Turrall v Jackson
[2018] NZHC 2370
•10 September 2018
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2017-404-0857
[2018] NZHC 2370
BETWEEN JOHN GRAHAM TURRALL and BUTLER TRUSTEES (2014) LIMITED
PlaintiffsAND
BRYAN LEE JACKSON
First Defendant
KAREN LETICA
Second Defendant/cont…
Hearing: 21 June 2018 Counsel:
A R Gilchrist for the Plaintiffs
R J Hollyman and A Peat for the First and Second Defendants A J Steel for the Third and Fourth Defendants
G E Schumacher for the Fifth and Sixth Defendants
Judgment:
10 September 2018
Reissued:
26 September 2018
CORRECTED AND RE-ISSUED JUDGMENT OF ASSOCIATE JUDGE SMITH
This judgment was delivered by me on 26 September 2018 at 2.00pm, pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Solicitors / Counsel:
J G Turrall, Auckland / A R Gilchrist, Auckland
D J Spencer, Auckland / R J Hollyman, Auckland and A Peat, Auckland P Friedlander, Auckland / A J Steel, Auckland
Duncan King Law, Auckland / G E Schumacher, Auckland
TURRALL v JACKSON [2018] NZHC 2370 [10 September 2018]
MAEGAN JANE FOX
Third Defendant
DONALD ANDREW FOX
Fourth Defendant
GRAHAM DAVID MILLIER
Fifth Defendant
JANET ELIZABETH MILLIER
Sixth Defendant
BRIAN GRAHAM BLUETT and TODD GRAHAM BRUCE BLUETT
Third Parties
JUDGMENT RECALLED AND RE-ISSUED TO CORRECT OMISSION IN PARAGRAPH (1) OF THE RESULT SECTION, BY ADDING AWARD OF INTEREST TO 3 FEBRUARY 2016 IN ACCORDANCE WITH PARAGRAPH [165]
[1] The plaintiffs (the trustees) are the trustees of a trust known as The Flo-ter Trust (the Trust). They apply for summary judgment for rent, outgoings and interest said to be owing under a registered lease (the Lease) of a motel property at 384 Ellerslie-Panmure Highway, Auckland (the property).
[2] The first to fourth defendants are former lessees of the property who took assignments of the Lease from earlier lessees or assignees. They operated the motel business at the property in the period June 1997 to September 2007, the first and second defendants (Mr Jackson and Ms Letica) between June 1997 and June 2004, and the third and fourth defendants (Mr and Mrs Fox) between June 2004 and September 2007. The third defendant, Maegan Fox, is the daughter of Ms Letica. The fourth defendant is Maegan Fox's husband.
[3] The fifth and sixth defendants (the Milliers) owned a company called Ellerslie Highway Motel Ltd (EHM). EHM held the Lease of the property before it was assigned to Mr Jackson and Ms Letica.
[4] In the period from September 2007 to early 2016 the Lease was held by Brian Bluett and Todd Bluett (the Bluetts). Substantial arrears of rent and outgoings accumulated in this period, and eventually the then-trustees issued a proceeding in this Court (the Bluett proceeding) for recovery of the arrears and interest, and for an order cancelling the Lease.
[5] In a judgment given on 3 February 2016 in the Bluett proceeding, Toogood J made a number of orders in favour of the Trust. First, an order was made granting the Trust possession of the property. Secondly, an order was made cancelling the Lease. Thirdly, judgment was entered against the Bluetts for rent and outgoings totalling
$979,796.70, together with unpaid rental, penalties and interest owing between
3 February 2016 and the date upon which the Trust took actual possession of the property.
[6] The Trust has made no recovery of the judgment debt or the sums that subsequently became payable by the Bluetts, although it has now registered a charging order over a property on Waiheke Island owned by Mr Brian Bluett. It now seeks to recover the rent arrears and other sums owed under the Lease (incurred by the Bluetts) from Mr Jackson and Ms Letica, and from Mr and Mrs Fox, under deeds of covenant given by them when they took their respective assignments of the Lease. It also seeks to recover the unpaid rent and outgoings from the Milliers, who provided a guarantee of EHM's obligations under the Lease.
Background
[7] The Lease was originally entered into on 19 April 1995. The original term was to expire on 6 December 2012, but it was extended to 6 December 2017 by a deed of variation dated 6 May 1997.
[8] The original lessee under the Lease was a party who had held an earlier lease of the property. But when the Lease was signed that party immediately assigned the Lease to EHM.
[9] In June 1997, when the Lease was assigned by EHM to Mr Jackson and Ms Letica, Mr Jackson and Ms Letica entered into a deed of covenant with the then-trustees of the Trust, under which they covenanted to pay the rental and other outgoings payable under the Lease.
[10] Mr and Mrs Fox also covenanted with the then-trustees of the Trust to pay the rental and other outgoings payable under the Lease when they took their assignment in June 2004.
[11] The last of the assignments that are relevant to this application was the assignment by Mr and Mrs Fox to the Bluetts in or about September 2007.
[12]The rent payable under the Lease when the Bluetts became the lessees was
$194,669.96 per annum plus GST. The rent remained at that level until the Lease was cancelled by the Court on 3 February 2016.
[13] The Trust says the following sums are owing under the Lease in respect of the period from 8 November 2011 to 3 February 2016:
(a)Outstanding rent $662,729.86.
(b)Outstanding insurance premium $52,151.05.
(c)Outstanding interest (at 20 per cent per annum under the Lease)
$241,751.85.
Total – $956,632.76
[14] Mr Jackson and Ms Letica, and Mr and Mrs Fox, say that they knew nothing of the Bluetts' defaults, and the escalating arrears, until the present proceeding was served on them in May 2017.
[15] After they were served with this proceeding, Mr Jackson, Ms Letica and Mr and Mrs Fox issued a third-party claim against the Bluetts for indemnity in respect of the Trust's claims against them. The Bluetts took no steps in response to the third- party claim, and it was set down for a formal proof hearing before Van Bohemen J on 22 February 2018.
[16] In a judgment given on 12 March 2018,1 Van Bohemen J made orders that Mr Jackson, Ms Letica and Mr and Mrs Fox are entitled to an indemnity from the Bluetts in respect of the Trust's claims. His Honour ordered the Bluetts to pay or secure any amounts due to the Trust when the amount of indebtedness (if any) of Mr Jackson, Ms Letica, and Mr and Mrs Fox to the Trust has been ascertained. His Honour entered judgment in favour of Mr Jackson, Ms Letica, and Mr and Mrs Fox
1 Turrall and Butler v Jackson [2018] NZHC 381.
for costs incurred by them to the date of the judgment, in the respective sums of
$30,632.21 and $10,499.60.
[17] His Honour reserved leave to Mr Jackson, Ms Letica and Mr and Mrs Fox to apply for the entry of judgment against the Bluetts in respect of any further amounts payable to them by way of indemnity by the Bluetts.
[18] On 7 April 2016, the trustees entered into an agreement to sell the property. A transfer to the purchaser was registered on 7 July 2016.
[19] On 28 March 2018 Mr Jackson, Ms Letica, and Mr and Mrs Fox registered a charging order over a property owned by Mr Brian Bluett on Waiheke Island. A charging order over that property was registered by the Trust on 14 June 2018.
Summary judgment – legal principles
[20]Rule 12.2(1) of the High Court Rules provides:
12.2 Judgment when there is no defence or when no cause of action can succeed
(1)The court may give judgment against a defendant if the plaintiff satisfies the court that the defendant has no defence to a cause of action in the statement of claim or to a particular part of any such cause of action.
[21] The principles to be applied in considering an application for summary judgment have been clearly established through decisions of the Court of Appeal such as Pemberton v Chappell, Grant v NZMC Ltd and Westpac Banking Corporation v M M Kembla New Zealand Ltd.2 The following broad principles are to be applied:
(a)The plaintiff must satisfy the Court that the defendant has no arguable defence to the claim brought against it. The issue is whether there is a real question to be tried.
Pemberton v Chappell [1987] 1 NZLR 1 (CA) at 3; Grant v NZMC Ltd [1989] 1 NZLR 8 (CA);
Westpac Banking Corporation v M M Kembla New Zealand Ltd [2001] 2 NZLR 298 (CA).
(b)It is generally not possible to determine disputed issues of fact based on affidavit evidence alone, particularly when issues of credibility arise. Issues of law, even though they may be complex, can, however, be determined in an application for summary judgment.
(c)Although the Court should adopt a robust approach, summary judgment may be inappropriate where the ultimate determination turns on a judgment that can only properly be reached after a full hearing of all the evidence.
[22]In Pemberton v Chappell, the Court of Appeal held:3
Where the defence raises questions of fact upon which the outcome of the case may turn it will not often be right to enter summary judgment. There may however be cases in which the Court can be confident – that is to say, satisfied
– that the defendant's statements as to matters of fact are baseless. The need to scrutinise affidavits, to see that they pass the threshold of credibility, is referred to in Eng Mee Yong v Letchumanan …
[23]In Eng Mee Yong, the Privy Council said:4
Although in the normal way it is not appropriate for a Judge to resolve conflicts of evidence on affidavit, this does not mean that he is bound to accept uncritically, as raising a dispute of fact which calls for further investigation, every statement on an affidavit however equivocal, lacking in precision, inconsistent with undisputed contemporary documents or other statements made by the same deponent, or inherently improbable in itself it may be.
The application against Mr Jackson, Ms Letica, and Mr and Mrs Fox
[24] It will be convenient to address the application against these parties first. The deeds of covenants signed by them were substantially the same, and of course the provisions of the Lease were the same. Their arguments were also substantially the same (to the point where Mr Steel was content to adopt Mr Hollyman's written submissions).
Relevant provisions of the Lease
[25]The Lease contained the following provisions:
3 Pemberton v Chappell, above n 2, at 4 per Somers J.
4 Eng Mee Yong v Letchumanan [1980] AC 331 (PC) at 341.
1. THE Lessee will pay the rental specified…
2(a) THE Lessee will… pay throughout the term all rates or charges…
3. TO pay to the Lessor upon demand the amount of each and every insurance premium paid or payable during the said term…
4.THE Lessee will also duly and punctually pay all telephone charges and all charges or levies for electricity and/or gas…
21.IN the event of the Lessee's default in payment of any rental or any sums payable to the Lessor… the Lessee shall pay to the Lessor interest at twenty per centum (20%) per annum on all such rental or other sums from the date the same fell due down to the date of payment…
36(a) IN the event that the Lessee's conduct… constitutes a breach of any lease covenants the Lessee covenants to compensate the Lessor for the loss or damage suffered by reason of the repudiation or breach.
The memorandum of variation of the Lease
[26] The memorandum of variation was dated 6 May 1997. The parties were the then-trustees of the Trust, EHM, and the Milliers.
[27] The memorandum extended the term of the Lease to 6 December 2017, and it increased the rent payable under the Lease for the period to 7 December 1997, to
$156,000 per annum plus GST. The Milliers confirmed the term of their guarantee given on 18 April 1995 "to pay all the rental hereby required and to become payable hereunder and to observe and perform all the covenants, agreements and conditions expressed or implied herein".
The deeds of covenant
[28] The deed of covenant signed by Mr Jackson and Ms Letica was in the following form:
WHEREAS [EHM] (hereinafter called "the Transferor") is registered proprietor of an estate in leasehold under and by virtue of [the Lease]
AND WHEREAS the Transferor wishes to transfer all its estate and interest in the Lease to [Mr Jackson and Ms Letica – "the Transferees"]
AND WHEREAS [the Trust] has consented to the Transferor transferring all its estate and interest in the Lease to the Transferees subject to and conditional upon the Transferees entering into this Deed of Covenant whereby they will
agree to observe and perform the terms and conditions of the Lease both express and implied now and in the future
NOW THEREFORE THIS DEED WITNESS as follows:–
1. IN consideration of [the Trust] consenting to the transfer of the Lease from the Transferor to the Transferees the Transferees do hereby covenant with [the Trust] to pay the rental and other outgoings payable now and in the future and to observe and perform the covenants and conditions both express and implied now and in the future.
2. THE Transferees do hereby acknowledge and covenant with [the Trust] that the covenants given in favour of [the Trust] contained herein shall not be prejudiced or affected by any of the following:–
(a)The liability of the Transferees or the prior Lessee ceasing from any cause whatsoever.
(b)The liquidation, receivership or bankruptcy of the Transferees or the prior Lessee.
(c)Any variation of the Lease between [the Trust] and a lessee who has acquired its estate or interest in the Lease as lessee subsequent to the Transferees herein.
(d)Any transfer of the estate or interest held by the Transferees in the Lease to a third party.
(e)Any variation of the Lease between [the Trust] and a lessee who has acquired its estate or interest in the Lease as lessee subsequent to the Transferees herein, the effect of which is to increase the amount of money payable under the Lease.
(f)The doctrine of operation by surrender of law of the Lease herein or any other legal concept or doctrine the effect of which is to diminish the liability of the Transferees for the future observance and performance of the terms and conditions of the Lease both express and implied.
(g)By reason of any legal limitation, disability or incapacity of or affecting the Transferees or the prior Lessee.
(h)By reason of any other fact, circumstance or law whatsoever whether or not any transaction related to this Deed has been void ab initio or subsequently avoided.
[29] The deed of covenant signed by Mr and Mrs Fox was in materially similar form. There were some minor drafting changes from the form of deed signed by Mr Jackson and Ms Letica, and a paragraph was added in which Mr and Mrs Fox covenanted to carry out certain work on the property. However, no counsel suggested that the changes were material to the issues that arise on the Trust's summary judgment application.
The evidence
[30] Affidavits were provided by Ms Letica and Mr Donald Fox. There was also an affidavit in opposition from Mr Stephen Sampson, an experienced commercial property manager with Barfoot & Thompson Commercial Property Management Ltd.
[31] In her affidavit, Ms Letica said that she and Mr Jackson always dealt with Mr Peter Butler, who was then a trustee of the Trust.
[32] Ms Letica described Mr Butler as an assiduous landlord during her tenure as a lessee of the property, and she could not understand how he could have allowed the rental arrears to accrue in the period when the Bluetts were the lessees.
[33] In September 2003, Mr Jackson and Ms Letica, together with their business partners, purchased the Botany Motor Inn, in East Tamaki, Auckland. The Lease was formally assigned to Mr and Mrs Fox on or about 14 June 2004. After that, Mr Jackson and Ms Letica were not involved with the motel.
[34] Ms Letica gave evidence of a discussion she had with Mr Butler in late 2011, about a variety of matters. Although the rental arrears by then would have already been substantial, Ms Letica said that Mr Butler did not mention them (or any other issues in relation to the motel).
[35] Ms Letica had telephoned Mr Butler to discuss certain mutual concerns she and the Trust had relating to a tenant with whom both had (separate) landlord/tenant relationships. Ms Letica and Mr Butler discussed these issues and exchanged information on them. Ms Letica described the conversation as long and amicable, with Mr Butler asking after both Ms Letica and Mr Jackson, and also Mr and Mrs Fox. Ms Letica said that she left the conversation feeling assured that there was an open dialogue between her and Mr Butler, and that if there were any problems with the Bluetts, he would let her and Mr Jackson know.
[36] Ms Letica described as "absurd" the Trust's apparent decision to allow unpaid rent to accumulate for almost seven and a half years during the Bluetts' tenure as lessees. She said that if the then-trustees of the Trust had let Mr Jackson and her know
that the Bluetts were struggling to pay the rent on time, she and Mr Jackson would have sought to step in and do something about it. They had been retired since 2006, and they would have been quite ready to take over the management of the motel on the property at any time, with a view to working the business up to the point where the Trust could recoup its losses.
[37] Ms Letica said that she and Mr Jackson never received any notices from Mr Butler relating to the Bluetts' unpaid rent. She contended that they should have received notice under the Property Law Act 2007 (the PLA) stating that there had been a breach of the rent covenant, and advising of the Trust's intention to cancel the Lease. Nor were Mr Jackson and Ms Letica given notice of the Bluett proceeding, filed in July 2015. She said that if they had received a copy of the Bluett proceeding they would have gone in then to sort matters out.
[38] Ms Letica also questioned the Trust's claim for compound interest under the Lease.
[39] In his affidavit, Mr Fox said that he and Mrs Fox managed the motel for Mr Jackson and Ms Letica from about September 2003, but it was not until June 2004 that the formal assignment took effect. Thereafter, he and his wife had very few interactions with Mr Butler while they were running the motel.
[40] Mr Fox said that he and Mrs Fox were only ever late with one rent payment, and that payment was made immediately once Mr Butler (promptly) drew the lateness to their attention.
[41] Mr Fox said that he and Mrs Fox sold the motel to the Bluetts in 2007. After the sale, Mr and Mrs Fox moved away from Auckland, and they did not maintain contact with either the Bluetts or Mr Butler. However, Mr Fox did run into Mr Todd Bluett on three occasions after the Bluetts bought the motel. He said that on each occasion they talked generally about the motel, without Todd Bluett indicating that there were any problems, financial or otherwise.
[42] After he and Mrs Fox sold the motel, Mr Butler never contacted them to say that there was any issue with the Bluetts or the motel. Mr Fox said that it came as a huge shock when, in 2017, he and Mrs Fox received the Trust's claim for rent arrears going back to at least May 2011. Like Ms Letica, Mr Fox said that if he and Mrs Fox had been made aware of the situation that had arisen with the Bluetts, they would have tried to intervene. That would have involved discussing the matter with Mr Jackson and Ms Letica, and some action may have been taken against the Bluetts to ensure that they started to make payments.
[43] Mr Fox further noted that there appeared to have been an arrangement between the Bluetts and the Trust that, after the Bluett proceeding was filed, they could remain in possession, without payment of rent, while the Trust attended to selling the property.
[44] Mr Fox produced a copy of the tender document (obtained on discovery from the Trust) by which the property was sold by the Trust in 2016. He noted that when he and Mrs Fox sold the motel to the Bluetts, a large number of chattels had been included, such as beds, televisions, fridges, tables and so forth. He wondered what had become of those chattels, as (other than light fittings and fixed floor coverings) no chattels were included in the agreement by which the Trust sold the property in 2016.
[45] Mr Sampson gave evidence of his experience in the administration of commercial leases, over the many years he has specialised in property management on behalf of landlords of commercial properties. He said that commercial property management contracts require the property manager to maintain all tenants/debtors' accounts to be kept up to date and properly managed, to minimise any arrears over 30 days.
[46] Mr Sampson was asked to express his opinion on any industry standard with respect to management of rent arrears, tenants in default of rent payments, and the extent to which the Trust's conduct in this case aligned with industry standards and good practice.
[47] Mr Sampson said that he had reviewed the Lease. In his opinion, there was nothing in it that differed from what he might have expected to see – it was a relatively standard commercial net lease.
[48] Mr Sampson made some fairly obvious observations on how a commercial landlord will generally manage a non-performing tenant (referring to such matters as keeping records of arrears at 30 days and 60 days and beyond, with appropriate follow-up contact with the defaulting lessee).
[49] He noted in this case that the rent arrears ballooned in the period between September 2011 and February 2016 from a starting arrears figure of $72,656.73, to
$979,796.70. He said that in his nearly 45 years' property management experience, this could only be described as an extreme case. He referred to an absence of consistent and accurate documentation of both arrears as they accrued (notwithstanding the existence of a dispute between the Trust and the Bluetts over the amount of the arrears), the absence of any follow-up communications with the Bluetts, and the absence of any consistent management of the arrears.
[50] Although the Bluetts' arrears began in or around 7 October 2008, the first letter from the Trust recording the arrears was not sent until around 7 September 2009, almost one year later. A meeting apparently then took place between the then-trustees and the Bluetts, at which the Bluetts agreed to pay the arrears off in instalments. However, the instalment plan was not followed, and a letter of demand was sent on 22 April 2010. There was a further meeting between the Bluetts and the then-trustees on or about 30 January 2012, but Mr Sampson could see no evidence of any steps being taken that a reasonable landlord would have taken to protect its position in respect of the arrears. While further letters of demand were sent, nothing was actually done to ensure rent payments were received.
[51] Mr Sampson noted that cl 23 of the Lease entitled the Trust to require the Bluetts to provide details of each month's turnover figures. From Mr Sampson's review of the files, it appeared that no such requirement was made until around 20 February 2012. In his opinion, the Trust should have been receiving those figures
from the date of commencement of the Lease, and should have been paying particular attention to them since the Bluetts went into default in October 2008.
[52] Mr Sampson expressed the view that there had been ample opportunity for the Trust to mitigate its losses by either putting in place an effective repayment plan with the Bluetts, or re-letting the property. In his view, the arrears were allowed to escalate out of control, and the Trust acted unreasonably in allowing that to occur.
[53] Mr Sampson said that he would have expected the Trust to have contacted the previous assignors, who retained an interest in the Lease, to afford them the opportunity of taking the Lease over. Failing that, the Trust could have sought another lessee.
[54] Mr Sampson was unable to determine from the documents he reviewed what the Trust intended with the Bluetts. He referred to the default interest rate of 20 per cent per annum under the Lease, but he was unable to say from his review of the documents whether that interest rate may have influenced the then-trustees' decision to retain the Bluetts as lessees. He expressed the view that, once it had become obvious that a defaulting tenant would not adhere to any payment or recovery plan, and would not be able to service the rent, steps would normally be taken to cancel the lease. That might be at the three month mark, or earlier if the lessee looked as if it would not recover.
[55] In Mr Sampson's opinion, good practice would have dictated that the Trust should have been well under way with steps to cancel the Lease by March 2009 if any recovery plan put in place with the Bluetts was not by then working.
[56] Generally in respect of the arrears, Mr Sampson said that he would regard six months' arrears as "substantial and a real problem". A years' worth of rent and arrears would be "extreme". He concluded that the Trust's administration of the Bluetts' tenancy fell well below standard commercial practice.
Affidavits sworn in the Bluett proceeding
[57] The first of these affidavits was an affidavit of Mr Butler sworn on 13 July 2015.
[58] Mr Butler attached a statement setting out the rent, outgoings and interest said to be owing as at 7 May 2015. He said that the arrears were then $709,509.72 comprising $505,269.39 in outstanding rent, $40,961.80 in outstanding insurance premiums, and $163,278.46 in outstanding interest on the rent and insurance premiums.
[59] Mr Brian Bluett swore an affidavit in the Bluett proceeding on 21 September 2015. Mr Bluett said that the business initially ran well. However, in about May 2008 the global financial crisis hit, resulting in an almost immediate downturn in income. He said that, by October 2008, they were not receiving sufficient income from the business to pay the rent.
[60] Mr Bluett said that from about early 2009 Mr Butler and his son periodically visited the motel (about three or four times a year) to demand payment of the outstanding rental. He said that they explained their financial difficulties to Mr Butler, but that he did not seem interested in their situation.
[61] Mr Bluett said that, by mid-2009, the Bluetts were looking to sell the business. To do that, they wanted to pay off the outstanding rent, and obtain an extension of the term of the Lease to make the business attractive to potential purchasers.
[62] Todd Bluett borrowed some money to pay off some of the outstanding rent, reducing the amount owing to around $43,000 as at December 2009. However, by 22 April 2010 Mr Butler sent another statement showing that the outstanding rent had risen to $61,934.15. Mr Bluett said he could not reconcile that figure with Mr Butler's statement as at 7 January 2010, showing rent arrears of $44,000. Mr Bluett referred to "confusion over the amount owing". He asked Mr Butler for a breakdown of the
$61,934.15 the Trust said was owing, but he did not recall receiving any response to his letter.
[63] In August 2011 Mr Bluett received a letter from Mr Turrall advising that the outstanding rent had risen to $83,438.03. Again, Mr Bluett could not reconcile this letter with earlier correspondence from Mr Butler, in which Mr Butler had said that the outstanding sum was around $66,000.
[64] Mr Butler sent a further letter on 16 November 2011, acknowledging receipt of certain sums from the Bluetts and advising that the outstanding sum was then around $46,634.70.
[65] By December 2011, Mr Bluett reckoned that they had more or less paid off the outstanding rent. He and his son thought they would be in a position to obtain an extension of the term of the Lease, with a view to selling the motel in the New Year. However, Mr Butler wrote again on 10 January 2012, advising that the outstanding rent was then $58,000. Mr Bluett could not understand that figure. On 16 January 2012 he wrote to Mr Butler in relation to the claimed rent arrears.
[66] On 26 January 2012, the Bluetts met with Mr Butler and his son to discuss the difficulties. They asked for a rent reduction, and a reduction in the penalty interest rate from 20 per cent to 10 per cent. Mr Butler did not commit the Trust either way, but said he would consider the Bluetts' proposal.
[67] On 20 February 2012, Mr Butler sent a letter requesting a monthly breakdown of the Bluetts' total turnover for the previous 12 months, and a copy of their latest profit and loss account. Mr Bluett said that he provided that information to Mr Butler on 7 March 2012. When he got no response, he followed up with a further letter to Mr Butler on 3 April 2012 asking for a response. By the Bluetts' calculations, they were more or less up to date with the rent at that stage, and considered that they were in a good position to sell the motel. However, they needed a Lease extension before they could sell.
[68] Mr Bluett said that, again, there was no response from Mr Butler. He wrote again to Mr Butler on 29 November 2012. There was no response to that letter either.
[69] Mr Turrall sent a letter of demand on behalf of the Trust dated 9 October 2014. By then, the arrears of rent, outgoings, and interest as at 10 September 2014 were said to be $571,709.24. The letter advised that if no arrangement was made for the arrears to be cleared immediately, the Trust would have no choice but to issue a notice under the PLA which would require the Bluetts to clear the arrears within 10 working days.
[70] The Bluetts went to Swayne McDonald, their solicitors, for advice. Swayne McDonald wrote to Mr Turrall on 23 October 2014, setting out the options as follows:
1.Your client re-enters the premises and terminates the lease. Our client's will be liable for the arrears but in all likelihood they would both be declared bankrupt. This situation sees no benefit for either party.
2.Our clients agree to surrender the lease to your client. In exchange for the value of the arrears our client agrees to sell the business to your client. Your client would receive the benefit of the goodwill in the business, all intellectual property and the chattels associated with the business. Your client would then be free to sell the property as freehold plus business or to sell the business to a new tenant with a new lease.
3.Your client agrees to allow our client more time to finish the rebranding and renovation of the business. If your client agrees in good faith to negotiate a new lease with any proposed purchaser of the business our clients are confident that they can sell the business once it is rebranded and renovated to a third party at sufficient price to clear all arrears.
[71] Again, Mr Bluett said there was no reply. The Bluetts were served with the Trust's Court proceeding in July and August 2015.
[72] Mr Bluett said that on 19 July 2015, Mr Butler and his son visited the motel. Mr Butler said that he intended to sell the land and buildings. He proposed that, while the Trust attended to selling the land and buildings, the Bluetts could stay on and run the business without payment of any penalties or rent. Mr Butler also said that a potential purchaser may be interested in purchasing some of the Bluetts' assets, which could make such an arrangement mutually beneficial. Mr Bluett did not follow up on that proposal.
[73] Mr Butler swore an affidavit in reply in the Bluett proceeding on 8 October 2015. He said that there had been no payments made by the Bluetts since the Court proceeding had been filed.
[74] Mr Butler acknowledged discussions with Mr Brian Bluett over a possible extension of the Lease term, saying that he told Mr Bluett that if the rent was paid up to date, and the Bluetts kept up with the maintenance, he would consider an extension of the Lease. No agreement was ever entered into for an extension for the Lease term.
[75] Mr Butler said that, from 7 October 2008, the Bluetts never paid the agreed monthly rental in one sum, or on due date. They paid various amounts on different dates, and many times deposits were made into the Trust's bank account, with no references to tell the Trust who had made the deposit. Also, there was a cheque for
$7,500 dated 25 June 2012 from the Bluetts that was dishonoured.
[76] Mr Butler accepted that the Bluetts asked for a reduction in the rent on a number of occasions, and that he was not agreeable to any reduction. He maintained the Trust's right to receive the full payments due under the Lease.
[77] Mr Butler provided a schedule setting out additional arrears and interest calculations from 7 June 2015 to 7 October 2015. The balance as at 7 October 2015 was said to be $863,071.08.
[78] Mr Butler acknowledged that he did not respond to a number of letters sent to him by Mr Brian Bluett. However, he said that he would often subsequently discuss matters with Mr Bluett.
[79] Mr Butler denied Mr Bluett's statement that he told Mr Bluett and his son that they would be allowed to continue to operate the motel business without payment of any rent until there was a sale of the land and buildings. He described such a proposal as "ridiculous". However, he said that he did advise the Bluetts that if the Court made an order cancelling the Lease he might be prepared to allow them to remain in the premises for a short period pending a sale. However, no inducement or categorical statement was made.
[80] Mr Butler said that he believed that the real reason for the drop in the turnover of the motel was a lack of maintenance, and that the motel had developed a bad name through the way it had been operated by the Bluetts.
The evidence for the Trust in this proceeding
[81] There was an affidavit sworn by Mr Butler on 28 April 2017. The substantive reply affidavit was provided by the plaintiff, Mr Turrall.
[82] In his affidavit, Mr Butler acknowledged that, by virtue of the Limitation Act, the liability of Mr Jackson, Ms Letica, and Mr and Mrs Fox under the deeds of covenant could not exceed a period of six years immediately preceding the filing of this proceeding. The proceeding was commenced on 1 May 2017, so the arrears of rent and outgoings owing on the property are not pursued in respect of the period prior to 1 May 2011.
[83] Mr Butler produced a statement detailing the rent, interest, and outgoings claimed for that period, as set out in paragraph [13] of this judgment. He also provided copies of invoices from the Trust's solicitors and counsel, totalling $8,268.62. These costs are claimed from the defendants under the Lease.
[84] Mr Turrall's first affidavit was sworn on 29 August 2017. In it, he responded to the affidavits of Ms Letica and Mr Fox.
[85] Mr Turrall noted that Ms Letica did not say that she ever asked Mr Butler whether the rent was being paid by the Bluetts, or how the motel business was performing. He noted also that Ms Letica and Mr Jackson could not have taken over the Lease of the property without the agreement of the Bluetts. He also expressed the opinion that it would have been highly unlikely that the Trust would have agreed to a transfer of the Lease to any party, unless the arrears had been cleared at the time of transfer. He also said that he thought it would be highly unlikely for the Bluetts to have agreed to transfer the Lease to anyone: he said that the Trust's impression was that the Bluetts were using the rent to meet other costs and expenses, and did not wish to leave the property. In Mr Turrall's opinion, the only possible remedy was for the Trust to cancel the Lease, and that is what it eventually did.
[86] Mr Turrall said that the trustees' experience has been that, where notice of rental arrears has been given to a prior tenant, the prior tenant has disappeared and taken steps to protect its position.
[87] Mr Turrall said that no steps were taken against the Bluetts after the judgment against them was obtained, because the Trust's understanding was that they had no assets that would be available to meet the judgment.
[88] Mr Turrall said that he knew of no duty on the Trust to mitigate its loss in circumstances where the amount being claimed is a sum of money payable under a contract, as opposed to a damages claim.
[89] On the Trust's general strategy with lessees, Mr Turrall said that, where a lessee is in arrears or breach of the Lease the lessee would be encouraged to sell the Lease. At that point the arrears would be paid from the sale price obtained by the lessee. In this case, however, it became apparent that the Bluetts did not want to sell, as they were using the motel as a "cash cow".
[90] Mr Turrall said that he discussed with Mr Butler what they would do. They concluded that the Trust was left with only one solution, and that was to take possession of the property. However, the Trust was reluctant to do that, because it meant that the Trust would be left with an empty motel that needed refurbishment. In that scenario, the Trust would suffer rental loss in addition to incurring capital expenditure, and someone would then have to be put in to run the motel. Eventually, the trustees concluded that they had no alternative but to terminate the Lease.
[91] Mr Turrall said that if the Trust had terminated the Lease earlier, it would have been in the position of having to build up the business as a motel over a period of time. The Trust did not own the chattels, so it would have had to buy new chattels. There would have been considerable capital expenditure re-establishing the motel, with no guarantee that the eventual income would equal or exceed the rent. While the rental arrears would have been less, there would have been a damages claim against former lessees on account of the re-establishment costs, and also a damages claim for the expected loss of rental for the remaining term of the Lease. The trustees concluded
that the best value of the property was to keep the Lease in place with a viable tenant. However, it became apparent over time that the Bluetts were not viable tenants, and that the only remaining option was to terminate the Lease.
[92] Mr Turrall said that the property was sold on an "as is where is" basis, with vacant possession. The Bluetts took all the chattels, and there was no lease in place.
[93] Mr Turrall's second affidavit was sworn on 2 November 2017. By then, the Milliers had been added as the fifth and sixth defendants, and the Trust amended its application for summary judgment to include its claims against the Milliers. Mr Turrall's second affidavit confirmed that the allegations in the Trust's (then) draft amended statement of claim were true and correct, and reconfirmed his and the Trust's belief that the defendants have no defence to the Trust's claims.
The argument for Mr Jackson, Ms Letica, and Mr and Mrs Fox
[94] Mr Hollyman made a number of arguments on behalf of Mr Jackson and Ms Letica. The first argument was that, because the Trust was no longer the owner of the property when it commenced this proceeding, it had no right to sue to recover rent owing under the Lease. He relied on s 233 of the PLA, which provides:
233 Benefit of lessee's covenants to run with reversion
(1)If the reversion expectant on the lease ceases to be held by the lessor (whether by transfer, assignment, grant, operation of law, or otherwise), the rights to which this section applies—
(a)run with the reversion; and
(b)may be exercised by the person who is from time to time entitled to the income of the land, whether or not the lessee has acknowledged that person as lessor (that is, with or without attornment by the lessee).
(2)Subsection (1) applies unless a contrary intention appears from the lease or from another circumstance.
[95] Mr Hollyman submitted that, having sold the property, the Trust is no longer "the person entitled to the income of the land".
[96] In a related argument, Mr Hollyman submitted that the covenant to pay rent was a covenant benefitting the property, and as such ran with the land (and became enforceable by the Trust's successor in title) under s 301 of the PLA when the Trust sold the land in April 2016.
[97] The second argument was based on the Trust's failure to alert Mr Jackson and Ms Letica to the arrears that accumulated during the Bluetts' tenure as lessees. Mr Butler spoke to Ms Letica after the Bluetts' defaults had occurred, but he made no mention of the issue. At that stage, there would have been an opportunity to all but eliminate the arrears, but Mr Butler's silence effectively deprived Mr Jackson and Ms Letica of the option to take measures of their own to try to rectify the position. Mr Hollyman submitted that this was arguably misleading or deceptive conduct in trade, giving Mr Jackson and Ms Letica a defence or counterclaim under s 9 of the Fair Trading Act 1986.5 The issue of misleading or deceptive conduct is one that requires further investigation at trial.
[98] The third argument was that, in failing to (i) take appropriate action to recover the rent and outgoings from the Bluetts, (ii) cancel the lease at an earlier time, and (iii) promptly take steps to enforce the judgment obtained against the Bluetts in February 2016, the Trust failed to mitigate its loss. In making this argument, Mr Hollyman submitted that the Trust's conduct in the circumstances has been wholly unreasonable. He referred to the judgment of the Court of Appeal in Seon Developments Ltd v Wise, in support of the proposition that judgment should not be entered for a landlord whose conduct in allowing arrears to accrue was "wholly unreasonable".6 In the extreme circumstances of this case, the Court should exercise its discretion not to enter summary judgment.
[99] Mr Hollyman submitted that the Trust has made no real attempt to explain the failure to take steps against the Bluetts at any earlier stage. That appears to be in stark contrast with the experience of Mr Jackson and Ms Letica with the Trust. Furthermore, Mr Jackson and Ms Letica should have been made parties to the
5 Section 9 of the Fair Trading Act provides that no person shall, in trade, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.
6 Seon Developments Ltd v Wise (1994) ANZ ConvR 315 (CA).
proceeding commenced against the Bluetts in 2015. The trustees' half-hearted approach appears to have continued once judgment was entered. No steps were taken immediately, and over a year passed before the present proceeding was issued. It was only when the defendants themselves secured judgment against the Bluetts on their third party claim, and registered a charging order against Mr Brian Bluett's property, that the Trust finally took steps to secure its position (by registering its own charging order on Mr Bluett's property).
[100] Mr Hollyman next submitted that notice of intention to cancel the lease should have been served on Mr Jackson and Ms Letica as "lessees", under s 245(1) of the PLA. That subsection provides:
245 Cancellation of lease for breach of covenant to pay rent
(1)A lessor may exercise a right to cancel a lease because of a breach of the covenant to pay rent under the lease only if—
(a)the rent has been in arrears for not less than 10 working days; and
(b)the lessor has served on the lessee a notice of intention to cancel the lease; and
(c)at the expiry of the period specified in the notice, the breach has not been remedied.
…
[101] Mr Hollyman relied on s 245(1)(b), and the definition of "lessee" in s 4 of the PLA:
Lessee means a person who enters into a lease as lessee, and includes a person who has accepted a transfer or assignment of a lease.
[102] He submitted that as Mr Jackson, Ms Letica and Mr and Mrs Fox had all accepted assignments of the Lease, they qualified as "lessees", and were thus entitled to notice of the Trust's intention to cancel under s 245(1)(b).
[103] In addition to those arguments, Mr Hollyman raised issues over the quantum of the Trust's claim. One of the quantum issues is that any entitlement to interest would have merged in the judgment obtained by the Trust on 3 February 2016. There is no
basis on which interest could be claimed at the rate of 20 per cent per annum in respect of the period after that date.
[104]As noted above, Mr Steel adopted Mr Hollyman's submissions.
The argument for the Trust
[105] Mr Gilchrist first addressed the basis on which an assignor of a lease can be liable for unpaid rent falling due after the date of the assignment of a lease. For assignments that occurred on or after 1 January 2008, the implied covenant in s 241 of the PLA applies.7 In this case, the relevant assignments all took place before 1 January 2008. Mr Gilchrist submitted that continuing liability of the assignors following assignments made before that date depends on whether the assignee (at the time) entered into a deed of covenant with the lessor to pay rent and observe the covenants during the remainder of the term. An assignee who has entered into such a deed of covenant remains liable for breaches of covenant throughout the residue of the term created by the lease. That liability does not come to an end when the assignee assigns the lease to another person.8
[106] Mr Gilchrist submitted that the covenants of Mr Jackson and Ms Letica and Mr and Mrs Fox in their respective deeds of covenant "to pay the rental and other outgoings payable now and in the future and to observe and perform the covenants and conditions both expressed and implied now and in the future", were both sufficient to create privity of contract between the Trust and the respective assignee.
[107] Mr Gilchrist acknowledged that the liability of Mr Jackson, Ms Letica, and Mr and Mrs Fox can only relate to the period extending back six years before the Trust brought its claims against them.9 He submitted that, apart from the limitation
7 Section 241 materially provides:
241 Transferor or assignor remains liable
(1) If there has been a transfer or assignment of a lease, the transferor or assignor remains liable to the lessor for—
(a)the payment of the rent payable under the lease; and
(b)the observance and performance of all covenants of the lessee.
8 Hinde McMorland & Sim Land Law in New Zealand (chapter 11, Leasehold Estates: Transfers and Assignments of leases) online ed at [11.197].
9 Sections 11(1) and 16(1)(a) of the Limitation Act 2010.
restriction in respect of rent falling due before May 2011, there is no restriction preventing the Trust from recovering from the former lessees the sums owed by the Bluetts under the Lease.
[108] Mr Gilchrist submitted that a claim for rent is not a claim for damages, so the question of mitigation of damage does not arise. The Trust had the option to take advantage of the Bluetts' breaches of covenant, or to exercise the right to cancel. If it did not cancel, the Lease would continue until the Trust did some act which showed an intention to determine the Lease. The Trust had no obligation to cancel the Lease because of a breach of covenant on the part of the lessee.
[109] Mr Gilchrist submitted that s 233 of the PLA has no application. The Trust is not suing Mr Jackson and Ms Letica (and Mr and Mrs Fox) under the Lease; it is suing those parties under their respective deeds of covenant. In any event, the Trust brought an action in respect of the Lease at a time when it was entitled to do so. The person entitled to sue in respect of the Lease was the Trust. The Trust enforced its rights pursuant to the Lease against the Bluetts, and part of that enforcement resulted in the Lease being cancelled on 3 February 2016. The Lease was not on foot when the Trust sold the fee simple estate in April 2016, so the new owners were not entitled to the income of the land in respect of the (then cancelled) Lease.
[110] Mr Gilchrist submitted that there has been no "unreasonable conduct" on the part of the Trust. The reference by counsel for Mr Jackson and Ms Letica to Seon is not apposite, because that case was concerned with an alleged repudiation by the lessees. The Court held that the lease had not been repudiated because the premises had not been vacated by the lessee. More fundamentally, the Court of Appeal in Seon said that it has never been the law that a person is only entitled to enforce his or her contractual rights in a reasonable way. Any fetter on the innocent party's right of election whether or not to accept a repudiation would only be applied in extreme cases.
[111] Mr Gilchrist submitted that the Trust had no duty to advise the former lessees of the Bluetts' rent arrears. There was no duty under the PLA to serve any notice on the former lessees – a notice of intention to cancel a lease must be served on the lessee in possession, and former lessees such as Mr Jackson, Ms Letica and Mr and Mrs Fox
are not "lessees" for the purposes of the PLA provisions relating to notice of intention to cancel a lease.
[112] Mr Gilchrist submitted that no sufficient basis has been provided to support the alleged breach of the Fair Trading Act. Nor are any of the "factual issues" raised by the defendants (including questions about why the Trust has not been able to obtain payment of the arrears from the Bluetts) relevant.
[113] Mr Gilchrist submitted that there is no issue over quantum. But if (contrary to that submission) the Court does consider that there are issues over quantum, judgment can be entered on liability, with quantum left to be dealt with at trial.
Discussion and conclusions on the claims against Mr Jackson, Ms Letica and Mr and Mrs Fox
[114] I deal first with Mr Hollyman's submission that the claim against his client is precluded by s 233 of the PLA. I do not accept that submission.
[115]Sections 232 to 235 provide:
232Rights under lease to which section 233 applies
(1)Section 233 applies to all or any of the following rights under a lease:
(a)the right to receive the rent payable:
(b)the right to enforce every covenant of the lessee, including a covenant relating to a subject matter that was not in existence when the covenant was made:
(c)the right to enforce any guarantee of the performance of all or any covenants of the lessee:
(d)all rights and remedies of the lessor.
(2)In subsection (1)(b), the reference to every covenant of the lessee is,—
(a)for a lease that comes into operation before 1 January 2008, a reference to every covenant of the lessee that refers to the subject matter of the lease; and
(b)for a lease that comes into operation on or after that date, a reference to every covenant of the lessee, whether it refers to the subject matter of the lease or not.
(3)In subsection (1)(d), the reference to the rights and remedies of the lessor under a lease includes a reference to—
(a)the right to give any notice under the lease; and
(b)the right to take advantage of any condition of the lease; and
(c)the right to re-enter or apply for an order of possession of the land; and
(d)the right to cancel the lease.
233Benefit of lessee's covenants to run with reversion
(1)If the reversion expectant on the lease ceases to be held by the lessor (whether by transfer, assignment, grant, operation of law, or otherwise), the rights to which this section applies—
(a)run with the reversion; and
(b)may be exercised by the person who is from time to time entitled to the income of the land, whether or not the lessee has acknowledged that person as lessor (that is, with or without attornment by the lessee).
(2)Subsection (1) applies unless a contrary intention appears from the lease or from another circumstance.
234When rights arising from covenants may be exercised
(1)A person who is entitled under section 233(1) to exercise a right to which that section applies—
(a)may exercise that right even though the basis for doing so first arose or accrued before the time at which that person became so entitled; and
(b)is the only person entitled to exercise that right.
(2)Subsection (1)(a) applies unless—
(a)the right was waived; or
(b)the lessee was released from the obligation to which the right relates.
(3)Subsection (1)(b) applies unless the person who becomes entitled to exercise the right has agreed to the exercise of that right by some other person (in which case the right may be exercised by the other person to the extent so agreed).
235Rights and obligations under lease after severance
(1)This section applies to a lease if—
(a)the reversion expectant on the lease is divided into different parts, and different persons are entitled to the income of those different parts (that is, a severance of the reversion as regards the land); or
(b)the lease has terminated for part only of the land comprised in the lease (that is, a severance of the reversion as regards the estate).
(2)The obligations referred to in section 231 and the rights and remedies to which section 233 applies—
(a)must be apportioned; and
(b)to the extent required by that apportionment, must remain attached, as the case requires, to—
(i)each part of the reversion; or
(ii)that part of the land for which the lease has not been terminated; and
(c)may, to that extent, be—
(i)enforced by the person entitled to enforce those obligations under section 231; or
(ii)exercised by the person entitled to exercise those rights and remedies under section 233.
[116] These sections are contained in subpart 4 of Part 4 of the PLA. That subpart is headed "Effect on leases of transactions concerning reversion", and in my view it is concerned with leases that remain on foot when the land is transferred (or the "reversion expectant on the lease" ceases to be held by the lessor for some other reason). 10
[117] In this case, if the "transaction" was the sale of the property by the Trust in April 2016, there was then no lease in existence on which the transaction could have had an effect.
[118] A second reason for rejecting the submission relates to the meaning of the expression "reversion expectant on the lease" in s 233 of the PLA. "Reversion" is not defined in the PLA, but the learned authors of Land Law in New Zealand say that,
10 Under s 5 of the Interpretation Act 1999, the matters that may be considered in ascertaining the meaning of an enactment include the indications provided in the enactment. Under s 5(3), "indications" includes headings to parts and sections in an enactment.
according to whether or not they entitle their owners to immediate enjoyment of the land, estates in land are classified as estates in possession or estates in expectancy. An estate in possession gives a right to the enjoyment of the land at the present time. An estate in expectancy gives a present right to the enjoyment of the land at some future time. Estates in expectancy are of two kinds, reversions and remainders.11
[119] There are two kinds of reversion, namely reversions after freehold estates and reversions after leasehold estates. Here, the relevant kind of reversion must be reversion after a leasehold estate. The authors of Land Law in New Zealand provide the following example of such a reversion:12
If C owns an estate in fee simple in Whiteacre and grants a lease to D for 21 years, C then has a reversion expectant on the determination of D's lease.
[120] In this case, there was no relevant "estate in expectancy" when the Trust entered into an agreement to sell the property in April 2016. The Lease had been cancelled by the Court on 3 February 2016, and thereafter the Trust had an estate in possession, as it had full rights to the present enjoyment of the land. I think the "reversion" referred to in s 233(1)(a) must be the same as the "reversion expectant" referred to in the introductory part of the section, and the use of the words "transfer, assignment, grant" in the introductory part of s 233 indicates that the intention was that, after the "transfer, assignment, grant, operation of law or otherwise", there would continue to be a "reversion expectant on the lease", but it would be held by someone other than the owner/lessor. That would not be the position with a cancelled lease, where there would no longer be any "reversion expectant". Consistent with that view, s 233(1)(b) contemplates that there will be a "lessee". There will be no lessee after a lease has been validly cancelled.
[121] My third reason for rejecting this submission is that the view of s 233 I have just set out appears to be consistent with s 235 of the PLA, which relates (in part) to the situation where a lease has terminated in respect of only part of the leased land. In that situation, the rights and remedies referred to in ss 232 and 233 of the PLA must
11 Hinde McMorland & Sim, Land Law in New Zealand (chapter 11, Leasehold Estates: Transfers and Assignments of leases) online ed at [3.0005].
12 Hinde McMorland & Sim, Land Law in New Zealand (chapter 11, Leasehold Estates: Transfers and Assignments of leases) online ed at [5.005].
be apportioned, and they are only to remain attached to that part of the land for which the lease has not been terminated.13 If the intention of s 233 was that a transferee of land could sue on an earlier lease which had been cancelled prior to the acquisition of the land by the transferee, it is not immediately obvious why that would not also apply (if that lease had only been cancelled as to part of the land) to the cancelled part. But that is not what s 235(2)(b) provides.
[122] A fourth reason for rejecting Mr Hollyman's submission based on the operation of s 233 is concerned with the consequences if Mr Hollyman's submission were correct. If it were correct, s 233 would presumably apply equally to a lease granted by a vendor that had been cancelled, say, five years before the sale transaction. It seems to me improbable that the legislature intended to confer a windfall benefit on the purchaser in such a case, simply because a tenant occupying the land five years earlier had failed to pay all of the rent due to the vendor.
[123] Mr Hollyman relied on three cases in support of his argument based on s 233 of the PLA. The first was the decision of Brown J in Mitre 10 (New Zealand) v Thistle Dome Holdings Limited.14
[124] I note immediately that Mitre 10 was not a case where the relevant lease had been cancelled before the landlord sold the land. The relevant facts were these. Thistle leased certain land in Palmerston North to Mitre 10. A dispute arose over Mitre 10's observance of the lease covenants relating to maintenance and repair of the property. Thistle then signed an agreement to sell the property, subject to the lease. The day before settlement of the sale, Thistle issued an arbitration notice to Mitre 10, seeking reimbursement for its losses arising from the alleged breaches of the lease covenants. Mitre 10 sought a declaration that, following settlement, Thistle no longer had any right to pursue the claim for alleged breach of the lease.
[125] Brown J noted that s 233 is concerned with events following the point in time at which the reversion expectant on the lease ceases to be held by the lessor. His Honour considered that that period of time did not commence until settlement
13 Property Law Act 2007, s 235(2)(b)(ii).
14 Mitre 10 (New Zealand) v Thistle Dome Holdings Limited [2015] NZHC 3289.
occurred. His Honour considered that that intention was plain from the reference in s 234(1)(b) to "the only person entitled to exercise that right".15
[126] The main point about Mitre 10 for present purposes, however, is that it was not a case about the right of a transferee of land to exercise rights under an earlier lease granted by the transferor that had terminated before the transferee acquired the land.
[127] The second case relied upon by Mr Hollyman, Ballance Agri-Nutrients (Kapuni) Ltd v The Gama Foundation,16 was closer to the present facts. In that case, Ballance was the lessee of certain commercial premises in Christchurch owned by Gama Holdings Ltd. Ballance gave Gama Holdings notice of intention to vacate the premises, but shortly after that Gama Holdings entered into an unconditional agreement for sale and purchase of the freehold to The Gama Foundation (the Foundation). The date of settlement of the sale was 1 August 2001, and Ballance vacated the premises in October 2001. The transaction was not registered until 28 January 2002. Before Ballance vacated the premises, issues had arisen over the condition of the premises, and the extent to which Ballance was required to reinstate or repair the damage. The parties agreed to submit that dispute to arbitration. In an interim award, the arbitrator decided that the Foundation had standing to maintain the proceeding against Ballance. The arbitrator found that the Foundation's authority to bring the claim derived from s 112(1) of the Property Law Act 1952, a predecessor to s 233 of the PLA. That decision was upheld by the High Court. Ballance appealed to the Court of Appeal.
[128] In the Court of Appeal, counsel for Ballance submitted that, where the leasehold estate had terminated before the reversionary fee simple estate was sold, it could not be said that the covenant "goes with the reversionary estate".17 That was said to be because the reversionary estate no longer existed – it had all become merged in the fee simple estate. Robertson J considered that, while there was "a superficial attractiveness" to that argument, it was overly semantic.18 His Honour said that there was nothing in the words used by Parliament in s 112(1) which suggested a restriction
15 At [36].
16 Ballance Agri-Nutrients (Kapuni) Ltd v The Gama Foundation [2006] 2 NZLR 319 (CA).
17 At [64].
18 At [65].
on its application to cases where the lessor sells the land to which unperformed covenants are attached, before the leasehold estate terminates. The Judge considered that such a distinction would be arbitrary and capricious and lead to consequences which were unacceptable and illogical. His Honour said:19
There is no reason why, when a leasehold estate terminates, the purchaser of the fee simple estate (as opposed to the reversionary estate) should not be entitled to the benefit of those covenants which, at that date, remain unperformed.
[129] However, the foregoing statement of opinion appears to be obiter, as His Honour went on to note that it was clear that, at the time of the sale and purchase of the freehold, the lease was still on foot. Ballance was still occupying the land at that date.20
[130] The second judgment was that of William Young J. William Young J referred to the argument of counsel for Ballance described above, noting that, on the argument, the transfer of the legal interest in the land to the Foundation was not a transfer of the reversionary estate, because the lease had come to an end prior to January 2002. His Honour went on to say: "Whether [counsel for Ballance] is right or not on this point raises some difficult issues, upon which we did not hear full argument."21
[131] William Young J preferred to decide the case on the basis that the Foundation became the party entitled to the income from the property for the purposes of s 112 with effect from 1 August 2001, when it acquired an equitable interest in the land. It did not matter that settlement of the transaction did not take place for some months after that, and that Ballance vacated the land in the meantime.
[132] The third judgment was the dissenting judgment of O'Regan J. His Honour disagreed with Robertson J on the point with which I am presently concerned, saying:22
The argument put to us was that, while the agreement to transfer the relevant property could properly be described as an agreement to transfer the reversion
19 At [65].
20 At [66].
21 At [113].
22 At [135].
(since the lease to the appellant was on foot at the time of the agreement), the transfer of legal title upon registration in January 2002 occurred after the termination of the lease at a time when the fee simple estate could no longer be described as a reversionary estate. I do not believe that the fee simple estate as it existed after the termination of the lease can be described as the reversionary estate. That of course raises the issue on which we have no finding of fact, namely when the lease terminated. But, assuming it terminated before the date of registration of the transfer of the property from Gama Holdings to the Foundation, I do not think that transfer could be described as a transfer of the reversionary estate.
[133] The third case relied upon by Mr Hollyman was a decision of the UK Court of Appeal in Re King.23 The case was decided under s 141(1) of the Law of Property Act 1925 (UK), a section in somewhat similar terms to s 233 of the PLA. But again, it seems to me that this was not a case where the relevant lease had been cancelled before the relevant land was sold. The sequence of events described in the judgment is not particularly easy to follow (at least on the issue of when the lease came to an end), but it appears that the owner of the land transferred the fee simple to the London County Council on 28 November 1960, subject to the relevant lease. While the Council had served a notice compulsorily acquiring all interests in the land, including that of the lessee, some years earlier, Lord Denning MR noted in his judgment that "King's executors [ie the lessee] have not yet transferred the lease to the London County Council…".
[134] The Court of Appeal held that the owner lost his right to sue the lessee under the lease when he transferred the land to the London County Council, but it appears that the case was not dealt with on the basis that there had been a cancellation, or termination, of the lease before the transfer.24
23 Re King [1963] 1 Ch 459.
24 Lord Denning MR referred to the case of Wedd v Porter [1916] 2 KB 91 (CA), a case in which a lease for a term of years had expired by effluxion of time. The lessee failed to yield the premises up in repair in accordance with his covenant, and stayed in occupation, holding over. The lessor afterwards sold the premises to a purchaser. The premises were still in a dilapidated state, and the purchaser sued the lessee for the want of repair. It was held that the purchaser was not entitled to recover for any dilapidations that existed when he bought the property. In discarding this judgment as being of no assistance on the issues before the Court, Lord Denning said: "The simple explanation is, of course, that the lease had expired when he bought. The only relationship with the tenant was an oral tenancy by holding over". This passage appears to imply that the Court of Appeal in re King did not consider that it was dealing with a case where the lease had been cancelled before the land was sold to the Council.
[135] The cases relied upon by Mr Hollyman do not persuade me that s 233 of the PLA should bear a different interpretation from the one I arrived at from my consideration of the section itself and the other sections in subpart 4 of Part 4 of the PLA. In my view, O'Regan J stated the position correctly in Ballance when he said: "I do not believe that the fee simple estate as it existed after the termination of the lease can be described as the reversionary estate". Still less, in my view, could it be described as a reversion expectant (on the lease).
[136] The learned authors of Land Law in New Zealand do not suggest any different interpretation. They acknowledge that a covenant in a lease to pay the rent will normally be a covenant which "touches and concerns" the land,25 and will thus run with the land and enure for the benefit of a person taking a transfer of the land from the landlord. A surety's covenant to pay the rent will, absent any stipulation in the covenant to the contrary, also run with the land, and thus be enforceable by a transferee from the landlord.26 But the discussion in Land Law in New Zealand appears to assume that the transferee's entitlement to enforce the lessee's covenant to pay the rent will arise only in relation to "transfers of reversions expectant on leases".27
[137] In P A Swift Investments (a firm) v Combined English Stores Group plc Lord Templeman noted that the benefit of a tenant's covenant that runs with the land vests in the successor in title of the landlord, who may sue on the covenant (although the benefit of the covenant may not have been assigned to the successor in title). Important for present purposes, Lord Templeman then said:28
For this purpose a successor in title of the landlord is the person who, at the date of the breach of covenant, is entitled to the reversion expectant on the expiration or sooner determination of the term demised by the lease.
25 Hinde McMorland & Sim, Land Law in New Zealand (chapter 11, Leasehold Estates) online ed. At [11.180].
26 Referring to P A Swift Investments (a firm) v Combined English Stores Group plc [1989] AC 632; [1988] 2 All ER 885 (HL), a decision which was approved in New Zealand by the Court of Appeal in Mayhew v Robert Jones Investments Limited (1993) 2 NZ ConvC. 191,719 at 191,722-191,723.
27 The learned authors state at [11.179]: "Since the Property Law Act 2007 came into force on 1 January 2008 it is still necessary to consider whether or not covenants touch and concern the land … (2) In relation to transfers of reversions expectant on leases when those leases came into operation before 1 January 2008."
28 Swift Investments (a firm) v Combined English Stores Group plc, above n 26 at 887.
[138] On that definition, I do not believe the party who purchased the property from the Trust in April 2016 was a "successor in title" to the Trust, who would have been entitled to sue Mr Jackson, Ms Letica or the Foxes on their respective deeds of covenant. At the time the purchaser acquired the property from the Trust, the Lease had been cancelled, and there was no "reversion expectant" to which the purchaser could have become entitled.
[139] Mr Hollyman endeavoured to persuade me that in such circumstances the "reversion" was the same as the fee simple estate in the property. I do not accept that submission. While I agree that a fee simple estate may include a number of lesser estates, any right the purchaser might have had to sue Mr Jackson, Ms Letica and the Foxes in this case was dependent on the purchaser becoming entitled to a reversion expectant on the expiry or earlier determination of the Lease. The purchaser was never so entitled.
[140] I conclude that s 233 was not intended to apply to situations where the lease between the vendor and the vendor's tenant has been cancelled before the sale to the purchaser. The section, and s 234(1) are directed at the situation where, at the time of the sale by the owner of the land, there exists a "reversion expectant" on a lease. No such reversion expectant exists in a case where the lease has been cancelled some months (or years) before the sale transaction.
[141] Nor in my view does s 301 of the PLA assist Ms Letica, Mr Jackson and Mr and Mrs Fox. Section 301 provides:
301 Construction of covenants relating to land: benefits
(1)This section applies to a covenant benefiting land of the covenantee, whether expressed in an instrument or implied by this Act or any other enactment in an instrument, and whether a positive covenant or a restrictive covenant.
(2)Unless a contrary intention appears in the instrument, the covenant is enforceable by—
(a)the covenantee; and
(b)the covenantee's successors in title; and
(c)persons claiming through the covenantee or the covenantee's successors in title.
(3)For the purposes of this section, the covenantee's successors in title include an occupier for the time being of the benefited land.
[142] A tenant's covenant to pay rent would not be a "restrictive covenant", so the issue is whether the covenant to pay the rent in a lease which has been terminated before the landlord sells the land, can be regarded as a "positive covenant" enforceable by the purchaser of the property as the landlord's "successor in title" under s 301 of the PLA.
[143]"Positive covenant" is defined in s 4 of the PLA as follows:
positive covenant means a covenant, including an express or implied covenant in an easement, under which the covenantor undertakes to do something in relation to the covenantor's land that would beneficially affect the value of the covenantee's land or the enjoyment of the covenantee's land by any person occupying it
[144] I do not think there was any relevant "positive covenant" in this case that survived the termination of the lease in February 2016. Thereafter, there was no "land"29 of the covenantors, which they could have undertaken to do anything "in relation to", that could have beneficially affected the value of the property, or the enjoyment of the property by anyone occupying it. There was no longer any leasehold estate, and neither the Bluetts nor Mr Jackson, Ms Letica or the Foxes had any interest in the property.
[145] The next issue raised by Mr Hollyman was the contention that Mr Butler's failure to disclose the continuing defaults by the Bluetts amounted to misleading or deceptive conduct, contrary to s 9 of the Fair Trading Act 1986. Reliance was placed on Ms Letica's evidence about her telephone conversation with Mr Butler, which was concerned with difficulties Ms Letica and Mr Jackson had had with a tenant who was also a tenant of the Trust. Mr Butler is said to have had the opportunity to raise the Bluetts' defaults at that stage, and it is alleged that it was misleading or deceptive for him not to have done so.
29 Defined in s 4 of the PLA as including any estate or interest in land (which would include a leasehold estate).
[146] The most recent authority on the circumstances in which a party's failure to speak up may amount to misleading or deceptive conduct appears to be the Court of Appeal decision in McAlister v Lai.30
[147] In McAlister v Lai, the Court of Appeal noted that s 9 of the Act does not require the existence of a duty of care or the existence of equitable obligations. All that is required for a successful s 9 claim is that, viewed objectively in the context in which it occurred, there was misleading or deceptive conduct.31 It is not necessary to prove that the person making the false representation knew of its falsity: if a representation is made in circumstances that qualify under s 9, it will be regarded as misleading or deceptive whatever the state of knowledge of the representor.32 Silence in certain contexts can amount to a misrepresentation, as too, can literal truth on occasions. The questions are whether in context the meaning affirmatively conveyed occasions. The questions are whether in the context the meaning conveyed by the defendant in one way or another is false, and whether a reasonable person in the claimant's situation, having characteristics of which the defendant was or should have been aware, would have been likely to have been misled or deceived.33
[148] In my view, the evidence in this case does not reach the arguable case threshold. Ms Letica does not suggest that there was any discussion about the Bluetts, or indeed the motel, in the telephone discussion she had with Mr Butler, and in those circumstances it is difficult to see how there could have been any misrepresentation (by words or by conduct), an essential component of a cause of action under s 9 of the Fair Trading Act.34 A defendant opposing a summary judgment application must put forward at least some evidential foundation for the defence he or she wishes to run, and especially where the events relied upon are within the defendant's knowledge (as here), it was not enough to suggest that Mr Butler's failure to mention the Bluetts' defaults when he spoke to Ms Letica merits further investigation at trial. There needed
30 McAlister v Lai [2018] NZCA 141.
31 Goldsbro v Walker [1993] 1 NZLR 394 (CA) at 401.
32 Red Eagle Corp Ltd v Ellis [2010] NZSC 20, [2010] 2 NZLR 492 at [28].
33 McAlister v Lai, above n 30, at [27] and [28], referring to Smythe v Bayleys Real Estate Ltd (1993) 5 TCLR 454 (HC), Unilever New Zealand Ltd v Cerebos Gregg's Ltd (1994) 6 TCLR 187 (CA), and Hanover Group Holdings Ltd v AIG Insurance New Zealand Ltd [2013] NZCA 442.
34 Red Eagle Corporation Ltd v Ellis [2010] NZSC 20, [2010] NZLR 492.
to be some evidence that Mr Butler affirmatively conveyed to Ms Letica something that was misleading or deceptive. In my view the evidence falls short of that standard.
[149] I do not accept Mr Hollyman's argument that Mr Jackson, Ms Letica, and Mr and Mrs Fox, were entitled to receive notice of the Trust's intention to cancel the Lease under s 245(1)(b) of the PLA. I accept Mr Gilchrist's submission that where the "lessee" referred to in s 245(1)(b) is in fact an assignee from an earlier lessee or assignee, the person required by s 245(1)(b) to be served is the person who is the lessee or assignee in possession of the premises at the date the notice is to be given. That interpretation is consistent with s 245(2) of the PLA, which provides:
245 Cancellation of lease for breach of covenant to pay rent
…
(2)However, if the lessor believes on reasonable grounds that the lessee has given up possession of the leased premises (whether or not the lessee has actually done so), the lessor does not need to serve a notice of intention to cancel the lease on the lessee but must serve the notice instead on all of the following whose names and addresses are known to the lessor:
(a)any mortgagee or receiver of the leasehold estate or interest:
(b)any sublessee of the lease:
(c)any mortgagee or receiver of the estate or interest of a sublessee.
[150] Nothing in s 245 appears to require service on a former lessee, who is known by the lessor to have given up possession of the leased premises.
[151] The next argument mounted for Mr Jackson, Ms Letica and Mr and Mrs Fox was that the Trust failed to mitigate its loss when it allowed the Bluetts' defaults to continue for so long, and when it failed to take steps to enforce its judgment against the Bluetts. Mr Gilchrist submitted that the claim against Mr Jackson, Ms Letica and Mr and Mrs Fox is not a claim for damages, and no duty to mitigate arises where a plaintiff's claim is for money payable under a contract.
[152] The principles established in White & Carter 35 apply where the duty to mitigate is pleaded in defence of a claim for money payable under a contract. However, the duty to mitigate only arises if a repudiation by the defendant has been accepted by the plaintiff.
[153] In White & Carter a contract was entered into for advertisements to be placed on rubbish bins. The advertiser purported to cancel the contract on the same day the contract was made. The appellants refused to accept the cancellation of the contract, and for three years they displayed the advertising. At the end of the three year contract term they sued for the contract price, having made no effort to find another advertiser. The question was whether the appellants were entitled to perform the contract and then sue for the contract price, or whether they were obliged to accept the repudiation and sue for damages for breach of contract (having mitigated their loss by re-letting the advertising space). It was held that the contractor was entitled to recover the full contract price and was not obliged to cancel and sue for damages.
[154] White & Carter has been subject to some criticism in New Zealand, on the ground that it is inconsistent with the principle that the innocent party should take reasonable steps to mitigate its loss. The contrary argument is that the decision is consistent with the principle that an innocent party has a right to performance of the contract.
[155] On review, the New Zealand Contracts and Commercial Law Reform Committee recommended that no action should be taken by the legislature to reverse the White v Carter principle.36
[156] In Seon Developments Ltd v Wise,37 the Court of Appeal considered a landlord's claim for summary judgment for unpaid rent, rates and insurance premiums, for a period when the premises were occupied, down to the date of re-entry. There had been no repudiation of the relevant lease. The appellants argued that the landlords should have mitigated their loss by exercising their right to re-enter for non-payment of rent
35 White and Carter Councils Ltd v McGregor [1962] AC 413, [1961] 3 All ER 1178.
36 Burrows, Finn and Todd, Law of Contract in New Zealand (6th ed, Lexis Nexis, Wellington, 2018) at 722.
37 Seon Developments Ltd v Wise (1994) ANZ ConvR 315, (1993) 2 NZ ConvC 191, 664.
sooner than they did. The Court of Appeal held that there was no duty to re-enter promptly on the failure by the lessee to pay rent, and that the lessors remained entitled to the payment of rent while the premises remained occupied.38 The lessors were entitled to look to those parties who were liable to them for the due performance of the covenants in the lease for payment of arrears while the premises were still occupied.39 The claim was not a claim for damages (which would have raised the question of mitigation).
[157] Mr Hollyman submitted that a duty to mitigate might arise in any case where it was "wholly unreasonable" for the plaintiff not to have taken reasonable steps to mitigate its loss. But I do not think that proposition is supported by the Court of Appeal in Seon.
[158] In this case, as in Seon, the lessees (the Bluetts) had the benefit of occupying the leased property through the period for which rent is claimed, and the lessor (the Trust) did not require the assent or cooperation of the lessees for it to perform its role as lessor. There appears to be no suggestion of the Bluetts having repudiated the Lease
– they remained in occupation and continued to make modest payments towards the outstanding rent (and interest thereon) until at least 31 March 2015 (when a schedule produced by Mr Butler in the Bluett proceeding shows that the Bluetts made a payment of $15,000 in reduction of the rent arrears). I accept that the door might have been open to Mr Hollyman's "wholly unreasonable" argument if the Bluetts had repudiated the Lease, but I do not think I have any evidential foundation for a finding that they did, or arguably did.
[159] As in Seon, 40 the Trust continued to be entitled to the payment of rent while the property remained occupied by the Bluetts. And no sufficient basis has been put forward by the defendants for the Court to find it arguable that the Trust had no legitimate interest, financial or otherwise, in performing the lease rather than
38 At 18.
39 At 20.
40 At [18].
cancelling it and claiming damages41 (even if such an argument was available in the absence of a repudiation of the Lease by the Bluetts, and I do not think it was).
[160] In those circumstances I do not see any basis on which the Court could "graft onto" the Lease additional equitable or other obligations on the Trust, not contained in the Lease itself, that would alter the Trust's entitlement to affirm the Lease. It cannot be for the Court to dictate to the Trust how it should have elected to exercise its rights under the Lease.
[161] The defendants may see that as a harsh result, but the Court is not free to effectively alter the contractual arrangements made by the parties. It was the responsibility of Ms Letica, Mr Jackson, and Mr and Mrs Fox to ensure that the Bluetts were paying the rent and insurance premiums payable under the Lease, and the situation in which they now find themselves appears to be the result of their apparent failure to appreciate that they had that responsibility (or if they did appreciate it, their failure to do anything to discharge it).
[162] I turn now to the quantum of the claims against Ms Letica, Mr Jackson and Mr and Mrs Fox.
[163] Mr Butler's schedule of unpaid rent and insurance premiums produced in the Bluett proceeding shows that the Bluetts were in credit in the sum of $2,645.55 following a payment of $16,000 made by them on 12 December 2011. The arrears on which the judgment was obtained in February 2016 have all accrued since then.
[164] While Mr Brian Bluett did raise in his affidavit filed in the Bluett proceeding certain issues over the amounts the Trust demanded of the Bluetts from time to time over the period of their occupancy of the property, I do not understand Mr Bluett to have challenged the schedule of payments that Mr Butler attached to his affidavit sworn in the Bluett proceeding on 13 July 2015. And in circumstances where the Bluetts finally elected not to oppose the claims made in the Bluett proceeding I do not believe I can place any weight on the claim made by Mr Brian Bluett (in his affidavit
41 For example, there was no evidence that the Trust could have cancelled the Lease and re-let the property at the same or a higher rental.
in the Bluett proceeding) that on 19 July 2015 Mr Butler told him that the Bluetts could stay on in the property, without paying any rent or penalty interest, until the Trust had sold the property. That claim was denied by Mr Butler in his reply affidavit, and it was not supported by anything in writing (which one would have expected to see if the Trust had granted the Bluetts a "rent holiday" of indefinite duration). The contention was in my view implausible to say the least, and in the end it was not pursued.
[165] I do not consider that the defendants have produced any evidence in this proceeding which would call into question the amount for which Toogood J entered judgment for rent, insurance and default interest on 3 February 2016 (the only significant issue raised by Mr Hollyman was a submission that any entitlement to interest merged in the judgment given on 3 February 2016, so that the Trust's entitlement to interest after that date could not exceed the statutory rate of five per cent per annum payable on judgments of the Court). Mr Fox did raise a question about what became of the chattels in the motel when the Trust sold the property, but Mr Turrall dealt with that in his reply affidavit, saying that the Bluetts took all the chattels when they left the property. In those circumstances, I am satisfied the Trust has shown that Mr Jackson, Ms Letica, and Mr and Mrs Fox have no arguable defence to the Trust's claims for the outstanding rent as at 3 February 2016 ($662,729.86), the insurance premiums outstanding as at that date ($52,151.05) and interest to that date ($241,751.85). There will be judgment for the Trust for those sums, together with interest for the period 4 February 2016 to the date of this judgment.
[166] On the amount of interest to which the Trust is entitled for the period since judgment was given against the Bluetts, the difficulty with Mr Hollyman's merger argument is that, until now, there has been no judgment against his clients in which the Trust's claim against them could have merged. The judgment entered by Toogood J on 3 February 2016 was a judgment against the Bluetts only, and I think the doctrine of merger could only apply to the parties to that judgment.
[167] The Lease provided (at cl 21) for default interest at the rate of 20 per cent per annum, and in my view the Trust is entitled to recover interest at that rate from Ms Letica, Mr Jackson, and Mr and Mrs Fox, from 4 February 2016 to the date of this
judgment, on the sums of $662,729.86 (rent owing as at 3 February 2016) and
$52,151.05 (insurance premiums owing as at that date). There will be judgment for interest accordingly.
The application against the Milliers
[168] The Milliers were the sole shareholders and directors of EHM, which ran the motel on the property for two years from 19 April 1995. In June 1997, EHM sold the motel business to Mr Jackson and Ms Letica.
[169] A lease of the property had been created on 25 October 1991. RJ & CI Duncan Limited became the lessee. The leasehold interest was sold to the Milliers on 19 April 1995, and a Deed of Arrangement and Surrender of Lease was executed. The Deed of Arrangement and Surrender of Lease provided that the original lease was to be surrendered and a new lease (the Lease) registered. The Milliers signed a Deed of Guarantee, guaranteeing their obligations under the lease, on 18 April 1995. The Deed of Arrangement and Surrender of Lease extended the end date of the term of the original lease from 6 December 2006 to 6 December 2012. The directors of RJ & CI Duncan Limited, who had earlier given guarantees, did not extend their existing guarantees of the Lessee's obligations into the extended term of the Lease.
[170] When the Milliers sold the motel business to Mr Jackson and Ms Letica in June 1997, Mr Jackson and Ms Letica wanted an extension of five years on the term of the Lease. To achieve that, the Milliers entered into the Memorandum of Variation of Lease with the Trust on 6 May 1997, paying $30,000 to the Trust in consideration of the Trust's agreement to extend the term. The term was further extended to 6 December 2017. That was the last the Milliers heard of the Lease, until late 2017 when the present claim was made against them.
[171] In his affidavit, Mr Millier said that he and his wife did not understand they were assuming a new liability under the Guarantee for the additional five-year term that arose from the sale to Mr Jackson and Ms Letica. They believed that their liability under the Guarantee would cease at the end of the original term in 2012.
[172] Mr Millier confirmed that the Milliers were never advised of the Bluetts' defaults, or of any issues with the motel's performance, that would affect the Milliers' liability under their Guarantee. He said that, if they had been informed of the arrears and the issues, he was confident that the Milliers would have been able to help in some way that would have prevented, minimised or reduced the arrears.
The Guarantee
[173] The Trust's claim against the Milliers is based on the Deed of Guarantee and Indemnity (the Guarantee) signed by the Milliers on 18 April 1995. The Guarantee guaranteed the performance of the terms and conditions of the Lease by the original lessee, RJ & CI Duncan Limited, but it also recorded that the Lease was to be transferred from RJ & CI Duncan Limited to EHM. EHM was referred to in the introductory part of the Guarantee as "the Lessee", but in cl 11 "the Lessee" was defined as including not only EHM but any other party who becomes the Lessee of the Lease or Assignee of the Lease or otherwise transfers or takes over the interest (in whole or in part) of EHM. The expression was also defined to include any successors in title or assigns of EHM.
[174]The Guarantee provided, at paragraphs 1 and 2:
1.[The Milliers] do hereby unconditionally and irrevocably guarantee to the Trust the due and punctual payment by the Lessee of the rent due and payable under the Lease and the performance of the terms and conditions of the Lease both express and implied.
2.[The Guarantee] given herein shall be enforceable at any time by the Trust by a written notice of demand being left at the premises. On notice of default by the Lessee under the Lease being given in accordance with this clause [the Milliers] shall forthwith make good the default specified in the written demand referred to.
[175] The Guarantee provided, at paragraph 4, that the liability of the Milliers under the Guarantee would not be abrogated, prejudiced or affected by any of the following:
(a)The granting or giving of time credit or any indulgence or other concession to the Lessee or [the Milliers] or by anything done or omitted or neglected to be done by the Trust in exercise of the authorities powers and discretions vested in the Trust by [the Guarantee] or by any security or by law or by any other dealing matter or thing whatsoever which but for this provision might operate to abrogate prejudice or affect this guarantee;
(b)The liability of the Lessee ceasing from any cause whatsoever (including release or discharge by the Trust);
...
(d) Any variation of [the Guarantee] and any other guarantee given in relation to the performance of the terms and conditions of the Lease both express and implied;
...
(f)Any claim that the Trust has not fully realised all rights or remedies available to the Trust;
(g)The doctrine of operation by surrender of law of the Lease herein.
[176] At cl 6, the Guarantee provided that the Trust could enforce the Guarantee against the Milliers without first having recourse to any other rights or remedies available to it, and without taking any steps or proceedings against the Lessee.
[177]Clauses 7 and 8 of the Guarantee provided:
7. THE [Milliers] hereby agree that notwithstanding anything contained in [the Guarantee] in the event that any of the rent hereby secured may not be recoverable by the Trust from [the Milliers] as surety on the footing of a guarantee whether:
(a)by reason of any legal limitation disability or incapacity of or affecting the Lessee; or
(b)by reason of the Lessee ceasing to be legally liable to pay any of such moneys by reason of any provision or enactment relating to insolvency liquidation or otherwise; or
(c)by reason of any other fact circumstances or law whatsoever;
and whether or not any transaction relating to such rent has been void ab initio or has subsequently been avoided or any of the matters or facts relating thereto has been or ought to have been within the knowledge of the Trust THEN all such rent shall nevertheless be recoverable from [the Milliers] as a principal debtor in respect thereof and [the Milliers] as a separate and additional liability under this Deed HEREBY INDEMNIFY the Trust in respect of any rent and/or the performance of the terms and conditions of the Lease both express and implied.
8. [THE Guarantee] contained herein shall subsist and continue to apply notwithstanding any subsequent variation of the Lease terms after the date hereof whether or not [the Milliers] were a party to or consented to such variation. The term "variation" shall include any new Lease granted in substitution for or in part substitution for the Lease referred to herein.
The Milliers' grounds of opposition
[178] Ms Schumacher adopted the arguments advanced by Mr Hollyman on behalf of Mr Jackson and Ms Letica. She then made these additional arguments:
(a)The Trust did not follow the appropriate notice procedure to trigger the obligations under the Guarantee. The notice procedure is a condition precedent to liability of the Milliers. The Lease having been terminated, it is now too late for the Trust to make demand, as there is nothing left to make demand under.
(b)Even if the obligations under the Guarantee had been properly triggered, the Guarantee did not extend beyond the original term of the Lease (6 December 2012). Accordingly, the Milliers cannot be liable under the Guarantee for any rent or other payments under the Lease falling due after 6 December 2012.
(c)Claims under a guarantee are claims for damages for breach of the guarantor's obligation to secure the principal's performance. If any claim under the Guarantee is available, the Trust was therefore under an obligation to mitigate its loss. In the exceptional circumstances of this case it is reasonably arguable that the Trust has failed to mitigate its loss. The failure to mitigate means the Trust is responsible for a majority, if not the entirety, of its own loss.
[179] I have already addressed and rejected the arguments advanced by Mr Hollyman. I now address each of Ms Schumacher's additional arguments.
The Milliers' additional argument number 1: Guarantee not properly triggered
[180] Ms Schumacher submits that, where a contract of guarantee requires that the creditor make demand upon the guarantor, demand must be made in accordance with the contract before liability arises. Clause 2 of the Guarantee required that written demand be left at the premises, and service of that demand was a condition precedent to any liability of the Milliers. Ms Schumacher submits that the affidavits of Mr Butler
and Mr Turrall make it clear that compliance with cl 2 of the Guarantee was never contemplated, let alone attempted.
[181] In the absence of any evidence proving that the necessary demand was made, the Trust cannot obtain summary judgment under the Guarantee. Moreover, it is now too late to make demand, as the Guarantee expired with the Lease (there was no provision extending the operation of the Guarantee beyond the term of the Lease).
[182] Ms Schumacher then addressed cl 7(c) of the Guarantee, set out at [177] above, submitting that the clause is insufficient to save the situation for the Trust: as service of notice on the guarantors was a condition precedent to their liability, a savings clause in the Guarantee itself which purported to protect the creditor from the failure to serve the notice, would be ineffective for that purpose. Clause 7(c) was itself part of the Guarantee, and it had no operation when the Guarantee itself never came into effect.
The Milliers' additional argument number 2: the Milliers' obligation did not extend beyond the original term of the Lease agreed by EHM
[183]Clause 4 of the Deed of Variation of Lease provided:
4.The Guarantors do, by their execution of this Variation of Lease, hereby confirm the terms of [the Guarantee] entered into by them with [the Trust] dated 18 April 1995 to pay all the rental hereby reserved and to become payable hereunder and to observe and perform all the covenants, agreements and conditions, expressed or implied herein.
[184] Ms Schumacher submits that, on the plain meaning of this clause, the Milliers were confirming their original guarantee obligations only in respect of the higher annual rent.42 There was no intention to extend their personal liability beyond the term of the Lease as agreed by EHM. Ms Schumacher notes that at the time the Duncans entered into their Deed of Guarantee alongside the Deed of Arrangement and Surrender of Lease creating the Lease and varying its term, the Duncans limited their guarantee to the original Lease term. That accords with commonsense and reality. The additional term created by the Memorandum of Variation was for the sole benefit of the assignees (Mr Jackson and Ms Letica), and in those circumstances
42 Referred to in paragraph [27] of this judgment; under the Deed of Variation of Lease the rent for the period to 7 December 1997 was increased to $156,000 per annum plus GST.
Ms Schumacher submits that it would have been odd for a commercial party in the Milliers' position to have accepted, at the same time, a further extension in their own comprehensive guarantee obligations.
The Milliers' additional argument number 3 – failure to mitigate
[185] Ms Schumacher submits that the claim under the Guarantee is a claim for damages, and that a plaintiff's duty to mitigate applies equally where its claim is for breach of a contract of guarantee.
[186] Ms Schumacher submits that the Trust took no steps at all to mitigate its loss. She refers to the evidence of Mr Millier, as well as the evidence of some of the other defendants, that if they had been given notification of the Bluetts' arrears, they would have taken steps to remedy the situation. She submits that the Trust could have taken a number of steps to mitigate its loss:
(a)it could have cancelled the lease with the Bluetts and sought a new tenant;
(b)it could have called on the previous Lessees, whose covenants were still extant;
(c)it could have called on the previous Guarantors, whose guarantees were still extant; or
(d)most logically, it could have informed all the people to whom the Trust is now looking for recovery, of the Bluetts' defaults.
[187] Ms Schumacher submits that there is no good reason why the Trust sat on its hands for as long as it did. It appears from Mr Bluetts' affidavit that little or no action was taken on behalf of the Trust when arrears were accruing.
The Trust's arguments in reply
[188] In response to Ms Schumacher's first additional argument, Mr Gilchrist submits that the starting point is that a guarantor is not entitled to any notification of
default, unless it is specifically agreed. That is because it is the guarantor's duty to ensure that the principal debtor complies with its obligations to the creditor.
[189] Mr Gilchrist submits that cl 2 of the Guarantee did not require notice or demand to be made of, or given to, the guarantors. Clause 2 simply stipulated that a written notice of demand had to be left at the premises. That has been done pursuant to notices under the PLA that were left at the premises.
[190] Mr Gilchrist next submits that the fact that the Lease has come to an end does not prevent the Trust from seeking to enforce the Guarantee. The authorities relied upon by Ms Schumacher basically say that a guarantor's liability does not extend beyond the terms of the guarantee; they say nothing about the creditor's entitlement to make demand after the term of the principal debtor's liability has come to an end. In this case, the breach of the Guarantee occurred while the Lease was still in force, and the Trust is entitled to claim for the losses that flowed from that breach.
[191] In response to Ms Schumacher's second additional argument, Mr Gilchrist submits that, on a proper construction of cl 4 of the Memorandum of Variation of Lease, the Milliers were confirming the terms of the Guarantee and confirming that pursuant to the terms of the Guarantee they guaranteed the payment of rental that became payable pursuant to the Variation. That included rental due for the extended term of the Lease.
[192] In response to Ms Schumacher's third additional argument, Mr Gilchrist submits that, whether the claim under the Guarantee is properly a claim for damages depends on the construction of the Guarantee, and the nature of the underlying obligation. In any event, whether the claim is properly a claim for damages or a claim for a liquidated sum, the figure will usually be the same. If the sum owing is by way of damages, mitigation may be a relevant factor affecting quantum. However, it was for the Milliers to prove that the Trust has not mitigated its losses, and they have not pointed to any authorities that discuss mitigation in the context of a damages claim pursuant to a guarantee. The Milliers have done little more than raise this as an issue.
[193] Mr Gilchrist further submits that the Milliers' mitigation argument is ill- conceived, because it relies on the Trust being required to mitigate its losses with the Bluetts, which they were under no obligation to do. There is nothing the Trust could have done to mitigate the loss in respect of the Milliers' obligations.
Discussion and conclusions on the application against the Milliers
[194] I do not accept Mr Gilchrist's submissions on the Milliers' first additional argument. In my view it is reasonably arguable for the Milliers that cl 2 of the Guarantee did require that the written notice of demand be given to the Milliers in accordance with the clause.
[195] I accept that the starting point is that, subject to the specific provisions of any given guarantee, the guarantor having undertaken to pay the monies due, it is the guarantor's duty, rather than the duty of the creditor, to see that payment is made by the principal debtor. Apart from special stipulation in the guarantee document, a surety is not entitled to any notification of default.43
[196] In this case there may not have been a notification of default stipulation in the Guarantee, but I think there was a requirement that notice be given to the Milliers before the Guarantee could be enforced. Clause 2 was concerned expressly with the question of when the Guarantee would be enforceable, and that could only sensibly have meant "enforceable against the Milliers as guarantors". The clause said that the Guarantee was to be enforceable "by" leaving a written demand at the motel premises, and the use of the words "shall be enforceable" and "by" in the same sentence suggest that the "written demand" referred to was intended to be an enforcement step directed to the Milliers. I think the intention of the clause must have been to ensure that the Milliers would be notified if and when the lessee made default under the Lease and the Trust required the Milliers to honour their obligation to make good the default. That intention might not be met if the Trust addressed the cl 2 written demand to someone other than the Milliers (and particularly if it were addressed to the defaulting lessees).
43 Brown v Aimers [1934] NZLR 414 at 417.
[197] I accept that the "written notice of demand" was to include a "notice of default by the Lessee", but I do not think that wording contemplated that the notice would be addressed to the Lessee. The point of the written demand was that the Milliers, not the Lessees, would know when their make good obligation had been triggered. A more difficult point is that cl 2 provided that the written notice of demand was to be "left at the premises". It might be argued that if the notice prescribed by cl 2 of the Guarantee was intended to be a notice directed to the Milliers the clause would have required personal service on them, rather than service by leaving the notice at the premises, possibly years after the Milliers had ceased to have any involvement with running the motel. But I think it equally arguable that the provision for service by leaving the written demand at the premises was simply intended to reflect first the then-current reality that the Milliers would be at the premises when EHM was the lessee, and secondly that the Trust did not want to be put to the trouble of locating the Milliers to effect personal service if they were not. (As and when the Milliers left the property, it would be for them to make arrangements for any documents left for them at the property to be forwarded on, or to negotiate some new arrangement with the Trust for the receipt of such notices.) In my view the provision relating to notification by leaving the written demand at the premises does not affect the interpretation that the written demand, being a demand concerned only with enforcement against the Milliers, was to be directed to them.
[198] In his affidavit dated 2 September 2015, Mr Bluett did say that on 9 October 2014 he and his son received a letter of demand from Mr Turrall. The letter stated the amount then said to be owing under the Lease, and said that the arrears "need to be cleared immediately". But the letter was not addressed to the Milliers, and for that reason was not sufficient "written notice of demand" within the meaning of cl 2 of the Guarantee.
[199] Mr Gilchrist did mention in his submissions that notices under the PLA were left at the premises, but the notices were not produced in evidence, and it is not clear if they were addressed to the Milliers as well as to the Bluetts. In those circumstances the Trust has not produced sufficient evidence of compliance with cl 2 of the Guarantee.
[200] I accept Ms Schumacher's submission that any such service defect could not be "cured" by any of the provisions at cls 4, 6, 7 or 8 of the Guarantee. Clause 7 would not apply because it was arguably not concerned with the procedural issue of what steps the Trust was required to take before it could enforce its rights under the Guarantee, but with matters affecting the substantive issue of what the Trust would be able to recover in particular circumstances if it did enforce the Guarantee. Nor does anything in cls 4, 6 or 8 seem capable of curing any defect in notification of a written demand under cl 2.
[201] If no written demand addressed to the Milliers was left at the premises in accordance with cl 2, I consider it arguable for the Milliers that their obligation under the Guarantee to make good the Bluetts' defaults had not been triggered, and the Guarantee was not enforceable, when they were joined as defendants in this proceeding. The Trust could not have been entitled to sue them on a guarantee that was not then enforceable, and in my view that is fatal to the summary judgment application against the Milliers. The application against them will be dismissed accordingly.
[202] In view of my conclusion on the Milliers' first additional argument, it is not strictly necessary to address their second and third additional arguments. However, in case the matter should go further I will briefly set out my views on those arguments.
[203] The second additional argument was that the Memorandum of Variation of Lease did not operate to extend the Milliers' obligations under the Guarantee beyond 6 December 2012. Ms Schumacher relied on cl 4 of the Memorandum of Variation of Lease, as set out at [183] above. The argument for the Milliers was that cl 4 was intended only to apply to the higher annual rent. There was no express provision that provided, and no intention that the Variation would provide, an extension of the Guarantee beyond the original term of the Lease for which the Milliers had themselves been the Lessees.
[204]I would not have accepted that argument.
[205] Clause 8 of the Guarantee provided that the Guarantee would subsist and continue to apply notwithstanding any subsequent variation of the Lease terms after the date of the Guarantee, whether or not the Milliers were a party or consented to the variation. The term "variation" in cl 8 was defined to include any new Lease that might be granted in substitution for the Lease.
[206] In my view, the Memorandum of Variation of Lease was a "variation" caught by cl 8 of the Guarantee, and the effect of cl 8 was that the Milliers' liability as guarantors would continue for the extended term. Clause 4 of the Memorandum of Variation of Lease did not lessen or detract from the Milliers' existing obligations under the Guarantee: it simply confirmed those obligations.
[207] The third additional argument advanced for the Milliers was that the Trust has failed to mitigate its loss. The argument was built on the proposition that the Trust's claim against the Milliers was a claim for damages, and in that respect the Milliers' position is to be distinguished from the positions of the first to fourth defendants; the claims against those defendants are essentially claims for the rent and outgoings payable under the Lease, not claims for damages.
[208] Ms Schumacher relied on the House of Lords decision in Moschi v Lep Air Services44 for the proposition that a surety's liability sounds in damages, and not in debt. That principle has been applied in New Zealand: see DFC New Zealand Limited v McKenzie,45 where Tipping J noted that "undoubtedly an action on a guarantee is an action for damages". And in ANZ Banking Group Limited v Gibson,46 Somers J noted:
The obligation of a surety or guarantor is to see that the debtor keeps his promise to the creditor. It is not an obligation to pay money to the creditor and he is not entitled to notice of the debtor's default. If the guarantor fails to have the debtor carry out his obligation to the creditor he is liable in damages to the creditor.
[209] First, I accept that the Trust's claim against the Milliers is properly a claim for damages, of the kind discussed by Somers J in ANZ Banking Group Ltd v Gibson. The Milliers' principal obligation was to see that the lessee for the time being kept its
44 Moschi v Lep Air Services [1973] AC 331.
45 DFC New Zealand Limited v McKenzie [1993] 2 NZLR 576 (HC).
46 ANZ Banking Group Limited v Gibson [1986] 1 NZLR 556 (CA) at 567.
promise to the Trust to pay the rent and otherwise perform its obligations under the Lease. Any failure to do so would, subject to the provisions of the Guarantee, result in a liability to the Trust for damages.
[210] A party claiming damages is generally expected to take reasonable steps to mitigate its loss caused by the defendant's breach. The burden of proof is on the defendant to show that there was a course of action which it was reasonable to expect the claimant to adopt that would have avoided all or an identifiable part of the claimant's loss.47 The question as to what it was reasonable for a person to do in mitigation of damage is not a question of law but a question of fact in the circumstances of each particular case.48
[211] Ms Schumacher submitted that proper mitigation steps would have had the potential to ameliorate most, and conceivably all, of the liability the Milliers now face. She listed a number of "clear, reasonable and available" steps that the Trust could have taken to mitigate loss, including cancelling the Lease and letting the Milliers know of the Bluetts' defaults.
[212] It appears to me that, in combination, the provisions of cls 4(a), 4(f), 6 and 7(c) of the Guarantee, including in particular the provision (in cl 4(a)) that the "giving of time credit or any indulgence or other concession to the Lessee" would not abrogate, prejudice or affect the liability of the Milliers under the Guarantee, effectively excluded the failure to mitigate arguments the Milliers now wish to run.
[213] And the effect of cl 6 of the Guarantee was to exclude from what might otherwise have been a duty to mitigate its losses, the failure by the Trust to cancel the Lease before enforcement against the Guarantors – the Trust was not obliged to first have recourse to any other rights or remedies, or to take any steps or proceedings against the Lessee, before it looked to the Milliers for payment.
[214] The only step the Trust might conceivably have taken to mitigate the loss caused by the Milliers' breach, therefore, would have been to give the Milliers earlier
47 Thai Airways v KI Holdings Ltd [2015] EWHC 1250 (Comm) at [38].
48 Gul Bottlers (PVT) Ltd v Nichols Plc [2014] EWHC 2173 (Comm) at [22].
notice of the Bluetts' defaults. But the starting point is that a guarantor is not ordinarily entitled to notice of a principal debtor's default.49 The very wide wording of the Guarantee (in particular cl 4(a), which effectively absolved the Trust from responsibility for "anything omitted or neglected to be done by the Trust… or by any other… thing whatsoever which but for this provision might operate to abrogate prejudice or affect [the Guarantee]"), in my view effectively precludes the mitigation argument the Milliers make. Similarly, cl 7(c) provided the Trust with an indemnity for the rent, as a separate and additional liability, if any part of the rent was not recoverable from the Milliers as surety "by reason of any other fact circumstances or law whatsoever".
[215] For all of the above reasons, I am not satisfied that the Milliers' third additional argument was reasonably arguable.
RESULT
(1)Judgment is entered against Mr Jackson, Ms Letica and Mr and Mrs Fox, in the sums of $662,729.86 (rent), $52,151.05 (insurance premiums), and
$241,751.85 (interest to 3 February 2016), together with interest on the rent and insurance sums at the rate of 20 per cent per annum calculated from the 4th day of February 2016 down to the date of this judgment.
(2)The Trust is entitled to costs against Mr Jackson, Ms Letica and Mr and Mrs Fox. If counsel are unable to agree on costs, the Trust may file a memorandum within 15 working days of the date of this judgment, and Mr Jackson, Ms Letica and Mr and Mrs Fox may file a memorandum or memoranda in reply within 10 working days of service of the Trust's memorandum.
49 Brown v Aimers, above n 43, at [417].
(3)The summary judgment application against the Milliers is dismissed. Costs on that application are reserved.
Associate Judge Smith
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