Strong v Hurunui Hotel (2004) Limited
[2015] NZHC 1216
•3 June 2015
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
CIV-2015-409-000113 [2015] NZHC 1216
BETWEEN RODGER EDMOND STRONG,
NOLA ANN STRONG AND
AMELIA LYNETTE SPENCE SIMPSON Applicants
AND
HURUNUI HOTEL (2004) LIMITED Respondent
Hearing: 26 May 2015 Appearances:
A N Riches for Applicants
J Moss for RespondentJudgment:
3 June 2015
JUDGMENT OF GENDALL J
Introduction
[1] The applicants as owners and landlords of the Hurunui Hotel property at
1224 Karaka Road, Waikari, (the Hurunui Hotel) have applied under s 244 Property Law Act 2007 (the PLA) for orders cancelling the lease and seeking possession of the Hurunui Hotel leased to the respondent. The application is brought on the grounds that the respondent has breached provisions in the lease by failing to remedy a requirement to redecorate the hotel premises as required under cl 6.3 of the lease. A Property Law Act Notice was issued against the respondent on 28 January 2015, requiring amongst other things remedy of this redecoration breach by 28 February
2015, but this did not occur.
[2] In response the respondent opposes the orders sought and says that, with respect to the redecoration requirement under the lease, it is not a question of
refusing to comply but a question of reaching agreement as to what was required by
STRONG v HURUNUI HOTEL (2004) LIMITED [2015] NZHC 1216 [3 June 2015]
way of redecoration before it could comply. The respondent also claims that, in the event it is held to be in breach of the lease and the Property Law Act Notice, it is entitled to relief under s 253 of the PLA 2007.
[3] At this point, the respondent notes that it has paid up all previous rent and insurance arrears under the lease and is up to date with respect to all payments required. The only remaining default alleged by the applicants, but which the respondent disputes, is this redecoration matter. Details of this redecoration requirement in fact follow an order which was made at a previous arbitration in 2014 between the parties.
[4] Accordingly it seems that the issues to be determined here are:
(a) Has the respondent breached the redecoration requirement in cl 6.3 of the lease?
(b)Have the applicants complied with the notice requirements in s 246 of the PLA?
(c) If the respondent has breached the redecoration requirement in cl 6.3, is it entitled to relief under s 253 of the Property Law Act?
[5] Finally, before me the respondent accepted that some redecoration of the hotel premises was required in terms of the lease but it sought a direction from the Court of exactly what was required to comply with this obligation. The respondent contended that it was ready, able and willing to redecorate the premises and to comply with all of the covenants in the lease once this specification for a redecoration requirement was agreed.
Background facts
[6] The applicants, as I have noted, are the owners and landlords of the Hurunui
Hotel. This is in their capacity as trustees of the R & N Strong Investment Trust.
[7] The respondent purchased the hotel business in June 2004 for the sum of
$240,000 plus GST and took an assignment of the existing lease from the previous lessee. That lease (the lease), which was dated and had commenced from
23 September 2002 ran for a period of 20 years minus one day, terminating in 2022. The initial rental under the lease was $40,000 plus GST per year.
[8] The evidence before the Court seems to indicate that historically there have been a number of defaults on the part of the respondent as tenant in payment of rent and other outgoings under the lease and certainly relations between the applicants as landlords and the respondent (and its directors) as tenant have soured over the years. Animosity between the parties clearly built up to a significant extent. This culminated in 2014 in a detailed arbitration taking place over a number of alleged breaches of the lease on the part of the respondent and certain counterclaims it made against the applicants.
[9] This arbitration between the parties took place before Mr Peter Whiteside QC (the Arbitration), as I have noted, during 2014 and his decision was issued on
16 September 2014. In that decision Mr Whiteside QC found specifically at paragraph 3.11:
There is no dispute the redecoration required under cl 6.3 of the lease at 23
September 2012 has not occurred. It must.
[10] And at paragraph 3.13 of his decision, Mr Whiteside QC required the respondent to undertake the redecoration work as follows:
I order that the claimant (the respondent) must by the date which is exactly four months from the date this award is released to the parties redecorate the premises leased by it as required under cl 6.3 of the lease.
[11] Shortly after the Arbitration decision was issued, the applicants commissioned Dulux to carry out a project specification for the work required to redecorate the interior and exterior of the hotel. A detailed project specification dated 7 October 2014 was prepared and sent to the respondent but it seems no response was received to that specification.
[12] At the conclusion of the four month time frame for redecoration specified by Mr Whiteside QC outlined at [10] above, no redecoration of the hotel had occurred. On 28 January 2015, the Property Law Act Notice was issued by the applicants. Specifically, this Notice sought that the respondent remedy five breaches of the lease which were set out in the Arbitration decision. These related to:
(a) Redecoration of the interior and exterior of the hotel premises; (b) Toilet repairs;
(c) Window repairs; (d) Insurance;
(e) Till receipts.
[13] All the matters in [12](b), (c), (d) and (e) above were remedied with the exception of the redecoration requirement in [12](a).
[14] As to this redecoration it is useful to set out in full the cl 6.3 stipulation in the lease regarding this which provides:
(a) The lessee must redecorate the premises throughout (both interior and exterior) to the satisfaction of the lessor before each of the redecoration dates in item 8 of Schedule A and the termination date in item 5 of Schedule A. The term “redecorate” includes the cleaning down of the whole of the interior of the premises including all partitions, installations or additions made to the premises and the treatment as previously treated of all internal surfaces of the premises by painting, papering, staining, polishing or otherwise to a specification approved by the lessor.
The redecoration dates are 23 September 2007, 2012, 2017 and 2022.
[15] According to the respondent, major disagreement has occurred concerning this redecoration requirement. The respondent says that it disagreed with the project specification for redecoration prepared by Dulux in October 2014.
[16] As to the hotel exterior, the respondent claims it cannot and should not at this point have to redecorate the entire exterior of the Hurunui Hotel for three reasons:
(a) The outside was painted at its expense in 2009 (albeit two years late in terms of the lease) with a 10 year paint guarantee. It is said that it is not in need of a repaint until 2019.
(b)If, despite the 10 year guarantee, a repaint is required, it should not be carried out until the applicants as landlords have attended to what are said to be repairs needed to the exterior of the hotel and the replacement of certain spouting and downpipes. As examples of these repairs, the respondent refers to damage to fascia boards including a hole created by birds in one area of exterior fascia board, and the lack of spouting and downpipes in certain areas of the hotel.
(c) Also, if a repaint is required, then it should not occur until earthquake strengthening work of the hotel is completed as set out in a Detailed Engineering Evaluation (DEE) from R D Sullivan commissioned by the applicants. In that DEE report, which is before the Court, it seems to be recommended that certain areas of the hotel need earthquake strengthening with the present structural strength of the hotel at between 10 to 14% of code and ultimately requiring an upgrade to about 65%.
[17] The applicants strongly dispute these arguments advanced for the respondent. They contend that the exterior (and interior) repainting is long overdue given that the lease required this to take place by 23 September 2012, that issues over minor repairs required to the fascia boards and the like can be attended to once the painting scaffolding is erected and issues over earthquake strengthening and the DEE report from R D Sullivan are simply a red herring. These issues will be addressed further later in this judgment.
[18] Turning now to the question of redecoration of the interior of the hotel, the
respondent’s position, as best I can tell, is that some of this work is not required and,
in any event, as a possible sale of the Hurunui Hotel business is pending and the purchaser wishes to re-theme and alter colour schemes of a number of interior rooms, discussion is required to defer at least some of this interior redecoration.
[19] On these aspects, the applicants’ position again is simply that the requirement under the lease to clean down and redecorate the interior of the hotel premises (as outlined at para [14] above) is an absolute one and now is long overdue.
Discussion
[20] I now turn to consider the issues identified at para [4] above.
Has the respondent breached cl 6.3 of the lease?
[21] Clause 6.3(a) is set out at para [14] above. It required redecoration of the hotel premises throughout (both interior and exterior) to the satisfaction of the lessor before each five yearly redecoration date outlined in the lease. These dates included, in particular of relevance here, 23 September 2012. “Redecoration” as to the interior of the hotel was defined in cl 6.3(a) to:
…include the cleaning down of the whole of the interior of the premises including all partitions, installations or additions made to the premises and the treatment as previously treated of all internal surfaces of the premises by painting, papering, staining, polishing or otherwise to a specification approved by the lessor.
[22] It is accepted by the respondent, and there can be absolutely no doubt in my mind, that the respondent as lessee is in default in carrying out redecoration of the hotel under this cl 6.3(a) which was due by 23 September 2012. No redecoration by way of cleaning down or repainting, either interior or exterior, as I understand it, has taken place. The respondent endeavours to explain this by saying there was uncertainty and a lack of agreement (in both the Arbitration decision and otherwise) as to what was required. However, in view of the lengthy time which has elapsed since September 2012, this can hardly be seen as a valid excuse or justification for the fact that no redecoration work has been undertaken.
[23] Nor, in my view, can blame for this be laid at the feet of the applicants as landlords. The order made by Mr Whiteside QC at the Arbitration, which required all redecoration work to be undertaken within four months of September 2014, was to a large extent it seems ignored by the respondent.
[24] For the respondent now to endeavour to explain this delay in terms of the matters outlined at para [16] above is not appropriate here. If the applicants as landlord had agreed currently that an exterior repaint of the hotel was not required at this point in light of the 10 year paint guarantee given at the time of the 2009 repaint, then that is another matter. But, there is no evidence before me to support the suggestion that the applicants had agreed to defer this exterior repaint requirement. And, given the applicant’s present stance, I am satisfied that in terms of the lease a repaint of the exterior of the hotel is required and is overdue.
[25] So far as concerns over the need for certain repairs of the exterior to be undertaken by the applicants as landlord before repainting occurs, that certainly seems to be sensible and appropriate. In the normal course of events, those repairs (which on the evidence before me do not appear to be particularly major) would be undertaken when the exterior scaffolding for the repaint is erected. Following agreement, repaint of those particular areas could then follow. I see no reason therefore for these matters to hold up any legal requirement on the part of the respondent as tenant to complete a repaint of the exterior of the hotel.
[26] As to the earthquake strengthening work noted at para [16](c) above, before me Mr Strong, the first named applicant, gave uncontested evidence on this. That evidence was simply that the local authority has confirmed that the Hurunui Hotel, being a historic place, has up to 25 years until about 2040 to undertake the earthquake strengthening work and this certainly is not a present or immediate requirement. Mr Strong went on in his evidence to state that an approach had been made to the Historic Places Trust to see whether they were able to help with financing this earthquake strengthening work now, but they indicated they were not able to help at present. Mr Strong confirmed that the applicants therefore had no present intention to carry out the earthquake strengthening work referred to in the DEE report and that this matter raised by the respondent in an endeavour to justify
their delay in completing the exterior redecoration work has simply turned out to be a red herring.
[27] Before me this latter aspect, as I see it, was not contested in any major way on behalf of the respondent. I accept that for present purposes it has no relevance to the strict terms of the redecoration requirement at paragraph 6.3(a) of the lease.
[28] Lastly, before me Mr Moss for the respondent referred the Court to a letter dated 20 August 2008 from the applicants to the respondents with regard to redecoration requirements for the hotel at that time. (This related to the stipulation for redecoration work to be carried out by the earlier 23 September 2007 date). Mr Moss noted that this letter appeared to agree that, so far as interior redecoration work was concerned at the time, this relating to the office, the flat, the upstairs bedroom, ceilings and wallpaper, would not need to be undertaken at that stage but would simply be completed “on sale of the lease”.
[29] So far as that aspect is concerned, as I see the position, although in August
2008 the applicants may have been prepared to defer part of the internal redecorating requirement until some later time when a sale of the lease occurred, it can hardly be said now that some seven years later in 2015 that agreement to a deferment still continues. I make this comment noting that the lease itself, for what is a traditionally built historic place hotel, provides strictly for full redecoration requirements every five years.
[30] The provisions of cl 6.3(a) of the lease in my view are also especially clear when it comes to redecoration of the interior of the premises. There can be little doubt that, given the age and historic nature of this hotel, as the lease specifically states, this is to include cleaning down the whole of the interior of the premises and repainting, papering, staining, and polishing interior surfaces all as approved by the landlord.
[31] I conclude therefore that there can be no question here that the respondents are in breach of the redecoration requirement under cl 6.3(a) of the lease which was to be completed by the last redecoration date, being 23 September 2012.
Have the applicants complied with s 246 of the Property Law Act?
[32] Section 246 provides a lessor with a right to cancel a lease because of breach of a covenant or condition in a lease (other than a rent covenant) only if the lessor has served on the lessee a notice of intention to cancel the lease and, at the expiry of a period that is reasonable in the circumstances, the breach in question has not been remedied.
[33] In this case it is clear that a notice under s 246(1) of the Property Law Act specifying the applicants’ intention to cancel the lease was properly served on the respondents.
[34] That notice gave a period of 28 days to remedy the breach. This followed a period in excess of four months allowed for by way of the redecoration period specified in the decision of Mr Whiteside QC at the arbitration, which had not been complied with.
[35] In this case I am satisfied that the respondent was adequately informed of the nature and extent of the breach of the lease and the applicant’s right to cancel in accordance with s 244 if it was not remedied. This notice in my view was a valid notice under s 246. The time allowed under the notice, being 28 days, was relatively short when one takes into account the extent of redecoration work required to fully remedy the breach. For present purposes only, however, I am prepared to accept that in the circumstances prevailing here this time was reasonable. I reach this point given the ultimate outcome here and my conclusion in favour of the respondent on its entitlement to relief against cancellation of the lease as I note at [50] following.
[36] I now turn therefore to the submission from the respondent that it is entitled to relief against forfeiture or cancellation of the lease here.
Is the respondent entitled to relief against cancellation of the lease?
[37] Under s 256(1) of the PLA the Court may grant relief against forfeiture or cancellation of the lease in its discretion. The principles relating to the exercise of this discretion to grant relief (other than for breach of a covenant to pay rent) were
considered by the New Zealand Court of Appeal in the leading decision McIvor v
Donald.1 In that decision at [494] Somers J said:
The legislature has not seen to lay down rules as to the exercise of the wide discretion it has conferred on the Court and the undesirability of Court attempting to do so was emphasised in Hyman v Rose…
Many of the subsequent reported cases are no more than instances of the exercise of the discretion but some point to features of general importance. Thus relief is normally granted to one who has made good the breach and is able and willing to fulfil his obligations in the future: Earl Bathurst v Fine…but when there are wilful breaches relief will not readily be given Shiloh Spinners v Harding…The latter case was concerned with the general equitable jurisdiction to relieve but is not on that account without value in considering the statutory jurisdiction.
Again, save in rare cases a lessee will not be permitted to buy his way out by the payment of a sum of money to his landlord unless the forfeiture [now cancellation] clause is merely security for the payment of money. In particular damages will seldom be a real or proper substitute for the performance of a covenant to repair.
[38] In considering an application for relief against cancellation for breach of a condition in a lease, Hammond J in Studio X Ltd v Mobil Oil NZ Ltd2 identified factors to be considered in the exercise of the Court’s discretion here as follows:
· Whether the breach was advertent or deliberately committed. In such a case there are sound reasons why in the normal case relief should not be given: why should a lessor be compelled to remain in a relation of neighbourhood with a person in deliberate breach of his obligations?
· Conversely, whether the breach was caused by inadvertence or was
entirely beyond the tenant’s control.
· Whether the breach involves an immoral/illegal user. It must be wrong in principle for a lessor to be forced into improper or illegal relations, possibly even exposing the lessor himself to some form of legal sanction.
· Whether a tenant has made or will make good the breach of the covenant and is able and willing to fulfil his obligations in the future.
· The conduct of the landlord.
· The personal qualifications of the tenant.
· The financial position of the tenant.
· Sometimes the position of third parties has had to be considered. For instance the position of a contracting purchaser of the interest.
· The gravity of the breach.
· Whether a breach has occasioned lasting damage to a landlord.
· There is a proportionality concern. Under this head there has to be concern whether whatever damage is said to have been sustained by the landlord can truly be said to be proportionate to the advantages she will obtain if relief is not granted. Generally speaking, and at a greater level of abstraction, there has to be a concern with keeping an even hand…
[39] These factors were noted and accepted in Neglasari Farms Ltd v Brakatin Holdings Ltd3 and in Grant v Hannay4 in this Court. And I accept that this discretion the Court has under s 253 of the PLA to grant relief from cancellation is a wide one but it is not unfettered. There needs to be a clearly unjust factor demanding relief.
[40] In the present case there can be no doubt in my mind that the breach, being failure to carry out the redecoration, was deliberate on the part of the respondent as lessee and could not be seen as inadvertent. It was not a matter which could possibly be seen as entirely beyond the tenant’s control in any sense.
[41] On the issue as to whether the respondent will make good the breach of this covenant and is able and willing to fulfil its obligations in the future, before me Mr Moss for the respondent said that this was precisely the position. I will turn to address this particular aspect later.
[42] As to the financial position of the respondent, it does seem that in the past it has been in breach of its rental and other financial obligations under the lease from time to time. But those rental and financial payment requirements under the lease, I am told, have now been brought up to date. From evidence before me there is a requirement for the respondent to make a significant payment (due to a third party) into the District Court of over $43,000 within about two weeks from 27 May 2015. No evidence was placed before me however to indicate that the respondent would be unable to meet this.
[43] So far as the position of third parties is concerned, there is evidence before the Court that a conditional contract exists for the sale by the respondent of the hotel business to a third party, one Kim Williams (Ms Williams). Ms Williams has provided an affidavit in this proceeding, sworn on 22 April 2015. She is an employee of the respondent. She has deposed that she and her partner are genuine and keen purchasers of the business, subject to completing due diligence, obtaining finance and obtaining the landlord’s consent to the assignment of the lease. That sale contract is at a price of $242,000 which includes $70,000 for intangible assets. Although dates for satisfying the conditions in the purchase contract have now come and gone, the evidence before the Court seems to suggest that Ms Williams and her partner are keen and genuine purchasers and, all other things being equal, if the contract becomes unconditional, they could meet a possession date, if not on the date provided for in the purchase contract of 30 June 2015, then on a date soon after that.
[44] Clearly, if the present application to cancel the lease is to succeed, then this contract secured by the respondent for a conditional sale of the business to Ms Williams and her partner would simply fall away. Ms Williams’ interests as a third party would therefore be significantly affected.
[45] Next, considering the gravity of the breach here, I am satisfied that the breach is indeed a serious one. I say this given that the redecoration requirement due to be satisfied in 2012 is overdue (and is even overdue for more than five years after the last redecoration under the lease which itself took place late in 2009). It is correct to say that the applicants, in granting a 20 year lease of what is a rather old but historic hotel, have necessarily taken certain commercial risks as to control of upkeep and redecoration processes for their hotel asset. That said, this explains somewhat the strict timetabling of redecoration requirements in the lease. Thus, in order to ensure maintenance and protection of what is a valuable but aging hotel asset with a heritage listing this risk, to an extent, might be said to be met by these significant redecoration requirements. It goes without saying that any refusal by the respondent to comply with the redecoration requirements would likely be to the detriment of the applicants. Possible lasting damage to the hotel itself might be caused if redecoration is not kept up.
[46] Finally, regarding proportionality concerns, issues over cancellation of the respondent’s lease and the impact this might have upon the respondent’s business assets represented by the hotel and also here a possible sale to Ms Williams and her partner must loom large. These too must be balanced with the applicants’ interests in having their substantial hotel property asset protected and maintained. From the evidence before me there can be no doubt that relations between the applicants and the respondent have soured over the years. There have clearly been a number of breaches on the part of the respondent in complying with fundamental aspects of the lease. These have included, amongst other things, requirements to pay rental, rates and insurance which I understand from time to time in the past the respondent on a number of occasions has not complied with.
[47] Although Mr Moss for the respondent endeavoured to advance arguments that the applicants here did not have clean hands and simply wished to cancel the lease and retake the premises for ancillary reasons, there was no evidence before me as I saw it to justify this claim. The respondent clearly is in breach of the redecoration requirement. The need for this work had previously been argued at the arbitration before Mr Whiteside QC last year. He concluded matters with the issue of a mandatory injunction requiring the respondent to undertake the work within the four month period. The applicants obtained and advised a project specification for the work from an independent source at Dulux but it appears little if anything has happened.
[48] Whilst I accept that position cannot be disputed, it is clear here that if cancellation of the lease is ordered, the respondent will lose the possibility of a sale of the business and lease to Ms Williams and her partner at the sale price of
$242,000. Whilst it will still be left with its tangible assets and stock in trade, the intangible assets noted in this sale are listed at $70,000. There can be no doubt too that, on a forced sale basis, usually the intangible assets (listed in the sale agreement at a value of $160,000) would be likely to fetch nothing like this figure on the open market.
[49] It is clear redecoration requirements under the lease are necessary and important. The respondent, however, contends that it has the means now to complete
this redecoration. It goes on to say that it would be disproportionate to the redecoration dispute, which can be remedied without further delay, if the draconian step of cancelling its lease were to be taken.
[50] Under all the circumstances here, but only by a relatively fine margin, I need to say that I agree. I am prepared to exercise my discretion under s 253 PLA to grant the respondent relief against cancellation. Clearly the breach of the lease can be promptly remedied and there are also a number of factors arising that I have outlined above which would be unjust if cancellation were to occur, such that relief is warranted here. In all the circumstances prevailing here determination of the lease is not a proportionate response to the respondent’s breach and in my view the essential justice of this case requires relief to be granted. But importantly, the relief I am prepared to entertain is to be granted on a conditional basis only.
[51] In saying that, I do need to acknowledge that the breach of the lease, being the failure to redecorate, cannot be said to be minor. Nevertheless, in balancing all factors which are before the Court, being on the one hand the adverse consequences to the respondent if relief against cancellation is not granted, (even just initially for the short conditional period I have in mind) with, on the other hand, the consequences to the applicants if relief is granted, I have reached the point where I consider the respondent should be granted relief. I reach this position essentially to allow the respondent a short period to complete the redecoration it says it can and in the meantime to provide the applicants with some financial assurance that the cost of this can be met. The respondent would then have the opportunity of endeavouring to effect the sale of its business it says it has spent time negotiating and/or otherwise to continue its operation of the hotel, provided it complies strictly with all its requirements under the lease.
Result
[52] In my view, the discretionary factors under s 253 PLA presently favour the respondent but, I repeat, only if it is to properly carry out its redecoration obligations under the lease without delay and with financial assurances given in the meantime that the cost of the work is properly covered. It is hoped that where necessary the
parties might work together now to conclude any painting and redecoration colour scheme and schedule requirements. Leave will be reserved to the parties to bring this matter back before the Court prior to 2 July 2015 as a matter of urgency if issues arise on these aspects.
[53] Under the specific circumstances of this case and for the reasons outlined above, I grant to the respondent relief against cancellation of the lease under s 253 of the PLA but only on the following strict conditions:
(a) The respondent within 20 working days of this judgment shall pay to the solicitors for the applicants the sum of $50,000 as security for performance of their redecoration obligations under the lease. This
$50,000 is to be held on interest bearing deposit and used by the solicitors for the applicants in payment towards the accounts (reasonably approved by the respondent) for tradesmen employed by the respondent to carry out the redecoration work.
(b)The respondent, within a period of 50 working days from the date of this judgment, is to have all redecoration work in terms of cl 6.3(a) of the lease carried out in a proper manner. For the avoidance of doubt this is to be a full redecoration of the interior and exterior of the hotel (with exterior repainting to follow the undertaking by the applicants as landlord of their obligations to complete the minor amount of repair work required to the exterior of the hotel), except where as to particular aspects agreed otherwise in writing between the parties prior to the work commencing.
(c) In the meantime the respondent is to continue to pay rental and all other outgoings under the lease and to comply with all its obligations as tenant thereunder.
[54] In the event that the respondent fails to satisfy the conditions contained in the preceding para [53] the applicants will be entitled immediately to judgment for:
(a) Cancellation of the lease;
(b) Possession of the Hurunui Hotel premises; and
(c) Payment of the full amount of any rental or other arrears that may then be owing under the lease by the respondent at the date of judgment together with interest at the relevant rate.
[55] Leave is reserved to the parties up to 2 July 2015 on 24 hours’ notice to bring this matter back before the Court as a matter of urgency if issues arise as outlined at [52] above.
Costs
[56] So far as costs on this application are concerned, they are reserved. If counsel are unable to agree on the question of costs, then they may file memoranda (sequentially), such memoranda not to exceed 7 pages, which are to be referred to me and in the absence of any party indicating they wish to be heard on the matter I will decide the issue of costs based upon the memoranda and the material then before the Court.
...................................................
Gendall J
Solicitors:
Saunders & Co, Christchurch
Jai Moss, Christchurch
2