SHK Trustee Company Limited v NZDMG Limited
[2021] NZHC 1895
•26 July 2021
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2021-404-491
[2021] NZHC 1895
BETWEEN SHK TRUSTEE COMPANY LIMITED
Plaintiff
AND
NZDMG LIMITED
First Defendant
HAORAN MAO
(also known as MARK MAO) Second Defendant
LILI DONG
Third Defendant
Hearing: 26 July 2021 Appearances:
Oscar Ward for the Plaintiff
No appearance for the First Defendant Second and Third Defendants in person
(Also present is Mr Carl Duan, the husband of Lili Dong, who has acted as a private interpreter for the Defendants)
Judgment:
26 July 2021
ORAL JUDGMENT OF ASSOCIATE JUDGE R M BELL
Solicitors:
Stace Hammond (Oscar Ward), Auckland, for the Plaintiff
Copy for:
Mr Mark Mao and Ms Lili Dong
SHK TRUSTEE COMPANY LIMITED v NZDMG LIMITED [2021] NZHC 1895 [26 July 2021]
[1] SHK Trustee Company Ltd is the landlord of industrial premises at 99 Kerrs Road, Wiri, Auckland. It leased the premises to NZDMG Ltd, a kitchen manufacturer. Ms Dong, the third defendant, is the director of NZDMG Ltd although at times Mr Mao, the second defendant, has also been a director. Ms Dong and Mr Mao are two of the shareholders, but not the only ones.
[2] There are two leases. One is called a warehouse lease and the other is an office lease. SHK Trustee Company Ltd cancelled the leases on 9 September 2020 for non- payment of rent and re-entered. In this proceeding, it claims unpaid rent and outgoings of $210,720.98 up to the cancellation, its costs of enforcing the lease, its costs for removing the lessee’s plant and equipment and cleaning the premises, and damages for loss of rent from the premises from 9 September 2020 to the date of hearing. Mr Mao and Ms Dong guaranteed the leases. SHK Trustee Company Ltd sues them under their guarantees. It applies for summary judgment against all the defendants.
[3] NZDMG Ltd has not taken any active steps in the proceeding. Mr Mao and Ms Dong have run the defence. In opposing the summary judgment application, they have raised defences that NZDMG Ltd would raise if it had taken any steps. Mr Ward proposed that I should enter judgment against NZDMG Ltd as it had not taken any steps to oppose. However, on a summary judgment application, I have to be satisfied that the defendant does not have any defences to the plaintiff’s claims. If Mr Mao and Ms Dong can show arguable defences which NZDMG Ltd could raise, I ought not to give judgment against NZDMG Ltd for more than I would give judgment against Mr Mao and Ms Dong.
[4] Mr Mao and Ms Dong take a jurisdiction point. They want this case stayed so that the matters in dispute can be referred to arbitration. If this court has jurisdiction, they deny that the company is liable for all the rent and outgoings claimed. They say that the company could not access the premises because of COVID-19 Alert Level restrictions, and the rent should be abated. They also say that the cancellation of the lease was unjustified. Because the lease was wrongly terminated, the company
suffered loss and they reserve the company’s rights to seek damages for wrongful termination.
[5] Mr Mao and Ms Dong have not had legal representation. I understand that they did try to get legal assistance but had trouble paying the lawyers. They have tried to manage as best they can without legal advice. Their English is limited. Their first language is Mandarin. The matter is made more difficult because the issues in the case are not straightforward. They would have been greatly assisted if they did have legal advice. On earlier occasions judges have urged them to obtain legal advice. I repeat that advice. It is in their own interests. Once they receive this judgment, they should consult a lawyer so that they can properly understand the effects of the judgment on them.
[6] I will come back to the jurisdiction question later. So far as the summary judgment is concerned, I apply the normal principles for plaintiff applications for summary judgment. The Court of Appeal restated them in Krukziener v Hanover Finance Ltd.1
The principles are well settled. The question on a summary judgment application is whether the defendant has no defence to the claim; that is, that there is no real question to be tried: Pemberton v Chappell [1987] 1 NZLR 1 at 3 (CA). The Court must be left without any real doubt or uncertainty. The onus is on the plaintiff, but where its evidence is sufficient to show there is no defence, the defendant will have to respond if the application is to be defeated: MacLean v Stewart (1997) 11 PRNZ 66 (CA). The Court will not normally resolve material conflicts of evidence or assess the credibility of deponents. But it need not accept uncritically evidence that is inherently lacking in credibility, as for example where the evidence is inconsistent with undisputed contemporary documents or other statements by the same deponent or is inherently improbable: Eng Mee Yong v Letchumanan [1980] AC 331 at 341 (PC). In the end the Court’s assessment of the evidence is a matter of judgment. The Court may take a robust and realistic approach where the facts warrant it: Bilbie Dymock Corp Ltd v Patel (1987) 1 PRNZ 84 (CA).
[7] I add this about applications for summary judgment. A shorthand way of thinking about a summary judgment application is that if a Judge is to give summary judgment, he or she must be satisfied that no useful purpose will be served by allowing the matter to go to trial, because everything can be decided now. That means that there would be no need for witnesses to give evidence and be cross-examined, and there
1 Krukziener v Hanover Finance Ltd [2008] NZCA 187, [2010] NZAR 307 at [26].
would be no need for discovery or any other normal interlocutory steps. As well, in some proceedings the court gives a decision which is based on an evaluation of a number of factors. For a final decision, the court may have a range of orders it may make. Sometimes they are matters of jury assessment, such as assessing damages, particularly in respect of future losses. Those cases are not normally susceptible to summary judgment treatment. If the court is to give summary judgment, it has to be satisfied that there is only one possible answer – and the plaintiff has to show the court that all other possible answers have been ruled out.
Background facts
[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.
[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.
[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 2.2 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 2.3 At 11.59 pm on 30 August 2020, Auckland moved to Alert Level 2.4 Auckland also moved to Alert Level 3 in February 2021.5 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.6 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.7
[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.
[14] The parties also communicated about whether their differences should be resolved by a reference to arbitration. The defendants believed that the government was going to set up a special tribunal which could resolve these differences and proposed that the parties refer matters to that tribunal. The lawyers for SHK Trustee Company Ltd advised them that they were mistaken, but did take on board the
2 COVID-19 Public Health Response (Alert Level 2) Order 2020.
3 COVID-19 Public Health Response (Alert Levels 3 and 2) Order 2020.
4 COVID-19 Public Health Response (Alert Level Requirements) Order 2020.
5 COVID-19 Public Health Response (Alert Level Requirements) Order 2021.
6 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.
7 See Schedule 2 of the Orders at footnotes 2 – 5.
suggestion that there should be an arbitration. They put forward the names of three Auckland barristers, all with recognised arbitration experience. NZDMG Ltd did not accept any of the names proposed. SHK Trustee Company Ltd’s lawyers then asked the Law Society to appoint an arbitrator. The Law Society appointed the Hon Robert Fisher QC but the matter went no further.
[15] SHK Trustee Company Ltd apparently lost patience with NZDMG Ltd. It served notices under s 245 of the Property Law Act 2007 on NZDMG Ltd at the Kerr’s Road premises by handing them to Ms Dong. The defaults claimed in the notices were non-payment of rent and operating expenses. The amount claimed for the warehouse lease was $134,439.93 and the amount claimed for the office lease was $24,907.48. 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. For the office lease, the arrears were $6,226.87 per month for April, May, June and July 2020. The notice did not require rent to be paid for the office for March 2020. In demanding those sums SHK Trustee Company Ltd was asking for rent and outgoings to be paid in full. It made no allowance for abatement of rent because of the COVID-19 lockdowns.
[16] The notices required the defaults to be remedied within 30 working days. That reflects ss 245B and 245C of the Property Law Act 2007, which were inserted in the Property Law Act last year. 8 Normally, for a notice under s 245 of the Property Law Act, a lessor may give the lessee only 10 working days in which to comply with the notice, but the legislation was amended last year to 30 working days where the periods in default were during the COVID-19 restrictions.
[17] NZDMG Ltd did not comply with the demands. On 8 September 2020, security agents instructed by SHK Trustee Company Ltd changed the locks and re- entered the premises. The 30 working days under the notices had expired. According to SHK Trustee Company Ltd, the re-entry was peaceable. At the time of re-entry, NZDMG Ltd had extensive goods, plant and equipment in the premises. SHK Trustee Company Ltd required NZDMG Ltd to remove all its property, but it complains that
8 COVID-19 Response (Further Management Measures) Legislation Act 2020, s 3.
NZDMG Ltd was slow about doing so. The last piece of equipment was not removed until 22 December 2020. SHK Trustee Company Ltd used security agents to secure the premises and it employed contractors to remove rubbish and to tidy up the premises. For that, it claims its costs of $72,878.76.
[18] NZDMG Ltd did not apply for relief against cancellation of the lease under s 253 of the Property Law Act 2007. It had three months in which to make such an application. Those three months expired on 7 December 2020.
[19] SHK Trustee Company Ltd did not find a new tenant. It did not try to re-let the premises. Instead, it put the property on the market to sell the freehold. In April 2021 it made an agreement to sell the building. Settlement is due on 30 July 2021. It claims, as damages, loss of rent from the building from the time of re-entry until today’s date.
[20]SHK Trustee Company Ltd seeks summary judgment for these sums:
Arrears of rent and outgoings $210,720.98 Interest at 12 per cent per annum
$24,697.14
Legal and enforcement costs
$36,287.80
Costs of removing chattels, making the premises good
$72,878.76
Damages for loss of rent
$264,841.47
Total:
$609,426.15
The jurisdiction challenge
[21] Ms Dong and Mr Mao filed an application to stay the proceeding on 16 June 2021. An application to stay a proceeding for lack of jurisdiction may be made by interlocutory application.9 As the matter can be brought by interlocutory application, it is within the jurisdiction of an associate judge.10 Ms Dong and Mr Mao say that the matters on which SHK Trustee Company Ltd sues should be referred to arbitration. Where there is a challenge to jurisdiction in a summary judgment application, the
9 Carter Holt Harvey Ltd v Genesis Power Ltd (No 2) [2006] 3 NZLR 794 (HC).
10 Senior Courts Act 2016, s 22.
jurisdiction question should be decided first, before the court considers the merits of the summary judgment application.11 But that does not require two separate hearings. The jurisdiction question should be considered first. If the court is satisfied that it has jurisdiction, it can go on to decide the merits of the summary judgment application.
[22]Each lease has this arbitration provision:
43Arbitration
43.1The parties shall first endeavour to resolve any dispute or difference by agreement and if they agree by mediation.
43.2Unless any dispute or difference is resolve by mediation or other agreement, within 30 days of the dispute or difference arising, the same shall be submitted to the arbitration of one arbitrator who shall conduct the arbitral proceedings in accordance with the Arbitration Act 1996 or any other statutory provision then relating to arbitration.
43.3If the parties are unable to agree on the arbitrator, an arbitrator shall be appointed, upon request of any party, by the president or vice- president of the New Zealand Law Society. That appointment shall be binding on all parties to the arbitration and shall be subject to no appeal. The provisions of Article 11 of the First Schedule of the Arbitration Act 1996 are to be read subject to this and varied accordingly.
43.4The procedures prescribed in this clause shall not prevent the Landlord from taking proceedings for the recovery of any rent or other monies payable under this lease which remain unpaid or from exercising the rights and remedies in the event of the default prescribed in sub-clause 28.1.
(Emphasis added)
Clause 43.4 refers to subclause 28.1. That provides the landlord with the right to cancel upon default by the tenant, subject to the provisions of s 245 of the Property Law Act 2007.
[23] The matters within cl 43.4 are not caught by the reference to arbitration in the preceding clauses. I take the words “recovery of any rent or other monies payable under this lease” as referring to primary obligations under the lease. The carve-out, may not necessarily apply to the performance of secondary obligations under the lease, such as payment of damages for breach of a covenant. Nevertheless, the claims for
11 Advanced Cardiovascular Systems Inc v Universal Specialties Ltd [1997] 1 NZLR 186 (CA).
unpaid rent are certainly not caught by the arbitration provisions and can still be determined in court. The arbitration clause may arguably apply to the other matters in the plaintiff’s statement of claim, such as the damages for lost rent.
[24] For those other matters, the question comes under Article 8(1) of the First Schedule of the Arbitration Act 1996:
8 Arbitration Agreement and substantive claim before court
(1) A court before which proceedings are brought in a matter which is the subject of an arbitration agreement shall, if a party so requests not later than when submitting that party’s first statement on the substance of the dispute, stay those proceedings and refer the parties to arbitration unless it finds that the agreement is null and void, inoperative, or incapable of being performed, or that there is not in fact any dispute between the parties with regard to the matters agreed to be referred.
(Emphasis added)
[25] Gault J’s decision in Pokeno Village Holdings Ltd v Pokeno Nine Ltd, is a recent decision considering the effect of Article 8(1) of the First Schedule of the Arbitration Act. He had to decide whether steps taken in a proceeding had amounted to a submission on the substance of the dispute. He said:12
[7] In determining whether there has been a statement on the substance of the dispute this Court should focus on whether a particular party has elected to submit the substantive dispute to the jurisdiction of the Court.13
[8] A party may make a first statement on the substance of the dispute in a variety of ways, some of which vary depending on whether the party seeking the stay is the plaintiff or defendant. There can be no general prescription.14
He went on to find that in that case the defendants’ participation in initial case management did not amount to a statement on the substance of the dispute under Article 8.
[26] If the application filed on 16 June 2021 were the first step that the defendants had taken, they might have good grounds for a stay. But they took an earlier step.
12 Pokeno Village Holdings Ltd v Pokeno Nine Ltd [2019] NZHC 2358.
13 Pathak v Tourism Transport Ltd [2002] 3 NZLR 681 (HC) at [52], followed in Dependable Property Management Ltd v Li [2015] NZHC 3355, (2015) 23 PRNZ 145 at [20].
14 Dependable Property Management Ltd v Li [2015] NZHC 3355, (2015) 23 PRNZ 145 at [21].
On 16 May 2021, they filed a memorandum in court for the first call of the summary judgment application. This memorandum is not in regular form. It is not a formal notice of opposition. It is not an affidavit. And it is not a formal application for a stay of proceeding. I infer that the defendants were probably not aware that when they filed that document, they had to elect whether to refer matters to arbitration or to submit the substance of their dispute to the court, or simply to seek case management directions. Nevertheless, whatever their subjective intentions, the court is required to work out their intentions objectively by reading the memorandum.
[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.15 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.
[28]The document includes:
1. The defendants request counterclaim to the plaintiff. The plaintiff terminated the two Deeds of Lease agreement between both parties during the arbitration procedure regarding the two Deeds of Lease:
…
2. The defendants seek summary judgment against the plaintiff and that two orders be granted on the papers:
a. The plaintiff to cover the compensation to the defendants on the moving cost and losses to resume business operation and reputation arisen by unjustified early termination of the two Deeds of Lease.
b. The plaintiff to cover the compensation to the defendants on the damage to the defendants’ assets, during the defendants moving out of the lease premises.
15 Minute of Woolford J dated 18 May 2021 at [5].
[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 already submitted the substance of the dispute to the decision of the court. Accordingly, I dismiss their application to stay the proceeding. With that, I move to the merits.
The claim for unpaid rent and operating expenses
[30] SHK Trustee Company Ltd has claimed full rent and operating expenses from March 2020 until cancellation on 8 September 2020. It has not accepted that there should be any adjustments to the rent and outgoings payable under the lease on account of COVID-19 Alert Level lockdowns. The defendants, however, refer to cl 27.5 of the lease and say that they are entitled to have the rent abated while access to the premises was barred under Alert Level restrictions. That clause says:
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:
(a)a prohibited or restricted access cordon applying to the premises; or
(b)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
(c)restriction on occupation of the premises by any competent authority,
then a fair proportion of the rent or 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.
[31]“Emergency” for the purpose of subclause 27.5 is defined:
47.1 In this lease:
…
(d)“emergency” for the purposes of subclause 27.5 means 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 caused by any act or omission of the Landlord or Tenant.
(Emphasis added)
[32] The defendants say that the COVID-19 pandemic is an epidemic under the definition of “Emergency”. When the government imposed lockdown restrictions their access to the premises was restricted by lawful authority and they could not fully conduct their business. They therefore say that the rent should be adjusted.
[33] The rent payment clause, cl 1.1, provides that all rent shall be paid without deductions or set off. That does not, however, mean that the rent cannot be abated under cl 27.5.16 The question of set-off does not arise. There is also no question of deduction in the sense explained by the Court of Appeal in Grant v NZMC.17
[34] It is reasonably arguable for the defendants that during the lockdown periods they could not use the premises for their business because they had to stay away from work. Manufacturing kitchens cannot be done remotely from home. Manufacturing kitchens is not an “essential service” under the lockdown rules.
16 Coffee Culture Franchises Ltd v Home Straight Park Trustees Ltd [2021] NZHC 577.
17 Grant v NZMC Ltd [1989] 1 NZLR 8 (CA) at 13.
[35] Clause 27.5 requires an abatement of a fair proportion of the rent and outgoings. This creates difficulties when a landlord seeks summary judgment and it is arguable that cl 27.5 applies. Typically, leases state rent in terms of fixed amounts. That is done to give certainty so that the parties cannot be under any mistake as to what must be done. A “fair proportion” formula leaves room for legitimate differences of opinion as to how much should be paid. I suppose that those who drafted the lease had in mind a process similar to what the Court of Appeal contemplated in Jacobsen Holdings Ltd v Drexel.18 That case was concerned with compensation under what was then s 129(b) of the Property Law Act 1952, when an order was made for access in favour of landlocked land.19 The court indicated that compensation should be assessed on the basis of what a willing seller and a willing buyer would arrive at during friendly negotiations, taking into account the particular potentialities of the land in respect of each party. The factors of benefit or detriment on either side would be material in assessing the amount of compensation appropriate.
[36] Obviously the factors of benefit and burden on each side are different under cl 27.5, but landlord and tenant would follow a similar process. I take it that, because not many cases have reached the courts, most landlords and tenants have worked out rent adjustments during the COVID-19 pandemic under the clause.
[37] But when the parties have not reached agreement, there is the problem of uncertainty for the court in establishing what should be the fair proportion of rent. Here, the parties have quite different views as to how much should have been paid. The difficulties are these. No evidence has been provided to assess what the parties would negotiate on a Drexel basis. Next, assessing a fair proportion is an evaluative exercise that cannot be done on a summary judgment application. The court can only record that the issue has been raised, recognise that it cannot decide the matter on a summary judgment application, and note it as a trial issue for decision after the court has heard full evidence.
[38] There is one matter on which I can be satisfied to the summary judgment standard. NZDMG Ltd did have access to the premises outside the Alert Level 3 and
18 Jacobsen Holdings Ltd v Drexel [1986] 1 NZLR 324 (CA).
19 See now Property Law Act 2007, s 330(1)(a).
Level 4 periods. I asked Ms Dong and Mr Mao about that. They accepted that they did have access to the premises outside those periods.20 Accordingly, for this case, it is arguable for the defendants that they did not have access to the premises under cl 27.5 of the lease from 24 March 2020 until 13 May 2020, and from 13 August 2020 to 30 August 2020. For those periods, it is not possible to say on a summary judgment application what the rent should be. That is a trial issue. Outside those periods, however, rent was properly payable. SHK Trustee Company Ltd is entitled to recover rent and outgoings at the rates provided in the leases. The amounts will need to be calculated.
[39] The lease provides for interest at a default interest rate of 12 per cent per annum: the First Schedule, cl 12 and the Second Schedule, cl 5.1. For the periods when rent was payable at the full rate, there will be interest on those amounts. Again, that will be a matter of calculation.
[40] The rent and outgoings for the periods for which I have not given judgment will be decided at trial after evidence and submissions about cl 27.5.
Was the cancellation of the lease valid?
[41] The defendants raised this question in their memorandum of 16 May 2021 when they referred to an unjustified termination of the lease. A landlord may not cancel a lease for non-payment of rent, unless they have first given the lessee a notice under s 245 of the Property Law Act 2007 to remedy defaults:21
245 Cancellation of lease for breach of covenant to pay rent
(1)A lessor may exercise a right to cancel a lease because of a breach of the covenant to pay rent under the lease only if—
(a)the rent has been in arrears for not less than [30] working days; and
(b)the lessor has served on the lessee a notice of intention to cancel the lease; and
(c)at the expiry of the period specified in the notice, the breach has not been remedied.
20 Transcript of their oral submissions, page 8.
21 Property Law Act 2007, ss 243 and 244.
(2)However, if the lessor believes on reasonable grounds that the lessee has given up possession of the leased premises (whether or not the lessee has actually done so), the lessor does not need to serve a notice of intention to cancel the lease on the lessee but must serve the notice instead on all of the following whose names and addresses are known to the lessor:
(a)any mortgagee or receiver of the leasehold estate or interest:
(b)any sublessee of the lease:
(c)any mortgagee or receiver of the estate or interest of a sublessee.
(3)The notice required by subsection (1)(b) or (2) must adequately inform the recipient of all of the following matters:
(a)the nature and extent of the breach complained about:
(b)the amount that must be paid to remedy the breach:
(c)the period within which the breach must be remedied (which must not be less than [30] working days after the date of service of the notice):
(d)the consequence that, if the breach is not remedied at the expiry of the period specified in the notice, the lessor may seek to cancel the lease in accordance with section 244:
(e)the right, under section 253, to apply to a court for relief against cancellation of the lease, and the advisability of seeking legal advice on the exercise of that right.
(4)The period for remedying the breach specified under subsection (3)(c) may run concurrently with the period specified in subsection (1)(a) in which the rent must be in arrears before the lessor may exercise any right to cancel the lease
The usual 10 working days in s 245(1)(a) has been adjusted to “30 working days” under ss 245B and 245C because of the COVID-19 amendments that apply in this case.
[42] The question is whether the notices adequately informed NZDMG Ltd of the nature and extent of the breaches complained about, and the amounts that must be paid to remedy the breaches. That is because SHK Trustee Company Ltd demanded payment of the rent and outgoings without any abatement, ignoring any adjustments under cl 27.5.
[43] For the defendants, it is arguable that during the lockdown periods they should not have to pay any rent at all, or that their rent should be markedly reduced because they could not have access to the premises at all. The warehouse rent is said to be in arrears for a period of 134 days, but 69 of those days were during Alert Level lockdowns when the company could not have access to the premises. For the office lease, the period is 43 days out of 122 days. It is arguable for the defendants that the amounts claimed in the notices under s 245 are markedly overstated.
[44] In Kent Sing Trading Co Ltd v JNJ Holdings Ltd22 the Court of Appeal dealt with notices under s 245 which make excessive demands. It referred to a decision of the Queensland Supreme Court about demands by mortgagees, Clarke v Japan Machine (Australia) Pty Ltd which said:23
An error in specification of the appropriate sum will not be the end of the matter. A question of fact and degree is involved in every case. The most relevant factors determining validity will be the extent of the error, and the capacity of the notice to give the mortgagor a reasonable opportunity to do what he is obliged to do.
[45] The Court of Appeal thought that applied to ss 245 and 246 of the Property Law Act 2007:24
[108] …There seem to be two kinds of errors: where the quantum is too large (or too small) as in Campbell v Commercial Banking Company of Sydney; and where several breaches are alleged but some of those are not in fact breaches, as in Pannell v City of London Brewery Co.
[109] In the former kind of case, so long as the error in the notice is sufficiently minor, the lessee can hardly say he or she has not been adequately informed of the nature and extent of the breach. On the other hand, if the error is sufficiently large in magnitude, then it is fair to say that the lessor has in substance failed adequately to inform the lessee of (at least) the extent of the breach.
….
[111] The underlying objective is that the notice ought to enable the recipient to understand with reasonable certainty what he or she is required to do.25 A notice that fails to do that or which misleads the recipient as to the nature or extent of the breach will be invalid.
22 Kent Sing Co Ltd v JNJ Holdings Ltd [2019] NZCA 388.
23 Clarke v Japan Machine (Australia) Pty Ltd (1984) 1 Qd R 404 (SC) at 412, as cited in Kent Sing, above n 23, at [107].
24 Kent Sing, above n 23.
25 Fox v Jolly [1916] 1 AC 1 at 13.
[46] In this case, it is arguable for the defendants that there are errors in the notice because the landlord has not recognised that there should be any adjustment to the rent and outgoings at all, and it has claimed rent in full. Accordingly, the notice does not adequately inform them what they really have to pay by way of rent and outgoings. Because the notice is arguably invalid, it is also arguable that SHK Trustee Company Ltd was not entitled to cancel the lease because it had not complied with s 245 of the Property Law Act 2007.
[47] In response to this, Mr Ward asked, what was the landlord to do? As to that, issuing a notice under s 245 is not the only remedy for a landlord who has not been paid rent during a lockdown. The landlord can get an authoritative determination of the rent payable by suing for the rent and obtaining a judgment as to how much is lawfully payable. Once the rent is fixed, the landlord may then give a s 245 notice for rent payable under the court’s determination. I appreciate that may take too long for impatient landlords who are out of pocket. Another course is to require payment of the rent only for the periods when COVID-19 access restrictions did not apply. If the landlord can clearly show that the tenant had access, and cl 27.5 was not triggered, it can ask for rent that fell due during those periods while leaving the disputable parts out. Landlords can protect themselves when drawing s 245 notices if they make sure that the rent they claim for cannot be properly contested. If they leave the matter open to dispute, they are making life hard for themselves as well as for their tenant.
Consequences of the invalidity of the cancellation
[48] If the defendants make out their arguable case that the cancellation was invalid, there are consequences. Because the cancellation was not valid, the landlord breached its covenant of quiet enjoyment and substantially reduced the benefit of the lease to NZDMG Ltd. The re-entry and barring NZDMG Ltd from using the premises showed SHK Trustee Company Ltd’s intention no longer to perform its obligations under the lease. That was a repudiation of the lease.
[49] While the cancellation was invalid, it was still effective. NZDMG Ltd and the defendants have treated the re-entry as bringing the lease to an end. In fact they may not have had any choice about the matter, because the landlord had security agents at
the premises who strictly regulated entry into the premises and only allowed the defendants to return so they could take their own belongings away. In short, the defendants, particularly NZDMG Ltd, have accepted cancellation of the lease by SHK Trustee Company Ltd. The obligation to pay further rent and other amounts and to observe other covenants ceased upon re-entry.26
[50] SHK Trustee Company Ltd’s claim for removal of equipment and making good the premises is based on cl 20.4 of the lease. But, having been evicted from the premises, under s 267 of the Property Law Act 2007, NZDMG Ltd is no longer required to perform obligations under the lease, including paying clean-up costs and the like.
[51] Similarly, having wrongly cancelled the lease, SHK Trustee Company Ltd is not entitled to claim damages for loss of rent after cancellation. It cannot claim that it has suffered loss when its invalid acts have released the defendants from paying rent and outgoings.
[52] There is another aspect to the claim for damages for loss of rent: whether adequate mitigation steps were taken. Most commercial landlords who re-enter will put the premises on the market again for re-letting. As an example, see the facts in Robert Jones Holdings Ltd v Northern Crest Investments Ltd.27 SHK Trustee Company Ltd did not do that. There is a question whether it should be able to recover for unpaid rent during the period of vacancy when it made no attempt to find a tenant.
[53]SHK Trustee Company Ltd has claimed its legal costs under cl 6.1 of the lease:
6.1Each party will pay their own costs of the negotiation and preparation of this lease and any deed recording a rent review or renewal The Tenant shall pay the Landlord’s reasonable costs incurred in considering any request by the Tenant for the Landlord’s consent to any matter contemplated by this lease, and the Landlord’s legal costs (as between lawyer and client) of and incidental to the enforcement of the Landlord’s rights, remedies and powers under this lease.
26 Contract and Commercial Law Act 2017, s 42(1)(a) and Property Law Act 2007, s 267(2)(a).
27 Robert Jones Holdings Ltd v Northern Crest Investments Ltd (2010) 11 NZCPR 206 (HC).
[54] As there are arguments as to amount of the rent claimed, the validity of the notice under s 245 and the consequences of any invalidity, the tenant’s liability to pay all the landlord’s costs may be open to scrutiny. I decline to make any order for costs under cl 6.1 at this stage. Those costs are a trial issue.
Outcome
[55] In summary, on the claim for rent and outgoings, SHK Trustee Company Ltd will have judgment for rent and outgoings, except for the periods 23 March to 13 May 2020 and 13 August to 30 August 2020. It will also have judgment for interest under the lease on unpaid rent and outgoings for those amounts for which I have given judgment. That will require some calculation. I adjourn this hearing until 6 August 2021 at 10 am. I ask Mr Ward to have calculations prepared to fix the amount of the judgment, including the amount of interest.
[56] It will also be necessary to give case management directions for the rest of the proceeding. SHK Trustee Company Ltd has summary judgment for only part of its claim. It is entitled to continue the proceeding to trial to obtain a decision on those matters where I have not given judgment. I repeat my request to the defendants to get legal advice about how the rest of the proceeding runs. This case will run much more smoothly and their case will be better presented if they have legal advice. On 6 August 2021, I want to give directions for the defendants to file and serve a properly pleaded statement of defence. Arrangements will need to be made for documents to be disclosed.
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Associate Judge R M Bell
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