Stylo Medical Services Limited v Hum Hospitality Limited
[2016] NZHC 804
•27 April 2016
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2016-404-80 [2016] NZHC 804
UNDER s 244 Property Law Act 2007 IN THE MATTER
of an application for cancellation of Deed of Lease dated 22 January 2011 and possession
BETWEEN
STYLO MEDICAL SERVICES LIMITED Applicant
AND
HUM HOSPITALITY LIMITED Respondent
Hearing: 14 April 2016 Counsel:
RO Parmenter for applicant
RJ Hollyman and GE Schumacher for respondentJudgment:
27 April 2016
JUDGMENT OF FAIRE J
This judgment was delivered by me on 27 April 2016 at 2:30 pm pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
Solicitors: Winston Wang & Associates
Foy Halse, Auckland (G Halse)
Stylo Medical Services Limited v Hum Hospitality Limited [2016] NZHC 804 [27 April 2016]
Contents
Introduction ............................................................................................................[1] Originating application...........................................................................................[2]
The opposition to cancellation of the lease ............................................................[5] The facts .................................................................................................................[9]
Litigation History .................................................................................................[17] Ellis J Decision [19] Whata J Decision No 1 [20] Whata J Decision No 2 [21] Extension Decision [22] Court of Appeal Decision [23] Whata J Decision No 3 [24]
Breach of covenant granting landlord right to inspect .........................................[26] Law – cancellation ...............................................................................................[29] The breaches.........................................................................................................[33] Conclusion............................................................................................................[39] Costs .....................................................................................................................[40]
Introduction
[1] This proceeding is the latest instalment in a long running dispute between the applicant landlord, Stylo Medical Services Ltd (“Stylo”), and the respondent tenant Hum Hospitality Limited (“Hum”), in respect of the lease of a property at
123 Grafton Road, Auckland.
Originating application
[2] On 19 January 2016, Stylo, filed an originating application for the cancellation of the lease pursuant to s 244(1)(a) of the Property Law Act 2007. Stylo seeks orders that:
(a) The lease is cancelled and Stylo is granted possession;
(b)Hum pays the landlord all rental arrears (if any) and outgoings up to the date of cancellation of the lease;
(c) Hum pays reasonable compensation for breaches of the lease; namely, interest under the lease on rental and outgoings from time to time owing; and
(d) Hum pays Stylo’s costs of, and incidental to, the originating
application.
[3] The grounds on which Stylo seeks cancellation are:
(a) Hum breached clause 13.1 of the lease by refusing to allow Stylo to inspect the premises;
(b) Hum breached clause 47.1 by failing to pay the rent due on 1
November and 1 December 2015; and
(c) Hum breached clauses 3.1 and 3.5 by failing to pay outgoings for which it was responsible, specifically an insurance levy of $3,299.67 due 1 December 2015, and an instalment of rates of $1,880 due
27 November 2015.
[4] Stylo submits that in respect of all three breaches, Property Law Act notices were served, there was no compliance and this application was made.
The opposition to cancellation of the lease
[5] Hum submits that the application should be dismissed as:
(a) The breaches of the lease have been cured/resolved; and
(b) The application forms part of a long running effort by Stylo to
damage Hum’s operations and bring the tenancy to an end.
[6] Hum submits that, in relation to the breach of the covenant to pay rent, Hum had written to the landlord explaining that it could not make those payments on time due to the need to pay the expenses of the quantity surveyor arising out of the prior Court hearings. Hum submits that payment had already been made at the time the application was filed, and by early March Hum was completely up to date with its obligations.
[7] Hum filed separate proceedings for breach of the covenant of quiet enjoyment and for misrepresentation on 30 March 2016.
[8] Hum submits that it should be granted relief from cancellation. It submits that the prior history of the parties should not constitute exceptional circumstances.
The facts
[9] Hum, together with Falling Apple Charitable Trust, operates a community project/social enterprise. The project provides “a supportive and inclusive environment to foster culture, art, music, education, health, sustainability, and well being in the community.” The director of Hum is Ms Rosanne Armitage.
[10] Hum entered into an agreement to lease 123 Grafton Road from Stylo. At the time, 123 Grafton Road was a dilapidated villa which Stylo had no funds to renovate. The director of Stylo is Dr Shen Tat Ooi.
[11] Ms Armitage, for Hum and Dr Ooi, for Stylo, signed a deed of lease on
22 January 2011. This deed of lease is based on the standard form agreement;
however, additional terms have been added.
[12] The lease is for an original term of six years with two rights of renewal for eight years each.
[13] Under the lease, Hum was given a three year rent holiday in exchange for carrying out certain renovations to the villa. The clauses requiring Hum to carry out certain works have been the subject of litigation in the past, however, these clauses are not directly problematic in the current case.
[14] The lease contains the standard provision relating to the payment of rent which requires the tenant to pay the rent by monthly payments in advance. It also states that all rent is to be paid without deduction or set-off. The original rent listed on the front page was $87,000 plus GST annually. Clause 47.1 provides that the rent will be increased to $100,000 plus GST annually on 1 December 2015.
[15] The lease requires Hum is to pay 100 per cent of the listed outgoings. These outgoings are listed in cl 3.
[16] Clause 13.1 provides that “[t]he Landlord and the Landlord’s employees, contractors and invitees may at all reasonable times enter upon the premises to view their conditions.”
Litigation History
[17] The parties have a reasonably extensive litigation history which I will outline briefly.
[18] Stylo first sought to cancel the lease when it issued a Property Law Act notice on 20 August 2012. That notice was withdrawn due to acknowledged deficiencies in the notice.
Ellis J Decision
[19] Stylo then issued another Property Law Act notice on 27 November 2012 requiring Hum to complete the renovation work and apply for building consent as required by the lease. This notice was then the subject of a 2013 decision by Ellis J.1
In that decision, Ellis J held that it was strongly arguable that the Property Law Act
notice did not adequately inform Hum of what it was required to do to remedy the
1 Stylo Medical Services Ltd v Hum Hospitality Ltd [2013] NZHC 2114 [Ellis J Decision].
breach of the lease. However, Hum was clearly in breach. 2 Ellis J considered the factors set out in Studio X Ltd v Mobile Oil New Zealand Ltd as to when the Court will exercise its discretion under s 253 of the Property Law Act and grant the lessee relief.3 Ellis J found that the factors weighed in Hum’s favour and Hum was granted relief against cancellation.4
Whata J Decision No 1
[20] Stylo later issued another Property Law Act notice stating that the works had not been completed to the required standard. This notice was the subject of several decisions by Whata J in 2014 and 2015. In the first decision, Whata J found that there was a genuine dispute about the extent of the repairs undertaken by Hum. Hum was granted relief from cancellation conditional upon the production of a report by an expert specifically assessing whether the required work had been completed in a
workman-like manner.5
Whata J Decision No 2
[21] Stylo then made a further application to the Court for cancellation for non- payment of rent. This was joined to the earlier proceeding.6 Hum argued that relief should be granted as the building’s foundations had never been fit for purpose and the rent should be abated pending the completion of the necessary repairs to the foundation by Stylo. Whata J considered the factors set out in Studio X v Mobil Oil New Zealand Ltd and also noted that “[i]n cases concerning non payment of rent,
relief is likely to be granted if arrears are paid, though subject to such conditions as the Court thinks fit”.7 Whata J found that Hum had assumed the risk in relation to the building; however, given the improvements Hum had made to the building, conditional relief was granted.8 Whata J ordered that Hum pay all outstanding rent
and outgoings within 15 working days.9
2 At [50].
3 Studio X Ltd v Mobil Oil New Zealand Ltd [1996] 2 NZLR 697 (HC) at 701, cited at [46].
4 At [52].
5 Stylo Medical Services Ltd v Hum Hospitality Ltd [2014] NZHC 1587 [Whata J Decision No 1].
6 Stylo Medical Services Ltd v Hum Hospitality Ltd [2014] NZHC 2029 [Consolidation Decision].
7 Stylo Medical Services Ltd v Hum Hospitality Ltd [2014] NZHC 2428 [Whata J Decision No 2]
at [24]–[25] (footnotes omitted).
8 At [37]-[39].
Extension Decision
[22] The amount was paid 16 working days later, one day outside the stipulated time. Stylo applied to the Court on the basis that failure to comply with the order meant that the lease must now be cancelled. Hum advised the Court that it had tried to pay on the fifteenth working day but could not do so because of banking transfer difficulties.10 Whata J held that the non-compliance was de minimis and that the
Court had inherent jurisdiction to extend the time to comply with the order.11
Court of Appeal Decision
[23] Stylo then appealed the Extension Decision to the Court of Appeal, who dismissed the appeal.12
Whata J Decision No 3
[24] Whata J Decision No 3 came after the report of the expert appointed as a result of Whata J Decision No 1. In that decision, the issues before Whata J were:
(a) Whether the lease should be cancelled for non-compliance with the covenant to repair;
(b) Whether the lease should be cancelled for non-payment of rent in
January 2015; and
(c) Whether a stay should be granted preventing Stylo from commencing further proceedings against Hum, pending resolution of an appeal by Stylo against the Extension Decision. 13
[25] Whata J considered that the amount owing at any given time was small relative to the contribution Hum made to the property and that the insistence by
10 Stylo Medical Services Ltd v Hum Hospitality Ltd [2014] NZHC 2723 [Extension Decision] at
[4].
11 At [34].
12 Stylo Medical Services Ltd v Hum Hospitality Ltd [2015] NZCA 405 [Court of Appeal
Decision].
13 Stylo Medical Services Ltd v Hum Hospitality Ltd [2015] NZHC 1150 [Whata J Decision No 3]
at [2]. Whata J Decision No 3 was released prior to the Court of Appeal Decision.
Stylo on enforcing its strict legal rights was not in accordance with the underlying premise of the agreement between the parties.14 However, he also stated that Stylo should not have to face any more non-compliance with the terms of the lease and that the Court would not indulge any further breaches by Hum.15
Breach of covenant granting landlord right to inspect
[26] In the current application a problem arose with the issue of the alleged breach of the covenant granting the landlord the right to inspect. Some arrangements were put in place for an inspection, but evidence in relation to these matters could not be completed for the purposes of this hearing. That led Mr Parmenter to apply for an adjournment of that part of the application. I indicated at the time that I was not minded to deal with the matter on that basis. In my view, the correct approach is to record, in this judgment, that this judgment does not investigate or rule in any way on the issue of whether or not there was a breach of the covenant granting the landlord the right to inspect the premises.
[27] For the avoidance of doubt, I record that if this becomes an issue that Stylo wishes to pursue in the future, this application and this judgment has not investigated or determined the issue of the potential breach of the covenant granting the landlord the right to inspect. Further, in the circumstances, it was not something that could appropriately be determined having regard to the time available to the parties. No estoppel can attach in respect of that issue arising from this judgment.
[28] The remainder of this judgment deals with the application for cancellation on the basis of breaches of the covenants to pay rent and to pay outgoings.
Law – cancellation
[29] Section 244 of the Property Law Act 2007 provides:
14 At [29].
244 Cancellation of lease for breach of covenant or condition:
general
(1) A lessor who wishes to exercise a right to cancel a lease because of a breach by the lessee of a covenant or condition of the lease may—
(a) apply to a court for an order for possession of the land; or
(b) re-enter the land peaceably (and without committing forcible entry under section 91 of the Crimes Act 1961).
(2) However, subsection (1) is subject to sections 245 and 246.
(3) If the lessor applies to a court for an order for possession of land for the purpose of cancelling a lease, the cancellation takes effect—
(a) on the making of the order; or
(b) on any later date that is specified in the order.
[30] Section 244 is subject to ss 245 and 246. Section 245 provides:
245 Cancellation of lease for breach of covenant to pay rent
(1) A lessor may exercise a right to cancel a lease because of a breach of the covenant to pay rent under the lease only if—
(a) the rent has been in arrears for not less than 10 working days; and
(b) the lessor has served on the lessee a notice of intention to cancel the lease; and
(c) at the expiry of the period specified in the notice, the breach has not been remedied.
…
(3) The notice required by subsection (1)(b) or (2) must adequately inform the recipient of all of the following matters:
(a) the nature and extent of the breach complained about: (b) the amount that must be paid to remedy the breach:
(c) the period within which the breach must be remedied (which must not be less than 10 working days after the date of service of the notice):
(d) the consequence that, if the breach is not remedied at the expiry of the period specified in the notice, the lessor may seek to cancel the lease in accordance with section 244:
(e) the right, under section 253, to apply to a court for relief against cancellation of the lease, and the advisability of seeking legal advice on the exercise of that right.
(4) The period for remedying the breach specified under subsection (3)(c) may run concurrently with the period specified in subsection (1)(a) in which the rent must be in arrears before the lessor may exercise any right to cancel the lease.
[31] It is sufficient for the purposes of this application that I adopt the summary of principles relating to applications for relief against forfeiture, contained in the judgment of French J in Mulholland v Waimarie Industries Ltd where her Honour said:16
[23] The principles relating to applications for relief against forfeiture (or cancellation, as it is now called) are well established and can be summarised as follows:
1.Where the breach consists solely of a failure to pay rent, there is a presumptive right to relief on payment of the arrears and costs. It is only in exceptional circumstances that relief is to be denied if the debt is paid in full.
2.This is because 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. The ability to forfeit the lease and take possession is regarded by the Court as security for payment.
3.Where, however, it is clear the tenant is hopelessly insolvent, the Court will not grant relief as a general rule.
4.Mere suspicion of insolvency is not enough to outweigh the presumptive right to relief on payment of rental and costs.
[32] To that summary, I add the comments made in Re Brompton Securities Ltd
(No 2):17
It would be an entirely new departure for the court to decline to grant relief on the ground that a tenant has been a bad payer in the past and is likely to continue to be a bad payer in the future.
The breaches
[33] The respondent accepts that it did not pay the November or December rent instalments as they fell due. It claims that the arrears have now been paid in their
16 Mulholland v Waimarie Industries Ltd (2009) 10 NZCPR 590 (HC) at [23] (citations omitted).
entirety. It does not deny that outgoings were not paid when they fell due. It says there are no outgoings currently outstanding.
[34] The applicant accepts that there are currently no arrears. The position is, then, that the respondent accepts that it breached the rent and outgoing covenants of the lease agreement but those breaches have now been remedied and that position is accepted by the applicant.
[35] The sole remaining issue is how I should deal with the statements made by Whata J in Whata J Decision No 3.18 In particular, his Honour recorded the following:19
I am not however sanguine about Stylo’s vulnerability to Hum’s financial position. We have reached the stage where Hum must pay its outstanding rental payments and regularise its payment of rental in accordance with the lease. Stylo should not have to be confronted with ongoing non compliance with rental payments. I propose therefore to give Hum one final opportunity to regularise matters and put its rental payments to Stylo on a proper footing. Accordingly, a condition of my relief against forfeiture is that Hum must pay all outstanding rental owing as at by 31 June 2015. If it does not do so, Stylo will have leave to seek cancellation from me without the need to file a further application. Hum can expect that I will then cancel the lease if the all relevant payments have not been made. Furthermore, Hum cannot expect further indulgence in relation to the non payment of rent on time. I record my expectation, having now presided over several cancellation applications that any further non payment of rent on time will result in cancellation.
The judgment followed the hearing on 24 April 2015 and was delivered on 27 May
2015.
[36] Mr Hollyman submitted that his Honour’s comments concern the respondent’s ability to pay and that it must, therefore, be viewed in context. He submitted, and I agree, that the decision cannot be taken to have meant that any technical late payment of rent would automatically result in cancellation. That would be to fetter this Court’s discretion in circumstances of future cases and in contradiction of the approach that the courts have adopted to the bad payer tenant
who is not in the insolvency category.
18 Stylo Medical Services Ltd v Hum Hospitality Ltd, above n 13.
[37] I do not regard the default here to be one that can be classified as an exceptional circumstance. All amounts referred to in the Property Law Act notices were paid shortly before the hearing. The respondent has met its rental obligations, including the payment of interest for late payment. That is interest at the default rate as prescribed in cl 5.1 and in the First Schedule to the lease, which is 14 per cent per annum. Cancellation is not appropriate.
[38] I was advised by counsel that there were separate proceedings involving other alleged breaches of the lease. The issues raised by those proceedings will have to be resolved in those proceedings and are certainly not matters that I have sufficient information about or could take into account for the purpose of resolving this application.
Conclusion
[39] The applicant’s application for an order for possession is refused. The
respondent is entitled to relief against forfeiture.
Costs
[40] The present situation arose principally from yet a further breach of the covenant to pay rent on behalf of the respondent. The final payment was only made on 8 April 2016 in the sum of $11,463.33. Admittedly, there is another issue that initially looked like having to be determined in this proceeding relating to the covenant in cl 13.1. I have ruled that could not be determined.
[41] Although the respondent has been successful in resisting the order for possession, and has obtained an order for relief against forfeiture, its own actions have really been the cause of yet a further application having to be made to the court. The last payment, in fact, appears to have been made on the day that the applicant’s submissions for the purposes of the hearing before me were filed.
[42] In the circumstances, I make no order for costs.
JA Faire J
0
7
0