AUCKLAND COUNCIL v COSDO EQUITY LTD [2014] NZHC 1900

AUCKLAND COUNCIL v COSDO EQUITY LTD [2014] NZHC 1900 [12 August 2014]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYCIV-2014-404-001849[2014] NZHC 1900UNDER Part 19 of the High Court Rules and s 253of the Property Law Act 2007IN THE MATTER OF relief against cancellation of leaseBETWEEN AUCKLAND COUNCILApplicantAND COSDO EQUITY LIMITEDRespondentHearing: 6 and 8 August 2014Counsel: D T Broadmore for the ApplicantR M Dillon and T A Hwang for the RespondentJudgment: 12 August 2014JUDGMENT OF DUFFY JThis judgment was delivered by Justice Duffyon 12 August 2014 at 4.30 pm, pursuant tor 11.5 of the High Court RulesRegistrar/Deputy RegistrarDate:Solicitors: Buddle Findlay, AucklandQueen City Law, Auckland[1] The applicant, ("the Council") in this originating application, seeks reliefagainst a proposed cancellation of its lease of commercial premises by therespondent, ("Cosdo"). The Council has exercised a right under the lease to abaterent and is refusing to pay rent at the agreed amount. Cosdo contends that it is entitled to cancel the lease for non-payment of the agreed rent. Under s 256 of the Property Law Act 2007 ("the Act"), the Court has discretion to grant relief againstcancellation or proposed cancellation, subject to conditions that it sees fit. The issue for this Court to determine is whether to grant the Council the relief that it seeks and, if so, on what conditions.Background[2] The Council and Cosdo are parties to a lease of premises at levels two to eight, and the basement of a commercial building on 360 Queen Street, Auckland("the premises"). The lease is to expire on 31 August 2014. It will not be renewed.[3] In 2013, the Council began to complain to Cosdo about the inadequacy andpoor quality of the premises' air-conditioning. The Council claims that under the lease, Cosdo as the lessor has an obligation to use best endeavours to maintain the air-conditioning and ventilation system, and that if the Council's business isdisturbed for more than 24 hours by the failure to provide proper maintenance, the rental payable is abated proportionally.[4] The Council says that between 8 February 2013 and 3 June 2014, its businesswas regularly and significantly disturbed by Cosdo's failure to carry out its maintenance obligations of the air-conditioning. This alleged failure has resulted in the Council claiming that it is entitled to abate rent under clause B5 of the lease, as Cosdo has not used its best endeavours to provide and maintain the air conditioning. The value of rent abatement that the Council has withheld from Cosdo is$159,723.50, including GST. By the Council's calculations this leaves the sum of$3,019 owing in rent. The Council accepts that it should pay this amount of rent but as of the date of hearing it had not done so.[5] On 21 July 2014, Cosdo served on the Council a notice that rent was outstanding and that if it was not paid by 4 August 2014, the lease would be cancelled. This led to the Council filing the present application, as well as an application for interim relief. Cosdo has given an undertaking that it will not cancel or purport to cancel the lease until further order of the Court, or until 31 August 2014, when the lease will expire. Because the application required a determination before 31 August 2014, it was brought on urgently for hearing at very short notice.[6] Both parties acknowledged before me that the lease provides for disputes regarding rent abatement to go to arbitration. Further, each has indicated its willingness to go to arbitration on this dispute. However, to date, neither has invoked the arbitration process under the lease.Parties' submissions[7] The Council contends that its right under the lease to abate the rent is applicable to the present circumstances. Clause B5 of the lease provides:The Lessor shall use its best endeavours to provide and maintain all lifts (if any), air-conditioning plant (if any), ventilation plant servicing the whole building whereof the demised premises form part if the Lessee is disturbed in its business conducted from the demised premises for twenty-four (24) hours or longer by the Lessor's failure to provide and maintain anylifts, air-conditioning plant, ventilation plant, then for the period of such disturbance the rental payable hereunder shall abate in fair proportion having regard to the degree of such disturbance.[8] Clause C4 of the lease provides for the resolution of disputes between the Council and Cosdo:That if any dispute shall arise as to whether or not the demised premises are tenantable for the purposes of the Lessee or as to the amount of rent at which shall be abated in the case of partial damage or any matter arising under this Lease is to be settled or determined by arbitration, then such dispute shall be referred to two (2) arbitrators, one to be appointed by the Lessor and one by the Lessee, and in the event of such arbitrators being unable to agree, then to their umpire to be chosen by them before entering upon the consideration of the question submitted to them, and the decision of such arbitrators or their umpire shall be final and binding on the parties, and every such reference shall be deemed to be a reference to arbitration within the meaning the Arbitration Act 1996 or any re-enactment or amendment thereof.[9] In support of its application, the Council has filed an affidavit from Aditya Vasa, a commercial property manager of the Council, in which he deposes that from February 2013 onwards, the Council has on numerous occasions engaged with Cosdo to resolve air-conditioning issues. These were so serious that from time to time, Council staff left the premises because the temperature was either"unbearably hot or so cold it was intolerable". Attached to Mr Vasa's affidavit is areport from an independent entity with apparent experience in assessing and measuring the quality of air-conditioning. This report supports the Council's assertion that there are problems with the premises' air-conditioning. The affidavit also attached copies of correspondence between the Council's legal officers and Cosdo's solicitors dating back as far as June 2013 in which the air-conditioning problems are traversed.[10] Mr Vasa also deposes that because the lease is due to expire on 31 August 2014, the Council has shifted most of its staff from the premises, but that approximately 20 to 25 persons remain working from the premises. Mr Vasa says that if the lease is cancelled, those persons will have nowhere to work from, and so they may not be able to continue to work for the Council until new premises become available on 1 September 2014.[11] Cosdo opposes the application. It argues that it would not cancel the lease ifthe Council paid Cosdo the agreed rent due under the lease. Sangeun Yoon, Cosdo'sproperty manager, has sworn an affidavit in which he deposes that Cosdo has substantial value and assets such that it could readily repay the Council if it was later found to be entitled to abate the rent.[12] Mr Yoon confirms that Cosdo has been dealing with the Council for over a year now regarding the air-conditioning problems. Mr Yoon asserts that if there are any serious air-conditioning problems (which Cosdo does not accept), those problems were caused by the Council altering the floor plan of the premises by partitioning space that was intended for use as open-plan offices.[13] Cosdo contends that the abatement the Council now claims is a cynical attempt to avoid paying the agreed rental up to the expiry of the lease on 31 August 2014.Relevant LawLegislation[14] A relevant statutory provision is s 253 of the Act. This section provides: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.[15] Under s 255, an application for relief is not to be taken as an admission by the person making the application that there has been a breach of the lease by the lessee, and that the lessor has the right to cancel the lease.255 Application for relief not to constitute admission(1) This section applies to an application for relief against the cancellation, or proposed cancellation, of a lease.(2) The application is not, in itself, to be taken as an admission by the person making it—(a) that there has been a breach of a covenant or condition of the lease by the lessee; or(b) that, because of the breach, the lessor has the right to cancel the lease; or(c) that a notice has been duly served on the applicant in accordance with section 245 or 246; or(d) that, at the time when the lessor applied to the court for an order for possession of the land or peaceably re-entered the land, the following periods had expired:(i) the period for the remedying of the breach specified in a notice served in accordance with section 245, if notice was served under that section:(ii) a period for the remedying of the breach that was reasonable in the circumstances, if notice was served under section 246.(3) The court may grant relief against the cancellation of the lease without determining all or any of the things set out in subsection (2).[16] Section 256 relates to the powers of the Court on an application for relief:256 Powers of court on application for relief(1) In determining an application for relief against the cancellation, or proposed cancellation, of a lease, under section 253, a court may grant—(a) the relief sought on any conditions (if any) as to expenses, damages, compensation, or any other relevant matters that it thinks fit; an(b) an injunction restraining any similar breach in the future.(2) The court may grant relief against the cancellation, or proposed cancellation, of a lease even though—(a) the cancellation is for a breach of an essential term of the lease; or(b) the breach is not capable of being remedied.Case law[17] McIvor v Donald [1984] 2 NZLR 487 (CA) and Studio X Ltd v Mobil Oil New Zealand Ltd [1996] 2 NZLR 697 (HC) are often cited as leading authorities onthe exercise of the Court's discretion under s 256 of the Act. Those cases consideredrelief against forfeiture under s 118 of the repealed Property Law Act 1952. However, cases decided under the 1952 Act are still regarded as useful under the 2007 Act: see Maydanoz NZ Ltd v Poppelwell t/a The Poppelwell Partnership [2012] NZHC 1026 at [42].[18] In McIvor v Donald, Somers J said at 494:The legislature has not seen fit to lay down rules as to the exercise of the wide discretion it has conferred on the Court and the undesirability of the Court attempting to do so was emphasised in Hyman v Rose [1912] AC 623, 631.[19] In Studio X, at 701, Hammond J cited the decision of the House of Lords inHyman v Rose with approval and listed a number of factors for the Court to consider.[20] It is well established that when only rent is in arrears, an application for relief against cancellation should be granted if the arrears can be paid. The applicant citesMulholland v Waimarie Industries Ltd (2009) 10 NZCPR 590 (HC), where French J said:[23] The principles relating to applications for relief against forfeiture (or cancellation, as it is now called) are well established and can be summarised as follows:1. Where the breach consists solely of a failure to pay rent, there is a presumptive right to relief on payment of the arrears and costs. It is only in exceptional circumstances that relief is to be denied if the debt is paid in full.2. This is because it is inequitable that the benefit of the lease should be lost to a tenant who has restored to the landlord all that the landlord is entitled to under the lease. The ability toforfeit the lease and take possession is regarded by the Court as security for payment.3. Where, however, it is clear the tenant is hopelessly insolvent, the Court will not grant relief as a general rule.4. Mere suspicion of insolvency is not enough to outweigh the presumptive right to relief on payment of rental and costs.[21] The same principles have also been clearly stated in Howard's Lodge Ltd vGuy HC Rotorua CIV-2011-463-733, 1 December 2011. Asher J said:[19] where a breach consists solely of a failure to pay rent it can bepresumed that relief will be granted on payment of the arrears and costs. It is only in exceptional cases that relief will be denied if the rent is or can, with certainty, be paid.[22] Where the breach is a failure to pay money, it will generally beaxiomatic that payment fixes the breach and further penalties are disproportionate save for the exceptional case of the type referred to in Gill v Lewis.[22] Those exceptional cases referred to in Gill v Lewis [1956] 2 QB 1 are described in this way:[T]here may be very exceptional cases in which the conduct of the tenants has been such as, in effect, to disqualify them from coming to the court and claiming any relief or assistance whatever. The kind of case I have in mind is that of a tenant falling into arrear with the rent of premises which he wasnotoriously using as a disorderly house [23] In Maydanoz NZ Ltd v Poppelwell t/a The Poppelwell Partnership, Brewer J dealt with an application for relief against cancellation where the applicant refused to pay operating expenses at a rate higher than the estimated amount in the initial lease. Brewer J considered the factors in Studio X and granted relief subject to conditions that the applicant was to pay the outstanding expenses to the lessor. Although the Court considered that the applicant was not justified to refuse to pay outgoings under the lease, a condition that the parties must appoint an arbitrator to resolve any extant disputes was imposed.[24] In Zhang v Wilson Garden Ltd [2014] NZHC 840, the tenant argued unsuccessfully that rent could be paid into a solicitor's trust account:[18] Mr Deliu submits that both proceedings should be consolidated and heard together and that it would be inappropriate to make an order for possession in favour of the applicants in this proceeding before the respondent's claims in the other proceeding are determined. The respondent proposes that relief against the proposed cancellation of the lease should be granted subject to a condition that the respondent pays $3,000 per month into a solicitor's trust account as partial security for the rent and outgoings pending resolution of the respondent's claims in the related proceeding. At the hearing, Mr Deliu indicated that the respondent would be able to pay the full amount of the rent and that if the Court concludes that the rent should be paid as a condition of granting relief, he invites the Court to direct that 50 per cent of the rent be paid to the applicants with the balance being paid into a solicitor's trust account pending determination of the respondent's claims.[25] Gilbert J refused to grant relief against cancellation, as the Judge considered that the respondent should not achieve the benefit of a set-off through the granting of relief when the parties had expressly agreed in the lease that no set-off would be available in relation to the rent.[26] In Godzone (2011) Ltd v Chew [2012] NZHC 2082, the lessee offered to pay penalty interest into a trust account pending determination of the arbitration to resolve the dispute between the parties. Woodhouse J held:[7] In my judgment this is a sum which comes in the same category as the liability for rent and the other principal amounts that have already been paid. In addition, in relation to rent, there is a no set off provision in the lease. Consequently this sum must also be paid as a condition of an order for relief.[27] In Robt Jones Investments Ltd v RG Caie Ltd HC Wellington CP695/88, 22 November 1988, the plaintiff/lessor sought summary judgment against the defendant/lessee for non-payment of rent of commercial premises. The lessee opposed summary judgment on the ground that there was a right to abate rent in the lease that it had invoked. The lease contained an express provision against set-off. However, the lessee argued that reducing the rent under the abatement provision was not a set-off of rent, as the rent that it was required to pay under the lease could only be rent payable in terms of the lease, which would include the agreed rent subject to the appropriate abatement.[28] Ongley J found that in the circumstances, whether rent was payable at the contracted sum or an abated sum was something that came within the arbitrationprovisions of the lease and he could see no good reason why those questions should not be referred to arbitration. Accordingly, he stayed the proceedings until the questions were determined by arbitration.Analysis[29] As the case law has made clear, the Court has a discretion regarding relief against cancellation. The Court may grant the relief sought on any conditions that it thinks fit.[30] I consider that this case can be distinguished from Zhang v Wilson Garden Ltd and Godzone (2011) Ltd v Chew. The argument in those cases revolved around the impact of the no set-off clauses in the leases, and nothing was said about a right to abate rent being a reason for the payment of something that was less than the agreed sum. The present lease contains a no set-off provision. But, clause B5 expressly provides that rent may be abated in certain circumstances. The key question is whether the present circumstances qualify under that provision. If they do, the Council's obligation under the lease to pay rent will be limited to the abatedrent.[31] Cosdo invited me to determine whether the circumstances met the requirements for a rent abatement. It considered the Council was acting in a cynical fashion by seeking to invoke the abatement right so close to the expiry of the lease. In essence, this is a submission that the Council is not exercising the right of abatement in a bona fide manner. I accept that Cosdo may see matters this way. However, in the context of an originating application, I am in no position to make findings of that nature.[32] The very nature of an originating application makes it difficult to assess assertions of good faith or lack thereof. Such assessments necessarily involve determinations on whether the relevant evidence is reliable and credible or not. Those cannot be made without seeing and hearing from the relevant witnesses, including their cross-examination. Given the urgency of the application, no one suggested that witnesses be available for cross-examination. This was realistic, butthe absence of cross-examination provides a further reason for why I cannot make determinations that attribute cynical motives to the Council. It would be procedurally unfair to do so. Before I could draw adverse inferences of that type against the Council, such assertions would have had to have been put to theCouncil's witness by Cosdo's counsel.[33] Even if the Council's witness had been available for cross-examination, I still do not think that the originating application procedure is appropriate for the resolution of disputed facts that entail allegations of lack of good faith. Once questions of reliability and credibility of witnesses are engaged, the processes involved in an ordinary proceeding in this Court, or an arbitral hearing, offers the best procedures for making determinations of this type.[34] Moreover, since both parties accept that their dispute is one covered by the arbitration provision in the lease, unless they both wanted to forego arbitration, which the Council does not, I cannot see how this Court could embark on resolving their dispute.[35] Finally, in the present case, whilst the application came on for hearing at very short notice, the parties have done an excellent job in putting the key issues before the Court. However, they may not have had sufficient time to cover all the factual issues that could assist in determining the substantive issues as to whether the air- conditioning is so defective that a rental abatement is warranted, and if so the proportion of that abatement. Any findings that I might make on those topics may create a res judicata that would preclude the parties from fully venting the same issues in an arbitral hearing.[36] The Council's position is that the originating application for relief is aninappropriate process to determine the substantive issues in dispute and that the parties should engage in arbitration. I agree with the Council. Clause C4 of the lease between the parties makes it clear that any disputes arising as to the amount of rent to be abated are to be settled or determined by arbitration. Further, the originating application procedure is a straightforward application that does not require detailed pleadings or interlocutory orders. Therefore, the procedure is notwell suited for contested applications where particularised pleadings and interlocutory steps might be required.[37] In terms of proportionality and the interests of both parties, I consider that justice weighs in favour of relief being granted. I am satisfied that the Council has established that it has a serious case to be argued for an entitlement to a rental abatement. This is not an issue that has simply arisen in the last days of the life of the lease. The Council has been expressing concerns about the inadequacy of the air- conditioning since early 2013. Cosdo's evidence confirms this. On the face of it, therefore, the Council's concerns about the air conditioning problems appear to me to be genuine. Though I note that Cosdo has not had a full opportunity to test its argument that the Council has no genuine reason for invoking the rental abatement provision in the lease. Accordingly, I make no explicit finding on this topic.[38] Abating the rent is not the same as a set-off, the latter being prohibited by the lease. If the right of abatement were to be treated as legally the same as a set-off, the abatement provision would be unworkable for the Council. The parties to this lease can never have intended such an outcome. The inclusion in the lease of a power to the lessee to abate rent in certain circumstances must mean that such is available; the only question being whether the circumstances for its exercise actually exist.[39] I am satisfied that Cosdo will not suffer irreparable harm if the abated portionof the unpaid rent is held in a solicitor's trust account until the substantial disputebetween the parties is resolved by arbitration. On the other hand, if relief is not granted, the Council will be placed in a difficult situation. Its evidence is that, in the short space of time before the lease expires, it would be hard pressed to find alternative accommodation for the remaining employees who are presently accommodated in the premises. Here justice weighs in favour of leaving the lease to run its short course.[40] Cosdo deposes that it has substantial assets, therefore, it seems to me that it will not be irreparably harmed if there is some delay in it receiving the rent that it claims it is due for the months of July and August 2014. There is no question aboutthe Council's ability to pay the agreed rental should it be found to be not entitled toabate the rent.[41] Both parties appear to me to be in a position where each could make good to the other any loss that the other might suffer. On the other hand, the parties appear to me to have moved beyond the stage of reaching a sensible resolution betweenthemselves. It may well be that each is now suspicious of the other's motivations.In the present circumstances, I consider that the better approach is for an equivalent monetary sum to the alleged abated rental payments for July and August 2014 to be held by a neutral third party. When I raised this issue with Cosdo, its counsel suggested that Meredith Connell's (a firm of solicitors) trust account would beacceptable. Though Cosdo's primary position is that the agreed rent should be paidto it now, as it could pay any amount that an arbitrator later found should be returned to the Council.[42] The parties raised the issue of payment of interest on the money to be held inMeredith Connell's trust account. Under the lease, interest is payable on unpaid rent. I consider that the payment of interest under the lease is probably best left to be determined in the arbitration. However, I would have thought that if the Council cannot establish that it is entitled to abate the rent, then any interest earned on the money held in the trust account would go towards reducing the interest payable on any unpaid rent, rather than be an additional sum that was paid to Cosdo. On the other hand, if the Council can establish it is entitled to abate the rent, then anyinterest earned on the money held in Meredith Connell's trust account would go tothe Council.[43] I intend to grant relief against cancellation on the following terms:(a) The Council will pay a sum of money that is equivalent to the abated rent it considers it is entitled to withhold from Cosdo to the trust account of Meredith Connell. The balance of the unpaid rent is to be paid directly to Cosdo forthwith;(b) The money paid by the Council is to be retained in Meredith Connell's trust account until such time as an arbitrator/s hasdetermined whether the Council is entitled to abate the rent, due to the inadequacies of the air-conditioning, ("the substantial dispute"), and any incidental consequences thereof between Cosdo and the Council;(c) The substantial dispute between Cosdo and the Council is to be determined by arbitration in accordance with the terms set out in clause C4. The parties are to appoint their respective arbitrators and to commence any other necessary steps under clause C4 to implement the arbitral process forthwith. Should the parties be agreed as between themselves on any departures from the arbitral process set out in clause C4, they are free to agree to a variation of those processes; and(d) Any costs arising from the payment to Meredith Connell's trustaccount are initially to be borne by the Council, but ultimately are to be borne by the party who in the arbitral process fails to establish an entitlement to those funds.[44] Leave is reserved to the parties to return to the Court on any of the conditions imposed in the granting of the relief against cancellation.[45] If the parties are unable to agree costs as between themselves relating to this application, they have leave to file memoranda on costs.Duffy J