| IN THE COURT OF APPEAL OF NEW ZEALAND I TE KŌTI PĪRA O AOTEAROA |
| CA562/2021 [2022] NZCA 447 |
| BETWEEN | TIMOTHY ERIC BRUCE SMITH |
| AND | PAROS PROPERTY TRUST LIMITED |
| Hearing: | 23 March 2022 |
Court: | Goddard, Simon France and Hinton JJ |
Counsel: | Appellant in person |
Judgment: | 21 September 2022 at 11.00 am |
JUDGMENT OF THE COURT
AThe appeal against the entry of judgment on the respondent’s claim for rent is allowed. The High Court judgment on that claim is set aside. The claim is remitted to the High Court to determine the amount of rent payable.
BThe appeal in relation to the dismissal of the appellant’s counterclaims is dismissed.
C Costs in this Court are reserved. If either party seeks costs, they may file a memorandum not exceeding five pages within 10 working days of the date of this judgment. The other party may file any memorandum in response (not exceeding five pages) within 10 working days. Costs will be determined on the papers.
DThe costs order in the High Court is set aside. Costs in the High Court will be determined by that Court in light of the outcome before this Court, and on remittal to the High Court.
EThe application for leave to adduce further evidence on appeal is declined.
____________________________________________________________________
REASONS OF THE COURT
(Given by Goddard J)
Table of contents
Para no
Introduction
The disputes between the parties
Summary of result on appeal
Background
The property and the lease
The parties
The 2018 rent review and the attempt to freehold – an overview
Declaration proceedings
Rent review notice re-issued
The current proceedings
High Court judgment
The appeal
Issue 1: Interpretation of cl 23 of the lease
The issue
High Court judgment
Submissions of Mr Smith on appeal
Analysis
Issue 2: Was the cl 23 process varied by agreement?
The issue
High Court judgment
Submissions of Mr Smith on appeal
Analysis
Issue 3: Was the lease validly cancelled?
The issue
High Court judgment
Submissions of Mr Smith on appeal
Analysis
Issue 4: Rent payable under the lease
The issue
High Court judgment
Submissions of Mr Smith on appeal
Submissions of Paros
Further submissions following the hearing
Analysis
Rent review notice a breach or repudiation?
Application to adduce further evidence
Costs
Result
Introduction
The disputes between the parties
Mr Smith, the appellant, lives in a townhouse at 54 Napier Street, Freemans Bay in Auckland (the property). The respondent, Paros Property Trust Ltd (Paros), owns the fee simple title to the property. In August 2015, Mr Smith and his former partner Ms Toni Shaw purchased the leasehold interest in the property (the lease).
In 2018 Mr Smith sought to exercise a right under the lease of the property to acquire the freehold. He considered that he had given a valid notice to trigger the freeholding process set out in cl 23 of the lease. Paros disagreed. Each party was firmly persuaded of the correctness of its position.
Mr Smith says that Paros’s conduct in connection with the freeholding process amounted to a breach and/or repudiation of the lease. He says he cancelled the lease on 30 August 2018. Paros says that it did not breach or repudiate the lease, Mr Smith was not entitled to cancel and there was no valid cancellation. Thus, Paros says, the lease remains on foot, and Mr Smith and Ms Shaw remain liable to pay rent under the lease.
Paros brought proceedings in the High Court seeking to recover rent under the lease from November 2018 onwards. Mr Smith opposed that claim on the basis that the lease had been cancelled. He counterclaimed for a declaration that the lease had been cancelled.
Paros was successful in the High Court.[1] Harland J found that the lease remained on foot. She entered judgment in favour of Paros for rent in the amount of $237,625, together with further amounts of rent falling due and unpaid up to the date of judgment and interest. The counterclaim was dismissed.
[1]Paros Property Trust Ltd v Smith [2021] NZHC 2163, (2021) 22 NZCPR 422 [High Court judgment].
Mr Smith appeals. He says that he gave a valid notice under the lease seeking to freehold the property. The refusal by Paros to engage with the freeholding process amounted to a repudiation. He was entitled to cancel, and did cancel, the lease.
Mr Smith also says that if the lease was not cancelled, the full amount of rent claimed by Paros and awarded by the High Court is not recoverable because the rent review notice relied on by Paros to determine the rent payable from November 2018 onwards was not given in accordance with the rent review process prescribed by the lease.
Summary of result on appeal
It is in our view very clear that the lease remains on foot. Mr Smith was not entitled to cancel it.
However, we accept Mr Smith’s submission that the rent review process adopted by Paros did not comply with the process prescribed by the lease. His appeal from entry of judgment for unpaid rent must therefore be allowed. We will remit the proceeding back to the High Court to determine the amount of rent that is payable.
Background
The property and the lease
The property is one of 30 terraced townhouses in a development known as “Freemans Close” which was constructed by the Auckland City Council (the Council) in the early 1970s. The Council retained ownership of the freehold estate in the land. Leasehold interests in each of the townhouses and a common area were created and sold to various parties.
The lease was granted by the Council in 1972. The recitals record that the lease was granted pursuant to the powers conferred by the Urban Renewal and Housing Improvement Act 1945 (URHI Act) “and … all other powers and authorities enabling it to do so”. From the early 1900s to the 1960s, Freemans Bay was considered a slum. In the 1950s the Council started an urban renewal scheme in that area. Many old houses were demolished and replaced by flats and townhouses such as the property.[2] As we explain below, the URHI Act provided for urban renewal schemes of this kind.
[2]Margaret McClure “Auckland Region: Expansion: 1941–1979” (1 August 2016) Te Ara: The Encyclopedia of New Zealand < >.
The term of the lease was originally 99 years, commencing on 14 November 1972. The initial yearly rent was $100 during the first 21-year period of the term. The lease provided for rent reviews at 21-yearly intervals. The lessee was required to pay rent:
… during each of the succeeding twenty-one (21) yearly periods which will commence on the 14th day of November 1993 the day of November 2014 and the 14th day of November 2035 and during the final fifteen (15) years of the term the respective annual rentals for each period determined by a valuation of the land only without taking account of any improvements on the land, in the manner provided in Section 152(3) Municipal Corporations Act 1954 …
In the 1990s, in the course of a local government reorganisation, the Council sold its interests in the freehold estates in the development to private purchasers. Some were investors who acquired the fee simple in several townhouses.
A variation of the lease was negotiated by the then lessor and lessee in December 2004. The 99-year term of the lease was deleted and replaced with a term of 32 years commencing on 14 November 1972, with a further term of 21 years commencing on 14 November 2004, and further 21‑year terms renewable in perpetuity.
The 2004 variation also modified the rent review dates. In place of rent reviews every 21 years, the lease was amended to provide for the yearly rental to be reviewed on 14 November 2011 “and every 7 years following that date on the terms set out in the lease”.
The lease as varied included a ratchet clause providing that the rent payable during any seven-year period would not be less than the rent payable during the previous seven-year period.
The 2004 variation also inserted in the lease a new cl 23 providing for a right to freehold:
23. If the Lessee has not been in breach of this lease the Lessee will have the option during the 12 month period prior to 14 November 2011, and then during the 12 month period prior to each subsequent rent review date, to purchase the Lessor’s fee simple estate in the Land in accordance with the following procedure and subject to the following conditions:
(a) The Lessee may at any time during the 12 months periods specified in this clause 23 give notice to the Lessor of the Lessee’s desire to purchase the Lessor’s fee simple estate in the Land. The notice will not be valid unless it is accompanied by a remittance for the cost of the valuation referred to in clause 23(b).
(b) As soon as practicable after receipt by the Lessor of the Lessee’s notice and payment by the Lessee of the cost of the valuation the Lessor will cause a valuation to be made by a registered valuer of the value of the Lessor’s fee simple estate in the Land.
…
(d) As soon as practicable after the making of the valuation the Lessor will give notice in writing to the Lessee (“Offer Notice”) offering to sell the Land to the Lessee at a price equivalent to the amount of that valuation inclusive of GST, if any. The Offer Notice must include a copy of the valuation.
(e) Within one month after the giving of the Offer Notice (time being of the essence) the Lessee must give notice in writing to the Lessor stating either:
(i) That the Lessee accept the Lessor’s offer at the price specified in the Offer Notice; or
(ii) That the Lessee does not accept such offer.
…
(g) If the Lessee fails to give notice referred to in clause 23(e) within the time specified, the Lessee will be deemed not to have accepted the Lessor’s offer and the Lessor’s offer will immediately lapse.
(h) The rights conferred by this clause binds the Lessor’s successors in title.
(i) The provisions of clause 21 of the lease shall not apply to this clause 23.
The parties
Paros acquired the freehold interest in the property on 18 December 2006. Mr Neil Christian is a director and the sole shareholder of Paros. He is an experienced commercial landlord.
As already mentioned, Mr Smith and Ms Shaw purchased the leasehold interest in the property in August 2015. At that time the annual rent under the lease was $31,000.
Mr Smith has been living in the townhouse since August 2015. He has been responsible for paying all outgoings in relation to the property since then, including the rent. He has also been responsible for everything to do with the operation of the lease from the lessees’ perspective.
The 2018 rent review and the attempt to freehold — an overview
The first rent review under the lease following Mr Smith and Ms Shaw’s purchase was due on 14 November 2018. Mr Smith was interested in purchasing the freehold of the property under cl 23 of the lease. He took steps which in his view complied with cl 23(a) to set in motion the freeholding process. He considered that the approach he had taken was consistent with cl 23, and that Ms Lisa Baillie, an employee of the property management company retained by Paros, had agreed to that approach orally in the course of a telephone conversation. For its part, Paros considered that Mr Smith had not taken the steps required to trigger its obligation under cl 23(b) to “cause a valuation to be made by a registered valuer”. In particular, he had not put Paros in funds to meet the cost of that valuation, as required by cl 23(a) and (b). A lengthy and at times acrimonious correspondence ensued. That correspondence, so far as relevant, is discussed in more detail below.
As already mentioned, Mr Smith considered that the failure by Paros to engage with the freeholding process as he conceived it amounted to a breach of the lease and a repudiation. On 30 August 2018 he gave notice purporting to cancel the lease. Paros does not accept that the lease has been validly cancelled.
In August 2018 Paros gave notice of its proposed annual rent for the
seven-year period commencing 14 November 2018. The notice did not invoke the process provided for in s 152(3) of the Municipal Corporations Act 1954, which requires a valuation to be carried out by three independent valuers in order to determine the new rent. Rather, the notice read:The Lease provides that the annual rent to apply shall be determined by valuation of the land (excluding improvements) in the manner provided in Section 152(3) Municipal Corporations Act 1954. Note that the Municipal Corporations Act 1954 has been repealed and the applicable legislation is now section 22 of the Public Bodies Leases Act 1969.
Reflecting the more streamlined process provided for by s 22 of the Public Body Leases Act 1969, the notice continued as follows:
We give you notice that:
1. The Lessor has caused a valuation to be made by a registered valuer who the Lessor considers to be competent to make a valuation of the fair annual rent for the land to apply for the next 7 year period from 14 November 2018 to 13 November 2025.
2. The valuer considers that the annual rental to apply from 14 November 2018 is $81,375.00 per annum.
3. You have two months from the giving of this notice to inform the Lessor in writing whether:
(a) You agree with the valuation; or
(b) You require that the valuation be determined by arbitration.
The above (a) or (b) of this paragraph 3 are your only two options in respect of the rent review.
4. Please note that if you fail to give notice within the time specified in paragraph 3 above, you shall be deemed to have agreed with the valuation. We therefore look forward to hearing from you as to whether you accept the Lessor’s rental valuation or whether arbitration is to be commenced.
5. We also note that in the event that there is any dispute or difference regarding this matter (the rental review), such dispute or difference shall be determined by arbitration pursuant to clause 21 of the Lease.
We strongly recommend that you seek legal advice regarding the content of this notice and regarding the provisions of the Lease.
On 12 October 2018 Mr Smith responded to the rent review notice, saying “THE FORMER LESSEE DOES NOT AGREE WITH THE NOTICE FOR RENTAL VIEW OF THE 13TH OF AUGUST.” He went on to explain that the notice was not agreed to because of his notice cancelling the lease “due to Lessor repudiation and breach”. This meant that the rent review process was irrelevant. He said that other issues with the notice had been communicated to Brown Partners, the solicitors for Paros.
Declaration proceedings
In November 2018 Paros sought to resolve the impasse between the parties by filing an originating application seeking declarations that the lease remained on foot, and that Mr Smith’s purported cancellation of the lease was invalid. The application named Mr Smith as sole respondent: Ms Shaw was not named as a respondent, or served with the proceedings.
In July 2019 Peters J delivered a judgment declining to grant the declarations sought by Paros.[3] Peters J considered that Ms Shaw should have been joined, and that no declarations about the status of the lease should be granted in proceedings to which she was not a party. Nor was the Judge satisfied that she had heard sufficient argument to be able to construe cl 23 of the lease, or to deal with Mr Smith’s argument that he had reached agreement on the freeholding process with Ms Baillie acting on behalf of Paros. In order to determine those issues there would need to be evidence from Mr Smith and Ms Baillie, and cross-examination. Ordinary proceedings were required rather than proceedings by way of originating application. Ms Shaw should have an opportunity to be heard in those proceedings.[4]
Rent review notice re-issued
[4]At [29], [31], [34] and [36].
In August 2019 Paros reissued its rent review notice, serving it on both Mr Smith and Ms Shaw. The notice was in similar terms to the August 2018 notice.
By letter dated 9 September 2019 Mr Smith responded to say that he regarded the reissued rent review notice as ineffective because the lease had been cancelled. His letter went on to state that the notice was also defective because even if the lease remained on foot “the original rent review notice under the Municipal Corporations Act was formally not agreed to, and the rental has not been determined in accordance with its terms, so the amount claimed is not able to be substantiated”.
The current proceedings
The current proceedings were issued by Paros in November 2019. Paros claimed that Mr Smith and Ms Shaw were substantially in arrears in paying rent due under the lease. It sued to recover rent at the level specified in the rent review notice issued in August 2018 (and reissued in August 2019).
Mr Smith and Ms Shaw opposed the claim for rent on the basis that the lease had been cancelled, following repudiation or breach by Paros.
There was also a cross-claim between the defendants: Ms Shaw sought an indemnity from Mr Smith, which he resisted.
High Court judgment
The proceedings went to trial before Harland J in June 2021. Mr Smith represented himself. Ms Shaw also appeared in person. Paros was represented by counsel.
The Judge identified three issues to be resolved:[5]
(a) How should cl 23 of the lease be interpreted?
(b)Was cancellation of the lease by [Mr Smith and Ms Shaw] legally justified?
(c) If not, what amount of rental is payable and by whom?
[5]High Court judgment, above n 1, at [21].
In summary, the Judge found that Mr Smith’s approach to the freeholding process was not consistent with cl 23 of the lease, properly interpreted. Nor had cl 23 been varied by oral agreement between Mr Smith and Ms Baillie. So Mr Smith had not validly invoked the freeholding process. Paros was not in breach of the lease and had not repudiated it. Cancellation by Mr Smith and Ms Shaw was not legally justified. The lease remained on foot.[6]
[6]At [64], [72] and [74].
The Judge accepted Paros’s submission that the rent review process prescribed by the Municipal Corporations Act was no longer applicable to the lease. The process prescribed by the Public Bodies Leases Act applied in its place, as a result of subsequent legislative amendments. So, the Judge concluded, the rent review notice given by Paros was valid.[7]
[7]At [80]–[82] and [86].
The Judge then turned to consider the amount of rent owing. The Judge found that Paros had given effective notice reviewing the rent. Mr Smith had not referred the amount of rent assessed to arbitration as provided for in s 22(2)(b) of the Public Bodies Leases Act. So the rent specified in the notice now applied.[8]
[8]At [86].
The Judge then ascertained the amount of rent payable on that basis, taking into account an ex gratia payment made by Mr Smith on 12 September 2019. As at 14 June 2021 the total amount owed was $237,625.[9]
[9]At [87].
Finally, the Judge considered the question of who was liable to pay the rent. Ms Shaw was liable to Paros as a lessee. But Mr Smith had agreed to indemnify Ms Shaw in respect of all liabilities under the lease caused by his actions and omissions. She was entitled to be indemnified by Mr Smith in relation to any rental arrears incurred from 20 August 2017 onwards, including any interest payable in relation to those arrears.[10]
[10]At [98]–[99].
Judgment was entered in favour of Paros against Mr Smith and Ms Shaw (jointly and severally) in the amount of $237,625, any further amounts falling due and unpaid under the lease up to the date of judgment and interest under s 9 of the Interest on Money Claims Act 2016.[11] The counterclaims were dismissed. Ms Shaw’s cross-claim succeeded: the Judge ordered that she was to be indemnified by Mr Smith. Costs were reserved.[12]
[11]At [103].
[12]At [105]–[107].
We set out the Judge’s reasoning on each issue in more detail below.
The appeal
Mr Smith appeals to this Court, challenging the findings of the High Court on each of the three issues determined by the Judge. Ms Shaw is no longer a party: the appeal proceeded on the basis that Mr Smith effectively stands in the shoes of the lessees under the lease.
The parties were unable to agree on a statement of issues. Paros submitted the following three issues were raised by the appeal:
1. Did the High Court err in its interpretation of clause 23 of the lease?
2. Did the High Court err in finding that there was no agreement between the appellant and the respondent varying clause 23?
3. Did the High Court err in concluding that the Public Bodies Leases Act 1969 applied to the 14 November 2018 rent review?
Mr Smith filed a more detailed list identifying 12 issues raised by his appeal.
Neither list of issues is entirely satisfactory. The Paros list omits the fundamental question of whether Mr Smith was entitled to cancel, and did cancel, the lease. Mr Smith’s list treats as distinct issues a number of subsidiary issues that are better grouped together. We will address the issues raised by the appeal under the following headings:
(a)The interpretation of cl 23 of the lease.
(b)Was the lease varied to provide for a process different from that prescribed by cl 23?
(c)Were the lessees entitled to cancel the lease in August 2018?
(d)What is the rent payable under the lease, if it remains on foot?
Issue 1: Interpretation of cl 23 of the lease
The issue
Mr Smith first raised the issue of freeholding with Mr Christian in December 2017. They spoke by telephone in early February 2018. Mr Smith then called Mr Christian again on 11 April 2018, saying he wanted to freehold the property and to agree on the process for doing so. Mr Christian responded by text message the same day, saying:
Hi Tim
Thanks for your email.
Re purchase of your L/HD Interest.
The Trust is not in a position to purchase this from you.
However, If you wish to freehold the land at 54 Napier St as in accordance with the lease you can tender your request in writing to Point Management the Trusts property managers. Once they receive your notice they will then advise the steps required. Prior Payment of valuation etc.
Thanks again
Regards
NeilThe next day, Mr Christian advised Mr Smith that Mr Smith’s contact at Point Property Management was Ms Baillie.
Mr Smith spoke to Ms Baillie by telephone on 19 April 2018. He gave evidence that the conversation included him emphasising that he wanted to ensure he complied with the lease and to avoid any issues with the filing of the notice. He says he discussed with Ms Baillie the difficulties with the freehold notice because under cl 23(b) of the lease it had to be accompanied by a remittance for the cost of valuation. Mr Smith says he asked Ms Baillie if it was up to him to locate an independent registered valuer and ascertain the cost of such valuation and send in payment for the cost of it with his notice. Mr Smith says Ms Baillie agreed that payment for the cost of the valuation in this way would be acceptable under the lease. Mr Smith says that he and Ms Baillie agreed that he could locate a registered independent valuer and send in remittance for the cost of valuation with his notice of intention to freehold.
While initially not recalling the phone call, Ms Baillie subsequently accepted that it occurred, but she did not accept that agreement of the kind outlined above was reached. We return to this under issue 2 below, when we consider whether this conversation amounted to a variation of the lease.
Mr Smith set about finding a valuer. He obtained a quote from Gribble Churton Taylor (Mr Matt Taylor). Having satisfied himself that this firm was independent of the lessor, he said:
I advised Gribble Churton Taylor of the lease clause and circumstances in terms of valuation and that the Lessor would be briefing them, appointing them and giving them the go ahead.
Mr Smith sent an email to Mr Taylor on 19 April 2018. This email provided certain background matters Mr Smith considered would be helpful to Mr Taylor, including the amount he understood that properties next door had recently sold for. He requested that Mr Taylor advise the full cost of his services and the name of the account into which the cost of the valuation should be paid. In this email, Mr Smith said:
The lessor (Neil Christian) has asked that the valuation is to be prepaid. To do this and to satisfy the lease clause requirements I am required to pay for the valuation in advance and send the remittance with the notice to the lessor of the lessee’s desire to purchase the land. My intention therefore in order to achieve this is to send a non negotiable cheque for the cost of your services as a registered valuer required under the lease.
On 26 April 2018, Mr Smith sent an email to Ms Baillie giving notice of his intention to purchase the lessor’s fee simple interest in the land. The email read:
Pursuant to “Right to Freehold” clause 23 outlined in the ground lease for [the property], I give notice of my intention to purchase the lessors fees simple interest in the land.
In accordance with the lease a registered valuer is required to be used and paid for by me. Accordingly please find attached the remittance for the valuation, Neil Christian has requested that this is prepaid and in accordance with this the valuer has been paid at my cost.
Please cause the valuation to happen by “reply all” confirming the receipt of this notice, and for the valuation to take place to the valuer who is cc’d above and myself.
Attached to the email was a copy of a Kiwi Bank cheque for $2,363.25 made out to Gribble Churton Taylor Ltd.
Ms Baillie forwarded this on to Mr Christian. She advised Mr Smith that she was checking with the lessor and would get back to him.
On the morning of 27 April 2018, Mr Christian wrote an email to Ms Baillie. Mr Christian said in this email that he considered that Mr Smith was “trying to maneuver [sic] things in a particular way that is less than honourable”. Mr Christian was not willing to appoint the valuer proposed by Mr Smith. Mr Christian noted:
At this stage their intentions are abundantly clear and it does raise an alarm bell to proceed with caution.
The freehold valuation process in the lease is very clear and simple to understand yet somehow they have got it so wrong? It’s hilarious really.
We would never agree to their proposal, so moving forward either Tim makes his request in accordance with the lease or we will not proceed.
Mr Christian indicated that he would think about a valuer he would be prepared to use.
Mr Christian telephoned Mr Smith and left a message for him to call him back. The call that ensued lasted one hour and 20 minutes. Both parties have set out their respective views of what was said during this phone conversation. It appears each continued to assert their respective views of the process to be undertaken to freehold the property, and no progress was made towards bridging the difference in their views.
On the same day Ms Baillie sent an email to Mr Smith (in a form approved by Mr Christian) advising that his application to freehold did not comply with the lease and that matters could not proceed as he proposed. The email suggested that if he had any difficulties understanding the freehold description in the lease, Mr Smith ought to contact Mr Christian or seek independent legal advice.
Mr Smith responded to Ms Baillie stating that his email was not an “application”, it was “notice” under cl 23 and that he considered he had fulfilled his obligations regarding the process for valuation and purchase of the fee simple estate. He noted that all the lessor needed to do was to “cause” the valuation to be made and reiterated his view that he had complied with the process set out in cl 23. He noted that he had had no previous dealings or relationship with Mr Taylor and that the valuer was registered and independent of him in every way.
Mr Christian then instructed his solicitors, Brown Partners, to liaise with Mr Smith. On 15 May 2018, Brown Partners sent a letter to Mr Smith advising that his email of 26 April was not, in their view, valid notice of his intention to purchase the fee simple estate in the land, as it was not accompanied by the cost of the valuation referred to in cl 23(b) of the lease. Brown Partners’ view about what was required was then set out. In summary, it:
(a)Sought confirmation that the lessees were not in breach of the lease by asking Mr Smith to:
(i)confirm that the land, buildings, fixtures and improvements had been kept in good order, repair and condition and outlined that an inspection of the property would be undertaken thereafter); and
(ii)provide evidence about the insurance policy for the property and supply a copy of it.
(b)Outlined that once the lessor was satisfied that there was no breach of the lease, the right to freehold would then become exercisable. In relation to this, the process was then outlined as follows:
(i)Notice of Mr Smith’s desire to purchase the fee simple estate should be provided to Brown Partners, who were authorised to receive it on behalf of Paros.
(ii)When notice was given, payment should also be made to Brown Partners’ trust account in the amount of $2,500.
(iii)Thereafter Paros would arrange for a valuation to be undertaken by a registered valuer of its choice.
(iv)Once the valuation was completed, Brown Partners would on behalf of Paros give Mr Smith notice offering to sell the land at the price equivalent to the amount in the valuation and would provide a copy of the valuation to him.
(v)Mr Smith could then decide whether to accept Paros’ offer, in which case he could purchase Paros’ land, or to decline the offer and the lease would continue.
Over the following months, correspondence was exchanged in which Mr Smith asserted that the process outlined by Brown Partners did not comply with the lease and Brown Partners maintained that it did. On 21 June 2018 Brown Partners sent an email to Mr Smith attaching an opinion obtained from a QC which concluded that the approach adopted by Mr Smith was not consistent with the lease. Mr Smith was unpersuaded.
On 20 August 2018, with a view to resolving the impasse that had developed, Paros suggested through Brown Partners that the interpretation of cl 23 be referred to arbitration. Mr Smith did not agree with this proposal.
High Court judgment
The first issue addressed by the Judge was the interpretation of cl 23, and whether one or other of the competing approaches complied with that clause.
The Judge began by setting out well-established principles governing the interpretation of contracts. She then turned to the text of cl 23. She considered that cl 23 anticipates that it is the lessor rather than the lessee who is responsible for “causing a valuation to be made”. The lessor is not required to accept a valuer nominated by the lessee.[13]
[13]At [50] and [54].
The Judge saw the wording of cl 23(a) as both difficult and important. The lessee can give notice to the lessor of the lessee’s desire to purchase the lessor’s fee simple estate in the land at any time during the 12-month period before each rent review date. The notice likely needs to be in writing, though no specific form is required. However the second sentence of cl 23(a), which provides “[t]he notice will not be valid unless it is accompanied by a remittance for the cost of the valuation referred to in clause 23(b)”, gives rise to more difficulty. She considered that on their face, paragraphs (a) and (b) of cl 23 appear to conflict with each other in terms of the timing of the notice in relation to the causing of the valuation.[14]
[14]At [57]–[60].
The Judge understood Mr Smith’s view to be that the proper inference is that the lessee must approach a valuer to obtain the cost of the prospective valuation, then provide the notice accompanied by the remittance for the cost of the valuation, which then triggers the lessor to cause the valuation by the lessee’s nominated valuer to occur. According to Paros, the proper inference is that the lessee indicates a desire to purchase the fee simple estate, the lessor then instructs a valuer and advises the sum of the remittance (exact or otherwise), and then the notice under cl 23(a) together with the remittance can be forwarded by the lessee to the lessor.[15]
[15]At [60].
The Judge preferred the inference suggested by Paros. The purpose of cl 23 was better met, in terms of the process to be followed, if the lessee advises of its desire to purchase the fee simple estate, the lessor then instructs a valuer and advises the sum of the remittance (exact or otherwise) to the lessee, who then gives notice together with the remittance to the lessor.[16]
[16]At [64].
It followed that the process adopted by Mr Smith was not consistent with cl 23.
Submissions of Mr Smith on appeal
Mr Smith submitted that the High Court gave insufficient consideration to the nature of the lease, and the power difference between the parties under a lease of this kind. The lease is a long-term relational contract with the domestic tenant, for whom the subject of the lease is their home. He submitted that the clear intention of the parties was that they would ensure fair valuations of the property under the lease.
Mr Smith also emphasised the need to consider the lease and the variation as a whole, rather than focussing exclusively on cl 23. He said that the 2004 variation involved a “quid pro quo” between the lessor and the lessee. The shortening of the rent review period from 21 years to seven years was of clear benefit to the lessor. Conversely, the right to freehold in cl 23 was conferred for the benefit of the lessee. It is a valuable right that should be given full effect.
Mr Smith submitted that given the nature of the contract, there is an obligation on the parties to co-operate in achieving the contractual object: in this context, to ensure that the right to freehold is meaningful. For the freehold clause to operate, the parties must co-operate and consult. In this case, Paros had failed to do so. To the contrary, Paros had taken an obstructive approach which was likely to cause confusion and delay.
Mr Smith placed some emphasis on the importance of the right to freehold to him in entering into the lease in 2015, and the circumstances surrounding his attempt to exercise the right to freehold in 2017 and 2018. However these are not matters which can affect the interpretation of cl 23. The provisions of the lease have the same meaning regardless of the identity of the lessee at any particular time. Nor can the interpretation of those provisions be altered by dealings between the parties falling short of a variation.[17]
[17]There may be circumstances in which post-contract conduct sheds light on the meaning of a contractual provision, interpreted objectively as at the time it was entered into: see Bathurst Resources Ltd v L & M Cole Holdings Ltd [2021] NZSC 85, [2021] 1 NZLR 696 at [88]–[90] per Winkelmann CJ and Ellen France J and [232(a)] per Glazebrook, O’Regan and Williams JJ, endorsing the approach of Tipping J in Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5, [2010] 2 NZLR 444 at [31]. But it was not suggested, and could not sensibly be suggested, that this was such a case.
Mr Smith said that the clause was unclear, and that he had spent considerable time and effort seeking to reach a shared understanding with Paros about how the process would work. Again, however, those post-contractual events cannot as a matter of logic or principle affect the interpretation of cl 23.
Mr Smith said that the Judge had misunderstood his argument about the interpretation of cl 23. He was not contending that it was for the lessee to select the valuer and ascertain the cost of the valuation under cl 23. Rather, what he was saying was that cl 23 was unclear. In those circumstances he sought discussion and the details of the cost of a lessor‑appointed valuation and the valuer that the lessor wished to appoint. He said he was told by Ms Baillie that this was a “matter for the lessee”. This response left him unable to pay the cost of the valuation. That is what led him to seek to reach agreement with Ms Baillie to himself appoint an independent registered valuer, and pay that valuer direct.
Mr Smith also placed some emphasis on the failure of the High Court to consider whether the process outlined in the letter from the lawyers for Paros dated 15 May 2018 was strictly consistent with the cl 23 process. As we understand the argument, it was that even if his approach was not consistent with cl 23, nor was that of Paros. We see this argument as primarily relevant to whether there had been a repudiation or breach by Paros, rather than to the interpretation of cl 23. We return to the issue of repudiation/breach below.
Analysis
As the Judge said, and as Mr Smith emphasised, cl 23 must be interpreted by reading the lease and the variation as a whole, and having regard to the context in which the lease and variation were entered into.[18] But the starting point for the interpretation exercise must of course be the text of the lease as varied, and in particular the text of cl 23.[19]
[18]High Court judgment, above n 1, at [50(b)].
[19]Bathurst, above n 17, at [116(b)] per Winkelmann CJ and Ellen France J and [232(a)] per Glazebrook, O’Regan and Williams JJ; Mandic v The Cornwall Park Trust Board (Inc) [2011] NZSC 135, [2012] 2 NZLR 194 at [15] per Elias CJ ; and Firm PI 1 Ltd v Zurich Australian Insurance Ltd [2014] NZSC 147, [2015] 1 NZLR 432 at [88]–[90] per McGrath, Glazebrook and Arnold JJ.
We accept Mr Smith’s submission that cl 23 does not set out the process to be followed by a lessee who wishes to freehold in a way as clearly as one might wish. We agree that co-operation between the parties on aspects of the process would avoid unnecessary practical difficulties.
However there are some elements of cl 23 which are in our view very clear.
First, the process is initiated by the lessee giving notice to the lessor of the lessee’s desire to purchase the fee simple estate during the relevant 12 month period.
Second, it is the lessor who causes a valuation to be made by a registered valuer of the value of the fee simple estate. That is expressly provided for in paragraph (b) of cl 23. And it is implicit in paragraph (d), which provides that the offer notice sent by the lessor to the lessee must include a copy of the valuation. That assumes that it is the lessor who has obtained the valuation, and that the lessee will not have a copy of that valuation until it is provided with the offer notice.
Third, it is implicit in paragraph (b) that the lessor is entitled to select the registered valuer who carries out the valuation. No provision is made for the lessee to nominate the valuer to be appointed by the lessor, or to be consulted about the appointment of the valuer. If a contract does not provide for an eventuality, the usual
inference is that no contractual provision was made for it.[20] It is in our view clear that under cl 23 the lessor is not required to appoint the valuer jointly with the lessee, or in consultation with the lessee. Had that been required, it would have been expressly provided for in cl 23. The protection for the lessee is that the valuation must be carried out by a registered valuer. The registered valuer must of course prepare their valuation in accordance with generally accepted valuation principles, consistent with their professional obligations. But the lessee has no say in who is appointed.[20]Bathurst, above n 17, at [116(b)] per Winkelmann CJ and Ellen France J and [264] per Glazebrook, O’Regan and Williams JJ.
Fourth, the requirement in paragraph (a) that the notice be accompanied by a remittance for the cost of the valuation cannot sensibly be read as requiring strict contemporaneity. That would be difficult to achieve from a practical perspective, especially now that cheques are no longer in widespread use. The purpose of this requirement is to ensure that the cost of the valuation is met by the lessee, and that the lessor is not required to initiate a valuation and incur the associated cost unless and until they have been put in funds by the lessee to cover that cost. We consider that it is open to a lessee to give a notice under cl 23(a) and subsequently pay the cost of the valuation to the lessor (for example, by electronic payment to the lessor’s bank account). The notice will then be accompanied by payment in the only sense that matters having regard to the purpose of that requirement. The notice will be effective once the payment has been made.
The practical difficulty in putting cl 23 into practice concerns the amount to be paid by the lessee under paragraph (a). If the lessor selects the valuer, and does so only after a notice has been given by the lessee, the lessee will not know the exact cost that will be incurred in carrying out the valuation at the time they give the notice and are required to remit the cost of the valuation. How is the lessee to comply with the requirement to pay a cost that is not known to them?
One path to resolving that difficulty is of course for the lessee and lessor to
co-operate, with the lessee advising the lessor of their intention to give notice under cl 23, the lessor obtaining a quote from a valuer and advising the lessee of the cost of the valuation, and the lessee paying that exact amount at the same time as they give their notice.But we do not consider that it is necessary to read into the clause an implied term requiring co-operation of this kind. Rather, cl 23 can and should be read in a manner that ensures that the lessee’s right to freehold under cl 23 is capable of being exercised even if the lessor does not engage, or is obstructive. We consider that the reference to the notice being accompanied by a remittance for the cost of the valuation should be read as requiring either a remittance for the exact cost of the valuation, if that is known, or alternatively a remittance for a reasonable pre-estimate of the cost of the valuation. If a lessee gives notice under cl 23(a) and makes payment to the lessor of an amount that is a reasonable estimate of the cost of obtaining a valuation, cl 23(b) is triggered.
We do not accept Mr Smith’s argument that the exact cost must be known before the payment contemplated by cl 23(a) can be made. That interpretation would make cl 23 unworkable in practice without a high level of cooperation between lessor and lessee. It would create opportunities for a reluctant lessor to delay or create other barriers to the freeholding process.
The approach adopted by Mr Smith of selecting a valuer, and sending Paros a copy of a cheque made out to that valuer, plainly is not consistent with the process contemplated by cl 23. Unless an agreement had been reached to vary the lease by adopting a different process, Mr Smith’s approach was insufficient to trigger the cl 23(b) obligation of the lessor to cause a valuation to be made — whether by Mr Smith’s chosen valuer, or by any other valuer. Mr Smith could not require Paros to use his preferred valuer. And he had not put Paros in funds to meet the cost of a valuation by an independent valuer of their choice. Neither the text nor the purpose of cl 23 was satisfied by this approach.
Conversely, we consider that the process suggested in the 15 May 2018 letter from Brown Partners to Mr Smith was largely consistent with cl 23. We do not consider that Mr Smith needed to give a further notice of his desire to purchase the fee simple estate; he had already done that. What he needed to do next was to remit the cost of a valuation to the lessor. It would have been more helpful if Paros had obtained a quote, and the precise amount of that quote had been communicated to Mr Smith. But Paros was not obliged to proceed in this way. Rather, Paros could seek payment of a reasonable pre-estimate of the cost of valuation. That is what it did.
However, as we explain below, the determination of this appeal does not turn on whether the approach suggested by Brown Partners on behalf of Paros was in fact correct. Even if their proposed approach did not comply with cl 23, that would not necessarily amount to either a breach or repudiation entitling Mr Smith to cancel. We return to this in the context of issue 3 below.
It follows that under the process provided for in cl 23 Paros never became obliged to obtain a valuation, and make an offer to sell the fee simple estate to Mr Smith and Ms Shaw at the price determined by that valuation. That leads into the second issue: was the cl 23 process varied by agreement?
Issue 2: Was the cl 23 process varied by agreement?
The issue
Mr Smith says that cl 23 was unclear, so he sought to resolve what was required by discussion with the lessor. Following a number of attempts to engage with Mr Christian, Mr Christian sent him a text message referring him to Point Property Management. The relevant portion of that text, which was set out in full above, read:
However, If you wish to freehold the land at 54 Napier St as in accordance with the lease you can tender your request in writing to Point Management the Trusts property managers. Once they receive your notice they will then advise the steps required. Prior Payment of valuation etc.
Thanks again
…
Mr Smith says he then reached agreement on the process to be followed in the course of a telephone conversation with Ms Baillie of Point Property Management on 19 April 2018.
Mr Smith argues that Paros should have followed that agreed process, and breached or repudiated the lease by failing to do so.
Mr Smith was asked in cross-examination about the words that indicated Ms Baillie’s agreement during the conversation of 19 April 2018. He said:
A… I asked her for advice, we ended up in agreement because she would not give advice ... she was very cagey about it and would only say: “That’s for the lessor,” when I proposed: “If I find an independent registered valuer and send in the remittance for that, would that satisfy the lease?” “Yes.” “Okay.”
…
Q… You’re saying she agreed, what did she say to you that made you think she’d agreed? Did she say: “I agree with that, that’s what you have to do”?
A“Yes, I think that would satisfy the lease.”
Mr Smith said that although the notes of evidence record him as saying that Ms Baillie said “that’s for the lessor”, he made an accidental slip while under cross-examination: he said “lessor” when he meant “lessee”. He confirmed to us that his recollection is that what she said was that these matters were for the lessee. That is the evidence he gave in his affidavits in the declaration proceedings. He submitted that the High Court should not have “seized on” this slip of the tongue, which was inconsistent with all his other evidence. We are content to proceed on the basis that Mr Smith’s consistent position has been that he was advised by Ms Baillie that these matters were for the lessee.
Paros says that no agreement of the kind asserted by Mr Smith was reached with Ms Baillie. Nor did she have authority to agree to a variation of the process prescribed by the lease on behalf of Paros.
The second issue for determination is thus whether any binding agreement on the process to be followed was entered into by Mr Smith and by Paros, acting through Ms Baillie as agent for Paros.
High Court judgment
The Judge was not satisfied that any binding agreement about the process to be followed under cl 23 had been reached in the course of the telephone conversation between Mr Smith and Ms Baillie on 19 April 2018, having regard to the evidence and the written communications at the time. Mr Smith’s evidence fell short of establishing that there was such an agreement. The contemporaneous correspondence tended to confirm that no such agreement had been entered into: Mr Smith did not assert that there was any binding agreement about process in his subsequent emails and letters.[21]
[21]High Court judgment, above n 1, at [68], [69] and [72].
Because the Judge reached this view, it was not necessary for her to consider the submission by Paros that Ms Baillie had no authority to agree to a variation of the cl 23 process. But the Judge noted that had she been required to determine this issue, she would have found that Ms Baillie’s authority did not extend to reaching the agreement contended for by Mr Smith.[22]
Submissions of Mr Smith on appeal
[22]At [73].
In his written submissions, Mr Smith described the agreement he considers he entered into with Ms Baillie as follows:
On 19 April 2018 Mr Smith consulted with the lessor’s nominated representative, Lisa Baillie, the property manager at the respondent’s registered office, regarding the process to freehold. Lisa Baillie maintained to Mr Smith that the cost of the valuation was a matter for the lessee, and that Mr Smith should follow the lease. Mr Smith suggested, and it was agreed with the property manager, that he, Mr Smith, could submit notice of intention to freehold and remittance for an independent registered valuer as the cost of the valuation, and that the lessor would make any further or alternative requirements known to him as to how to exercise the right to freehold.
(Footnote omitted.)
Mr Smith said he had a reasonable expectation that Ms Baillie was able to advise him. He had been explicitly referred to her by the lessor for advice on the process to freehold. Her authority to advise on the details of the freeholding process was never qualified by Paros at that time. It was only in the context of the declaration proceedings that issues were raised about limits on her authority.
Mr Smith was critical of Ms Baillie’s failure to refer to the 19 April 2018 phone call in her initial evidence in the declaration proceedings. However it is not clear what relevance that criticism has to the question whether an agreement was in fact entered into.
Analysis
It is necessary to distinguish between two types of “agreement” when considering this issue. In order for Mr Smith to succeed in arguing that the refusal by Paros to accept his approach to the freeholding process was a breach or a repudiation, he would need to establish that Paros had entered into a contractually binding agreement to adopt a process different from that which cl 23 otherwise required. By contrast, if the evidence establishes no more than an agreement by Ms Baillie that she considered that what Mr Smith proposed was consistent with the requirements of the contract, such an “agreement” would not alter Paros’s contractual obligations under cl 23. Such an agreement might conceivably give rise to an estoppel: but that was not the basis on which this aspect of the case was presented, and it is difficult to see how an estoppel could be made out on the facts of this case given the clear indication by Ms Baillie shortly afterwards, on 27 April 2018, that Paros did not consider that Mr Smith’s preferred approach was consistent with the lease and the absence of any relevant change of position on the part of Mr Smith during this short period.
The original lease is a formal written document executed by the Council under seal and signed by the original lessee. Their executions are witnessed. Similarly the 2004 variation was recorded in writing, signed by the parties and witnessed. In the normal course one would expect any further variation to be entered into in writing and signed. It is possible for a lease to be varied by oral agreement: but that would be inconsistent with ordinary practice. The normal inference is that parties dealing with matters such as a lease intend to be bound only by execution of a formal agreement.[23]
[23]See Stephen Todd and Matthew Barber Burrows, Finn and Todd on the Law of Contract in New Zealand (7th ed, LexisNexis, Wellington, 2022) at [3.7.2].
It is even less likely that parties to a lease would intend to be bound by a variation agreed orally over the telephone with an employee of a property management company, such as Ms Baillie.[24] Mr Smith does not contend that Ms Baillie had actual authority to agree to a variation of the lease. We do not consider that the text from Mr Christian can be read as holding Ms Baillie out as having authority to contractually commit Paros to a process different from that required by the lease. Mr Christian referred Mr Smith to Point Property Management to “advise the steps required” — implicitly, required under the lease. There was no suggestion that Point Property Management (through Ms Baillie) could agree to a process different from that required by the lease, and still less that they could do so orally without reference back to Paros and without the need for a written variation of the lease recording that agreement.
[24]It may be less difficult to argue that representations made by a property manager within the scope of their actual or apparent authority give rise to estoppels; but that is not the argument that was advanced by Mr Smith before the High Court or before this Court. Nor is it easy to see how an estoppel could be made out.
Thus even if Ms Baillie had purported to agree to modify the process prescribed by the lease, we would have declined to find that a telephone discussion to that effect amounted to an immediately binding contractual commitment on the part of Paros, without the need for any further formalities.
But in any event, the evidence does not establish an agreement to that effect. Mr Smith and Ms Baillie were discussing what the lease required, not how it should be changed. On Mr Smith’s own evidence, she was “cagey” about this. At its highest, his evidence suggests that Ms Baillie eventually agreed with the view he expressed that the lease permitted him to appoint a valuer, and that Paros would then cause that valuer to carry out the cl 23 valuation. If that is what Ms Baillie “agreed” about how cl 23 operated, then she was wrong. Paros was free to disown her “agreement” about what cl 23 required, and insist on compliance with cl 23 properly interpreted. It was not bound by any incorrect view Ms Baillie might have expressed about how the clause worked.
Our view is reinforced by the subsequent correspondence between the parties. If Mr Smith considered that a binding agreement had been reached about the operation of cl 23 in the course of the 19 April telephone call, one would expect to see that agreement referred to and invoked as the justification for his stance in the many communications that followed shortly afterwards. But as the Judge noted, that is not what occurred.[25]
[25]High Court judgment, above n 1, at [69(d)].
For example, on 8 June 2018 Mr Smith sent an email to Brown Partners in which he said that the process for freeholding was set out in the lease “which I have followed”. He did not suggest that the lease process had been modified by agreement with Ms Baillie. Rather, he described that discussion as involving consultation with her:
I did consult with Point Property on or about mid April. I am just looking for record of the phone conversation to show this. Mr Christian via his various entities is a professional lessor and landlord And had every opportunity to clarify the process beforehand. Why has he now changed his mind on the process? The Lessor appears to wish to name the price rather than have it fairly valued.
This is simply an argument about the appointment of the valuer. I am a domestic Lessee who has transparently and clearly followed the lease process to freehold and have been transparent and reasonable about the valuation to ensure the lease clause is complied with.
That communication reflects a view on the part of Mr Smith that the process he had adopted was consistent with cl 23. It does not suggest that he considered he had reached an agreement with Ms Baillie to modify that process.
An email from Mr Smith to Brown Partners on 20 August 2018 did refer to an agreement being reached with Ms Baillie:
The process of freeholding 54 Napier street under the lease was (as you have been made aware many times) agreed with the Lessor’s agents (Lisa Baillie of Point Property evidenced by phone records and emails) prior to the filing valid notice on the 26th of April. The lessee consulted with the Lessor(from November 2017), and the Lessors agents(April 2018) as to the freeholding process, serving valid notice in accordance with the lease, and in agreement with the Lessor’s agents on the 26th of April 2018 including remittance for the cost as required under clause 23. The Lessor’s agents agreed that the process intended and discussed with the Lessee was acceptable under the lease. Despite the opportunity and inquiry by the lessee, neither the Lessor, or his agents suggested any alternative process and did not nominate any process requirements, detail, cost or party to be paid …
However that email does not suggest that a binding agreement had been reached with Ms Baillie to adopt a process different from that provided for in the lease. Rather, it suggests that Mr Smith considered that Ms Baillie had agreed that his suggested process was consistent with the lease. And it expressly contemplates the possibility that Paros might suggest an alternative approach following that conversation — a possibility inconsistent with there being a binding commitment to accept his preferred approach.
Most tellingly, the email of 26 April 2018 in which Mr Smith gave notice of his desire to freehold:
(a)described the process he was adopting as “[i]n accordance with the lease”; and
(b)did not refer to any agreement with Ms Baillie, or suggest in any way that there had been an agreed modification of the cl 23 process.
If a variation to the lease process had been agreed one week earlier, and Mr Smith believed he was acting pursuant to that variation, one would expect this email to refer to that variation. It did not.
Because Mr Smith’s own evidence falls far short of what would be needed to establish a binding agreement to modify the process provided for in the lease, it is not necessary for us to consider his criticisms of Ms Baillie’s evidence.
In summary, the argument that a binding agreement to vary the process in cl 23 of the lease was entered into orally between Mr Smith and Ms Baillie is in our view plainly misconceived. It is inherently improbable that a lease was varied in this informal manner. Ms Baillie had neither actual nor apparent authority to do so. The exchange between them fell far short of a clear and unambiguous agreement to modify the lease in this way.
Issue 3: Was the lease validly cancelled?
The issue
Mr Smith’s letter dated 30 August 2018 identified two bases for cancellation of the lease: repudiation and breach. The conduct by Paros relied on by Mr Smith as repudiatory and/or a breach of the lease was, in summary, what he saw as the delay on the part of Paros in engaging with him about the freeholding process, demands and other conduct designed to frustrate his ability to freehold, insistence on following a process not in accordance with the lease, and failure to follow the process that he believed Ms Baillie had agreed was acceptable under the lease.
High Court judgment
The Judge said that because of her findings in relation to cl 23, she did not need to analyse this part of the argument in any detail. The lease had not been repudiated or breached by Paros, so cancellation was not legally justified. It followed that the lessees’ counterclaims could not succeed.[26]
Submissions of Mr Smith on appeal
[26]High Court judgment, above n 1, at [74]–[75].
Mr Smith’s argument before us proceeded on the basis that his entitlement to cancel the lease turned on whether or not he had given a valid notice of his desire to freehold the property under cl 23.
Mr Smith also submitted that Paros had breached duties of honesty, good faith and fair dealing. It had attempted to implement a process inconsistent with the process followed on previous rent reviews. And it had proposed a process for the freeholding that was invalid and inconsistent with the lease. This conduct amounted to both a breach and a repudiation.
Analysis
Mr Smith and Paros disagreed about the interpretation of the lease, and in particular cl 23. We have held that Paros was right to reject Mr Smith’s contention that he had given an effective notice under cl 23 of the lease. But even if Paros had been wrong, and Mr Smith had been right, it would not follow that Paros had repudiated the lease and that Mr Smith was entitled to cancel.
Section 36 of the Contract and Commercial Law Act 2017 sets out the circumstances in which a party may cancel a contract in response to a repudiation:
36 Party may cancel contract if another party repudiates it
(1)A party to a contract may cancel the contract if, by words or conduct, another party (B) repudiates the contract by making it clear that B does not intend to—
(a) perform B’s obligations under the contract; or
(b)complete the performance of B’s obligations under the contract.
(2) This section is subject to the rest of this subpart.
As the Supreme Court explained in Kumar v Station Properties Ltd, advancing an incorrect view about the meaning of a contract does not necessarily amount to a repudiation:[27]
The mere fact that a party vigorously espouses a view of a contract’s meaning that is ultimately shown or accepted to have been wrong does not mean that the party is thereby manifesting an intention not to perform its obligations under the contract. If it is clear that the party accepts that it is bound by the contract, whatever meaning it is ultimately determined to have, the party should not be held to have repudiated the contract. By contrast, if a party persistently refuses to perform unless the other party accepts additional onerous terms inconsistent with the contract or on the mistaken view that there was never an enforceable contract, the party may well be found to have repudiated the contract. In such circumstances, the stance adopted amounts to a refusal to accept any obligation to complete the contract in accordance with its terms.
[27]Kumar v Station Properties Ltd (in liq and in rec) [2015] NZSC 34, [2016] 1 NZLR 99 at [63] per Elias CJ and McGrath, Glazebrook and Arnold JJ (footnote omitted).
Repudiation is a serious conclusion that is not to be found or inferred lightly.[28] The repudiating party must have:[29]
… made it clear (by words or conduct) that it did not intend to perform, or complete the performance of, its obligations under the contract, or indicated that it will only perform the contract in a way substantially inconsistent with its obligations and not in any other way.
[28]At [58].
[29]Jade Residential Ltd v Paul [2020] NZCA 477 at [52].
In this case, Paros made it clear throughout that it intended to perform the lease. There was no suggestion from Paros that it did not intend to perform any of its obligations under the lease apart from the cl 23 obligation. Paros repeatedly stated that it was willing to perform its obligations under cl 23 as it understood that provision. The letter from Brown Partners dated 15 May 2018 set out a process that Paros would accept as consistent with cl 23. Paros’s willingness to comply with that process was reiterated on a number of occasions.
On 20 August 2018 Paros proposed that the parties’ competing interpretations in relation to cl 23 be referred to arbitration. This was a further indication that Paros was willing to comply with the lease properly interpreted, and was willing to have the correct interpretation determined authoritatively by a neutral third party.
It is in our view very clear that Paros had not repudiated the lease as at the date on which Mr Smith purported to cancel. We doubt that even the clearest indication by Paros that it would not perform its obligations under cl 23 would have been sufficient to amount to a repudiation of the lease as a whole. But we need not resolve that issue as Paros consistently, and in our view genuinely, affirmed its willingness to comply with cl 23 properly interpreted. There was not even a repudiation of Paros’s obligations under cl 23, let alone under the lease taken as a whole.
We turn to consider cancellation for breach, which is governed by s 37 of the Contract and Commercial Law Act. A party to a contract may cancel that contract if a term in the contract has been breached by another party and:[30]
(b)the effect of the … breach of the contract is, or, in the case of an anticipated breach, will be,—
(i)substantially to reduce the benefit of the contract to the cancelling party; or
(ii)substantially to increase the burden of the cancelling party under the contract; or
(iii)in relation to the cancelling party, to make the benefit or burden of the contract substantially different from that represented or contracted for.
[30]Contract and Commercial Law Act 2017, s 37(2)(b).
We have found that Paros did not breach any express term of the lease by declining to proceed to instruct Mr Smith’s preferred valuer, or for that matter any other valuer.
Nor do we consider that Paros breached any implied term relating to
co-operation or good faith in connection with implementing cl 23. We doubt that it is necessary to imply any such term in order for cl 23 to be effective. But in any event, the conduct of Paros was, in our view, consistent with the contractual framework. Mr Smith’s frustration with Paros stemmed from its unwillingness to accept his preferred approach to the freeholding process. We have concluded that that approach was wrong. But even if we had reached a different view, we would not have found that the parties to the lease had expressly or impliedly agreed that performance of any such implied term was essential, or that the effect of the alleged breach was sufficiently substantial to justify cancellation. Any breach was confined to the process to be followed in relation to the exercise of a right ancillary to the lease, which did not affect the lessee’s core entitlement to occupy the property in exchange for payment of the rent.It follows that the appeal must be dismissed so far as it relates to Mr Smith’s counterclaim for a declaration that the lease had been validly cancelled.
It also follows that Mr Smith’s defence to the claim for rent on the basis of cancellation must fail. It is therefore necessary to determine the amount of rent payable under the lease, which turns on the validity of the August 2018 rent review notice. We turn to consider that issue.
Issue 4: Rent payable under the lease
The issue
The only issue that remains in dispute is whether the notice given by Paros in August 2018, and re-issued in August 2019, was effective to reset the rent under the lease with effect from November 2018.
The 2004 variation provided for seven-yearly reviews of the rent “on the terms set out in the lease”. The relevant term was set out at [12] above: the annual rental is to be determined “by a valuation of the land only without taking account of any improvements on the land, in the manner provided in Section 152(3) Municipal Corporations Act 1954”. Section 152(3) of the Municipal Corporations Act provided as follows:
(3) Every valuation under paragraph (b) of subsection one of this section shall be made by three independent persons, one to be appointed by the Council, one by the lessee, his executors, administrators, or assigns, and the third by those two appointed persons. The valuation fixed by any two of those persons shall be final, and where no two of them reach the same decision the decision of such third person as aforesaid shall be final. The lease may contain any subsidiary matter to give due effect to the provisions of the said paragraph.
Section 152(3) was repealed by the Local Government Amendment Act (No 3) 1977. That Amendment Act introduced a new s 231 into the Local Government Act 1974 which conferred on local authorities a power to lease land, and deemed leases entered into under the Municipal Corporations Act to be leases under the Public Bodies Leases Act:
231 Leasing of land by council
(1)The council shall, in addition to all other leasing powers exercisable by the council under any other provision of this Act [], or under any other enactment, or under any grant, conveyance, or deed, have power to lease any land or building or other real or personal property vested in the Corporation of the district (not being land that is a public reserve within the meaning of the Reserves Act 1977 or a building on any such public reserve) in accordance with the Public Bodies Leases Act 1969, and that Act shall apply accordingly.
(2)Any lease entered into pursuant to any of the provisions of sections 152, 153, 153A, 155, 157, and 158 of the Municipal Corporations Act 1954 or sections 172, 173, 173A, 175, 177, and 178 of the Counties Act 1956 and current at the commencement of this Part of this Act shall be deemed to be leases entered into pursuant to the appropriate provisions of the Public Bodies Leases Act 1969, and the provisions of that last‑mentioned Act shall apply accordingly.
The August 2018 rent review notice recorded that it was given pursuant to the rent review process provided for in s 22 of the Public Bodies Leases Act, rather than under s 152(3) of the Municipal Corporations Act. Section 22 of the Public Bodies Leases Act provides:
22 Periodic review of rents
(1) Subject to this section, a lease granted under this Act may contain provision for the review of the yearly rent payable thereunder at such periodic intervals during the term of the lease, being not less than 5 years, as the leasing authority thinks fit.
(2) Where a lease contains any such provision for the review of rent—
(a) not earlier than 9 months and not later than 3 months before the expiry by effluxion of time of any such period (not being the last such period of the term of the lease), or as soon thereafter as may be, the leasing authority shall cause a valuation to be made by a person whom the leasing authority reasonably believes to be competent to make the valuation of the fair annual rent of the land for the next ensuing period of the term of the lease, so that the rent so valued shall be uniform throughout the whole of that ensuing period:
(b) as soon as possible after that valuation has been made, the leasing authority shall give to the lessee notice in writing informing him of the amount of that valuation and requiring him to notify the leasing authority in writing within 2 months whether he agrees to the amount of that valuation or requires that valuation to be determined by arbitration in accordance with paragraph (c):
(c) within 2 months after the giving of that notice to the lessee, he shall give notice in writing to the leasing authority stating whether he agrees to the valuation specified in the notice given to him or requires that valuation to be determined by arbitration. If he so requires, that valuation shall be determined in accordance with the provisions of clauses 7 to 11 of Schedule 1, which shall, with the necessary modifications, apply as if the valuation were being made to determine the rent payable under a renewal lease:
(d) if the lessee fails to give to the leasing authority within the time specified in paragraph (c) the notice referred in that paragraph, he shall be deemed to have agreed to the valuation set out in the notice given to him under paragraph (b):
(e) the yearly rent agreed to or deemed to have been agreed to by the lessee or determined by arbitration under this subsection shall be the yearly rent payable under the lease for that ensuing period.
If the Public Bodies Leases Act regime applies to rent reviews under the lease, the rent review notice given by Paros was effective to set a new rent. The lessees did not give notice within two months requiring the rental valuation to be referred to arbitration. But if it does not apply, and the s 152(3) Municipal Corporations Act regime still applies, the notice was not effective to reset the rent. So the final issue for determination is which regime applies.
High Court judgment
The Judge proceeded on the basis that the lease had been granted under s 152 of the Municipal Corporations Act. It followed that the deeming provision in s 231(2) of the Local Government Act applied to the lease: it was deemed to have been entered into under the Public Bodies Leases Act, and the provisions of that Act applied accordingly. In particular, the Judge was satisfied that the process set out in s 22 of the Public Bodies Leases Act applied to the valuation undertaken for the purposes of the rent review in this case.[31]
[31]High Court judgment, above n 1, at [81]–[82].
It followed that Paros had given effective notice reviewing the rent. Mr Smith had not referred the amount of rent assessed to arbitration as provided for in s 22(2)(b) of the Public Bodies Leases Act. So the rent specified in the notice now applied.[32]
Submissions of Mr Smith on appeal
[32]At [86].
Mr Smith emphasised that the lease expressly provides that the valuation of land is to be carried out “in the manner provided in Section 152(3) Municipal Corporations Act 1954”. He submitted that this provision incorporates the terms of the statute into the lease as if it had been set out in that instrument. He relied on the following passage from the recent decision of the High Court in Sai Louie v Pengelly’s Properties Ltd:[33]
The effect of such incorporation is expressed by Lewison LJ, writing extra‑judicially. Where the terms of a statute are incorporated by reference into a contract, “the contract has to be read as if the words of the statute are written out in the contract and construed, as a matter of contract, in their contractual context”. Because the statutory terms have to be construed in their contractual context, “their meaning in the context of the contract is not necessarily the same as their meaning in the context of the statute”.
[33]Sai Louie v Pengelly’s Properties Ltd [2021] NZHC 663 at [54] (footnotes omitted), referring to Kim Lewison The Interpretation of Contracts (6th ed, Sweet & Maxwell, London, 2015)Because the words of s 152(3) of the Municipal Corporations Act should be treated as if set out in the lease, Mr Smith said, the High Court erred in treating the repeal of that Act, and the deeming provision in s 231(2) of the Local Government Act, as introducing a new and different rent review process.
Submissions of Paros
Paros did not take issue with Mr Smith’s submission that the lease effectively incorporated in its terms the words of s 152(3) of the Municipal Corporations Act. But, Paros submitted, the Judge was right to find that a statutory deeming provision applied the rent review process under the Public Bodies Leases Act to this lease. Paros submitted that:
(a)The lease and rent review provision were entered into pursuant to the Municipal Corporations Act and the rent review mechanism in the lease was to be pursuant to the terms of s 152(3) of that Act. That was common ground at trial.
(b)When the s 152(3) mechanism was repealed, leases entered into in terms of the Municipal Corporations Act were statutorily deemed to be leases under the Public Bodies Leases Act by s 231(2) of the Local Government Act, the review provisions of which would then apply.
(c)The clear legislative intention of the Local Government Amendment Act (No 3) 1977 was for the Public Bodies Leases Act regime to apply to leases granted by a council (both prospectively and retrospectively).
Thus, Paros submitted, when it became the owner of the freehold, and entitled to enforce the lease, it took an assignment of a Public Bodies Leases Act lease, to which the rent review mechanism in s 22 of that Act applied.
Further submissions following the hearing
At the hearing of this appeal we raised an issue that had not been addressed in the High Court. It appears to have been common ground below that the lease was granted under s 152 of the Municipal Corporations Act. However Recital III of the lease refers to the lease being granted under the URHI Act:
The Lessor grants this Lease pursuant to the powers conferred by the Urban Renewal and Housing Improvement Act 1945 and to all other powers and authorities enabling it to do so.
We sought further submissions from the parties on the implications of Recital III of the lease, and in particular whether, having regard to that recital, s 231(2) of the Local Government Act applied to the lease.
In its further submissions, Paros argued that:
(a)The recital records that the lease is granted under the URHI Act and all other powers and authorities enabling it to do so.
(b)Those italicised words are apt to refer, among other things, to s 152 of the Municipal Corporations Act. That was a relevant source of powers to lease, and other provisions of the lease — including the rent review provision — reflected an intention to grant the lease pursuant to, in part, s 152 of the Municipal Corporations Act.
(c)Section 231(2) of the Local Government Act applied to the lease because any lease entered into pursuant to, among other things, s 152 of the Municipal Corporations Act is identified as one to which s 231(2) applies.
Paros also submitted that there was no evidence in relation to the status of the property under the URHI Act, because it was common ground at trial that this was a lease granted under the Municipal Corporations Act.
Paros emphasised that this point had not been taken by the appellant at trial, or raised by him on appeal.
Mr Smith responded to Paros’s further submissions emphasising that in his view the reference to s 152(3) should be read as importing the process described in that provision into the lease. Subsequent repeal of the Municipal Corporations Act was therefore irrelevant. The deeming provision in s 231 of the Local Government Act was also irrelevant as the lease had been entered into under the URHI Act, not the Municipal Corporations Act.
Mr Smith went on to submit that by giving the rent review notice on 13 August 2018 Paros was, and remains, in breach of the lease. This was a further basis on which his cancellation notice of 30 August 2018 was valid and effective. Mr Smith also submitted he should be awarded damages for the breach.
Analysis
In these proceedings Paros sues to recover rent pursuant to the lease, claiming rent at the level specified in the notice it gave in August 2018 (and re-issued in August 2019). It was incumbent on Paros to establish its entitlement to rent at the level specified in that rent review notice. Paros therefore needed to satisfy the Court that the notice was valid.
Mr Smith’s primary response to the claim for rent was that the lease had been cancelled. That argument did not succeed in the High Court, and has not succeeded before us. But Mr Smith did also argue both before the High Court and this Court that any rent review needed to be carried out in accordance with s 152(3) of the Municipal Corporations Act, rather than following the Public Bodies Leases Act process. We consider that this argument was clearly live in both courts, and is sufficient to raise the question whether the Public Bodies Leases Act process applied in place of the Municipal Corporations Act process. That is essentially a question of law. There is no barrier to Mr Smith advancing, before this Court, a further legal argument as to why s 231(2) of the Local Government Act did not displace the operation of the Municipal Corporations Act rent review process.
The URHI Act made provision “with respect to the Improvement of Housing Conditions and the Reclamation of Overcrowded Areas, and for other Purposes”.[34] It conferred broad powers on local authorities in relation to insanitary or otherwise inadequate housing. The Act also provided for reclamation of areas in an
over-crowded, degraded or insanitary condition, or containing houses unfit for human habitation or which were insanitary or unhealthy, or otherwise unsuitable for human habitation. The local authority was empowered to take such land under the Public Works Act 1928, or purchase or otherwise acquire it.[35][34]Urban Renewal and Housing Improvement Act 1945, long title.
[35]Sections 18–20.
The URHI Act went on to confer broad powers on local authorities to re‑subdivide and improve reclamation areas, including the power to:[36]
Sell or lease any of the land and any buildings or erections thereon upon or subject to such terms and conditions as the local authority thinks fit, and nothing in section thirty-five of the Public Works Act, 1928, shall apply in respect of any such sale.
[36]Section 21(2)(f).
It seems clear from the terms of the lease that it was granted under these powers. We do not consider this is an issue that needed to be the subject of any evidence at trial.
Paros submits that this lease could also have been granted under the Municipal Corporations Act. As originally enacted, s 152 of that Act provided for a maximum term of 66 years. But it was amended in 1966 to permit leases with a maximum term of 99 years: Municipal Corporations Amendment Act 1966, s 3. The present lease was granted in 1972. Paros submits, as noted above, that the Council’s intention to grant the lease under the Municipal Corporations Act as well as the URHI Act is illustrated by the references to s 152 in the rent review provision.
We consider that the reference to s 152(3) in connection with rent reviews is at least equally consistent with the lease not being granted under the Municipal Corporations Act, with the result that s 152(3) would not apply unless expressly incorporated by reference.
In any event the critical point for present purposes is that whatever other powers might have been available to the Council, it expressly recorded that it was granting the lease under the URHI Act. It did not expressly invoke its powers under the Municipal Corporations Act, and did not need to rely on those powers in order to lawfully grant the lease.
The issue is thus whether, in circumstances where a lease was expressly granted under the URHI Act and the Council neither expressly relied on the Municipal Corporations Act nor needed to do so, the deeming provision in s 231(2) of the Local Government Act nonetheless applies because the Council could have relied on its Municipal Corporations Act powers.
We do not consider that in these circumstances the lease can be described as having been entered into “pursuant to” the Municipal Corporations Act powers. As a matter of ordinary usage, it seems odd to describe the lease as entered into pursuant to a power that was not expressly invoked, and did not need to be invoked.
Nor do we consider that s 231(2) was intended to require lessors and lessees to undertake a sophisticated counterfactual analysis of whether, despite reference to powers under another Act, a lease might also have been granted under the Municipal Corporations Act. Plainly if the lease had been for a term in excess of 99 years, which would have been permissible under the URHI Act but not under the Municipal Corporations Act, it would not be arguable that the lease had also been granted under the Municipal Corporations Act and that s 231(2) applied. The same would apply if any provision of the lease fell outside the scope of what was permitted under the Municipal Corporations Act. So it would follow from the argument for Paros that in order to determine whether this lease or any other lease containing a similar recital came within the deeming provision in s 231(2) of the Local Government Act, it would be necessary to carry out a detailed review of the lease to see if any of its terms would have been outside the leasing powers conferred by the Municipal Corporations Act. We do not consider that when Parliament enacted s 231 in 1977 it contemplated an approach of this kind. That would have created significant complexity and uncertainty for both lessors and lessees. Section 231 must have been intended to operate in a clearer and more transparent manner, which enabled all parties to know where they stood.
We therefore consider that s 231(2) of the Local Government Act applies where a council expressly relied on the powers conferred by the leasing provisions of the Municipal Corporations Act when granting the lease. In those circumstances, it would be apparent to the parties that s 231 applied, and thus that the Public Bodies Leases Act applied. Section 231(2) also arguably applies where there is no express reference in the lease to the statutory power under which the lease was granted, but the only relevant power available to the Council was conferred by the Municipal Corporations Act: but we need not determine that here. However s 231(2) does not apply to leases such as the present one, which expressly record that they are made pursuant to another Act, and neither invoke nor depend for their validity on the provisions of the Municipal Corporations Act.
It follows that Paros was not able to increase the rent under the lease by giving a notice in the manner contemplated by s 22 of the Public Bodies Leases Act. Rather, it was necessary to follow the process prescribed in s 152(3) of the Municipal Corporations Act. That process required a valuation by three independent persons. No such valuation has taken place. The rent remains at the level applicable from 14 November 2011 to 13 November 2018: $31,000 per annum.
We will therefore allow the appeal from the judgment in relation to rent payable by Mr Smith.
Paros suggested in its further submissions that if we reached this conclusion, the appeal should be allowed only as to quantum. Judgment should still have been entered for $86,500 and for the further rent that has fallen due on 14 May 2022. Paros also sought a direction fixing a final quantum of judgment for rental arrears by way of a review under the s 152(3) Municipal Corporations Act process. However we consider that it is preferable simply to allow the appeal, and refer these matters of quantum and ancillary relief back to the High Court.
Rent review notice a breach or repudiation?
Although it follows that the rent review notice was ineffective, we do not accept Mr Smith’s further submission that giving that notice amounted to a breach by Paros entitling him to cancel. Mr Smith could simply disregard the invalid notice, as he did. Paros did not have a contractual obligation to refrain from giving incorrect or invalid notices. Nor does the mere fact of giving such a notice have such a significant adverse effect on the lessee that they are entitled to cancel, even if this were characterised as a breach. An attempt by the lessor to terminate the lease in reliance on an invalid rent review notice and retake possession might well amount to a repudiation or anticipatory breach entitling the lessee to cancel: but that is not the position here. Paros has been content to allow Mr Smith to remain in possession, and refer the question of what rent is recoverable to the courts.
Application to adduce further evidence
For the sake of completeness, we note that Mr Smith applied for leave to adduce further evidence in the form of a letter relating to the rent review process adopted under the lease in 2011. He says that the letter is relevant because it shows that in 2011 the rent review process that was adopted was the process set out in s 152(3) of the Municipal Corporations Act, and not the process provided for in s 22 of the Public Bodies Leases Act.
This evidence is not fresh. It could have been adduced before the High Court. More importantly, it is not relevant to the issues before this Court. The question of which rent review process applies under the lease turns on the interpretation of the lease, and on the effect of the statutory deeming provision in s 231(2) of the Local Government Act. The approach adopted by the lessor in 2011 sheds no light on that question. As it happens, we have found that this approach was correct. But if we had found that it was wrong, all that the letter would establish was that an incorrect process had been followed in 2011. We note there was no suggestion by Mr Smith that he was aware that this process had been followed in 2011 before he acquired the property, or that he had relied on this information in some way.
In these circumstances we decline leave to adduce further evidence on appeal.
Costs
As already mentioned, costs were reserved by the Judge in her judgment following trial. Paros claimed indemnity costs pursuant to the lease and disbursements. A number of disputes in relation to costs were determined by the Judge in a separate decision.[37] That determination proceeded on the basis that the claim for rent had succeeded, and that the lease entitled Paros to recover indemnity costs incurred in recovering rent that Mr Smith had failed to pay in breach of the lease.[38]
[38]At [23]–[24].
The success of Mr Smith’s appeal, and the reference back to the High Court, mean that the award of costs in the High Court will need to be revisited. We set aside the award of costs by way of consequential relief. Costs in the High Court will need to be determined by that Court in light of the outcome before this Court, and on remittal to the High Court.
Paros asked that costs be reserved by this Court, as if the appeal was unsuccessful it proposed to seek indemnity costs. Mr Smith indicated that if he was successful, he claimed disbursements.
The appeal has been successful in part, though that partial success stemmed from a legal issue identified by this Court rather than from any argument advanced by Mr Smith. We encourage the parties to consider whether, in these circumstances, it might be sensible for costs to be permitted to lie where they fall. But if agreement cannot be reached on costs, memoranda may be filed in accordance with the orders made below.
Result
The appeal from the entry of judgment on the respondent’s claim for rent is allowed. The High Court judgment on that claim is set aside. The claim is remitted to the High Court to determine the amount of rent payable.
The appeal in relation to the dismissal of the appellant’s counterclaim is dismissed.
Costs in this Court are reserved. If either party seeks costs, they may file a memorandum not exceeding five pages within 10 working days of the date of this judgment. The other party may file any memorandum in response (not exceeding five pages) within 10 working days. Costs will be determined on the papers.
The costs order in the High Court is set aside. Costs in the High Court will be determined by that Court in light of the outcome before this Court, and on remittal to the High Court.
The application for leave to adduce further evidence on appeal is declined.
Solicitors:
Brown Partners, Auckland for Respondent
at 125–126.
- AGLC
- Smith v Paros Property Trust Limited [2022] NZCA 447
- Case
- [2022] NZCA 447
- Decision Date
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