Victoria Quarter no.1 Limited (as Trustee of the Victoria Quarter no.1 Trust) v FBB Holdings Limited
[2015] NZHC 3007
•30 November 2015
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2014-404-001218 [2015] NZHC 3007
BETWEEN VICTORIA QUARTER NO.1 LIMITED
(AS TRUSTEE OF THE VICTORIA QUARTER NO.1 TRUST)
Plaintiff
AND
FBB HOLDINGS LIMITED First Defendant
DAVID ROBERT DANIEL MCGRATH Second Defendant
Hearing: 25, 26 May 2015 (Submissions 29 May, 3, 4, & 8 June 2015) Appearances:
D W Grove for Plaintiff
A R Davie for DefendantsJudgment:
30 November 2015
JUDGMENT OF HINTON J
This judgment is delivered by me on 30 November 2015 at 5 pm pursuant to r 11.5 of the High Court Rules.
..................................................... Registrar / Deputy Registrar
Counsel/Solicitors:
D Grove, Barrister, Auckland
B Cran, Knight Coldicutt Limited, Auckland
A R Davie, Treadwells, Auckland
VICTORIA QUARTER NO.1 LTD v FBB HOLDINGS LTD & ANOR [2015] NZHC 3007 [30 November 2015]
Introduction
[1] This claim relates to a Heads of Agreement dated 12 May 2010 to lease part of the premises at Victoria Park Market to the first defendant, FBB Holdings Limited (“Flying Burritos”).
[2] The plaintiff landlord, Victoria Quarter No. 1 Limited (“VQ”) seeks damages for breach against Flying Burritos and against the second defendant, Mr McGrath, the shareholder and director of Flying Burritos, in his capacity as guarantor.
[3] The Victoria Park complex was being redeveloped and hence there was a sunset date of 15 June 2011 for Flying Burritos to be given possession of the rebuilt premises. After that, Flying Burritos was to carry out its own fit out.
[4] Flying Burritos cancelled the Heads of Agreement to lease on 20 June 2011 on the basis that possession was not provided to it on or before the sunset date of 15
June 2011.
Issues
[5] The issues for determination are:
(a) Was possession provided on or before the sunset date, (which determines whether Flying Burritos was entitled to cancel)?
(b) If possession was given, from what date was rental payable, if any,
given the definition of “commencement date”?
(c) If there was a lease had it been surrendered by operation of law? (d) Did Mr McGrath provide a guarantee?
(e) Was Flying Burritos liable for “extras” relating to the build?
(f) If VQ is entitled to damages, in what quantum (including what was
meant by “OPEX”)?
[6] Flying Burritos had pleaded an additional defence based on s 363 of the Building Act 2004. The gist of this argument was that if VQ had given possession to Flying Burritos by the sunset date, without having obtained a code of compliance certificate, VQ was in breach of s 363 which provides that a person must not permit the use of premises intended to be for public use where there is no code compliance certificate. This argument was not pursued.
Heads of agreement to lease
[7] The relevant Heads of Agreement to lease was entered into on 12 May 2010. Flying Burritos is the named tenant. The original landlord was Victoria Park Leasing Limited (“VP”). Pursuant to a deed of assignment dated 3 August 2011, the plaintiff, VQ, became the landlord. No issue was taken by Flying Burritos regarding the assignment.
[8] The key provisions of the Heads of Agreement are set out (unnumbered) in a
Schedule:
· Deposit: 10 per cent of total annual rent, to be held in landlord’s solicitor’s
trust account until the agreement becomes unconditional.
· Fit out period: From the commencement date.
· Term: 12 years.
·Commencement date: the date one calendar month after the Lessee has received a Certificate of Public Use or Code Compliance Certificate (as the case may be) from the Landlord, and possession of the Premises is given and taken. Where possession is given in the month of December 2010 however, the Commencement Date will be 1 February 2011.
· Total annual rent: $150,000 plus GST.
· OPEX estimate: $156 plus GST per m2.
[9] Clause 5 of the Heads of Agreement is the sunset date clause:
Sunset date: Where the Tenant has not been given possession of the Premises by the 15th of June 2011, the Tenant may at its discretion cancel the Agreement to Lease, with any deposit paid by the Tenant to be refunded in full, including any interest thereon, and neither party will have any further claim against the other.
[10] At the end of the schedule is a list of “Special Conditions”. Relevantly:
1.The rental will be $0.00/m2 for the first six months from the commencement date. This does not include OPEX which will be paid by the tenant from the commencement date.
2.The landlord will contribute $160,000 plus GST towards the tenant’s fit out on the commencement date. These funds will be spent on fixed chattels that will become the landlord’s chattels in the event that the lease is terminated or not renewed. These chattels are to be listed with the Landlord and no other charges are to be placed on these items.
[11] Clause 2 of the Heads of Agreement itself, provided that the parties acknowledge that the Heads of Agreement supersedes any other agreement between the parties and is a binding document once any conditions have been satisfied. It states that as soon as practicably possible the landlord shall prepare an agreement to lease on standard terms for the Centre which shall include the terms “in these heads” and “the tenant shall sign the same within 10 working days”.
[12] No agreement to lease was ever signed, nor was there evidence of one being prepared. The “standard terms for the Centre” referred to in clause 2 of the Heads of Agreement were not put into evidence.
[13] The parties accept that the Heads of Agreement (including the Schedule) is contractually binding on them.
Subsequent events
[14] Between June 2010 and May 2011 VQ worked towards completing the premises so that possession could be given to Flying Burritos. The director of Flying Burritos, Mr McGrath, liaised with Mr Henderson (who was a director of VP and was subsequently employed as a consultant to VQ), Mr Van Luyt (construction
manager of CMP Construction Limited, VQ’s contractor) and others, with regard to VQ’s concept plans, design work and building required to get the premises ready for an internal fit out.
[15] Extra work was carried out, some of which was at the suggestion of Flying
Burritos, for which VQ says Flying Burritos is liable.
[16] On 27 May 2011, Mr McGrath sent an email to Mr van Luyt, stating that:
[I] was somewhat taken aback by the extent to which the stormwater pipes from the Destructor building deck are protruding through the ceiling below. At no time have we been informed by way of elevation drawings of the extent of these protrusions … Quite honestly whoever designed this has had no consideration for what is going down below, really quite moronic. … Interested to hear what we can do to solve this as it really compromises how the space can be fitted out.
[17] Mr van Luyt replied on 30 May 2011 at 8.45 am, noting:
I was not aware that you were in Auckland, nor were we aware that you were on site. We cannot have you wandering around on site without our knowledge. If you contacted us we could have discussed the drainage issues. All the drain points from the deck above have always been on the drawings. …
[18] Mr McGrath replied later that morning and said:
… regardless of whether I was on site or not the stormwater pipes have been poorly designed and whilst they are shown on the plans there are no elevations of how far they protrude from the ceiling. They are protruding much further than they need to … and makes it very difficult to fit the space out. …
[19] Two more emails were exchanged on 30 May 2011 about the drainage pipes. Mr van Luyt stressed that he had a look at them and “we have kept them as high as possible”. Mr McGrath replied saying that “there must be a better solution”.
[20] Throughout this email exchange, Mr Henderson was copied. Mr Henderson emailed Mr McGrath later that same afternoon on 30 May. He made no mention of the stormwater pipes. He informed Mr McGrath:
I’ve been to your premises today, and they’re ready for your fitout. Please
let me know if there’s anything I can do to help in this area.
He also noted that he was asked by the bank to “chase” Mr McGrath for the deposit
for the premises.
[21] On 2 June 2011, Mr McGrath replied and said:
As you know when we saw you the other day we were putting in our building consent and as such we will not be ready to start our fitout until early to mid July which will give your builders the opportunity to get everything shipshape.
[22] On 8 June 2011, Mr Henderson emailed Mr McGrath, again confirming that the premises were ready for fit out and asked him to confirm that the deposit would be paid by 16 June.
[23] On 10 June 2011, Mr McGrath replied and referred to the email he sent on
27 May regarding stormwater pipes that were in his opinion far from satisfactory. Regarding the fit out, he said:
I note that you again pointed out that the space is ready for fitout, as I pointed out in my last email we will not be ready for fitout until mid-late July.
[24] On 20 June 2011, Flying Burritos wrote to VQ cancelling the agreement, relying on the sunset clause and on the fact that possession had not been granted by
15 June 2011. This was strongly contested by VQ.
[25] After the date of cancellation on 20 June 2011, the parties tried to reach a commercial solution. On 14 July 2011, Mr McGrath wrote to Mr Henderson:
Thank you for your time in meeting on Tuesday to discuss the issues in regard to the [premises]. We have been extremely patient in waiting for this building to be completed, it is still not. Our position is still that we consider the lease to be extinguished as pursuant to clause 5 of the heads of agreement and our letter of 20th June.
However we would be willing to enter into discussions for a new lease for
the yet to be built Battery Building as discussed yesterday. …
This would also allow the [premises] to be re-leased at the premium that everyone is telling us it could demand.
[26] Some time later, the plaintiff applied for a code compliance certificate for the premises. The result of a Council inspection on 22 February 2012 was that the
premises failed to meet Council requirements. The inspection checklist recorded that not all conditions were complete and that kitchen wastes were not separated. No further information is provided regarding what conditions were then unsatisfied.
[27] A code compliance certificate was eventually issued on 9 May 2013. This certificate was obtained without a tenant’s fit out. The code compliance certificate was not “received” by Flying Burritos, which it argued was necessary in terms of the commencement date clause of the agreement, despite their cancellation.
[28] On or about 11 July 2013, the plaintiff entered into a new agreement to lease with another tenant. It appears that the new tenant did not commence their fit out and a notice of default was issued. The plaintiff then re-entered the premises and the premises have remained vacant since.
Was possession provided on or before the sunset date?
[29] The primary issue for determination in this case is whether VQ gave or offered possession of the premises by 15 June 2011 as per the sunset clause.
[30] VQ alleges that Flying Burritos was in possession or was offered possession of the premises before the sunset date; that Flying Burritos therefore wrongly purported to cancel the agreement and that it is in breach of the agreement by failing to pay the sums due under it. It submits that the cancellation on 20 June 2011 amounted to a repudiation of the contract.
[31] VQ relies on the emails sent on 30 May 2011 and 8 June 2011 when Mr Henderson confirmed that the premises were ready for fit out. It submits it was ready, willing and able to give possession by 15 June 2011 and had offered it to the defendants. VQ says that possession was not taken up by Flying Burritos because, as Mr McGrath said, they would not be ready to commence fit out until mid-late July
2011 and of course before then, Flying Burritos cancelled.
[32] Flying Burritos submits that no keys were made available, numerous workers were on site at an inspection on 16 June 2011 and Mr McGrath was required to sign in at the site office on that date. The defendants say these factors mean possession
was not given. The first defendant says Mr van Luyt’s “admonishment” of Mr McGrath for being on site without permission prior to 30 May 2011 is inconsistent with the offer of possession on 30 May. Flying Burritos submits further that the landlord’s work was unfinished and the premises were therefore not capable of being the subject of a “sensible fit out”, which was required before possession.
[33] Both parties submitted that to give possession in this context the premises had to be ready for fit out. The first defendant said they had to be capable of being the subject of a “sensible” fit out. I am not sure there is any difference.
[34] I agree that possession in the context of the sunset clause required the premises to be ready for fit out.
[35] The first defendant also referred to commentary provided in Hinde on Commercial Leases that describes the legal right of exclusive possession of the premises as an essential feature of a lease.1 The first defendant says no exclusive possession was given.
[36] I do not consider that the concept of exclusive possession applies to “possession” for purposes of the sunset clause. There is no doubt that exclusive possession must be provided once “commencement date” (i.e. the actual start of the lease) is reached but that would not necessarily be on giving of possession. A code compliance certificate still had to be obtained and a month pass thereafter before “commencement date” is reached. Furthermore, the tenant’s fit out still had to be carried out and it was clear that at least some parts of the landlord’s works had to wait on or work around the tenant’s fit out. There had to be an element of practicality to the exercise. That is clear from the parties’ correspondence at the time.
[37] Possession for purposes of the sunset clause required free access to and use of the premises for fit out.
1 G W Hinde Hinde on Commercial Leases (3rd ed, LexisNexis, Wellington, 2015) at 9.
[38] If possession for purposes of the sunset clause did require exclusive possession then I consider the first defendant waived that requirement. Mr McGrath wrote on 2 June 2011 in response to being told the premises were ready for fit out, saying “we will not be ready to start our fit out until early to mid July which will give your builders the opportunity to get everything shipshape”. This suggests Mr McGrath was expecting there could be a builder on site until possibly even some time in July. Further Mr McGrath and Mr van Luyt had clearly been working closely together and in a co-operative fashion on both the plaintiff ’s plans and what would be required by the first defendant for fit out. Down to the date of cancellation Mr van Luyt seemed to have reasonable grounds to think his construction company would continue on with the first defendant’s fit out. In these circumstances I do not consider the first defendant can rely on a failure to provide exclusive possession, if that is the correct interpretation.
[39] In my view, possession could be offered in this context without the physical handing over of keys. A review of the email exchange between the parties shows that at no point did Mr McGrath ask for the keys. I accept Mr Henderson’s evidence that the handing over of keys is not normally done as part of giving possession in a commercial fit out situation. Mr Henderson also pointed out that his and Mr van Luyt’s offices were on site. Therefore, Mr McGrath would have no problems with access.
[40] Regarding whether Flying Burritos should have had to “sign in” to the premises if it had possession, I note that CMP Construction Limited was instructed to undertake the redevelopment of the entire Victoria Park complex. The premises that are the subject of these proceedings form a part of the Victoria Park complex. Mr Henderson gave evidence that there was a site office for the overall site and that it may be normal to sign in to get into the site but not to sign in to get into their actual premises. Mr Hunter gave evidence that he believed he could not get into the premises without signing in. However, he was on site on 26 May 2011 (before purported handing over of possession) and could not remember going on site again before April 2015. Mr McGrath did not go to the premises between 26 May and
16 June. He said he had to sign in at the site office on 16 June.
[41] A related point is Mr van Luyt’s email on 30 May 2011 saying Mr McGrath could not wander around on site without informing him first. I agree it does not sit well with offering of possession by the plaintiff later that same day. However, the email was sent before possession was offered and not after. It was also in relation to Mr McGrath’s site visit on 26 May 2011, four days previously, and Mr van Luyt could have been referring to the site as a whole, not the subject premises. In addition, possession was specifically offered again six days later. I do not give much weight to this email or the argument that signing in to the Victoria Park complex meant possession could not be granted. Signing in to the Victoria Park complex must always have been contemplated until the overall work was finished.
[42] In my view there was no requirement to sign in to the Flying Burritos premises as such, if there ever had been, at least from the time of Mr Henderson’s
30 May 2011 email and signing in to the complex was a formality that did not prevent possession being offered.
[43] Mr McGrath says also that there were still numerous workers onsite in their premises when he visited on 16 June 2011 and that this indicated a lack of possession. However, this was denied by Mr van Luyt who said he could not recall any workers being there and Mr McGrath was unable to back up his claim under cross-examination. He could not recall how many people were there or what they were doing. He said “I think there was (sic) some people doing stuff in the entry area”. I prefer Mr van Luyt’s evidence. If there were people present, it seems to be more likely to be in connection with the complex as a whole and in any event did not mean possession could not have been offered.
[44] I turn to the matters Flying Burritos raises which it says rendered the premises not capable of being the subject of a “sensible fit out”. Mr Davie often referred instead to the premises being “not fit for occupation”. I accept that if the matters raised meant the premises were not ready for fit out, then the defendants could rely on the sunset clause to say they had not been given possession of “the premises” and could cancel the lease. I do not accept that the premises had to be “fit for occupation”. That clearly was not the case as the premises were a shell.
[45] Flying Burritos refer to the three most serious deficiencies with the premises as at the sunset date being non-completion of the firewall in the downstairs area, sprinklers not being operational and the issue with the drainage pipes to which Mr McGrath referred in his correspondence.
[46] Mr van Luyt gave evidence that the firewall would be completed during the tenant’s fit out so as to allow various services (electricity, water, telephones etc) to be installed prior to completing the wall. He said that installation of these services was the first defendant’s responsibility. Mr Hunter, giving evidence for the first defendant, said that in this case that was incorrect. The tenant’s fit out did not have services fitted into the wall. Mr Hunter accepted that the firewall was not a big job and could have taken between half an hour to a day to complete depending on how many people were working on it. I do not consider that non-completion of the firewall meant the premises were not ready for fit out.
[47] Mr van Luyt said the sprinkler system was installed but was not turned on. He said it would not have been turned on until after the fit out. The defendants say that the sprinklers were not operational and that as at 26 May 2011 when Mr Hunter visited the site, the upstairs ceilings did not have any sprinklers contained within them. Mr Hunter did not go to the site again after 26 May 2011. I accept Mr van Luyt’s evidence that as at 15 June 2011 the sprinkler system was installed and it was the tenant’s responsibility to complete the upstairs ceiling during fit out and that this is the answer as to why the sprinklers were not operational.
[48] Regarding the stormwater drainage pipes, the defendants acknowledged the pipes conformed with the plans they signed off on but say they were never provided with elevation plans and that this was a fundamental flaw in the base build plans. Mr van Luyt said the pipes were marked on the plan as provided to the defendants. He also said that the pipes could nonetheless have been moved to accommodate the defendants’ request and that it was not a significant issue. He acknowledged during cross-examination that he did not come up with a solution before the contract was cancelled, but said some suggestions were made. If, as seemed to be accepted by the first defendant, the pipes were consistent with the plans, then even though the pipes may then have been in an unfortunate position, that would not mean possession
could not be given. It would mean the first defendant had not properly protected its position. I note also that the first defendant does not say the pipe position was unworkable, but rather that it was a poor design or far from satisfactory.
[49] Other alleged defects related to air conditioning, venting of the stove, deck lighting, and similar. These all seemed to be relatively minor issues. They were matters that were either to be addressed during fit out (including the air conditioning) or were not so significant as to prevent the premises being ready for fit out.
[50] Overall, I prefer the evidence of Mr van Luyt that what was required to be provided for purposes of possession was the shell of the building such that the premises were ready for fit out. To provide one hundred per cent completed premises by 15 June 2011 was not envisaged, as a number of matters could only be addressed during fit out. The parties had to work together on these things, as seemed to be envisaged in their dealings and correspondence and as indeed they had done for some time.
[51] I note it is odd that though the defendant is offered possession, which the parties agree means ready for fit out, the agreement provided that fit out is on commencement date, which is not until a month after possession date and may be later, depending on the code compliance certificate. However, the parties cannot have intended that not being able to fit out immediately meant the tenant had not been given possession, because on that basis the tenant could never be given possession, as fit out was by definition later, at least by a month. It seems the intention was for fit out to be as at possession date. An accompanying letter from the lawyer who drafted the heads of agreement made it clear that that was the intention and that was borne out by the parties’ correspondence.
[52] In my view the plaintiff did both offer possession and was in a position to give possession by 15 June 2011.
[53] Therefore, the defendants were in breach of the Heads of Agreement when they purported to cancel in reliance on the sunset clause. Damages for loss caused by a breach naturally follow.
From what date was rental due, if any?
[54] The first defendant says that even if possession were given, no rental ever became payable because no certificate of public use or code compliance certificate (which I refer to jointly as “code compliance certificate”) had been obtained as at
15 June 2011 and therefore the agreement did not “commence”. Rental was only payable or triggered from “commencement date” (the first six months being at $0 per square metre).
[55] I do not agree with this argument. The sunset clause applied only to possession. There was no date stipulated in the Heads of Agreement with regard to the landlord obtaining the code compliance certificate. This could have happened some time after possession. Consistent with that, the defendants did not in their correspondence, when offered the premises for fit out, request the code compliance certificate, nor was any reference made to non-provision of the certificate until quite some time after cancellation.
[56] I also accept the plaintiff’s argument that, the defendants having repudiated the agreement, the plaintiff was not required to continue to take steps required of it as lessor, so the plaintiff was not obliged to actually push on and obtain the code compliance certificate. The plaintiff cannot be obliged to keep taking steps pursuant to the contract when the defendant is refusing to acknowledge the existence of the contract.2
[57] However, for purposes of proving their damages claim in terms of lost rental, the plaintiff does have to show what would have been a likely timeframe for it to have obtained the code compliance certificate had the tenant not repudiated the agreement. That will then trigger the commencement date from which the lost rental can be calculated.
[58] Curiously, the plaintiff ’s case was that it could not obtain a code compliance certificate until fit out was completed and so for purposes of the damages claim the
plaintiff says the commencement date was to be calculated by allowing a reasonable
2 Hirst v Vousden [2004] UKPC 24, (2004) 6 NZCPR 135.
period for the tenant’s fit out and a reasonable period after that for the landlord to obtain the code compliance certificate. They gave some evidence of each of those reasonable periods. They said that the tenant’s fit out would not take more than three months and would probably take a lot less and that the code compliance certificate would issue shortly afterwards.
[59] My reading of the commencement date provision is that it is referring to a code compliance certificate for the landlord’s work, that being something under the landlord’s control and something the lessee can “receive … from the landlord”. It also appears to be wrong for the plaintiff to say it could not obtain a code compliance certificate until fit out was completed, as it subsequently did obtain a certificate before a tenant fit out.
[60] There is no evidence as to what would have been a likely time period for the plaintiff to obtain a code compliance certificate following on from possession being given in June 2011, without the tenant’s fit out having been completed. The plaintiffs simply said this was not possible. The only evidence I can fall back on is what actually happened, which is that a code compliance certificate was applied for some time later by VQ (without a tenant’s fit out), rejected by the Council on 22
February 2012 and then issued on 9 May 2013.
[61] I therefore have to treat the commencement date, for purposes of the damages claim, as being 9 June 2013, being one calendar month after the lessee could clearly have received a code compliance certificate from the landlord. The six months rent holiday provided for in Special Conditions clause 1 has to be added to that date, such that rent is payable from 9 December 2013.
[62] I stress that if I had evidence to properly establish the likely timeframe for VQ to obtain a code compliance certificate without the tenant’s fit out, I would have adopted that timeframe, rather than the actual date a code compliance certificate was obtained. I accept the actual date is likely to have been rather later than the “likely” time frame, as VQ was presumably in no hurry, having no tenant.
Was the lease surrendered by operation of law?
[63] As an alternative defence, the defendants say that the lease had been surrendered by operation of law. They say the surrender occurred as a result of the plaintiff’s entering into the new agreement to lease dated 11 July 2013 and that other issues show the defendant’s lease was “over”, namely non-rendering of invoices post the 11 July 2013 lease and re-negotiations between the parties themselves.
[64] Hinde on Commercial Leases states:3
The doctrine is based upon estoppel: the circumstances must be such that it would be inequitable for the parties to rely on the fact that no formal surrender was executed or lease surrender instrument registered. Express words of surrender are not required provided the conduct of the parties is inconsistent with the continuance of the lease. Although a surrender by operation of law does not depend upon the subjective intention of the parties, it does require “some unequivocal act which has the effect of estopping the parties from asserting that the lease is still extant”.
…
Surrender by operation of law may also take place when a new and valid lease is accepted by the lessee from the immediate lessor, or, it would seem, where the lessor leases the premises to a third party on the lessor’s own account rather than on behalf of the lessee.
(emphasis added)
[65] In Steve Christenson and Co Ltd v Furs and Fashions (N.Z.) Ltd, Wilson J
summarised the principle as follows:4
Surrender by operation of law is a form of reciprocal estoppels by representation. The tenant represents to the landlord that the leasehold estate is at an end and the landlord represents to the tenant the same thing. The representations may be made by words (oral or written) or by conduct, and the law views the effect of the representations objectively, the actual intention of the representor being irrelevant.
[66] Lastly, in Miller v Mattin, Richardson J said “there can be no doubt that the lease terminated when the new tenant obtained possession of part of the premises”.5
3 Hinde on Commercial Leases, above n 1, at 492 (footnotes omitted).
4 Steve Christenson and Co Ltd v Furs and Fashions (N.Z.) Ltd [1971] NZLR 129 (HC).
5 Miller v Mattin (1993) 2 NZ ConvC 191,714 at 191,718 (CA).
[67] I agree with the plaintiff that the concept of surrender by operation of law is not applicable here. It requires reciprocal estoppels with each party representing to the other that the agreement is at an end and equity then stops one from denying that. That is simply not the case here. The first defendant cancelled the lease. The plaintiff says this was in fact repudiation and is suing for damages. The plaintiff is not obliged to continue to send invoices and it is able, in fact obliged, to try to re-let the premises in order to mitigate its losses.
Did Mr McGrath provide a guarantee?
[68] The plaintiff submits that there is a guarantee enforceable against Mr McGrath and that in the alternative Mr McGrath is estopped from denying the enforceability of the guarantee and/or there has been part-performance of the guarantee.
[69] Mr McGrath submits that s 27 of the Property Law Act 2007 has not been complied with as there was no “contract of guarantee” in the heads of agreement. Further, if there were a contract of guarantee contained in the heads of agreement, it was not signed by Mr McGrath as guarantor and is therefore unenforceable. In this latter regard, Mr McGrath says there was no provision for the signature of a guarantor and there is no evidence to show an intention on the part of Mr McGrath to sign in a dual capacity, i.e. as guarantor and on behalf of Flying Burritos.
[70] Section 27 of the Property Law Act provides:
27 Contracts of guarantee must be in writing
(1) This section applies to contracts of guarantee coming into operation on or after 1 January 2008.
(2) A contract of guarantee must be –
(a) in writing; and
(b) signed by the guarantor.
(3) Subsection (2) does not require the consideration for a contract of guarantee to be in writing or to appear by necessary implication from a writing.
(4) In this section, contract of guarantee means a contract under which a person agrees to answer to another person for the debt, default, or liability of a third person.
[71] To see whether there was a “contract of guarantee”, some more detail regarding the Heads of Agreement to Lease is necessary at this point.
[72] The document is headed “Heads of Agreement to Lease”. The heading is followed by the names of the parties, described as Landlord (VP) and Tenant (Flying Burritos).
[73] Paragraph B of the introductory passage says “the Landlord has agreed to offer to the Tenant a lease of part of the Centre in Stage One as described in the Schedule (Premises) on the terms and conditions set out below”.
[74] Clause 1 then provides:
Principal Terms of Lease
The principal, but not exclusive terms of the Landlord’s offer to lease the Premises (which the Tenant hereby accepts) are set out in the Schedule, which includes the Landlord’s standard specifications which is attached to this agreement or as provided to the Tenant.
(emphasis added)
[75] On the second page of the Heads of Agreement, after the seventh clause, the agreement is signed “by VP as landlord” and “by the tenant Flying Burritos”. Mr McGrath signed on behalf of the tenant.
[76] The next two pages provide the Schedule. It sets out the particulars of the tenant, premises and the key terms of the Heads of Agreement as referred to earlier. The Schedule concludes by listing ‘Special Conditions’.
[77] I view the Heads of Agreement and the attached Schedule as one document, regardless of the Schedule referring to a “proposed Agreement to Lease and/or Deed of Lease”. The Heads of Agreement to Lease makes it clear that the conditions in the schedule are accepted by the tenant. The first defendant does not suggest the documentation should be viewed in any other way.
[78] There are only two references in the written document to a guarantee. On the second page of the Schedule, it records:
Guarantor (being the shareholder and director of the Tenant where the
Tenant is a Company): Danny McGrath subject to clause 4 above
[79] The other reference to a guarantee is at clause 4 (of the Heads of Agreement) where the landlord acknowledges that the tenant intends to grant a franchise in its business and that it may be desirable for the tenant to assign the lease to a future franchisee. It says that the “Landlord agrees that on such assignment it will release absolutely any guarantees and personal covenants given on behalf of the Tenant”.
[80] In my view there is no contract of guarantee in writing, and the guarantee (which undoubtedly was intended) is therefore unenforceable. Neither the Heads of Agreement, nor the Schedule, nor any other document I have been provided with, actually records that Mr McGrath “agrees to answer to another person for the debt, default, or liability of a third person” (which is required for a contract of guarantee under s 27(4)). I do not consider that either the naming of Mr McGrath as guarantor or clause 4, amount to a contract of guarantee. If the agreement had said “Mr McGrath guarantees the tenant’s obligations under this agreement”, or similar, that would be a different matter. I also do not consider the handwritten reference by Mr McGrath on an earlier draft of the Heads of Agreement to “an existing guarantee” constitutes a written contract of guarantee, as there is still no reference to what is guaranteed. I do not consider I should assume the guarantee is of all the tenant’s obligations. That seems too ready a circumvention of s 27. For that matter, the entirety of the tenant’s obligations is not clear, as the Schedule expressly says the terms are not exhaustive.
[81] I accept that the standard position under a lease is for the guarantor to guarantee all of the obligations of the tenant but that is not invariable, and the point of s 27 is that such a guarantee is unenforceable unless in writing.
[82] I note that of all of the cases cited by the parties under s 27,6 in none has a guarantee been enforced where there is no written record of one person’s agreement to answer to another for a default.
[83] I therefore agree with the second defendant that the guarantee is unenforceable.
[84] In light of that finding I do not need to consider whether Mr McGrath signed the Heads of Agreement in a dual capacity as tenant and guarantor.
Estoppel and part performance
[85] VQ argued that if the guarantee were unenforceable, then in the alternative Mr McGrath is estopped from denying the enforceability of the guarantee and/or the doctrine of part performance applies.
[86] In VQ’s reply to the defendants’ second amended statement of defence, it pleaded:
… the second defendant is estopped from denying his obligations as guarantor given his specific representations that he would be a guarantor and the plaintiff’s actions thereafter in part performing the heads of Agreement to Lease and expending funds on works specifically requested by the second defendant.
[87] In relation to part performance, the plaintiff initially submitted that the doctrine was developed to mitigate the harshness of the rules as to written contracts. However, in its reply submissions, it accepted that the doctrine of part performance is not applicable to contracts of guarantee.
[88] I therefore need only consider the estoppel argument.
[89] The plaintiff here relies on Tait-Jamieson v Cardrona Ski Resort Ltd.7 In that case there was no question that Mr Tait-Jamieson had agreed to act as a guarantor
6 Vuletic v Contributory Mortgage Nominees Ltd (2006) 7 NZCPR 552 (CA) at [3]; Doughty- Pratt Group Ltd v Perry Castle [1995] 2 NZLR 398 (CA) at 401; All Metals Trading Company Ltd v Eagle Wire Products Ltd [2013] NZHC 2198 at [9] (in this case, guarantor liability limited to 12 months rent and outgoings).
7 Tait-Jamieson v Cardrona Ski Resort Ltd [2012] 1 NZLR 105 (HC).
and was agreeing to pay $83,000 to Cardrona, should Central Lakes Ski Racing Inc not be able to do so. There was a written document confirming the guarantee of
$83,000, drawn up by a co-guarantor and circulated to the three guarantors. This document was not signed by Mr Tait-Jamieson. There was a series of later communications during which Mr Tait-Jamieson confirmed his commitment to the guarantee. The Judge held that it would be unconscionable for Mr Tait-Jamieson to rely on the absence of a signature and the estoppel argument was successful.
[90] In considering whether the law of estoppel applied to the enforcement of guarantees, French J referred to the general difficulty in doing so. She referred to comments made by the House of Lords in Actionstrength:8
[53] … As Lord Hoffman points out, it is in the nature of a guarantee that the party seeking to enforce it will always have performed first by conferring a benefit on the principal debtor so as to create the guaranteed debt without which the creditor cannot sue. It will thus always be the case, in every claim, that the creditor will have acted to their detriment on the faith of the guarantor’s promise. To apply part performance or admit an estoppel on that basis would obviously have the effect of making all oral guarantees enforceable, thereby completely defeating the purpose of the Contracts Enforcement Act.
and said:
[54] In my view, the significance of Actionstrength to this case is that despite the difficulties, the Law Lords (or at least a majority of them) did not discount the possibility of there being circumstances in which a guarantor could be estopped from relying on the Statute of Frauds. Lord Bingham and Walker accepted that as a matter of law the ordinary principles of estoppel by convention may apply to guarantees given appropriate facts, while Lord Clyde said he was content to proceed on the assumption that estoppel could apply.
[55] In accepting that general estoppel principles are, or may be applicable, to oral guarantees, Lords Bingham, Walker and Clyde emphasised that there must be something more than the promise of the guarantor itself. While their respective formulations of the “something else” differ slightly, all identified the sorts of circumstances in which estoppel would be available as involving the following elements:
• An assumption on the part of the creditor that goes beyond the primary assumption that the guarantor will honour their promise, such as an assumption that the guarantor regards the agreement as enforceable.
• The assumption is induced or encouraged by the guarantor.
8 Actionstrength Ltd (t/a Vital Resources) v International Glass Engineering IN.GL.EN SpA
[2003] UKHL 17, [2003] 2 AC 541.
• The creditor relied on that assumption.
• It would be unconscionable in all the circumstances for the guarantor to place reliance on the statute.
[91] The estoppel claim in Actionstrength failed because, in seeking to show inducement or encouragement, the plaintiff was unable to rely on anything beyond the oral agreement. In contrast, French J in Tait-Jamieson gave weight to the fact that there was a written record of the agreement, there was certainty as to its terms, as well as the express representations confirming the unsigned agreement would be honoured. The Judge said:9
It is an irresistible inference from the evidence that [Mr Tait-Jamieson] clearly intended to encourage a belief in the validity of the agreement and its enforceability.
[92] The plaintiff argues that in this proceeding, there is, like Tait-Jamieson, a written document as opposed to a mere allegation of a guarantee based on an oral agreement. It submits that the four elements cited by French J above are clearly satisfied. It says that based on the agreement to lease being signed and the explicit discussions between Mr McGrath and Mr Henderson, the plaintiff was encouraged to perform the works requested by Mr McGrath. Further, it would be unconscionable for Mr McGrath to rely on s 27 as all parties worked on the assumption that there was an enforceable guarantee.
[93] The defendants argue that Tait-Jamieson can be distinguished, noting the fact that the guarantee document was circulated to Mr Tait-Jamieson for approval and then addressed to the respondent. Further, Mr Tait-Jamieson personally obtained a significant benefit as a result of the guarantee. The defendants say here, Mr McGrath took the view that the guarantee would come after a lease agreement is signed and he did not obtain a significant benefit from the purported guarantee.
[94] In my view, estoppel cannot get around the requirements of s 27 in this case. Tait-Jamieson can be distinguished. The essential point of difference is that there was a written record of the agreement in that case and there was certainty as to its
terms. The only aspect missing was the signature of the guarantor.
9 Tait-Jamieson, at [58].
[95] In this case, I say again that there was a clear intention between the parties that Mr McGrath would provide a guarantee. Further, the discussions between Mr McGrath and Mr Henderson may very well have encouraged the plaintiff to enter into the agreement. The plaintiff relied on Mr McGrath’s agreement to provide a guarantee. However, unlike Tait-Jamieson, the material term or terms of the guarantee are not in writing, nor is there any oral evidence about the terms of Mr McGrath’s guarantee. I do not consider the sentence handwritten by Mr McGrath on the earlier draft of the Heads of Agreement is clear enough to constitute a contract of guarantee. In the circumstances, this Court cannot assume that Mr McGrath had agreed to guarantee all or any specific obligations under the agreement.
[96] The estoppel argument therefore fails for the same reason that the primary argument as to a guarantee fails. There is no clear evidence as to the terms of the guarantee, either written or oral, which Mr McGrath can be estopped from denying.
Claim for “extras” relating to the build
[97] VQ claims that there were a number of specific variations requested by the defendants to the plaintiff’s plans for the premises which required additional work, for which Flying Burritos agreed to pay. VQ sought damages in the sum of
$113,909.09 for these variations.
[98] The claimed additional work and costs were broken down by Mr Van Luyt as follows:
(a) aluminium composite panels ($32,900);
(b) additional canopy framing and plywood ($11,729.24); (c) structural steel to canopy ($11,814);
(d) additional waterproofing membrane to canopy roof ($6,400); (e) additional gutter sumps and downpipes ($2,130);
(f) additional cap flashings to parapets ($1,912);
(g) light cabling to canopy soffits and slab ($2,000); (h) sprinklers to canopy soffits etc ($9,628);
(i) change sliders to bifolds plus glass balustrade ($18,933.61); (j) FBB fit out alarms ($2,959);
(k) additional soil waste connections ($2,500); (l) aco grate bifolds ($2,308);
(m) SW connections to aco grates ($1,500);
(n) additional holes in precast concrete wall panels ($1,771);
[99] These costs total $108,484.85 including GST, which falls short of the claimed
$113,909.09, however in light of my finding nothing turns on this.
[100] Flying Burritos denies agreeing to pay for the additional costs. It says it agreed only to be liable for a sum of $6,610 relating to aluminium joinery for bi-fold doors (not included in the above list). Mr McGrath’s position was that the $6,610 would be deducted from the $160,000 fit out contribution that the plaintiff agreed to make pursuant to Special Conditions clause 2. Mr McGrath said that most of the purported additional work related to the canopy and that Flying Burritos did not approve any variations to the canopy.
[101] In the plaintiff ’s reply submissions it says there is no dispute that extra costs were incurred and that these costs were incurred upon the instructions of Mr McGrath, but it accepts that the evidence relating to agreement to pay the extra costs is not satisfactory. It is unclear from the plaintiff’s reply submissions (received after the hearing) whether the claim for “extras” was in fact still being pursued. The
plaintiff said in the post-hearing submissions that “the total claim, excluding the claim for costs for the extra works, is now $755,470.90”.10
[102] In any event, the claim for extra costs cannot succeed. Although I accept that significant extra costs were no doubt incurred at least in part at Mr McGrath’s request, there is no or insufficient evidence that the first defendant had agreed to pay for those costs other than to some extent by deduction from the $160,000 contribution to fit out due from the plaintiff. In particular I would expect to see at least an email or a file note, but there was nothing of that nature. Even Mr Henderson’s oral evidence was vague and to me suggested that if any money were to be paid, it would be brought to account when the plaintiff made its $160,000 contribution to the defendant’s fit out. The plaintiff never had to make that contribution. No claim was made by the first defendant for any deduction from damages otherwise payable resulting from the plaintiff ’s not having to pay that sum. Although the $160,000 fit out contribution was to be the plaintiff’s asset, there would obviously have been depreciation suffered over the period for which damages are claimed. It may not therefore be unfair that the plaintiff does not recover any of these extra costs.
Quantum of damages
[103] The plaintiff claimed for lost rental from 1 March 2012 to 1 May 2015 at
$14,554.40 including GST. The defendant said that if any rent was due, which it denied, it was at $14,375 per month including GST, with which the plaintiff subsequently concurred.
[104] The plaintiff did not advance the claim for lost rental beyond 1 May 2015. No issue was taken by the first defendant over the plaintiff having done all it reasonably could to mitigate its losses by actively marketing the premises for lease or sale but despite these efforts, the premises were still vacant.
[105] I have already found on the basis of the evidence available to me that rental is claimable from 9 December 2013, not from 1 March 2012, so the plaintiff will be
10 Emphasis added.
entitled to judgment for lost rental from 9 December 2013 to 1 May 2015 at $14,375 per month, including GST.
[106] I now turn to the matter of the claim for OPEX/rates. Mr Henderson gave detailed evidence of the OPEX calculation, including rates. He was not cross- examined, nor was any contrary evidence called. No point was raised regarding the OPEX calculation in the defendant’s opening or during the hearing. In the defendant’s closing submissions they point to the OPEX estimate in the Schedule of
$156 plus GST per square metre and say they are unsure how that becomes $3,641 per square metre and that counsel can see no mention of rates in the agreement. The plaintiff is not claiming $3,641 per square metre. It is claiming $3,641 per month. This seems to be less than the OPEX estimated in the Schedule of $156 plus GST per square metre. Also, if the question of whether rates were included in OPEX, or for that matter the basis of the OPEX claim generally were to be challenged, that needed to be in cross-examination or in very clear submissions. I am applying Mr Henderson’s calculations, there being nothing else before me, but only from commencement date as I have determined it, namely 9 June 2013.
[107] The claim for special damages for extras has already been rejected.
Result
[108] In my view, possession of the premises was able to be given to the defendants by 15 June 2011 and was offered to them by then. The sunset clause could not be engaged. The first defendant repudiated the agreement by purporting to cancel it and is liable for damages.
[109] Turning to the guarantee, I consider that there is no written “contract of guarantee” and therefore the guarantee does not comply with s 27(2)(a) of the Property Law Act, as the material terms of the guarantee are not in writing. Also, because there is not even an oral contract of guarantee, there can be no estoppel. The claim against Mr McGrath therefore fails.
[110] The concept of surrender of lease by operation of law is not applicable.
[111] The plaintiff is entitled to judgment against the first defendant for damages calculated as follows:
(a) Loss of rent of $14,375 per month including GST from 9 December
2013 to 1 May 2015;
(b) Loss of OPEX income from 9 June 2013 to 1 May 2015:
(i) $4,534.25 per month including GST from 9 June 2013 to 31
January 2014;
(ii) $3,641.50 per month including GST from 1 February 2014 to
1 May 2015;
(iii)$1,543.79 per month including GST in rates from 1 July 2014 to 1 May 2015.
(iv) $1,533.43 per month including GST in rates from 1 February
2014 to 30 June 2014.
Costs
[112] The plaintiff wished to file separate submissions on costs. They should do so within 14 days and the defendant can reply within a further 14 days.
Hinton J
3
2
1