Taste of Asia Limited v Hillcrest Properties Limited
[2020] NZHC 2081
•18 August 2020
IN THE HIGH COURT OF NEW ZEALAND DUNEDIN REGISTRY
I TE KŌTI MATUA O AOTEAROA ŌTEPOTI ROHE
CIV-2019-412-000029
[2020] NZHC 2081
UNDER The Property Law Act 2007 IN THE MATTER
of an application under s 253 for relief against cancellation of a lease
BETWEEN
TASTE OF ASIA LIMITED
Applicant
AND
HILLCREST PROPERTIES LIMITED
Respondent
CIV-2019-412-000030 IN THE MATTER
of an application for an order for possession
BETWEEN
HILLCREST PROPERTIES LIMITED
Applicant
AND
TASTE OF ASIA LIMITED
Respondent
Hearing: 10 and 11 August 2020 Appearances:
D Tobin and J C McLeod for Taste of Asia Ltd
A Pinnock and M C Ryan for Hillcrest Properties Ltd
Judgment:
18 August 2020
Reissued:
(Recalled and reissued on 5 March 2021)
JUDGMENT OF LANG J
[on application for relief against forfeiture and application for order granting possession of premises]
TASTE OF ASIA LTD v HILLCREST PROPERTIES LTD [2020] NZHC 2081 [18 August 2020]
[1] These proceedings concern the lease of a restaurant and takeaway premises situated in a shopping centre in the Dunedin suburb of Mornington. The premises are owned by Hillcrest Properties Limited (Hillcrest) and have been leased to Taste of Asia Limited (Taste of Asia) since April 2011.
[2] The proceedings were filed after Taste of Asia subleased the premises to a company called Lim 88 Investments Limited (Lim 88) in October 2013. It failed to obtain Hillcrest’s consent to the sublease and thereby breached one of the terms of the lease. This has prompted Hillcrest to give notice that it intends to cancel the lease. In one proceeding Hillcrest seeks an order giving it possession of the premises.1 In the other, Taste of Asia seeks an order granting it relief against forfeiture of the lease.2
[3] It is common ground that the breach entitled Hillcrest to cancel the lease and that it has served valid notice under s 246 of the Property Law Act 2007 (the Act) of its intention to do so. The determinative issue for both proceedings is whether Taste of Asia should be granted relief against forfeiture of the lease.
Background
[4] The premises originally comprised a hardware store. Taste of Asia’s director, Mr Delvin Chin, has a background in the hospitality industry. He believed the premises had the potential to be converted into a Chinese restaurant and/or takeaway business. He then entered into negotiations to lease the premises with Hillcrest’s director, Mr Gordon McLauchlan.
[5] On 20 October 2011 Hillcrest and Taste of Asia entered into a deed of lease under which Taste of Asia leased the premises as from 20 April 2011. The lease was to be for an initial term of five years from that date, with Taste of Asia having two rights of renewal of five years each. The annual rental of $30,000 plus GST was to be reviewed at each renewal date. This meant the lease would expire, assuming Taste of Asia exercised both rights of renewal, on 19 April 2026.
[6]The lease contained the following clause:
1 CIV-2019-412-30.
2 CIV-2019-412-219.
34.1THE tenant shall not assign sublet or otherwise part with the possession of the premises or any part thereof without first obtaining the written consent of the Landlord which the Landlord shall give if the following conditions are fulfilled:
(a)The Tenant proves to the satisfaction of the Landlord that the proposed assignee or subtenant is (and in the case of a company that the shareholders of the proposed assignee or subtenant are) respectable and responsible and has the financial resources to meet the Tenant’s commitments under this lease;
(b)All rent and other moneys payable have been paid and there is not any subsisting breach of any of the Tenant’s covenants;
(c)In the case of an assignment a deed of covenant in customary for approved or prepared by the Landlord is duly executed and delivered to the Landlord;
(d)in the case of an assignment to a company (other than a company listed on the main board of a public stock (exchange) a deed of guarantee in customary form approved or prepared by the landlord is duly executed by the principal shareholders of that company and delivered to the Landlord; and
(e)The Tenant pays the Landlord’s reasonable costs and disbursements in respect of the approval and the preparation of any deed of covenant or general and (if appropriate) all fees and charges payable in respect of any reasonable inquiries made by or on behalf of the Landlord concerning any proposed assignee subtenant or guarantor. All such costs shall be payable whether or not the assignment or subletting proceeds.
…
[7] Mr Chin then set about developing the hardware store into premises suitable for restaurant and takeaway businesses. The takeaway business had opened by the end of 2011 under the name Wok Fusion. Mr Chin then developed a restaurant next door under the name Sichuan 88. He and his wife met the costs of installing the fixtures and fittings for both businesses, and Mr Chin estimates these amounted to at least
$600,000. He and his wife worked in both businesses from the outset. At this time Mr Chin also had a day job with a catering company.
[8] Mr Chin knew Hoy Kong and Cuiha Lim from his employment with the catering company. He also knew they had successfully operated a restaurant and takeaway business in Christchurch. Mr Chin says that in 2013 he approached Mr and
Mrs Lim and asked them to come to Dunedin to operate the two businesses he had established at the Mornington shopping centre. They duly came to Dunedin and began running both businesses.
[9] In October 2013 Taste of Asia entered into a deed of sublease of the premises with Mr and Mrs Lim’s company, Lim 88. The sublease was to commence on 2 October 2013 and was to be for an initial term of two years six months and 20 days. Lim 88 had two rights of renewal of five years each. The deed of sublease therefore had a final expiry date of 19 April 2026. The deed also provided for Lim 88 to lease the businesses Taste of Asia had commenced in the premises.
[10] The rental for the sublease of the premises was $2,500 plus GST per month. In addition, Lim 88 was to pay an annual rental for the business in the sum of $156,000 plus GST. The rent for both the premises and the business was to be reviewed and adjusted in line with the Consumer Price Index on 20 April 2016 and 20 April 2021. In addition, Lim 88 was to pay all outgoings on the property including rates and insurance expenses.
[11] Although the deed of sublease contained a provision for Hillcrest’s consent it is common ground that neither Lim 88 nor Taste of Asia ever sought Hillcrest’s consent to the sublease.
[12] Taste of Asia and Lim 88 entered into a further deed of sublease in June 2015. The essential terms of the sublease remained the same other than that the rent was to be reviewed every second year from the commencement date and increased on each such date by ten per cent. In addition, the deed of sublease contained the following new terms:
20.1The Sublessor and the Sublessee agree that in the event that the Sublessor sells the Business during the term of this Sublease, that the Sublessee will be entitled to a one-off payment of $250,000.00 if the Sublessor sells the Business during the term of the Sublease for an amount between $1,600,000.00 and $1,800,000.00.
20.2The Sublessee agrees that the within Sublease is personal to the Sublessee and that the Sublessee has no right to sell the Sublease of the Business without the prior written consent of the Sublessor, which
may be granted on such terms and conditions as the Sublessor in its sole discretion determines.
20.3The Sublessee further agrees that it will not communicate with the Head Landlord in any way regarding a new grant of Lease either during the term of the within Sublease, or for a period of two (2) years from the date of termination of the within Sublease.
[13] The second deed of sublease again contained a section under which Hillcrest was to provide its consent. On this occasion the section contained the signature of a legal secretary employed by Taste of Asia’s solicitors who purported to witness the head lessor’s signature. The head lessor did not, however, sign the agreement. It is again common ground that neither Taste of Asia nor Lim 88 sought Hillcrest’s consent to the second deed of sublease.
[14] On 19 April 2016, Hillcrest and Taste of Asia entered into a deed of renewal under which the lease was renewed for a further term with no rental increase. They then entered into a deed of variation of lease on 7 March 2018 under which Taste of Asia was given four further rights of renewal of five years each, thereby extending the final expiry date to 19 April 2046. In both the deed of renewal and deed of variation the parties agreed that Taste of Asia would continue to lease the premises on the terms and conditions contained in the original lease.
[15] Taste of Asia did not exercise its right under the second deed of sublease to review the rental payable for the business in 2017. In January 2019, however, Taste of Asia’s solicitors advised Lim 88 that the rental for the business would be increased to the sum of $188,760 per annum plus GST.
[16] Mr McLauchlan contends Hillcrest did not become aware of the sublease to Lim 88 until February 2019. He deposes:
14.The Applicant [Hillcrest] first became aware of the fact the Respondent [Taste of Asia] had sublet the Premises when I was contacted by Ms Lim in or around February 2019. I ran into her in the mall at Mailer Street (the Applicant owns the entire property). She was very distressed and explained that she could not keep up the payments to the Respondent. I asked her about this and she explained that she was sub-letting the Premises. I was extremely shocked. Ms Lim told me that she was working flat out, paying for everything in respect of the business, but could not keep up with the Respondent’s financial demands. She said she would not be able to keep the
restaurant open much longer. She told me that she had recently been in hospital for a major operation and even then the Respondent had not shown her any leeway. She stated that she had asked that the bond of $50,000.00 be returned to her to help financially through that period but as soon as she was out of hospital the Respondent wanted it repaid immediately.
15.I was extremely shocked to hear all of this. Ms Lim then provided me with copies of the documentation between her company, Lim 88 Investments Limited, and the Respondent. She also gave me a letter she had received from O’Neill Devereux, the solicitors for the Respondent, dated 28 January 2019 advising that the Respondent had exercised the rent review and effective from the date of the letter the annual rent was increased to $188,760.00 per annum plus GST.
[17] Hillcrest served a notice of its intention to cancel the lease on Taste of Asia and Lim 88 on 24 April 2019. It rejected a subsequent attempt by Taste of Asia to obtain retrospective consent to the sublease. Hillcrest maintains that the breach of lease is so serious that relief against forfeiture should not be granted, and that it should be entitled to regain possession of the premises.
Relevant principles
[18] The principles that apply to an application for relief against forfeiture are now well-established. Section 253 of the Act provides the Court with a broad discretion to grant relief against the cancellation of a lease on the ground of a breach of covenant or condition of the lease. It may grant relief even where the breach is incapable of remedy.3 A failure to obtain the lessor’s consent to an assignment or sublease is incapable of remedy because it is a “once and for all” occurrence.4 It is therefore necessary for the party in breach to obtain an order granting relief against forfeiture of the lease.
[19] In Studio X Ltd v Mobil Oil New Zealand Ltd, Hammond J suggested that the following factors may be relevant to the issue of whether relief should be granted:5
*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?
3 Property Law Act 2007, s 256(2)(b).
4 Scala House & District Property Co Ltd v Forbes [1974] QB 575 (CA) at 588 and 591.
5 Studio X Ltd v Mobil Oil New Zealand Ltd [1996] 2 NZLR 697 (HC) at 701.
*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. Afterall a lease is both an interest in land and a contract and a Court ought not to estreat an entire interest of that character simply because (for instance) the tenant fails to repair (at a cost of
$50) a window the tenant's son happened to put a cricket ball through.
[20] In Detour Clothing Ltd v Star Five Ltd, Heath J emphasised that the factors identified by Hammond J in Studio X were not to be regarded as a “checklist” of factors to be considered in every case.6 Rather, the Court is required to identify factors that are relevant to the particular application before it. Some of the factors identified in Studio X will be relevant to most cases whilst others may only assume significance in some cases. In every case, however, it will be necessary to identify whether other factors also need to be taken into account in determining whether relief should be granted. Heath J also added:
[44] I observe, as did Joseph Williams J in Pike River,7 that while Hammond J listed the “proportionality” factor discretely, the need for a proportionate response to any breach underpins the exercise of the Court’s discretion. Ultimately, a balancing exercise is required to determine whether,
6 Detour Clothing Ltd v Star Five Ltd [2017] NZHC 1172, (2017) 18 NZCPR 862 at [43].
7 Pike River Coal Ltd (In rec) v O’Malley Farming Ltd (2011) 6 NZ ConvC 95-559 (HC) at [44].
and if so on what terms, relief should be granted. That is the approach that I take in this case.
Analysis
Nature and seriousness of breach
[21] Mr Chin maintains that Taste of Asia’s failure to obtain Hillcrest’s consent to the sublease was inadvertent. He says he knew Taste of Asia was required to obtain Hillcrest’s consent to the sublease. He says he leaves such issues to his solicitors, and he assumed they had attended to it. He says he did not refer to the sublease at the time the lease was renewed in 2016 and when it was varied in 2017 because he believed Mr McLauchlan already knew of the sublease. He says he was not aware that Hillcrest’s consent had not been obtained until he was summoned to a meeting with Mr McLauchlan and his son Stuart in March 2019. He says that he then immediately consulted his solicitors and discovered Hillcrest’s consent had not been obtained.
[22] Mr Chin also says two other factors demonstrate conclusively that he was open with Hillcrest about the sublease. He says that in 2013 he asked Mr McLauchlan to provide a letter supporting the transfer of the restaurant’s liquor licence to Lim 88. This resulted in Mr McLauchlan sending the following letter in Hillcrest’s name to the Dunedin City Council on 14 October 2013:
RE: The transfer of Liquor Licence from Taste of Asia Ltd to Lim Investments Ltd.
We as the Landlords have no problem with such transfer.
[23] Mr McLauchlan acknowledges he signed the letter but says he does not know who created it because it does not have Hillcrest’s usual letterhead. Mr Chin denied preparing the letter but for present purposes it is sufficient that Mr McLauchlan acknowledges he signed it. He says he can vaguely recall Mr Chin asking him to provide the letter but did not attach any significance to it. He says he was aware Mr Chin traded through entities other than Taste of Asia and believes he may have thought Lim 88 was one of those. He is adamant, however, that Mr Chin did not tell him Taste of Asia had sublet the premises to Lim 88. He says he is sure he would recall being advised about a matter as significant as a sublease.
[24] Taste of Asia also relies on the fact that from at least July 2015 Hillcrest began rendering invoices to Lim 88 for the outgoings payable in relation to the premises. Mr Chin believes this practice began in 2013 but there is no way now of ascertaining whether that is correct. Mr Chin contends this shows Taste of Asia did not try to conceal Lim 88’s involvement with the business from Hillcrest. Mr McLauchlan acknowledges that Lim 88 has paid the outgoings since 2015 but says he did not attribute any significance to that fact for essentially the same reason he did not attach weight to the letter about the liquor licence.
[25] I accept that these two factors should arguably have placed Hillcrest on notice that Taste of Asia may have entered into an arrangement with Lim 88 that affected the lease of the premises. If Hillcrest had made enquiries in 2013 and/or 2015 it may have learned of the sublease several years before Mr McLauchlan’s conversation with Mrs Lim in February 2019. Ultimately, however, the lease did not impose any obligation on Hillcrest to make such enquiries. Rather, it imposed an obligation on Taste of Asia to obtain Hillcrest’s consent if it wishes to sublease the premises to a third party. I therefore regard the two factors on which Mr Chin relies as being neutral for present purposes.
[26] I consider the most significant factor in this context to be the fact that Taste of Asia failed to obtain Hillcrest’s consent in both 2013 and 2015. Taste of Asia’s solicitors may have inadvertently omitted on one occasion to obtain Hillcrest’s consent even though the document they had prepared expressly provided for the head lessor to give consent to the sublease. I consider it inherently unlikely, however, that this would occur on two separate occasions. If Taste of Asia’s solicitors had inadvertently failed to obtain Hillcrest’s consent in 2013 they would in all likelihood have identified their error when they prepared the second sublease in 2015. At that point they would have endeavoured to rectify the situation if it was their responsibility to ensure Hillcrest consented to the sublease.
[27] I consider it much more likely, however, that Mr Chin instructed his solicitors not to approach Hillcrest in both 2013 and 2015. Two factors persuade me this must be so. First, Taste of Asia’s solicitor, Mr Todd Whitcombe, would obviously have been in a position to confirm Mr Chin’s evidence that the failure to obtain Hillcrest’s
consent occurred through error or inadvertence on the part of his firm. I therefore gave Mr Tobin the opportunity during the hearing to take instructions from Mr Chin as to whether Taste of Asia wished to call Mr Whitcombe as a witness. After taking instructions Mr Tobin advised me that Taste of Asia did not propose to call Mr Whitcombe as a witness. In answer to a question from me, Mr Tobin confirmed that Taste of Asia’s stance was not based on Mr Whitcombe’s unavailability to give evidence. Rather, it was based on its decision that Mr Whitcombe was not to be called as a witness. This leads to the obvious inference that, if he was to be called as a witness, Mr Whitcombe would have given evidence that did not support Mr Chin’s version of events.
[28] Secondly, I regard the inclusion of special clause 20.3 in the second deed of sublease to be significant, at least in relation to that transaction. For convenience I set it out again:
20.3 The Sublessee further agrees that it will not communicate with the Head Landlord in any way regarding a new grant of Lease either during the term of the within Sublease, or for a period of two (2) years from the date of termination of the within Sublease.
The significance of this clause lies in the fact that it effectively prohibited Lim 88 from engaging in direct communications with Hillcrest. It is likely, in my view, that this reflected Mr Chin’s desire to ensure Hillcrest knew nothing about the sublease.
[29] It is difficult to understand why Mr Chin would wish to conceal the existence of the sublease from Hillcrest. Subsequent events show that Lim 88 was a suitable subtenant that has been able to meet all its obligations under the sublease. Mr and Mrs Lim also had prior successful experience in the industry. Mr Chin may have been concerned that the income Taste of Asia was to receive under the sublease might influence Hillcrest’s approach when it came to the first rent review in April 2016. He denied that this was the case and it is not immediately apparent why the rental Taste of Asia received for the business, as distinct from the premises, would affect the rental it should pay for the premises.
[30] It is not necessary for me to reach any firm conclusion regarding Mr Chin’s motivation. It is sufficient to record my finding that he decided to conceal the
existence of both subleases from Hillcrest. That is obviously a deliberate and serious breach of Taste of Asia’s obligations under the deed of lease.
The effect of the breach on Hillcrest
[31] Hillcrest acknowledges the breach has not caused it to suffer any financial harm. It has received all of the payments Taste of Asia was required to make under the lease. Nor does Hillcrest complain about the manner in which Lim 88 has used the premises. Lim 88 has continued to use the premises for the same purpose and in largely the same manner as Taste of Asia used them before it entered into the first sublease.
[32] Furthermore, the fact that Mr and Mrs Lim have been running the two businesses is well known to Hillcrest. Mr McLauchlan has known they have been managing them for several years, and he has never raised any issue about their ability or competence to run them. Hillcrest has, in fact, advanced a settlement proposal that would result in it purchasing the fixtures and fittings from Taste of Asia and then leasing the premises to Lim 88. This obviously implies Hillcrest has confidence in Mr and Mrs Lim’s ability to look after the premises and manage the businesses.
[33] I am therefore satisfied that Hillcrest has suffered no direct or indirect consequences as a result of the breach.
Would consent have been forthcoming if it had been sought?
[34] Given the nature of the breach I consider it appropriate to consider whether Hillcrest would have granted consent to the sublease if it had been asked to do so in either 2013 or 2015. The lease required Hillcrest to consent to an assignment or sublease if the conditions set out in clause 34.1 of the lease were satisfied. Of these, the only relevant condition is that set out in clause 34.1(a), which provides:
34.1 THE tenant shall not assign sublet or otherwise part with the possession of the premises or any part thereof without first obtaining the written consent of the Landlord which the Landlord shall give if the following conditions are fulfilled:
(a) The Tenant proves to the satisfaction of the Landlord that the proposed assignee or subtenant is (and in the case of a company that the shareholders of
the proposed assignee or subtenant are) respectable and responsible and has the financial resources to meet the Tenant’s commitments under this lease;
…
[35] Hillcrest has never expressed any concern that Lim 88, or Mr and Mrs Lim, are anything other than respectable and responsible persons. Rather, its concern relates to Lim 88’s ability to meet its financial obligations under the sublease. There is no evidence regarding Lim 88’s financial position in 2013, or as to Mr and Mr Lim’s ability at that time to ensure it met its obligations under the sublease. Hillcrest now accepts, however, that Lim 88 met its obligations under the sublease between 2013 and 2015. This means that Taste of Asia and Lim 88 have effectively established, albeit with the benefit of hindsight, that Lim 88 could meet its obligations when it entered into the sublease in 2013. It also means Hillcrest would have been required to grant consent to the second sublease in 2015.
[36] In addition, the sublease effectively increased Taste of Asia’s income by approximately $150,000 per annum. Taste of Asia’s ability to meet its obligations under the head lease therefore increased significantly as a result of the sublease.
Hillcrest’s stance
[37] Hillcrest was plainly not to blame in any respect for the events that resulted in the breach. It had no knowledge of either sublease and could not be expected to know of them unless Mr Chin expressly told Mr McLauchlan that it was being undertaken. It is nevertheless appropriate to consider whether Hillcrest’s current stance is reasonable and justified having regard to the provisions of the lease.
[38] One of Mr McLauchlan’s ongoing concerns appears to be that he no longer likes Mr Chin and feels he cannot trust him. That is unfortunate but is probably inevitable given the events that have occurred. The relationship between a landlord and tenant is not, however, one that depends on mutual affection or trust. Many tenants will not like or trust their landlords and the reverse will also no doubt often be the case. Ultimately, however, the relationship of landlord and tenant is contractual in nature, supplemented where necessary by terms implied by law. The fact that
Mr McLauchlan no longer likes or trusts Mr Chin is not a relevant consideration for present purposes.
[39] Hillcrest’s principal concern, however, is that the terms of the sublease are so onerous that Hillcrest risks being party to a commercially immoral arrangement if it permits the sublease to remain on foot. Ms Pinnock submitted that Taste of Asia’s conduct in relation to the sublease also demonstrates “a pattern of trying to extract as much money as possible from the sub-lease”. The conduct includes instances in which Taste of Asia has required Lim 88 to pay the rental of the premises under the sublease prior to the date on which Taste of Asia is required to pay the rental payable under the head lease to Hillcrest. This means Taste of Asia has the use of the monies paid to it by Lim 88 for the intervening period. Ms Pinnock submits such conduct amounts to a form of commercially immorality to which Hillcrest should not be required to be a party.
[40] I make four points about this argument. First, many parties to commercial arrangements seek to extract the maximum financial gain from them. Such conduct does not of itself generally engage concepts of commercial immorality. Secondly, there is no evidence other than that given by Mr McLauchlan to suggest the terms of the sublease are unduly onerous. Thirdly, Mr and Mrs Lim are clearly persons with prior commercial experience in the hospitality industry. They agreed on Lim 88’s behalf to the terms set out in the sublease. If Mr and Mrs Lim now consider Lim 88 cannot meet its obligations under the sublease they need to negotiate with Taste of Asia to extricate Lim 88 and themselves from that predicament.
[41] Finally, Hillcrest has no right to intervene in the ongoing business relationship between Taste of Asia and Lim 88. Its interest is restricted to ensuring its rights and interests under the head lease are not prejudicially affected by that relationship. If Lim 88 is unable to meet its obligations under the sublease Taste of Asia will still be required to meet its obligations under the head lease. Hillcrest also still retains the benefit of the personal guarantees given by Mr Chin and his wife under the head lease.
The effect of cancellation on Taste of Asia
[42] If the lease is cancelled Taste of Asia will lose the benefit of the funds and efforts it has devoted thus far in developing the two businesses. It will also lose the ability to generate income from the businesses, either as the sublessor of the premises or as the operator of the businesses, during the remainder of the term of the lease. Potentially this extends until 2046.
[43] Ms Pinnock suggested to Mr Chin in cross-examination that he could remove the fixtures and fittings and re-establish the businesses at a different venue. It is not difficult to see why Mr Chin was unenthusiastic about that suggestion. Effectively it would require Taste of Asia to re-establish its businesses again from scratch.
[44] Taste of Asia’s only other alternative would be to sell the fixtures and fittings to Hillcrest so that it can re-let the premises to another tenant. In all probability Lim 88 would be the new tenant. This outcome is unlikely to be of much comfort to Taste of Asia because, standing alone, the fixtures and fittings are probably worth very little. Their real value lies in the fact that they enable the occupier of the premises to generate an income from the two businesses.
[45] I therefore accept that cancellation of the lease would produce very significant financial consequences for Taste of Asia.
Effect of cancellation on third parties
[46] Lim 88 is the only other party that would be affected by the cancellation of the lease. Ordinarily a sublessee would be prejudiced by the cancellation of a head lease. That appears not to be the case here because Lim 88 supports Hillcrest’s bid to cancel the head lease. Cancellation of the head lease would inevitably lead to cancellation of the sublease, thereby freeing Lim 88 from the clause in the sublease that prohibits it from dealing directly with Hillcrest regarding the head lease. I have no doubt it does so because it hopes to enter into a lease of the premises directly with Hillcrest on terms that are more favourable than those in the sublease from Taste of Asia.
[47] Lim 88 is therefore motivated by commercial considerations. Its position is therefore likely to improve if the head lease is cancelled so that it can deal directly with Hillcrest as landlord.
Conclusion
[48] It is now necessary to balance the competing considerations to determine whether cancellation of the lease is proportionate to the breach. The most significant factor in Hillcrest’s favour flows from my conclusion that the breach was deliberate and therefore serious. The courts will not generally require a landlord to remain in a contractual relationship with a tenant who deliberately or wilfully breaches the terms of a lease.
[49] Balanced against that, however, is the fact that the breach has caused no financial or reputational damage to Hillcrest. Taste of Asia has continued to meet all its obligations under the lease and in all respects Lim 88 appears to have occupied the premises as a model subtenant.
[50] The most significant factor militating in favour of relief is the considerable loss Taste of Asia will undoubtedly suffer if the lease is cancelled at this point. This will relate not only to past investment but also to the inability to earn income for the remainder of the term of the lease. I regard Mr McLauchlan’s personal dislike and mistrust of Mr Chin and the stance taken by Lim 88 in relation to the present proceedings as neutral factors. I place no weight on Hillcrest’s argument that the sublease amounts to a commercially immoral arrangement.
[51] It follows that I consider the factors weighing against cancellation outweigh those favouring it. Although the breach was serious, it would be disproportionate in my view to permit the lease to be cancelled when the breach has not caused Hillcrest to suffer any damage or loss and Taste of Asia stands to lose significantly if cancellation occurs.
Result
[52] The application by Taste of Asia for relief against forfeiture is granted. The application by Hillcrest for an order granting it possession of the premises is dismissed.
Conditions
[53] The Court has the power to impose conditions when it grants relief against forfeiture.8 The evidence discloses that there may be concerns as to whether Lim 88 now has the ability to meet its obligations under the sublease. It seems therefore seems appropriate at this stage to require Taste of Asia to formally seek Hillcrest’s consent to the sublease.
[54] I will leave it to the parties in the first instance to reach agreement as to how this is to be done. In the absence of agreement they have leave to file memoranda setting out their respective arguments as to the conditions the Court should impose on the granting of relief against forfeiture.
Costs
[55] Counsel will no doubt be aware of the manner in which the courts have approached the issue of costs in cases where a tenant successfully seeks relief against forfeiture.9 If the parties cannot reach agreement on costs they have leave to file concise memoranda addressing that issue and I will determine costs on the papers.
Lang J
Solicitors:
O’Neill Devereux, Dunedin Solomons, Dunedin Counsel:
D Tobin, Barrister, Dunedin
J C McLeod, Barrister, Dunedin A L Pinnock, Barrister, Dunedin
8 Property Law Act 2007, s 256(1)(a).
9 See Roses are Red Ltd v Board of Administration of the Methodist Church of New Zealand [2009] NZCA 237, (2009) 19 PRNZ 369.