Zhong Mao Investment Management Limited v Oak Tree Motel Limited

[2015] NZHC 2525

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2015-404-001298 [2015] NZHC 2525

IN THE MATTER OF

an application seeking orders for

possession of land and payment of rent

UNDER

Section 244 and 251 of the Property Law
Act 2007

BETWEEN

ZHONG MAO INVESTMENT MANAGEMENT LIMITED Plaintiff

AND

OAK TREE MOTEL LIMITED First Respondent

RICHARD BOS Second Respondent

Hearing:	5 October 2015
Appearances:	I J Thain and S A Welsh for Plaintiff J F Anderson for respondents
Judgment:	14 October 2015

JUDGMENT OF WOOLFORD J

This judgment was delivered by me on Wednesday, 14 October 2015 at 11:00 am pursuant to r 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Solicitors:

Wilson McKay, Auckland

Counsel:

J Anderson, Auckland

ZHONG MAO INVESTMENT MANAGEMENT LIMITED v OAK TREE MOTEL LIMITED & ANOR [2015] NZHC 2525 [14 October 2015]

Introduction

[1]      The applicant, Zhong Mao Investment Management Limited (ZMIM), owns a motel in Mangere.   It had been abandoned by a previous tenant and was in poor condition.  The second respondent, Richard Bos, saw potential in the business and caused the first respondent, Oak Tree Motel Limited (OTM), of which he was the sole director and shareholder, to enter a 30 year lease of the property.   Mr Bos guaranteed the lease.

[2]      OTM has not paid any rent since December 2013.   ZMIM now applies to cancel the lease and for an order that Mr Bos pay the outstanding rent.   This is opposed by the respondents, who apply for relief against cancellation of the lease under s 251 of the Property Law Act 2007 (PLA 2007).

Factual background

[3]      The  Travellers  International  Hotel  is  situated  at  190  Kirkbride  Road, Mangere, Auckland.  In late 2012 Mr Bos answered an advertisement on Trade Me seeking a purchaser for the existing lease of the property.   Mr Bos inspected the motel and discovered it was in poor condition.  It needed substantial repairs and full redecoration.  The existing chattels also needed replacement.  Turnover was low and the business was barely functional.  Mr Bos was informed by the tenant that there were substantial arrears of rent.  Shortly afterwards, ZMIM cancelled the lease and the tenant abandoned the premises.

[4]      Mr Bos saw potential in the property and started negotiations with ZMIM through a real estate agency.  He inspected the property again around 13 March 2013 and prepared a list of work that would be required to bring the property up to an operational  standard.    This  work  mostly  involved  repairs  to  the  decks  and  an extensive redecoration.   He expected to be able to carry out much of the work himself.  He thought some of it could be carried out progressively, as not all rooms would be required for guests until the business had been properly re-established. Mr Bos estimated the cost of this work to be in the region of $200,000.   He also calculated that he would be required to contribute his own labour almost full-time for approximately four months, to a value of around $44,000.  During the inspection on

13 March 2013 he observed minor damage, apparently caused by vandalism, but he thought that this was inconsequential in the context of the re-decoration that he would be carrying out. The damage was mostly a couple of broken windows.

[5]      After the inspection on 13 March 2013 and through much of April, Mr Bos negotiated an agreement with ZMIM.   In terms of the agreement, ZMIM would provide the property all the usual vendor plant, fixtures and fittings, together with a

30 year lease, a rent free period of six months and then graduated rent until the new business was fully operational.   Mr Bos expected to carry out the remedial works evidently required and complete a full redecoration of the property.  He would also provide new chattels to the value of $250,000 to establish, in effect, a new business.

[6]      After the initial inspection, Mr Bos inspected the property again in early April and mid-April and, at that time, observed some more vandalism damage.  As before, this was not of an extent that caused him undue concern.  He says he was prepared to repair this damage, although it had not been part of the discussion with ZMIM or the proposed agreement.  Mr Bos felt that ZMIM would be grateful for his additional input and would recognise this in some way.

[7]      A draft agreement to lease was sent to Mr Bos in mid-April 2013, followed by a deed of lease shortly thereafter.  The agreement to lease and deed of lease were executed at the same time.  They both bear the date 6 May 2013, which is the date they were apparently executed by ZMIM.  To the best of Mr Bos’ recollection, he signed both documents no later than 3 May 2013, as he paid the $20,000 deposit required on that day.   The commencement date of the lease was 20 May 2013. Mr Bos was granted pre-commencement access.   When he inspected the property once again between 6 and 20 May 2013, he says that he discovered significant further damage that had not been present when he last inspected the property.  This included the complete removal of some of the windows, some of the sliding doors and holes in the ceilings.  He informed ZMIM’s agent and arranged a meeting with her at the property.

[8]      Mr  Bos  says  he  expected  this  damage  would  be  covered  by  ZMIM’s

insurance, but, in any event, he considered it to be the responsibility of ZMIM.

ZMIM’s  agent,  however,  informed  Mr  Bos  before  the  commencement  date  of

20 May 2013,  that  ZMIM did  not  have  insurance  and  would  not  be  fixing the damage.  Mr Bos says that by then he had committed himself to the agreed works set out in the agreement to lease, made arrangements to purchase the chattels and commenced fixing the additional damage.   He says that with hindsight he perhaps should have insisted on a better response from ZMIM, but he was a practical person and threw himself into the remedial works regardless.  He says that there was too much work to do and not enough time and he expected that ZMIM would not have difficulty understanding and responding to the extent of the problem.  Mr Bos says he thought it was obvious that ZMIM would help, and likely compensate him in the future, probably by further abatement of rent.

[9]      Mr Bos says that as the remedial works continued, he kept discovering more and more damage.  In addition, other problems with the property emerged which had not been evident on previous inspections.  This included rotten particleboard flooring (it had been hidden by floor coverings) and a damaged liner causing leaks in the swimming pool.  Mr Bos says he worked nearly full-time over many months dealing with additional damage and estimates conservatively that he would have worked at least 50 hours a week for 40 weeks, which he values at $110,000.   This was in addition to the works that he had agreed to carry out in the agreement to lease.

[10]     The business commenced trading around April 2014, which is much later than originally expected, which Mr Bos attributes to the extensive repairs required. Since that time, Mr Bos says that turnover has increased steadily, although the winter months had seen some decline.

[11]     The lease provided for a rent-free holiday of six months and, accordingly, the first rent payment became due under the lease six months after its commencement, on 20 November 2013. A deposit of $20,000 paid on commencement, was treated as the rent due in November.   OTM then made a further payment of $10,000 in December 2013.  Since that payment of $10,000 in December 2013, OTM has failed to make any further payment towards the monthly rental.  The applicant’s solicitors calculate that the amount of rent outstanding is now $562,129.60.

[12]     On 11  March  2014,  ZMIM  gave  OTM  and  Mr Bos  a  written notice of intention to cancel the lease for non-payment of rent.  The notice was subsequently resolved after ZMIM and OTM agreed on a rental payment plan.  However, OTM did not comply with the agreed payment plan.   In fact, OTM did not make any monthly rental payments or any payments towards the rent arrears.

[13]     On 23 March 2015, a second written notice of intention to cancel the lease for non-payment of rent was served on OTM and Mr Bos.  The notice informed OTM and Mr Bos of the nature and extent of the breach of the covenant to pay rent. At the expiry of the period specified in the notice, neither OTM nor Mr Bos had remedied the breach.   To date, ZMIM has not received any payment from either OTM or Mr Bos or any of the further rent amounts as they have fallen due on a monthly basis.

Application for relief against cancellation

[14]     The real issue in this case is OTM’s application for relief against cancellation, as the fact that the rent remains in significant arrears is not disputed by OTM or Mr Bos.  Where a breach of lease consists solely of a failure to pay rent, as here, there is a presumptive right to relief on payment of the rent arrears and costs.  It is only in exceptional circumstances that relief is to be denied if the debt is paid in

full.1    Where, however, it is clear that the tenant is hopelessly insolvent, the Court

will not grant relief as a general rule.2

[15]     In the present case, I am of the view that OTM is unable to pay the rent arrears and costs from its own resources.  OTM’s draft financial statements for the year ended 31 March 2015 show motel income of only $256,598 before expenses. Mr Bos states that the business should turn over approximately $380,000 per annum if there was proper road access (Watercare were then undertaking major works in Kirkbride Road).  The rent payable is, however, $330,000 for the current year, which leaves next to no money to pay staff wages, rates, electricity/gas and all other normal motel expenses.  What Mr Bos has done since opening the motel in April 2014 is to

meet all these expenses, rather than pay any rent.  It seems to me that the business

1      Mulholland v Waimarie Industries Ltd (2009) 10 NZCPR 590 at [23].

2      Inner City Businessman’s Club Limited v James Kirkpatrick Ltd [1975] 2 NZLR 636 (SC).

has never been profitable and there is no likelihood of it paying the rent arrears and costs.  In those circumstances, the Court should not burden ZMIM with an insolvent tenant by giving OTM relief against cancellation.

[16]     However, Mr Bos draws the Court’s attention to a number of factors, which he says cumulatively should lead the Court to exercise its discretion to allow him time to try and recover his investment in the property through sale of the lease to a third party.   He says that sale to a third party would enable OTM to pay the rent arrears and costs.

[17]     First, he says that ZMIM’s calculation of the rent arrears is erroneous in that it should be $462,129.60, rather than $562,129.60.  This is because the rent for the second six months of the lease was $20,000 plus GST and not $20,000 plus GST per month, which is a difference of $100,000.  There was substantial argument during the course of hearing about the proper interpretation of the lease, but ultimately I am of the view that such argument is immaterial.  OTM is unable to pay even the lesser sum.

[18]     Secondly, Mr Bos says that he expended approximately $200,000 more than he bargained for on repairs to the property, as well as an extra $50,000 of his time. He says that in terms of the lease, ZMIM should have had insurance against damage to the property which it had an obligation to repair.  Mr Bos also says that he was entitled to an abatement of rent while those repairs were underway.

[19]     Clause 23.1 of the lease does indeed provide that the landlord shall at all times during the term keep and maintain insurance of the type shown and for the risks specified in the First Schedule.  The First Schedule specifies that the landlord should  have  insurance  for  loss,  damage  or  destruction  of  any of  the  landlord’s fixtures, fittings and chattels, in addition to cover for the building against damage and destruction by fire, flood, explosion, lightning, storm, earthquake and volcanic activity.  Clause 25.1 obliges the landlord to indemnify the tenant against the cost of making good damage caused by risks the landlord is obliged to insure against.

[20]     However, counsel for ZMIM points out that the term of the lease did not commence  until  20  May  2013  and  consequently  ZMIM  had  no  obligation  to maintain any insurance prior to commencement of the term.   ZMIM also submits that the obligation to maintain insurance against loss, damage or destruction of the fixtures, fittings and chattels only related to the specified risks (fire, flood, explosion, lightning, storm, earthquake and volcanic activity) and no other risk, such as theft or vandalism.

[21]     Under clause 27.1 of the lease, the landlord was obliged to repair damage to the premises, but only using insurance monies received by the landlord in respect of such damage, while clause 27.3 provides that until the completion of repairs or reinstatement, a fair proportion of the rent and outgoings would cease to be payable as from the date of damage.

[22]     There are a number of difficulties for Mr Bos with these lease provisions. Most of the extra $200,000 expended on repairs by Mr Bos was as a result of vandalism damage which occurred prior to the commencement of the lease, in which case, as noted above, ZMIM had no liability toward.  Further, some of the extensive repairs undertaken by Mr Bos did not relate to the theft or vandalism damage.  He himself refers to rotting floor boards hidden under floor coverings and leaks in the swimming pool liner.   It seems that Mr Bos undertook extensive remedial work knowing that ZMIM had not committed itself to paying for such work and without a clear provision in the lease requiring ZMIM to pay for such work.

[23]     In any event, any abatement of rent could apply only until completion of the repairs, which appears to have been about April 2014.  No rent has however been paid in the subsequent 18 month period, even if the rent were to be abated up until April.

[24]     Thirdly, Mr Bos says that ZMIM took precipitous action when it issued the first  notice of intention  to  cancel  the  lease  as  early as  11  March  2014,  almost

10 months after the commencement of the lease.   He says that the notice made it difficult for the respondents to continue investment in the motel and to develop the business.   The bank was also unwilling to lend additional money while the issue

hung over the lease.  However, Mr Bos and OTM appeared to accept at that time that the rent payable for the second six months of the lease was $20,000 per month, rather than the position they now take, that the rent was $20,000 for the entire six month period.  As a result of the notice, OTM agreed to pay the arrears as specified and to pay the rent going forward under a rental payment plan.  It therefore seems to me that ZMIM were within its rights to issue the notice when it did.   It cannot be said to be precipitous.

[25]     Fourthly,  Mr  Bos  says  that  the  conduct  by  ZMIM  was  misleading  or deceptive and that it is an appropriate case for variation of the lease pursuant to s 43(2)(b) of the Fair Trading Act 1986.  There is no claim of deliberate, deceptive or misleading conduct by ZMIM.  Rather, Mr Bos says that OTM was entitled to rely on the leased property being in substantially the same condition as when it was inspected in the particular circumstances of this case, given the context of the work agreed to be done.

[26]     However, Mr Bos inspected the property multiple times before OTM entered into the lease.  He was aware that the motel was in very poor condition and subject to  vandalism.    Further,  OTM  was  granted  access  to  the  property in  the  period between signing the lease on 3 May 2013 and the commencement of the lease on

20 May 2013, during which period Mr Bos found more damage.   Consequently, when OTM entered into the lease and, again when OTM took possession of the property, it had actual and constructive knowledge of the condition of the property and any damage or deterioration that occurred after the execution of the lease documents.  It also had actual and constructive knowledge that if any such damage and deterioration had occurred, the property remained unprotected from, and was in fact continuing to be affected by, vandalism and/or deterioration.  Finally, OTM also had actual and constructive knowledge of the state of disrepair of the property and the nature and extent of the work that would be required by OTM to bring the property into a condition where it could be used for OTM’s business.  Accordingly, OTM can be seen as having affirmed the lease.  It did not seek any variation of the lease until after the first notice of intention to cancel the lease had been served on it and then, it only sought a further two to three months rent free, which was not agreed.

Discussion

[27]     The crucial issue in the end is whether I should grant relief on the basis that the respondents have a period (the respondents suggest until 31 December 2015) to procure the sale of the business/assignment of the lease on terms that would enable rent arrears and costs to be paid up-to-date.

[28]     Mr Bos says that attempts to sell the business have been unsuccessful to date because the spectre of cancellation has been a significant barrier.  He says that relief on this basis would remove that barrier.  It would also enable the respondents to have a last opportunity to avoid the forfeiture of all their hard work and expense to the benefit of ZMIM.

[29]     I have my doubts that giving Mr Bos an extra three months would make any difference.  In his affidavit sworn 29 June 2015, Mr Bos says:

29.      I believe the value of my business with a compliant lease and the road works completed would be in the region of $1,000,000 and I have received a real estate agent’s appraisal to that effect last year.  I have recently received an offer to purchase the business for $640,000, but I have not been able to progress this while there has been the possibility of the lease being cancelled.   This could place me in breach of contract with any purchaser. This has all been explained to the landlord via its solicitor.  It would have enabled us to pay all rental arrears but the landlord has so far declined to participate in this process.

30.      The present position is that there are two interested parties.  There is one offer that has been signed by the purchaser conditional upon due diligence.   There are a few relatively minor changes my solicitors have proposed to the offer which I believe will be resolved with the purchaser. The offer is attached and marked “E”.  There is also interest from a second potential purchaser as a likely back-up agreement.  Both purchasers naturally require the lease issue to be resolved.

[30]     Mr Bos’ optimum that a few relatively minor changes would be resolved did not eventuate.   In an affidavit sworn five weeks later, on 4 August 2015, Mr Bos updates the situation.  He says:

2(f)      I believe the landlord has planned to cancel the lease and then sell the business with a new lease and obtain for itself the substantial increased value that would arise.  Even at a fire sale price, I have recently received an offer of $640,000 conditional on due diligence and upon the landlord confirming  continuation  of  the  lease  subject  to  satisfaction  of  the  rent arrears.  My requests to the landlord for this have been ignored or denied and

the purchaser has been unwilling to continue for that reason.  The sale has been lost but I am confident there would be any number of purchaser readily available if the lease was confirmed.  Annexed and marked “A” is a letter dated 15/07/2015 from Simpsons, Lawyers, advising the purchaser would not continue the negotiations because of the delay sorting out the lease.

[31]     On the other hand, in two affidavits sworn on 10 June 2015 and 20 July 2015, a law clerk employed by ZMIM’s solicitors has deposed that ZMIM has not been asked for its consent and has certainly not given its consent to an assignment of the lease.   He also says that to the best of his knowledge there is still no agreement, arrangement or understanding for the re-leasing of the property by ZMIM to any party.

[32]     What I am left with is that there is no assurance that the rent arrears and costs will be paid.   In cases where the Court has granted relief against cancellation for non-payment of rent, either the money has been paid or there has been a high degree of certainty that it would be paid, which is simply absent in this case.  It may have been different if there was advice from OTM’s bankers that they were willing to advance a significant sum of money to cover rent arrears and costs if the lease were to be confirmed.  From the evidence, it seems that OTM has never sought ZMIM’s consent to an assignment of the lease or discussed in a realistic manner with ZMIM how an assignment of the lease could be accomplished to the satisfaction of both parties.  ZMIM has not received any rent since December 2013.  In my view, OTM have had sufficient time to enable it to negotiate an assignment of the lease if that outcome was viable.

[33]     I do have considerable sympathy for Mr Bos, who has clearly expended considerably more money and time than he bargained for.   Even if the lease is cancelled, he may continue to have some sort of claim against ZMIM for the work undertaken, but he will need to seek legal advice on that issue.  I would also urge the parties to talk constructively in order to preserve value in the business for both parties.

Result

[34]    OTM’s application for relief against cancellation is dismissed.   ZMIM’s application  to  cancel  the lease is  granted.    I direct  that  the agreement  to  lease (incorporating a deed of lease) dated 6 May 2013 between ZMIM and OTM in respect of premises situated at 190 Kirkbride Road, Mangere, Auckland, (being all the parts of land containing 6,897 square metres more or less on Lot 1, Deposited Plan 99200, and being contained in identifier VA 53D/1490) is cancelled with effect from midnight on Saturday, 31 October 2015.

[35]     There will be a further order granting ZMIM possession of the property and directing OTM and Richard Bos to deliver up possession peaceably to ZMIM and to do all things necessary to give effect to ZMIM’s possession.  The lease is cancelled and possession is to be granted from and including Sunday, 1 November 2015.

[36]     There  will  be  a  further  order  that  OTM  is  liable  to  pay  ZMIM  rent  of

$457,129.60 plus penalty interest at 15 per cent on the outstanding amount, pursuant to clause 13 of the First Schedule of the Deed of Lease.  This sum is the total of all rent outstanding from May 2014 to September 2015.  In the context of this case, I make no determination whether the rent payable in the second six months of the lease ending in April 2014 was $20,000 plus GST or $120,000 plus GST.

[37]     Finally, costs are payable by OTM on a 2B basis.

……………………………….

Woolford J