Waimauri Ltd v Mahon
[2020] NZHC 1170
•29 May 2020
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2018-404-000454
[2020] NZHC 1170
BETWEEN WAIMAURI LIMITED
Plaintiff/First Counterclaim Defendant
TIMOTHY LAIRD EDNEY
Second Counterclaim DefendantWAIKORO LIMITED
Third Counterclaim DefendantAND
NEVILLE CHRISTOPHER MAHON
First Defendant
BEACH ARENA LIMITED
Counterclaim Plaintiff
Hearing: 3-6, 9-13 & 16 March 2020
Further submissions 19, 20, 24, 25, 27 and 31 March, 17 and 27 April
Appearances:
D Chisholm QC and M J Lenihan for Waimauri Ltd, Edney and Waikoro Ltd
A Glenie and A C van Ammers for Mahon and Beach Arena Ltd
Judgment:
29 May 2020
JUDGMENT OF MUIR J
This judgment was delivered by me on Friday 29 May 2020 at 3.00 pm pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar Date:…………………………
WAIMAURI LIMITED v MAHON [2020] NZHC 1170 [29 May 2020]
TABLE OF CONTENTS
Introduction 1
Background 2
Overview 2
The lease 9
The representations about the hotel which Mr Mahon says were made by
Mr Edney 15
The problems with the hotel 20The loan agreement 22
The alleged variation 23
The 2014/2015 period 24
2016 sales and the parting of the ways 29
The issues 31
Was there a November 2013 agreement in the terms alleged by Mr Mahon? 33
BAL and Mr Mahon’s estoppel pleading 63
Conclusion on estoppel 125
Conversion of sums from Waikoro to Waimauri 128
Introduction 128
The background in detail 129
Discussion 159
What then is owing under the Loan Agreement? 178
The alternative counterclaim – Quantum Meruit 199
Result 216
Costs 218
Introduction
[1] This is a difficult case. It pits a particularly hard-headed and unsympathetic property investor and money lender, Mr Timothy Edney, against a long-term business associate, Mr Neville Mahon. The latter is no neophyte himself, but he says he has been treated so shabbily by Mr Edney that the Court should intervene on his behalf. In particular, he says that Mr Edney has breached the terms of an agreement varying obligations under a lease and loan and has so conducted himself that he should not only be estopped from recovery under the loan and associated guarantee, but should be required to disgorge a substantial profit ultimately made on sale of the relevant premises.1
Background
Overview
[2] The litigation has as its backdrop the old Station Hotel (now known as the “Arena”), situated on Beach Road, Auckland City and adjacent two development lots.2 Mr Edney’s company Waikoro Limited (Waikoro) had reluctantly acquired these properties as part of a trade which he was obliged to take in order to secure a prime development opportunity in the inner city. The hotel was very much past its glory days and was being run essentially as student accommodation.
[3] For 30 years Mr Edney and Mr Mahon had enjoyed a business relationship and seeming friendship. Mr Mahon likewise had property and business interests, including some offshore. He clearly regarded Mr Edney as something of a muse, but with his own significant experience, was often a sounding board for Mr Edney also.
[4] After a long period of gestation, the two agreed upon a lease and option arrangement for the Arena and adjacent land. The options were both “put” and “call” at the level of $12,600,000. Beach Arena Limited (BAL) was the vehicle in which the lease was to be taken.
1 I refer to Mr Edney and Mr Mahon personally. Corporate entities were however involved.
2 One of which had frontage to Beach Road and the other to Anzac Avenue.
[5] The condition of the hotel was far worse than imagined with regular flooding, unsanitary overflows of sewage and falling masonry creating serious health and safety risks to the occupants and the public generally. Mr Edney’s attitude was that, in terms of the lease, these were all BAL’s responsibilities. The only assistance offered was to lend BAL money at 12 per cent interest, with a default rate of 18 per cent. BAL soldiered on using cashflow to meet immediate maintenance requirements as well as improvements to the accommodation. It stabilised the position, added value to the hotel and, as the result of an expensive and time-consuming resource consent process, unlocked the development potential of the adjacent land. But it often did so at the expense of meeting its rental and other financial obligations under the lease. It was forced to take out a loan from Mr Edney’s company Waimauri Limited (Waimauri) to meet an initial shortfall. This was personally guaranteed by Mr Mahon. Subsequently Mr Edney folded further tranches of BAL debt into the loan, despite consistent opposition from Mr Mahon.
[6] After approximately two years, and with the call option still in place, Waikoro set about attempting to effect a sale. It did so with Mr Mahon and BAL’s agreement and co-operation in provision of information to prospective purchasers, execution of conditional deeds of surrender when required and the like. At the time Mr Edney’s stated position was that “provided I just get what I contracted for I will be happy”. But no sale was achieved in the option period.
[7] Several months later, however, Waikoro entered into separate sales agreements for the hotel and development lots for a combined total of $16,700,00, $4,100,000 over the “put” price. It then terminated BAL’s lease and issued proceedings against Mr Mahon for $2,420,925,3 being the sum said to be owing under the loan, including over $1,000,000 of compound interest.4
[8] Mr Mahon alleges that he and Mr Edney entered into a collateral arrangement in or about November 2013, which not only relieves him of the claimed liability but which he now says supports a counterclaim by BAL for the $4,100,000 profit less the
3 This sum was adjusted in opening to $1,859,972.46 by adopting a simple as opposed to compound interest calculation.
4 In an initial demand under the loan, an entitlement to interest compounded daily was asserted.
sum secured by the initial loan.5 Alternatively, BAL claims $766,295.18 on a quantum meruit for the moneys it expended maintaining and improving the property and pursuing the resource consent.
The lease
[9] Mr Edney and Mr Mahon first corresponded about the Arena on 21 and/or 22 May 2011. Clearly the hotel had been the subject of antecedent discussions, no doubt in the course of their regular catch ups over coffee. I accept that it was something of a problem investment for Mr Edney in respect of which he was happy to have Mr Mahon’s input.
[10] Mr Mahon’s first email indicated that he was “trying to do a deal for [Mr Edney] with some Chinese”. He asked a number of questions about the operation of the business and condition of the building. That was followed up by further questions on 24 May 2011 about rates, insurance premiums, Historic Places Trust status and related matters.
[11] By October 2011, however, discussion had turned to a possible lease of the premises by Mr Mahon’s interests. On 27 January 2012 Mr Mahon’s partner, Ms Saren Loo, who is a qualified architect, wrote to Mr Edney with details about her background and intentions for the redevelopment of the hotel. She proposed a three- year lease with an option to purchase, and with Mr Edney providing $300,000 to fund improvements.
[12] From these initial discussions the ultimate Deed of Lease emerged. It is common ground that, although undated, it was signed on 20 December 2012 and that, during the course of its negotiation, Mr Mahon undertook a number of inspections, accompanied on occasion by either Ms Loo or others engaged by them.
[13]The principal terms of the lease were as follows:
(a)A 10-year term expiring 19 December 2022.
5 Nominally $442,682.92 although, as later discussed, in fact $370,622.63.
(b)An annual rental of $600,000 plus GST ($57,500 per month, GST inclusive) plus outgoings.
(c)Call options exercisable by 20 December 2015 and in favour of BAL over:
(i)the development lots $ 6,000,000
(ii)all properties $12,600,000 plus chattels
(iii)the hotel (if BAL had already exercised its option over the
development lots) $ 6,600,000 plus chattels
(d)Put options exercisable at the conclusion of the call option period and in favour of Waikoro over:
(i)all properties $12,600,000 plus chattels
(ii)the hotel (if BAL had already exercised its option over the
development lots) $ 6,600,000 plus chattels
(e)A requirement that BAL procure a guarantee and mortgage from the owners of two Newmarket apartments owned by Ms Loo’s family interests with the guarantee limited to the value of the properties and with an effective maximum ceiling of $500,000.
[14] The lease also included detailed provisions in respect of maintenance. I set these out in full:
[56]Maintenance and Works
In addition to the obligations of the Tenant under clause 20 & 21 of schedule 2 of the lease:
(a)The tenant has inspected the Landlord’s Properties prior to entering into this lease and has made all inquiries of the
various aspects of the properties it requires. The Tenant accepts the properties at the commencement of this lease on an as-is basis.
(b)The Landlord gives no warranty or makes any representation that the Landlord’s Properties are now suitable or will remain suitable or adequate for use by the Tenant or that any use of the Landlord’s Properties will comply with any laws or requirement of any authority.
(c)The Tenant shall comply at the Tenant’s expense with all rules and regulations of any authority that has jurisdiction over the Landlord’s Properties and their operation.
(d)The Tenant acknowledges that the building is registered with and included on the New Zealand Historic Places Trust register with a Category 2 rating. Prior to undertaking any proposed works on the building the Tenant shall procure the prior consents of the Landlord and all relevant authorities to ensure that the works do not conflict with or are in breach of the protection afforded by this regulation.
(e)The Tenant shall at the Tenant’s sole expense be responsible for all maintenance of the Landlord’s Properties and the replacement of any plant, equipment and chattels located at the Landlord’s Properties during the term of the lease. This shall include but not be limited to the plumbing, electrical wiring, light fittings, bulbs, fire alarm systems, security systems, telephone systems, air extraction, water heating systems, lifts, ceilings, floors, floor coverings, fire escapes, doors and windows.
(f)The Tenant shall occupy and use the Landlord’s Properties at its own risk and shall release the Landlord form [sic] all claims, demands or liability (to the full extent allowed by law) which may arise in respect of any accident, damage or injury occurring to any person or property on or about the property at any time during the term of this lease.
(g)The Landlord commissioned an IEP report of the Landlord’s Properties by BGT Structures, Structural Engineers dated July 5, 2012. This report rated the Arena Hotel Building at 38% NBS. There shall be no requirement for the Landlord to upgrade the Arena Hotel building beyond this level during the term of the lease.
(h)The Landlord shall be under no obligation to perform any capital works on the property during the term of this lease. The Tenant shall have no obligation to carry out any capital works to the Landlord’s Properties.
The representations about the hotel which Mr Mahon says were made by Mr Edney
[15] Mr Mahon says a number of representations were made by Mr Edney about the condition of the hotel which were inaccurate. He also says that although Mr Edney gave him advice about the insurance premiums payable on the building which was accurate at the time, he failed to tell him of a 12-fold increase, of which Mr Edney was notified before the lease was signed.
[16] The representations as to condition are partly in writing and said partly to be oral.
[17] Mr Mahon says that he was “always reassured [by Mr Edney] that, though the building was old, all maintenance was up to date and it was safe and sanitary”.
[18] In addition, he inquired in writing on 21 May 2011 about whether the property had been rewired because “one of [the prospective Chinese purchasers] thinks the whole building needs to be”. He was told by Mr Edney on 22 May 2011 “Electrical wiring tidied up. Gets BWOF (Building Warrant of Fitness) without issue. Problem was with fire detectors. All now reviewed and working fine”.
[19] However, much of what Mr Mahon criticises is in the nature of omission on Mr Edney’s part. He says in particular that:
(a)Although Mr Edney referred to problems with the fire detectors, he said nothing about the fire riser which was “dilapidated” and subsequently acknowledged by Mr Edney to be such.
(b)Although the lease referred to an IEP report rating the hotel building at 38% NBS, Mr Edney did not disclose that the same report also identified that “some cracking was present to the spandrel beams above the windows on the front (Beach Road) façade” and recommended that:
(i)concrete in these areas is remediated and the reinforcing checked to ensure the structural integrity of the beam; and
(ii)the connection of the concrete balconies and construction of the parapets may need to be further investigated to ensure their stability.
(c)There was no disclosure of Auckland Council’s Initial Evaluation Procedure Report dated 15 July 2011 rating the hotel building at 26% NBS, or of its Seismic Performance Report dated 24 October 2012 rating the two-storey building on the Beach Road development lot6 at 24% NBS. In both cases a seismic rating of “D” resulted.
(d)There was no disclosure of previous sewage overflows which Mr Edney’s employee Mr Hennah later acknowledged on 15 September 2014, that he was aware of.
The problems with the hotel
[20] These were numerous, and several were so serious that the continued operation of the premises was at risk. Only as a result of the considerable assistance given (without remuneration) by Ms Loo’s brother, Mr Con Lu, a university lecturer in engineering, were they resolved on a basis which permitted ongoing occupation, albeit that multiple rooms were required to be decommissioned from time to time. The problems included:
(a)Significant pieces of masonry falling from the building to the footpath below, necessitating that the façade be scaffolded and protective mesh installed.
(b)Discovery of asbestos on level 7.
(c)Failure of the fire riser to pass a Council inspection on 13 May 2013, resulting in threatened closure of the hotel and significant repairs to the system.
6 This comprised a former restaurant downstairs and accommodation upstairs which could be accessed directly from the hotel. This building was subsequently demolished by Waikoro, without, Mr Mahon said, consultation with BAL.
(d)Serious flooding problems resulting on one occasion with a ceiling collapsing on a hotel occupant and requiring new membrane, additional gutters and façade repairs at the point of water ingress.7
(e)Major sewage overflows on 13 September 2014 and 6 February 2015, the latter requiring 13,000 litres of sewage to be pumped from the basement.
(f)Multiple electrical faults resulting from long term maintenance inadequacies and water ingress.
[21] Waikoro declined to assist in the remediation of any of these problems despite the health and safety implications. Its position was that no matter how onerous the obligation, BAL was responsible for all maintenance on the building. Mr Edney did, however, offer to lend money, secured by Mr Mahon’s personal guarantee, to effect repairs.
The loan agreement
[22] I will discuss the background to this in more detail later. It had its origins in BAL’s inability to meet the insurance bill of $144,815.84 presented shortly after commencement of the lease. An initial short-form agreement was subsequently replaced by a more comprehensive document dated 20 September 2013 which captured BAL’s other shortfalls over the intervening period. The agreement provided for repayment on 31 March 2014. Advances attracted a base interest rate of 12 per cent and a default rate of 18 per cent. Waimauri was identified as the lender, BAL as the borrower and Mr Mahon as guarantor.
The alleged variation
[23] Key to Mr Mahon’s contentions is that a variation agreement was entered into between himself and Mr Edney in or about November 2013 which substantially altered BAL’s obligations under the lease and loan and, correspondingly, Mr Mahon’s
7 In an email dated 21 June 2013 Mr Hennah described these as “well beyond anything experienced previously to my knowledge”.
obligations under the latter. In the alternative, he says that if a variation cannot be established, the representations made by Mr Edney at that time were relied on by him and create an estoppel. The same discussions are said to provide the basis of BAL’s first counterclaim – attempted recovery of Waikoro’s profit on resale. Again, I intend to discuss the relevant evidence and pleadings in subsequent sections of this judgment.
The 2014/2015 period
[24] Throughout this period BAL continued to deal with the hotel’s serious maintenance problems and undertook numerous capital works including upgrading rooms and facilities. It also prosecuted a successful application for resource consent in respect of the development lots. In so doing their value was significantly enhanced. But, because of the marginal nature of the operation and Mr Mahon’s reluctance to take on more debt, these costs were often at the expense of BAL meeting its rental and other obligations under the lease. As a result, it became increasingly indebted to Waikoro – a position which Mr Edney chose to unilaterally address by transferring the debts to the Waimauri loan.
[25] As time passed the relationship between Mr Edney and Mr Mahon became more fractured with Mr Edney seeking performance under the lease and Mr Mahon essentially adopting the position that he was doing Mr Edney a favour by improving the value of his asset and that he and BAL should be released from their obligations.
[26] In September 2014 they agreed that the properties would be put to market and both parties pursued various sale options over the succeeding period. Mr Mahon also advanced various proposals for his interests to purchase the hotel on a basis funded by Mr Edney but these did not garner any interest. At least by mid-2015 it was apparent that BAL would not be exercising any of its options under the lease and Waikoro stepped up its sales efforts.
[27] During this initial sales period Mr Edney and his advisor Mr Johnston indicated to Mr Mahon that any upside over the $12,600,000 put and call option price would be applied to BAL and Mr Mahon’s liabilities; indeed, Mr Edney indicated that he would be happy to receive what he contracted for, suggesting that there was even potential for BAL to receive some profit if the sale price was sufficient.
[28] On 2 September 2015 Waikoro entered into a conditional sale for one of the development lots for $5,500,000, and a month later a similarly conditional agreement for the balance of the properties for $9,700,000. In each case conditional Deeds of Partial Surrender of Lease were willingly provided by BAL.8 However, neither agreement became unconditional.
2016 sales and the parting of the ways
[29] On 8 April 2016 a further conditional agreement was entered into. The purchaser was LCO Capital Ltd (LCO) which agreed to pay $15,000,000 for both the hotel and the development lots. Again, the agreement did not proceed. Ultimately, however, the development lots were successfully sold to LCO for $8,200,000 and the hotel to another party for $8,500,000. Both sales were effected after the expiration of BAL’s options.
[30] Again, Waikoro sought surrenders of lease, but BAL would not co-operate unless Waikoro entered into an agreement (a “one pager”) providing for a clean break. Waikoro could not be persuaded and terminated the lease. Waimauri in turn made a demand under the loan agreement on 11 August 2016 for $1,633,623.18, amended on 1 October 2016 to $2,420,925.22. This was the sum initially sought in its statement of claim together with default interest at 18 per cent from 1 April 2014.
The issues
[31]Ultimately there are only five real issues in this case:
(a)Was there an agreement in or about November 2013 whereby BAL would be given relief from its financial obligations under the lease and, in the event of a proximate sale, would be entitled to have its debt wiped clean and to receive any additional “upside”?
(b)If not, should Waimauri nevertheless be estopped from asserting its strict contractual rights?
8 The Deeds provided for the lease obligations to continue if the sales agreements did not both become unconditional and settle.
(c)If (a) and (b) are answered in the negative, can Waimauri claim sums owed by BAL to Waikoro which Mr Edney unilaterally chose to “fold” into the loan agreement?
(d)If not and Waimauri is limited to the initial advance under the agreement, how does the Court now deal with the fact that, according to Waimauri’s own internal records, such amount was overstated by
$71,960.29?
(e)Can, if all else fails, BAL bring a quantum meruit claim for the moneys expended by it on the properties”?
[32] In the background, however, lie BAL’s allegations about nondisclosure and misrepresentation. I am not required to address these directly because there is no prayer for rescission or a corresponding damages claim. However, BAL and Mr Mahon say that these issues are nevertheless important because they explain why Mr Edney would have considered it appropriate to make the concessions alleged. Accordingly, Mr Glenie submits that they go to the credibility of Mr Mahon’s assertions.
Was there a November 2013 agreement in the terms alleged by Mr Mahon?
[33] BAL and Mr Mahon claim that in 2013 an oral variation agreement was entered into between Mr Mahon and Mr Edney which:
(a)Exonerates BAL from any liability to Waimauri and therefore likewise exonerates Mr Mahon from liability under the guarantee.
(b)Entitles BAL to claim the upside ($4,100,000 over the call option price of $12,600,000 less the “original” loan amount),9 which Waikoro ultimately achieved on sale of the properties.
9 Referred to as $442,682.92 in para 19(b) of the second amended statement of defence and counterclaim dated 17 February 2020. The pleading is silent as to whether such sum would also attract interest at the default rate specified in the agreement. Note the subsequent discussion in this judgment about the sum “originally borrowed”.
[34] I start with how the pleadings have changed over time which, in Waimauri’s submission, significantly undermines the credibility of the claim.
[35] The variation agreement was first pleaded in Mr Mahon’s statement of defence and counterclaim dated 16 May 2018. At the time he and Waimauri were the only parties to the proceedings. I set out the relevant pleading in full:
2 …
(e)In or about April 2013, and as a result of BAL discovering a number of significant defects (Defects) with the Beach Property which were not reasonably ascertainable at the time the Lease was executed, the plaintiff, BAL, and Waikoro entered into an oral agreement (Variation Agreement) whereby:
(i)BAL would remain in possession of the Properties;
(ii)BAL would no longer pay rent or have the Option;
(iii)BAL would manage the remediation of the Defects, ready them for sale and manage a sale process;
(iv)Waikoro would be responsible for the funding of the remediation of the Defects and would reimburse BAL and Mr Mahon for any such remediation costs incurred and paid for by them;
(v)Waikoro would accept a reasonable offer to purchase the Properties;
(vi)Upon receipt of a reasonable for and/or sale of the Properties then BAL and Mr Mahon on the one hand; and the plaintiff and Waikoro on the other; all accepted that neither side had any liability to the other and that no sums would be due under or in respect of the BAL Loan Agreement.
[36] That pleading was essentially repeated in an amended statement of defence and counterclaim dated 15 February 2019. The only change was to para 2(e)(iii) to which the words “and Mr Mahon” were added after the reference to BAL.
[37] Consistent with these pleadings, both initial iterations of the counterclaim were limited to a claim for $861,361.08, being a sum of “remediation costs” which it was asserted were repayable in accordance with the variation agreement.10 In the original pleading this claim was advanced by Mr Mahon personally but by the time of the
10 Refer para 2(e)(iv) of both the 16 May 2018 and 15 February 2019 pleadings.
amended pleading, BAL had been added as a party and the counterclaim proceeded in its name.
[38] However, shortly before trial, leave was sought by BAL and Mr Mahon to file an amended defence and counterclaim. The application came before Downs J on 13 February 2020. He granted the application having recorded Mr Chisholm QC’s concession that the plaintiffs could “live with” it. His Minute of the same date records:11
15… The interests of justice favour Mr Mahon having leave to advance an amended counterclaim, as this will permit full ventilation of his case—however seemingly improbable—without material prejudice to Waimauri or Waikoro.
[39] A second amended statement of defence and counterclaim was accordingly filed on 17 February 2020. Again I set out the relevant section of the pleading in full:
2 They … say further:
…
f.In or about November 2013, Mr Edney informed Mr Mahon he was planning to sell the Properties. He proposed that any profit from that sale be shared on the following basis:
i.BAL would remain in possession of the Properties;
ii.BAL would no longer pay rent or have the Option;
iii.BAL and Mr Mahon would manage the remediation of the Defects, read the Properties for sale, undertake the work necessary to obtain a resource consent for the Development Lots, continue to develop the hotel business, remit all net funds received from the Properties to Waikoro, and assist in facilitating a sale process;
iv.Waikoro would be responsible for the funding of the remediation of the Defects and would reimburse BAL and Mr Mahon for any such remediation costs incurred and paid for by them;12
v.Waikoro would accept a reasonable offer to purchase the Properties;
11 Minute of Downs J, dated 13 February 2020, at [15].
12 This aspect of the alleged variation agreement was abandoned by Mr Mahon in evidence (12 March 2020 at 2.55 pm).
vi.BAL would vacate the Properties before expiry of the Lease in the event of a sale;
vii.Upon the receipt of a reasonable offer for and/or sale of the Properties then BAL and Mr Mahon on the one hand; and the plaintiff and Waikoro on the other; all accepted that neither side had any liability to the other and that no sums would be due under or in respect of the BAL Loan Agreement.
viii.Any surplus realised on the sale of the Properties by Waikoro which was in excess of $13,042,682.92 (being the $12.6m Option price set out in the Lease plus the original $442.682.92 borrowed by BAL) would be due to BAL.
g.Mr Mahon accepted that proposal, and thus entered into an oral agreement with Mr Edney on the terms set out at paragraph (f) above (Variation Agreement).
[40]The following significant changes will be apparent:
(a)The date of the alleged variation agreement changes from in or about April 2013 to in or about November 2013.
(b)BAL and Mr Mahon’s obligations are expanded beyond remediation of the defects to include all work associated with readying the properties for sale including obtaining a resource consent for the development lots, continued work and development of the hotel business and assistance in the sales process.
(c)Inclusion of a term that BAL would vacate the properties before expiration of a lease in the event of a sale.
(d)Inclusion of a pleading that any surplus on the sale of the properties by Waikoro over $13,042,682.9213 would be payable to BAL.
[41] In turn, the pleading included a new counterclaim for $3,457,317.08, being the “uplift” on resale allowing for the option price and the amount specified in the September 2013 Loan Agreement.
13 Being the Option price of $12,600,000 plus the $442,682.92 specified as owing under the 22 September 2013 loan agreement.
[42] Under cross-examination Mr Mahon was invited by Mr Chisholm to put some “flesh on the bones” of the alleged variation agreement. He said that during the relevant period he and Mr Edney met regularly, most often at Frasers café in Mt Eden but also at Mr Edney’s Shortland St office. The meetings were, he said, every two to three weeks and he was “90 per cent” sure that the relevant meeting was “around” November 2013. Confirming what was said in his brief of evidence, he maintained that variation agreement was initiated by Mr Edney “because he could see things going off the rails” and he was “trying to coax me into getting them sold a lot quicker”.14
[43] None of the specifics of time, place or content of this/these discussion(s) were put to Mr Edney in cross-examination.15 Mr Edney did, however, vigorously deny entering into any oral agreement either at that time, previously or subsequently in the terms alleged. He said it was his invariable practice in respect of any oral arrangement to seek to record it in writing immediately, and that the absence of any such record in this case fortified his position.
[44] Likewise, Mr Johnston consistently denied ever being told by Mr Edney, or otherwise understanding there to be any variation agreement entered into by the parties. Correspondence from him was consistent with such denial. For example, only three months before the lease was terminated he referred, in correspondence with Mr Lu, to Mr Edney’s advice that Mr Mahon was to provide “a schedule of repayments”.
[45] I have concluded that Mr Mahon is unable to establish the variation agreement for which he and BAL contend. I do so by a wide margin. It is, in my view, an ex post facto rationalisation by Mr Mahon of a series of assumptions, in themselves probably understandable in the context of his long association with Mr Edney and belief, that in the final analysis he would be treated in a way which could broadly be described as “fair”. In the face of Mr Edney’s uncompromising approach to the
14 This contrasts with the letter from Mr Mahon’s solicitors dated 22 December 2016 which identified the relevant meeting as having occurred at Mr Mahon’s instigation following heavy rains in April 2013 which exposed major problems with the hotel’s weathertightness.
15 It was put to him that he met with Mr Mahon in late 2013 or early 2014. Mr Edney agreed they had met in late 2013 on more than one occasion. It was also put to him that he said to Mr Mahon they should work together to sell the properties. Mr Edney demurred.
transaction, that is however, all it is – an attempt to recraft history in answer to a perceived betrayal of their relationship.
[46] It is not necessary for this judgment to be freighted with every reference in the record that is inconsistent with the twin pillars of the alleged variation agreement, namely that BAL’s only financial obligation during the currency of the lease was to remit “net funds”,16 and that on sale of the properties it was entitled to any uplift over
$13,042,682.92. In cross-examination Mr Chisholm referred to no fewer than 26 such instances. I need only refer to the highlights.
[47] I start with the pleadings. Mr Chisholm predictably focuses on the fact that through two iterations of the statement of defence and counterclaim, the alleged variation was said to have occurred approximately seven months earlier than the date specified in the final pleading. Again, predictably, he urges me to conclude that the change to the date reflected the late realisation that an April 2013 agreement was almost impossible to reconcile with the September 2013 Loan Agreement which, in its terms, captured arrears of rental and other recoverable outgoings. He emphasises that when asked about the change of date, Mr Mahon was unable to offer any explanation.17
[48] Significantly, initial correspondence from Mr Mahon’s solicitors, Anderson Creagh Lai on 22 December 2016 identified the time at which the agreement was entered into as April 2013 and inevitably Mr Mahon’s recall of those events would have been more reliable in 2016 than in 2020. However, it is not the specific date which is itself important. It is the fact that the change occurred, the fact that it occurred so late and (what I agree with Mr Chisholm) can be inferred as the reasons for it. All reflect adversely on the credibility of the assertion.
[49] I come then to the correspondence from Anderson Creagh Lai. It is a comprehensive letter. It deals both with the BAL issue and another unrelated one. The
16 And the associated alleged variation that on sale of the properties no sums would be due by BAL/Mr Mahon to either Waikoro or Waimauri.
17 The relevant exchange was:
Q. It is certainly something I would like to know the answer to.
A.Okay, well I’m sorry I can’t answer that. I just don’t have the – I can’t remember what I was doing between April and September that year and I am sorry I can’t answer that question.
discussion in respect of BAL comprises over 11 pages. The level of detail is consistent with detailed instruction from Mr Mahon. Specifically:
(a)It refers to a revised arrangement in April 2013.
(b)It says that the agreement was that “BAL would help manage and improve the properties in order to assist Waikoro to achieve their sale to a third party, that Waikoro would not unreasonably decline any offer to purchase received from a third party, and that at the point of sale any claims which the parties had against each other would be set aside i.e. the slate would be “wiped clean”.
(c)It recognises that offers “in excess of $15m” had been received which would have “provided Mr Edney with a significant uplift”, that he was obliged to have accepted the same and that at such a point “all claims would have fallen away”.18
(d)It seeks in its penultimate paragraph an acknowledgement that “no party has any claims against any other in relation to the Beach Road properties”.
[50] I regard the letter as pointing to the inexorable conclusion that it was not part of any agreement, as then understood by Mr Mahon, that BAL would be entitled to any uplift in the circumstances now asserted.19 In my view, late assertion of such an entitlement not only undermines Mr Mahon’s credibility in respect of the specific allegation, but, because of the importance of the allegation in context, goes to the credibility of the assertion that an agreement on any terms was reached with Mr Edney at that time.20
18 Unbeknown to Mr Mahon as at 22 December 2016 Waikoro had in fact already done so, achieving a total recovery of $16,700,000.
19 That is, a sale by Waikoro following expiration of the call option.
20 Significantly, in litigation between Mr Mahon and another of Mr Edney’s companies, The Station at Waitiri Limited, (in which Mr Mahon unsuccessfully claimed that the defendant was “wharehousing” various South Island properties on his behalf and on which substantial profits were ultimately made), Mr Mahon swore an affidavit dated 24 February 2017 annexing and adopting the content of the Anderson Creagh Lai letter.
[51] Mr Mahon endeavoured to explain the position by saying that he was unaware until Mr Edney filed his brief of evidence in November 2019 that there had been an uplift, or certainly an uplift sufficient to warrant bringing a counterclaim. I cannot accept that evidence. Even at the sale level identified in Anderson Creagh Lai’s correspondence, there was likely to have been a sufficient level of uplift that I have no doubt Mr Mahon would have wished to pursue if he genuinely regarded BAL as having any such entitlement. Moreover, at any time between December 2016 and BAL’s first assertion of such entitlement, he could have searched public data bases and established the sale price. He did not do so and maintained pleadings which made no mention of the alleged claim. Likewise, had he genuinely believed the entitlement existed he could have simply pleaded it without identification of the specific sum recoverable, then sought discovery and quantified BAL’s claim accordingly.
[52] Subsequent correspondence between the parties simply reinforces that conclusion. For example, on 31 March 2015, at which point there was evident testiness in some of the correspondence between the parties, Mr Mahon said to Mr Edney:
Now I fully understand your (sic) looking for money on top of what we have achieved for you on the property I think you should take over management ASAP.
There was no suggestion in the email that BAL was itself entitled to any such increment.
[53] The alleged agreement in respect of uplift is also inconsistent with another of the pleaded terms, namely that “upon the receipt of a reasonable offer … all accepted that neither side had any liability to the other …”21 – what Anderson Creagh Lai described in their correspondence as an agreement that “the slate would be wiped clean”. And this, in turn, is inconsistent with Mr Mahon’s attempts in 2015 and 2016 to negotiate an exit from what he himself recognised was at that stage a “mess”.22
21 Paragraph 2(f)(vii) of the Second Amended Statement of Defence and Counterclaim, dated 12 February 2020.
22 So described in an email from Mr Mahon to Mr Johnston on 15 September 2015.
[54] For example, on 6 July 2015 he proposed that BAL be released from “its agreement with [Mr Edney] and any debt associated with Beach Arena” and that the Family Trust assets associated with his wife and brother-in-law, which had been provided as security for guarantees under the lease, be “returned”. The response from Mr Edney was to remind Mr Mahon that he had a binding option to purchase and that until released from the business of running the hotel, BAL’s obligations to maintain the building continued. Presciently Mr Mahon in turn responded by observing that if he hadn’t known Mr Edney for 25 years and they didn’t have other business interests “we would be in court about now”. He went on, however, to say:
I have given you a deal that cleans things up I completely understand if you don’t wish to take it but please stop going around and around in circles…
[55] These statements cannot, in my view, be reconciled with the asserted existence of a concluded agreement, less than two years earlier, in terms that any reasonable offer would result in “the slate being wiped clean”. If any such agreement had been entered into it would inevitably have been referenced at the time of the exchange. Mr Mahon would not have been proposing a new “deal”, and he certainly would not have expressed himself in terms that he “completely understood” if Mr Edney did not wish to take it.
[56] A similar dynamic can be seen in an exchange between Mr Johnston and Mr Mahon on 9 September 2015. Mr Johnston wrote, identifying Mr Edney’s desire to clarify that “you have an existing option to purchase” and that he would be requiring “full repayment of the loans outstanding”. Mr Mahon’s response included the observation “our old deal just won’t fly”. There was no suggestion that the deal had already been varied.
[57] And in like vein is an inquiry from Mr Mahon to Mr Edney on 6 July 2016 at which point Mr Edney was in receipt of an attractive offer from LCO for both the development sites:
What I want to know is exactly what the arrangements will be between ourselves if and when this particular deal settles…
(emphasis added)
[58] By that stage Mr Mahon was in a position of considerable weakness. BAL’s call option (including the option resurrected under the terms of BAL’s penultimate surrender of lease) had expired. Mr Mahon knew that a sale of the hotel was imminent, and that BAL was in default of various commitments under the lease. He must also have appreciated its vulnerability to forfeiture if Waikoro required vacant possession for the purposes of its sale. His relationship with Mr Edney had deteriorated further and he had instructed his staff to make no further payments under the lease. It was clearly the time to remind Mr Edney of any antecedent agreement had there been one. To the contrary, he asked what the arrangements “will be”, hoping, as I assess the situation that, in the event of a favourable sale delivering a substantial profit over the option price Mr Edney would do what Mr Mahon regarded as the decent thing and “wipe the slate clean”.
[59] Likewise, the alleged agreement that BAL would only be liable for “net funds received from the Properties” (which I see as conceptually related to the alleged clean slate term) cannot stand in light of the contemporary correspondence and documents. In particular:
(a)On 10 March 2014, under pressure from Mr Edney about payment of rent, Mr Mahon responded:
As at today there is 43K in the bank we can transfer that or wait until the full 57K is in the bank I’d say Monday?
This is at a time only four months after the alleged agreement and yet Mr Mahon expressly acknowledged that satisfaction of BAL’s full obligations would require payment of $57,000 (in fact $57,500 including GST).
(b)A month later, on 11 April 2014, Mr Edney was again highlighting accrued arrears of rental and outgoings (at that stage totalling
$442,682.92). He wanted to have the arrears documented in a “new loan agreement”. Mr Mahon’s response was:
We need to discuss another solution this has become a project to get your money back I really can’t see any profit for us in all this but given Coronation I think we are all committed to
try and complete the revocations (sic) and get this business and property into a state you can sell when time permits.
In its terms the correspondence contemplates some future arrangement. It does not purport to suggest that such an agreement had already been reached.
(c)On 22 December 2014 and in response to Mr Edney’s concern about accumulating rental and operating expenses arrears, Mr Mahon responded:
The hotel is about to go into its busiest trading time so more than just 58k can be paid over next four months.
The reference to “58k” must again be taken to be the rental payable under the Lease.
(d)In February 2015 Waikoro’s employee, Mr John Hennah, forwarded to Mr Mahon one of many potential contracts for purchase of the hotel. Mr Mahon responded:
Hi John,
I think we should just clear up the spirit of what this is all about before moving forward.
As I have said to Tim on many occasions if it was not for his support on Coronation your team would have had the keys to this back a very long time ago there is nothing in this for us and it does take a reasonable amount of management time more for Saren and Con than myself.
After expenses you receive all proceeds, the accounts are audited and your (sic) are welcome to these any time you require.
We are happy to keep holding the fort for your team but feel free at any time if you don’t think we are doing a good enough job to take it back over.
We have created considerable value by achieving a resource consent on the balance land and stopped the place being closed down on numerous occasions.
The chattels in the main have been upgraded all of level 5 and 7 chattels of course are brand new but we don’t expect money for these, they are yours to deal with.
So you are free to make all decisions to do with this property. We will try our best for you to achieve your objectives which is of course to exit with the most amount of money.
I have copied Con and Saren. (emphasis added)
Significantly, the letter refers to the “spirit of what all this about”. Not to a specific agreement. Tellingly also, Mr Edney’s response emphasised BAL’s contractual commitments. Again this is usefully set out in full:
Hi Neville
Yes, you are very right.
Arena and Coronation are linked.
We are happy for you to receive any upside in the properties but expect you to perform the agreements.
You have a purchase / loan obligation at the Arena.
We are pleased to be able to put any inquiries or offers to buy it onto you.
However while the obligation remains the decision to sell continues to rest with you.
We will continue to send you all offers as received. Kind regards,
(e)On 3 June 2015 Mr Edney and Mr Mahon corresponded about façade repairs which Mr Edney offered to loan money for. Mr Mahon identified the “whole Arena situation” as one which “needs to be managed carefully as it has the potential to destroy relationships we are doing our best”. Mr Edney’s response emphasised the contractual relationships:
… If you underpay rent or outgoings it just goes on the loan. Would prefer you met your lease obligations though.
(f)It is inconsistent with the two conditional Deeds of Partial Surrender executed by BAL in October and November 2015 in the context of its prospective sales. Both recited in cl 3.1:
The Lessee shall remain liable for the rental and all outgoings and the due performance of all the covenants and conditions of the Lease in respect of the Arena Hotel Premises up to the Surrender Date [being the date of the settlement of the relevant sales contracts].
(g)BAL’s GST returns for the entire period of its occupation were premised on a rental liability of $57,500 per month (GST inclusive).
[60] I conclude therefore that BAL/Mr Mahon fail to establish that a variation agreement was entered into in the terms pleaded.
[61] I accept that by a date in early to mid-2015 there was an implicit understanding between Mr Edney and Mr Mahon that BAL was highly unlikely to exercise its option, at least at the nominated price, and that Waikoro was accordingly free to negotiate with others to achieve that or a better price, confident that BAL would co-operate as required (including provision of Deeds of Surrender of Lease if necessary).
[62] BAL does not plead a 2015 agreement to that limited effect, nor would it necessarily have relieved BAL/Mr Mahon from existing obligations, or entitled BAL to any uplift. There are, however, a number of exchanges between the key players in the period 2015/2016 which reflect this implicit understanding and which BAL/Mr Mahon rely on in support of their estoppel claims. I will come to these shortly.
BAL and Mr Mahon’s estoppel pleading
[63] At the commencement of trial on 3 March 2020 I granted leave, without opposition, for BAL/Mr Mahon to introduce a new (effectively alternative) pleading based on estoppel. Relevantly it was in terms:23
[2]In relation to paragraph 1(g), they further say that if the Plaintiff and Counterclaim Defendants deny entering into the Variation Agreement
23 Defendant/Counterclaim Plaintiff’s Reply, dated 28 February 2020, at [3].
then they are now estopped from asserting otherwise or relying on the strict terms of the Lease or the Loan insofar as they conflict with the alleged terms of the Variation Agreement in that:
a.The Plaintiff and Counterclaim Defendants by words or conduct created or encouraged a belief or expectation on the part of Mr Mahon and BAL to the effect(s) set out in paragraph 2(f) of the Second Amended Statement of Defence and Counterclaim dated 17 February 2020 (SODAC).
b.Mr Mahon and BAL reasonably relied to their detriment on those words or that conduct, by:
i.acting in accordance with paragraph 2(f) of the SODAC (including by not cancelling the Lease and vacating the Properties, remitting net funds instead of paying the rent stated in the Lease, not asserting the Option, expending resources on remediating and improving the Properties, assisting with potential sales of the Properties, signing conditional agreements to surrender the Lease and vacate the Properties on sale);
ii.not insisting that the parties formally document variations to the Lease or Loan.
c.It would be unconscionable for the Plaintiff and Counterclaim Defendants to be able to now resile from their words and conduct.
[64] This pleading was first foreshadowed during a pre-trial teleconference on 28 February 2020, which was convened to revisit aspects of the plaintiff’s own estoppel pleading. At the conclusion of the discussion Mr Glenie indicated that it now occurred to him that if the exchanges between Mr Edney and Mr Mahon in November 2013 did not reach the threshold of a contractual variation, nevertheless they may support an estoppel allegation. My subsequent Minute in respect of the conference, issued on the same day, recorded:
[4] [Mr Glenie’s] concession in this respect [relating to the plaintiff’s pleading] was, however, put in the context of a like concession sought from Mr Chisholm QC – the context being that, on reflection, the defendants should be pleading as an alternative to the existence of a variation agreement, an estoppel arising out of various representations allegedly made by Mr Edney at that time.
(emphasis added)
[65] I further suggested that Mr Glenie prepare a draft pleading which he did. This was in the form for which I subsequently granted leave.
[66] I detail this history because of the extent to which it emphasises the close correlation between the alleged agreement in November 2013 and the new estoppel pleading. The latter was clearly intended to act as a backstop premised on the same exchanges. This was reinforced in the opening lines of the subsequent pleading. Neither at the conference, nor at the commencement of trial when the issue of leave was addressed, was it suggested that an estoppel was being asserted on the basis of any subsequent exchanges between the parties. Had that been the case, then I doubt Mr Chisholm’s response would have been so accommodating, and leave may very well have been declined.
[67] In support of the new pleading Mr Glenie invokes orthodox estoppel principles requiring words or conduct creating or encouraging a belief or expectation, reasonable reliance, detriment to the party relying, and unconscionability in terms of departure from the expectations created.24 He emphasises that in Wilson Parking New Zealand Ltd v Fanshawe 136 Ltd the Court of Appeal identifies “a clear and unequivocal” expression of the representation relied on as only necessary in the case of “express representations”,25 and says that, because para 2(b)(i) of the pleading refers simply to an expectation created “by words or conduct”, this requirement does not apply.
[68] I do not accept that submission, at least in the broad terms it is made. To the extent that any representation relied on derives from words, it will fall into the category of “express representation” and require clarity and unequivocality, albeit the words should always be considered in their context.
[69] By contrast, Wilson Parking appears to recognise that representations by conduct are not subject to the same stringent requirements, although Burbery Mortgage Finance & Savings Ltd (in rec) v Hindsbank Holdings Ltd,26 which the Court of Appeal cites as authority for its principles,27 makes no such distinction. That
24 Wilson Parking New Zealand Ltd v Fanshawe 136 Ltd [2014] NZCA 407, [2014] 3 NZLR 567 at [44].
25 At [44].
26 Burbery Mortgage Finance & Savings Ltd (in rec) v Hindsbank Holdings Ltd [1989] 1 NZLR 356 (CA) at [36].
27 Principles which the Court of Appeal in Wilson Parking New Zealand Ltd v Fanshawe 136 Ltd
[2014] NZCA 407, [2014] 3 NZLR 567 at [44], says are “not in dispute”.
is not a tension which I need resolve because what are relied on in this case are express representations.
[70] In respect of at least two of the “variations” said to be established by estoppel, this argument is in my view unsupported by the evidence. I refer to the “net proceeds” and “uplift entitlement” allegations.
[71] As to the first variation, my previous discussion refers. Rather than encouraging an expectation that recovery be limited to net receipts, Waimauri, via Mr Edney and Mr Johnston consistently reminded Mr Mahon of the extent to which the liabilities under the lease were accruing, sought payment arrangements and emphasised Waikoro’s reliance on the letter of the signed documents.
[72] Only in June 2016, and by way of a negotiated amendment to a proposed form of Agreement for Surrender of Lease, was a reduced liability recognised by Waikoro, and then only with effect from 9 April 2016.28 Simultaneously, Mr Johnston asked about repayment arrangements for prior accrued liabilities.
[73] In respect of the uplift point, I need to return to the evidence. Mr Glenie relies firstly on Mr Edney’s response on 8 March 2015, to Mr Mahon’s “spirit of what this is all about” email29 and, in particular, on Mr Edney’s statement:
We are happy for you to receive any upside in the properties but expect you to perform the agreements.
[74]However, at the time of this statement, BAL retained an option to purchase for
$12,600,000. While that option existed, the upside was BAL’s to retain, either directly as a result of exercise and on-sale, or indirectly as the price of surrendering the option
28 Mr Johnston sought such a surrender from Mr Mahon on 8 April 2016 in the context of the first of what were ultimately two sales agreements with LCO. Mr Mahon initially declined to provide the surrender but as the result of a telephone discussion, later on 8 April or early 9 April (which I intend to discuss more fully subsequently in the judgment), agreed to do so. The document he returned on 9 April deleted Mr Johnston’s proposed clause 3.1 in terms of which BAL was identified as remaining liable for the rental and outgoings up until the surrender date. In substitution, Mr Mahon inserted by hand the clause “The lessee will pay net revenue after all outgoings”. This amendment was rejected by Mr Edney but Waikoro ultimately agreed to a modified version in terms “The lessee will pay net revenue after all outgoings with effect from 9 April 2016”. So amended, the document was signed by Mr Johnston as attorney for Waikoro and countersigned by Mr Mahon on 14 June.
29 Discussed in [59](d) above.
in the context of a sale by Waikoro. Although, as I have indicated, the evidence suggests that by a point in early to mid-2015 the parties were operating on the premise that any sale would likely be in the name of Waikoro, Mr Edney’s email simply recognised the underlying economic realities while the call option subsisted. The balance of his email was consistent in that respect. He noted:
We are pleased to be able to put any inquiries or offers to buy it onto you.
However, while the obligation remains the decision to sell continues to rest with you.
We will continue to send you all offers as received.
Kind regards
[75] Moreover, it is difficult for Mr Mahon to assert reliance on the statement when his response was in terms:
This is a self-serving load of nonsense and certainly not in the spirit of my working relationship with you.
The property is not ours to sell.30
[76] Next, Mr Glenie refers to an exchange on 31 March 2015 in which Mr Edney said to Mr Mahon:
As long as I get what is contracted I will be happy. The balance can go to you. You have asked me to help with the tenant and potential purchasers. I have been doing that.
[77] Again this must be seen in the context of the existing call option which, on multiple occasions over the succeeding months, Mr Edney and Mr Johnston emphasised was still in existence.31
30 I note parenthetically that the reference is again to the “spirit of [Mr Mahon’s] working relationship” as opposed to a specific agreement with Mr Edney.
31 For example, on 31 August 2015 Mr Edney stated “the option rests with you until mid-December if I remember”. On 9 September 2015 Mr Johnston advised “Tim would like to clarify that you currently have an option to purchase the development site (and the hotel) that I understand expires in Mid Dec 2015. If you do not exercise this option Tim then has the ability to Put the development site and hotel to you for the same price, being $12.6m plus GST, plus Chattels. He intends to exercise the Put option if you fail to exercise the purchase option”.
[78] I have no doubt that Mr Mahon similarly understood this context. It is the only tenable explanation for the fact that at no stage in 2016, even after the relationship between Mr Edney and Mr Mahon had completely foundered and Waikoro had terminated the lease and forcibly recovered possession, did BAL claim an entitlement to any upside. And this despite the fact that solicitors were engaged to forward a detailed letter which in its terms acknowledged interest in the properties excess of
$15,000,000. Whether analysed in terms of the specifics of the belief or expectation said to be created, or in terms of reliance, is irrelevant in that context. Obviously a party cannot rely on what that party does not believe.
[79] However, whether the plaintiff should be estopped from denying agreement that “the slate should be wiped clean”32 is a more difficult inquiry on the evidence.
[80] In addition to the emails from Mr Edney I have just referred to (and to which I must necessarily return later) Mr Glenie relies on two particular exchanges between Mr Johnston and Mr Mahon, one in writing in mid-September 2015 and the other in the course of a telephone discussion either late 8 or early 9 April 2016.
[81] Further description of Mr Johnston’s role is necessary at this point. He holds a senior position with the firm Castle Partners. In his brief of evidence, he describes the firm as being boutique investment bankers, specialising in the property sector. Mr Edney has been a client of his for almost 20 years dating back to a time when Mr Johnston was employed by one of the major trading banks, of which Mr Edney was a customer. I have no doubt, given the expansiveness of Mr Edney’s property empire (described in evidence as exceeding 100 commercial properties), that he was one of Mr Johnston’s major, if not the major client. Their long and trusted business relationship was reflected in the fact that Mr Johnston held a power of attorney for Waikoro which the evidence establishes he exercised in relation to execution of sales contracts for various parts of the properties and in relation to various Deeds of Surrender sought from BAL. At key points in negotiations with Mr Mahon, and particularly on the occasions of Mr Edney’s frequent trips abroad, Mr Johnston was
32 As essentially pleaded in paragraph 2(f)(vii) of the Second Amended Statement of Defence and Counterclaim in turn cross-referenced in paragraph 2(b)(i) of the Defendant and Counterclaim Plaintiff’s Reply.
the relevant point of contact. In respect to the first exchange I refer to, Mr Edney’s evidence was that, at the time, “Mr Johnston was under strict instructions that he was to, effectively to sell the Arena for $14 million on behalf of BAL”.
[82] Having heard Mr Johnston’s evidence, I assess him as a careful, even taciturn, advisor. I have no doubt that when the positions he adopted were subject to Mr Edney’s imprimatur, he expressed himself accordingly and that where he did not, it was because he was acting within the terms of his express authority. The fact that in respect of the first exchange it was copied to Mr Edney who took no issue with it and that the specific statements now relied on were, on their face, consistent with earlier statements by his principal, confirms that assessment. And because of the extent to which Waikoro and Waimauri’s positions became intermingled in the context of exit arrangements, that express authority was, I conclude, on behalf of both companies to the extent of such statements.
[83]The background to the first exchange was receipt by Mr Mahon of an offer of
$5,500,000 for the development site fronting Anzac Avenue. At $15,000 per square metre, he regarded the offer as very attractive. He put it to Mr Johnston who said that he “assume[d] [Mr Edney] would agree to anything you are comfortable with as long as you are aware of the implications of any shortfall”. Thus, he was signalling Mr Edney’s final say so on price, an example of the sort of qualification I have referred to earlier. Later in the exchange Mr Mahon added into the mix the possibility of his interests acquiring the balance assets, funded by Mr Edney. He said (copied to Mr Edney):
What I have offered to try and get out of this mess is you take the $5.5m and Beach Arena remaining titles are funded by a new [mortgage] from Tim [Edney] for 3 years at an interest rate slightly above his cost of funds.
Alternatively we both work to get the hotel sold for cash over [the] next few months.
You must understand I am trying to be realistic and helpful here.
[84]The response from Mr Johnston needs to be set out in full:
I think the best option for you to solve the mess you are currently in is to get the contract for the development site to Tim to countersign if it is in an appropriate form (please check offer regarding your thoughts on the additional
height still remaining on the hotel, ie we do not want to compromise the sale price for hotel).
We then meet later this week or early next week to progress a marketing and sales programme for the hotel – agent to be agreed upon. You are to assist the sale process so that the price is maximised so that as much of your obligations to Tim are extinguished as possible.
At this stage further advances from Tim on this asset to you or associated parties is not being considered.
I look forward to your response. (emphasis added)
[85] Mr Mahon responded, again copying Mr Edney, saying that he would put Mr Johnston’s comments about the “mess I am in to one side at the moment”. He made further suggestions about how the hotel might be marketed and about technical aspects of the height restriction.
[86] I accept that at the relevant point in time the immediate focus was on a part sale only, with the prospect that, on the later sale of the hotel there might still be some component of the BAL/Mahon liability which was not “extinguished”. But Mr Johnston’s email drew a direct correlation between price maximisation as a result of co-operation in the sales process and extinguishment or part extinguishment. In its terms it clearly contemplated that, to the extent the sale price exceeded $12,600,000, it would be applied to liabilities potentially (although not contemplated at the time) to the extent of fully extinguishing them.
[87] Although I accept that over the succeeding months BAL did “assist the sales” process as requested by Mr Johnston,33 often at considerable cost to it in terms of time, resource and its legal rights under the lease, there seem to me, however, to be two difficulties in BAL/Mr Mahon relying on this exchange to found a “clean slate” estoppel.
[88] The first is a pleading problem. The pleading focuses on the alleged November 2013 meeting and the commitments said to have been made by Mr Edney at that
33 In particular it co-operated in the provision of information to prospective purchasers (an onerous requirement at times), assisted them with inspections and provided deeds of partial surrender as requested.
time.34 There is no application for further amendment although Mr Glenie does invoke the wording of r 1.9 and submits that I may legitimately focus on the “real controversy between the parties”. However, I consider Mr Chisholm correct in saying Mr Edney’s interests should not be obliged to “shadow box to ascertain precisely what the representation is that might be relied upon to found the clean slate estoppel”. That is particularly so given the circumstances in which the pleading was introduced, which I have previously described.
[89] More substantive, however, is the problem of reliance. Indeed, although Mr Mahon quoted parts of the relevant exchange in his brief of evidence, he did not even refer to the phrase “so that as much of your obligations to Tim are extinguished as possible”. He simply observed that, when approximately a month later, Mr Johnston requested that he sign a partial surrender of lease in respect of the same sale and purchase, he co-operated because “I considered that my agreement with Mr Edney [being the alleged agreement of November 2013] was still in place”.35
[90] The second relevant exchanges with Mr Johnston are in the period 8-9 April 2016. Again, some background is necessary.
[91] On 23 October 2015 BAL entered into an agreement for partial surrender of lease. It did so at Waikoro’s request and in the context of a conditional sale agreement to Tasman Cook International Limited (Tasman Cook). Clause 2.3 of the agreement provided that in the event of the sale becoming unconditional and settling, then both the “put” and “call” options in the lease would be cancelled. Clause 4.2 in turn provided that if for any reason the sale was cancelled, then the call options would resurrect for a period of 10 working days following the cancellation, with the put option, in turn, applying for three months following expiration of the call option.
34 The alleged estoppel is against (i) asserting otherwise if entering into the Variation Agreement is denied and (ii) relying on the strict terms of the lease or the loan insofar as they conflict with the alleged terms of the Variation Agreement.
35 I do not, however, accept Mr Chisholm’s submission that subsequent execution by BAL of partial surrenders of lease which acknowledged ongoing rental obligations necessarily indicates an absence of reliance. Such acknowledgment could co-exist with an expectation that, provided the price was good enough, all arrears would be extinguished.
[92] By April 2016 the Tasman Cook transaction had not been made unconditional and on 8 April at 11.15 am Mr Johnston wrote to Mr Mahon as follows:
We are looking to cancel the sale agreement to Tasman Cook which you had executed a conditional agreement to surrender the lease at Arena back in November December 2015. We have now executed a conditional contract to sell the whole property at Anzac/Beach Road to LCO Capital Limited. If you are able to sign the attached document so that the purchaser is able to conduct DD on the basis that if they can settle the property they will be getting vacant possession. If you could execute and return this today it would enable the DD process to start immediately.
Look forward to your response.
[93] The letter included a draft (conditional) Agreement for Surrender of Lease. Unlike the previous partial surrender, this did not provide for rehabilitation of the call option in the event the LCO transaction did not proceed. It did, however, provide for rehabilitation of the put option. To that extent, Mr Glenie describes the document as “very one sided”.
[94] Mr Johnston’s advice about having “now executed a conditional contract” with LCO aligns with the date of that contract which is likewise 8 April 2016. The contract was conditional on due diligence (cl 21.1) and on Waikoro “reaching agreement with Beach Arena Limited…. for the surrender of the Hotel Lease as at the settlement date on terms satisfactory to the vendor in its sole and absolute discretion” (cl 21.2(a)). Significantly, it was not conditional on non-exercise or surrender of BAL’s call option which was resurrected for 10 working days at the point the Tasman Cook agreement was cancelled. In that sense Waikoro’s position was potentially exposed and BAL’s negotiating position significantly enhanced. But Mr Mahon’s evidence was that by April 2016 he had forgotten about the rehabilitation provision. Nor was there any evidence about his ability to exercise the option at that time. I regard his capacity to do so as unlikely given the 10 per cent deposit payable on exercise and the prompt settlement requirements.
[95] Although there was no evidence as to whether Waikoro was aware of its potential exposure at the point it sought the surrender, I accept that it was, in any event, keen to see the LCO transaction proceed and, in that context, to satisfy the cl 21.2(a) condition. As Mr Johnston explained in evidence, LCO was, by a significant margin,
the most substantial and well-resourced of the purchasers who had shown interest. And by that point, provided an acceptable price could be obtained, Waikoro was, in my assessment, a reasonably motivated vendor for what had been a difficult asset on its books.
[96] Mr Mahon responded to Mr Johnston’s email later the same day. He noted that he had not been provided with any detail about the proposed deal in terms of timing or price and then said:
We will not sign any further agreements but you can rely on this email for us to be extremely helpful, flexible and give every assistance needed for due diligence.
[97] That was not an acceptable response to Mr Johnston. The reasons are obvious. Although elsewhere in his email Mr Mahon talked about vacant possession not being straight forward, and in the order of 90 days being required, I am satisfied that, as a highly experienced property consultant, Mr Johnston was well aware that the longer he did not obtain a surrender from Mr Mahon, the greater Mr Mahon’s leverage and so the greater the risks to the LCO transaction. In an email sent at 5.34pm the same day, he stated:36
We cannot proceed with any sale if the conditional surrender is not signed. No one would spend anytime (sic) or money knowing that an issue could occur later.
[98]Mr Mahon responded at 5.49 pm:
All leases and agreements have expired anyway so not sure what the problem is here.
[99]Mr Johnston in turn replied at 7.20 pm:
The surrender of leases are conditional on the sale and settlement of the properties as that has yet to occur they are still enforceable and that is why we are trying to achieve a sale of the whole site at a good price so the lease is at an end for all parties.
[100]Mr Mahon in turn responded:
36 I note the apparent inconsistency between the stated inability to “proceed with any sale” at 5.34pm and the advice at 11.15 am that “We have now executed a conditional contract”.
Is the price and terms a secret?
[101] At some point thereabouts there was a telephone discussion between the parties, because in an email dated 9 April 2016 at 2.49pm+1200 he wrote to Mr Johnston as follows:
As per our phone conversation signed agreement attached.
[102] The attachment was the agreement for surrender of lease but with cl 3.1 (relating to ongoing lessee obligations for rental and outgoings) struck out and replaced with “the lessee will pay net revenue after all outgoings”.
[103] Mr Mahon gave, without objection, supplementary oral evidence in relation to this discussion. It had not featured in his written brief – a point which Mr Chisholm appropriately emphasises in terms of the prominence that the conversation now assumes. His evidence was as follows:
Q What are your recollections of that phone conversation?
A My phone conversation with him was that he was begging me and he assured me that he would keep my agreement going forward. He wouldn’t affect my agreement going forward. I – when he called me I really wasn’t that interested in taking his call. I was basically sick and tired of it because most of the purchases and people and people that they dealt with, they could never get there. There was just never any horse power in their buyers.
Q Do you recall where you where?
A From my memory, yes, I was back in New Zealand and I was at home that afternoon. It was probably about 5.30, 6.00 o’ clock.
Q And do you recall how long you spoke for?
A Yes it was quite a long time because I was very grumpy when he called me.
Q And what was the outcome of that phone call in relation to the surrender?
AWell look, I just vented my anger with them. They were starting to keep things secret. He assured me that because of his relationship with Tim Edney, I knew that he, they were close all the way back to the ANZ days, that he would make sure that I was looked after.
[104] The issue of the conversation had earlier been raised by Mr Glenie in his cross- examination of Mr Johnston. The reference to the conversation in Mr Mahon’s email of 9 April 2016 was put to him. His response was that he could not remember the conversation. The following exchange then occurred with the Court:
Q Would it be fair to suggest that something has been said which has persuaded Mr Mahon to change his mind from the previous day and to sign the document which the previous day he said he was not going to sign?
A I think he was talking about no more documents other than this one.
Would not sign any further agreements.
[105]Mr Glenie then asked:
Further, meaning further to the, this one here?
[106]To which Mr Johnston responded:
This one here and he did alter it as well.
[107] Because of the supplementary oral evidence given by Mr Mahon, I granted leave for Mr Johnston to be recalled. Mr Mahon’s evidence was read to him by Mr Glenie. The following exchange then occurred:
QIn that case could you give the Court any response that you have to the evidence that Mr Mahon has given?
AI have no memory of the conversation four years ago, but I never sort of commit or talk about another agreement, which I didn’t know about, even I think the next day when there was, he marked it up, I had to go back to Mr Edney to get instructions on the rent saying he wanted and that took six weeks.
Q So you still have no clear recollection of that phone call, that is correct?
A No.
QAnd you have no recollection of saying to Mr Mahon you would not effect his agreement going forward?
A No I wouldn’t.
QAnd you have no recollection of telling him that you would make sure that he was looked after?
A No, definitely not.
[108]I make the following findings in respect to the telephone conversation:
(a)It was instigated by Mr Johnston who, for the reasons I have already indicated was keen to obtain the surrender.
(b)Although motivated, he did not “beg” Mr Mahon for the document. Such would be inconsistent with his demeanour and any sign of desperation would have altered the negotiating balance between the parties.
(c)Something was said by Mr Johnston which persuaded Mr Mahon to provide the surrender which he had previously declined to do.
(d)I am satisfied it was not an assurance that Mr Edney would honour the full terms of the agreement BAL/Mr Mahon assert in these proceedings, that is, as per the first part of Mr Mahon’s supplementary evidence. I accept Mr Johnston’s direct evidence in re-examination that he was not aware of any other agreements apart from those documented.
(e)I find, however, that Mr Mahon was given some level of comfort about his and BAL’s position in the event that he signed the surrender.
(f)On the balance of probabilities I consider this likely to have been more than simply identification of a “good price” or confirmation of the advice given in Mr Johnston’s email at 7.20 pm on 8 April that such an agreement would see the lease “at an end for all parties”. Mr Mahon’s well documented requirement was not just that the lease be brought to an end, but that his and BAL’s other liabilities be addressed.
(g)I conclude that the core message was that the LCO transaction was Mr Mahon’s “best shot”, so far, at getting what Mr Johnston had previously described as the “mess” he was in, cleaned up.
[109] I have little doubt that if Mr Johnston had been asked at that point whether he thought Mr Edney would likely waive BAL/Mr Mahon’s liabilities in the event the contract went unconditional, he would have said “yes” having regard to the parties’ history and the fact that the purchase price exceeded the put option price plus accrued debt. But I do not consider he went as far as to make any specific representation in those terms, despite the fact that it would have aligned generally with his email of 15 September 2015. I consider him likely to have been wary at that point of anything that might be seen to commit his client. This is emphasised by a communication two months later, and which I will come to shortly, in which his views were expressed to be “without prejudice to Tim’s position”.
[110] However, even if I am wrong in that assessment and a representation was made that “$15million will see all your debts extinguished and the whole mess at an end”, or words to similar effect, there remain difficulties with the estoppel claim.
[111] For a start, the same pleading issues arise. There is no allegation of an estoppel based on this or any other exchange with Mr Johnston.
[112] Then there is the same problem with reliance because Mr Mahon did not simply sign and return the surrender. He amended it by deleting the clause confirming BAL’s continuing liability under the lease pending settlement and substituting a new clause.
[113] As Mr Johnston advised Mr Mahon on 12 April 2016, this change was unacceptable to Mr Edney37 and the Deed was not ultimately signed by both parties until 14 June when the words “with effect from 9 April 2016” were added to Mr Mahon’s clause and the amendment was countersigned by Mr Johnston, as attorney for Waikoro, and by Mr Mahon.
[114] In the interim Mr Lu had written to Mr Johnston (on 8 June 2016) asking for “his view of how things currently stand commercially between Tim E and Beach Arena in regard to any potential sale”.
37 The email records: “the understanding that you had proposed in late December 2015 that you will make payments of $80,000 per month until a settlement is achieved”. Mr Mahon in turn rejected any such understanding in the response on the same date.
[115] I set out Mr Johnston’s response of the same day in full. This was copied to Mr Mahon:
Hi Con
To be honest I am not sure as there appears to be continual discussions going which I am not involved also I was not involved when lease etc was document 3 or so years ago.
But the last conversation I had with Tim before he departed and in the emails circulated around on the Part St sale.
It was stated Neville was going to provide a schedule of repayments from the Arena. I know Tim has a loan with a PG to Neville and security over the lease. I have no knowledge of these loans but I know Josh keeps a balance.
Without prejudice for Tim’s position seeing he is away. But I assume he wants you to work with him to get the place sold in an orderly manner so that all parties walk away still talking.
I assume like any lender he is asking you to put forward a possible payment schedule for his review and then if agreed we get this thing unconditional and settled.
Regards Tim
[116] To the extent that execution of the Deed of Surrender is advanced as evidence of alleged detrimental reliance on any April representation,38 there are accordingly several problems.
(a)Although Mr Johnston assumed a position whereby all parties would “walk away still talking” and acknowledged in evidence that such outcome was highly unlikely in the event Mr Edney chose to both keep an “uplift” of $4,100,000 over option price and sue Mr Mahon for alleged arrears of $1,800,000, that statement is expressly said to be “without prejudice for [Mr Edney’s] position”.
38 I am unable to identify anything else in the evidence which would qualify in this respect as consistent with BAL’s reduced co-operation in the months immediately prior to termination of the lease. By 6 July 2016, for example, Mr Mahon was advising Mr Lu that he would not be signing anything further “until I know the full story”.
[152] The same dynamic can be seen in the June/July 2015 period. Mr Edney had received a report from Mr Con Lu, referring to continuing problems with the building façade, from which a large steel drainpipe had become detached. Mr Edney wrote to Mr Mahon in response saying:
That Con is also very worried means you should do the repairs before anything falls off or causes a problem.
As offered before we are prepared to loan you the money as soon as required.
[153]Mr Mahon responded within the hour:
Not interested in borrowing money Tim for a property we don’t own.
He went on to describe, “This whole Arena situation” as one which needed to “be managed carefully as it has the potential to destroy relationships we are doing our best”.
[154] However, within two months of this communication Mr Edney again gave unilateral instructions to his staff to transfer outstanding BAL debts (again comprising substantially of rental outgoings and interest, as provided for under the lease) to the Waimauri loan. On 31 July 2015 Mr Penny, an employee of the Rockfield Group, made the necessary transfer. On 13 August 2015 he then sent an email to BAL’s in- house book-keeper Ms Chung stating:
As per instructions your loan balance at the end of July has been transferred to the Beach Arena loan account.
[155] It is common ground that the “instructions” he referred to were those of Mr Edney.
[156] He enclosed two statements, one showing BAL confusingly indebted to “Siat Limited” (an acknowledged error) in the sum of $21,532 and another showing it indebted to Waimauri Ltd in the amount of $1,536,500.86. The Siat Limited invoice identified a credit of $178,551.99 on 13 August with an equivalent debit to Waimauri Ltd.
[157] In September 2015 there were a number of email exchanges between Mr Penny and Ms Chung, in which Ms Chung queried the quantum of this addition to the Waimauri loan. The ultimate outcome was that Mr Penny re-issued Waimauri’s statement showing a balance of $86,174.90 owing as at 31 July 2015. In his evidence before this Court Mr Penny in turn acknowledges that this sum was in error and the correct amount was $60,941.48.
[158] Waimauri relies on these exchanges between Mr Penny and Ms Chung as establishing either an agreement on the part of BAL that the loan transfer should take place, or alternatively as the basis for an estoppel.
Discussion
[159] In its terms, the loan agreement identified two prerequisites for any further advances to be made under the document:
(a)that they were “agreed by the Lender and the Borrower”; and
(b)that they be either for the purposes of “financing fitout and capital expenditure required in respect of the Property” or “paying the legal fees” associated with preparation of the document.
[160] Significantly, there was no provision for further advances to pay “rent in arrears owing in respect of the Property” (as provided for in cl 2.2(b)).
[161] BAL/Mr Mahon neither agreed to the loan addition of $833,623.67 made on 31 March 2015 nor to the now adjusted addition of $60,941.48 made on 31 July 2015. Mr Mahon consistently rejected the idea in vigorous terms. Indeed, on 9 September
2015 he went further and said in respect of attempts to recover under loans that he intended to “keep [his] powder dry”.
[162] Mr Edney referred in his brief of evidence to an email from Mr Mahon on 24 October 2013 in which he said:
…when I signed the last lot of documents we added any further advances to the Arena document Greg49 wrote to John Brown and told him this to cover you.
[163] He says that he understood this to mean that no further loan application was necessary. I consider that an untenable construction. The reference was clearly to the additions made to the loan agreement. In their terms these required that further advances be for specified purposes and the subject of agreement between the parties.
[164] As at 31 March 2015 and 31 July 2015 Mr Edney could be under no illusions that Mr Mahon did not want to expose himself further under the personal guarantee. It would also have been clear to Mr Edney that the amounts which he sought to transfer to the loan comprised substantially arrears of rental, operating expenses and interest. They did not therefore qualify in terms of the extended definition of the Loan or the associated cl 2.2. It was for these reasons that Mr Edney correctly recognised from the outset that a new loan agreement would be necessary if arrears of rental and operating expenses were to be transferred to Waimauri. Clearly, he had a strong and frequently reiterated desire to do so. The reasons were obvious. The exposure of the guarantors under the lease was $500,000 only, the default interest rate under the loan agreement (18 per cent) was higher than under the lease (14 per cent) and under the loan agreement he had the benefit of Mr Mahon’s personal guarantee.50 Indeed, Mr Edney’s enthusiasm to establish a new loan agreement was such that although rebuffed by Mr Mahon with advice that he did not appreciate “being made a fool of”, he nevertheless directed it to be done on the same day that the advice was given.
49 Gregory Shanahan, Mr Mahon’s solicitor.
50 Mr Glenie invites a more cynical conclusion – that the transfers were made so that Mr Edney could put illegitimate pressure on Mr Mahon if necessary. I cannot exclude such a possibility but make no finding in that respect.
[165] Waimauri nevertheless argues that the transferred sums are appropriately defined as “Moneys Owed” under the loan agreement:
Moneys owed means all moneys which the Borrower presently is or in the future becomes actually or contingently liable to pay to the Lender under this agreement or the Security Documents.
(emphasis added)
[166] Under the General Security Agreement (GSA) signed the same day, Secured Moneys are in turn defined as:
All moneys which the Debtor presently is or in the future becomes actually or contingently liable to pay to the Secured Party under the Finance Agreements.
[167]The Finance Agreements are defined as meaning:
… the Loan Agreement and any other agreement pursuant to which the Lender agrees to provide financial accommodation to the Borrower.
[168]I reject Waimauri’s argument. It fails on three grounds:
(a)It is belied by Mr Edney’s recognition that a new loan agreement was necessary.
(b)In the context of specific additions to the loan agreement identifying the particular circumstances in which further advances could be made, the general references in the definition of Moneys Owed must, in my view, bow to the particular.
(c)There is, in any event, no evidence of any “other agreement” (that is agreement between Borrower and Lender) pursuant to which the Lender agreed to provide financial accommodation. As such there is no evidence of any additional Finance Agreement for the purposes of the GSA and therefore sum of Secured Moneys under that document.
[169] For these reasons I do not consider the sums transferred on 31 March 2015 and the adjusted sum identified as transferred on 31 July 2015 comprise either part of the Loan or Moneys Owed under the loan agreement.
[170] I note that there are six subsidiary and smaller debits to the loan account (apart from interest) being:
(a) 30/6/2015 $1,200.00 (b)
30/7/2015
$7,503.75
(c)
30/11/2015
$5,451.70
(d)
30/11/2016
$685.50
(e)
31/7/2017
$944.50
(f)
30/9/2017
$2,709.40
[171] There is no evidence of agreement between Lender and Borrower in respect of these sums. Mr Mahon stated that he neither asked to approve nor “communicat[ed] approval of those conversions or transfers to anyone”. I note that the last three items were debited to the loan account after termination of the BAL lease.
[172] Alternatively to its claim in contract, Waimauri pleads an estoppel. It says BAL and Mr Mahon should be estopped from denying that the amounts converted to the Waimauri Loan are not moneys loaned in terms of the loan agreement. The asserted foundation for that claim is in the exchanges between Mr Penny and Ms Chung in August and September 2015. Waimauri says that Ms Chung’s correspondence created a belief or expectation that BAL accepted the transfer, that Waimauri reasonably relied on this by not prior terminating the lease, that it would suffer substantial detriment if that expectation were now to be departed from and that in all the circumstances it would be unconscionable to allow BAL to do so.
[173] I reject this argument. For a start it is grounded in exchanges with a low-level employee of BAL who was never held out as having authority to commit BAL to loan advances or to expand Mr Mahon’s guarantee liability. BAL correctly describes her as a book keeper. She was also a part-time nanny to Ms Loo. Mr Edney was well aware that Mr Mahon was the directing mind and will of BAL. That is why, when he
sought to convert Waikoro’s debts into Waimauri loans, he initially sought Mr Mahon’s agreement. To suggest, in the face of Mr Mahon’s determined refusal, that Mr Edney had a reasonable expectation that Ms Chung’s engagement with accounting details signified BAL’s acceptance of his unilateral actions, is a bridge considerably too far.
[174] A telling exchange in that respect is on 19 February 2016 when Mr Penny referred Ms Chung to the fact there is “still a big loan outstanding and also rates etc”. Her response was “sorry, I am not sure about it as [Mr Mahon] just instruct me to pay the hotel rent to Rockfield”. Ms Chung was simply a functionary doing her limited job.
[175] Nor, even if I were prepared to find words or conduct creating the requisite belief or expectation, would I have been satisfied that these were either reasonably relied on by Waimauri or that it acted to its detriment. In particular I reject Mr Edney’s evidence that he would have prior terminated the lease. Waikoro did not do so at any time during 2014 when the arrears were mounting. It allowed similar arrears to accrue from July 2015 through to August 2016. Mr Edney had “bigger fish to fry”. By mid- 2015 at the latest, he was aware that BAL was most unlikely to exercise its call option and would struggle if the properties were “put”. His focus was on realising the property for the maximum sum possible. There is no other explanation for the active endeavours Waikoro made to sell the property while the option still existed. A sale of the hotel on favourable terms required that it be well presented and operating satisfactory. Mr Mahon, and more especially his brother-in-law Mr Lu, who it is clear from the correspondence Mr Edney respected, provided the best means of ensuring that outcome. Only when Mr Edney had his “ducks in a line” and a sale of the hotel concluded was the lease terminated, despite the significant and ongoing arrears. At that point Mr Mahon, Mr Lu and Ms Loo were dispensable, but not before.
[176] Mr Chisholm also emphasises the fact that in each of BAL’s accounts for the years ending 31 March 2015, 2016 and 2017, ever escalating loan amounts are identified as owing to Waimauri Ltd under the heading “current liabilities”. This is an evidential point only. It cannot found an estoppel for the reason that such accounts were only provided to Waimauri shortly before trial. Nor do I consider the point to
have much in the way of probative value. BAL had been presented with a fait accompli. Waimauri claimed the sums as owing to it. It was not a case of the liability being contingent in the traditional sense requiring a note to the accounts. Barring the alleged November 2013 agreement on which Mr Mahon relies, rent, operating expenses and interest was owed to some entity, whether Waikoro or Waimauri. I accept Mr Mahon’s evidence that although he was uncomfortable about the loan characterisation in the accounts, such characterisation reflected professional advice from external accountants.51
[177] Accordingly, I reject the claim based on estoppel. In the result, I find that none of the converted sums are recoverable under the loan agreement.
What then is owing under the Loan Agreement?
[178]This ostensibly simple inquiry turns out to have a number of fish hooks.
[179] The starting point is obviously the loan agreement which identifies the amount of the loan as $442,682.92. Consistent with that, para 5(a) of the Statement of Claim pleads that among the advances made by Waimauri to BAL under the Loan Agreement were:
(a)The amount of $442,682.92 advanced by Waimauri to BAL as recorded in the definition of “Loan” in the BAL loan agreement.
[180] The response in the Second Amended Statement of Defence and Counterclaim (consistent with BAL’s previous pleadings) was an admission of para 5(a) but a denial of the balance of the alleged advances.
[181] Ordinarily that would be an end of the matter. However, in reviewing various documents referred to in the evidence for the purposes of my judgment I identified an email from Rockfield Group’s Ms Lisaca to Mr Edney dated 23 December 2014 in which the quantum of the “Beach Arena arrears” was identified as:
51 BAL’s sole shareholder Most Best Holdings Ltd was a foreign incorporated entity which, Mr Mahon said in evidence, created particular obligations to recognise as current liabilities all claims on the company whether disputed or not.
Waimauri Loan as at 31/03/14 $ 402,882.52 Beach Arena rent and opex as at December 2014
$ 873,205.82
Beach Arena rent and car park January 2015
$ 58,122.91
Total
$1,334,211.25
[182] By Minute dated 18 March 2020 I inquired how the stated sum of $402,882.52 aligned with the amount specified in the loan agreement. Mr Glenie candidly admitted that he had not prior identified the inconsistency and both counsel drew my attention to another of Rockfield Group’s internal account ledgers which recorded:
20/9/13 Total per loan agreement
20 September 2013
$442,682.92 $442,682.92 Less Double take up of $71,960.29 included in the $211K loan balance. This account from Waihapu books was not reversed although the loan was recorded in Waimauri books
Interest of initial loan (insurance premium)
Interest for 19/09/13 – 31/03/14Interest of 2nd loan $211K)
Interest for 19/10/13 – 31/03/14)
$71,960.29
$15,822.06
$16,337.32
$370,722.63
$386,544.69
$402,882.51
31/03/14
Reconciled balance vs Waimauri books
$402,882.51
$402,882.51
[183] The undisputed position on the primary documents is therefore that the sum actually advanced as at 20 September 2013 was $370,722.63 not $442,682.92 – a difference of $71,960.29. In turn the difference between $370,722.63 and the
$402,882.52 referred to in Ms Lisaca’s email of 23 December 2014 to Mr Edney is accounted for by accrued interest.
[184] Mr Chisholm does not dispute the apparent error but points to the fact that in its records, Waikoro (or the wider Rockfield Group) identifies having paid $55,612.52 of BAL related invoices in the period between 22 September 2013 and 31 March 2014 as identified in the following Waikoro invoices to BAL:
(i)Invoice 0946 25 September 2013
K R Flooring $ 7,327.20
(ii)Invoice 0950 23 October 2013
NZ Fire Service $ 4,625.00
Hongkong Grace Blinds $ 2,302.00
Pacific Building Services $ 6,900.00
Assetcare $ 589.33
Argus Fire Protection $ 3,271.75
Fire Watch $ 299.00
Camel Space $ 3,450.00
Fire Control Services $ 4,969.15
Sung Hing Trading $ 5,000.00
KR Flooring $ 1,700.00
(iii)Invoice 0952 29 October 2013
Qian Wu $ 1,380.00
Bevan Davies $ 1,328.25
(iv)Invoice 0955 20 November 2013
Sung Hing Trading $ 7,500.00
Qian Wu $ 790.89
Trent Matson $ 4,000.00
$ 55,612.62
[185] In addition Mr Chisholm points out (accurately in my view) that interest continued to accrue on the $370,722.63 advanced under the loan agreement. By the due date of repayment (31 March 2014) he calculates this sum to have been $23,523.11 and points out that under cl 4.5 of the loan agreement interest is calculated “on a daily basis at the Default Interest Rate on all moneys (including interest) payable under the Agreement that may from time to time be overdue …”.
[186] In the result, he says that on 1 April 2014 – the day after the due date of payment – there was owing, under the loan agreement, a total of $449,868.36, but that in the interests of simplicity this Court should simply give judgment for the amount specified in the loan agreement ($442,682.92) and adopt a start date for default interest of 1 April 2014.
[187] Mr Glenie rejects that proposal. He submits that it amounts to an attempt by the plaintiff to “backfill” its error in a way which is plainly unjust.
[188] Turning to specifics he says, firstly, that the approach involves rolling into the loan, amounts which were demonstrably never to BAL’s account. He refers in particular to an October 2013 invoice from CBRE Valuation for $11,563.25 which I agree was never properly to BAL’s account, because it was never within the category of expenditure identified in cl 2.2(a) of the loan agreement. However, although this invoice featured in a schedule prepared by Ms Lisaca and was annexed to the plaintiff’s memorandum of 19 March 2020, it was not among those third party invoices for which recovery is sought under Mr Chisholm’s ultimate proposal.
[189] Secondly, he says that this was never the way the case was pleaded by the plaintiff. Rather Waimauri sought to recover the amount erroneously specified in the loan agreement as its starting point and then to add alleged third party payments as a result of the transfers that occurred in March 2015. He says Mr Mahon has had no opportunity to give evidence in response to this changed approach. There is merit in this criticism.
[190] Next he says that Waikoro has failed to prove adequately that any agreement between the lender and borrower (as specified in the amendments to the loan agreement) was ever reached in respect of the relevant third party invoices, or that they fell within the cl 2.2(a) definition. He points out that Ms Lisaca was not called to establish any such agreement.
[191] I have some hesitation in respect of this submission because, in respect of the KR Flooring invoice of $7,327.20, for example, Mr Mahon acknowledged, in response to a question from me, that it was something in respect of which payment was “to the benefit of Beach Arena” and there was at least one example in the evidence of Ms Chung requesting (albeit she said in error52), that a third party invoice be transferred to “Waimauri Loan”. However, I accept that as a matter of proof Waikoro did not establish an agreement between lender and borrower that these specific
52 The invoice related to demolition of the Beach Road restaurant premises. BAL says that Waikoro did this without its consent and that it was never liable for the associated costs. Ms Chung said in evidence that she directed addition to the loan in error. It is not among the invoices totalling
$55,612.62 which Mr Chisholm seeks to add to the loan amount of $370.722.63.
amounts be added to the loan.53 Nor do I consider an estoppel applicable given that, at the point Mr Edney sought to cover the relevant payments by an advance from Waimauri, Mr Mahon made his opposition clear.
[192] This then segues into Mr Glenie’s final submission. He accurately points out that the relevant invoices did not reflect in contemporaneous loans. Rather they were simply paid by Waikoro or some other entity within the Rockfield Group and then unilaterally folded into the loan approximately 18 months later (31 March 2015). So, he says, Mr Chisholm’s proposal simply compounds the error in Waimauri’s pleaded claim whereby, without agreement at the time of transfer, debts identified as owing by BAL to Waikoro (and subject to the limited guarantee in the lease) became debts subject to Mr Mahon’s unlimited guarantee under the loan agreement.
[193] I accept that submission. If Waimauri chose not to make advances at the time the invoices were submitted by BAL for payment – if indeed they were submitted – and if instead Waikoro (or another entity) chose to pay the invoices and carry the debts on the Waikoro–BAL ledger, then at the point Mr Edney chose to roll the debt into a Waimauri advance he should, in my view, be able to point to a contemporaneous agreement to do so. He cannot.
[194]Moreover:
(a)the effect of Mr Chisholm’s proposal would be to have Mr Mahon personally responsible for default interest at 18 per cent per annum on the relevant third party accounts from 1 April 2014, when in fact they formed no part of the loan (even on Mr Edney’s approach) until 31 March 2015;54 and
53 Mr Edney’s evidence in this respect was unspecific. He simply said “The third party payments were made at the request of either Mr Mahon, Ms Loo, Mr Lu or Ms Catherine Chung”. He does not identify to whom they were made, how they were made, when they occurred, or at whose request they were made on each occasion. With the exception noted above, no email correspondence was produced. I conclude that this evidence was insufficiently direct to be reliable and was in the nature of a rationalisation.
54 For the period 1 April 2014 to 31 March 2015 such interest totals $10,010.27.
(b)if, as I have found, Mr Edney was not entitled to give the unilateral direction he did, then the proposal would effectively saddle Mr Mahon with a further five plus years of interest for which he is not liable.
[195] In my view Mr Edney’s interests must look to BAL and its guarantors if they seek to recover these amounts.55
[196] This therefore leaves the question of Mr Mahon’s statement of defence. I do not see how it can be decisive. Mr Glenie submits, with in my view strong justification, that basic obligations of candour on the part of Rockfield Group required it to “front” the error when it was discovered. He suggests nothing less than a statement to the effect that “we have just realised that the original loan balance for which you gave an uncapped personal guarantee was overstated by $71,000”. In any event, the Court cannot countenance a judgment demonstrably at odds with the primary accounting records. It has power under rr 1.9(1) and (2) to make amendments of its own motion to correct defects or errors or to ensure that the real controversy between the parties is determined. There is now a real controversy from Mr Mahon’s perspective in respect of the quantum of liability under the loan agreement, albeit one identified by the Court. The basic facts are not in issue. Mr Chisholm acknowledges the error.
[197] I conclude therefore that the quantum of the loan amount specified in para 5(a) of the statement of claim is appropriately amended to $370,722.63.
[198] I further conclude that the quantum of the judgment under the agreement should be $394,245.74, comprising the original loan amount of $370,722.63 plus interest to 31 March 2014 of $23,523.11 and that for the purposes of this judgment interest should then accrue from 1 April 2014.
The alternative counterclaim – Quantum Meruit
[199]BAL advances as an alternative counterclaim an entitlement to the sum of
$766,295.18 being expenditure for what it calls “non-maintenance” works on the
55 Since there are currently outstanding proceedings in this respect I decline to express any view on ultimate recoverability.
properties.56 Its closing submissions identify the expenses as falling into the following categories:
(a) Renovations to the hotel $114,483.93 (b)
Works on the exterior façade of the hotel
$121,300.62
(c)
Consultant and Council’s fees to obtain Resource Consent to prepare the properties for sale
(including seismic investigations)
$132,619.00
(d)
Works on the Hotel’s guttering systems and repair interiors damaged by flood words
$ 5,2749.32
(e)
Works on the Hotel’s sewage system and in cleaning up damage caused by sewage
leakage
$ 13,833.80
(f)
Removal of asbestos from ceilings on level 7
$ 9,583.65
(g)
Non-repair works on fire riser
$ 1,010.85
(h)
Establishment of the Back Packers accommodations
$253,071.81
(i)
Repair to faulty fire safety and plumbing
utilities damaged as a result of poor watertightness and internal flood issues
$ 47,693.10
(j)
Repair of faulty electrics and wiring damaged
as a result of weather tightness and internal flooding issues
$ 30,438.51
56 The pleaded sum is $910,026.06. This was reduced in opening.
(k) Removal of organic and inorganic waste on
development sites $ 8,510.57
[200] Of this sum BAL identifies $51,907.23 as amounts which were not paid for by it but rather by Waikoro. This amount was then added to Waikoro’s “ledger” and ultimately unilaterally converted to a Waimauri loan. BAL’s position is that under the lease it was not required to make any of these payments and that if they are therefore recoverable under the loan a corresponding amount should be paid to it under its counterclaim. Having regard to my previous findings that aspect of the submission does not need to be pursued.
[201]Although in its second amended pleading, the claim (at that stage for
$910,026.06) was advanced as an alternative to a claim for the uplift on resale of the properties, BAL’s closing submissions more appropriately recognise it as an alternative claim to what is described as the “clean slate” component of its contract/estoppel pleading.
[202] The pleading itself is contained in four short paragraphs and is a prayer for relief:
Second (alternative) counterclaim: breach of contract/restitution
21BAL repeats paras 1-17 above.
22BAL has incurred and paid $910,026.06 in respect of remediation costs in respect of the properties.
23The first, second and/or third counterclaim defendants were liable to, but failed to reimburse for these costs in accordance with the Variation Agreement.
24The first, second and/or third counterclaim defendants have thereby breached the Variation Agreement.
[203] So pleaded (and despite the elliptical reference in the heading to “restitution”) the claim was one for breach of contract based on the alleged variation agreement and, in particular, the term of that agreement pleaded in para 2(f)(iv):
Waikoro would be responsible for funding of the remediation of the Defects and would reimburse BAL and Mr Mahon for any such remediation costs incurred and paid for by them.
[204] However, as I have already noted, that particular alleged term of the variation agreement was abandoned by Mr Mahon in evidence.57
[205] The case advanced in closing (which proceeds exclusively on restitutionary principles) was not in substance therefore the pleaded case. On the pleaded case the claim must fail. However, I would not have been prepared to find a restitutionary remedy in any event.
[206]Mr Glenie relies on the often cited observations of the Court of Appeal in
Morning Star (St Lukes Garden Apartments) Ltd v Canam Construction Ltd:58
It is sufficient to say that there is general agreement that a plaintiff will be able to establish a quantum meruit claim where the defendant asks the plaintiff to provide certain services, or freely accepts services provided by the plaintiff, in circumstances where the defendant knows (or ought to know) that the plaintiff expects to be reimbursed for those services, irrespective of whether there is an actual benefit to the defendant.
[207] This submission must be considered against the background of the following provisions in the lease:
(1) Clause 8.1(a) which provides that the tenant is to maintain the interior of the premises in the same condition as they were at commencement:
(2) Clause 8.1(c) which requires the tenant to paint and decorate those parts of the interior previously painted and decorated:
(3) Clause 8.1(d) which requires the tenant to replace floor coverings, worn or damaged other than by fair wear and tear:
(4) Clause 8.2(a) which requires the tenant to keep the grounds in a clean and tidy condition:
57 Refer to footnote 12 above.
58 Morning Star (St Lukes Garden Apartments) Ltd v Canam Construction Ltd [2006] BCL 814 (CA) at [50].
(5)Clause 56(e) which provided that:
The tenant shall at the tenant’s sole expense be responsible for all maintenance of the landlord’s properties and the replacement of any plant, equipment and chattels located in the landlord’s properties during the term of the lease. This shall include but not be limited to the plumbing, electrical, wiring, light fittings, bulbs, fire alarm systems, security systems, telephone systems, air extraction, water heating systems, lifts, ceilings, floors, floor coverings, fire escapes, doors and windows.
[208] These provisions in turn need to be read in the context of cl 56(a) which records acceptance of the properties, which included unmaintained grounds, on an “as is” basis. Inclusion of the term “as is” negatives any ability to imply fitness for purpose or wider concepts of “business efficacy”.59
[209] Mr Glenie submits that BAL was not legally obliged to make payments in any of the categories identified, that the expenditure assisted Waikoro in achieving improved sale prices, and that “the plaintiffs must surely admit that they knew BAL expected to be reimbursed for those very substantial expenses”.
[210] Maintenance is generally defined as the care and work invested in a property to keep it operating and productive, the action of keeping something in working order or in repair, and the doing of replacement work to a building.60 The expenses in respect of façade repairs, repairs to guttering, repairs to the sewage system, investigation of the fire hydrant system and repairs to fire safety, plumbing, electrical and wiring systems all fit within that general definition. But, if there were any doubts in this respect, they are dispelled by the comprehensive provisions of cl 56(e) which, in my view, place beyond all reasonable argument that maintenance extends to replacement where required.
[211]Other identified expenses fall clearly into the category of capital works. The
$114,483 expended on upgrades to bedrooms and bathrooms and $253,071 spent on
59 JNJ Holding Ltd v Kent Sing Trading Company Ltd [2017] NZHC 3274 at [340]-[342] and [426](a).
60 Bryan A Garner (ed) Black’s Law Dictionary (11th ed, Thomson Reuters, Texas, 2019) at 1142; Shorter Oxford English Dictionary, Volume 1: A – M (6th ed, Oxford University Press, New York, 2007) at 1680; Daniel Greenberg (ed) Stroud’s Judicial Dictionary of Words and Phrases, Volume 3: P – Z (9th ed, Thomson Reuters, London, 2016) at 2208.
establishment of the backpackers61 are the most obvious examples. However, the maintenance/capital works distinction is not one which I consider to have any relevant implication for the counterclaim because cl 56(h) provides that the landlord “shall be under no obligation to perform capital works”. A restitutionary remedy cannot be granted to compel what the lease itself specifically denies – which is the practical effect of allowing recovery for BAL’s capital expenditure.
[212] Moreover, that expenditure was undertaken at a time when BAL had an option to purchase and resulted in improvement to the value both of the business and of the buildings in which the business operated. Provided the option subsisted, such expenditure was to BAL’s potential benefit. If it did not choose to exercise the option then the expenditure remained to the benefit of the business for the duration of the lease, albeit ultimately improving the value of the reversion. Even the amounts spent on maintenance, however unexpected, would have to some extent enhanced the value of the premises. Likewise, the cost of the resource consents stood (as events ultimately demonstrated) to increase the combined value of the various holdings beyond the option price.
[213] As to the costs of removing rubbish from the adjoining sites, BAL attempts to hold Waikoro responsible simply on the basis that the work enhanced the properties’ value. But that ignores the “as is” qualification in the lease. In so doing BAL implicitly asserts a landlord obligation to make the premises fit for purpose where one did not otherwise exist. The argument also overlooks the potential benefit which BAL stood to achieve via the option by having the property presented tidily.
[214] As the Morning Star case62 demonstrates, restitutionary remedies will, within the contractual context, typically only be available in the cases of either unenforceable agreements or work in anticipation of the agreement. Neither applies here. The parties’ rights, obligations and remedies were governed by (and explicable in the context of) the contract they entered into.
61 In the context of which the asbestos removal costs totalling $9,583.65 were incurred, comprising
$4,083.65 for removal and $5,500 for repainting.
62 Above n 58.
[215] Even on a very liberal interpretation of the pleadings therefore, the alternative counterclaim must fail.
Result
[216] I give judgment in favour of Waimauri and against Mr Mahon in the amount of $394,245.74 plus interest calculated in accordance with the loan agreement. I note that in his memorandum dated 27 April 2020 Mr Chisholm calculates the total sum owing as at 27 April 2020 as being $825,663.72. If that calculation is not accepted I reserve leave to file memoranda accordingly.
[217]I dismiss the counterclaim.
Costs
[218] The plaintiff has foreshadowed an application for indemnity costs. That position may need to be reconsidered in light of the fact that this judgment is for approximately 20 per cent only of that sought in opening, and 15 per cent of that pleaded. The impact of the counterclaim will also need to be considered.
[219] In the event the parties are unable to resolve costs, memoranda may be filed (maximum seven pages plus any schedules) on the following timetable:
(a)Plaintiff’s memorandum to be filed and served 25 June 2020.
(b)Defendant/counterclaim and Plaintiff’s memorandum to be filed and served 9 July 2020.
(c)Plaintiff’s reply (if any) to be filed and served 16 July 2020.
[220] Counsel should indicate in their memoranda whether hearing time is required. Given the history of this and related litigation I expect that may be necessary.
Muir J
Counsel:
D Chisholm QC, Barrister, Auckland M J Lenihan, Barrister, Auckland
A Glenie, Glenie Legal, Auckland
A C van Ammers, Barrister, Waiheke
Solicitors:
Brown Partners, Auckland (J Brown) Jesse & Associates, Auckland (J Nguy)
9
2
1