Storageone Kapiti (2012) Limited v Sharja Limited

[2022] NZHC 2252

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

I TE KŌTI MATUA O AOTEAROA TE WHANGANUI-A-TARA ROHE

CIV-2022-485-149

[2022] NZHC 2252

UNDER

Sections 261 and 264 of the Property Law Act 2007

IN THE MATTER

of a lease at 12 Manchester Street, Paraparaumu

BETWEEN

STORAGEONE KAPITI (2012) LIMITED

Applicant

AND

SHARJA LIMITED

Respondent

Hearing:

8 August 2022

Appearances:

C S Chapman for the Applicant

N J Tutt and G S McCardle for the Respondent

Judgment:

5 September 2022

JUDGMENT OF COOKE J

[1]    By originating application dated 18 March 2022 the applicant seeks relief under s 264 of the Property Law Act 2007 (the Act) in relation to a failure to renew its lease with the respondent, and potentially under s 253 in relation to cancellation of the lease for alleged breach. The applicant also relies on an estoppel in relation to the renewal of the lease. The application is supported by affidavits of Antony Molenaar, the sole director and beneficial owner of the applicant, and Philip McConchie of Spencer Homes Ltd who provided the applicant with some advice. The application is opposed by the respondent. Sharon Beer, the sole director and shareholder of the respondent, has filed an affidavit outlining the basis of the opposition. The respondent also advances a counterclaim seeking a declaration that the lease was validly cancelled, and an order for possession under s 251.

STORAGEONE KAPITI (2012) LTD v SHARJA LTD [2022] NZHC 2252 [5 September 2022]

Background

[2]    The applicant (Storageone) entered into an agreement to lease commercial premises at Paraparaumu from  the  respondent  (Sharja)  by  an  agreement  dated  18 December 2014.   The lease was on standard ADLS terms.   It commenced on     1 March 2015 for a period of five years with further four renewal periods of five years each, and a final expiry date of 29 February 2040.

[3]    The first right of renewal was for the term commencing 1 March 2020 but Storageone overlooked giving a renewal notice. The lease nevertheless continued to be applied by the parties from that time, although Sharja argues that the continuation was in the form of a monthly tenancy. Disagreements developed between the parties in relation to Storageone’s adherence to the terms of the lease and in December 2021 Sharja gave notice of termination of the periodic tenancy that it said was in existence from 1 March 2020. It is this step that has led to the application.

[4]    Sharja also alleges that Storageone acted in breach of the lease, particularly in two key respects, in a way that entitles it to cancel the lease.

[5]    First, the lease is a commercial lease. Storageone uses the premises for its business of letting out individual secure storage units located at the premises. This takes place on the ground floor. There is additional space in the first floor. I accept that this space was fitted out for residential occupation. It had a kitchen and bathroom, plumbing configured for a washing machine, an in-built wardrobe in one room, and light switches in that room were at the appropriate placement and height for either side of a bed. But cl 16 of the ADLS lease prevented Storageone using the premises for other than business use without the landlord’s consent. The building was also not permitted to be used for residential occupation by the Kapiti Coast District Council (KCDC). Storageone nevertheless sub-let the first floor to residential tenants without Sharja’s permission until the issue was raised by Sharja. On 23 November 2021 Storageone gave notice to its tenants.

[6]    Secondly, Storageone made a structural alteration to the ground floor by removing two internal walls to incorporate an office space into a larger reception area.

It did so without Sharja’s consent as required by cl 20 of the lease. That work included relocating a structural post which had been located within one of the walls.

[7]    Sharja has raised these matters as reasons why it has a right to terminate the lease for breach, and as part of its opposition to relief under s 264. It has been prepared to enter a new lease with Storageone, but on terms that are more beneficial to it, including with respect to a new rent with the existing rent now said to be below market value. No steps were required to address the two breaches referred to above if the lease on these different terms was entered.

Relief for failure to renew the lease

[8]    Under s 261 of the Act the Court may grant relief under s 264 if a lessee has failed to give a notice to renew the lease within the specified time and specified manner required by the lease. Section 264 provides:

264     Relief court may grant on application

(1)On an application under section 261, the court may grant relief against the refusal of the lessor to extend or renew the lease, or enter into a new lease, or transfer or assign the reversion, as the case may be.

(2)In particular, the court may—

(a)do either of the following:

(i)      order the lessor to extend or renew the lease or enter into a new lease with the lessee, mortgagee, or receiver; or

(ii)     order the lessor specifically to perform the lessor’s covenant or agreement to transfer or assign the reversion, and to execute all necessary assurances for that purpose; and

(b)grant relief under paragraph (a)(i) or (ii) on any conditions (if any) as to expenses, damages, compensation, or any other relevant matters that the court thinks fit.

…

[9]The Court has a broad discretion in relation to grant of relief under this section.

Several non-exhaustive factors have been referred to by the authorities:1

(a)why notice of renewal was not given, and whether it was inadvertent;

(b)whether default was due to any action of the lessor;

(c)the lessee’s conduct, in particular whether they have complied with all conditions and covenants and have been a good tenant;

(d)the prejudice to the lessee if the relief is not granted;

(e)the prejudice to the lessor if the relief is not granted;

(f)the lessor’s motivation for the refusal to renew and the lessee’s intentions;

(g)whether the interests of third parties are affected.

[10]   Relief under s 253 of the Act is also potentially relevant. This section allows the Court to grant relief in relation to a proposed cancellation of a lease due to breach. I do not accept Mr Chapman’s argument that Sharja cannot rely on cancellation for breach on the basis that it did not exercise a right to cancel the lease under ss 244 or 246 of the Act and has elected to proceed on the basis that the lease ended for non- renewal. Sharja has raised the breaches as part of its counterclaim as an alternative basis upon which the lease should be brought to an end. This falls within s 244(1)(a) of the Act. The breaches are not denied. In any event it would be of little practical utility for me to fail to address the question whether Sharja may cancel the lease for breach under s 244.

[11]   But I do accept Mr Chapman’s submission that the factors relied upon will likely be the same for both claims. Similar factors are identified by the authorities on

1      Ponsonby Mall Trust Ltd v New Zealand Food Industries Ltd (2005) 7 NZCPR 48 (HC) at [29]; Twin Peaks Coffee Company Ltd v Broadway Developments 1986 Ltd (2010) 12 NZCPR 49 (HC) at [49].

relief from cancellation for breach under s 253, and the particular factors of significance in application for relief under s 264 in any particular case are likely to be the factors of importance under ss 251 and 253.2

The relevant factors

[12]   While the parties raised a number of matters, and addressed some issues in greater detail, in my view the question of relief turns on certain key factors.

[13]   The first relevant factor is that Storageone’s failure to give notice of renewal was inadvertent. That mistake took place in the context of a lease where neither party strictly followed the technical requirements. The parties entered the agreement to lease but never executed a formal deed. Sharja did not exercise its right to increase the rent by giving notice of annual CPI adjustments under cl 2.5 of the draft deed of lease and cl 10 of the schedule to the agreement to lease until 2020. When Storageone failed to give notice of renewal this was not noticed by Sharja. Rather Sharja thereafter gave notices of CPI rent increases. The failure was not recognised by either party until Sharja later raised it as a reason why the lease did not continue and had to be renegotiated.

[14]   A second factor of considerable significance is that Sharja has advised that it is willing to enter a new lease with Storageone for the same period, but with Storageone paying a higher rent. There is no suggestion that Sharja no longer wants Storageone as a tenant. Sharja advised that the breaches of the lease that it relies upon required no remedial action if Storageone entered the new lease on the terms that Sharja proposed. So it would seem that there is no issue about a long-term lease between the two parties continuing. The only issue is the rent and associated terms of the lease.

[15]   In Ponsonby Mall Trusts Ltd v New Zealand Food Industries Ltd the Court dealt with an application for relief where the landlord had a commercial opportunity

2      Peegeecee Ltd v Parkview on Hagley Ltd [2019] NZHC 258 at [118]–[119].

to develop the property if the lease was not continued.3 The question was whether the landlord could rely on this as a basis to oppose relief. Asher J said:4

The prejudice that the lessor Trusts raise is the prejudice of not being able to take advantage of the mistake. However, the whole purpose of the … discretion is to stop landlords being able to take advantage of a lessee’s mistake. If the plaintiff trusts’ submission is right, it means that [the section] becomes a meaningless remedy, or at least a remedy that will be seldom invoked. As a matter of common sense, lessors are unlikely to resist renewal, unless they can see a commercial advantage to themselves in the lease terminating. If the inability to exploit that commercial advantage is seen as prejudice which the lessor can raise to stop the granting of relief, relief will seldom be granted. This is not the way in which the New Zealand Courts have approached the discretion over the years.

[16]   Here the position is even more stark. Sharja is happy to have a lease with Storageone continue. It simply wants better terms. There is force in Mr Chapman’s criticism of Sharja’s stance in this respect. This can fairly be described as a case where the landlord is seeking to take advantage of the tenant’s mistake in order to secure a better deal. There would have to be compelling reasons for the Court not to grant relief in those circumstances.

[17]   Here that could only arise from Storageone’s two breaches of the lease. Sharja argues that the breaches were serious, and that Storageone is not a good tenant. I address each breach in turn.

Residential sub-tenant

[18]   The use of the first floor for residential purposes was a breach of cl 16 of the lease. There is a question whether this was a knowing breach, but I am not convinced that this makes a material difference. If Storageone was not aware that this was a breach it should have been. The fact that the space was configured for residential occupation does not mean that Storageone should not have checked what the position was. It was plain on the face of the lease that residential sub-letting was not permitted.

[19]   But no harm has been caused by this breach. Sharja raises an issue about the impact on its insurance cover, but it has provided no information about its policy or

3      Ponsonby Mall Trusts Ltd v New Zealand Food Industries Ltd, above n 1.

4 At [47].

any impact on its insurance cover. In any event any impact would now be in the past. I accept that the residential tenants have left and this space is no longer used for residential occupation. In general “… it is inequitable that the benefit of the lease should be lost to a tenant who has restored to the landlord all that the landlord is entitled to under the lease”.5 Here there has been no adverse effect from the breach, and Storageone would be obliged to honour the terms of the lease going forward.

[20]   I see no significance in this breach. This is reflected in the fact Sharja sought no more than an acknowledgement that Storageone would only use the space for commercial purposes to deal with this issue in its proposal that the parties enter a new lease.

Alterations

[21] There is more significance in the other breach of cl 20.1 of the lease, which prohibits Storageone from making alterations or additions to any part of the premises without obtaining consent from Sharja. Storageone removed two internal walls without seeking Sharja’s prior consent as required. Moreover there was a structural post inside one of those walls which was moved. Philip McConchie of Spencer Homes explained that there are no structural concerns from this work, although I note he was only instructed by Storageone after the post had been moved. The fact that the post was structural means that a building consent was required for this work. It was not obtained. The position now needs to be regularised by the grant of a Certificate of Acceptance by the KCDC under s 96 of the Building Act 2004.

[22]   Clause 20.1 of the lease provides that the consent of the landlord to such work cannot be unreasonably or arbitrarily withheld or delayed. Mr McConchie gave evidence that it was routine for landlords to give consent for work of this kind. I accept this to a point, but here that consent was never sought, there was a structural alteration necessitating a building consent involved, and a specialist was only instructed after the work had been done. But I accept Mr McConchie’s evidence that there is no structural concern arising from this work. Provided that the position is regularised by

5      Mulholland v Waimarie Industries Ltd (2009) 10 NZCPR 590 (HC) at [23].

a decision of the KCDC, and that Storageone restores the tenancy to its original state at the end of the lease should Sharja require it, then there is no prejudice to Sharja.

[23]   I note that Sharja’s proposal for a new lease contained no terms directed to the alterations apart from Storageone acknowledging that it would not engage KCDC without Sharja’s prior consent. This reflects the lack of prejudice to Sharja. The outstanding issues arising from this breach are appropriately addressed by conditions imposed on the grant of relief under s 264(2)(b) of the Act. I address this further below.

[24]   In relation to both breaches I accept Mr Chapman’s submission that the authorities indicate that where a breach of lease has been remedied, the Court invariably grants relief.6

[25]   I also accept that there are other circumstances of some relevance — including that this is a long term lease, and it has continued to operate at the CPI adjusted price since 1 March 2020. But I do not accept that any other factors relied on by the parties are of significance (apart from the estopple that I address below). For example, I do not accept that there is significant prejudice to Storageone or to third parties if relief is not granted. That is because Sharja has offered for a lease to continue, albeit on different terms. So this prejudice will not arise.

Estoppel

[26]   Storageone argues that Sharja is estopped from contending that the lease was brought to an end by a failure to give notice of renewal.

[27]   The principles of waiver or estoppel can operate when a landlord makes an express or implied representation that a lease is continuing notwithstanding that the tenant had failed to give the formal notice of renewal.7

6      McIvor v Donald [1984] 2 NZLR 487 (CA) at 494; New Zealand Mint Ltd v Greys Avenue  Investment Ltd [2015] NZHC 2051 at [23].

7      McDrury v Luporini [2000] 1 NZLR 652 (CA); Peegeecee Ltd v Parkvale on Hadley Ltd, above n 2, at [57].

[28]   Under the lease Storageone was required to give three months’ notice of the renewal. So notice would have been required by 1 December 2019 for renewal with effect from 1 March 2020. No such notice was given. On 5 March Ms Beer nevertheless sent Mr Molenaar an invoice seeking rent “for the 1st of March 2020 for the CPI rent increase”.   Mr Molenaar replied asking to see the calculations, and    Ms Beer responded that the “CPI increase is 1.9 per cent as advised by my accountant”. Mr Molenaar responded indicating that he had adjusted the automatic payment accordingly. A further notice of a CPI increase was then given by Sharja, and accepted by Storageone, the following year. Even apart from these exchanges, the correspondence from Sharja has proceeded on the basis that the lease continued.

[29]   I accept that this evidences an implicit representation by Sharja that the lease was continuing in its terms notwithstanding a failure to give a notice of renewal. Storageone relied on this representation to its detriment by agreeing to, and then paying the CPI adjusted rent from 1 March 2020, and then 1 March 2021. If it had been a monthly tenancy it would have had no obligation to do so.

[30]   Ms Tutt argued that the mere fact of continued occupation did not show a continuation of the lease. Clause 36.1 of the lease provides that occupation after the lease has ended continues as a monthly tenancy. The difficulty with this argument is that Sharja made demand for a CPI increase when this monthly tenancy supposedly commenced, and it was only entitled to do that under the terms of the continuing lease. Under cl 36.1 a monthly tenancy would be “at the rent then payable”. But Sharja sought, and obtained a higher rent. Ms Tutt argued that this meant there was a separate agreement for a monthly tenancy at a higher rental. But I do not accept that the exchange between the parties evidences a new agreement for a monthly tenancy. It naturally refers to a continuation of the lease in its terms through Sharja exercising the right to obtain a CPI increase.

[31]   For these reasons I accept that the applicant has made out the basis for waiver or estoppel. But I do not to decide the application on this basis. Estoppel involves the Court granting equitable relief. Here there is a statutory provision directed to relief in s 264. When a statutory basis to grant effective relief exists a question may arise whether resort to equitable relief is appropriate. That may be particularly so where the

statutory relief introduces further, and broader considerations than the equitable remedy. Section 264 involves the Court considering the wider circumstances, and includes a specific jurisdiction to grant relief on conditions. Here there are the issues concerning Storageone’s breaches of the lease to consider. I have also decided that conditions associated with relief would be appropriate given the breaches. I do not say that a Court can never give equitable relief in cases such as this. But in my view the Court should apply the statutory provision as the primary basis upon which relief is granted.

[32]   The fact that the requirements for an estoppel are satisfied is, however, relevant in relation to the grant of relief under s 264. It is a further significant factor in favour of the grant of relief.

Conditions associates with relief

[33]   For the above reasons I accept that relief under s 264 is appropriate, with the real issue being the conditions upon which relief should be granted.

Regularising alterations

[34]   It is first appropriate that there should be conditions associated with the need to regularise the position concerning the alterations made to the ground floor of the premises. In Opoworth of New Zealand Ltd v 3R Global Ltd the Court granted relief on the basis that the tenant was required to remedy the position concerning the removal of partitions.8 Similar conditions are appropriate here. In particular relief is granted on the following conditions:

(a)That Storageone is to make application for the issue of a Certificate of Compliance by the KCDC.

(b)That all costs associated with obtaining the Certificate of Compliance shall be met by Storageone.

8      Opoworth of New Zealand Ltd v 3R Global Ltd [2020] NZHC 472 at [47].

(c)That in the event that a Certificate of Compliance is not issued by KCDC leave is reserved to apply to the Court for further orders or directions.

(d)That Storageone is to fully restore the premises to its original state at the completion of the lease should that be required by Sharja, including by taking any steps necessary for consent to such work, and at its cost.

[35]   I did not understand conditions of this kind to be in dispute if the Court was minded to grant relief. But given that the precise form of the conditions has not been subject to argument I reserve leave for both parties to apply to the Court in relation to them. I do not agree that Sharja is entitled to any contribution to its legal costs arising from this matter given that this issue has become interlinked with the series of other matters it has raised.

Regularising rent

[36]   There is a further, and more contentious matter that arose during the course of argument. As indicated, under the terms of the agreement to lease Sharja was entitled to seek CPI rent increases each year. It did not do so, with notices of CPI rent increases only given from 1 March 2020. So the rent paid by Storageone has been less than what Sharja was entitled to. At the same time Sharja’s stance in relation to Storageone continuing as tenant has been that the rent under the lease is now lower than market value. Sharja has indicated that it was willing to enter a new lease with Storageone, but at a higher rent.

[37]   So the Court is faced with a situation where the tenant has failed to act in accordance with its strict legal rights by giving notice that it wishes to renew, and the landlord has failed to follow its strict legal rights by giving notice of CPI increases. It seems to me that the Court is effectively being asked to regularise a lease where the formalities have not been properly observed by either side. And in those circumstances it may not be unfair for that regularisation to put the landlord, as well as the tenant, back into the position that they would have been had they properly acted in accordance with their legal rights. I also bear in mind that Storageone has been in breach of its lease in the two respects that I have referred to.

[38]   I have no evidence on the market value of the rent for the property. But the whole object of CPI adjustments would be to adjust for inflation. This was part of the bargain struck by the parties. For that reason it would seem just to allow the rent to be adjusted for CPI as the lease contemplated.

[39]   This matter was not raised in Sharja’s pleading, or its written submissions in advance of the hearing. But it emerged during the course of the hearing, and was able to be addressed by counsel in their oral submissions. When the Court considers the conditions for the grant of relief it may not be strictly confined to matters raised in the pleading, provided that natural justice is observed. For that reason I do not think that this is a barrier to the grant of relief on this condition.

[40]   Mr Chapman sought that any such right for Sharja to alter the rent should not take effect until 1 March 2023. I agree that this is appropriate. The parties have agreed on the rent applicable for this year, and complications emerge from seeking to alter the rent now,  including in relation to whether the increase should be backdated to     1 March 2022. It does overall justice to say that Sharja is entitled to an adjustment to account for all CPI adjustments that have not been made with effect from 1 March 2023.

[41]   An argument emerged between the parties as to what the adjusted figure was. Mr McCardle produced a spreadsheet identifying calculations for an adjusted rent, but Mr Chapman did not accept that they correctly calculated what the adjusted rent should be. I am not in a position to make a finding on that matter as matters presently stand. It is also something that the parties should be able to agree upon without the Court’s assistance. For that reason I will impose a condition that Sharja may give notice of an increased rent to address the CPI adjustments not made since the lease commenced, to take effect from 1 March 2023. But I reserve leave for the parties to revert to the Court in the event of disagreement.

[42]   Mr McCardle also asked for a further condition requiring Storageone to pay the difference between the rent it had paid, and the rent it would have been required to pay had Sharja fully exercised its rights to CPI increases. He asked for leave to provide a further spreadsheet calculating that figure. I declined that application, and do not

think such a condition is appropriate. The rationale for giving Sharja a right to adjust its rent to that which it would have been entitled to had it given notice is to regularise the lease going forward. Both sides failed to give formal notice in accordance with their legal rights. I am making adjustments accordingly. But to require Storageone to pay an amount reflecting an increased rent that was never demanded goes too far. I do not agree that such a condition is appropriate.

Conclusion

[43]   For the above reasons, and by way of summary I reach the following conclusions:

(a)I grant the application for relief under s 264 of the Act.

(b)The relief is on the conditions set out in paragraphs [34] and [41] above.

(c)Leave is reserved as outlined in paragraphs [35] and [41] above.

(d)The respondent’s counterclaim for a declaration and an order for possession is dismissed.

[44]   As to costs my preliminary view is that the applicant would be entitled to costs on a 2B basis. If costs cannot be agreed I will receive memoranda to be filed and served by the applicant within 10 working days, to be responded to within 10 working days. Both memoranda should be no longer than five pages plus a schedule.

Cooke J

Solicitors:

Brandons, Wellington for the Applicant

BMC Lawyers, Kapiti Coast for the Respondent