COFFEE CULTURE FRANCHISES LIMITED v HOME STRAIGHT PARK TRUSTEES LIMITED [2021] NZHC 577

COFFEE CULTURE FRANCHISES LIMITED v HOME STRAIGHT PARK TRUSTEES LIMITED [2021]NZHC 577 [18 March 2021]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV-2020-404-2374[2021] NZHC 577UNDER the Companies Act 1993, section 290IN THE MATTER OF an application to set aside a statutorydemandBETWEEN COFFEE CULTURE FRANCHISESLIMITEDApplicantAND HOME STRAIGHT PARK TRUSTEESLIMITEDRespondentHearing: 18 March 2021 at 2:15pmAppearances: P A Cowey for the ApplicantW M Irving and N H Browne for the RespondentJudgment: 18 March 2021ORAL JUDGMENT OF ASSOCIATE R M BELLSolicitors:Parry Field (P A Cowey/D L Bell), Christchurch, for the ApplicantRussell McVeagh (W M Irving/N H Browne), Auckland, for the Respondent[1] Coffee Culture Franchises Ltd applies to set aside a statutory demand dated20 November 2020 requiring it to pay $43,717.14 for rent and outgoings from 14 May2020 to 7 December 2020 for premises it leases, Unit G, HS3 Building, 21 HomeStraight, Te Rapa, Hamilton. Coffee Culture Franchises Ltd disputes its liability,because it says that the rent and outgoings have reduced on account of COVID-19restrictions that apply to its premises. It relies on a clause in the standard ADLS lease,cl 27.5. This is apparently the first case in which this clause has been considered inthe context of the COVID-19 pandemic.[2] Coffee Culture Franchises Ltd applies to set aside under s 290(4)(a) of theCompanies Act 1993, that is, that the debt the subject of the demand is subject to asubstantial dispute. It does not say that it has any set-off, counterclaim or cross-demand against Home Straight Park Trustees Ltd and it does not rely on any "othergrounds" under s 290(4)(c) of the Companies Act.[3] The standard approach under s 290(4)(a) is that the onus is on the applicant toshow that there is a genuine and substantial dispute as to the existence of the debt. Thetask for the court is not to resolve the dispute, but to determine whether there is asubstantial dispute that the debt is due. Merely asserting that a dispute exists is notenough. What is required is material, which may be short of proof, to support theclaim that the debt is disputed. If that material is available, the dispute should normallybe resolved by means other than proceedings in the companies court. It is usually notpossible to resolve disputed questions of fact on affidavit evidence alone, particularlywhen issues of credibility arise, although the courts have sometimes found thatstatements made on affidavit are contrary to available documents or are inconsistentwith earlier statements by the parties.[4] Coffee Culture Franchises Ltd runs and franchises caf s and restaurants. It has20 around the country. This case concerns its lease of one of its cafés. The premisesare defined as Unit G23, HS3 Building, 21 Home Straight, Te Rapa, Hamilton, andinclude car parks and some use of common property. The premises are part of a largercommercial building. The anchor tenant is the Inland Revenue Department. TheInland Revenue offices have capacity for a large number of staff. There are varyingnumbers given in the evidence – in one place it said that there are 350 staff andelsewhere it is suggested there are up to 500. According to Ms Coburn, Coffee CultureFranchises Ltd's director, the café was provided to attract the anchor tenancy. Shesays that the company invested about $550,000 in setting up the premises. The café'sbusiness comes from Inland Revenue staff and foot traffic to the Inland Revenueoffices.[5] The lease is for 10 years, beginning 8 July 2019, with one right of renewal fora further six years. The original landlord was Hamilton Homezone Ltd, but it assignedits interest when it sold the premises to Home Straight Park Trustees Ltd. Thatcompany took ownership on 1 May 2020. Tenancies in the building are managed byOyster Management Ltd.[6] The lease is the Auckland District Law Society's standard deed of lease butwith added terms. The key provision for this case is cl 27.5:No Access in Emergency27.5 If there is an emergency and the Tenant is unable to gain access to thepremises to fully conduct the Tenant's business from the premisesbecause of reasons of safety of the public or property or the need toprevent reduce or overcome any hazard, harm or loss that may beassociated with the emergency including:(a) a prohibited or restricted access cordon applying to thepremises; or(b) prohibition on the use of the premises pending the completionof structural engineering or other reports and appropriatecertifications required by any competent authority that thepremises are fit for use; or(c) restriction on occupation of the premises by any competentauthority,then a fair proportion of the rent or outgoings shall cease to be payablefor the period commencing on the date when the Tenant becameunable to gain access to the premises to fully conduct the Tenant'sbusiness from the premises until the inability ceases.[7] "Emergency" is defined in cl 47.1(d) –47.1 In this lease:(d) "emergency" for the purposes of sub-clause 27.5 means asituation that:(1) is a result of any event, whether natural or otherwise,including an explosion, earthquake, eruption,tsunami, land movement, flood, storm, tornado,cyclone, serious fire, leakage or spillage of anydangerous gas or substance, infestation, plague,epidemic, failure of or disruption to an emergencyservice; and(2) causes or may cause loss of life or serious injury,illness or in any way seriously endangers the safety ofthe public or property; and(3) the event is not caused by any act or omission of theLandlord or Tenant.(emphasis added)[8] The rent payment clause (cl 1.1) provides that all rent shall be paid without anydeductions or set-off by direct payment to the landlord or as the landlord may direct.Clause 29.1 stipulates the essentiality of payments. Clause 43 is an arbitration clause,but under cl 43.4 the arbitration provisions do not prevent the landlord from takingproceedings for the recovery of any rent or other monies payable under the lease andfrom exercising rights and remedies in the event of default.[9] Some of the other clauses are relevant for this case. Under cl 53 the tenant hasthe exclusive right to operate a coffee shop in the building, subject to qualifications,one of them being that the tenant acknowledges that the landlord cannot prevent theInland Revenue or another tenant from having tea and coffee-making facilities in theirexclusive leased areas. Clause 55.1 requires the tenant to operate its business from thepremises at a minimum from 9 am to 5 pm on each working day. That reflects the factthat the café is to serve the Inland Revenue Staff and visitors to the offices of the InlandRevenue and is not to serve the public generally.[10] The importance of the Inland Revenue Department as an anchor tenant can beseen in two other provisions. The Crown can veto any request by the tenant for achange of use (cl 16.4) and the Crown can also veto any proposed assignment or sub-tenancy (cl 33.1(b))[11] On 26 March 2020, the Government put New Zealand into "Level 4 lockdown"on account of the COVID-19 pandemic. Home Straight Park Trustees Ltd became thelandlord on 1 May 2021 when the country was under Level 3 lockdown and since thenthere have been alert levels for Hamilton down to 7 December 2020 sometimes alertlevel 2, sometimes alert level 1:1 May 2020 to 13 May 2020 Alert Level 314 May 2020 to 8 June 2020 Alert Level 29 June 2020 to 12 August 2020 Alert Level 112 August 2020 to 21 September 2020 Alert Level 222 September 2020 to 7 December 2020 Alert Level 1[12] Throughout this time, that is since 1 May 2020, Coffee Culture Franchises Ltdhas kept its café closed and has not paid Home Straight Park Trustees Ltd anythingtowards rent or outgoings. Its case is that under cl 27.5 it cannot have access to thepremises, and the rent must be adjusted as a result.[13] Home Straight Park Trustees Ltd accepts that under the Alert Levels 3 and 4,there are restrictions that trigger cl 27.5. The statutory demand excludes any claim forrent or outgoings for any Alert Level 3 period. But it says that cl 27.5 of the lease doesnot apply during Alert Levels 1 and 2 because at that time the tenant regained fullaccess to its premises. Under Alert Level 2 restrictions, restaurants and cafés couldnot have more than 100 customers at a time. Each customer had to be seated at a table,there could not be more than 10 customers at a table together, and the tables had to bearranged so that there was at least one metre of separation and only one worker couldserve any table.1 For Level 1, there is a requirement to maintain records to enablecontact tracing of customers. That restriction applies also at other levels, but at AlertLevel 1 there are no other restrictions on operating a café.21 COVID-19 Public Health Response (Alert Level 2) Order 2020, cl 12.2 COVID-19 Public Health Response (Alert Level Requirements) Order 2020, cl 8.[14] Home Straight Park Trustees Ltd points out that a national state of emergencywas declared under the Civil Defence Emergency Management Act 2002 on 25 March2020, but that ended on 13 May 2020. It relies on that to suggest, as part of its case,that any emergency relating to the Coffee Culture Franchise premises similarly endedon the same date.[15] Coffee Culture Franchises Ltd says, however, that that is not the full picture.Since 26 March 2020 the Inland Revenue has required that little to no staff use itsoffices in the building. Ms Coburn says:3As a result of COVID-19, the anchor office tenant, the IRD, has mandatedlittle to no staff in the building since 26 March 2020.[16] The landlord recognises that there is at least a problem with the number ofInland Revenue staff going to work in the building. An email of 21 July 2020 fromOyster Management Ltd to Ms Coburn said amongst other things:4In addition to the above, we are meeting with IRD to discuss timing for theirfull return to their premises. We appreciate the difficulty the reducedoccupancy poses on tenants and whilst we have no legal ability to require themto occupy the premises at full capacity, we will be raising our concerns for theretail businesses should they delay their return further.[17] Coffee Culture Franchises Ltd says that without the Inland Revenue officesbeing fully staffed and with reduced numbers of people visiting the Inland Revenueoffices, it has lost business and cannot fully operate its café. Coffee Culture FranchisesLtd also says that it is not insolvent and as a sign of good faith it has paid the sumdemanded into its solicitors' trust account.[18] Before Home Straight Park Trustees Ltd issued its statutory demand, there wascorrespondence between the parties trying to reach a resolution, but they wereunsuccessful. In that correspondence, Coffee Culture Franchises Ltd did refer to thedifficulties it was under because the Inland Revenue office was not fully manned. Theemail from Oyster Management Ltd which I have just quoted seems to reflect thatunderstanding.3 Affidavit of Sacha Maree Coburn, sworn 3 December 2020 at [26].4 Email of Liam Costley, Property Manager Oyster Management Ltd, dated 21 July 2020.[19] I make clear that I am only required to decide whether the debt is subject to a"substantial dispute". The evidence that would be required to decide the final meritsis missing. If I do decide that there is a substantial dispute, I am not in a position todecide what might be a "fair proportion" of the rent and outgoings under cl 27.5. Thatmatter of assessment cannot be decided on an application to set aside a statutorydemand.[20] There was a suggestion by Coffee Culture Franchises Ltd that the arbitrationclause in the lease applied, but at the time of the hearing it withdrew that part of itscase. It accepted that the arbitration clause does not apply to proceedings by thelandlord to recover rent and outgoings. In the hearing, Mr Cowey emphasised thepoint by saying that in this case the tenant was contesting its liability for the rent andwas not asserting any set-off, counterclaim, or cross demand and therefore would notbe pursuing arbitration. The matters it raises are purely by way of defence to the claimfor rent and outgoings.[21] Home Straight Park Trustees Ltd raised a "pay now, argue later" point. In theoriginal submissions this was put as an absolute bar on Coffee Culture Franchises Ltdbeing able to raise the defence at all, but in his submissions today Mr Irving modifiedit to say that the "pay now, argue later" matter he was raising really went to weight inhow the court assessed the arguments for Coffee Culture Franchises Ltd that there wasa substantial dispute. For its "pay now, argue later" submission, Home Straight ParkTrustees Ltd emphasised Associate Judge Lester's decision in Kkeshav InternationalLtd v Heaton Holdings Ltd.5 In that case, Associate Judge Lester dealt with cl 27.3 ofthe ADLS lease, which has a similar formula to cl 27.5. Clause 27.3 provides:27.3 Until the completion of the repairs or reinstatement a fair proportionof the rent and outgoings shall cease to be payable as from the date ofdamage.[22] Part of the argument today has been whether Associate Judge Lester'scomments were directed at a purely retrospective abatement claim – that is, a claim bythe tenant that he had overpaid in the past and he should be able to deduct hisoverpayments from any rent currently due, or whether the tenant was also seeking an5 Kkeshav International Ltd v Heaton Holdings Ltd [2020] NZHC 1513, (2020) 21 NZCPR 125.abatement of current rent. Associate Judge Lester's decision suggests that theabatement of current rent would be some $646.00.6 The important thing for thisdecision is to note what Associate Judge Lester said:7[39] I am not satisfied that the fact a tenant claims an abatement againstthe current rent reduces the rent payable by the tenant in the face ofclauses 1.1, 29.1 and 44.3. The scheme of the leases is that the payment ofrent is an essential requirement. Rent is to be paid without any deduction.The tenant seeks a deduction by raising a disputed abatement. The landlordis not to be deprived of the benefit of the no deduction—no set-off clause, bythe assertion of a right to an abatement, even if such is referred to arbitration.If [counsel for the applicant]'s submissions were correct, the tenant's claimedabatement would prevail until arbitration. I consider that propositioninconsistent with the scheme of the lease as a whole. I do not see any basis totreat a disputed abatement claim any different from any other disputed tenantclaim.[23] Mr Cowey submitted that that was directed only at a retrospective abatement,but for this decision I will also consider it on the basis that there might be an abatementof $646.00 from current rent. If paragraph [39] of Judge Lester's decision is read inisolation, it suggests that under clauses of the lease such as cls 27.3 and 27.5, the tenantis required to pay the full rent even in circumstances of destruction of premises or totalexclusion from the premises, and to bring a later proceeding against the landlord torecover the overpaid rent. That would be while the tenant cannot gain access to thepremises, cannot carry on the business and is suffering cash-flow difficulties.[24] With great respect to Associate Judge Lester, I do not consider that cls 27.3 or27.5 were intended to require a tenant whose business has collapsed to carry on payingrent and to claim back an overpayment later if it has managed to survive despite cash-flow difficulties in the meantime. In my judgment, under cl 27.5 rent is re-set andthere is not a deduction as such. A tenant who says that cl 27.5 has been triggered issaying that a new rent is payable, even if it may be difficult to work out what the newamount should be. It is then an abatement clause. I use "abatement" in the same senseas Duffy J used that term in Auckland Council v Cosdo Equity Ltd where she said:8Abating the rent is not the same as a set-off, the latter being prohibited by thelease. If the right of abatement were to be treated as legally the same as a set-off, the abatement provision would be unworkable for Council. The parties to6 Kkeshav International Ltd v Heaton Holdings Ltd [2020] NZHC 1513 at [38].7 Kkeshav International Ltd v Heaton Holdings Ltd [2020] NZHC 1513 at [39].8 Auckland Council v Cosdo Equity Ltd [2014] NZHC 1900, (2014) 15 NZCPR 537 at [38].this lease can never have intended such an outcome. The inclusion in the leaseof a power to a lessee to abate rent in certain circumstances must mean thatsuch is available, the only question being whether the circumstances for itsexercise actually exist.[25] Associate Judge Lester considered that the abatement provisions were a formof deduction. I refer to the Court of Appeal's decision in Grant v NZMC Ltd,9 whereit considered the effect of a provision requiring rent to be paid "free and clear ofexchange or any deduction whatsoever". The court recognised that under the commonlaw a tenant has a right to make certain deductions from rent. Examples it gave includemoney paid on repairs, covenanted to be but not in fact done by the landlord, andmonies payable by the landlord where the failure to pay imperilled the tenant'spossession. The Court of Appeal held that a covenant to pay rent without deductionwould embrace such matters. Clearly the court intended that if there was no commonlaw or statutory right for a tenant to make deductions the requirement to pay the rentapplied anyway.[26] In the light of Grant v NZMC Ltd, the requirement in this lease to pay rentwithout deduction is a requirement not to exercise any common law or statutory rightsto make deductions from the rent lawfully payable. That does not apply where therent has itself been adjusted by circumstances such as an emergency under cl 27.5. So,with great respect to Associate Judge Lester, I am unable to accept what he has said inhis paragraph [39].[27] Now for the substance of the dispute.[28] Clause 27.5 applies if there is an emergency and the tenant is unable to gainaccess to the premises to fully conduct the tenant's business. It is helpful to considerthe lease without an emergency and the access that the tenant would enjoy undernormal circumstances. "Access" means that the tenant and those associated with itmay enter, stay in the premises and leave. It must be remembered that the tenant itselfis a company, an artificial entity without a physical presence. It would not make senseto say that access is restricted to the company and does not extend to the humansassociated with it. The lease gives the tenant exclusive possession of the premises.9 Grant v NZMC Ltd [1989] 1 NZLR 8 (CA) at 13.With that, the tenant has the right to occupy the premises and the right to allow andbar entry to others. It can control access and has access itself. The permitted use underthe lease is a café and restaurant. To operate as a café and restaurant the tenant mustbe able to have access to the premises for its staff, for contractors such as cleaners, forsuppliers and also for customers. If customers cannot access the premises, the businesscannot operate. A requirement for access must be access to allow the business tooperate. That covers suppliers, staff and customers. When cl 27.5 says "the tenant isunable to gain access to the premises to conduct the tenant's business", that means thatthose people cannot access the premises as they normally would but for the emergency.[29] Home Straight Park Trustees Ltd put its case on the basis of the Governmentrestrictions under the various Alert Level orders. It accepted that under Alert Levels3 and 4 the premises had to remain closed and could not operate. But it said it wasstill legally open to the tenant to operate a café and restaurant under Alert Level 2 andAlert Level 1 conditions. It was a matter of economic bad luck for the tenant that noInland Revenue staff were coming to the premises, but that was entirely irrelevant tothe question of access.[30] The position for Coffee Culture Franchises Ltd is that the Inland Revenuerestrictions on access to the café are relevant and amount to additional restrictions onaccess which go beyond the government's restrictions imposed by the COVID-19orders. Coffee Culture Franchises Ltd says that since the start of the pandemic theInland Revenue offices have been de-populated, with little or no staff working there.There was some debate as to what Ms Coburn meant by "mandated." Home StraightPark Trustees Ltd said that that simply meant that the Inland Revenue had authorisedits staff to work from home rather than actually barring them from coming to work. Iam not sure that much turns on the terminology. The practical effect is that becauseof the directions of the Inland Revenue, the staff working in the Inland Revenue officewere much reduced. The case is similar to many commercial buildings where a caféon the ground floor is a facility for those working in the building and for those visitingthose offices, rather than for passing foot traffic.[31] It is arguable for the tenant that when the Inland Revenue told its staff they donot have to come to work, (or alternatively they should not come to work), and thenumbers coming to work were to be reduced, that was a measure within cl 27.5 toreduce or prevent any hazard (in this case, spreading the coronavirus). For CoffeeCulture Franchises Ltd, it is arguable that that has had a practical effect on its business.If Inland Revenue staff are discouraged from coming to their place of work, thateffectively amounts to a bar on those customers coming to the café which is to servicethe offices of the Inland Revenue Department.[32] The point can be put this way. If Inland Revenue staff do not have to go towork at Home Straight, there is no point in them, the café's standard customers,coming to the café. The practical effect is that the staff stay away and similarlytaxpayers who might have to deal with the Inland Revenue are also discouraged fromcoming to Home Straight.[33] In short, the directions of the Inland Revenue to its staff to stay away have apractical effect. It restricts the access of those staff to the premises of the café, and theaccess of customers is relevant access under cl 27.5. Without access by customers,the business cannot work. There is an arguable case for Coffee Culture Franchises Ltdthat cl 27.5 has been triggered.[34] Having reached that point, I recognise that there is a substantial dispute. As Iindicated earlier, it is not possible for me to go further and specify what would be afair proportion under cl 27.5. I cannot adjust the amount of the statutory demand to aminimum amount which should be paid notwithstanding the emergency under cl 27.5.[35] I have simply outlined the argument available to Coffee Culture FranchisesLtd. To make out its case in full it will need to muster considerable evidence to supportits case. But that will be for determination in another forum. As the amount of thedemand is within the jurisdiction of the District Court, it appears that a District CourtJudge will have the honour of giving the first definitive interpretation of cl 27.5.[36] As I am satisfied that there is a substantial dispute under s 290(4)(a), I set asidethe statutory demand. I add this. I consider this was an unusual case for a statutorydemand. Home Straight Park Trustees Ltd is seeking a determination on a new issuewhich had not been tested in court before. I understand there have been no decisionson cl 27.5 in the context of the COVID-19 pandemic, even though many landlords andtenants must have grappled with it. There are clear questions of interpretation to bedecided. Statutory demands are best left for occasions where the test for legal liabilityin the demand is already clearly established. Home Straight Park Trustees Ltd wastaking a risk using the statutory demand when it knew that the law was uncertain.[37] Home Straight Park Trustees Ltd is to pay costs to Coffee Culture FranchisesLtd. If counsel cannot agree costs, memoranda may be filed..Associate Judge R M Bell