Stylo Medical Services Ltd v Hum Hospitality Ltd
[2020] NZHC 499
•12 March 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 499
UNDER section 244 of the Property Law Act 2007 IN THE MATTER
of an application for cancellation of Dead of Lease dated 22 January 2011 and possession
BETWEEN
STYLO MEDICAL SERVICES LTD
Applicant
AND
HUM HOSPITALITY LTD
Respondent
Hearing: 4 October 2019 and 12 December 2019 Counsel:
R O Parmenter for Applicant R J Sussock for Respondent
Judgment:
12 March 2020
JUDGMENT OF BREWER J
This judgment was delivered by me on 12 March 2020 at 4:00 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 499 [12 March 2020]
Introduction
[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 2018.1 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 belli2 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
1 Stylo Medical Services Ltd v Hum Hospitality Ltd [2018] NZHC 642.
2 An occurrence giving rise to war.
lease and that Stylo has breached the covenant conferring on Hum the right to quiet enjoyment of the premises.3 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:
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.
Procedural history
[6] Stylo’s application was called before me on 4 October 2019. I took it from the submissions of the parties that the issue of the quantum of rent would likely be resolved by the applicability of the rent review clauses in the lease which provide that on review the annual rent cannot be reduced (“ratchet clauses”).
[7]At the outset of the hearing I advised counsel that I saw three main issues:
(a)Is there an operative ratchet clause?
(b)If there is, can Hum pay the amount of the proven default?
(c)How does the existence of [Hum’s proceeding] affect the Court’s discretion to grant or withhold relief?
[8]Mr Parmenter, for Stylo, was content to proceed on that basis.
[9] Ms Sussock, for Hum, at once referred to the arbitration clause in the lease and submitted that any question of the applicability of a ratchet clause would have to be determined by arbitration.
3 Hum Hospitality Ltd v Stylo Medical Services Ltd HC Auckland CIV-2016-404-636.
[10]I directed counsel to file submissions on the point and adjourned the hearing.
[11]The hearing resumed on 12 December 2019.
[12] The jurisdictional issue on the claimed right to arbitrate rather died away. First, Mr Parmenter pointed out the probable applicability of Article 8(1) of Schedule 1 to the Arbitration Act 1996 (“Article 8”). Essentially, this requires a Court to stay proceedings “brought in a matter which is the subject of an arbitration agreement” if a party requests that “not later than when submitting that party’s first statement on the substance of the dispute”.4 Hum made no such request.
[13] Second, Ms Sussock submitted that Hum’s main defence to the claim for unpaid rent is already part of Hum’s proceeding. Hum’s argument is that the applicable ratchet clause does not apply to entrench rent at $120,000 per annum because there was a rent review agreed on the February 2017 renewal which reduced the rent. It would be different if the rent review had taken place during the course of a term of the lease (there are different formulations of the ratchet in the applicable clauses). Therefore, with a factual issue as to what was agreed in this case which is also an issue in Hum’s proceeding, Ms Sussock submitted a consolidation of proceedings is appropriate.
[14] Ms Sussock did not abandon her submission that arbitration is the correct jurisdiction for the “matter” she submits is in issue. Her submission is this is not the “matter” Stylo wishes to progress – whether the lease should be cancelled.
Issue
[15] This judgment decides the issue of jurisdiction, namely whether Stylo’s claim must be decided by arbitration.
4 Zurich Australian Insurance Ltd v Cognition Education Ltd [2014] NZSC 188, [2015] 1 NZLR 383.
Discussion
[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 case did not have option (a) struck out and that part of Hum’s case is that the true agreement between the parties preserved option (a).
[24] In Ms Sussock’s submission, these are matters which must be decided by arbitration. The relevant clauses in the lease are:
44.1 UNLESS any dispute or difference is resolved by mediation or other agreement, the same shall be submitted to the arbitration of one arbitrator who shall conduct the arbitral proceedings in accordance with the Arbitration Act 1996 and any amendment thereof or any other statutory provision then relating to arbitration.
…
44.3THE procedures prescribed in this clause shall not prevent the Landlord from taking proceedings for the recovery of any rent or other monies payable hereunder which remain unpaid or from exercising the rights and remedies in the event of such default prescribed in clause 28.1 hereof.
[25] Ms Sussock submits that cl 44.3 does not permit Stylo to litigate the issues she has raised in relation to the claimed rent review.
[26] I have decided I have jurisdiction to determine Stylo’s application. Hum has not invoked cl 44.1 of the lease in accordance with Article 8, and the Hum proceeding pleads Hum’s position on the rent review in any event:
·The parties agreed upon an escalating rental after the three year rent abatement period of $87,000 plus GST from 1 February 2014, $100,000 plus GST from 1 December 2015 and $120,000 plus GST from 1 December 2016, with the rent to be reviewed on renewal and every 2 years thereafter.5
·The Deed of Lease contained the following terms:
44.4The annual rent was $87,000.00 plus GST, increasing to $100,000.00 plus GST from 1 December 2015 and $120,000.00 plus GST from 1 December 2016 with the rent to be reviewed on renewal and every two years following according to the provisions of the lease.
[27] Therefore, Article 8 applies. Hum has waived any right for the issue of the claimed rent review to be resolved by arbitration.
[28] In any event, I find the issue of whether there has been a rent review is one that falls within the ambit of cl 44.3 of the lease.
[29] Ms Sussock cited Hi-Tech Investments Ltd v World Aviation Systems (Australia) Pty Ltd.6 That was an application for summary judgment by a landlord for unpaid rent. The tenant filed an appearance under protest to jurisdiction saying there was a dispute as to whether the sums claimed were payable. The tenant’s case was that a rental review had taken place in accordance with the lease, that the tenant was paying rent at the reviewed rate, and that the landlord subsequently and contrary to the concluded review claimed greater sums.
[30]Associate Judge DH Abbott held:
[22] Rent can only be payable either as the parties agreed at the commencement of the lease, or as fixed in accordance with the rent review procedures of the lease. I do not accept that clause 44.3 allows the landlord to claim a rent which has not been fixed in this way, or to seek a determination by the Court as to whether or not it has been fixed in this way. The evidence is clear that the rent review mechanism was initiated. It seems that the revised rent was accepted by the defendant and under the terms of the rent review mechanism it was thereby deemed to be the rent payable. There is now a dispute or difference as to whether it has been or can be altered. That seems to me to call into question whether the rent which the plaintiff now claims is payable.
[23] Counsel for the plaintiff endeavoured to persuade me that any issue as to the rent that was payable was merely an element in proving its claim for a
5 Amended statement of claim dated 5 December 2018, cl 39.
6 Hi-Tech Investments Ltd v World Aviation Systems (Australia) Pty Ltd HC Auckland CIV-2006- 404-3579, 13 October 2006.
debt due. However, taking the facts of the present case, this could mean showing that the notice of 27 September 2005 (which was given and acted upon as part of the rent review mechanism) is not binding. It seems to me that any challenge to the rent review mechanism must go beyond merely recovery of rent that is payable.
[24] For these reasons, I construe clause 44.3 as allowing proceedings for recovery of rent or other monies for which liability has been established under the lease or (if necessary) by the arbitration procedures of clause 44.1.
[31] Accordingly, Ms Sussock’s submission is that the issue of whether there has been a rent review is one that is not able to be determined under cl 44.3.
[32] I disagree. In my view, the division of roles between cl 44.1 and cl 44.3 is summed up by the Court of Appeal in OMV New Zealand Ltd v Precinct Properties Holdings Ltd:7
[29] In summary, cl 44.3 operates as an exception to cl 44.1 and permits claims for unpaid rent to be litigated. To the extent that a tenant believes it has a defence to such a claim (by which we mean a defence that some or all of the rent is not payable, for reasons other than the existence of a cross-claim in the nature of a set-off) that defence can be pleaded and ventilated in the context of such litigation. But claims for set-off and counter-claims relating to alleged breaches of the lease or misrepresentations by the landlord would not, in our view, qualify. Those are properly matters for arbitration under cl 44.1.
[33] In this case, Stylo claims for unpaid rent and relies on the rent provisions contained in the lease. Hum disputes the rent claimed is payable arguing there has been a valid rent review. That is a defence that some of the rent claimed is not payable. It is not a defence which relies on a cross-claim in the nature of a set-off.
The next step
[34] The Hum proceeding is scheduled to commence on 1 August 2020. The issue of whether the lease provided for the “rent to be reviewed on renewal and every two years thereafter” is pleaded for determination. The Court’s answer to the issue would most likely determine Stylo’s claim in this case for payment of arrears of rent. If there are arrears of rent, the determination of the other issues in the Hum proceeding would bear on the Court’s discretion as to cancellation of the lease. The issue now is whether
7 OMV New Zealand Ltd v Precinct Properties Holdings Ltd [2018] NZCA 240, (2018) 19 NZCPR 899.
I should adjourn Stylo’s application until after the determination of the Hum proceeding, consolidate Stylo’s application with the Hum proceeding, or proceed to determine Stylo’s application.
[35] I direct submissions from Stylo to be filed and served by 31 March 2020. Submissions from Hum are to be filed and served by 14 April 2020. I will determine the matter on the papers unless counsel apply for a hearing.
Brewer J
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