BAZANG V EVELYN FLINT & ORS AS TRUSTEES OF THE F C FLINT ESTATE HC AK CIV 2006-404-6446

BAZANG V EVELYN FLINT & ORS AS TRUSTEES OF THE F C FLINT ESTATE HC AK CIV 2006-404- 6446 31 October 2006IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV 2006-404-6446BETWEEN BAZANG LIMITED Applicant AND EVELYN MARTHA FLINT & ORS AS TRUSTEES OF THE F C FLINT ESTATE Respondents Hearing: 25 October 2006 Appearances: D B Hickson for applicant W A Johnston for respondents Judgment: 31 October 2006JUDGMENT OF ALLAN JSolicitors: Castle Brown, PO Box 9670, Newmarket, Auckland for applicant Johnston Pritchard Fee & Partners, PO Box 1115, Auckland for respondents[1] The applicant is the lessee of commercial premises situated at 467 Khyber Pass Road, Auckland. The respondents are the lessors of those premises. [2] The applicant is substantially in arrears in respect of rent and outgoings. The respondents' calculation is that the applicant owes $115,067.99 for rental and $42,195.76 in respect of its share of outgoings. On 19 October 2006 the respondents re-entered the premises, changed the locks and terminated the lease. [3] This proceeding was filed the following day. In it, by way of originating application, the applicant seeks relief against forfeiture.Factual background[4] In September 2001, the premises then being vacant, the respondents entered into negotiations with Speedy Sign-A-Rama Limited (the franchisor) which holds the licensing rights for New Zealand in respect of Speedy Signs, which is an international franchised signwriting network, operating in at least 30 countries and having in excess of 700 worldwide franchises. The franchisor sought suitable premises for its Newmarket franchisee, the applicant. [5] In late October 2001, negotiations between the parties culminated in an agreement as to the terms of an agreement to lease, to be executed by the applicant and the respondents. On the evidence it appears that the franchisor conducted the entire negotiations on behalf of the applicant. [6] The undated agreement to lease ultimately executed by the applicant and the respondents, provided for a) a five year term commencing on 1 November 2001, with one right of renewal for a further term of five years. If that right of renewal was exercised the lease was to terminate on 31 October 2011;b) rental of $35,000 per annum plus GST payable together with a proportionate share of outgoings as from 1 February 2002; c) one carpark immediately to the rear of the premises; d) the parties to enter into a formal deed of lease on terms no more onerous than those contained in the Auckland District Law Society commercial lease form, third edition, 1993; e) rent reviews each two and a half years; f) the respondents as landlords to contribute towards the fit-out costs of the premises, the actual cost of the fit-out or $25,000 plus GST, whichever was the less. That amount was to be paid directly to the franchisor within 14 days of receipt of tax invoices for such fit-out work; g) the respondents as landlord to carry out, at their cost, certain agreed electrical work in addition to payment towards fit-out costs; h) the following matters (the reference to "Franchisor" being in each case a reference to Speedy Sign-A-Rama Limited);2. Assignment or sub-lease2.1 The Landlord will not agree to any assignment, renewal, extension or modification of the Lease without the prior consent of the Franchisor while it remains the Franchisor of the Tenant. 2.2 The Landlord will permit the Tenant or any successor hereunder to assign its interest under the Lease to any approved Franchisee of the Franchisor, or to the Franchisor, with the prior written consent of the landlord, which consent shall not be unreasonably withheld and in which event the liability of the Tenant or successor (and any guarantor thereof) shall then cease.3. Default by Tenant3.1 In the event of any default by the Tenant under the Lease the Landlord will immediately, and before taking any action against the Tenant, notify the Franchisor providing full details thereof. The Franchisor will upon receipt of such notice have the right but notobligation to remedy the default. Any such notice shall be sent to the Franchisor at the Franchisor's facsimile or e-mail addresses as follows: E-Mail: Franchise@speedysigns.co.nz Fax No: (09) 526 1502 3.2 Speedy Signs has the right at any time to enter the Premises for the purpose of remedying any default under the Lease, and in doing so will not be required to obtain the consent of the Landlord. 4. Business Use/Signage4.1 The permitted business use for any franchisee of the Franchisor is sign manufacturing/and ancillary and administration of associated businesses (and without limitation any use permitted by the Franchisor which is permitted under relevant local authority and/or governmental authorities). 4.2 The Landlord agrees to allow the Tenant (or any permitted successor) to display Speedy Signs trademarks, logos, insignias and window graphics used in connection with the Tenant's business.[7] The applicant duly entered into possession. Fitting out was completed. The respondents met their financial obligations to contribute to fit-out costs. Because the applicant took a smaller proportion of the building than had been occupied by the former tenant, it was necessary to undertake certain electrical work. That took some time but was eventually completed at the respondents' cost. [8] The respondents, by their solicitors, duly prepared a deed of lease in the form contemplated by the agreement to lease, and sent it to the accountants who were acting as business advisers to the applicant. The deed of lease was first sent by the respondents on 23 January 2002. It was not signed and returned. A follow up letter of 1 February 2002 produced a reply of 5 February 2002 from the accountants, advising that Mr Thomas, director of the applicant, had arranged a time to sign the lease, and it would be returned when executed. But it has never in fact been executed, although no objection has been taken to its terms. [9] Mr Thomas, the applicant's sole director, says that the respondents have repeatedly failed to comply with their obligations to put the leased premises into a proper state of repair, and that they have failed on numerous occasions to carry into effect promises to do so. For this reason, he claims, he has declined to execute thedeed of lease, and has withheld the unpaid rent and outgoings. The repairs concerned are wide-ranging in character but they appear to consist primarily of electrical and water-proofing work. For their part, the respondents say they have attended diligently to all legitimate complaints and the premises are in a proper state of repair. [10] The first five year term of the lease expires on Tuesday 31 October 2006. During that five year period, the applicant has withheld from the respondents, significantly more than half the total amount owing in respect of rental and outgoings. [11] The dispute is heavily documented. There is correspondence between the parties (the respondents at all times communicating through their solicitors), and Mr Thomas has made a number of file notes of discussions with the respondents' solicitors. One such file note is said to be a contemporaneous record of a discussion between Mr Thomas and Mr George Johnston, one of the respondents, during which Mr Johnston is said to have represented to the applicant that no further rent need be paid until the premises were put into a proper state of repair by the respondents. That alleged promise is stoutly denied by Mr Johnston. [12] Although the applicant relies upon the failings of the respondents as its justification for withholding rent, there have nevertheless been occasions upon which the applicant has accepted that payments ought to be made, and indeed, over a period of two years or so, payments were made sporadically. There were two significantly large payments; the first, of $60,285.33 was made on 3 September 2003. The applicant's cheque was dishonoured on 5 September 2003. A further large payment of $20,000 drawn on the account of Mr and Mrs Thomas (rather than the applicant), was made on 31 August 2004. That cheque was dishonoured on 2 September 2004. It is proper to draw the inference from these instances of dishonour that the applicant was, for much of the term of the lease, financially embarrassed. Its claims to be justified in withholding rent on the ground of the respondents' failure to repair, must be considered in the light of the applicant's apparent financial embarrassment, of which there is further evidence in the form of file notes and letters which speak ofshort term financial difficulties, and the financial constraints imposed by virtue of business growth and the applicant's dependence on payments from its customers. [13] After the date of dishonour of the cheque for $20,000, there was just one further payment, of $5,000 on 19 July 2005.Counsels' arguments[14] For the applicant, Mr Hickson submitted that re-entry was unlawful because the respondents had failed to give notice of their intention to re-enter to the franchisor as required by clause 3.1 of the agreement to lease. He further submitted that relief ought to be granted against forfeiture because there was no rent outstanding since the applicant was entitled to withhold rent until the premises were repaired, and was entitled to rely on the promise allegedly made by Mr George Johnston in August 2005. [15] For the respondents Mr Johnston denied that clause 3.1 operated to render the entry unlawful, and argued that on the evidence, the premises were in a perfectly acceptable state of repair. Further, he said, the Court ought to accept Mr George Johnston's robust denial of any August 2005 agreement to the effect claimed by the applicant.The law[16] The Court's jurisdiction to grant relief against forfeiture, when that forfeiture is based on non-payment of rent, is equitable in character. It is quite independent of s 118 of the Property Law Act 1952. I observe that the intitulment in this proceeding refers to s 118, although the argument proceeded on both sides in reliance on the Court's equitable jurisdiction. [17] The principles are usefully discussed in such authorities as Gill v Lewis[1956] 2 QB 1; Daalman v Oosterdijk [1973] 1 NZLR 717; Guardsman Restaurant (ChCh) Ltd v Victoria Square Estates Ltd HC ChCh M339/87 11 December 1987;Taheke Holdings Ltd v Harborow (1991) 1 NZ ConvC 191,064, and Cooper v Clark(1992) 2 NZ ConvC 191,309. In Cooper v Clark Hillyer J pointed out that, save in exceptional circumstances, the function of the Court in exercising the equitable jurisdiction is to grant relief when all that is due for rent and costs has been paid up. The right of re-entry being in essence in the nature of a security, if, having been paid, a landlord is fully compensated, then the Court will ordinarily grant relief. [18] Generally speaking relief will not be refused solely for non-payment of rent, provided that the arrears are made good, unless it can be shown that an applicant lessee is hopelessly insolvent: Inner City Businessmen's Club Ltd v James Kirkpatrick Ltd [1975] 2 NZLR 636.Discussion[19] I have found it unnecessary to engage in a detailed consideration of the claims and counterclaims made by the applicant and respondents as to the state of repair of the demised premises, the promises allegedly made by the respondents to repair, and the adequacy of the applicant's reasons for withholding such a large proportion of the accrued rental over the five year term of the lease. That is because I have concluded that the respondents' re-entry was unlawful, and the applicant is entitled to relief on that ground alone. The unlawfulness arises by reason of the respondents' failure to comply with the provisions of clause 3 of the special provisions of the agreement to lease. Those provisions require the respondents, before taking any action against the applicant for default under the lease, to notify the applicant's franchisor, and to provide full details of the default. Upon receipt of any such notice, the franchisor has the right, but no obligation, to remedy the default. [20] It is, I think, necessary to imply into the provision a term to the effect that the franchisor will have a reasonable period within which to make good the default. [21] Mr Archibald, managing director of the New Zealand franchisor, gave evidence to the effect that no such notice had been received by the franchisor from the respondents, and it is not argued by the respondents that any such notice was given.[22] The effect of the failure to give a notice to the franchisor must be considered in the context of the agreement to lease as a whole, and against the background of the commercial negotiations which preceded it. The entire negotiations were conducted, not by the applicant, but by the franchisor. It was the franchisor which approved the premises, and the terms of the agreement to lease, so that the respondents were well aware of the vital interest of the franchisor in both the suitability of the premises and the financial detail contained within the agreement to lease. It was the franchisor which negotiated for the inclusion of the special conditions. Clause 2 of those special conditions prohibited the respondents from agreeing to an assignment, renewal extension or modification of the lease, without the prior consent of the franchisor, while it remained the franchisor of the applicant. Clause 2.2 required the respondents to consent to an assignment of the leasehold interest by the applicant to any approved franchisee of the franchisor. The combined effect of clauses 2.1 and 2.2 was to put the franchisor in control of the selection of assignees, while the franchisor remained the franchisor of the applicant. [23] The evident purpose of clause 2 was to preserve the premises during the terms of the lease for the applicant, while a franchisee, or successors of the applicant who were franchisees. [24] That purpose is further carried into effect by clause 3, which requires the respondents to notify the franchisor of any default by the applicant before any action consequent on default was taken by the respondents. That enabled the franchisor to step in to remedy the default if it wished, so securing the premises and the lease for the franchised operation. [25] The respondents omitted to give any notice pursuant to clause 3.1. Had they done so the franchisor might well have paid the arrears, or sought to negotiate with the respondents for a payment programme, so preserving the integrity of its franchise network. Whether it would, in fact, have done so, is of course unknown, but it was entitled to the opportunity. [26] Moreover, clause 3.1 conferred a benefit not only on the franchisor, but also upon the applicant. It was entitled to require the respondents to comply with clause3.1 because the giving of a notice enabled the franchisor, if it chose, to come to the aid of the applicant. So the applicant stood to benefit if the franchisor elected to act. [27] In my view, the respondents' failure to give the requisite notice rendered the respondents' re-entry invalid. The case is analogous to that considered under s 118 by Eichelbaum J (as he then was) in Short v Kirkpatrick [1982] 2 NZLR 358, at 361. The unlawfulness of re-entry may not in every case justify relief against forfeiture. An extreme case in which forfeiture was refused was Psycho Scene The Label Shop Ltd v Gibson HC NWP CIV 2003-443-56 4 March 2004. [28] But in this present case I regard compliance with clause 3 to be a fundamental precondition to the exercise of the lessees' right to re-enter.Result[29] The respondents' re-entry was unlawful. The applicant is accordingly entitled to relief and to resume possession of the demised premises. [30] I observe however, that the applicant's apparent victory may prove to be somewhat Pyrrhic in character. The initial term of the lease terminates on 31 October 2006. There is a right of renewal for a further five year term commencing on 1 November 2006. However, ordinarily, the right to a renewed term is available only to lessees who are not in breach of the covenants contained in the lease. I note that clause 35 of the draft deed of lease tendered for execution by the respondents to the applicant (but not signed by the applicant) contains a provision to that effect. There has been no suggestion that the terms of the deed of lease are not acceptable to the applicant. It has declined to execute the deed solely because it believes that the landlords are in default in respect of their repair obligations. The lease may bind the applicant despite the fact that it is not signed. Or there may be an implied term in the agreement to lease precluding renewal where rental remains unpaid. These are however matters I am not required to decide. [31] The applicant might well find that the respondents are not amenable to renewal. If that is so an issue may arise between the parties as to whether theapplicant is in default of its obligations to the respondents so as to disentitle it to a renewed+- term. I raise this matter explicitly simply in order to confirm (if confirmation is needed), that I have made no findings as to whether the applicant is in default of its rental obligations to the respondents. In particular, I have not ruled upon Mr Hickson's argument that both in fact and in law, the applicant was justified in withholding rent by reason of the respondents' alleged defaults.Costs[32] In all the circumstances costs are reserved. Counsel may file memoranda if they are unable to agree.C J Allan J