Tauranga Crossing Limited v Tauranga ADT Limited
[2022] NZHC 3576
•21 December 2022
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2021-404-2419
[2022] NZHC 3576
BETWEEN TAURANGA CROSSING LIMITED
Plaintiff
AND
TAURANGA ADT LIMITED
First Defendant
PAUL JOHN LOMAX
Second Defendant
Hearing: 25 July 2022 Appearances:
J Marcetic and ND Whittle for the Plaintiff
P Murray and KM Paterson for the Defendants
Judgment:
21 December 2022
JUDGMENT OF ASSOCIATE JUDGE SUSSOCK
This judgment was delivered by me on 21 December 2022 at 4 pm pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Solicitors/Counsel:
Chapman Tripp, Auckland Turner Hopkins, Auckland
P Murray, Akarana Chambers, Auckland
TAURANGA CROSSING LTD v TAURANGA ADT LTD [2022] NZHC 3576 [21 December 2022]
Introduction
[1] The plaintiff owns the Tauranga Crossing Shopping Centre. In May 2019 the first defendant entered into a lease of premises from the plaintiff to operate a bar and eatery in the Centre.
[2] The bar and eatery closed on 23 March 2020 as a result of the Covid-19 lockdown. The business did not re-open following the reduction in Alert Levels and the lease was terminated on 8 October 2020.
[3] The plaintiff has brought a claim against the first defendant for unpaid rent, liquidated damages for failing to re-open in breach of the lease and recovery of the loan provided for the fit-out. A claim is also brought against the second defendant, Mr Lomax, under his guarantee.
[4] The plaintiff seeks summary judgment only of the claims against the first defendant for unpaid rent and liquidated damages and against the second defendant in respect of his guarantee of those obligations, but not for recovery of the loan. When the plaintiff re-entered the premises, the plaintiff took possession of the fit-out and chattels and there is a dispute regarding value. Summary judgment is not therefore sought for recovery of the loan.
[5]The amounts that are sought on summary judgment are as follows:
(a)$124,727.94 from the first defendant comprising unpaid rent and expenses of $46,077.94 plus liquidated damages of $78,650;
(b)$97,706 from the second defendant in accordance with the guarantee cap under the lease; and
(c)interest on the unpaid sums and costs.
[6] The plaintiff says the defendants have no defence to the plaintiff’s claims because:
(a)the $124,727.94 of unpaid rent, expenses and liquidated damages have been properly claimed, remain unpaid and the defendants have no basis (contractual or otherwise) to resist payment; and
(b)properly interpreted, the upper limit “cap” on Mr Lomax’s liability as the guarantor of the first defendant is $97,706.
[7] The first and second defendants say in response that the first defendant has a counterclaim for the value of the fit-out and that, despite the plaintiff recognising that there is a genuine dispute regarding that value, the plaintiff is seeking to steal a march on the defendants by applying for summary judgment on part of its claim. The defendants say that in the context of the wider dispute between the parties, granting summary judgment would lead to an injustice and would be oppressive.
[8] In any event, the defendants submit they have strongly arguable defences to the plaintiff’s claims. Firstly, the liquidated damages are out of all proportion to the interest sought to be protected and are claimed in circumstances where the plaintiff contributed to the alleged breach of the lease. Secondly, the plaintiff’s calculation of the liability cap under the guarantee is arbitrary and seeks to unfairly inflate the second defendant’s liability.
Issues
[9]The issues are:
(a)Is there a reasonably arguable defence to the claim for unpaid rent and expenses?
(b)Is there a reasonably arguable defence to the claim for liquidated damages?
(c)What is the relevant 12 month period for calculating the cap on the guarantee?
(d)Can the defendants rely on a counterclaim in relation to the fit-out to resist summary judgment?
(e)Should I exercise my discretion not to award summary judgment in the context of the wider dispute?
Background
[10] The first defendant, Tauranga ADT Limited (TADT) entered into a lease with the plaintiff, Tauranga Crossing Limited (TCL) in respect of a tenancy at the Tauranga Crossing shopping centre (Centre) in May 2019 (Lease). The terms of the Lease are discussed in detail below.
[11] The second defendant, the director of TADT, Mr Lomax, guaranteed the obligations of TADT under the Lease (Guarantee). Mr Lomax’s liability under the Guarantee is limited, with the interpretation of that limit being one of the issues in dispute.
[12] TADT operated a bar and eatery called Something and Social. The bar and eatery was part of a dining area within the Centre known as the Observatory. TADT fitted out the premises at considerable expense, with the defendants submitting the book value of the fit-out and chattels as at 31 December 2020 was $660,964.76. TCL provided a $500,000 loan to TADT to assist with the fit-out.
[13] TADT says that in August 2019, Mr Lomax approached the landlord, TCL, with concerns regarding the lack of sales and the lack of customer presence at the Centre. TCL does not accept that there is any credible basis for TADT or Mr Lomax’s complaints regarding low sales in the centre. However, whilst TCL did not accept Mr Lomax’s complaints, in the interests of assisting TADT, on 29 January 2020 TCL provided TADT with 50 per cent rent relief from 1 July 2019 to 30 June 2020. The letter recording the agreement reached includes that there would be a loan repayment holiday for six months from 1 February 2020 and that there would be “50% gross rent relief from 1 July 2019 to 20 June 2020”. This letter is discussed in more detail below when discussing calculation of the rent payable.
[14] On 23 March 2020, TADT closed Something and Social after New Zealand entered Alert Level 3 due to the Covid-19 pandemic. Two days later, on 25 March 2020, New Zealand entered Alert Level 4. TADT remained closed in accordance with Alert Level 4 requirements.
[15] On 27 April 2020 New Zealand moved to Alert Level 3, when TCL submits TADT could have opened for contactless delivery or pick-up. TADT did not do so.
[16] On 13 May 2020, New Zealand moved to Alert Level 2. At this Alert Level TADT could have opened for dining in with restricted numbers and for delivery and pick-up, but again did not do so.
[17] TADT says that at that time Mr Lomax had discussions with Mr Andrew Wadsworth, a representative of TCL, about ongoing concerns with the lack of customers at the Centre. In the absence of any information about the action TCL would take to improve foot traffic, TADT says it was unable to recommence trading as Mr Lomax says it would have constituted insolvent trading.
[18] On 27 May 2020 Mr Wadsworth from TCL sent an email to Mr Lomax at TADT “further to our discussions” acknowledging that the bar and restaurant industry has been significantly affected by Covid-19 but saying that TCL is encouraged by the foot-traffic to Tauranga Crossing since the change to Alert Level 2. Mr Wadsworth goes on:
Prior to Covid-19 we discussed, and essentially agreed, temporary rent relief with conditions around Something & Social taking steps to improve food and service. Matters, of course, have changed since then and the Landlord is willing to revisit this discussion to support you through this difficult time, provided that you reopen.
You asked about our future plans and vision for The Observatory. Prior to Covid-19, the Landlord and its consultants began a comprehensive review of the customers’ feedback and experience. In response to the findings, and to adapt to the effects of Covid-19, we have engaged consultants (design, food & beverage) to assist with conceptual designs for further improvements to The Observatory. This will require significant investment from the Landlord, and we believe it will increase foot-traffic into the precinct and enhance the customers’ experience.
Once this plan has been finalised in the coming weeks this will be presented to each restaurant owner in The Observatory.
This plan will be presented and discussed with you, however, the Landlord does not agree that this discussion occurs before you decide whether or not to reopen. This is clearly not the intent of the lease. Since the opening last April, the Landlord has spent over $200k to provide various changes to The Observatory, some of which you specifically asked for. Although the Landlord acknowledges further improvements are required to The Observatory, they are becoming frustrated at the apparent dismissal of any investment to date and have asked for you to confirm your opening date with urgency.
[19] At 11.59 pm on 8 June 2020 New Zealand moved to Alert Level 1. From that time, TADT could have opened for dining at full capacity and for delivery and pick- up.
[20] Ms Riley from TCL annexes a copy of an email apparently sent on a without prejudice basis on 9 June 2020 by Mr Wadsworth to Mr Lomax, this time saying:
Based on conversations with the Landlord their current offer on a without prejudice basis is as follows:
·Something and Social to open for trade
·No payments required in regards to the rent and the loan until December 2020
·Continued or further relief can be discussed at a later date
Before considering any other options that we discussed on Friday, they require your response to the above in writing.
[21] TCL says that after prolonged correspondence and efforts to encourage TADT to re-open, on 30 June 2020 TCL served notice of cancellation of the Lease on TADT, Mr Lomax, and other interested parties, for breach of the lease by failing to re-open and restart trading.
[22] TADT’s solicitors sent a letter dated 8 September 2020 to the solicitors for TCL which sets out a chronology of steps following service of the notice of cancellation as follows:
(a)on 3 August 2020, TADT’s solicitors made an offer to TCL’s lawyers to resolve matters;
(b)on 6 August 2020, TCL’s solicitors advised that a counter-offer was being formulated and would be provided the following week;
(c)on 12 August 2020 Auckland moved to Alert Level 3 and borders were closed so that Mr Lomax was prohibited from leaving Auckland and could not attend the premises to conduct the necessary preparations to reopen the business;
(d)on 18 August 2020, TCL’s solicitors sent an email advising that they were working on a further surrender proposal and requested information about financing statements registered against TADT which TADT’s lawyers said were provided on 20 August 2020; and
(e)on 21 August 2020, lawyers for TCL requested the fixed asset register of the fitout and details of the leased items which TADT again says it provided.
[23]The letter then states:
On 27th August 2020, you requested confirmation that our client had abandoned the Premises so that your client was able to immediately take possession of the Premises. You advised that the transaction with the incoming tenant was at risk if your client did not have certainty as to when it could take possession. In addition, you advised that your client was motivated to reach a settlement and the replacement transaction was a key part of your client’s understanding. In response, we advised that our client’s preference was to reach a settlement before the end of the week and to avoid protracted settlement discussions. A further “without prejudice” offer was made to your client in an attempt to reach a settlement. You responded by advising that your client was not prepared to wait for a settlement before commencing action to take possession and that it was not yet possible to ascertain the maximum amount our client was liable for.
[24] Ms Riley’s affidavit filed in reply to Mr Lomax’s affidavit raises a number of issues, but it does not take issue with the chronology set out above. Nor does it attach the letter TCL’s lawyers sent in response on 15 September 2020 (referred to in the next letter from TADT’s solicitors attached to Mr Lomax’s affidavit).
[25] On 7 October 2020, TCL and TADT reached agreement that orders could be made by consent terminating the Lease and granting possession of the premises to TCL. Those orders were made and the Lease was terminated on 8 October 2020.
[26] Following the orders terminating the Lease, TCL took possession of the premises, including the fit-out and chattels.
[27] Ms Riley’s evidence is that when agreement was reached on cancellation of the Lease and return of the premises “we did not reach any agreement with TCL and Mr Lomax about the outstanding debts under the Lease and the Loan.”
[28] Mr Lomax’s evidence is that the agreement “to allow TCL to re-enter the premises [was] on the basis that the parties would in good faith enter into settlement discussions.”
[29] No resolution has been reached on the amounts outstanding. TADT submits this is despite TADT having introduced the new tenant.
[30] On 11 November 2021, TCL gave formal notice of demand for the amounts it says are owing and, on 8 December 2021, TCL filed these proceedings in the absence of payment by TADT and Mr Lomax.
Summary judgment principles
[31] Rule 12.2(1) of the High Court Rules 2016 provides that the Court may give judgment against a defendant if the plaintiff has satisfied the Court that the defendant has no defence to a claim or a part of a claim.
[32] The principles governing summary judgment applications are well established:1
The principles are well settled. The question on a summary judgment application is whether the defendant has no defence to the claim; that is, that there is no real question to be tried: Pemberton v Chappell [1987] 1 NZLR 1 (CA) at 3. The court must be left without any real doubt or uncertainty. The onus is on the plaintiff, but where its evidence is sufficient to show there is no defence, the defendant will have to respond if the application is to be defeated: MacLean v Stewart (1997) 11 PRNZ 66 (CA). The court will not normally resolve material conflicts of evidence or assess the credibility of deponents. But it need not accept uncritically evidence that is inherently lacking in credibility, as for example, where the evidence is inconsistent with undisputed contemporary documents or other statements by the same deponent, or is
1 Krukziener v Hanover Finance Ltd [2008] NZCA 187, [2010] NZAR 307 at [26].
inherently improbable: Eng Mee Yong v Letchumanan [1980] AC 331 (PC) at
341. In the end the court’s assessment of the evidence is a matter of judgment. The court may take a robust and realistic approach where the facts warrant it: Bilbie Dymock Corporation Ltd v Patel (1987) 1 PRNZ 84 (CA).
[33] The Court of Appeal has confirmed recently in SRG Global Remediation Services (NZ) Limited v Body Corporate 197281 that the Court has a residual discretion not to enter summary judgment even if the plaintiff establishes that the defendant has no arguable defence. This discretion arises from the use of the word “may” in r 12.2 of the High Court Rules.2
[34]The Court of Appeal referred to the following summary of the position:3
(a)The discretion implied by the use of the word “may” is to be restrictively applied. In a great majority of cases, once the court is satisfied the defendant has no defence, there is no room for the exercise of discretion.
(b)The residual discretion may be invoked to avoid oppression or injustice to the defendant where:
(i)The proceeding involves the actions or possible liability of a third party which is not before the court;
(ii)The proceedings are such that the opportunity should be given to allow discovery or other interlocutory applications to be concluded;
(iii)The circumstances of the case disclose very unusual features, the presence of which leads the court to conclude that the entry of summary judgment would be oppressive or unjust; or
(iv)The combination of complex issues of fact and law justify the dismissal of the application for summary judgment, either as a matter of discretion or because the court cannot be satisfied that the defendant has no defence.
(c)Even where the court is not satisfied that a defence has been made out, in exceptional circumstances the application may be adjourned to allow for other processes to be followed.
2 SRG Global Remediation Services (NZ) Limited v Body Corporate 197281 [2022] NZCA 518 at [59].
3 At [60], citing Robert Osborne and others McGechan on Procedure (online ed, Thomson Reuters) at [HR12.2.11].
Interpreting the terms of the Lease
[35] The first three issues relating to whether there are reasonably arguable defences to the claims for unpaid rent and expenses, for liquidated damages and the “cap” on the guarantee, each involve interpretation of the Lease, and so involve contractual interpretation.
[36] The parties accept that the principles of contractual interpretation are well settled and are as follows:4
(a)The objective is to ascertain the meaning which the document would convey to a reasonable person having all the background knowledge reasonably available to the parties at the time of the contract.
(b)Primacy should be given to the written words of the contract, but interpreted within its overall context.
(c)If the language has an ordinary and natural meaning, that will be powerful, but not conclusive.
(d)If a particular interpretation produces a commercially absurd result, that may be a reason to read the contract in a different way than the language suggests. (The conclusion that an ordinary and natural meaning of contractual language produces a commercially absurd result should only be reached in the most obvious and extreme of cases.)
Is there a reasonably arguable defence to the claim for unpaid rent and expenses?
[37] The plaintiff is claiming unpaid rent of and expenses amounting to $46,077.94. This is calculated as follows:
Balance as at 8 October 2020
Less rent abatement
$132,577.23 (July 2019 to January 2020) ($38,475.46) Less rent abatement
4 Bathurst Resources Ltd v L&M Coal Holdings Ltd [2021] NZSC 85, [2021] NZCCLR 17 at [43]– [47], citing Firm PI 1 Ltd v Zurich Australian Insurance Ltd [2014] NZSC 147, [2015] 1 NZLR 432.
(February 2020 to June 2020)
Less Gross Occupancy Costs
($27,482.47) (to 31 March 2020) ($20,541.37) Balance owing
$46,077.94
[38] The lease provided different ways to calculate TADT’s rent at different points in the 10-year term.
[39] The plaintiff submits that to calculate the actual rent incurred and payable by TADT there are two key clauses: 19.1 and 3.10. Clause 19.1 provided a structured rent abatement whereby, as long as TADT complied with all terms of the Lease, TCL would apply an abatement to the Base Rent for the first three “Lease Years”. An abatement of 38.5 per cent applied to the Base Rent during the first Lease Year. The lease defines “Lease Year” at clause 1.1, as:
Lease Year means each period of 12 months of the Lease Term commencing on the Commencement Date.
[40] The Commencement Date is defined as 24 January 2019 in the First Schedule at Item 7.
[41]The Base Rent is defined as $176,500 plus GST per annum.
[42] The Base Rent payable during the first Lease Year from 24 January 2019 to 23 January 2020 was therefore $108,547.50 (plus GST), being $176,500 (plus GST) minus 38.5 per cent x $176,500 (plus GST).
[43] TCL submits clause 3.10 then provided a “wash-up process” aligning the total amount payable by TADT in respect of “Base Rent, Operating Expenses, Council Rates and Marketing Fund Contribution” with 8 per cent of TADT’s gross sales in each Lease Year. Ms Riley in her evidence for TCL explains that the lease is a gross lease and there is no provision for separate payment for operating expenses, Council rates and marketing fund contributions.
[44] Clause 3.10.2 requires a comparison to be made at the end of the Lease Year between the Rent and Operating Expenses incurred by TADT in accordance with clause 19.1 during the Lease Year against 8 per cent of TADT’s gross sales.
[45]Clause 3.10.2 provides:
From the Rent Commencement Date until the end of the third Lease Year, upon calculation of the Tenant’s Gross Sales (assessed in accordance with the Fifth Schedule of this Lease) at the end of each Lease Year, there will be an additional payment to the Landlord, or credit payment to the Tenant, to the effect that the aggregate total of the Base Rent, Operating Expenses, Council rates and Marketing Fund Contribution (the “Gross Incurred Cost”) payable by the Tenant to the Landlord during each Lease Year, will be adjusted to be 8% of the Tenant’s Gross Sales (“Gross Occupancy Cost”).
[46] The Lease Year is defined differently for the purposes of clause 3.10 than for clause 19.1, clause 3.10.1 providing that:
For the purposes of clauses 3.10.2 to 3.10.5 only, “Lease Year” means each period of 12 months of the Lease Term during the three year period commencing on the Rent Commencement Date.
[47] The Rent Commencement Date is defined in the First Schedule of the Lease as 4 April 2019. The relevant Lease Year for the purposes of clause 3.10.2 therefore begins on 4 April 2019.
[48]The plaintiff submits that, read in context, the wash-up process under clause
3.10.2 is complementary to the clause 19.1 process. The effect is that it ensures that TADT is ultimately liable for rent and operating expenses that are no more (and no less) than 8 per cent of TADT’s Gross Sales. The plaintiff says the abatements under clause 19.1 provide a cash-flow benefit to TADT, as the Tenant, in its first three years as it establishes its business. Clause 3.10.2 then provides certainty as to the Rent and Operating Expenses that TADT may incur by linking them to TADT’s Gross Sales, with the prospect of a credit if the Rent and Operating Expenses actually incurred exceed 8 per cent of Gross Sales.
[49] TCL submits that on this basis “[f]or the Lease Year ending 3 April 2020, the wash-up process resulted in a credit of $20,541.37 to TADT.”
Discussion
[50] The statement of account attached to the notice of demand served on TADT and Mr Lomax refers to an “8% GOC washup to 31 March 2020” but it does not refer to an “8% GOC washup” for the period 1 April 2020 to the date the Lease was cancelled, 8 October 2020.
[51] In my view there is an argument that the “8% GOC washup” needs to be completed not only for the period to 31 March 2020, as TCL has done in this case, but also for the period from 1 April 2020 to 8 October 2020. Something and Social was closed for this whole time, having closed on 23 March 2020 when New Zealand went into Alert Level 3 and having not re-opened. 8 per cent of the Tenant’s Gross Sales would, therefore, have been nil during this period. On this basis, there is an argument available to the defendants that the rent payable for the period 1 April 2020 to 8 October 2020 as defined by clause 3.10 is nil.
[52] According to the statement of account provided by TCL, the rent charged during this period is $54,964.95. This is more than the unpaid rent that TCL submits is now owing. Including the 8 per cent GOC washup for this period would therefore reduce the unpaid rent to nil.
[53] Clause 3.10 was added to the Lease as part of the special conditions in Item 22 of the First Schedule and only refers to a Lease Year with no express reference to part years. The standard clause in clause 3.1 of the Lease relating to the adjustment that applies after the first three years, requiring the tenant to pay the greater of the Base Rent or Percentage Rent, expressly provides for a “Broken Period”.
[54]TCL may have an argument available that the 8 per cent GOC washup in clause
3.10.2 only applies if the tenant completes the Lease Year, as defined, and does not apply to broken periods. However, this is not a matter that I can decide on a summary judgment basis, particularly in the absence of evidence leading up to the inclusion of clause 3.10 as a special condition in the lease. The clause does not expressly say that it only applies for each full year. Nor does the evidence filed on behalf of TCL or TADT shed any further light on this, as neither party expands on the background to inclusion of the special conditions in item 22.
[55] TADT submits that the rent payable is nil (or even in TADT’s favour) based on the submission that the 8 per cent GOC washup for the period 8 October 2019 to 7 October 2020 needs to be completed first before deducting the rent abatements. TADT submits that there is no clause in the Lease that determines the priority of or resolves any inconsistency between clauses 3.10 and 19.1. On the face of the Lease, TADT says it is therefore arguable that the Base Rent payable is calculated by first applying clause 3.10.2, to determine 8 per cent of the Tenants Gross Sales, and then applying the clause 19.1 Rent Abatement.
[56] Whether that is the case or not, the terms of the agreement reached for rent relief on 29 January 2020, as set out in the letter signed by Mr Wadsworth and Mr Lomax, include that the 50 per cent gross rent relief agreed from 1 July 2019 to 3 June 2020 “will not be taken into account for the 8 per cent GOC reconciliation for Year 1 and Year 2” and “[t]he Lessor will not request any catch up payments as part of this GOC reconciliation (should the GOC for the relevant year be lower than 8%).” In my view, this appears, arguably, to mean that the 8 per cent GOC wash up is to be compared against the Base Rent payable without taking into account the January 2020 rent relief agreed and only reimbursement payments to the Tenant are to be made, not top up payments to TCL.
[57] Any submission that an interpretation that leads to nil rent being payable cannot be correct because TADT was in breach of the lease through not reopening and that it should not be able to benefit from its breach does not necessarily follow. Unlike clause 19.1 which was added as a special condition at the same time, clause 3.10 does not expressly state that it applies only while the tenant has complied with all terms of the Lease. Instead the special condition inserting clause 3.10 into the lease simply begins by saying:
For as long as Tauranga ADT Limited occupies the Premises under this Lease, a new clause 3.10 is inserted.
[58] In addition, TCL was prepared to make an offer to TADT on 9 June 2020 that no rent would be payable until December 2020 if it opened (as referred to above) so it is not necessarily commercially absurd for no rent to be payable.
[59] In my view it is far from clear what rent was payable under the Lease. I therefore conclude on this first question that the defendants have a reasonably arguable defence to TCL’s claim for unpaid rent and expenses.
Is there a reasonably arguable defence to the claim for liquidated damages?
[60] The plaintiff claims that liquidated damages of $78,650 are due in accordance with clause 8.2.2.
[61] Under clause 8.2.1, TADT was required “to keep the Premises open for full retail trade during such times on such days as are reasonably determined from time to time by the Landlord to apply to the Property, or to that part of the Property of which the Premises form part.” The clause further provided that the Landlord was to give not less than 10 working days written notice of any change to such hours.
[62] Clause 8.2.2 (as amended by the special conditions in Item 22 of the First Schedule) provides:
For as long as Tauranga ADT Limited occupies the Premises under this Lease, the Landlord agrees that Liquidated damages under this clause 8.2.2 shall only be payable by the Tenant once the Tenant has breached clause 8.2.1 for more than one (1) Centre trading day.
The Tenant undertakes to pay to the Landlord liquidated damages as an estimate of the loss to the Property as a whole of any breach of clause 8.2.1 calculated at the rate of $200 for the first hour or part thereof of each day and
$50 for each hour for any part of the rest of that day (after the first hour) during which the Tenant fails to open the Premises and conduct the Tenant’s business as required by clause 8.2.1, such moneys to be used by the Landlord for marketing of the Property in such manner as the Landlord sees fit. The Tenant acknowledges that no payment under this clause shall prejudice the right of the Landlord to exercise any other right or power of the Landlord to enforce the provisions of this Lease for breach of such covenant.
[63] TCL relies on the Supreme Court decision 127 Hobson Street Ltd v Honey Bees Preschool Ltd (Honey Bees), which held that a party to a contract may impose consequences for breach which protect its interests in performance of the contract.5 Ms Riley has given evidence that TCL submits is unchallenged as to the importance of Centre shops being fully opened during retail hours. Closed shops decrease foot
5 127 Hobson Street Ltd v Honey Bees Preschool Ltd [2020] NZSC 53, [2020] 1 NZLR 179 at [59].
traffic and customers are less likely to come back if they find the shops they need are closed. Ms Riley deposes that the Centre markets particular opening hours, and if customers come in to find a particular shop closed, they are less likely to come back. TCL submits it is obvious that TCL had a “legitimate interest” in Something and Social remaining open and that the $650 daily rate is inherently reasonable in the context of a multi-million dollar shopping centre and the negative impact of the ongoing closure of a major bar and restaurant within it.
[64] TCL says no evidence has been adduced to suggest that the liquidated damages are out of all proportion to TCL’s legitimate interests in TADT’s performance of the Lease.
[65] TCL submits that TADT’s breach of clause 8.2.2 started on 10 June 2020 as New Zealand had moved to Alert Level 1 at 11.59 pm on 8 June 2020. From that time, TCL says restaurants and bars could re-open at full capacity.
[66] In response, TADT submits that there are three issues with TCL’s claim for liquidated damages under clause 8.2.2. First, TADT submits, on an objective assessment, the liquidated damages are out of all proportion when compared with the Landlord’s interests under the Lease contemplated by the parties at the time they entered into the Lease. TADT relies on part of the Supreme Court’s summary in Honey Bees of the test to determine whether a contractual clause providing for liquidated damages is an unenforceable penalty:6
(a)A clause stipulating a consequence for breach of a term of a contract will be an unenforceable penalty if the consequence is out of all proportion to the legitimate interests of the innocent party in performance of the primary obligation. A consequence will be out of all proportion if the consequence can fairly be described as exorbitant when compared with the legitimate interests protected.
…
[67] TADT further relies on the Supreme Court’s description of a legitimate interest as follows:7
6 127 Hobson Street Ltd v Honey Bees Preschool Ltd, above n 5, at [91].
7 At [59].
A legitimate interest is an interest in performance of the primary obligation. A party to a contract may therefore impose consequences for breach which protect its interests in performance of the contract. The first enquiry is as to the nature of the innocent party’s performance interest to which the clause responds or relates. This assessment is to be made at the point of formation of the contract because the question of whether an impugned clause is a penalty is a matter of construction. It therefore falls to be decided as at the time the clause was agreed between the parties and by reference to both the terms and the circumstances of the contract.
[68] TADT submits that the first enquiry therefore is to determine the nature of the Landlord’s interests to which clause 8.2.2. relates and this assessment is to be made at the time of entry into the Lease.
[69] At the time of entry into the Lease, May 2019, TADT submits the parties could not have contemplated the impact of Covid-19 or its impact on trading conditions and that as a matter of construction objectively assessed (as described in Firm PI 1 Ltd v Zurich Australian Insurance Ltd):8
(a)Clause 8.2.2 is aimed at ensuring that, where the Tenant was able to open under normal trading conditions, the Tenant did open, and would pay a monetary penalty for failing to open for periods of time measured in hours. In such circumstances the consequence for failing to open for a period of hours (as opposed to months) is in proportion to the legitimate interest protected under clause 8.1.1.
(b)Clause 8.2.2 cannot apply in circumstances where the Tenant was unable to open for a period of months in non-standard trading conditions (with Government imposed restriction on hospitality business under Alert Level 2) and as a result of a dispute between the Landlord and Tenant about whether the Tenant could recommence trading after a Government imposed lockdown for fear of trading insolvently.
[70]TADT submits that the Landlord is claiming liquidated damages at the rate of
$650 per day for the 121 days between 10 June 2020 and 8 October 2020. During that
8 Firm PI 1 Ltd v Zurich Australian Insurance Ltd, above n 4, at [60].
time, Tauranga was in Alert Level 2 for 41 days. At Alert Level 2, gathering and distancing restrictions were in place on the hospitality industry. Furthermore, from 12 August 2020 to 30 August 2020, Auckland was at Alert Level 3 and so Mr Lomax was unable to leave Auckland during that time.
[71] TADT submits that on any objective assessment these circumstances could not have been contemplated by the parties in May 2019. Applying liquidated damages for a period of months (when the pre-estimate of loss is calculated in hours) is out of all proportion to the Landlord’s interests in the business being open during normal trading conditions.
[72] TADT says the second issue with the claim for liquidated damages arises from the misrepresentations made by the Landlord from 6 August 2020 that it would negotiate a surrender of the Lease and a settlement. TADT and Mr Lomax submit they relied on those representations in making the decision not to recommence trading. By the time the Landlord changed its position, Auckland had moved to Alert Level 3 and the opportunity to recommence trading had been lost.
[73] TADT submits that it would be unjust to impose liquidated damages on the Tenant for allegedly breaching the Lease by failing to open (in particular by summary judgment) in circumstances where the Landlord caused (or at least contributed to) the breach.
[74] The third issue raised by TADT in relation to liquidated damages is the quantum when compared to the amount of the rent claimed. The amount of the unpaid rent claimed is $46,077, yet the liquidated damages claimed are $78,650. TADT says that at nearly twice the amount claimed, this by itself calls into question whether the liquidated damages are proportionate and appropriate. TADT says that in Honey Bees, the Supreme Court noted that where a liquidated damages clause purports to provide a pre-estimate of loss, it would be helpful for a notional assessment of actual damages suffered to be provided.9 TADT submits that such an assessment is necessary, rather than just helpful, in this case given the quantum claimed.
9 127 Hobson Street Ltd v Honey Bees Preschool Ltd, above n 5, at [77].
[75] TADT points to Ms Riley’s evidence for the plaintiff which it says is merely that “closed shops are likely to decrease foot traffic and have a negative impact on other businesses operating in the Centre”. Given the impact of Covid-19 on all businesses, whether the Landlord suffered any actual loss as a result of TADT’s bar and eatery not opening, is questionable. TADT says that for these three reasons the Tenant (and Mr Lomax under the Guarantee) have arguable defences to the liquidated damages claimed by the Landlord.
[76] TCL, in responding to Mr Lomax’s evidence that Something and Social could not re-open at this time without trading at a loss, constituting insolvent trading, said that of course the reality is that TADT was continuing to incur liability even without re-opening.
[77] TCL further submits that Mr Lomax seeks to attribute TADT’s trading difficulties to foot traffic issues for which he blames TCL but that Mr Lomax’s assertions on this point are unsupported, lack credibility and are insufficient to prevent entry of summary judgment in this regard.
[78]TCL specifically submits:
(a)There is unchallenged evidence from Ms Riley that other businesses in the Centre, including food outlets in the Observatory, did not experience similar issues to TADT and that there was evidence of other issues around quality of food causing low sales by TADT.
(b)Furthermore, Ms Riley says that TADT’s successor at the Premises has not experienced the issues that TADT did and other food outlets in the Centre were able to open and stay open after the Alert Level 4 lockdown in March to April 2020.
(c)Mr Lomax relies on wrongly re-characterising good faith efforts by TCL to assist TADT with its low sales as acknowledgement of some error on TCL’s part rather than attempts at support.
(d)Mr Lomax has referred to a threat made against TCL of a potential claim for misleading and deceptive conduct, but no such claim has been made to date and there is no basis for such a claim.
[79] Finally, TCL points to the fact that the standard liquidated damages clause in the Lease allows liquidated damages of $1966 and that these were reduced to $850 per day under the amended terms in support of its submission that the damages are not out of all proportion to the interest being protected.
Discussion
[80] TCL’s submission is that “[a]bsent any Alert Level restriction, TADT’s failure to re-open and trade triggered clause 8.2.2”. However, it appears from the Covid-19 timetable attached to the defendants’ submissions that on 12 August 2020, following new cases emerging, the Auckland region moved to Alert Level 3 and the rest of New Zealand moved to Alert Level 2.
[81] On 30 August 2020 Auckland moved to Alert Level 2 at 11.59 pm with extra restrictions on travelling and gatherings and the rest of New Zealand remained at Alert Level 2.
[82]On 21 September 2020 all regions except Auckland moved to Alert Level 1 at
11.59 pm and on 23 September 2020, Auckland moved to Alert Level 2 without extra restrictions on travel and gatherings at 11.59 pm. It was only on 7 October 2020 that Auckland moved to Alert Level 1.
[83] The Ministry of Health Alert Levels Summary records in relation to Alert Level 2:
Hospitality businesses legally must keep groups of customers separated and seated. Physical distancing of 1 metre must be applied – this will determine the maximum capacity of the business.
[84] In addition, everyone was legally required to wear a face covering if aged 12 and over in shopping malls, indoor marketplaces, takeaway food stores and public venues. Furthermore, all workers in a public facing role at a hospitality venue (which
would have included the defendants’ business) were required to wear a face covering. The Ministry of Health Summary further records that people were to keep one metre apart in places where there is a cap on numbers, like cinemas and hospitality.
[85] Although TCL relies on there being no Alert Level restriction, it appears therefore that there were in fact Alert Level restrictions during this time.
[86] In my view, TADT has a reasonably arguable defence to the claim for liquidated damages for failing to open because TADT’s obligation is only to be open during such times and on such days “as are reasonably determined from time to time by the Landlord to apply to the Property” pursuant to cl 8.2.1. Whether it was reasonable for the Landlord to determine that Something and Social was to be open during Alert Level 2 and for the period 9am to 7pm, rather than the original hours of 9am to 9pm, requires full consideration of the evidence. This cannot be undertaken in the summary judgment context. I record that there was no evidence given about notice of the reduction in trading hours from 9am to 7pm.
[87] In addition, whether the liquidated damages are unenforceable for being an unfair penalty10 or based on estoppel, as TADT submits, are not matters that can be determined in this summary judgment application.
What is the relevant 12 month period for calculating the cap on the guarantee?
[88] It is accepted that Mr Lomax is TADT’s Guarantor under the Lease. He has guaranteed, amongst other things, payment of the rent and other monies due by TADT under the Lease. It is common ground that Mr Lomax’s liability under the Guarantee is capped. The dispute between the parties is as to the calculation of that cap.
[89] Clause 11 of the Sixth Schedule of the Lease (as added by Item 22 of the Special Conditions) provides:
The liability of the Guarantor under this Lease shall be limited to an amount equal to 12 months’ Base Rent payable under this Lease from time to time.
10 See remaining paragraphs summarising test for whether contractual clause for liquidated damages is an unenforceable penalty in 127 Hobson Street Ltd v Honey Bees Preschool Ltd, above n 5, at [91].
[90] TCL accepts that while “Base Rent” is defined at Item 9 of the First Schedule as $176,500 plus GST under the Lease, the Guarantee cap is limited by the amount that is “payable” under the Lease at the relevant time. TCL submits that the amount payable is properly determined by reference to clause 3.10 and the “wash-up” process. TCL says the relevant Lease Year for clause 3.10 is from 4 April 2019 to 3 April 2020 as it is the most recently completed Lease Year in which the “wash-up” process was undertaken, submitting that the “wash-up” has not been done subsequently.
[91] In TCL’s submission, Mr Lomax’s approach to calculating the Guarantee cap, bears similarity and faces similar problems to TADT’s approach to calculating the unpaid rent.
[92] TCL submits that 8 per cent of TADT’s Gross Sales for the Lease Year of 4 April 2019 to 3 April 2020 was $97,706, with Ms Riley giving evidence as to this figure. TCL says that amount is therefore the Guarantee cap and, being less than the total amount owing by TADT, the amount TCL seeks from Mr Lomax.
[93] TADT responds that the liability cap in the Guarantee provides that liability is limited to the “12 months’ Base Rent payable from time to time”. As the Lease was cancelled on 7 October 2020, TADT submits that it is at least arguable that the “12 months’ Base Rent payable from time to time” is the Base Rent payable in the 12 month period before cancellation, rather than for 4 April 2019 to 3 April 2020 as TCL submits.
[94] Secondly, TADT submits TCL calculates the guarantee cap based on its interpretation that the intent of clause 3.10 is for the Tenant to pay rent of no more or less than 8 per cent of TADT’s Gross Sales. However, TADT says it is not clear that is what the Lease provides. Clause 3.10 does not define Base Rent. Clause 3.10.2 results in an aggregate total for the Base Rent, Operating Expenses, Council Rates and Marketing Fund Contribution. TADT submits that even if TCL is correct on the appropriate 12 month period, it is arguable that the Base Rent is less than $97,706 to account for the other costs.
[95] Thirdly, TADT says that in calculating the Base Rent payable by the Tenant, the Landlord applies the clause 19.1 Rent Abatement and the Agreed Rent Abatement. However, in calculating the cap on the Guarantee the Landlord excludes the two rent abatements. TADT says it is again arguable that for the purposes of determining the Base Rent payable, the two Rent Abatements must be applied.
[96] For these reasons, TADT submits the position is too uncertain in respect of the Guarantee for summary judgment to be entered.
Discussion
[97] Because I have concluded that the first defendant has reasonably arguable defences to the claims for unpaid rent and expenses and liquidated damages, summary judgment could not be entered on the Guarantee against Mr Lomax in any event.
[98] But even if I had found in favour of TCL on the first two questions, I would not have been prepared to enter summary judgment on the Guarantee. This is because, in my view, TADT has a reasonably arguable defence that the reference to “12 months’ Base Rent payable from time to time” is for the 12 month period prior to cancellation rather than 4 April 2019 to 3 April 2020 as TCL submits. The Guarantee cap therefore also needs to be determined in a full hearing.
Can the defendants rely on a counterclaim in relation to the fit-out to resist summary judgment?
[99] The defendants do not need to rely on any counterclaim in relation to the fit out to resist summary judgment because of the decisions I have reached on the first three issues.
[100] If there were not arguable defences, however, the Court of Appeal has held that a counterclaim is not available as a defence to an application for summary judgment.11 The Court of Appeal went on to distinguish set-offs, holding that a defendant may set- off a cross-claim that so affects the plaintiff’s claim that the two are in effect interdependent so judgment on one cannot fairly be given without judgment on the
11 Baxter v Murray [2020] NZCA 222 at [15].
other (by reference to Grant v NZMC).12 The Court of Appeal, however, commented that the right to raise a set-off may be contractually excluded, either expressly or by clear implication.13
[101] In this case clause 3.3.2 of the Lease provides that “[t]he Tenant shall pay the Rent and other moneys to be paid to the Landlord … without deduction or set-off.” The right to raise a set-off in relation to the unpaid rent is therefore contractually excluded.
[102] There may be a question as to whether the exclusion applies in respect of liquidated damages. However, even if set-off is not excluded, any set-off pleaded in relation to the fit-out would have to be so interdependent that judgment on liquidated damages could not fairly be given without regard to any set-off in relation to the fit- out. I do not need to record a view on this at this stage.
Should I exercise my discretion not to award summary judgment in the context of the wider dispute?
[103] I am not required to determine this final issue because of the decisions I have reached that the defendants have reasonably arguable defences to TCL’s claims.
Result
[104] For the reasons set out above I decline TCL’s application for summary judgment.
Directions
[105] The defendants have not yet filed statements of defence. Due to the timing of this judgment just prior to Christmas, I make directions below extending the period in r 12.13 of the High Court Rules within which statements of defence are required to be filed and for the future conduct of the proceedings.
[106]I direct:
12 Grant v NZMC Ltd [1989] 1 NZLR 8 (CA) at 12-13.
13 Baxter v Murray, above n 10, at [15]-[16],
(a)the defendants are to file and serve statements of defence within
25 working days of this judgment;
(b)the parties are to file a joint memorandum with any differences set out within a further 20 working days addressing the matters referred to in r 7.3(2) of the High Court Rules; and
(c)further directions will then be made on the papers or a case management conference allocated.
Costs
[107] The usual position where a plaintiff is unsuccessful in a summary judgment application is for costs to be reserved until after determination of the substantive claim.14 I record however that costs have been awarded where a plaintiff ought to have realised summary judgment was not appropriate.15
[108] I ask the parties to confer and try to reach agreement. If that is not possible, memoranda may be filed of no more than five pages (not including schedules), on behalf of the applicant within 30 working days of receipt of this judgment and on behalf of the respondent within a further 10 working days, a slightly longer period than usual given the summer break. Any application for costs will then be determined on the papers.
Associate Judge Sussock
14 High Court Rules 2016, r 14.8(3).
15 See for example Mason v Dodd [2020] NZHC 2005 at [2] and [11].
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