SHK Trustee Company Limited v NZDMG Limited

[2022] NZHC 2620

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2021-404-000491

[2022] NZHC 2620

BETWEEN

SHK TRUSTEE COMPANY LIMITED

Plaintiff

AND

NZDMG LIMITED

First Defendant

HAORAN MAO
Second Defendant

LILI DONG

Third Defendant

Hearing:

28-30 March 2022

Appearances:

P J Morris and E Gamet for the Plaintiff

No appearance for or on behalf of the First Defendant H Mao, Second Defendant in person

L Dong, Third Defendant in person

Judgment:

11 October 2022

JUDGMENT OF HARVEY J

This judgment was delivered by me on 11 October 2022 at 3 pm, pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar Date: ………………………….

Solicitors:           Stace Hammond, Hamilton And to:  Second Defendant

Third Defendant

SHK TRUSTEE COMPANY LTD v NZDMG LTD [2022] NZHC 2620 [11 October 2022]

Contents

Introduction............................................................................................................... [1]
Issues.......................................................................................................................... [8]

Background............................................................................................................... [9]

Procedural history................................................................................................... [18]

What was payable during the COVID-19 Alert Level 3 and 4 Lockdowns?             [20]

Plaintiff ’s submissions............................................................................................ [20]
Defendants’ submissions......................................................................................... [42]

Legal framework and principles............................................................................... [49]

Discussion................................................................................................................. [56]

What was payable under Alert Level 3?................................................................... [56]

What was payable under Alert Level 4?................................................................... [63]

Is the plaintiff entitled to loss of rent damages, removal and reinstatement costs?     [69]

Submissions.......................................................................................................... [69]
Discussion................................................................................................................. [71]

Are the Property Law Act 2007 notices issued to the defendants valid?                   [76]

Plaintiff ’s submissions............................................................................................ [76]

Defendants’ submissions......................................................................................... [83]

Discussion................................................................................................................. [86]
What are the consequences of any invalidity of the notices?..................................... [91]

Should any of the defendants’ counterclaims be granted?........................................ [92]

Counterclaim plaintiffs’ submissions....................................................................... [92]

Counterclaim defendants’ submissions................................................................... [101]

Discussion............................................................................................................... [106]
Decision.................................................................................................................. [109]

Costs....................................................................................................................... [111]

Introduction

[1]    By an oral decision dated 26 July 2021, Associate Judge Bell gave summary judgment in favour of the plaintiff, SHK Trustee Company Ltd (SHK) for its claim for rent and outgoings as well as interest, later calculated in the amount of $146,371.71, against the first defendant, NZDMG Ltd.1 This excluded the periods of the Level 3 and 4 COVID-19 lockdowns in Auckland in 2020.2 The first defendant, NZDMG Ltd is a kitchen manufacturing company, who previously leased commercial premises from SHK. The second and third defendants, Haoran Mao and Lili Dong, are directors and guarantors under the leases of the first defendant.

1      SHK Trustee Company Limited v NZDMG Limited [2021] NZHC 1895 [Summary Judgment]; as directed, the sum was later calculated in a case management conference, SHK Trustee Company Limited v NZDMG Limited HC Auckland CIV-2021-404-491, 6 August 2021 [Minute of Associate Judge Bell] at [2].

2      SHK Trustee Company Limited v NZDMG Limited [2021] NZHC 1895 at [55].

[2]    Associate Judge Bell also noted that the second and third defendants took issue on a jurisdictional point – that they preferred the proceeding was deferred until such time as the parties had engaged in arbitration.

[3]    In addition, the Judge raised issues at paragraphs [41] to [54] of his decision that the notice of termination of the lease may have been invalid where the amounts claimed were sufficiently incorrect in magnitude with the result that the defendants were not properly informed as to the extent of their alleged breach of the lease and any remedies. The Judge then outlined the consequences of any potential invalidity. In concluding, Associate Judge Bell determined that any assessment of the COVID-19 Alert Level 3 and 4 rent and outgoings could not be properly considered in a summary judgment application and accordingly confirmed that those and related issues would need to be decided following a further hearing.

[4]    The second and third defendants eventually filed a statement of defence as well as a counterclaim, the details of which are set out below. That counterclaim is also considered in this decision. The first defendant, NZDMG Ltd, has remained unrepresented throughout the proceedings. As Associate Judge Bell made clear to the second and third defendants in his minute of 6 August 2021, NZDMG Ltd as a company cannot take any part in the proceeding except through a lawyer.

[5]The hearing of the remaining issues took place on 28 and 30 March 2022.

[6]    The second and third defendants do not have legal representation. This is despite the fact that several Judges of this Court have implored the second and third defendants to obtain legal advice a number of times. For their part, the second and third defendants have said they cannot afford representation and have instead conferred with government agencies as to their legal rights.

[7]    Added to that, the second and third defendants have limited command of English and during the hearing had to call on the assistance of an associate to help with translations. While expressing concern at the outset, Mr Morris for the plaintiff sensibly accepted that the proceedings would be assisted with the support of a translator even if he was an associate of the second and third defendants. The lack of

access to legal advice and the language difficulties have arguably had an impact on how the defendants have progressed their defence and their own counterclaims against the plaintiff. This issue will be discussed later in this judgment.3

Issues

[8]The issues for determination are:

(a)What was payable during the COVID-19 Alert Level 3 and 4 Lockdowns?

(b)Are the Property Law Act 2007 notices issued to the defendants valid?

(c)What are the consequences of any invalidity of the notices?

(d)Is the plaintiff entitled to loss of rent damages, removal and reinstatement costs?

(e)Should any of the defendants’ counterclaims be granted?

Background

[9]    The background to these proceedings is helpfully set out in the decision of Associate Judge Bell and, for convenience, the relevant parts are reproduced:4

[8]        The parties used the Auckland District Law Society Deed of Lease, 6th edition, 2012(5) for both leases. The warehouse lease is dated 14 February 2018. SHK Trustee Company Ltd is the landlord. The tenant is shown as “KMaster Panel Limited” which is the former name of NZDMG Ltd. Ms Dong and Mr Mao are the guarantors. The term of the lease is eight years, beginning 1 December 2017 with two rights of renewal of eight years each. There is a holiday for rent (not outgoings) in December each year from 2017 to 2020. The office lease was made on 26 October 2018. That lease is for a smaller area than the warehouse lease. It is on similar terms. There is a rent holiday in October, November and December 2018, December 2019, and December 2020.

[9]        In 2019 there was a rent review of monthly rent for both leases. The upshot was that the total rent for each month under both leases (including GST and outgoings) was $35,879.03.

3      See Deng v Zheng [2022] NZSC 76, which was issued after this proceeding had concluded, at [75]–[84] for a discussion on relevant cultural considerations in the context of what evidence might be put before the Court and the extent to which a judge must be alive to language, customs and their interpretation or understandings by affected parties.

4      Summary Judgment, above n 1, at [8]–[10].

[10]On 26 March 2020, NZDMG Ltd paid SHK Trustee Company Ltd

$50,000. That was on the first day of the Level 4 lockdown under the COVID- 19 pandemic. SHK Trustee Company Ltd applied that to rent for February 2020 for both leases, and applied $14,120.97 for the warehouse lease for rent in March 2020. None of the $50,000 payment was applied to March rent for the office lease. That was the last payment that NZDMG Ltd made to SHK Trustee Company Ltd.

[10]Regarding the impact of the Level 3 and 4 COVID-19 lockdowns:

[11]   For some of the time between that last payment and the date of cancellation New Zealand was under COVID-19 lockdowns. On Monday 23 March 2020 the country moved into Alert Level 3. Just before midnight on 25 March 2020 the country moved into Alert Level 4 lockdown. On 27 April 2020, the country moved to Alert Level 3, and on 14 May 2020, to Alert Level

2.5 At 11.59 am on 12 August 2020, Auckland moved back to Alert Level 3 although the rest of the country stayed at Alert Level 2.6 At 11.59 pm on 30 August 2020, Auckland moved to Alert Level 2.7 Auckland also moved to Alert Level 3 in February 2021.8 That was after SHK Trustee Company Ltd cancelled the lease.

[12]   The significance of these alert levels is that the orders and regulations made under the Health Act 1956 imposed restrictions on accessing business premises.9 NZDMG Ltd was a kitchen manufacturer. Kitchen manufacturing is not an “essential service” under the Alert Level regulations, and there were restrictions on NZDMG Ltd and its directors and staff accessing the premises during lockdown periods.10

[13]   NZDMG Ltd sought an adjustment of rent relying on cl 27.5 of the leases. While there were communications, the parties did not agree what rent should be paid. SHK Trustee Company Ltd recognised that there should be some adjustment on account of the Level 4 lockdown but did not accept that there should be any reduction in rent for any other period. It was only prepared to allow a partial reduction in rent during the Level 4 lockdown period. NZDMG Ltd on the other hand did not accept that it should have to pay any rent at all. The short point here is that the parties did not agree what rent should be paid under cl 27.5.

[11]             Then on the issue of potential remedies including arbitration, the parties discussed whether their differences might be resolved by arbitration. The defendants believed that the government was establishing a “special tribunal” which could resolve

5      COVID-19 Public Health Response (Alert Level 2) Order 2020.

6      COVID-19 Public Health Response (Alert Levels 3 and 2) Order 2020.

7      COVID-19 Public Health Response (Alert Level Requirements) Order 2020.

8       COVID-19 Public Health Response (Alert Level Requirements) Order 2021.

9      See, for example, Borrowdale v Director-General of Health [2020] NZHC 2090, [2020] 2 NZLR 864 at [26], [29] and [76]. The first Alert Level 4 lockdown required the closure of all premises and quarantining at places of residence, with exceptions for the performance or delivery of essential businesses and essential personal movement.

10 See Schedule 2 of the Orders at footnotes 2 – 5.

these differences and proposed that the dispute be referred to that tribunal. The plaintiff’s counsel advised the defendants that they were mistaken but did take on board the suggestion that there should be an arbitration. The names of three Auckland barristers with recognised arbitration experience were proposed but the first defendant did not accept any of the names suggested. The plaintiff then asked the New Zealand Law Society to appoint an arbitrator, in response to which the Law Society appointed the Hon Robert Fisher QC, but the matter went no further.

[12]             Since arbitration did not proceed, the plaintiff issued notices under s 245 of the Property Law Act 2017 (PLA), dated 23 July 2020. These notices claimed that the NZDMG Ltd was in default, having been in breach of its obligations under the lease to pay rent and other outgoings, and sought $134,139.93 in rental arrears for the warehouse lease and $24,907.48 for the office lease, as well as legal costs and disbursements of $1,500 associated with each notice. The notice for the warehouse lease claimed unpaid arrears of $15,531.19 in March 2020 and $29,652.16 per month for April, May, June and July 2020. The office lease arrears were $6,226.87 per month for April, May, June and July 2020. The notice did not require rent for the office for March 2020. The plaintiff sought payment in full, with no allowance was made for any COVID-19 lockdowns rental abatement. The defendants were given 30 working days to pay.11 They did not.

[13]             Then on 8 September 2020, the plaintiff changed the locks and re-entered the premises as the 30 working days under the notices had expired. A notice of cancellation dated 8 September was served on the defendants advising that the plaintiff had exercised its right to cancel the leases, as the breaches in the Notices relating to unpaid rent had not been remedied. A letter of demand for the rental arrears was also issued on 8 September, demanding payment of the rental arrears, outgoings and enforcement costs totalling $222,676.36. The first defendant still had goods, plant and equipment in the premises and so the plaintiff required the first defendant to remove all its property. However, the last item was not removed until 22 December 2020. The plaintiff used security agents to secure the premises and subsequently employed contractors to tidy the premises and remove rubbish at a cost of $72,878.76.

11     Property Law Act 2007, ss 245B and 245C.

[14]             In response, the defendants did not apply for relief against cancellation under s 253  of  the  PLA  in  the  three-month  statutory  time-frame  (which  expired  on   7 December 2020). After re-entry, the plaintiff did not re-let the premises and instead put it up for sale with settlement scheduled for 30 July 2021.

[15]The plaintiff then sought summary judgment as follows:

(a)$210,720.98 – Arrears of rent and outgoings;

(b)$24,697.14 – Interest at 12 percent per annum;

(c)$36,287.80 – Legal and enforcement costs;

(d)$72,878.76 – Removing chattels, making the premises good;

(e)$264,841.47 – Damages for loss of rent.

$609,426.15 – Total.

[16]On the challenge to jurisdiction and an application for a stay, the Judge said:

[27] When the case was called in the summary judgment list on 18 May 2021, Woolford J considered that the document could be classified as a notice of opposition. He recorded his understanding of the grounds of defence.12 One of the grounds was that, according to the defendants, SHK Trustee Company Ltd wrongly terminated the lease during the arbitration process, pursuant to which the New Zealand Law Society had appointed the Hon Robert Fisher QC as arbitrator, acting pursuant to cl 43 of the deeds of lease. Woolford J certainly did not understand the document to say that the court should not decide the substance of the dispute between the parties. That is borne out by some of the words that the defendants have used in the document.

…

[29] Other parts of the document can be read as showing attempts  to have matters arbitrated, but the document does not request that the current proceeding be stayed so that the issues can be referred to arbitration. There are complaints the plaintiff ought to have observed the arbitration process, but they are historical. In asking for summary judgment against the plaintiff, the defendants have asked the court to decide the substance of the dispute. In doing so, they have submitted to the jurisdiction of the court under art 8(1) of the First Schedule to the Arbitration Act 1996. Their application for a stay came too late because by then they had

12     SHK Trustee Company Limited v NZDMG Limited HC Auckland CIV-2021-404-491, 18 May 2021 at [5].

already submitted the substance of the dispute to the decision of the court. Accordingly, I dismiss their application to stay the proceeding.

…

[17]             Associate Judge Bell gave judgment for the plaintiff for the period claimed with the exception of those weeks when the Level 3 and 4 lockdowns were in effect. He found that he could be satisfied to the summary judgment standard that NZDMG Ltd did have access to the premises outside of the Alert Level 3 and 4 periods and that rent was properly payable.13 However, he determined that there was a live issue as to what a fair proportion of rent should have been during Level 3 and 4 which would need to be decided at trial.14 The Judge noted that it was arguable that the PLA Notices were invalid because the landlord had not recognised any adjustment to the rent and outgoings for Level 3 and 4. The plaintiff was potentially not entitled to cancel the lease having not complied with s 245.15 The consequences of invalidity, including the claims for damages for lost rent and removal of chattels, were also issues for trial.16

Procedural history

[18]             The earlier procedural history culminating in Associate Judge Bell’s decision on 26 July 2021 is set out in that judgment and this decision need not be encumbered with that detail.

[19]             On 6 August 2021, Associate Judge Bell issued a case management conference minute issuing various directions and confirming that the proceedings would be heard over three days commencing 28 March 2022. Prior to trial, various submissions, casebooks and memoranda were filed by the parties. In the end, the hearing only required two days, 28 and 30 March. Following that hearing, the defendants filed further memoranda citing a number of authorities in support of their defence and counterclaims.

13     Summary Judgment, above n 1, at [38].

14 At [40].

15     At [46]–[47].

16     At [48]–[54].

What was payable during COVID Level 3 and 4 Lockdowns?

Plaintiff ’s submissions

[20]             Ms Gamet, for the plaintiff, submitted that her client is entitled to recover rental arrears, outgoings and damages as a consequence of the first defendant’s failure to pay rent during COVID-19 Alert Levels 3 and 4, 23 March to 13 May 2020, and 13 August to 30 August 2020 (the Relevant Period). The amounts sought by the plaintiff are:

(a)Rent arrears and outgoings – $81,684.16;

(b)Default interest – $16,220.46 (calculated from 1 August 2020, being the date the last payment fell due, until the date of hearing on 28 March 2022);

(c)Legal costs – $38,002.08, with a further calculation to be provided by memorandum;

(d)The costs of making good and removing of chattels – $65,037.46;

(e)Loss of rent damages – $347,614.33.

[21]             Counsel contended that the first defendant defaulted on payment of rent and outgoings and refused to pay from March 2020 onwards. During the Level 3 and 4 lockdowns, the total rent and outgoings was $35,879.03. Further, counsel argued that the plaintiff was entitled to default interest under the leases at the rate of 12 percent per annum. This amount continues to accrue while the proceedings are extant and will need to be calculated post hearing should judgment be issued in the plaintiff’s favour.

[22]             Ms Gamet submitted that under cl 6.1 of the leases the plaintiff is entitled to recover the legal costs associated with enforcing the leases and recovering rent and other losses. These include enforcing the leases, demanding payment, seeking arbitration, serving PLA notices, attendance on re-entering and terminating the leases, attendance on summary judgment proceedings to recover rent and attendance for the substantive hearing. The plaintiff contended that it will provide an update on the total legal and enforcement costs it has incurred by way of memorandum.

[23]             The plaintiff also seeks $65,037.46 being the costs of making good the premises and removing the defendants’ chattels following their eviction. Counsel noted that some of the invoices rendered were from Tata New Zealand Limited or Milano Homes Limited, companies related to the plaintiff. As the plaintiff’s witness Mr Rajpal confirmed, the use by the plaintiff of its associated companies resulted in trade discounts being made available.

[24]             In short, Ms Gamet contended that NZDMG Ltd and, by extension, the second and third defendants as guarantors are liable for the cost of making good the premises and removing the first defendants’ chattels under cl 20.4 of the leases. Under cl 30.1 the defendants’ failure to pay rent and outgoings activated that clause with the result that the plaintiff argued that the defendants have repudiated the lease.

[25]             Counsel submitted that after the leases were terminated, the plaintiff provided several opportunities and extensions of time for the defendants to remove their property from the premises. Three weeks after the leases were terminated, according to the plaintiff, a substantial amount of chattels and rubbish remained in situ.17 In any event, the first defendant did not vacate the premises until late December 2020. Moreover, the plaintiff had incurred significant costs in removing chattels and rubbish and reinstating the premises. Ms Gamet contended that the plaintiff is entitled to claim those clean up and reinstatement costs and seek judgment for them.

[26]             As to claims of loss of rent and loss of bargain damages, counsel submitted that these are available where the tenant has repudiated the lease: Robt Jones Holdings Limited v Northern Crest Investments Limited.18 The plaintiff argued that the first defendant in defaulting on its rent and outgoings repudiated the lease and under cl 29.1 this breach is deemed to be ongoing to the essence of the first defendant’s obligations under the leases. This breach then entitled the plaintiff to recover the damages from the first defendant. Clause 30.1 further entitled the plaintiff to damages for its losses and damage suffered as consequence of the first defendant’s repudiation. Accordingly, the plaintiff seeks damages for the lost rent it would have received but for the first

17     Of which photos have been provided in evidence.

18     Robt Jones Holdings Limited v Northern Crest Investments Limited (2009) 11 NZCPR 206 at [16].

defendant’s defaults. The period claimed between the date of termination of the leases, 8 September 2020 and up to when the premises was sold, on 30 April 2021.

[27]             As to the claim that cl 27.5 of the lease should have applied, Ms Gamet submitted that during Alert Level 3, this clause was not engaged. That clause provides that in the case of an emergency where the tenant is unable to gain access to the premises to fully conduct the business from the premises, then a fair proportion of the rent and outgoings shall cease to be payable from when access was unavailable. Under cl 47.1, counsel pointed out “emergency” for the purposes of subclause 27.5 is defined as a situation that:

(1)    is a result of any event, whether natural or otherwise, including an explosion, earthquake, eruption, tsunami, land movement, flood, storm, tornado, cyclone, serious fire, leakage or spillage of any dangerous gas or substance, infestation, plague, epidemic, failure of or disruption to an emergency service; and

(2)   causes or may cause loss of life or serious injury, illness or in any way seriously endangers the safety of the public or property; and

(3)  the event is not cause by any act or omission of the landlord or tenant.

[28]             Ms Gamet contended that this clause was inserted into the ADLS lease because of the 2011 Canterbury earthquakes. In any event, counsel argued that the plaintiff did offer to reduce the rent by 30 percent at Alert Level 4, but the first defendant refused to accept that accommodation and by way of a counter-offer refused to pay any rent from March 2020 onwards. The plaintiff then decided it was entitled to claim the entire rent outstanding because it was required to take enforcement action.

[29]             Accordingly, the plaintiff’s position is that it is entitled to the rent for Alert Levels 3 and 4, on the basis that it had made an offer of rent reduction which was rejected followed by a failure of the defendants to provide any reasonable counter proposal. Alternatively, the plaintiff contended that it was entitled to the full rent at Level 3 and reduced rent at Level 4, because the first defendant was able to access its premises and conduct its business at Level 3. Further, the defendants failed to produce any evidence that they could not operate at Alert Level 3. So the plaintiff argued that cl 27.5 is not triggered for Alert Level 3. Regarding Alert Level 4, if the Court

considers a reduction is appropriate because cl 27.5 is engaged, then a Ms Gamet submitted that a 30 percent reduction in rent is fair.

[30]             In support of its claim that the defendants could access their premises under Alert Level 3, counsel cited the Health Act (COVID-19 Alert Level 3) Order 2020 that came into force on 27 April 2020, along with the COVID-19 Public Health Response (Alert Levels 3 and 2) Order 2020, which came into effect on 12 August 2020. The third order was then issued on 22 August 2020, the COVID-19 Public Health Response (Alert Levels 3 and 2) Order No. 2, 2020. Ms Gamet contended that considering these three orders, the defendants had access in Alert Level 3 to undertake business with the result that clause 27.5 was not engaged.

[31]             Counsel cited Coffee Culture Franchises Limited v Home Straight Park Trustees Limited,19 involving access to a café in an IRD office building, and Mountford v Cheam which involved access by the proprietor to her bakery.20 Both authorities were cited to underscore that the issue was one of access by the proprietor to their business rather than any downturn in custom due to the pandemic. Ms Gamet contended that, unlike a café or bakery, the defendants’ business did not require customer access. While the defendants claimed that their businesses were dependent on China, had cashflow issues and financial problems generally, those matters were irrelevant to whether cl 27.5 of the lease is engaged. As to a fair reduction in rent as foreshadowed, the plaintiff argued that a 30 percent reduction during Alert Level 4 would be appropriate and the total amount so adjusted would be $24,111.03.21

[32]             For comparative purposes, Ms Gamet pointed out that the COVID-19 Response (Management Measures) Legislation Act 2021 was passed on 21 November 2021 and introduced a new “no-access in an emergency clause” for leases where such a provision did not exist. This was modelled on cl 27.5 of the ADLS lease. Under the Covid Response (Management Measures) Act 2021, when determining a fair proportion of rent reduction, the parties are required to consider any loss of income experienced by the lessee, for all or any of that rental period where there is an epidemic

19     Coffee Culture Franchises Limited v Home Straight Park Trustees Limited [2021] NZHC 577.

20     Mountford v Cheam [2021] NZHC 1535 at [44].

21     See also counsel’s memorandum of 29 March 2022.

and the lessee is unable to gain access to conduct fully their operations in any part of the premises, because of reasons or health or safety related to the epidemic.22 Counsel noted that there was limited case law on this issue.

[33]             However, the New Zealand Law Society’s submissions to the Finance and Expenditure Select Committee suggested that relevant factors would include in addition to loss of income, as a non exhaustive list:23

(a)The lessee’s ability to operate remotely;

(b)The nature of the lessee’s business;

(iii) The continuing right of the lessee to store goods and business equipment in the premises;

(c)Any government wage subsidy;

(d)The number of staff able to attend at the premises and the extent to which the premises can be used in a manner that is consistent with the social distancing requirements;

(e)The borrowings and commitments of the parties regarding the building in which the premises are situated.

[34]             Ms Gamet submitted that the financial projections of the first defendant are a useful starting point in assessing the loss of income experienced by the lessee during the relevant period. Here the defendants have not provided evidence for their loss of income for the period 23 to 25 March 2020 during Alert Level 3. In addition, during the first period of Alert Level 4, the defendants failed to provide evidence to support loss of income claims. That is also relevant to the period 27 April to 13 May 2020 under Alert Level 3. Ms Gamet submitted that the projected statement of profit and loss records $279,753 total income in August being significantly more than is recorded for June at $188,070, and July at $87,951.

22     Covid-19 Response (Management Measures) Legislation Act 2021, sch 6, pt 4, s 4A.

23     New Zealand Law Society “Submission to the Finance and Expenditure Committee on the COVID-19 Response (Management Measures) Legislation Bill 2021” at [4.10].

[35]             Counsel acknowledged that the defendants could not operate their business remotely during Level 4. That said, they were able to store their chattels and goods in the premises throughout the period of the lease and during Alert Levels 3 and 4. Ms Gamet argued that the defendants received COVID-19 wage subsidies for the months of June, July and August 2020 as well as business government loans from June 2020 to May 2021 of $29,800 per month. Despite this, accounts for the months prior have not been made available by the first defendant.

[36]             Ms Gamet noted further that NZDMG had provided no evidence as to the number of staff able to attend the premises but noted that it is a large premises which could be used consistently with social distancing requirements.

[37]             Counsel then cited Jacobson Holdings Limited v Drexel in the context of the phrase “fair proportion” and how compensation might be assessed on the basis of what a willing seller and a willing buyer would arrive at during friendly negotiations.24 Ultimately, the plaintiff submitted that a 30 percent reduction in rent during Alert Level 4 would be appropriate.

[38]             On the question of the plaintiff adequately mitigating its losses for the purposes of damages for loss of rent, Ms Gamet contended that the plaintiff could not re-let the premises because the defendants refused to remove their chattels in a timely manner. Between 8 September and 23 December 2020, the defendants moved their chattels to new premises. In March 2021, some three months after the defendants removed the last of their chattels, the plaintiff readied the premises for sale. The plaintiff did not re-let the premises because it would not have been possible for some time after the leases were terminated due to the state of disrepair following the first defendant’s departure and because the market in the COVID-19 environment would have likely made it difficult for the plaintiff to secure a new tenant. In any case, on 30 April 2021, the plaintiff entered into an unconditional agreement for the sale of the premises.

[39]             Regarding arbitration, the plaintiff had first sought resolution via that route, but the defendants refused to participate citing, confusingly, a government tribunal which was not in existence, as set out in an email from the second defendant to Stace

24     Jacobsen Holdings Limited v Drexel [1986] 1 NZLR 324 (CA) at 324.

Hammond on 3 July 2020. That was followed up by a subsequent email on 9 July 2020 to Stace Hammond. That same day, the second defendant wrote to the New Zealand Law Society to also confirm rejection of arbitration. Despite the fact that both the Law Society and Stace Hammond explained to the defendants that any such government “tribunal” did not exist, the defendants persisted in their denial of the option of private arbitration, as contemplated under the leases.

[40]             On the issue of representation, Ms Gamet submitted that three judges have directed that the defendants seek legal assistance. They have not done so, even at the time of the substantive hearing. It is well settled, according to counsel, that a company cannot be represented by anyone other than a lawyer, without leave. In exceptional circumstances, usually in emergency situations, leave can be given. The plaintiff, in any event, argued that the current proceedings concern neither an emergency and nor are they straightforward. The short point is that the first defendant, according to counsel, cannot be represented by the second and third defendants.

[41]             In conclusion, Ms Gamet contended that the plaintiff was entitled to recover unpaid rent, operating expenses, interest and recovery costs, as well as the costs of making good the premises and loss of future rent following the defendants’ breaches. This especially applies to the period where New Zealand was affected by Level 3 and Level 4 lockdowns. In those instances, according to counsel, at best, the defendants might be entitled to a 30 percent reduction of the rent and operating expenses but only for the periods when the Level 4 lockdown was effective.

Defendants’ submissions

[42]             The second and third defendants submitted that they were without means to engage counsel and had instead relied on phone calls to government agencies as to their legal rights. They argued that their financial position was such that it was impossible for them to afford a lawyer for advice and to defend the proceedings.

[43]             The second and third defendants submitted that a government-funded “arbitration tribunal” was to be created and so they did not wish to engage in any process other than the government-funded arbitration regime. This was why they opposed the reference to private arbitration by the plaintiff and the New Zealand Law

Society. It is also why, they claimed, the defendants did not wish to take other steps, including relief against forfeiture. This was because they read Associate Judge Bell’s decision to mean that the plaintiff had acted, in effect, unlawfully and improperly, with the result that the PLA notices were invalid and, therefore, the termination of lease was also unjustified.

[44]             On the issue of cl 27.5 of the lease, the defendants argued that because they were prevented from entering their premises under Level 4 lockdown, they should not have to pay any rent at all. They considered the offer of a 30 percent reduction unacceptable which they conveyed to the plaintiff’s solicitors. On more than one occasion, the defendants emphasised that they were waiting for the government- funded “arbitration” process and consequently considered that they did not need to engage any further, more so because they considered Associate Judge Bell’s decision was issued in their favour.

[45]             While the defendants accepted that they received wage subsidies and loan monies from the government, nonetheless, their obligations were to their customers and to their staff in the first instance and so those funds were applied accordingly. Moreover, the defendants emphasised that they understood that they could not operate under Alert Level 3 because they were not considered an emergency service or the kind that was permitted to operate under Alert Level 3. The defendants also argued that because of the actions of the plaintiff in wrongfully terminating the lease, they had suffered significant personal stress and ill health, as well as financial difficulties. They referred to a loan from the BNZ that they had to take out because of the lack of income during the lockdown period.

[46]             In their closing submissions, the second and third defendants read verbatim large tracts of Associate Judge Bell’s decision, particularly those references that they considered supported their arguments. The defendants reiterated their earlier submissions that up until the Level 3 and Level 4 lockdowns, their relationship with the plaintiff was reasonable but that once the lockdown was enforced, that connection deteriorated. This was because the plaintiff refused a 100 percent rent abatement for the entire period of Level 3 and Level 4 lockdowns, which the defendants considered they were entitled to in the circumstances.

[47]             The defendants then argued that their subsequent eviction and the termination of the lease by the plaintiff was a surprise and was wrongful. The defendants submitted that they did not have access to their premises, could not conduct their business properly and, therefore, could not pay their rent to the plaintiff because they had no income during this period. They also contended that there was no evidence from the plaintiff that the defendants’ business was operating during Level 3 or Level 4 lockdowns. Added to that, the defendants asserted that, due to the nature of their business, social distancing requirements meant that they could not operate their business under either Alert Level 3 or 4.

[48]             Finally, the defendants submitted that their relationship with the plaintiff had been cordial, in effect, up until the lockdown because the plaintiff was eager for the defendants to purchase the premises. When a purchase was no longer viable due, in part, to the COVID-19 pandemic impacts, the relationship deteriorated. The result was the defendants have had to incur significant costs through damage to their equipment, finding new premises, moving on more than one occasion and then, most significantly, for a loss of production due to the necessity of having to move as a result of the plaintiff’s wrongful actions. For all these reasons, the defendants contended that they are entitled to the full amount of their counterclaim from the plaintiff.

Legal framework and principles

[49]Clause 27.5 of the Leases (which follow the ADLS standard lease) provides:

No Access in Emergency

27.5If there is an emergency and the Tenant is unable to gain access to the premises to fully conduct the Tenant’s business from the premises because of reasons of safety of the public or property or the need to prevent reduce or overcome any hazard, harm or loss that may be associated with the emergency including:

(i)prohibited or restricted access cordon applying to the premises; or

(ii)prohibition on the use of the premises pending the completion of structural engineering or other reports and appropriate certifications required by any competent authority that the premises are fit for use; or

(iii)restriction on occupation of the premises by any competent authority.

then a fair proportion of the rent and outgoings shall cease to be payable for the period commencing on the date when the Tenant became unable to gain access to the premises to fully conduct the Tenant’s business from the premises until the inability ceases.

[50]The leases define “emergency” in cl 47.1(d) to include an epidemic.

[51]             As noted, there is limited case law on the application of cl 27.5 of the ADLS lease and, in particular, how a “fair proportion” of rent might be assessed in the event of no access in an emergency. However, it is uncontroversial that it applies to the COVID-19 Lockdowns where there is restricted access.25

[52]             Although not directly applicable in this case, given that the Leases already contain the ADLS “no access in emergency clause”,26 as the plaintiffs have stated, there is some guidance to be found in commentary and text of the COVID-19 Response (Management Measures) Legislation Act 2021, which inserted an implied covenant provision regarding a “no access in emergency clause” into the PLA which was modelled on cl 27.5 of the ALDS lease.27 Relevantly, sch 3, cl 4A(4) of the PLA (the implied covenant) provides that:28

Fair proportion of rent otherwise payable will cease to be payable

…

(4) In determining the fair proportion, the matters that the lessor and lessee will consider must include any loss of income experienced by the lessee in respect of that rental period because, for all or any of that rental period,—

(a)  there is an epidemic; and

(b)  the lessee is unable to gain access to all or any part of the leased premises to conduct fully their operations in all or any part of the leased premises, because of reasons of health or safety related to the epidemic.

25 See Coffee Culture Franchises Limited v Home Straight Park Trustees Limited [2021] NZHC 577; Mountford v Cheam [2021] NZHC 1535; and more recently Burgered Restaurants Auckland Ltd v Chunilal (as trustees of Auroma Trust) [2022] NZHC 1903 where Gendall J, in the context of setting aside a statutory demand, was satisfied that cl 27.5 had been triggered and that some rent abatement was warranted so as to raise a genuine and substantial dispute as to the existence of a significant part of the rent and outgoings debt claimed.

26     Pursuant to s 245F(1)(c) of the Property Law Act 2007, the relevant provisions only apply to a lease that does not include any no access in an emergency clause that covers an epidemic.

27     See COVID-19 Response (Management Measures) Legislation Bill (77–1) (Select Committee report) at 5–6.

28     Schedule 3 clause 4A: inserted, on 3 November 2021, by Schedule 6 clause 16 of the COVID-19 Response (Management Measures) Legislation Act 2021.

[53]             The government’s guidelines outline what it considers are the relevant criteria when assessing a “fair proportion” of rental reduction. These align with the Law Society’s Submissions to the Select Committee as cited by the plaintiff. In summary, relevant considerations may include:29

(a)The degree to which the tenant is prevented from access to all or part of the premises by COVID-19 restrictions. The restrictions may change during the affected period so the rent reduction may also change at each different level of COVID-19 restrictions. The rent reduction ends when the tenant can access the premises to fully operate their business.

(b)If a tenant can access the premises but cannot operate fully, a rent reduction may still apply. Some businesses, however, with larger premises may be able to operate by providing for physical distancing. In addition, where practicable, reasonable efforts to cut back the consumption of outgoings for the property should be made.

(c)The parties should consider the tenant’s loss of income when assessing a “fair proportion” so the tenant must prove a loss of income as a result of the restrictions on access to their premises. A starting point in assessing a ‘fair proportion’ of rent could be to take the percentage of loss of income and apply that percentage to the rent. While the tenant’s loss of income is the guiding factor in determining a fair proportion of reduced rent, the parties may also consider other relevant factors.

(d)A rent reduction applies where a reduction in a tenant’s ability to generate income, or their profitability, is directly connected to lack of access. For example, like a café or restaurant or a tourism business when the borders are closed. However, where a tenant cannot access the premises, but can operate remotely and have no loss of income, a rent reduction will be unlikely.

29     See Ministry of Justice “Rent reduction for commercial leases: Guidelines to assist parties”

< commercial-leases/guidelines-to-assist-parties/>.

(e)The tenant’s overall financial position may be a relevant consideration and only the tenant's loss of income during the relevant period is considered. Any increase in sales that the tenant may experience after the restrictions have changed is not relevant to the 'fair proportion' of rent for the earlier period. COVID-19 Resurgence Support Payments received by the tenant during the period may be relevant to the assessment of a fair proportion.

(f)The tenant will need to give the landlord reasonable evidence of their loss of income which should be based on the tenant’s normal operations that were being performed during the appropriate benchmark period.

(g)Where the landlord is in a strong financial position, a greater reduction of rent could be justified, than would be the case if the landlord had substantial financial commitments under its funding arrangements for the property. The tenant’s financial position will also be relevant. COVID-19 support payments received by the tenant during the period may be relevant to the assessment.

[54]             As Associate Judge Bell noted in the Summary Judgment, some helpful analogy might also be made with the Court of Appeal’s decision in Jacobsen Holdings Ltd v Drexel. In that case compensation was said to be assessed on the basis of what a willing buyer and a willing seller would arrive at during friendly negotiations taking into account the particularities of the land and taking into account all factors of benefit or detriment on either side.30

[55]             Ultimately, as Associate Judge Bell earlier observed, a “fair proportion” leaves room for legitimate differences of opinion as to how much should be paid.31 The dearth of authority in relation to cl 27.5 suggests that in the majority of cases parties have been able to resolve any differences directly. The short point is that there is no exhaustive list of criteria of what might be taken into account in assessing a fair proportion of rent abatement when the tenant has restricted access to the premises. It would be undesirable to create such a list given the myriad circumstances which may

30     Jacobsen Holdings Limited v Drexel [1986] 1 NZLR 324 (CA) at 324.

31     Summary Judgment, above n 1, at [35].

arise.     Necessarily it will be a matter of fact and degree in each case, grounded squarely in the circumstances in the particular case.

Discussion

What was payable under Alert Level 3?

[56]             Clause 27.5 is, as Campbell J noted in Mountfort v Cheam, about access.32 That must be the starting point. The degree to which the tenant (or those associated with the tenant) has access to the premises during the Alert Levels is necessarily dependent on the nature of the business. In this case, the question of what a fair proportion of rent is has been complicated by the parties’ different positions as to what that actual access was.

[57]             In summary, the plaintiff was prepared to entertain a rental reduction of 30 percent of the amounts due and payable under the lease for Level 4 but did not consider it was obliged to offer any such accommodation for the Level 3 lockdown. It argued that the defendants could have resumed production under Level 3 and had full access to the premises. Conversely, the defendants claimed that no rental and outgoings were payable under Levels 3 and 4. Their business was not an essential service and could not operate from home. They had no income during this period and, therefore, were not able to pay rent during the period of the Level 3 and 4 lockdowns. When the issue of wage subsidies and government loans was put to the defendants, they emphasised their obligations to their employees and customers, rather than to the plaintiff.

[58]             Turning to the issue of what amounts were duly payable, it does appear that the defendants were confused as to whether they could operate their business during Level 3. Ms Dong’s submissions and answers to questions make it clear that, unsurprisingly for someone who does not use English as their first language, the intricacies of the three COVID-19 orders referred to by Ms Gamet, would likely have been challenging for the second and third defendants to properly understand. I say that with no disrespect but what appeared evident during the hearing was that, from time to time, the second and third defendants would become confused as to what

32     Mountfort v Cheam [2021] NZHC 1535 at [53].

exactly was meant both in terms of the decision of Associate Judge Bell and the detail of the three COVID-19 orders mentioned during the proceedings.

[59]             It is also unclear as to whether the defendants actually had staff on site during the Level 3 lockdown period. If they had, then that would strengthen the plaintiff’s argument that the defendants could and were operating their business at full capacity during Level 3. If, however, it emerged that the defendants had a genuine misunderstanding that because they were not an essential service, they could not operate under Level 3, that would arguably be a different scenario. If the defendants genuinely misapprehended their ability to operate under Level 3 and were not in fact present with their staff at their premises during those periods, then some consideration might be given as to what amounts were payable to the plaintiff under Alert Level 3. Ms Gamet acknowledged this possibility in her Memorandum of 29 March 2022, in which she submitted that if the Court considers that a rent reduction is required for Level 3 in addition to Level 4, that a 30 percent reduction under Level 3 “is fair”. This is despite the fact that cl 27.5 of the lease is couched in objective terms.

[60]             Conversely, if there was evidence to confirm that the defendants were present with their staff and continuing to operate their business under Alert Level 3 – for example, electricity bills that were congruent to similar accounts before the Level 3 and 4 lockdowns, then the plaintiff would be justified in seeking payment of the full amount of rent during Level 3. Provision of the electricity and related utilities accounts by the defendants might have shown any variation and usage during the relevant periods of Level 3 and Level 4. CCTV video footage or photographs from relevant service providers during Level 3, might also have been available could have supported the plaintiff’s claims. In short, there is no evidence that during Alert Level 3 the defendants were present at the premises with their staff operating their company in a business as usual fashion.

[61]             That said, the counterpoint is that had the defendants volunteered evidence of utilities and related costs, with the assistance of competent counsel, then there would at least be clarity on the point. Further, there is also an argument that it is not for the plaintiff to absorb completely any additional losses due to the defendants’ confusion over which Alert Level information was then in the public domain. While the

defendants may have been confused, the landlord had all its usual costs associated with the premises. Accordingly, some sensible compromise is required.

[62]             During questions from the bench, the defendants disputed that they were in fact present at the premises with their staff, from time to time, continuing to operate their business. They also asserted that the plaintiff has provided no evidence to confirm that they were present and working during Level 3. However, as mentioned, the plaintiff should not have to bear the burden entirely of the defendants misunderstanding. In my assessment, the plaintiff is entitled to 70 percent of the rent and outgoings during Alert level 3, or $30,862.4333, plus interest at 12 percent.34

What was payable under Alert Level 4?

[63]             As foreshadowed the Level 4 lockdown is a different scenario. The defendants could not have access to their premises, even if they wanted to, and so production ceased. Ideally, the parties should have come to an amicable arrangement as to what the rental reduction should be in such circumstances as is envisaged by cl 27.5. As the evidence demonstrates, the plaintiff offered a 30 percent rental reduction but this was rejected by the defendants who, instead, sought first, a complete reduction in rent and outgoings or failing that, resolution through a state-funded “arbitration process” as the pathway to resolving the dispute between the parties. The short point is that it would not be difficult to see how tenants and landlords would be forced into impossible situations where one relied on the other to pay obligations and to keep their respective businesses running at a time when neither received income – the tenant from customers and the landlord from the tenant.

[64]             The question then becomes what was payable under Level 4 in terms of a “fair proportion” of the rent and related costs due? If, as foreshadowed the plaintiff was prepared to accept a 30 percent reduction under Level 4, then that is a useful starting point of an appropriate rental reduction because that it what the plaintiff had previously indicated would be acceptable. That the plaintiff then withdrew the proposal, given the stance of the defendants that they should pay nothing, is entirely understandable

33     Comprising $25,860.52 for the Warehouse Lease and $5,001.91 for the Office Lease.

34     Comprising $19,249.59 for the Warehouse Lease and $3,858.62 for the Office Lease.

since the plaintiff was then required to incur further costs in pursuing its claims and eventually in making good the premises following re-entry.

[65]             Regarding the Level 4 lockdown period, I consider that a rent reduction of 40 percent to be fair and reasonable in the circumstances. This is because it would be unjust to expect a business to continue to pay rent when it is not receiving its usual income. In arriving at that figure, I note that there are few applicable precedents. Complicating that assessment further has been the dearth of detailed financial information for the defendants. So inevitably, the size of the discount has been determined in the absence of detailed financial information, which is less than ideal.

[66]             However, it is uncontentious that the defendants had no access to the premises and no ability to carry out their manufacturing business remotely. Even so, the counter point to that argument is the reality that the defendants received COVID-19 wage subsidies and business loan payments of a not insignificant total sum. That said, I also acknowledge the defendants’ submission that their employees were a priority during a time of lockdown; more so given that the wage subsidies could only be used for that purpose, to pay staff and not for any other costs.

[67]The key point is that some rent is due and owing during both Level 3 and Level

4. Consequently, I reject the defendants’ submission that they should be entitled to effectively a rent holiday during Level 3 and Level 4 lockdowns. The defendants expected the plaintiff to compromise but plainly were unwilling to do the same. That is not what is contemplated by the lease nor is it fair to the plaintiff in such circumstances. For completeness in this context, and as foreshadowed, I note the plaintiff’s acknowledgment that a rent reduction of 30 percent for both Level 3 and 4 was considered “fair.” I also note counsel’s helpful calculation of a 50 percent rent reduction under Level 4 as an alternative but without a corresponding description of that percentage being “fair”.

[68]             In summary, and in the absence of more detailed financial information, in the circumstances, the plaintiff is entitled to 60 percent of the rent due under the lease of during Alert level 4. That amounts to $23,108.21, plus interest at 12 percent.

Is the plaintiff entitled to loss of rent damages, removal and reinstatement costs?

Submissions

[69]             The plaintiff claims $347,614.33 in damages for loss of rent and loss of bargain. They also claim $38,002.08 in legal costs (with a further calculation on costs to be provided by memorandum) and $65,037.46 for the costs of making good/removal of chattels.

[70]             The defendants rejected that claim and reiterated their arguments that the PLA notices were invalid with the effect that the plaintiff wrongfully terminated the lease.

Discussion

[71]             Plainly from the point of re-entry and cancellation the defendants were no longer under a contractual obligation under the lease to pay rent.35 However, the question is whether the plaintiff can recover damages for loss flowing from that loss of bargain and breach of lease. Although the plaintiff has cancelled the lease validly, I do not consider that damages for loss of rents from the point of re-entry are appropriate here. In claiming damages for loss of rent for the period following re- entry and cancellation, the plaintiff as the lessor is under the “normal duty to mitigate the damages claimed by making all reasonable efforts to re-let”.36 As I pointed out to Mr Morris, once the plaintiff had re-entered the premises on 8 September last, it was within its power to have the defendants’ chattels and other property removed. However, it made no attempt at all to re-let the premises and nor did it promptly sell the property as an alternative, notwithstanding arguments over reinstating the premises ready for re-letting or sale.

[72]             While I appreciate that the plaintiff sought to act reasonably by giving the defendants ample time to remove their property, once that had expanded into November, a full two months after re-entry, then the defendants’ requests could be seen as unreasonable. Put another way, as I mentioned to Mr Morris, the plaintiff

35     Contract and Commercial Law Act 2017, s 42(1)(a) and Property Law Act 2007, s 267(2)(a).

36     See for example Hinde McMorland & Sim Land Law in New Zealand (online ed, Lexis Nexis) at [11.241].

could easily have placed a notice in the newspapers as well as serving the defendants that unless their property was removed from the premises within a further month, then the items would be sold to defray expenses. This is not an uncommon occurrence, as Mr Morris acknowledged.

[73]             The plaintiff submitted that they were unable to re-let the premises due to the defendants refusing to move their chattels quickly, notwithstanding the plaintiff’s requests to allow the premises to be sold. However, as set out above, the plaintiff could have had the defendants’ property removed from its premises during that period and for the cleaning and restoration of the premises to its previous state to get underway well before Christmas.37 Notwithstanding the effects of COVID-19 on the availability of contractors, builders and painters, it was also possible that, working diligently to mitigate losses, the plaintiff might have taken more urgent steps to have the premises reinstated by, say, the end of January and certainly by the end of February 2021. It did not act to mitigate its losses in a timely fashion.

[74]             In short, the defendants should not be saddled with all the plaintiff’s costs of inaction in failing to remove the defendants’ property from their premises within two months from re-entry and then having those premises reinstated to a reasonable extent by the end of December and certainly by the end of January 2022. In any case, the plaintiff reveals one of the reasons for the decision not to seek a new tenant was because of market conditions due to COVID-19. The defendants, themselves facing the economic downturn, which precipitated these proceedings, should not have to shoulder the all plaintiff’s costs of its decision to delay removing the defendants’ property and consequently to reinstate them back to a tenantable or saleable state. If a landlord makes the decision not to re-let the premises, then that is hardly the fault of the tenant.38

[75]             All of that said, taking all of the relevant circumstances into account, I consider that the plaintiff is entitled to recover the removal and premises reinstatement costs from the defendants in full or $65,037.46. Clause 20.4 of the lease provides that “the cost of making good resulting damage and the cost of removal of the Tenant’s chattels

37     See cl 20.3 of the Leases.

38     See also Associate Judge Bell’s comments in Summary Judgement, above n 1, at [52].

shall be recoverable from the Tenant and the Landlord shall not be liable to pay any compensation nor be liable for any loss suffered by the Tenant”. Likewise, the legal costs claimed of $38,002.08, with a further calculation to be provided by memorandum, should be paid by the defendants.

Are the Property Law Act notices issued to the defendants valid?

Plaintiff ’s submissions

[76]             The plaintiff argued that the letters of demand and notices were valid, notwithstanding that the sums claimed were without any abatement or adjustments under cl 27.5. Ms Gamet submitted that the notices recorded outstanding rent of:

(a)For the warehouse lease, $135,639.83 made up of rental arrears of

$134,139.83, along with legal costs and disbursements of $1,500 associated with the notice;

(b)For the office lease, $26,407.48 made up of rental arrears of $24,907 along with legal costs and disbursements of $1,500 in connection with the notice were also due and payable according to the plaintiff.

[77]             Counsel noted that Alert Level 4 applied for 33 days and the total rent for that period, without reduction, would have been $32,082.66. The second period of Alert Level 4 lasted 27 days and the total rent for that period would have been $5,512.32.

[78]             Ms Gamet contended that if the PLA notices were overstated, which is denied, as a result of a non-including of a rent reduction for Alert Level 4 or 3, the overstatement would only be for a comparatively small sum of the total owed (a total of $11,278.50 on counsel’s calculations made on the basis of rent being reduced by 30 percent at Alert Level 4). Counsel then cited Kent Sing Trading Co Limited v JNJ Holdings Limited in support where the Court of Appeal confirmed that a notice is not invalid merely because it demands a greater sum than is owed.39 This is because, according to the Court of Appeal, the underlying objective of a PLA notice is that it

39     Kent Sing Trading Co Limited v JNJ Holdings Limited [2019] NZCA 388 at [103].

ought to enable the recipient to understand with reasonable certainty what is required by way of response, so that a notice that fails to do so or which misleads as to the nature or extent of the breach will be invalid.40 Accordingly, the plaintiff argued that the difference (on their submitted calculations, $11,278.50) is sufficiently minor that it would not have mislead the defendants as to the extent and nature of the breaches, namely that rent was due.

[79]             Other authorities cited by the plaintiff included Campbell v The Commercial Banking Company of Sydney, and Clarke v Japan Machine (Australia) Pty Limited.41 The Supreme Court of Queensland in Clark v Japan Machine (Australia) Pty Limited underscored that it will always be a question of fact and degree in every case and with the most relevant factors determining validity will be the extent of the error and the capacity of the notice to give the defaulting party reasonable opportunity to deal with the breach.42 Accordingly, the plaintiff contended that any overstatement of the amount due was minor and would not affect the overall validity of the PLA notice, that the defendants were in default and needed to pay the amounts due within 30 days.

[80]             As to the question of notice to remedy the breach, this was set out in the PLA notices. The consequence of the failure to remedy the breach was also set out and so the defendants cannot argue that they did not know what the result would be if the breach had not been remedied. In addition, the notices referred to the ability of the defendants to seek relief and legal advice. In any event, the plaintiff argued that a landlord is entitled to cancel the lease for the non-payment of rent following the issuing of a valid PLA notice. Here, counsel submitted, the PLA notices were valid and, accordingly, the plaintiff is entitled to recover costs, to recover lost rent, costs for the removal of equipment and costs incurred for making good the premises.

[81]             Even so, Ms Gamet contended that, if the Court were to find that the notices were invalid, it was the defendants who repudiated the lease in the first place by failing to pay rent when it fell due and owing. In paragraphs 77 to 80 of their submissions,

40 At [111].

41     Campbell v The Commercial Banking Company of Sydney (1879) 2 NSWLR 375 (PC).

42     Clarke v Japan Machines (Australia) Pty Ltd [1984] 1 Qd R 404 (SC) at 412 – 413.

counsel set out the steps taken by the plaintiff to demand compliance with the terms of the lease by the defendants.

[82]             In summary, Ms Gamet argued that the PLA notices were valid. If they were in error, which was rejected, then it would only be for the amount covered by the Level 4 lockdown which in itself did not amount to a significant or substantial misstatement of the amount owing by the defendants. Accordingly, counsel submitted that the PLA notices were valid and effective, and so was entitled to cancel the lease.

Defendants’ submissions

[83]             The second and third defendants submitted that the decision of Associate Judge Bell made it clear that the termination of the lease was based on invalid PLA notices. As a result, the Judge’s decision was that the plaintiff had acted improperly and was not entitled to damages, interest or costs.

[84]             The defendants reiterated their position that the PLA notices were invalid because they overstated the amount of rent and operating expenses due from the defendants to the plaintiff. This was because, they argued, without 100 percent rent reduction for the weeks of Level 3 and 4 lockdowns, the amount stated in the PLA notice was overstated. Following the line of authorities set out in Associate Judge Bell’s decision of 26 July 2021, the defendants contended that, in reliance on those authorities, it was evident that the PLA notices were invalid. As a result, the cancellation of the lease was also invalid. This then engaged the defendants’ right to bring a counterclaim.

[85]             The defendants denied that they had repudiated the lease and instead asserted that it was the plaintiff who had done so by issuing invalid PLA notices and then wrongfully purporting to terminate the lease and re-entering the premises, all to the defendants’ detriment. Added to that, the defendants submitted that they were willing and able to pay the rent due in March 2020, but the plaintiff refused to submit invoices that excluded rental due during the Level 3 and Level 4 lockdowns. Moreover, the defendants argued that as a result of the invalid PLA notices and the wrongful termination of the leases, the defendants were entitled to pursue their counterclaims against the plaintiff.

Discussion

[86]             At the risk of labouring the point, it was evident during the hearing when the second and third defendants were making submissions or answering questions, that their facility in English had an impact on their understanding of the proceedings. In particular, the second and third defendants maintained the view, contrary to several explanations of the nature of summary judgment proceedings, that Associate Judge Bell had found in their favour. They argued that the learned Judge had determined that the PLA notices were invalid and, consequently, the termination of the lease was wrongful. When I pointed out to Ms Dong that at the start of paragraph [48] of Associate Judge Bell’s decision, the word “if” is used which qualified the rest of the sentence, she did not at first appear to comprehend the importance of that qualifier. Moreover, as Mr Morris pointed out, there appears to be an error in the second sentence with the word “if” missing between “because” and “the”, as follows:

Because [if] the cancellation was not valid, the landlord breached its covenant.

[87]             I also pointed out to Ms Dong that, if her position was correct, it could not be reconciled with the conclusions of Associate Judge Bell that the plaintiff was entitled to judgment. This was an application for summary judgment, on the amounts claimed for rent and operating expenses, plus interest, for the period of the dispute, excluding the weeks when the Levels 3 and 4 lockdowns were in force. On more than one attempt to explain to Ms Dong and Mr Mao that from paragraph [42] onward, Associate Judge Bell was speaking hypothetically, the second and third defendants appeared immovable that the Judge had found in their favour. This was simply not correct. The Judge had found in favour of the plaintiff, except for the periods covered by Levels 3 and 4 lockdowns and had issued summary judgment accordingly.

[88]             The defendants, relying on their erroneous interpretation of Associate Judge Bell’s decision, argued that the PLA notices issued to them by the plaintiff were invalid. In their statement of defence and counterclaim from 17 September 2021, the defendants contended that the notices were invalid because they overstated the amount due and owing by the defendants to the plaintiff. This is premised on the defendants’ submission that during Level 3 and 4 lockdowns they were not required to pay any rent or outgoings at all to the plaintiff, in reliance on cl 27.5 of the leases.

[89]             As I indicated during the hearing, Associate Judge Bell did not find that the notices were invalid and consequently that the termination was wrongful. The learned Judge was speaking hypothetically, in the sense that it was reasonably arguable that they were. The authorities he cited are also relevant to any assessment as to the validity of the PLA notices. Case law underscores that there must be significant and substantial error on the face of the notice to justify a determination of invalidity. Put another way, to be deemed invalid, the PLA notice must significantly overstate the amount of rent and operating expenses due and payable. The defendants’ argument would be worthy of consideration if in fact their original premise, that no rent and operating expenses were payable under Alert Levels 3 and 4 were correct. Yet, as I have already found, that approach is misconceived.

[90]             Even with the adjustment to the amounts due under Alert Levels 3 and 4 as I have made above, that still did not render the original PLA notices invalid. This is because the difference in the amounts as calculated by the plaintiff in the original PLA notices contrasted with the amounts I have determined in this decision are not wildly at variance. The difference in the amounts is not significant to such an extent as to render the defendants confused as to what is being sought, what the remedy is for them to make good on the claimed breach of lease with the result, that I find the PLA notices issued by the plaintiff, while somewhat incorrect, were nonetheless valid.

What are the consequences of any invalidity of the property law notices?

[91]As the notices were valid, this question need not be considered.

Should any of the defendants’ counterclaims be granted?

Counterclaim plaintiffs’ submissions

[92]             On 17 September 2021, almost two months after Associate Judge Bell’s decision, the defendants filed a statement of defence and counterclaim. As already discussed, the second and third defendants first re-iterated their position that the plaintiff’s PLA notices and letter of demand, dated 24 July and 8 September 2020, were invalid on the grounds already discussed and that they should not have had to pay any rent during COVID-19 Alert levels 3 and 4.

[93]             They stated that the invalid notice and purported cancellation of the leases were wrongful and the re-entry and barring of the defendants from using the premises demonstrated that the plaintiff refused to comply with its obligations under the lease which amounted to a repudiation. The defendants set out in their statement of defence and counterclaim that, following re-entry on 8 September 2020, the lease was at an end and the defendants were no longer obliged to pay any rent or outgoings and were also not required to pay the clean-up costs and related expenses. This was consistent with the decision of Associate Judge Bell, according to the defendants.

[94]             As a result of the wrongful cancellation, the plaintiff is not entitled to claim damages for loss of rent after cancellation because it cannot claim it has suffered loss when its invalid acts have released the defendants from paying rent and outgoings. Similarly, the defendants argued that since the PLA notices were invalid, the defendants do not have to pay the wrongful eviction legal fees and enforcement costs.

[95]On their counterclaim, the defendants seek:

(a)$177,600 being the damage or destroyed machines seized on the plaintiff’s premises during clearance of the property;

(b)$200,000 being temporary premises lease following wrongful eviction;

(c)$436,000 being the loss of construction facilities, exhibition hall and decoration costs expended by the defendants before the wrongful eviction;

(d)$33,978.09 being the remaining rent holiday which the defendants are entitled to but for the wrongful termination by the plaintiff;

(e)$58,870 being the moving of machinery, garbage disposal and labour costs during clearance of the property; and

(f)$500,000 being the operation loss from discontinued production after the wrongful eviction until recovery.

[96]             The  defendants  claim  that  they  had  to  temporary  rent   premises  from  10 September 2020 to store large amounts of machinery and assets and this involved

renting four temporary premises at 11A Vesty Drive, Mt Wellington, at a cost of

$26,067.35 (GST inclusive) per month between 10 September and 28 March 2021 and at 11B Vesty Drive, Mt Wellington, at a cost of $1,700 (GST inclusive) for the same period. The third temporary premises was 264 Roscommon Road, which the defendants submitted cost them $2,070 (GST inclusive) per month from 1 October to 28 March 2021. The fourth claimed premises was not identified and nor was the rate of rent confirmed.

[97]             Eventually, on 28 March 2021, the defendants moved into long-term premises at 68 Ascot Road, Mangere. At paragraph 14, the defendants set out “loss of following investments on the premises”:

(a)Negative pressure industrial workshop and waste treatment circulation system at a cost of $183,000 (GST inclusive);

(b)The cost of power upgrade construction of $133,000 (GST inclusive);

(c)The cost of replacing energy-saving lamps in the workshop of $9,000 (GST inclusive);

(d)Supporting cost of water and gas dust removal system of $40,000 (GST inclusive);

(e)Cost of four sets of cabinet showrooms of $38,000 (GST inclusive); and

(f)Total equipment installation of $33,000 (GST inclusive).

[98]             The defendants claimed they incurred losses of $58,870 for the moving of machinery and garbage disposal and related labour costs. As foreshadowed, the defendants also claim loss of $500,000 including machinery damage, discontinued production and loss of revenue until production recovered in November 2020.

[99]             On the issue of the damaged machinery, the defendants claimed that this had been done by the plaintiff and its agents, with the result that the defendants were out of pocket to a significant degree. Added to that were the costs associated with having to move quickly from the premises as a result of what the defendants claimed was the

plaintiff’s improper and unjustified termination of the lease. The defendants considered that the plaintiff should be liable for those costs of moving because they would not have needed to incur those expenses had the plaintiff offered a more sensible rent reduction during the period of the COVID lockdowns at Levels 3 and 4.

[100]         The defendants reiterated in their closing submissions their counterclaim for approximately $1.4m, for damaged or destroyed machinery, renting temporary premises, the costs of other chattels, their entitlement to a rent holiday, moving and garbage disposal costs, as well as a claim of $500,000 for loss of operation costs.

Counterclaim defendant’s submissions

[101]         The plaintiff argued that the defendants are not entitled to recover losses sought for the reasons set out in paragraphs 87 to 108 of the plaintiff’s closing submissions. Regarding the counterclaims, counsel submitted that they should be dismissed on the basis that the defendants had provided no evidence to support their claims which, in any event, are not sustainable, taking into account the terms of the leases.

[102]         In summary, the plaintiff denied that any machines were damaged or destroyed during eviction of the tenants because the defendants arranged their own movers responsible for removing their chattels. Any damage or destruction would have been the fault of the defendants or their representatives. On 15 September 2020, Dana Yang, one of the defendants’ representatives, confirmed that there was an incident while operating the truck crane where the machine fell down. That same day, the second defendant emailed the plaintiff’s solicitors and referred to “an unexpected crane accident” which delayed removing chattels.

[103]         Counsel argued that the defendants failed to provide any evidence supporting their assertions that the plaintiff was involved in damage to their chattels, apart from a photograph of broken glass. No evidence has been provided by the defendants to support the $177,600 claimed. There was also a question of who owns the machinery, whether it is the first, second or third defendant or a combination of them because without that clarity, the second and third defendants appear to have sought recovery of loss in respect of assets not owned by them but by the first defendant.

[104]         Ms Gamet contended that the defendants have failed to provide evidence of the cost of the two sets of temporary premises. It is also unclear as to whether the loss claimed is suffered by the first, second or third defendants or a combination of them. Counsel also argued that clauses 20.1, 20.3 and 20.4 of the leases obligate the first defendant to pay for alterations or additions to the premises. Expenditure incurred would have been left behind when the defendants moved. Accordingly, the plaintiff submitted that this is not a loss due to termination of the lease. This loss would be irrecoverable, despite when or why the leases were terminated. Counsel confirmed that the plaintiff has factored in a rent holiday into the sum claimed for lost rent.

[105]         Ms Gamet submitted that clause 20.3 of the leases places the obligation on the first defendant to remove chattels from the premises at the end of the leases. The cost of moving the machinery would have been owing at the termination of the lease, regardless of who terminated and why. The short point, according to counsel, is that the defendants have not provided the evidence to prove that subsequent losses were caused by their eviction from the premises or as a result of COVID-19.

Discussion

[106]         I agree with the plaintiff that the defendants’ counterclaims are not sustainable. First, although $177,600 is being claimed for damaged or destroyed machinery the defendants have failed to provide any cogent evidence substantiating this claim. Indeed, the plaintiff’s evidence was that it was the defendants or their agents who damaged the machinery. Secondly, the $200,000 being claimed for temporary premises following “wrongful eviction” cannot be claimed because the defendants were in breach of the lease which meant the plaintiff was entitled to rent and to evict the defendants.

[107]         Thirdly, the $436,000 claimed for loss of construction facilities, exhibition hall and “declaration costs” have not been substantiated by evidence. Fourthly, the amount of $33,978.09 being claimed as a “rent holiday” but for the alleged wrongful termination of the lease, cannot be claimed because I have already made adjustments of a reduction in rents during Level 3 and Level 4.  Fifthly, the amount claimed of

$58,870  for  the  moving  of  machinery,  garbage  disposal  and  labour  costs  were

expenses incurred entirely as a result of the defendants’ own conduct. Sixthly, the

$500,000 being claimed for losses from discontinued production and purported wrongful eviction cannot be sustained for the reasons set out above.

[108]Similarly, the defendants’ claims set out in paragraph 14 for $183,000,

$133,000, $9,000, $40,000, $38,000 and $33,000 are not sustainable. No relevant evidence has been provided to justify these claims which, in any event, are premised on the incorrect assertion of the defendants that the lease was wrongfully terminated. In summary, the defendants’ counterclaim in its entirety must be dismissed.

Decision

[109]         SHK Trustee Company Limited is entitled to judgment on the unpaid rent and operating expenses plus interest during the COVID Alert Level 3 and 4 lockdown periods, along with removal, premises reinstatement and legal costs as follows:

(a)Rental due during COVID-19 Alert level 3: $30,862.43;

(b)Rental due during COVID-19 Alert level 4: $23,108.21;

(c)Interest at 12 percent on the above sums from 1 August 2020;

(d)Removal of chattels and premises reinstatement costs: $65,037.46

(e)Legal costs: $38,002.08

[110]The defendants’ counterclaims are dismissed.

Costs

[111]         Counsel may file a costs memorandum of up to seven pages after one month from the date of this decision. The second and third defendants can file a submission in response within a further month from receipt of the plaintiff’s memorandum.

Harvey J