Stylo Medical Services Ltd v Hum Hospitality Ltd
[2020] NZHC 2969
•11 November 2020
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2019-404-365
[2020] NZHC 2969
UNDER s 244 of the 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 LTD
Applicant
AND
HUM HOSPITALITY LTD
Respondent
Hearing: 24 August 2020
(Further written submissions: 7 and 8 September 2020)
Counsel:
R O Parmenter for Applicant R J Sussock for Respondent
Judgment:
11 November 2020
JUDGMENT OF BREWER J
This judgment was delivered by me on 11 November 2020 at 2:00 pm pursuant to Rule 11.5 High Court Rules.
Registrar/Deputy Registrar
Solicitors:
Winston Wang & Associates (Auckland) for Applicant Lowndes Jordan (Auckland) for Respondent
STYLO MEDICAL SERVICES LTD v HUM HOSPITALITY LTD [2020] NZHC 2969 [11 November 2020]
Introduction
[1]In my judgment of 12 March 2020,1 I set out the background to this dispute:
[1] The applicant (“Stylo”) seeks an order cancelling its lease of premises to the respondent (“Hum”). Stylo also seeks orders for possession of the premises, the payment of arrears of rental (if any) and for ancillary relief.
[2] This, by my count, is the sixth occasion Stylo has brought legal proceedings seeking to evict Hum from the premises. The last occasion was resolved in Hum’s favour by Katz J in her judgment of 11 April 2018.2 In that case the precipitating event was Hum’s inadvertent failure to give a renewal notice of the lease within the required timeframe. Justice Katz ordered Stylo to enter into a new lease with Hum for a further term of eight years from 1 February 2017 (plus one further right of renewal for eight years) and otherwise upon, and subject to, the covenants and agreements in the original lease (dated 22 January 2011).
[3] The apparent casus belli3 for this attempt to evict Hum is non-payment of rent. Stylo contends that from 1 December 2016 the annual rent, payable monthly, is $120,000 plus GST.
[4] Hum’s notice of opposition raises issues of substance which I divide into two categories:
(a)Interpretation of the lease. Hum contends that the rental is no longer $120,000 plus GST but a much lesser sum which it has been paying. It claims there was a rent review as at 1 February 2017 which reduced the rent and that Stylo owes Hum $137,624 in overpaid rent.
(b)Dispute going to the formation of the lease. The leased premises is a substantial two-storey heritage villa in central Auckland. Hum operates as the business arm of a charitable trust and the idea was to renovate the premises to support the work of the trust. The lease was structured accordingly. Hum, in 2016, sued Stylo and others, alleging against Stylo that it was induced by Stylo’s misrepresentation to enter into the lease and that Stylo has breached the covenant conferring on Hum the right to quiet enjoyment of the premises.4 The case (“Hum’s proceeding”) is due to be heard in this Court commencing 1 August 2020.
[5] In its notice of opposition, Hum claims to have carried out substantial improvements and restoration work to the property valued at over $650,000. It refers to Hum’s proceeding and submits:
1 Stylo Medical Services Ltd v Hum Hospitality Ltd [2020] NZHC 499.
2 Stylo Medical Services Ltd v Hum Hospitality Ltd [2018] NZHC 642.
3 An occurrence giving rise to war.
4 Hum Hospitality Ltd v Stylo Medical Services Ltd HC Auckland CIV-2016-404-636.
i.It would be unjust in circumstances where the respondent is continuing to pay market rent to cancel the lease until those proceedings have been determined.
[2] I also summarised the parties’ positions on the correct interpretation of the lease:
[16] Stylo has applied by way of originating application to cancel the lease, to obtain possession of the premises and to recover arrears of rent (if any). Stylo relies on cl 47.1 of the lease which provides:
Despite the provisions in clauses 2.1 to 2.4 the rent will be increased to
$100,000.00 plus GST on the 1st December 2015 and to $120,000.00 plus GST on 1 December 2016. Thereafter the rent will be reviewed every two years according to the provisions in clauses 2.1 to 2.4.
[17] Hum responds that the lease was renewed from 1 February 2017 and the rent was reviewed as at that date and reduced to the rent it is paying.
[18]Hum relies on cl 33.1 of the lease which provides (relevantly):
IF the Tenant has given to the Landlord written notice to renew the lease at least 3 calendar months before the end of the term and is not at the date of the giving of such notice in breach of this lease (including any maintenance obligations) then the Landlord will grant a new lease for a further term from the renewal date as follows:
(a)If the renewal date is a rent review date the annual rent shall be agreed upon or failing agreement shall be determined in accordance with clauses 2.1 and 2.2 but such annual rent shall not be less than the rent payable as at the commencement date of the immediately preceding lease term;
…
(e)Pending the determination of the rent the Tenant shall pay an interim rent in accordance with clauses 2.3 and 2.4; and
(f)Notwithstanding anything contained in clause 33.1(e) the interim rent referred to in that clause shall not be less than the annual rent payable as at the commencement date of the immediately preceding lease term.
[19] Hum submits that the words “as at the commencement date of the immediately preceding lease term” refer to the commencement date of the lease on 1 February 2011 at which time the rental was zero because cl 46.1 provided for a “rent free holiday for a period of 36 Months from the commencement date of this lease”.
[20] Hum submits that this can be contrasted with the wording in cl 2.1 which provides for rent reviews other than on lease renewal. The ratchet clause is:
(d)Notwithstanding any other provision of this clause, the annual rent payable as from the relevant rent review date shall not be
less than the annual rent payable as at the commencement date of the then current lease term.
[21] Hum accepts that if this provision applies then the ratchet clause would hold the rental at $120,000 plus GST. Its argument is that it does not apply.
[22] A difficulty for Hum is that the front page of the First Schedule to the lease has this entry:
RENT REVIEW DATES:
(a) Each renewal date;(Delete where appropriate if neither OR
option is deleted, then option (a) (b) (Insert dates): See clause 47.1
applies)
[23] Ms Sussock submits that the two Agreements to Lease preceding the lease did not have option (a) struck out and part of Hum’s case is that the true agreement between the parties preserved option (a).
[3] My judgment of 12 March 2020 held that Hum could not invoke the arbitration provisions of the lease to decide the issues raised by Hum in relation to the claimed rent review.
[4]The Hum proceeding has been adjourned and will not be heard until 2021.
[5]This judgment decides Stylo’s application for cancellation of its lease to Hum.
[6]There are, potentially, two major issues:
(a)Has Hum underpaid rent?
(b)If so, given Hum’s proceeding, should the lease be cancelled?
Has Hum underpaid rent?
[7] The starting point must be the Deed of Lease itself. That is the document signed by the parties, which on its face contains the terms of their agreement.
[8] The Deed is dated 22 January 2011. The First Schedule sets out the basic structure:
[9] As is clear from the First Schedule, the Rent Review Date refers to cl 47. That is found in the Second Schedule of the Deed. I have quoted 47.1 at [2]. For ease of reference, I will do so again:
Despite the provisions in clauses 2.1 to 2.4 the rent will be increased to
$100,000.00 plus GST on the 1st December 2015 and to $120,000.00 plus GST on 1 December 2016. Thereafter the rent will be reviewed every two years according to the provisions in clauses 2.1 to 2.4.
[10] This provision is specific and clear. The rent will be $120,000 plus GST on (and from) 1 December 2016 for a period of two years. The rent after 30 November 2018 will be as reviewed according to clauses 2.1 to 2.4.
[11] Clause 33.1, on which Hum relies, is part of the printed form of the lease. It applies where the lease is coming up for renewal and the tenant gives notice that it wishes to renew the lease. In this case, the relevant renewal date was 1 February 2017. Clause 33.1(a) regulates the setting of rental “[i]f the renewal date is a rent review date”.
[12] In my view, 1 February 2017 was not a rent review date. The option for rent review dates being “Each renewal date” was deleted in the First Schedule and cl 47.1 is specified as the operative rent review provision.
[13] It is immaterial that Hum, subsequent to Katz J ordering Stylo to grant a renewal of the lease from 1 February 2017, attempted to engage Stylo in a rent review process treating 1 February 2017 as the rent review date. Stylo never accepted that a rent review was mandated by the lease. Therefore, the process that Hum engaged in by itself to arrive at a new “market rent” is not binding on Stylo.
[14] I note Hum’s argument that the lease is different in its nomination of rent review dates than the two agreements to lease which preceded it. As to the first agreement to lease:
(a)The first agreement to lease is dated 1 November 2010. It is in a different form to the lease. The First Schedule is as follows:
(b)It can be seen that option (a) (“Each renewal date”) has not been crossed out, but beside the alternative (“OR”) the words “see clause 10 of the further terms” has been inserted. Clause 10 provides:
Rent review
The rent will be increased to $100,000.00 on the 1st December 2015 and to $120,000.00 on 1 December 2016. Thereafter the rent will be reviewed every two years at then market rent.
[15] In my view, the first agreement to lease is materially the same as the lease in terms of rent review. On a plain reading, cl 10 set out the basis on which rent would be reviewed.
[16]As to the second agreement to lease:
(a) The second agreement to lease is dated 8 December 2010. It is in the same printed form as the first agreement to lease. The First Schedule is as follows:
[17] As with the first agreement to lease, option (a) has not been crossed out but the words “see clause 10 of the further terms” have been added. Clause 10 is in identical terms to cl 10 in the first agreement to lease.
[18] I do not consider the failure to cross out option (a) has any significance in interpreting the lease. It is a drafting error. It is clear that cl 10 applies. The substance of cl 10 is carried forward to cl 47 of the lease.
[19] Accordingly, I do not accept that the lease provides a materially different regime for reviews of rent than the two agreements to lease. In all three documents the rent was to increase to $120,000 on 1 December 2016 for a period of two years.
[20]I accept that the two agreements to lease did not have a ratchet clause.
[21] Ms Sussock for Hum filed a further affidavit of Ms Armitage sworn on 22 August 2020, two days before the hearing, and a further affidavit sworn on 24 August 2020, on the day of the hearing. Ms Armitage seeks to attack the lawfulness of the circumstances in which the lease came to be signed by Hum. Ms Sussock submits that because of this, issues of credibility are evident and so the originating application procedure is inappropriate. Ms Sussock submits I should not decide Stylo’s application now.
[22] I do not accept this submission. Stylo claims it is owed rent. On a plain interpretation of the lease, Hum has not been paying the mandated rent. It is not necessary to look beyond the words of the lease since they clearly set out the contractual intentions of the parties.
[23] Hum, in this context, relies on the recent decision of the Supreme Court in 127 Hobson Street Ltd v Honey Bees Preschool Ltd.5 But, the passages cited are orthodox law and do not assist Hum in the context of this case:
[93] We accept Mr Gedye’s submission that the starting point is that the exercise of a right of renewal is normally regarded in law as the grant of a new lease and clear words are needed to displace this presumption…
5 127 Hobson Street Ltd v Honey Bees Preschool Ltd [2020] NZSC 53.
[94] … Contractual interpretation invites a common sense approach to the task of assessing what the parties intended by the words, objectively assessed.
(footnotes omitted)
[24] In this case there are clear words to rebut the presumption, and a common sense, objective, assessment of cl 47.1 reveals the parties’ contractual intention: an intention carried forward from cl 10 in both preceding agreements to lease.
[25]I answer “yes” to the first major issue: has Hum underpaid rent?
Should the lease be cancelled?
[26] Section 253 of the Property Law Act 2007 (the Act) allows Hum, as lessee, to seek relief against the cancellation of the lease.
[27] Section 254 provides that when there has been a breach, a lessor may only exercise its rights of cancellation 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.
[28]Any notice must be in the form specified in s 245(3).
[29] The Court’s discretion to grant relief is wide.6 Where a breach consists solely of a failure to pay rent, as here, there is a presumptive right to relief. It is only in exceptional circumstances that relief is to be denied if the debt is paid in full.7
6 Property Law Act 2007, s 251. Act 2007, s 251.
7 Mulholland v Waimarie Industries Ltd (2009) 10 NZCPR 590 (HC) at [23].
[30] In Studio X Ltd v Mobil Oil New Zealand Ltd, Hammond J set out a number of factors which can be considered in the exercise of the court’s discretion. Relevant to this decision are:8
(a)The nature, form and gravity of the breach;
(b)The conduct of the tenant;
(c)The conduct of the landlord;
(d)The ability of the tenant to remedy the breach or breaches; and
(e)Proportionality or fairness as between the parties — the outcome should not be disproportionate to the breach or the loss suffered.
[31] I am mindful that the Hum proceeding raises issues which go to the formation of the lease. The lease (broadly) required Hum to renovate the premises to a specified extent. Hum says it spent about $650,000 trying to do that. It claims, among other things, that Stylo did not, as it was obliged to do, put the premises into a proper condition for Hum’s work to take place as planned. In those circumstances I consider it would be unfair to cancel the lease if Hum can remedy its default by bringing lease payments up to date. The issue is whether it can.
[32] I asked Hum to tell me its position on paying arrears of rent if I found it to be in arrears. Ms Sussock did so in her memorandum of 7 September 2020. Ms Sussock calculates that rental arrears will be at least $150,000. Hum ask for six months to pay the arrears, with one-sixth payable four weeks following my decision and the balance payable in sixths each month for the five months thereafter. Ms Sussock submits:
The 6 month period proposed for repayment of the arrears is longer than usual but it is submitted that it is appropriate in the circumstances because :
5.1.1the applicant did not at any stage during the rent review process initiated by the respondent require that the parties go to arbitration to resolve the dispute as to whether there was a rent review on renewal
8 Studio X Ltd v Mobil Oil New Zealand Ltd [1996] 2 NZLR 697 (HC) at 701. Also see Howard’s Lodge Ltd v Guy HC Rotorua CIV 2011-463-711, 1 December 2011 at [19] – [20].
or not which would have resulted in an earlier decision and reduced (and less delayed) arrears;
5.1.2the impact of the Covid 19 pandemic is significant and given the investment of the respondent in the property it would not be in the interests of justice for the pandemic to cause the respondent to be required to give up its investment in the property;
5.1.3the delay arising as a result of the adjournment of the main Hum proceeding also arose as a result of the Covid 19 pandemic and the consequential impact on counsel for the respondent’s availability, rather than through any fault of the respondent itself.
[33] Mr Parmenter, in his memorandum of 8 September 2020, opposes Hum’s position. His submission is that Hum’s intention to go fundraising is insufficiently certain to conform with the case law in this area. Mr Parmenter submits that all Hum’s proposal will likely achieve is more delay.
[34] It is well-established that for the court to grant relief against cancellation for non-payment of rent, either the money needs to have been paid, or there needs to be a high degree of certainty that it will be paid.9
[35] I consider Hum’s proposal to be too uncertain and the six month period too long. Stylo is entitled to its rent or to possession of its real estate if the rent is not brought up to date promptly. Hum’s history with regard to paying rent is relevant. This is the fourth application by Stylo to cancel the lease for unpaid rent.
[36] In view of the factors I have pointed to in [31], and the impact of the Covid-19 lockdown on the Hum proceeding, I will allow Hum one calendar month from the date of this judgment to pay the sum I specify at [44].
[37] The final question is quantum. Mr Parmenter submits that the rental arrears amount to $150,007.40. Ms Sussock agreed, in her memorandum dated 7 September, that the rent in arrears “will be at least $150,000” in the case the annual rent remained at $120,000.
9 See, for example, Paros Property Trust Ltd v Faith (2014) 15 NZCPR 878 (HC) at [55] and
Mulholland v Waimarie Industries (2009) 10 NZCPR 590 (HC) at [29].
[38] Mr Parmenter also seeks an award of interest, calculated at 14 per cent per annum, and further payment in respect of operating expenses of $22,382.45. Although interest was not originally claimed in the Property Law Act notice, Mr Parmenter has claimed interest in his written submissions and in his originating application. He claims interest on the basis of s 22 of the Interest on Money Claims Act 2016. The Deed of Lease provides that the lessee must pay interest at 14 per cent on rent and other moneys payable under the lease until the date of payment.
[39] I accept that Hum must pay interest on all arrears at a rate of 14 per cent per annum.
[40] There are, however, differences between the parties on what payments have been made by Hum. For example, Hum says it paid $13,416 on 23 February 2017 and Stylo counters that only $9,583 was paid. Another example is that Dr Ooi in his spreadsheet shows Hum paying $6,326.89 as opex on 28 February 2019 whereas Ms Armitage for Hum shows a figure of only $2,321.73 being paid as opex that day.
[41] I am mindful also that the financial information provided to me is current only to August 2020.
[42] It is not possible for me to make a final calculation of the monies owed to Stylo under the lease without further information from the parties. I will, therefore, make interim orders and direct the parties to provide further affidavits.
Decision
[43] I make an order that Hum is liable to Stylo for rental of the premises on and from 1 December 2016 at the annual rate of $120,000 plus GST and reviewable in accordance with cl 47.1 of the lease.
[44] I find that Hum is in arrears with its rental payments to at least $150,000. I order Hum to pay Stylo $150,000 on account of arrears of rental no later than one calendar month from the date of delivery of this judgment.
[45] If Hum fails to pay Stylo $150,000 as aforesaid, then the lease is cancelled and Hum must forthwith give possession of the premises to Stylo.
[46] If Hum does pay Stylo $150,000 as aforesaid, then the balance of the arrears of rental and any other arrears of payments due must be identified (including interest on all arrears at the rate of 14 per cent per annum) and paid.
[47] If the parties cannot agree on quantum then each must file a further affidavit and spreadsheet deposing to its view of what is outstanding and addressing the other party’s spreadsheet where there are differences. The parties are also to file memoranda on how the dispute as to quantum is to be resolved. Stylo’s affidavit and memorandum are to be filed by 14 December 2020. Hum’s affidavit and memorandum are to be filed by 5 February 2021.
[48] Pending resolution of any dispute as to quantum, the lease will remain in force provided rental payments are paid on time. If Hum defaults on the payment of any rental due, then unless Hum can show the non-payment was remedied within 10 working days of being due, the lease is cancelled and Hum must forthwith give possession of the premises to Stylo.
[49] Once quantum of arrears has been established, I will make further orders timetabling payment and providing for cancellation of the lease and surrender of possession of the premises in default.
[50] Finally, if Hum does not pay Stylo $150,000 as aforesaid, the total arrears will be assessed in accordance with [47] and final orders for payment will be made.
Costs
[51] Stylo is entitled to costs on this proceeding to this point. If costs cannot be agreed, Stylo is to file its memorandum by 14 December 2020. Hum is to file its memorandum in reply by 5 February 2021.
Brewer J
16
3
1