after settlement, the new purchaser was entitled to all rent. Heath J considered because the Patels had brought their suit before settlement, they came within s 233(1)(b). He refused to strike out the claim. Implicit to this is the corollary: the Patels would have failed had they brought a claim after settlement.

7      Elizabeth Toomey (ed) New Zealand Land Law (3rd ed, Thomson Reuters, Wellington, 2017) at [8.15.08].

8      Paramoor Nine Ltd v Pacific Dunlop Holdings (New Zealand) Ltd (1990) 1 NZ ConvC 190,449. This case was cited with apparent approval by the Court of Appeal in Ballance Agri-Nutrients (Kapuni) Ltd v The Gama Foundation [2006] 2 NZLR 319 at [55].

9      At 10.

10     Patel v Digital Printing Group Ltd (2008) 10 NZCPR 30.

[12]              Heath J also considered the Patels could succeed under s 233(2), which provides the right to recover rent continues if a “contrary intention” appears from the lease or other circumstance. This because the Patels and the new owners had apportioned their respective entitlement to rent and outgoings in the sale and purchase agreement. The Patels had also sued prior to settlement. Heath J considered all this implied the parties had agreed the Patels were entitled to rent before settlement.

[13]              In Mitre 10 Ltd v Thistle Dome Holdings Ltd, Brown J considered what was needed to establish a “contrary intention”.11 Thistle leased a property to Mitre 10, which Thistle then sold to a third party. Thistle and Mitre 10 had been arguing about Mitre 10’s obligation to maintain and repair the property. Thistle told the purchaser it was considering proceedings against Mitre 10 to recover damages for breach of the lease. Brown J found no contrary intention had been demonstrated because:12

… contrary intention in the context of s 233(2) is not established solely by unilateral statements or conduct on the part of a lessor/vendor. I consider that it is necessary to show that such contrary intention is shared, explicitly or implicitly, by the assignee/purchaser. At the least some endorsement or acknowledgement on the part of the assignee/purchaser is required. It may be that such endorsement need not take the form of a binding contract but there must be at least some acknowledgement which affirmatively demonstrates that the assignee/purchaser does not demur from what the lessor/vendor proposes.

[14]              The last case of relevance is Turrall v Jackson.13 Associate Judge Smith held s 233 does not apply when the lease has been cancelled:14

I conclude that s 233 was not intended to apply to situations where the lease between the vendor and the vendor’s tenant has been cancelled before the sale to the purchaser. The section, and s 234(1) are directed at the situation where, at the time of the sale by the owner of the land, there exists a “reversion expectant” on a lease. No such reversion expectant exists in a case where the lease has been cancelled some months (or years) before the sale transaction.

[15]              These cases emphasise the importance of a predictable regime in this context. For example, Brown J said s 233 created “a bright line after which only the assignee may either commence litigation itself or continue with litigation previously

11     Mitre 10 (New Zealand) Ltd v Thistle Dome Holdings Ltd [2015] NZHC 3289, [2016] 2 NZLR 846.

12 At [69].

13     Turrall v Jackson [2018] NZHC 2370.

14 At [140].

commenced by the original lessor.”15 So, once a property subject to a lease has been sold, the original lessor loses the ability to sue for breach of covenant unless a contrary intention is apparent.

[16]              Despite this, Frema’s claim should not be struck out for two reasons. First, it is arguable s 233(2) applies. There is little evidence as to exactly how the demands for rent were made, or how sale occurred. That the property was sold with vacant possession may imply the sale parties intended Frema would continue to be entitled to receive rent (creating a shared common intention like that in Mitre 10). Second, it may be this case is like Turrall v Jackson because the property was sold with vacant possession, after the lease was cancelled. These are possibilities only; again, neither the lease nor sale and purchase agreement are in evidence. Facts matter.

[17]It cannot be said the claim is untenable.

Result

[18]The appeal is dismissed.

Costs

[19]              Agreement is encouraged. If the parties cannot agree, they may submit memoranda of not more than five pages each: Shelf by  27 March 2019; Frema by   3 April 2019.

……………………………..

Downs J

15 Mitre 10 (New Zealand) Ltd v Thistle Dome Holdings Ltd, above n 11, at [36]. I note in finding a new owner must take on litigation started by a previous owner, the Judge disagreed with Heath J’s reasoning that a landlord could bring a claim up to the day before a property was sold (although agreed with the result on the basis that on the facts, a “contrary intention” existed). The distinction is immaterial here because the claim was brought long after sale.