Three Five Limited v Napolian Liquor Limited
[2018] NZHC 3025
•21 November 2018
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2018-404-442
[2018] NZHC 3025
UNDER the Contract and Commercial Law Act 2017 and the Fair Trading Act 1986 BETWEEN
THREE FIVE LIMITED
Plaintiff
AND
NAPOLIAN LIQUOR LIMITED
Defendant
Hearing: 7 November 2018 Appearances:
A Cherkashina for the plaintiff No appearance for the defendant
Judgment:
21 November 2018
JUDGMENT OF JAGOSE J
This judgment was delivered by me on 21 November 2018 at 2:00 p.m. pursuant to r 11.5 of the High Court Rules 2016.
Registrar/Deputy Registrar
……………………………………
Counsel/Solicitors:
B J Norling and A Cherkashina, Norling Law Ltd, North Harbour B S Thomson, Pidgeon Law, Auckland
THREE FIVE LTD v NAPOLIAN LIQUOR LTD [2018] NZHC 3025 [21 November 2018]
[1] The plaintiff (“Three Five”) seeks judgment by default on its damages claims arising out of alleged misrepresentations by the defendant (“Napolian”), which was listed for formal proof before me as Duty Judge.1 The claims are raised under s 35 of the Contract and Commercial Law Act 2017, and ss 9 and 14 of the Fair Trading Act 1986.2 Napolian has not responded to the claims in any way.
Background
[2] Three Five is an investment vehicle for its shareholders, Mark and Jennie Engel. Ms Engel is Three Five’s director; Mr Engel describes himself as its manager. On 9 June 2017, Mr Engel entered into a sale and purchase agreement with Napolian for a commercial property situated in the food court area of the Rialto Centre in Auckland’s Newmarket. Settlement occurred on 29 June 2017, Mr Engel nominating Three Five as the purchaser.
[3] The property comprises three commercial units, two of which were tenanted when Three Five purchased the property. One of those units, Unit 5I, was leased by Alex Enterprises Limited from 1 April 2017, in operation of a Turkish food outlet. On or about 1 July 2017, Alex Enterprises abandoned the property and ceased to pay rent.
[4] Three Five initially pursued Alex Enterprises for the unpaid rent. In lawyers’ correspondence, Alex Enterprises claimed it had cancelled the lease, as induced by Napolian’s misrepresentation about the income able to be generated from the unit.
[5] Three Five was not able to relet the unit. Within a year of purchasing the property for $750,000 (after commencing this proceeding, in which it sought the sale be avoided), Three Five sold it for $700,000. Three Five thus now only seeks compensatory damages.
The representations
[6]Three Five pleads Napolian represented it:
1 HCR 15.9.
2 The plaintiff abandoned its first cause of action, for breach of warranties.
(a)leased Unit 5I to Alex Enterprises, on a fixed term of three years commencing 1 April 2017;
(b)with two rights of renewal, finally expiring on 31 March 2026;
(c)at an annual rent of $24,918.80 (plus GST and outgoings) by monthly payments of $2,076 (plus GST and outgoings).
[7] All that literally is true, established by the 1 January 2017 lease agreement obtained by Mr Engel after enquiry of Napolian’s agent (together with other unspecified documentation and information).
[8] Mr Engel says he was put onto the property by his account manager at ANZ Bank, who provided him in early 2017 with Napolian’s agent’s Information Memorandum, calling for expressions of interest in the property. In evidence and submission, significant weight was put on the Information Memorandum as painting a rosier picture of the investment opportunity than was the reality. But, again, the Information Memorandum – which accurately records the tenancies and their financial contributions – literally is true.
[9] More significantly, the Information Memorandum recorded Unit 5I accommodated “a Turkish food operation at that changes hands [sic] as a Going Concern with a new 3x3x3 lease starting April 2017”. The Information Memorandum stipulated expressions of interest in the property closed on 2 March 2017. Thus the Information Memorandum predated commencement of Alex Enterprises’ lease.
[10] Three Five pleads the representation is false because Alex Enterprises was entitled to cancel the lease, and/or abandon the premises and stop paying rent, on grounds of Napolian’s misrepresentation to it. Three Five says Napolian was on notice from 5 June 2017 Alex Enterprises contended to have been induced to enter the lease by Napolian’s alleged misrepresentation of prospective income, and Alex Enterprises “was in serious financial troubles [sic] and could shortly cancel the [l]ease”.
[11] Three Five pleads in turn to have been induced to purchase the property by Napolian’s representation of Alex Enterprises’ tenancy, inferentially as at least reliable for the purposes of acquisition of the property for investment.
Discussion
[12] The issue accordingly is whether the circumstances of the represented tenancy were such, without Napolian’s disclosure of Alex Enterprises’ contended circumstances, as to constitute actionable misrepresentations. Certainly “silence in the face of an inference” may be misleading and deceptive conduct.3 The question is whether the circumstances created a duty on Napolian to disclose the status of Alex Enterprises’ tenancy.4
[13] When seeking judgment by default for other than a liquidated demand or recovery of land or chattels, as is the case for Three Five here, “[t]he plaintiff must, at or before the formal proof hearing, file affidavit evidence establishing, to a Judge’s satisfaction, each cause of action relied on”.5 Three Five exclusively relies on Mr Engel’s affidavit for that purpose.
[14] Mr Engel expressly deposes he was not aware of any prospect for Alex Enterprises’ cancellation of the lease at the time of the property’s sale or settlement. Instead his awareness arose from Three Five’s lawyers’ subsequent correspondence with Alex Enterprises’ lawyers, and various contemporaneous documentation disclosed in its course. The documentation includes annotated text messages from a director of Alex Enterprises to a director of Napolian (on 1 April and 5 June 2017), and a copy of a transcript of a recording of a meeting between them on 11 June 2017. There are contentions Napolian furnished Alex Enterprises with significant rent concessions. Mr Engel’s affidavit offers those others’ statements in that correspondence and documentation to prove the truth of their contents – essentially, of the pleaded ‘falsity’ of Napolian’s representation to Three Five at [10] above.
3 Bonz Group Pty Ltd v Cooke (1996) 7 TCLR 206 (CA) at 210.
4 March Construction Ltd v Christchurch City Council (1995) 6 TCLR 394 at 402.
5 HCR 15.9(4).
[15] As such, those statements are hearsay. They are not admissible as evidence, unless the circumstances relating to the statements provide reasonable assurance the statements are reliable, and the makers of the statements are unavailable as a witness or I consider undue expense or delay would be caused if the makers were required to be a witness.6
[16] The statements primarily were elicited from Alex Enterprises’ lawyers to resist Three Five’s notice of intention to cancel for unpaid rent, on grounds Alex Enterprises earlier had cancelled the lease for Napolian’s alleged misrepresentation to it. Those circumstances do not provide reasonable assurance the statements are reliable as to Napolian’s conduct and knowledge. To the contrary, direct correspondence between Mr Engel and Alex Enterprises’ director illustrates the latter’s characterisation of them both as having been ‘conned’ by Napolian, justifying their co-operative pursuit of Napolian. Meanwhile, Napolian’s agent recorded its principal’s assertion Alex Enterprises gave no notice of cancellation, and was paying full rental.
[17] Neither is there any evidence Alex Enterprises’ lawyers, or the directors of each Alex Enterprises and Napolian, or Napolian’s agent were unavailable as witnesses (as is defined in the Evidence Act). Nor is there any basis on which I may consider undue expense or delay would have been caused by requiring them to be witnesses.
[18] The result is Three Five has no admissible evidence of the pleaded ‘falsity’. If that was to be my conclusion, Three Five’s counsel, Anya Cherkashina, urged I should adjourn the hearing to direct additional evidence be given. But that power relates only to additional evidence from “any deponent of an affidavit filed”.7 The onus is on the plaintiff to file all its affidavit evidence “before or at the formal proof hearing”.8 Mr Engel is express he has no personal knowledge of the pleaded falsity. There is no ‘additional evidence’ he could give that would assist.
6 Evidence Act 2006, ss 16-18. Section 19 also proffers a ‘business record’ exception, which is not material here, because the documents are not made “in the course of a business, and as a record or part of a record of that business”: s 16(1) – definition of ‘business record’. They are instead documents of a dispute between lessee and lessor.
7 HCR 15.9(5).
8 HCR 15.9(4).
[19] The circumstances of the represented tenancy otherwise literally are true. The lease is in standard ADLS 6th edition form, providing no assurance of any continuation of its tenancy if circumstances otherwise entitled its cancellation. The Information Memorandum’s calculation of net annual rental returns alone cannot sensibly be construed to provide that assurance. The Information Memorandum expressly notes, of the three tenancies in the property, the biggest (contributing over 70 per cent of the net annual rental) is the longest established. Only one of the other two identically- sized tenancies was leased (to Alex Enterprises). The third, highlighted as having “one of the best positions in the food court”, was vacant – seemingly for some time, due to the then owner’s “multiple personal reasons including but not limited to substantial amount of time spent overseas”. But it is represented as capable of generating rental similar to that of Alex Enterprises’ tenancy.
[20] Mr Engel – although having “extensive experience dealing with commercial investment properties”, and acknowledging “[w]ith commercial properties, the value of the rent dictates the value of the property and its investment value” – appears not to have enquired further into the three tenancies’ prospects. Instead his and Ms Engel’s “primary goal was to find a property which would instantly generate sufficient monthly income to satisfy our expenses”, which were not met without Unit 5I’s contribution. Mr Engel goes so far as to say the sale would not have settled “even at a reduced price” had he become aware (presumably, after entry into the sale and purchase agreement) of Alex Enterprises’ prospective cancellation.
[21] But nothing in the Information Memorandum – published in advance of the commencement of Alex Enterprises’ tenancy, and therefore without the factual foundation for any contended misrepresentation to it by Napolian – represents the property would (as distinct from had the potential to) generate any specific level of income.9 At least at the time of the Information Memorandum’s publication, there was nothing further about the tenancies to disclose; Napolian’s agent then had reasonable present grounds on which to represent rental returns, including that prospectively
9 The evidence is unclear as to precisely when Mr Engel was given the Information Memorandum by his ANZ account manager. If after the closing date for expressions of interest, it may not be a representation attributable to Napolian at all, unless affirmed by Napolian’s agent on Mr Engel’s subsequent enquiry. But the evidence does not address that.
recoverable from the vacant tenancy.10 Napolian cannot be said then to have had a duty to disclose its pre-contractual dealings with its tenants: allegations of its own ‘sharp practice’ with Alex Enterprises cannot elevate its silence to misrepresentation.11
[22] Instead, Mr Engel assumed the property “would instantly generate sufficient monthly income”. That goes beyond any legitimate inference to be taken from the Information Memorandum as justifying acquisition of the property for investment. Mr Engel’s assumption is not liable to disturb the legitimacy of Napolian’s silence; instead, prospective buyers could reasonably be expected to investigate the foundation for any such assumption.12 The recency of Alex Enterprises’ tenancy, and the third tenancy’s vacancy, gave additional grounds for such independent enquiry.
[23] The Information Memorandum advised “[l]ease documents & LIM report is [sic] available and can be provided upon request”. Napolian’s provision of that lease on request, as Mr Engel said he made, is no representation the lease will persist for its or any term; instead, it is a clear indication the potential purchaser is to make its own enquiries beyond the Information Memorandum’s spruiking of the property for sale. In those circumstances, even if the pleaded ‘falsity’ could be established, Napolian had no duty to disclose the status of any lease.
Result
[24]For all the above reasons, Three Five’s claims against Napolian are dismissed.
—Jagose J
10 McKenzie Institute International v Accident Rehabilitation and Compensation Insurance Corp
(1997) 8 TCLR 329 (CA) at 331.
11 March Construction Ltd, above n 4, at 402.
12 Mills v United Building Soc [1988] 2 NZLR 392 at 410 (HC) and 413 (CA).
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