HUM HOSPITALITY LTD v STYLO MEDICAL SERVICES LTD [2016] NZHC 1418

HUM HOSPITALITY LTD v STYLO MEDICAL SERVICES LTD [2016] NZHC 1418 [27 June 2016]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYCIV-2016-404-000636[2016] NZHC 1418BETWEEN HUM HOSPITALITY LIMITEDPlaintiffAND STYLO MEDICAL SERVICES LIMITEDDefendantHearing: 20 June 2016Appearances: R J Hollyman and G E Schumacher for PlaintiffR O Parmenter for DefendantJudgment: 27 June 2016JUDGMENT OF COURTNEY JThis judgment was delivered by Justice Courtneyon 27 June 2016 at 4.30 pmpursuant to R 11.5 of the High Court RulesRegistrar / Deputy RegistrarDate..Introduction[1] This application for an interim injunction concerns the property at 123 Grafton Road, Auckland. It is owned by Stylo Medical Services Limited and leased to Hum Hospitality Ltd. In the substantive proceeding Hum alleges misrepresentation regarding work that Stylo undertook prior to the lease and breach of the covenant of quiet enjoyment. Stylo has made a number of counterclaims, including that Hum is using the premises to operate a boarding-house/guest accommodation in breach of the lease.[2] Stylo has applied for an interim injunction to constrain Hum's use of thepremises pending determination of the substantive proceeding.1 The situation is urgent because Stylo's insurer, Medical Assurance Society (MAS), has given notice that the insurance over the property is to be cancelled effective 31 July 2016 on the ground that the property is being used for boarding-house/guest accommodation.[3] The application for injunction falls to be determined on the usual principles set out in American Cyanamid Co v Ethicon and Klissers Farmhouse Bakeries Ltd v Harvest Bakeries Ltd;2 whether there is a serious question to be tried, where the balance of convenience lies and what the overall justice of the case requires.Relevant terms of lease[4] The lease ran for six years from 1 February 2011 with two rights of renewal of eight years each. The final expiry date is 31 January 2033. As a result of an agreed rent holiday rental first became payable on 1 February 2014.[5] The First Schedule to the lease identified the use to which the premises willbe put as "café, bar and restaurant". Clause 16.1 provides that:The Tenant shall not without the prior written consent of the Landlord use or permit the whole or any part of the premises to be used for any use otherthan the business use. The Landlord's consent shall not be unreasonably orarbitrarily withheld or delayed in respect of any proposed use:1 Stylo also applied for injunctive relief in relation to further inspections and testing of the premises. That aspect may yet be the subject of agreement between the parties. Because of the relative urgency surrounding the use aspect I am delivering this decision first. If it proves necessary I will give a separate decision in relation to inspection.2 American Cyanamid Co v Ethicon (1975) AC 396, [1975] All ER 504 (HL); Klissers Farmhouse Bakeries Ltd v Harvest Bakeries Ltd [1985] 2 NZLR 129 (CA) at 139.(a) Not in substantial competition with the business of any other occupant of the property which might be affected by the use:(b) Reasonably suitable for the premises: and(c) Complying with the requirements of the Resource Management Act 1991 or any other statutory provisions relating to resource management.If any change in use renders any increased or extra premium in respect of any policy or policies of insurance on the premises the Landlord as a condition of granting consent may require the Tenant to pay the increased or extra premium.[6] The lease also limits Hum's right to assign or sub-let the premises. Clause 34.1 relevantly provides that:The Tenant shall not assign sublet or otherwise part with the possession of the premises or any part thereof without first obtaining the written consent of the Landlord which the Landlord shall give if the following conditions are fulfilled:(a) The Tenant proves to the satisfaction of the Landlord that the proposed assignee or subtenant is (and in the case of the company that the shareholders of the proposed assignee or subtenant are) respectable responsible and has the financial resources to meet theTenant's commitments under this lease:(b) All rent and other monies payable have been paid and there is notany subsisting breach of the Tenant's covenants [7] Stylo is responsible for insuring the property; clause 23.1 provides that:The Landlord shall at all times during the term keep and maintain any buildings on the property insured under a policy of the type shown in the first schedule and such cover may extend to:(a) A 12 month indemnity in respect of consequential loss of rent and outgoings;(b) Loss damage or destruction of any of the Landlord's fixtures fittingsand chattels; or(c) Public liability.[8] The First Schedule specifies "full replacement and reinstatement" as the typeof insurance required.[9] Hum's use of the building is, in addition to the limitations provided by clause 16, further constrained insofar as it might affect Stylo's insurance. Clause 24.1provides that:The Tenant shall not carry on or allow upon the premises any trade or occupation or allow to be done any act or thing which:(a) Shall make void or voidable any policy of insurance on the property: or(b) May render any increased or extra premium payable for any policy of insurance except where in circumstances in which any increased premium is payable the Tenant shall have first obtained the consent of the insurer of the premises and the Landlord and made payment to the insurer of the amount of any such increased or extra premium as may be payable but the carrying on by the Tenant in a reasonable manner of the business use or of any use to which the Landlord has consented shall be deemed not to be a breach of this clause.In any such case where in breach of this clause the Tenant has rendered any insurance less effective or void and the Landlord has suffered loss or damage thereby the Tenant shall forthwith compensate the Landlord in full for such loss or damage.Background[10] The property comprises a two-storied villa that is subject to a category B heritage listing. For some years it was run as a boarding house and when Stylo bought it in 2008 it was very dilapidated. Stylo did some work, including re-piling, but did not have the funds to complete all the repairs and renovations required.Stylo's sole director and majority shareholder is Dr Shen Tat Ooi. In 2008 henegotiated the lease of the premises with Hum's sole director and shareholder,Roseanne Armitage. In broad terms Hum assumed the responsibility for undertaking the necessary work in return for a three year rent holiday.[11] Hum's plan was to operate what Ms Armitage describes as a social enterprise,in conjunction with the Falling Apple Charitable Trust. The villa was to serve as a community centre that would facilitate interaction within the community and promote the arts and education. According to Ms Armitage the villa is now used for a variety of community activities such as workshops, dance classes and meetings. There is a coffee hut on the property run by volunteers. Aside from the coffee hutHum's use of the premises, both planned and actual, is at odds with the use permitted under the lease. But Ms Armitage says (and this is not challenged) that Dr Ooi knewfrom the outset what Hum's plan for the property was. In any event, this aspect ofHum's operation is not the subject of the injunction application. Stylo is concerned with the use of the villa for residential purposes.[12] In 2015 MAS endorsed Stylo's policy to exclude cover for loss or damageresulting from use that did not comply with the terms of the lease in relation to occupancy conditions. Stylo subsequently obtained a report from a town planner, Mr Cutler, to advise on the lawfulness of Hum's use of the premises. Mr Cutlerreported that, in his opinion, the villa was being operated as visitor accommodation in breach of the District Plan. Mr Ooi sent a copy of the report to MAS. This resulted in MAS cancelling the policy with effect from 31 July 2016.The issue[13] Although there is substantial residential space in the villa, any residential use would be a breach of the lease. Ms Armitage (and later her partner and child) havelived on the premises from an early stage with Dr Ooi's knowledge, though not necessarily his consent. However, it seems that if Ms Armitage were to seek consent for herself and her family to reside on the premises it would be granted, since single household unit occupancy is a permitted use under the Auckland Council District Plan and neither the Auckland Council nor MAS have ever expressed concern about that aspect of the villa's use.[14] What has given rise to the present application is concern that the villa is being used as a boarding-house/guest accommodation. Such use would be contrary to the terms of the lease. Moreover, Stylo could not consent to such use, since the villa is zoned Residential 7C under the District Plan which only allows for visitor accommodation as a discretionary activity, not a permitted activity.[15] Stylo says there is sufficient evidence, including Mr Cutler's report, to raise aserious question as to whether Hum is using the premises as a boarding-house/guest accommodation. It maintains that it was obliged to disclose the report to its insurer and not only faces the impending cancellation of that cover but has also been unable to secure alternative cover. The reason for both the cancellation of the existing coverand the refusal of other insurers to offer alternative cover is Hum's continued use ofthe premises in breach of the lease.[16] Hum says that any previous non-compliance was rectified and that Stylo has deliberately sabotaged its own insurance position as part of its long-running campaign to terminate the lease.A serious question?Previous non-compliant use[17] The relationship between Stylo and Hum has been acrimonious for some years. Both sides complain of misconduct by the other. The parties mistrust one another deeply and cannot agree on even the most obvious of issues. Stylo has applied three times to cancel the lease for breaches of other covenants but, to date, Hum has been granted relief from cancellation.3[18] Although there has never been litigation over Hum's use of the premises,there have been complaints. In December 2012 Dr Ooi emailed MAS advising that on a recent inspection he had noticed that every room in the property was occupied and that there was no existing consent for use as a boarding-house. He wanted to know whether insurance on the premises would be affected. This enquiry led to MAS seeking a re-inspection of the property with an initial indication that it would no longer provide cover for the risk.[19] Ms Armitage provided MAS with information about the use of the site that must have allayed the insurer's concerns because the insurance continued. In her email to MAS on 20 December 2012 Ms Armitage described the nature of the project being undertaken at the premises and went on to state that:We currently have Five core members who live on site. The individuals on site were hand selected out of a large number of people who put their handup to participate in the renovation of the villa All of them have multiple capabilities pertaining to Renovation the skill set of the Five chosencurrently include the following; Barrista, Office Administration, Building Painting, Environmental Architect and Designer.[20] At around the same time the Council emailed Ms Armitage advising that:3 Stylo Medical Services Ltd v Hum Hospitality Ltd [2013] NZHC 2114; Stylo Medical Services Ltd v Hum Hospitality Ltd [2014] NZHC 1587; Stylo Medical Services Ltd v Hum Hospitality Ltd [2014] NZHC 2428; Stylo Medical Services Ltd v Hum Hospitality Ltd [2014] NZHC 2723;Stylo Medical Services Ltd v Hum Hospitality Ltd [2015] NZHC 1150; Stylo Medical Services Ltd v Hum Hospitality Ltd [2015] NZCA 405; Stylo Medical Services Ltd v Hum Hospitality Ltd[2016] NZHC 803.The property is zoned Residential 7, so people are able to live there. It may become a breach of our Districts Plan if you operate the residential activity as a commercial enterprise e.g. a boarding-house.[21] With the Council and the insurer apparently content with this state of affairs nothing further appears to have happened until 2014. In April 2014 a surveyor acting for Stylo wrote to the Council asking for confirmation as to which consent conditions had been complied with. The enquiry appears to have been in relation to the work Hum had, or was expected to have, undertaken. The Council responded, advising that the consent to operate a coffee kiosk had been complied with and the consent to undertake alterations and to operate a restaurant had not been implemented and would lapse in March 2015 if not implemented. Then it advised that:There have been general compliance issues over the last 2 years in relation to not paying their consenting fees, illegal signage and parties/functions thatbreaches Council's noise limits. We are currently investigating the use of theproperty as a place of assembly, and entertainment facility and visitor accommodation.[22] On 24 April 2014 the Council issued an abatement notice requiring Hum to"cease operating visitor accommodation" at the premises by 9 May 2014. Theabatement note referred to the fact that the site was being advertised as visitor accommodation on Facebook.[23] In July 2014 Dr Ooi emailed Ms Armitage reiterating the fact that the lease required that the premises be used for a restaurant, bar and café, that she was not allowed to use the property for residential purposes and not allowed to advertise on Facebook. The email was dated 9 July 2014 and Dr Ooi referred to the fact that the Facebook advertisement was still on the website that day. Ms Armitage says that the Facebook advertising was discontinued after that.MAS endorses Stylo's policy[24] In about October 2015 MAS conducted an inspection of the premises prior to renewal of the insurance. This does not appear to have been prompted by anything Dr Ooi did or said to his insurer. Mr Parmenter, for Stylo, advised that it was simply a routine inspection. When MAS renewed the insurance in November 2015 it included the endorsement:There is no cover under this policy for loss or damage at the property as a result of any unpermitted activities or use of the property outside the terms and conditions of the lease agreement in relation to the occupancy of the premises.[25] In his affidavit in support of the injunction application Dr Ooi asserted that the endorsement came about because Ms Armitage told MAS when it inspected that the occupants of the rooms were her flatmates and builders who were doing work at the property in return for lodgings. This assertion was not challenged in Ms Armitage's subsequent affidavits.[26] Dr Ooi did not take any steps in relation to the endorsement until he mentioned it in discussions with counsel in early 2016. As a result of those discussions he instructed Mr Cutler to advise on the lawfulness of Hum's use of thepremises.Mr Cutler's report[27] Stylo relied heavily on Mr Cutler's report to show that the villa is being used for visitor accommodation. There are, however, aspects of the report that give cause for concern and Stylo accepts that. One example is that Mr Cutler pointed to the fact that all the bedroom doors had locks on them as showing that the villa was offering visitor accommodation. But Hum points out that this feature reflects the villa'shistorical use as a boarding-house. Given the villa's previous use the inference that Mr Cutler chose to draw was clearly not the only one available.[28] Of greater concern is that Mr Cutler also relied on the photograph of a notice showing prices for rooms to rent. It is now accepted, however, that this photograph was taken in 2014. Mr Hollyman, for Hum, was rightly critical of this aspect of the report. Neither Mr Cutler nor Dr Ooi explained how an old photograph came to be advanced as part of the recent enquiry. It was left to Mr Parmenter to dismiss it as a mistake, though whose mistake it was and how it came about were not touched on.[29] I find that Mr Cutler's report is of limited value, save for any unchallengedfacts recorded in the report. Mr Hollyman, however, asserts that the use of the photograph is disentitling conduct by Stylo that should preclude injunctive relief altogether. Misconduct by an applicant must have "an immediate and necessaryrelation to the equity sued for" if it is to be treated as precluding equitable relief.4Knowingly offering evidence that is untrue for the purpose of misleading the Court in relation to relief can be expected to result in the relief being refused. But it is amatter for assessment in each case as to whether the applicant's conduct justifies thatstep. In the present case I am not satisfied that Mr Cutler's reliance on the photograph was central to Stylo's case so as to amount to disentitling conduct by Stylo itself.Evidence of current use: a serious question?[30] Putting aside the evidence that has no or doubtful probative value, Stylo'sapplication rests on the following. First, in an affidavit filed in February 2016 inother proceedings (relating to Hum's ability to pay the rent) Hum produced a budgetthat showed its expected income from renting nine rooms in the villa. This is consistent with the use of the premises to provide residential accommodation on a commercial, per-room basis.[31] Secondly, in 2016 (date unknown but prior to 4 May) Hum listed the villa on the Airbnb and letsbookhotel.com websites advertising its availability for visitor accommodation. Following a complaint by Stylo the Council visited the premises and required those advertisements to be withdrawn. Hum says that it did not appreciate that its use of the premises in this way contravened the District Plan and that it immediately complied with the direction. While there is no reason to disbelieve Ms Armitage, it is rather surprising that, against the background outlined earlier, she did not realise that renting out rooms on a commercial basis was not permitted.[32] Thirdly, in his report Mr Cutler recorded Ms Armitage's statement to him thatthe premises were being "subleased as a common flat share with one lease to a collective group of flatmates, rather than individual rooms being rented or subleased". Ms Armitage does not dispute making this statement but is inconsistent with the budget forecast produced only two months earlier.4 Royal Bank of Scotland PLC v Highland Financial Partners [2013] EWCA Civ 328, [2013] 1 C.L.C 596; see also Heydon, Leeming and Turner Meagher, Gummow and Lehane's EquityDoctrines and Remedies (5th ed, LexisNexis, Wellington,2015) at [3-115].[33] Fourthly, in an affidavit in opposition Ms Armitage has deposed that there now are six people residing at the villa using it for long-term accommodation. But no details of the occupants or the terms on which they are occupying the villa were provided.[34] I start from the point that, against a background of previous non-compliance, including an abatement notice, Hum was advertising rooms in the villa for rent on a commercial basis as late as 4 May 2016. It seems to be accepted that Hum has removed those listings. But it is disturbing that Hum appears not to have grasped that what it was doing was in breach of both its lease and the District Plan, notwithstanding that the Council had previously advised that it could not let out rooms on a commercial basis. It is legitimate for Stylo to have concerns aboutHum's understanding of and willingness to comply with its lease obligations in this regard.[35] The next matter of concern is Ms Armitage's statement to Mr Cutler that Hum has sublet part of the villa to a group of flatmates rather than renting out individual rooms. It is unclear what Ms Armitage meant by the premises being sublet; the way the statement is framed could mean either that Hum had sublet to a single group that includes Ms Armitage and her partner and child. Or it could mean that Hum had sublet to a single group that was separate from Ms Armitage and her partner and child. In either case, the existence of a sublease without Stylo's consentis a breach of clause 34.1 of the lease.[36] It would have been a simple matter for Hum to have provided exact details of the occupants (which would be required if consent for a sublease were sought) but it has elected not to clarify who the occupants are or the exact terms on which they occupy the villa. Moreover, if the sub-lessees are a separate group from Ms Armitage's family, there would be two households occupying the villa, which would be a breach of both the lease and of the District Plan, which only permits a single household unit as a permitted activity.[37] In these circumstances I am satisfied that there is a serious question as to whether the villa is being used for a residential purpose other than just accommodation for Ms Armitage and her family and is therefore in breach of thelease and the District Plan. Given the history of advertising rooms for rent there is also a serious question over whether there will be further similar breaches of the lease.Balance of convenience[38] I turn, then, to consider where the balance of convenience lies. The sole basis on which the application is advanced is that the premises will be uninsured at the end of July. Stylo faces the task of trying to obtain fresh insurance, which it says it is unable to do because it must disclose the information it has about Hum's use of thepremises to any prospective insurer.[39] Hum asserts that Stylo is the author of its own misfortune by choosing todisclose Mr Cutler's report to MAS and to other prospective insurers so that Dr Ooi cannot now claim to be genuinely affected by Hum's conduct and should not beentitled to the protection of the equitable jurisdiction. Hum also asserts that it has obtained confirmation that alternative cover is available.[40] Hum may or may not be correct that Stylo was not obliged to disclose Mr Cutler's report to MAS when it did. Mr Cutler's report was obtained followingrenewal in October 2015 and the common law does not require disclosure of facts affecting the risk after inception or renewal.5 On the other hand, fire policies commonly include a condition requiring the insured to advise of changes in circumstances that affect the risk during the policy period so it is possible that Stylo did have a contractual obligation to disclose the report. Since Stylo did not produce its policy wording, however, I do not know whether that is the case and therefore proceed on the basis that it had no obligation to make disclosure when it did.[41] But disclosure of Mr Cutler's report is not the real cause of Stylo's problem.Even before MAS gave notice of cancellation, the endorsement (which did not result from anything Stylo said or did) meant that Stylo's insurance was already seriouslycompromised by Hum's non-compliant use of the premise. Since October 2015 Stylo5 Birds, Lynch and Milnes MacGillvray on Insurance Law Sweet & Maxwell (13th ed, Sweet & Maxwell, London, 2015) at [17-026].has been effectively uninsured for any loss or damage resulting from most of the uses to which Hum has been putting the premises. For example, the endorsement was in place when Hum had the villa listed on Airbnband letsbookhotel.com in early 2016. Had there been any incident of loss or damage resulting from the residential use of the villa during that time the policy would not have responded at all.[42] In light of the endorsement imposed in December 2015 Stylo cannot be criticised for having taken steps to confirm that the use of the premises compliedwith both the lease and the District Plan. Having obtained Mr Cutler's report(flawed though it was) it would have had to disclose it on renewal. Its early disclosure of the report simply brought the inevitable cancellation forward by three months. Moreover, in seeking alternative cover Stylo had an obligation to disclosefacts material to the risk which, judging from MAS' reaction to it, would haveincluded the report. Its failure to do so would have made any new insurance voidable.[43] Nor do I accept Hum's assertion that Stylo is deliberately sabotaging itsinsurance arrangements as part of its plan to terminate Hum's tenancy. It is true thatHum alleges a myriad of objectionable behaviours by Stylo and Dr Ooi. These are the subject of the claim for breach of the covenant of quiet enjoyment. But Dr Ooi points out, correctly, that no sane business person would jeopardise their insurance arrangements where there is an obligation to the mortgagee to insure. This is especially the case when Hum plainly would not have the resources to reinstate the villa in the event of its being destroyed or damaged. Making a decision on the basis of affidavits without the benefit of cross-examination I am not prepared to find that Dr Ooi has deliberately placed himself and his company at such risk.[44] The balance of convenience plainly favours Stylo in this case. Stylo has a contractual obligation to its mortgagee to insure the premises. Hum could not rebuild if its activities resulted in the loss of or damage to the villa. Having the building insured is a benefit to both Stylo and Hum (Ms Armitage herself has expressed concern at the need for insurance given the extent of work that Hum has done to the building).[45] It is clear that insurance will not be obtained unless compliance with the use obligations under the lease is assured. There is now only a matter of weeks left for Stylo to arrange fresh insurance. But more significantly, even aside from the impending cancellation, Stylo is effectively uninsured now for any loss or damage arising from the unauthorised use of the premises. On the present state of the lease this includes the use by Ms Armitage and her family, though that aspect could be rectified through Hum seeking consent for that use.[46] Finally, I do not accept Ms Armitage's assertion that she has obtained confirmation from a broker that he could arrange insurance over the premises. The evidence in support of this assertion was a two line email from an insurance broker without any indication as to who the prospective insurer is, the terms on which insurance would be offered or the information provided as the basis of the insurance. This falls well short of establishing that insurance arrangements have been or could be made in the current circumstances.The overall justice of the case[47] In assessing the overall justice of the case I recognise that the evidence as to non-compliance is not clear-cut and that, on previous occasions where non- compliance has been established Hum has desisted. But for a commercial landlord the existence of insurance, particularly when it has an obligation to its mortgagee, means that there is little margin for error. The overriding consideration at present, and one that affects both the parties, is that the villa is already subject to the endorsement and will soon be entirely uninsured. So long as there is the risk of non- compliant use, finding alternative insurance will be extremely difficult. For these reasons, I consider that the overall justice of the case favours Stylo.Result[48] I intend to grant interim relief. However, the precise terms require further input from the parties. During the argument Mr Parmenter provided a draft form of interim injunction but that was not specifically addressed by Mr Hollyman, who had not previously seen it. I propose that counsel confer as to an appropriate form of order and:(a) File a joint memorandum as to an agreed form of an order by 5 pm on 29 June 2016; or(b) If counsel cannot agree, each party is to file a memorandum by 5 pm on 29 June 2016 and I will make an order that I consider appropriate.[49] Stylo is entitled to costs on the injunction application on a 2B basis.____________________P Courtney J