The Wallace & York Partnership v RSG Consultants Limited
[2021] NZHC 2548
•28 September 2021
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
I TE KŌTI MATUA O AOTEAROA TE WHANGANUI-A-TARA ROHE
CIV-2021-485-42
[2021] NZHC 2548
UNDER the District Court Act 2016 IN THE MATTER OF
a breach of guarantee
BETWEEN
THE WALLACE & YORK PARTNERSHIP
Appellant
AND
RSG CONSULTANTS LIMITED
Respondent
Hearing: 3 June 2021 Appearances:
T D Gee for the Appellant
F B Q Collins and J M Perry for the Respondent
Judgment:
28 September 2021
JUDGMENT OF PALMER J
Solicitors:
McBride Davenport James, Wellington Gibson Sheat, Lower Hutt
THE WALLACE & YORK PARTNERSHIP v RSG CONSULTANTS LIMITED [2021] NZHC 2548
[28 September 2021]
Summary
[1] In 2013, the Wallace and York Partnership (the Partnership) purchased Level 7 of the Willeston Centre in Wellington from what is now RSG Consultants Ltd (RSG). In the sale and purchase agreement, and a deed of guarantee, RSG guaranteed minimum rental payments to the Partnership for the full term of the lease. The Guarantee was subject to a requirement, in cl 23.2, that the Partnership:
… will not unreasonably withhold consent to a replacement tenant or the terms and conditions provided that [the Partnership] continues to receive a minimum of $11,[3]33.33 plus GST per month and is agreeable if necessary to extending the lease term …
[2] In February 2017, when the guarantee had been activated, RSG proposed to the Partnership that it should enter into a new six-month tenancy of Level 7. The Partnership objected it could not do so but would be available to discuss it later. RSG repudiated the guarantee and stopped payments. Judge C N Tuohy, in the Wellington District Court held the Partnership withheld consent unreasonably and that RSG was entitled to the guaranteed sum for six months.1 The Partnership appeals.
[3] The plain meaning of cl 23.2 is to place two obligations on the Partnership, as Purchaser, if RSG is obliged to underwrite the rent. First, the clause requires that the Partnership’s consent to a replacement tenant or terms and conditions of a replacement tenancy will not be unreasonably withheld. The second obligation is the requirement that the Partnership “is agreeable if necessary” to a lease extension. It is an additional obligation, not an aspect of the obligation not to unreasonably withhold consent. The Partnership was not presented with a lease between the correct parties, with terms and conditions of such a lease, or with a clear indication of what the Partnership would receive by way of rental. Accordingly, there was not a sufficient proposal to which the Partnership could consent or withhold consent. Furthermore, the Partnership explicitly left open the prospect of further discussions. In any case, withholding consent in those circumstances was reasonable. I uphold the appeal.
1 Wallace and York Partnership v RSG Consultants Ltd [2020] NZDC 23908 at [40].
What happened?
[4] The facts are not in dispute. I gratefully summarise the comprehensive account set out in the judgment of Judge C N Tuohy of the Wellington District Court.2
The lease and guarantee
[5] Dr Lyndsay Gordon has a family partnership, the Wallace and York Partnership, to invest in property to provide for him and his family in his retirement. On 2 September 2013, the Partnership purchased Level 7 of the Willeston Centre in Wellington from what is now RSG Consultants Ltd (RSG). The property was developed and managed by the Wellington Company Ltd (TWC). Mr Ian Cassels was the shareholder and director of RSG and also director of TWC.
[6] The sale from RSG to the Partnership was subject to an existing lease to a commercial tenant, Service Solutions 2012Ltd (SSL) with a six-year term expiring on 31 March 2019 and two rights of renewal for three years each. The rent for the initial six-year term was $11,333.33 per month. There was a break clause in the lease permitting SSL to terminate the lease at 31 March 2016. Rent reviews were scheduled under the lease for 1 April 2016, 2019 and 2022.
[7] The sale and purchase agreement contained a vendor rental guarantee clause, providing that RSG would guarantee minimum rental payments to the Partnership for the full term of the lease. The term was also imported into a deed of guarantee dated 10 October 2013, which was executed by RSG. Under the deed, RSG guaranteed to the Partnership the tenant’s performance of the lease obligations and
… the due, proper and punctual payment to the Landlord by the Tenant of all sums which are now owing or may from time to time become owing to the Landlord (“the moneys hereby secured”) in the manner and at the time set out in the terms of the Lease in accordance with clause 23.0 of the Agreement.
[8]Clause 23 provided:3
23.0Vendor Rental Guarantee
2 At [3]–[21].
3 The parties agree the figure in cl 23 should be as corrected here.
23.1 The Vendor undertakes from the date of settlement to guarantee the monthly lease rental payments of [SSL] during the term of its initial lease up until the 31st March 2019 and in the event of [SSL] invoking its break clause on the 31st March 2016 and vacating the premises the Vendor will take over the lease obligations as stated in the Deed of Lease dated 18 June 2013 and pay the monthly rent of $11,[3]33.33 plus GST until the lease expiry of 31st March 2019.
23.2 If for any reason the Vendor during the term of the initial lease is obliged to underwrite the rent the Purchaser will not unreasonably withhold consent to a replacement tenant or the terms and conditions provided that [the Partnership] continues to receive a minimum of $11,[3]33.33 plus GST per month and is agreeable if necessary to extending the lease term beyond the initial lease expiry date of the 31st March 2019 for up to a period of a maximum of three (3) years.
23.3 If for any reason the varied lease term extends beyond the 31st March 2019 the monthly rental shall increase by 6% to $11,801.33 plus GST and continue for the remaining term of the varied lease.
Dispute
[9] In late 2015 to early 2016, Dr Gordon and Mr Andrew McCarthy of TWC communicated over SSL’s rent review due 1 April 2016. TWC prepared a draft renewal and variation at a market rent figure proposed by TWC of $12,750 plus GST per month.
[10] Instead, SSL exercised the break clause in the lease at 31 March 2016 but negotiated with the Partnership a month by month extension. It continued to pay the initial rental until 31 July 2016. SSL quit Level 7 at the end of July 2016. After that, RSG paid the Partnership the minimum rental payment plus GST each month under the guarantee, until March 2017.
[11] On 28 February 2017, Mr Andrew McCarthy of TWC advised the Partnership by email they had an opportunity to sub-lease Level 7 for six months to the Dental Council. On 28 February 2017, Dr Gordon responded in what he described as “a quick off the cuff analysis” for the Partnership by email. He said his guess was that a sub- lease by WCL to the Dental Council could not exist without a head lease in place. He suggested that, if TWC wished to sub-lease Level 7 that would involve it taking up a six-year head lease. He said, once repairs come to an end he would be endeavouring to lease to a long-term tenant. Dr Gordon said “I shall be out of Wellington until the 9th March after which we can discuss the matter further if you so desire”.
[12] On 1 March 2017, Mr Gorrie of TWC emailed Dr Gordon to say his response seemed unreasonable and contrary to their agreement, citing cl 23.2, and suggesting Dr Gordon had a short-lived opportunity to consent but that if there was “any delay or non-committal” they would consider damages.
[13] On 2 March 2017, there was a further letter from RSG’s solicitors to the Partnership’s lawyers asserting that RSG became the tenant under cl 23.1, therefore they had the right to sublet and any attempt to prevent that would be unreasonable. In summary, on a without prejudice basis, it said:
(a)RSG would be prepared to consider entering an agreement whereby the six-month lease would be direct from the Partnership to the Dental Council;
(b)if the rental under the new lease was less than the guaranteed minimum,
RSG would meet the minimum; and
(c)the guarantee would continue till 31 March 2019, subject to the Partnership agreeing to grant further leases up to that date.
[14] The proposed terms, including start and end dates and rental, were not specified. The letter sought an urgent response. In early March 2017, RSG supplied a draft lease to the Dental Council at $11,250 plus GST per month.
[15] On 9, 10 and 11 March 2017, there were email exchanges between Dr Gordon and Mr McCarthy of TWC about earthquake damage repairs being carried out to the building under TWC’s management. Dr Gordon said “[u]ntil the state of the property is in good condition, my objective of finding a long-term tenant will be rather difficult and my dependence on the guarantor on-going”. TWC was acting on behalf of RSG.
[16] On 16 March 2017, RSG’s solicitors objected to the Partnership advertising the property for sale with a rental guarantee and advised that in light of the failure to respond to its 2 March 2017 letter, RSG would treat the Sale and Purchase Agreement as being at an end and payments would cease.
[17] On 31 March 2017, the Partnership’s solicitors replied that the guarantee did not make RSG the tenant, the property was not now being marketed for sale, and RSG had no right to cease payment. It also said:
As our client was marketing the property, a short term tenant would not have been acceptable as such a tenancy would reduce the marketability of the property. Our client is no longer marketing the premises for sale and instead now seeking a long term tenant. Our client has advised us that they are presently in negotiations with a tenant who wishes to take up a 5 year lease of the premises.
[18]RSG did not reply and made no payments to the Partnership for the period after
31 March 2017. But, through TWC, RSG did introduce the Partnership to the Nursing Council as a potential long-term tenant on 23 March 2017. A programme of works to enable that was undertaken from May to December 2017.
[19]In April 2017, Colliers advised the Partnership a market rental would be about
$14,000 plus GST per month. On 29 August 2017, the Partnership leased Level 7 to the NZ Nursing Council from the completion of the programme of works until February 2022, with two rights of renewal for three years each. The Nursing Council began paying rent from 15 December 2017, at a much higher level than the rental guarantee provided for.
[20] The Partnership claimed the amount of the rental guarantee from RSG from 31 March 2017 to 15 December 2017.
The District Court decision
[21] In December 2020, Judge Tuohy, in the Wellington District Court held that the Partnership’s failure to respond to the 2 March 2017 letter meant it withheld its consent to the proposed six-month lease.4 He did not consider cl 23 created a new lease to RSG if the break clause was exercised.5 He held that cl 23.2 of the Partnership meant that, provided the Partnership receives at least $11,333.33 plus GST per month, it may
4 District Court decision, above n 1, at [32].
5 At [38].
not withhold consent on the basis of the level of rental offered or the term of any lease up to the expiry of the guarantee (or for up to three years thereafter).6 He held:7
There is no doubt that the reason why the landlord refused consent was because he considered that the short term of the proposed replacement lease would be detrimental to his commercial interests. He may well have been right but in my view that was not a reason which could justify the withholding of consent under cl 23.0. Provided that the replacement lease was for a term which did not extend longer than 31 March 2019 (plus three years provided the increased rental was payable) and the landlord received at least the initial rental payable by SSL, he could not refuse consent for reasons related to duration or rental level – at least without losing the benefit of the guarantee for the duration of the proposed lease. I consider that that was the true nature of the bargain made by the parties as expressed in cl 23.
[22] The Judge held that RSG was not entitled to discharge the guarantee but that the Partnership was prevented from enforcing the guarantee for the anticipated duration of the six-month lease to which it unreasonably refused consent.8 The Partnership appeals.
[23] The appeal is brought under s 124 of the District Courts Act 2016. Under s 127, the appeal is by way of rehearing. Under s 128, the High Court may make any decision it considers should have been made or direct the District Court to rehear or enter judgment, and make an order as to costs.
Relevant law
[24] This case turns on contractual interpretation. There is no dispute between the parties about the relevant law which was stated by the Supreme Court in Firm PI 1 Limited v Zurich Australian Insurance Ltd.9 In summary, the aim is to ascertain:10
… the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.
6 At [42].
7 At [46].
8 At [54].
9 Firm PI 1 Ltd v Zurich Australian Insurance Ltd [2014] NZSC 147, [2015] 1 NZLR 432 at [60]– [63]. Neither party’s submissions involve arguments based on evidence of prior negotiations or subsequent conduct, so the recent Supreme Court judgment in Bathurst Resources Ltd v L&M Coal Holdings Ltd [2021] NZSC 85 does not bear on this case.
10 At [60], citing Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 (HL) at 912 per Lord Hoffmann.
[25] Context may point to some interpretation other than the most obvious one.11 But “the text remains centrally important” because its ordinary and natural meaning, construed in the context of the contract as a whole, “will be a powerful, albeit not conclusive, indicator of what the parties meant”.12
What does cl 23.2 mean?
Submissions
[26] Mr Gee, for the Partnership, submits the District Court wrongly construed cl 23.2. He submits its natural and ordinary meaning, consistent with the factual matrix, is that if what he calls the two provisos were not met, there were no restrictions on the Partnership’s right to withhold consent, reasonably or unreasonably. But if the two provisos were met, the landlord must not unreasonably withhold consent to a replacement tenant or the terms and conditions of the replacement lease. He also submits the District Court’s adoption of a construction contended for and pleaded by neither party is inconsistent with the principles of natural justice.
[27] Mr Collins, for RSG, submits cl 23.2 is bespoke, with the intent of securing a minimum monthly payment, reassuring the Partnership of that, and limiting the Partnership’s ability to refuse consent so as to make it easier for the vendor to plug the gap with a replacement tenant. He submits the proviso that the Partnership continues to receive a minimum rental is the general control and the proviso that the lease term can be extended to accommodate a longer duration for a replacement tenant mitigates risk to RSG. He submits the Judge’s interpretation does not give cl 23.2 an additional meaning but prevents the Partnership from insisting on a more profitable replacement tenant arrangement. He submits the Partnership had legal advice, this was a commercial transaction of some complexity and the Partnership was concerned about the risk SSL would leave.
11 At [61].
12 At [63].
The meaning of cl 23.2
[28] The objective purpose of cl 23.1 is that the vendor guarantees the rental to be received by the purchaser for a specified term. Clause 23.2 deals with the parties’ obligations regarding replacement tenants in that eventuality – that is, if RSG is obliged to underwrite the rent. For convenience, I quote it again:
23.2 If for any reason the Vendor during the term of the initial lease is obliged to underwrite the rent the Purchaser will not unreasonably withhold consent to a replacement tenant or the terms and conditions provided that [the Partnership] continues to receive a minimum of $11,[3]33.33 plus GST per month and is agreeable if necessary to extending the lease term beyond the initial lease expiry date of the 31st March 2019 for up to a period of a maximum of three (3) years.
[29] I consider the plain meaning of this clause is to place two obligations on the Partnership, as Purchaser, if RSG is obliged to underwrite the rent.
[30] First, the clause requires that the Partnership’s consent to a replacement tenant or terms and conditions of a replacement tenancy will not be unreasonably withheld. This benefits RSG by allowing it to meet its minimum rental guarantee through arranging a replacement tenant. This is a conditional obligation, conditional on the vendor being obliged to underwrite the rent. It maintains the interests of the Partnership in relation to the rental guarantee in cl 23.1. The logical corollary is that, if the Partnership does not receive its minimum rental, it may unreasonably withhold consent to a replacement tenant or the terms and conditions of the replacement tenancy.
[31] The second obligation is the requirement that the Partnership “is agreeable if necessary” to a lease extension. This is not part of the requirement not to unreasonably withhold consent; it is not part of the proviso. It makes no logical sense for the Partnership to be obliged not to unreasonably withhold consent as long as the Partnership “is agreeable if necessary to extend the lease”. That would obviate the efficacy of the requirement not to unreasonably withhold consent. Rather, as a matter of inelegant grammar, the subject of this part of the clause is the Purchaser. So, in addition to the requirement not unreasonably to withhold consent, the Purchaser also “is agreeable if necessary to extend the lease”. This is an additional requirement of the contract if the vendor is obliged to underwrite the rent.
[32] The second obligation is in the interests of RSG in expanding the class of replacement tenants. It may or may not be in the interests of the Partnership, depending on market conditions. To recognise that, it is specified to be only “if necessary”. And, if the lease term is extended, cl 23.3 provides for a rental increase, at least from the minimum rental. This obligation does not figure in this case. But it informs the meaning of the clause.
[33] Contrary to the District Court’s conclusion, I do not consider cl 23.2 prevents the Partnership from withholding consent based on the level of the rental or the terms of the lease in every circumstance. The text of the clause does not support that interpretation. Neither does the context of the transaction. Judges should be wary of opining on what constitutes commercial common sense. But it is difficult to think of reasons why a purchaser of a property with a guaranteed rental clause would agree to such a blanket exception to the guarantee. There is nothing in the context here to suggest the Partnership did. And it is contrary to the ordinary meaning of the text.
Did the Partnership unreasonably withhold consent?
Submissions
[34] Mr Gee, for the Partnership, submits the Partnership’s failure to respond to the proposals in the letter of 2 March 2017 did not constitute a withholding of consent because it was not simply a replacement lease, there were not terms and conditions proposed, and a reasonable time had not elapsed by 16 March 2017. Even if the Partnership did withhold consent, he submits it was reasonable not to consent because:
(a)the sublease proposal was misconceived in law;
(b)the direct lease proposal involved the Partnership giving up its contractual right to refuse further tenancies until 31 March 2019;
(c)the terms of the lease were not provided;
(d)it was reasonable to prefer a long-term lease; and
(e)it was reasonable to believe the Partnership’s solicitors could advise on the last point.
[35] Mr Collins, for RSG, submits the Partnership’s stated preference of having a long-term tenant was outside the scope of the grounds on which consent could be refused. The Partnership never requested the terms and conditions of the proposed lease. All that was required for consent was a replacement tenant that could meet the minimum payments.
Unreasonable withholding
[36] It is difficult to construe Dr Gordon’s failure to respond to the 1 March 2017 email and the 2 March 2017 solicitor letter as “withholding consent to a replacement tenant or the terms and conditions”. RSG’s communications were premised on the sub-lease being from by RSG. Dr Gordon had expressed his doubt that was the legal situation. He was correct. I agree with the Judge’s analysis that cl 23 did not create a new lease to RSG if the break clause was exercised. RSG has properly abandoned the notion that it did. The Partnership had been provided with no terms and conditions of a lease, let alone a proposal for a lease based on the correct legal premise of who the parties were. And the only indication of the rental of the proposed lease was the without prejudice indication that if it were less than the minimum guaranteed, RSG would top it up. In those circumstances, there was not a sufficient proposal to which the Partnership could consent or withhold consent, in terms of the first obligation of cl 23.2.
[37] Furthermore, Dr Gordon explicitly left open the option of discussion. On 28 February 2017, in doubting RSG’s legal premise, Dr Gordon said he would be available to discuss the matter further from 9 March 2017. There were interactions by TWC with Dr Gordon on 9, 10 and 11 March 2017 which were not directly about this issue. TWC, did not re-open the proposal made in the email of 1 March 2017 or the solicitor’s letter of 2 March 2017. RSG did not follow up on Dr Gordon’s offer to discuss the matter further. On 16 March 2017 it simply treated the Sale and Purchase Agreement as at an end and indicated its rental guarantee would cease. It was not entitled to treat the Partnership’s stance as the withholding of consent.
[38] Even if the Partnership did withhold consent, which I consider it did not, I would not agree withholding consent was unreasonable. The Partnership was not presented with a proposed replacement tenancy founded on the correct legal basis. That was the substance of Dr Gordon’s initial objection to it. Neither was the Partnership presented with the terms and conditions or a clear understanding of the minimum rental, to which cl 23.2 explicitly refers. Without a legally sound proposed lease, its terms and conditions, and a clear indication of what the Partnership would receive by way of rental, any withholding of consent was entirely reasonable.
[39] The Judge considered that the Partnership withheld its consent because the short term of the proposed replacement would be detrimental to its commercial interests. That view was formed on the basis of legal advice and reflected a legitimate business objective. Perhaps, if a legally sound tenancy with specified terms and conditions had been proposed, that reason may not have been sufficient to justify withholding consent. But the absence of a legally sound proposed tenancy and terms and conditions at the time is fatal to any withholding of consent being unreasonable.
What was the appropriate remedy?
[40] Mr Gee, for the Partnership, submits that if the Partnership did breach cl 23.2, the appropriate remedy was not relief from the entirety of the guarantee for six months, but a claim in damages. He submits such a claim has not been pleaded, no damage has been shown, and it is speculative whether the Dental Council would have taken up the lease or saved RSG any money if consent had been given.
[41] Mr Collins, for RSG, submits the correct position is that the Partnership failed to allow RSG to mitigate its obligations for six months, resulting in a corresponding deduction. Alternatively, it was an equitable set-off to the extent the Partnership could have mitigated the burden on RSG if it had consented. He submits the negotiations with the Dental Council were well-advanced but the Partnership’s refusal of consent made it inevitable that RSG would have to pay for the six month period itself. The Partnership should not benefit from its wrongful act.
[42] In light of my conclusion that the Partnership did not withhold consent, and did not unreasonably withhold consent, this issue is moot. If it had been otherwise, I
record that I would have accepted Mr Collins’ submission that the Partnership would have failed to allow RSG to mitigate its obligations for six months. As it is, RSG was not entitled to discharge the guarantee and is liable to the Partnership under the guarantee from the time SSL ceased payments.
Relief
[43] I uphold the appeal, quash the District Court’s decision and order that RSG is liable to the Partnership under the guarantee from 31 March 2017 to 15 December 2017.
[44] If the parties cannot agree on interest and costs, I give the Partnership leave to file brief submissions of up to 10 pages within 10 working days of this judgment. RSG may file submissions in response of the same length within 10 working days of that. The Partnership may file submissions of up to five pages within five working days of that.
Palmer J
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