WADE V TAURANGA HOTELS LIMITED HC ROT CIV 2006-463-000392

WADE V TAURANGA HOTELS LIMITED HC ROT CIV 2006-463-000392 28 May 2007IN THE HIGH COURT OF NEW ZEALAND ROTORUA REGISTRY CIV 2006-463-000392BETWEEN GRAHAM FRANK WADE Plaintiff AND TAURANGA HOTELS LIMITED Defendant Hearing: 28 May 2007 Appearances: K G Parker for Plaintiff Judgment: 28 May 2007JUDGMENT OF FOGARTY J[1] In early October 2004 the plaintiff entered into an agreement for sale and purchase of a business as vendor with the purchaser, Tauranga Hotels Limited. The agreement was executed on the form approved by the Real Estate Institute of New Zealand and by the Auckland District Law Society. The name and description of the business was the Cheers Tavern. The consideration for the sale was $350,000 plus GST, if any. I will come back to the question of GST later in this judgment. The $350,000 was made up of $115,000 for plant, fittings and fixtures and $235,000 for the goodwill of the business. The Cheers Tavern operation depended on continuing licences held under the Sale of Liquor Act 1989 and under the Gaming and Lotteries Act 1977, later replaced by the Gambling Act 2003. [2] The agreement for sale and purchase provided for a possession date of 1 December 2004 or such earlier date as may be mutually agreed. There were a number of special conditions of sale. Clause 17 provided:This Agreement is conditional to the 22nd day of November 2004 upon any licensing consent that may be required by the Purchaser being granted.[3] Clause 19 provided:This Agreement is conditional to the 22nd day of November 2004 upon the Landlord agreeing: (i) To vary the Lease for a further term of 6 (six) years by way of two three year rights of renewal; and (ii) To grant a First Right of Refusal to lease the adjoining premises should they become available; and (iii) That the personal liability of Keith Mitchell as Guarantor of the obligations of the Lessee under the Lease will be released on the transfer of shares in the Lessee and/or on him ceasing to be a Director of the Lessee.[4] On 12 October 2004 Mr Wade wrote to the landlord as follows:Dear Ewen, Further to our telephone conversation of today I would appreciate confirmation of the following as discussed: 1. I am selling Cheers to Colin Jenkins Family Trust Tauranga Hotels Limited. 2. The new purchasers would like confirmation of an extension of the lease for a further six (6) years as they intend to spend considerable money on renovations and the addition of a TAB. 3. The new purchasers would like first right to lease the adjoining premises should they become available.That was sent by fax and on the same day Mr Ewen Castle endorsed the fax saying:I agree to the 3 points above.[5] That fax and response by Mr Castle certainly satisfied special condition 19(1) and (2) but did not deal with (3) the question of the personal liability of Mr Keith Mitchell. [6] Earlier, on 16 September, Tauranga Hotels Limited had obtained a temporary authority under the Sale of Liquor Act to conduct an on-licence down to 16December 2004. On 27 September First Southern Trust (FST) applied for a venue licence under the Gambling Act 2003. [7] It is important, in order to appreciate what happened subsequently, to note that there became problems obtaining final licences under the Gambling Act 2003. By law, licences in respect of gambling machines on the premises had to be held by a different person than the person who held the liquor licences. The licences held by the Cheers Tavern were held by Pub Charity Incorporated and expired on 30 September 2004. There was a background of difficulties with that licence as the gambling machines were not intended to be or allowed to be the principal business and there was concern by the licensing authority that they were. This concerned carried over and was the reason why the original application by FST for a gambling licence was refused on 4 March 2005. FST and the defendant applied to the High Court for judicial review of that decision and affidavits in support were sworn by Mr Kerry Bird and Mr Keith Mitchell. That application was successful and on 13 May the Department of Internal Affairs granted an operator's licence and gambling licence, but on conditions which were unacceptable to the defendant and FST. That led to an appeal which was resolved by negotiation. So it was not until November 2005 that licences in respect of gambling on terms acceptable to the defendant were issued. [8] In the meantime, the plaintiff had ceased trading at the end of December 2004, but had paid the rent on the lease until 1 June 2005. It is quite clear from the proceedings over the gaming licences with the Department of Internal Affairs that the defendant was pursuing the goal of opening its business on the premises, fully refurbishing the premises as intimated to the landlord in clause 2 of Mr Wade's fax on 12 October. [9] It so happened that by mid 2005 the defendant had negotiated with the landlord to also lease the adjoining premises. About that time Mr Castle sold to the Landmark Partnership and the net result was that from June 2005 there was a new landlord and a new lease to the defendant.[10] After the gaming licences had finally been issued in November 2005 the plaintiff's solicitor submitted a settlement notice for settlement on 13 December. That was met with the repost that the plaintiff had nothing left to sell. This is in spite of the fact that the defendant had physical possession of the premises since July/August 2005 including possession of the chattels and fittings referred to in the agreement but had paid nothing to the plaintiff. [11] It needs to be kept in mind that on or about 12 October 2004 the then landlord had agreed, in writing, to an extension of the lease for a further six years. Had the plaintiff wanted to take every step to formally protect his position he would have been in a position to impose his lease and that extension on the new owner. But the practical solution, contemplated as far back as 12 October 2004 was that the purchasers wanted not only the plaintiff's lease but also the adjoining premises, in order to create larger premises. Upon the sale to the new owner a lease was so granted. [12] There is nothing in this narrative of facts, in my opinion, which enables the events that took place to be treated as some kind of separate event, as distinct from being an event consequential upon the original agreement for sale and purchase of the business back in October 2004. Quite apart from anything else, the defendant has taken possession of the chattels and fittings. [13] The statement of defence denies most matters, including the existence of the agreement for sale and purchase. I find that the agreement for sale and purchase has been proved in the evidence of Mr Wade by production of the document. Generally the facts that I have been referring to are all narrated and proved by documents produced by Mr Wade, many of which were not discovered but which were obtained under the Official Information Act 1982 from the Department of Internal Affairs. [14] The statement of defence relies on standard clause 6.16 of the agreement which provides:6.1 That the vendor warrants and undertakes that: (6) Until possession has been given and taken the vendor will properly carry on and conserve the business as a going concern and use all reasonable endeavours to maintain the turnover and to preserve the goodwill thereof.That clause needs to be read in the context that the agreement envisaged a possession date of 1 December 2004 or such earlier date as may be mutually agreed. [15] As has already been sketched above, without the detail, the intentions of the purchaser as to timing foundered upon the problem of obtaining a gaming licence from the Department of Internal Affairs under the Gambling Act 2003. However, far from this problem being taken advantage of by the purchaser as a ground for getting out of the agreement and far from the purchaser requiring the vendor to continue conducting the business pursuant to standard clause 6, contrary to the original spirit, the purchaser did none of these things. Rather the purchaser pursued vigorously obtaining the appropriate licences under the Gaming Act. This included filing affidavits which referred to having just purchased the venue from Mr Wade, and on the basis that it would refurbish and refit the bar completely, and on the basis that the business would be remodelled. In this context the purchaser was arguing that the new business would not suffer from the same deficiencies that had concerned the Department of Internal Affairs originally about the operation of the Cheers Tavern. [16] Mr Parker submitted and pleaded that this conduct of the purchaser was either waiver or variation of the agreement in respect of the warranty conditions which were not subject to compliance. His citation of Lord Denning in the English Court of Appeal in Howells Rickards Limited v Oppenheim [1950] 1 All ER 420 at 423 is apposite:They would have had, in effect, to rely on the waiver almost as a cause of action. At one time, there would have been theoretical difficulties about their doing that. It would be said that there was no consideration, or, if the contract was for the sale of goods, that there was nothing in writing to support the variation. Plevins v Downing, coupled with what was said inBessler, Waechter Glover & Co v South Derwent Coal Co. Ltd gave rise to a good deal of difficulty on that score, but all those difficulties are swept away now. If the defendant, as he did, lead the plaintiffs to believe he would not insist on the stipulation as to time, and that, if they carried out the work, he would accept it, and they did it, he could not afterwards set up the stipulation in regard to time against them. Whether it be called waiver or forbearance on his part, or an agreed variation or substituted performance, does not matter. It is a kind of estoppel. By his conduct,he made a promise not to insist on his strict legal rights. That promise was intended to be binding, intended to be acted on, and was, in fact, acted on. He cannot afterwards go back on it.(Emphasis added)[17] Whether or not the Court recognises a waiver or rather a variation is a fact intensive judgment. In this particular case I am satisfied that what I have before me is more waiver or forbearance than variation, but in line with Lord Denning it is sufficient to identify an estoppel. I refer also to National Westminster Finance NZ Ltd v National Bank of New Zealand Ltd [1996] 1 NZLR 548. [18] The modern law of equity recognises that conduct raising estoppel comes in a variety of forms. It is no longer necessary to fit conduct generating estoppel into particular categories. I am quite satisfied in this case that the defendant, by its conduct, was effectively representing to the plaintiff that it was not insisting on strict application of the agreement for sale and purchase, but was rather pursuing vigorously the same goal which it had at the time it entered into the agreement in October 2004, which was to obtain possession of the premises and if possible the adjoining premises, with licences under the Sale of Liquor Act and under the Gambling Act, with the intention of completely renovating the business. In that sense while the consideration for the sale was divided up between a value for plant and a value for goodwill, it is evident that the new owner had from the outset a business plan which did not depend on continuity of the goodwill of the Cheers Tavern as such. The Court keeps in mind that the allocation of consideration into plant and fittings on the one hand and goodwill on the other is often dictated more by considerations of the law of tax than it is by any assumed obligation or promise on the part of the vendor that there is goodwill in the business. [19] It was always going to be a matter of judgment as to when the plaintiff was in a position to seek settlement of the contract. Arguably, it would have been from 1 June 2005 when the defendant took legal possession of the premises under the new lease. Probably out of caution the solicitors for the plaintiff did not submit a statement and seek enforcement of the contract until the date nominated of 13 December 2005. Nothing particularly turns on that, as Mr Parker hasappropriately submitted that credit for the rental from 1 June 2005 to 13 December should be given to the first defendant. [20] For the sake of completeness only I observe that the negotiation of a new lease for extended premises at a different rental had the effect of obviating the third sub-clause of clause 19 relating to the personal liability of Keith Mitchell as the new lease was plainly negotiated directly with the new owner, but as I have observed, the purchaser took advantage of the position it had secured by the original agreement for sale and purchase and the agreement on 12 October of the landlord to extend the term. [21] Had there been a seamless transition of the two businesses then the agreement could have been viewed as a supply of a going concern under s 11(1)(c) of the Goods and Services Tax Act 1985 and as a result GST would have been chargeable at the rate of 0%. However, given the turn of events Mr Parker submits that the proviso to clause 16(1) of the standard agreement applies so that GST is payable in respect of supply. I agree. [22] Mr Parker then submitted that judgment should be entered in the sum of $437,884.42 calculated as follows: Purchase price 350,000.00 GST 43,750.00 _________ 393,750.00 Less credit for rental from 1 June 2005 to 13 December 2005 at $348,620 plus GST p.a. ($39,219.75 incl GST pa) 20,947.67 _________ 372,802.33 Interest at 12% from 13 December 2005 to 28 May 2007 65,082.09 _________ 437,884.42 Judgment is awarded accordingly to the plaintiff, against the defendant in the sum of $437,884.42.[23] The plaintiff is entitled to costs on a 2B basis. I allow 2B even though this is a formal proof as the active opposition to the claim ceased only about two months ago, and after the briefs of evidence had been filed, and there was considerable work done by Mr Parker in organisation of the documents produced in support of the claim (in two bundles), and in his opening address and legal analysis. [24] I should note that this claim by the plaintiff against the defendant is made in the context where it is understood that the defendant has on-sold to a third party and that the plaintiff intends to pursue proceedings under the Companies Act 1993 should the defendant not satisfy the judgment in full. These proceedings may well be against the directors and/or shareholders of the company and other persons. I note this for the reason of making it clear that I am satisfied that the doctrine of merger of cause of action in judgment does not apply here. Parliament has reformed the law of equity by providing other ways of bringing proceedings against persons standing behind limited liability companies. It is appropriate that common law recognises this and that Parliament has effectively given people, like Mr Wade, a separate procedure, but consequential upon the contingency of liquidation, of pursuing persons who may have obtained the benefit of this sale, leaving Tauranga Hotels Limited as a shell.Solicitors: Tompkins Wake, Hamilton, for Plaintiff