Zhou v Pacific Pearly Accommodation Limited
[2020] NZHC 3133
•26 November 2020
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV 2020-404-000113
[2020] NZHC 3133
UNDER Sections 244 and 251 of the Property Law Act 2007 IN THE MATTER OF
of a lease dated 15 May 2013 in respect of the premises at 9 Bicknell Road, Favona, Auckland
BETWEEN
KENING ZHOU and NAIYUAN SANG
Applicants
AND
PACIFIC PEARL ACCOMMODATION LIMITED
Respondent
Hearing: 24 July 2020 Appearances:
D L C Liu for the Applicants
C A Murphy for the Respondent
Judgment:
26 November 2020
JUDGMENT OF VAN BOHEMEN J
This judgment was delivered by me on 26 November 2020 at 2.00pm Pursuant to Rule 11.5 of the High Court Rules
…………………………
Registrar/Deputy Registrar
Solicitors/Counsel:
Heritage Law Ltd, Auckland High St Chambers
ZHOU v PACIFIC PEARL ACCOMMODATION LIMITED [2020] NZHC 3133 [26 November 2020]
Introduction
[1] The applicants, Kening Zhou and Naiyuan Sang (the Trustees), as trustees of the Zhou and Sang Family Trust (the Trust), apply under the Property Law Act 2007 (PLA) for orders cancelling a lease over a property the Trust owns at 9 Bicknell Road, Favona, Auckland, which the Trust purchased in October 2014. The Trustees also seek possession of the property, rental up to the date of cancellation or, if later, the date of possession, and compensation for breaches of the lease.
[2] The principal building on the property was built in the 1960s by the Ministry of Works for use as a hospital. Its use changed over time to that of a boarding house.
[3] The respondent, Pacific Pearl Accommodation Ltd, is the lessee and operator of the boarding house and was the lessee and operator of the boarding house at the time of the Trustees’ purchase of the property.
[4]The Trustees say Pacific Pearl has breached the lease in various respects.
[5] Pacific Pearl denies that there has been a breach of the lease sufficient to warrant cancellation and, if the Court finds there has been any such breach, seeks relief against cancellation under s 253 of the PLA 2007.
Relevant background
[6] The following account is drawn principally from two affidavits, with accompanying exhibits, sworn by Mr Zhou on 28 January 2020 and 28 May 2020 and two affidavits, with accompanying exhibits, sworn by Allan Eaton, the sole director and shareholder of Pacific Pearl, on 19 March 2020 and 19 June 2020. Some information has also been obtained by affidavits of expert witnesses who gave evidence on behalf of the parties.
The lease
[7] By deed of lease dated 15 May 2013, Pacific Pearl took a lease of the property from Hargian Enterprises Ltd (the Lease). The lease was for a term of 10 years from 15 May 2013, with two rights of renewal of five years each.
[8] The lease was in the standard form of the Auckland District Law Society (Sixth Edition). Relevantly:
(a)Clause 11 of the First Schedule provided that there would be market rent reviews every two years commencing 15 May 2015.
(b)Clause 21.1 of the Second Schedule provided:
The Tenant shall comply with the provisions of all statutes, ordinances, regulations and by-laws relating to the use of the premises by the Tenant or any other occupant and will also comply with the provisions of all licences requisitions and notices issued by any competent authority in respect of the premises or their use by the Tenant or other occupant … .
(c)Clause 22.1 of the Second Schedule provided:
The Tenant shall not:
…
(c)Use the premises or allow them to be used for any noisome noxious illegal or offensive trade or business.
(d)Clause 33.1 of the Second Schedule provided:
The Tenant shall not assign sublet or otherwise part with the possession of the premises … without first obtaining the written consent of the Landlord which the Landlord shall not unreasonably withhold or delay if the following conditions are fulfilled:
…
(e)The Tenant pays the Landlord’s reasonable costs and disbursements in respect of the approval and the preparation of any deed of covenant or guarantee and (if appropriate) all fees and charges payable in respect of any reasonable inquiries made by or on behalf of the Landlord concerning any proposed assignee subtenant or guarantor. All such costs shall be payable whether or not the assignment or subletting proceeds.
(e)Clause 37.1 of the Second Schedule provided:
The Tenant will during the term permit the Landlord … to have access to inspect the premises provided that:
(a) Any such inspection shall be at a time which is reasonably convenient to the Tenant after reasonable written notice.
(b) The inspection is conducted in a manner which does not cause disruption to the Tenant.
(c) …
The purchase of the property by the Trust
[9] On 13 September 2014, Mai Zhou, the Trustees’ son, acting as agent for the Trust, entered into an agreement with Hargian Enterprises for the sale and purchase of the property (Agreement for Sale and Purchase).
[10] Clause 23 of the Agreement for Sale and Purchase provided that the agreement was conditional on the purchaser being satisfied as to the suitability of the property for the purchaser’s intended use.
[11] On reviewing the Land Information Memorandum for the property, the Trustees learned that a Code Compliance Certificate (CCC) had not been issued in respect of building works carried out under Building Consent 966343 (BC 966343), which was apparently granted in December 1996.
[12] By letter dated 2 October 2014, the solicitors for Mai Zhou advised the solicitors for Hargian Enterprises that cl 23 of the Agreement for Sale and Purchase could be treated as satisfied if, among other things, Hargian Enterprises obtained a CCC for BC 966343 prior to settlement.
[13] The real estate agent acting for Hargian Enterprises arranged for the Trustees to meet with the agent and Mr Eaton at the property that day. At the meeting, Mr Eaton undertook to obtain a CCC for the works authorised by BC 966343 at no cost to the Trust. Mr Eaton wrote a letter to Mai Zhou confirming the same. The Trustees say that, having made that undertaking, Mr Eaton requested that they make the Agreement for Sale and Purchase unconditional.
[14] Mr Eaton says his motivation in offering to obtain the CCC was to secure the benefit of a variation to the Lease he had agreed with Hargian Enterprises in 2013 under which rent would be reviewed by reference to the Consumer Price Index (CPI)
rather than market rent. It is clear from Mr Zhou’s evidence, however, that he was not aware of the alleged variation when the Trust agreed buy the property.
[15] The following day, on 3 October 2014, the Trust’s solicitor, Mr Liu, who is also counsel in this proceeding, advised the solicitor for Pacific Pearl that the Agreement for Sale and Purchase was unconditional. The Trust was subsequently nominated as purchaser of the property and the Trustees became the registered owners upon settlement on 26 February 2015.
Auckland Council inspects property and issues notices
[16] By letter dated 5 May 2015, Mr Darryl Kemp, a senior technical compliance adviser at the Auckland Council, advised the Trustees of concerns identified in a Council inspection of the building and the steps to be taken to address those concerns.
[17]The steps included:
(a)The need to apply for CCC on the outstanding building consent; and
(b)The need to remove bedrooms and caravans that had been added to the property in contravention of conditions in a resource consent issued in March 1993 or to apply for a new resource consent.
[18]In accompanying separate letters, the Council issued:
(a)A Dangerous Building Notice which identified building work to be carried out within a specified timeframe; and
(b)A Notice to Fix requiring the removal of unauthorised building work and obtaining records required for a Compliance Schedule under the Building Act within specified timeframes.
[19] By letter dated 13 May 2015, solicitors for the Trust forwarded the letters and notices from the Council to the solicitors for Pacific Pearl and said:
Your client is required to comply with its obligations and take prompt actions to remedy all defects within the timeframe as required by the Auckland Council. In the event that your client failed to comply with its obligations our clients reserve their right to seek damages from your client.
[20] There is no evidence of any reply to this letter, but Pacific Pearl does not deny that it was received. Nor is there any evidence of any follow up action by the Trust or the Council within the timeframes set out in the Notices.
Resource consent to increase occupancy
[21] In early 2017, Pacific Pearl applied to the Auckland Council for resource consent to increase the occupancy of the boarding house from 45 to 100 persons. Pacific Pearl did not give notice of the application to the Trust.
[22] By decision dated 25 May 2017, the Auckland Council granted Consent No 52416, which allowed an increase in the capacity of the boarding house from 45 people to 100 people within 50 bedrooms. The consent included six “Development in progress conditions” requiring the forming, sealing and marking of driveways, parking spaces and manoeuvring areas and other related matters that had to be implemented before commencing use of the redeveloped access and parking spaces. The consent also included four “Post Development conditions”, one of which specified that only two caravans were to be on site at any one time.
Settlement of dispute over rent review
[23] In May 2016 and 2017, the Trust and Pacific Pearl commenced proceedings against each other and, in Pacific Pearl’s case, also against Hargian Enterprises. The Trust sought payment of rent arrears based on market rent reviews undertaken in 2015 and 2017. Pacific Pearl sought rectification of the Lease to reflect the variation Mr Eaton said he had agreed with Hargian Enterprises in 2013.
[24] The Trust, Pacific Pearl and Hargian Enterprises subsequently agreed to settle the two proceedings. That agreement was recorded on a deed of settlement dated 13 May 2019 (Deed of Settlement).
[25] Recitals A to E of the Deed of Settlement recorded the parties, the rent reviews, Pacific Pearl’s claim to the variation and the filing of the respective proceedings. Recital F stated:
F.The parties have agreed to settle any and all claims that they have against the other on the terms and conditions of this deed.
[26] The operative clauses of the Deed varied the Lease so that rent reviews would be by reference to the CPI; set out the payments to be made by Pacific Pearl to the Trust and Hargian Enterprises and associated arrangements; recorded that all parties denied liability; discontinued all claims and cross-claims; and recorded that each party would be responsible for its costs.
Request for assignment of lease
[27] On 16 July 2019, Mr Eaton advised the Trust that Pacific Pearl had sold its boarding house business and requested the Trust’s consent to an assignment of the lease. The Trustees asked Mr Liu to obtain information about the identity and financial means of the purchaser. With the consent of Pacific Pearl, Mr Liu communicated directly with the solicitor for the proposed assignee to obtain that information.
[28] Following a question from the solicitor for the proposed assignee as to whether Pacific Pearl was compliant with its obligations under the Lease, Mr Liu engaged with Pacific Pearl’s then solicitor, Ms Wu, on that question. In ensuing correspondence, the Trust learned of Consent No 52416 and the conditions it imposed. Mr Liu then sought information about whether Pacific Pearl had complied with the conditions of Consent No 52416. He also noted that Pacific Pearl had not obtained the CCC for the works carried out under BC 966343.
[29] In an email dated 9 September 2019, Mr Gregory Simon, who became the solicitor for Pacific Pearl from that date, challenged what he understood to be the Trust’s position, namely that it could withhold its consent to the assignment of the Lease unless Pacific Pearl obtained a CCC for the works carried out under BC 966343 and completed the work required by the conditions of Consent No 52416.
[30] Over the next two days, Mr Simon and Mr Liu exchanged views on the nature and scope of Pacific Pearl’s obligations with respect to obtaining a CCC and under Consent No 52416, and on whether these questions bore on Pacific Pearl’s performance of its obligations under the Lease. They could not agree.
[31] On 10 September 2019, Mr Simon advised Mr Liu that Pacific Pearl’s agreement to sell its business had been cancelled by the proposed assignee and that the reason given was that Mr Liu and his client were too difficult to deal with.
Renewed request for assignment of the Lease
[32] Nonetheless, in an email dated 17 September 2019, Mr Simon formally applied on behalf of Pacific Pearl to assign the lease to the same assignee. Mr Simon also said that if consent were given, he would arrange for payment of an outstanding invoice rendered by Mr Liu for costs in responding to the earlier request for an assignment.
[33] Mr Liu’s response on 19 September 2019 advised that the Trustees were willing to consent to the assignment subject to seven conditions, some of which had a number of subparts. The first condition elaborated on the proposal that the assignee take on responsibility for the CCC. The second condition stated that Pacific Pearl had been operating its business at levels significantly above the maximum occupancy of 30 persons stipulated under the Building Warrant of Fitness (BWOF) for the building and required Pacific Pearl to reduce the number of occupants to 30 persons prior to the date of assignment or at least within 28 days of the letter.1 The final paragraph of the letter noted that under cl 6.1 of the Lease, Pacific Pearl was obliged to pay the Trust’s costs regardless of whether or not the assignment proceeded.
[34] Attached to the letter was a copy of the BWOF dated 23 May 2019 which stated that Crowd Occupancy for the Pacific Pearl Lodge was 30 persons. In a covering email, Mr Liu asked whether Pacific Pearl had regulatory approval to operate above the occupancy level specified in the BWOF and whether Pacific Pearl had complied with the conditions of Consent No 52416.
1 The requirements for building warrants of fitness are set out in s 108 of the Building Act 2004.
[35] The following day, Mr Simon provided Mr Liu with a “replacement” BWOF. The replacement BWOF was also dated 23 May 2019. It stated that Crowd Occupancy for the Pacific Pearl Lodge was 100 persons.
[36] Mr Liu subsequently ascertained from the Auckland Council that the increase in numbers in the BWOF had been approved in July 2018 at the application of Prestige Building Compliance at the request of Mr Eaton’s wife.
Auckland Council becomes involved again
[37] Mr Liu’s inquiries of the Council led to a further visit to the property by Mr Kemp on 20 September 2019. No formal report of this visit was produced in evidence. However, in an email to Mr Liu sent the day of the visit, Mr Kemp said he had noted some compliance issues and that a notice would be issued. The issues identified in the email were:
Sprinkle [sic] system has been altered and extended Smoke control door held open and some not closing.
[38]There is no evidence of any Council notice being issued following this visit.
Exchanges between solicitors become more fractious
[39] In a letter dated 20 September 2019 to Mr Simon, Mr Liu said, among other things, that because the Trustees had not authorised the application to amend the BWOF, the approved occupancy level remained 30, which Pacific Pearl was exceeding. Mr Liu also said that because Pacific Pearl had not carried out the works required by the conditions of Consent No 52416, Pacific Pearl’s consented capacity remained at 45, which it was also exceeding. Mr Liu said that unless Pacific Pearl provided written confirmation that would reduce its occupancy levels to comply with regulatory requirements within 28 days, a PLA notice would be issued.
[40] Mr Liu also noted the unauthorised alterations to the sprinkler system and issues with the smoke control doors identified by Council staff during the recent site and said the Trustees would require the CCC for the works carried out under BC 966343 to be issued before they would consent to an assignment of the Lease.
[41] In his response of 25 September 2019, Mr Simon, among other things, challenged Mr Liu’s understanding of the purpose of building warrants of fitness under the Building Act 2004, and said compliance with the conditions of Consent No 52416 was not a prerequisite to increasing the occupancy level of the boarding house and that non-compliance with the consent conditions did not amount to a breach of the Lease. Mr Simon also signalled a likely claim by Pacific Pearl against the Trust for wrongful withholding of consent to the assignment of the Lease.
Service of PLA notice
[42] In a letter dated 27 September 2019, Mr Liu informed Mr Simon that the Trust would issue a proceeding to seek specific performance of its undertaking to obtain a CCC for the works under BC 966343 and would be serving a PLA notice cancelling the Lease on Pacific Pearl within next day or two. A copy of the PLA notice, dated 27 September 2019 and signed by Mr Liu (PLA Notice), was enclosed.
The PLA Notice stated that Pacific Pearl had breached the Lease by failing to:
(a)Pay the Trust’s costs in considering the request to assign the Lease; and
(b)Comply with all statutes, ordinances, regulations and by-laws relating to the use of the property as required by cl 21.1 of the Lease.
[44] Included with the PLA Notice were copies of invoices Mr Liu had submitted to the Trustees for his legal costs totalling $8,850.10. One invoice, dated 9 September 2019, was for $2643.55 and related to costs incurred when Ms Wu had been acting for Pacific Pearl. Another invoice, dated 27 September 2019, was for $6,206.55.
[45]The PLA Notice was served on Pacific Pearl on 30 September 2019.
Council and Trust seek to inspect property
[46] By letter dated 2 October 2019, Mr Doug Glazebrook, a Senior Project Specialist at the Auckland Council, advised the Trustees that the Council intended to inspect the property on 17 October 2019. On 7 October 2019, the Trustees informed
Pacific Pearl of the impending inspection and asked that the tenants of the boarding house be advised accordingly. The Trustees also advised that Mr Zhou would be present at the inspection.
[47] By letter dated 8 October 2019, Mr Liu informed Mr Simon of the inspection and asked that his letter be treated as sufficient notice under cl 13.1 of the Lease. By email of the same date, Mr Simon advised that Pacific Pearl would not object to the Trust exercising any rights it had under the Lease.
[48] Also, on 8 October 2019, in anticipation of the inspection to take place the following week, Mr Zhou asked Mr Kemp for details of the compliance issues identified during his visit to the property on 20 September 2019. In his reply, Mr Kemp noted that he had been asked to check the occupancy level of the property having regard to the BWOF and that, in the course of his visit he noted various issues shown in photos he supplied to Mr Zhou, including fire and other safety issues as well as cabins and multiple caravans on site.
Mr Zhou denied entry to property
[49] When Mr Zhou arrived at the property on 17 October 2019 he was denied entry by the site manager who advised him that Mr Eaton was at the hospital and did not want anyone to see the property while he was not present.
[50] Mr Eaton acknowledges that Mr Zhou was denied entry. He says he was concerned the Trust was intending to re-enter the property and cancel the Lease.
Application by Pacific Pearl for injunctive relief
[51] By letter dated 16 October 2019, Ms Murphy, counsel for Pacific Pearl in this proceeding, informed Mr Liu that Pacific Pearl would be applying for an urgent interim injunction to restrain the Trust from acting on the PLA Notice unless the Trust agreed not to act on the Notice pending the further order of the Court. While denying any breach of the Lease, the letter also outlined steps Pacific Pearl would take to obtain a CCC and undertake the work necessary to fulfil the conditions of Consent No 52416. The letter estimated that it would take three months for the work to be performed.
[52] Correspondence and discussions between Ms Murphy and Mr Liu and between Ms Murphy and counsel retained by the Trust did not resolve matters.
[53] On 21 October 2019, Pacific Pearl filed its application for an interim injunction. Justice Downs heard counsel for both parties later that day. As recorded in his minute of that date, Downs J was not persuaded relief was necessary and declined the application.2 The substantive proceeding remained on foot.
Inspection by Auckland Council and MBIE compliance officers
[54] On 14 November 2019, the property was inspected by a team of compliance officers from the Auckland Council and the Tenancy Compliance & Investigations Team of the Ministry of Business, Innovation and Employment.
[55] By letter dated 17 December 2019, Mr Glazebrook reported on the visit to the Trustees. In summary, the letter advised:
(a)The Council had cancelled the BWOF because the building had been exhibiting a BWOF falsely claiming that test and maintenance records had been kept when no such tests were done or recorded;
(b)While the maximum occupancy was recorded as 100, that number was dependent on work requiring a building consent which had not been applied for and the work not done. As a consequence, the correct maximum number was 30 and there were 58 current residents;
(c)Because no records had been kept since the issue of the two BWOFs in May 2019, it would not be possible to issue a BWOF for 2020;
(d)There were two “tiny houses” near the front of the property for which there was no building consent; and
2 Pacific Pearl Accommodation Limited v Kening Zhao and Naiyuan Sang as trustees of the Zhao & Sang Family Trust HC Auckland CIV-2019-404-002230, 21 October 2019 (Minute of Downs J on application for interim relief).
(e)While they had been removed before the arrival of the inspection team, the team was aware that there had been “many caravans” on the property prior to its visit.
[56] The letter advised that action was needed to bring the building back into the BWOF regime. The letter also stated that the Council held a fire engineer’s report on the premises but did not provide any further information about that report.
[57] By email dated 20 December 2019, Mr Liu forwarded Mr Glazebrook’s letter to Mr Simon. Mr Liu’s email said the letter was self-explanatory and requested Pacific Pearl to take all necessary steps “to remedy the breaches set out in the letter within a reasonable timeframe,” failing which the Trust would take further steps to enforce its rights under the Lease. Mr Simon’s email replies later than evening were inappropriate and unprofessional.
Fire Safety Report
[58] Mr Yen Tu, a Senior Fire Engineer at the Auckland Council, produced a report summarising fire safety concerns observed during the visit on 14 November 2019. The report stated that in Mr Tu’s opinion, the building should not be occupied by members of the public and was not safe to occupy in its current condition.
Application for orders cancelling lease and application for relief
[59] On 30 January 2020, the Trustees filed their originating application for orders cancelling the Lease and granting possession of the property. The application and accompanying affidavits were served on Pacific Pearl on 5 February 2020.
[60]The application alleged five breaches of the Lease by Pacific Pearl:
(a)Failure to obtain within a reasonable time a CCC for the works carried out under BC 966343 which was an implied term of the Lease;
(b)Operating the boarding house in breach of Consent No 52416;
(c)Overcrowding of the property and illegal, noxious and offensive use of the property;
(d)Obtaining a BWOF under false pretences and operating the property in breach of the BWOF;
(e)Refusal to pay the Trustees’ legal costs;
(f)Refusal to allow inspection by Trustees.
[61] On 19 March 2020, Pacific Pearl filed its notice of opposition and application for relief.
Further inspection by Auckland Council
[62] On 20 May 2020, the Auckland Council undertook a further inspection of the property, apparently in response to a request by Pacific Pearl for a CCC for the works required under BC 966343. The Council declined to issue the CCC. The report of the inspection recorded “Fail” against a significant number of items in a Council checklist of inspection details. In the Additional Comments section of the report, the following was recorded:
Due to the amount of changes to plan and non-compliance ended the inspection as evident not as per the consented plans therefore final INSPECTION HAS FAIILED AND CCC CANNOT BE APPLIED FOR AS WORKS ARE NOT CODE COMPLIANT.
Amended notice of opposition and application for relief
[63] On 19 June 2020, Pacific Pearl filed an amended notice of opposition and application for relief. In its amended notice, Pacific Pearl:
(a)Denied that the PLA Notice sufficiently identified how the alleged concerns were breaches of the Lease;
(b)Denied it was in breach of the covenants of the Lease because, specifically, because:
(i)It was not a term of the Lease that a CCC would be obtained, or that it would be obtained in a reasonable time;
(ii)It was not operating in breach of Consent No 52416;
(iii)It was not using the property in an illegal, noxious or offensive manner;
(iv)It had not obtained the BWOF under false pretences;
(v)It was not obliged to pay the Trustees’ legal costs when they had unreasonably withheld their consent to an assignment of the Lease; and
(vi)The Trustees had not been deprived of access to the property.
[64] Pacific Pearl also said that the Trustees were estopped by the Deed of Settlement from pursuing their claims.
[65] Pacific Pearl said that if the Court found there was a breach of the Lease, it sought relief against cancellation because:
(a)The Trustees were estopped by the Deed of Settlement from pursuing their claims;
(b)It had taken all reasonable steps towards obtaining the CCC;
(c)The Auckland Council had confirmed that it had fulfilled the conditions of Consent No 52416;
(d)It had acted promptly to remedy the Trustees’ valid concerns and remained willing and able to observe its obligations under the Lease.
[66] The application was originally set down for hearing on 4 June 2020. Because of restrictions imposed under or following on from the COVID-19 Alert Level 4 and Level 3 lockdowns, the hearing was adjourned to 24 July 2020.
Relevant provisions of PLA
Sections 243, 246 and 253 of the PLA provide, as relevant:
243 Sections 244 to 264 to be code
(1)A lease may be cancelled only in accordance with sections 244 to 252.
(2)Any relief against any of the following things may be given only in exercise of the powers conferred by sections 253 to 264:
(a)the actual or proposed cancellation of a lease; or
(b)the refusal to extend or renew a lease; or
(c)the refusal to enter into a new lease; or
(d) the refusal to transfer or assign the reversion expectant on a lease.
(3)Any term expressed or implied in a lease or in any other instrument has no effect if it—
(a)provides that the lease is automatically cancelled by breach of a covenant or condition of the lease; or
(b)is otherwise inconsistent with this section or with sections 244 to 264; or
(c)has the purpose or effect of avoiding the need for compliance with this section or with sections 244 to 264.
…
246 Cancellation of lease for breach of other covenants
(1)A lessor may exercise a right to cancel a lease because of a breach of a covenant or condition of the lease (except the covenant to pay rent) only if—
(a)the lessor has served on the lessee a notice of intention to cancel the lease; and
(b)at the expiry of a period that is reasonable in the circumstances, the breach has not been remedied.
(2)The notice required by subsection (1)(a) must adequately inform the recipient of all of the following matters:
(a)the nature and extent of the breach complained about:
(b)if the lessor considers that the breach is capable of being remedied by the lessee doing or stopping from doing a particular thing, or by the lessee paying reasonable compensation, or both,—
(i)the thing that the lessee must do or stop doing; or
(ii)the amount of compensation that the lessor considers reasonable; and
(c)the consequence that, if the breach is not remedied at the expiry of a period that is reasonable in the circumstances, the lessor may seek to cancel the lease in accordance with section 244:
(d)the effect of section 247(1) and (2):
(e)the right, under section 253, to apply to a court for relief against cancellation of the lease, and the advisability of seeking legal advice on the exercise of that right.
…
253 Relief against cancellation of lease for breach of covenant or condition
(1)All or any of the following persons may apply to a court for relief against the cancellation, or proposed cancellation, of a lease on the ground of a breach of a covenant or condition of the lease:
(a)the lessee:
(b)a mortgagee of the leasehold estate or interest:
(c)a receiver appointed in respect of the leasehold estate or interest:
(d)if 2 or more persons are entitled to the leasehold estate or interest as joint tenants, 1 or more of those persons on behalf of the other joint tenants.
(2)If an application made in accordance with subsection (1)(d) is not made by all of the joint tenants, the application must be served on every joint tenant who is not already a party, unless the court orders otherwise.
(3)Relief may be sought in—
(a)a proceeding brought by the lessor for an order for possession of the land; or
(b)a proceeding brought for the purpose of seeking the relief.
(4)A proceeding referred to in subsection (3)(b) must be brought—
(a)before an order for possession of the land is made in a proceeding referred to in subsection (3)(a); or
(b)if the lessor has peaceably re-entered the land, not later than 3 months after the date on which the lessor peaceably re- entered the land.
(5)Subsection (4)(b) is subject to section 254.
[68] It is clear from s 243(1) that a lease may be cancelled only in accordance with ss 244 to 252. In the present case, the Trustees are relying on s 246.
[69]Section 246(1) requires that a notice of cancellation be served on the lessee.
[70] Section 246(2) requires that a notice of cancellation must adequately inform the lessee of:
(a)The nature and extent of the breach complained about;
(b)The steps to be taken to remedy the breach if the lessor considers the breach can be remedied, and
(c)The fact that the lessor may cancel the lease if the breach is not remedied at the expiry of a period that is reasonable in the circumstances.
[71] The only notice on which the Trustees rely is the PLA Notice dated 27 September 2019 and which was served on Pacific Pearl on 30 September 2019.
Questions for decision
[72] Having regard to s 246 of the PLA, the PLA Notice, the Trustees’ application to cancel the Lease and Pacific Pearl’s amended notice of opposition, the questions for decision are:
(a)What are the alleged breaches of which Pacific Pearl has been given notice in terms of s 246(2)?
(b)Are the Trustees estopped from pursuing their claims in respect of those breaches by the Deed of Settlement?
(c)If the Trustees are not estopped from pursuing their claims, has Pacific Pearl breached the Lease, and given notice of the breach in accordance with s 246 of the PLA, by:
(i)Failing to obtain a CCC for the works carried out under BC 966343 within a reasonable time?
(ii)Failing to comply with the conditions of Consent No 52416?
(iii)Overcrowding the property and using the property in an illegal, noxious or offensive manner?
(iv)Obtaining a BWOF under false pretences?
(v)Refusing to pay the Trustees’ legal costs?
(vi)Depriving the Trustees of access to the property?
(d)If Pacific Pearl has breached the Lease in one or more of the above respects, does the breach justify cancellation of the Lease?
(e)If there has been a breach of the Lease that justifies cancellation, should the Court nonetheless grant Pacific Pearl relief from cancellation?
Analysis
What are the alleged breaches of which Pacific Pearl has been given notice?
[73]The PLA Notice alleged two breaches of the Lease:
(a)Failure to pay the Trust’s costs in considering the request to assign the Lease; and
(b)Failure to comply with all statutes, ordinances, regulations and by-laws relating to the use of the premises as required by cl 21.1 of the Lease.
[74]Paragraph 3 of the PLA Notice called upon the Trustees to:
(a)Remedy the breach regarding payment of the Trust’s costs by paying those costs which totalled $8,850.10;
(b)Remedy the breach of cl 21.1 by:
(i)Reducing the number of occupants to below 45 people;
(ii)Carrying out the necessary works to remediate the compliance issues identified by the Auckland Council during the site visit on 20 September 2019 including but not limited to the unauthorised alteration and extension of the sprinkler system.
[75] It is clear that, with respect to the alleged failure to pay the Trust’s costs, the PLA Notice satisfied the requirements of s 246(2) to inform Pacific Pearl adequately of the nature and extent of the breach and the steps Pacific Pearl had to take to remedy the breach, namely pay the Trustees $8,850.10.
[76] With respect to the second breach, however, simply repeating part of cl 21.1 of the Lease does not adequately inform Pacific Pearl of the nature and extent of the breach. Those general words, without further particularisation, give Pacific Pearl no useful information about the nature and extent of the alleged breach.
[77] The only particularisation provided is in paragraph 3 of the PLA Notice in its calls to reduce the number of occupants to 45 and to carry out the works necessary to remediate the compliance issues identified by the Auckland Council during the 20 September 2019 site visit, including but not limited to the unauthorised alteration and extension of the sprinkler system.
[78] It follows that no other alleged breaches of cl 21.1 can provide a basis for cancellation of the Lease pursuant to the PLA Notice of 27 September 2019.
[79] It is also relevant that, while paragraph 3 of the PLA Notice stated that the compliance issues identified by the Auckland Council included but were not limited to the unauthorised alteration and extension of the sprinkler system, as at the date of service of the Notice, the only information that Pacific Pearl had of the compliance issues identified by the Council during the 20 September 2019 site visit was that provided in Mr Liu’s letter of the same date to Mr Simon. That letter identified only the alteration to the sprinkler system and issues with the smoke control doors. That was because, as at the date of that letter, that was all the information that Mr Liu had received from Mr Kemp.
[80] This means that, as at the date of service of the PLA Notice, Pacific Pearl had no notice of the other compliance issues that were identified during the 20 September 2019 site visit. Those other issues were only subsequently disclosed to the Trust in Mr Kemp’s email of 8 October 2019 to Mr Zhou.
[81] In addition, as at the date of service of the PLA Notice, the inspection by Mr Glazebrook and others from the Auckland Council on 14 November 2019 had not been carried out and their reports on that inspection had not been issued. It follows that none of the compliance issues that arose from that inspection and which were identified in Mr Glazebrook’s letter of 17 December 2019 and in Mr Yen Tu’s fire safety report are relevant to an application for cancellation based on the PLA Notice which predated the inspection and those reports. The same conclusion applies to the compliance issues identified in the Auckland Council’s inspection of the property on 20 May 2020.
[82] For these reasons, the evidence and submissions of the Trustees and of Pacific Pearl that addressed issues of alleged non-compliance that came to light after the PLA Notice had been served are not relevant to the questions the Court must decide. That includes evidence and submissions about the presence of unconsented cabins and multiple caravans on site, electrical cables going to the cabins and the caravans, fire safety issues other than unauthorised alterations to the sprinkler system and identified issues with the smoke control doors, and the presence of unconsented tiny houses on the property.
Are the Trustees are estopped by the Deed of Settlement from pursuing their claims?
[83] The Deed of Settlement was signed in 13 May 2019. The dispute that led to the issuing of the PLA Notice did not arise until after Pacific Pearl requested an assignment of the Lease on 16 July 2019, some two months later. Notwithstanding the broad terms of Recital F, it is apparent that the claims referred to in that recital are those recorded in Recitals A-E. That is confirmed by the operative clauses of the Deed, all of which relate to the rent reviews and the rent review mechanism. In addition, Recital F is not itself an operative provision.
[84] It follows that the Deed of Settlement has no relevance to disputes that arose after it had been executed. That includes the dispute over the CCC because, at the time of the Deed of Settlement, the Trust had taken no steps to follow up the letter sent by their solicitors on 13 May 2015, exactly four years earlier than the Deed of Settlement. Despite that letter, it is clear that the dispute over the CCC crystallised only after Pacific Pearl requested the Trust’s consent to assign the Lease.
Has Pacific Pearl breached the Lease by failing to obtain the CCC within a reasonable time, and has it been given notice of this breach in accordance with s 246?
[85] As with the other questions that relate to alleged breaches of the Lease, it is appropriate to consider first whether Pacific Pearl was adequately informed of the nature and extent of the alleged breach in the PLA Notice. The answer in this case is that Pacific Pearl was not informed of this alleged breach in the PLA Notice.
[86] In his letter of 27 September 2019 forwarding the PLA Notice, Mr Liu distinguished between Pacific Pearl’s undertaking to obtain the CCC, in respect of which he said a proceeding for specific performance would be issued, and the PLA Notice, which did not refer to the CCC.
[87] In addition, even if the failure to obtain the CCC or to undertake the works necessary to obtain the CCC had been identified in the PLA Notice, I do not accept that the undertaking to obtain the CCC was an implied term of the Lease.
[88] The Lease was already in place when the Trust purchased the property. The terms of the Lease were not in issue when the solicitors for Mai Zhou advised the solicitors for Hargian Enterprises that the due diligence clause of the Agreement for Sale and Purchase could be treated as satisfied if Hargian Enterprises obtained a CCC for BC 966343 prior to settlement. When Mr Eaton became involved, it was not in relation to the terms of the Lease but in relation to the Agreement for Sale and Purchase between Mai Zhou / the Trust and Hargian Enterprises. In that respect, Mr Eaton might be seen as acting on behalf of Hargian Enterprises.
[89] If the undertaking is an implied term in any wider agreement, it is an implied term of the Agreement for Sale and Purchase. It is not an implied term of the Lease.
Has Pacific Pearl breached the Lease by failing to comply with the conditions of Consent No 52416, and has it been given notice of this breach in accordance with s 246?
[90] Failure to comply with the conditions of Consent No 52416 is not specifically identified as a breach of the Lease in the PLA Notice. However, I accept that the call in paragraph 3 of the PLA Notice to reduce the occupancy level to 45 is an implied reference to the conditions of Consent No 52416. It is only if the conditions of the consent, which permitted occupancy of 100 persons, had not been complied with that Pacific Pearl was obliged to reduce occupancy to 45, the level permitted under the previous resource consent. This would have been understood by Pacific Pearl. Mr Liu’s letter of 20 September 2019 to Mr Simon stated explicitly that because (in his understanding) Pacific Pearl had not carried out the works required by the conditions of Consent No 52416, Pacific Pearl’s consented capacity remained at 45.
[91] However, in a letter dated 11 March 2020, Mr Rizal Ismail, a Compliance Monitoring Officer at the Auckland Council, advised Pacific Pearl that it had met all of the conditions of its resource consent. While the letter is markedly short on detail, it is comprehensive.
[92] In his affidavit in support of the Trust, Mr Paul Moodie asserts that the conditions of the consent have not been complied with. The points he makes, however, are minor: the presence of a caravan in a parking area and the car park layout not being
consistent with the details in the resource consent. They are hardly a basis for cancelling a lease and were not identified in the PLA Notice.
[93] In short, the evidence is that the conditions of Consent No 52416 have been met and, even if they had not been, the non-compliance is minor and relates to matters of which Pacific Pearl had not been given notice in the PLA Notice.
Has Pacific Pearl breached the Lease by overcrowding the property and using the property in an illegal, noxious or offensive manner, and has it been given notice of the breach in accordance with s 246?
[94] The obligation not to use the property for any noisome, illegal, noxious or offensive manner is set out in cl 22.1(c) of the Second Schedule to the Lease. The PLA Notice does not allege that this clause has been breached. Accordingly, Pacific Pearl has not been given notice of this alleged breach.
[95] Even if the PLA Notice had identified a breach of cl 22.1, other than the call to reduce the occupancy level to 45, there is no reference in the PLA Notice to overcrowding or using the premises in an illegal, noxious or offensive manner.
Has Pacific Pearl breached the Lease by obtaining a BWOF under false pretences, and has it been given notice of the breach in accordance with s 246?
[96] Despite the BWOF being raised extensively in the correspondence leading up to service of the PLA Notice, the BWOF is not identified in the PLA Notice, either directly or by implication. As already discussed, the call in paragraph 3 of the Notice to reduce the occupancy level to 45 is an implicit reference to Consent No 52416. It is not an implied reference to the BWOF under which occupancy was set at 30 or 100, depending on which version of the BWOF dated 23 May 2019 was effective. Furthermore, as at the date of service of the PLA Notice, both the Trust and Pacific Pearl understood that the “replacement notice”, which authorised occupancy of 100 persons, was in effect. The replacement notice was only cancelled after the Council inspection on 14 November 2019, well after the PLA Notice had been served. Accordingly, Pacific Pearl was not given notice of the alleged breach relating to the BWOF in the PLA Notice.
[97] Even if Pacific Pearl had been given notice in the PLA Notice of a breach relating to the BWOF, I do not consider that the alleged obtaining of the BWOF by false pretences, even if proved, was a breach of the Lease.
[98] Under the Building Act, the obligation to obtain a BWOF is an obligation on the owner not an obligation of the tenant. Mr Zhou said in his second affidavit that he agreed to Mr Eaton obtaining the BWOF on behalf of the owner. In taking on that role, Mr Eaton was acting as agent of the owner. He was not performing an obligation under the Lease. If Mr Eaton failed to carry out that task appropriately, that, of itself, could not constitute a breach of the Lease.
Has Pacific Pearl breached the Lease by refusing to pay the Trustees’ legal costs, and has it been given notice of the breach in accordance with s 246?
[99] It is clear that Pacific Pearl was given notice of this alleged breach in the PLA Notice. It is also clear that it has not paid those costs.
[100] In his first affidavit, Mr Eaton says that Pacific Pearl has not paid these costs because, in response to Pacific Pearl’s request for an assignment of the Lease, the Trust raised a sequence of issues regarding compliance with Consent No 52416 and BC 966343 and compliance with the Lease which were not related to the request for assignment and were increasingly specious and unreasonable. In its amended notice of opposition, Pacific Pearl said it did not pay the costs because the Trust unreasonably withheld consent to the assignment of the Lease.
[101] Pacific Pearl’s obligation under cl 33.1(e) of the Lease was to pay the Trustees’ reasonable costs and disbursement in respect the Trustees’ approval of the assignment of the Lease, including all fees and charges payable in respect of any reasonable enquiries by the Trustees concerning the proposed assignee. That obligation remained even if the assignment did not proceed.
[102] Two invoices were enclosed with the PLA Notice: one dated 9 September 2019 for $2,643.55; the other dated 27 September 2019 for $6,206.55.
[103] The first invoice related to the period from 16 July 2019, when Pacific Pearl first requested the Trust’s consent to the assignment of the Lease, to 8 September 2019 when Ms Wu ceased acting for Pacific Pearl. Mr Zhou’s first affidavit and relevant exhibits establish that from 16 July to 22 August 2019, the Trust’s focus was on obtaining information about the proposed assignee. Those are costs payable under cl 33.1(e).
[104] After 22 August 2019, Mr Liu, on behalf of the Trust, began to enquire about Pacific Pearl’s compliance with the Lease, first in relation to compliance with the Auckland Unitary Plan, then in relation to Consent No 52416, and then in relation to BC 966343. Those initial enquiries were prompted by the request from the solicitor for the proposed assignee for information about Pacific Pearl’s compliance with the Lease. While the information being sought was not information concerning the proposed assignee, I accept that, in the context of a request to the Trust for consent to an assignment of the Lease, it was reasonable for the Trust to seek that information.
[105] For that reason, I am satisfied that the costs covered by the first invoice were properly payable by Pacific Pearl in accordance with cl 33.1 of the Lease. In addition, in his email of 17 September 2019 making the second request for the Trust’s consent to an assignment of the Lease, Mr Simon, acting on behalf of Pacific Pearl, accepted that these costs were payable by Pacific Pearl.
[106] I consider that costs incurred by Mr Liu in engaging with Mr Simon between 9 September 2019 and 17 September 2019 were of a similar character and were properly payable by Pacific Pearl under cl 33.1 of the Lease.
[107] From 19 September 2019 to 27 September 2019, however, Mr Liu’s enquiries took on a more far-reaching and intrusive character. Although expressed as conditions of the Trust’s consent to the proposed assignment, the matters on which Mr Liu required Pacific Pearl to satisfy the Trust extended well beyond information that was reasonably required to approve the assignment. The information sought was not information concerning the proposed assignee.
[108] For these reasons, I do not accept that all of the costs covered by the second invoice were payable by Pacific Pearl under cl 33.1 of the Lease. Because those costs have not been itemised, it is not possible to say how much of costs fall outside cl 33.1. However, given the change in character of the inquiries took place half-way through the period of the invoice (10 to 27 September 2019), it is reasonable to assume that about half of the costs, or $3,103.28, are payable under cl 33.1. This means that, in accordance with cl 33.1 of the Lease, Pacific Pearl should have paid the Trust’s costs in the amount of approximately $5,747.00.
[109] Accordingly, I find that Pacific Pearl breached the Lease by failing to pay the Trust’s costs in the sum of $5,747.00.
Has Pacific Pearl breached the Lease by depriving the Trustees of access to the property, and has it been given notice of the breach in accordance with s 246?
[110] It is clear that Pacific Pearl breached cl 37.1 of the Lease by denying Mr Zhou access on 17 October 2019 for the purposes of inspecting the property after written notice and written consent had been provided.
[111] However, that breach took place after the PLA Notice had been served, so is not referred to in the Notice. Accordingly, Pacific Pearl was not given notice of this breach. Accordingly, the breach provides no basis for cancelling the Lease.
Conclusion from analysis of alleged breaches
[112] The only breach of the Lease for which notice was given in accordance with s 246 of the PLA was Pacific Pearl’s failure to pay costs in the sum of $5,747.00. That breach arose in the context of increasing inquiries by the solicitor for the Trust that extended well beyond information that was reasonably required to approve the assignment. While that does not excuse the non-payment, I do not consider it is a breach that is sufficiently serious to justify cancellation of the Lease.
[113] Even if the breach had been sufficient to justify cancellation of the Lease, it is a breach that can readily be remedied and for which relief from forfeiture would be appropriate.
Result
[114] For all the above reasons I dismiss the Trust’s application for orders cancelling the Lease in favour of Pacific Pearl of the property at 9 Bicknell Road, Favona, Auckland.
Costs
[115] Pacific Pearl is entitled to costs on a 2B basis. If the parties are unable to agree costs, they may submit memoranda of no more than 4 pages each. Any memorandum by Pacific Pearl is to be filed and served by 17 December 2020. Any memorandum in reply by the Trustees is be filed and served by 30 January 2021.
Note to parties
[116] It is apparent that neither the Trust nor Pacific Pearl have been diligent in carrying out their respective responsibilities as landlord and tenant. While much of the evidence that was adduced about the construction of the premises and the premises’ compliance with the Building Act and fire safety regulations was not relevant to the alleged breaches of the Lease for which Pacific Pearl was given notice in accordance with s 246 of the PLA, that does not mean those issues of alleged non-compliance are not serious and do not warrant attention. To the contrary, they must be addressed by the Trust as owner of the property and by Pacific Pearl if it remains as tenant.
G J van Bohemen J
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