KNIGHTS (NEW ZEALAND) PROPERTY HOLDINGS LIMITED v ENGEL [2020] NZHC 1116

KNIGHTS (NEW ZEALAND) PROPERTY HOLDINGS LIMITED v ENGEL [2020] NZHC 1116 [26 May2020]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV-2019-404-002386[2020] NZHC 1116BETWEEN KNIGHTS (NEW ZEALAND) PROPERTYHOLDINGS LIMITEDPlaintiffAND MARK RICHARD ENGELDefendantCIV-2020-404-000098BETWEEN KNIGHTS (NEW ZEALAND)PROPERTY HOLDINGS LIMITEDPlaintiffAND DOUBLE EIGHT LIMITEDDefendantHearing: 18 May 2020Appearances: P D Sills for PlaintiffD R Bigio QC and E D Nilsson for DefendantsJudgment: 26 May 2020JUDGMENT OF WOOLFORD JThis judgment was delivered by me on Tuesday, 26 May 2020 at 11:30 ampursuant to r 11.5 of the High Court Rules.Registrar/Deputy RegistrarSolicitors: Christopher Taylor, Parnell, for PlaintiffLeeSalmonLong, Auckland, (D Nilsson and A McDonald) for DefendantsCounsel: P Sills, Auckland, for PlaintiffD Bigio QC, Auckland, for Defendant[1] These two proceedings are related. They both concern an ultra-hightemperature (UHT) milk processing plant at 20 Maleme Street, Greerton, Tauranga(the property). The property is owned by Double Eight Ltd (Double Eight).Mark Richard Engel is Double Eight's sole director.[2] The property was leased to Knights (New Zealand) Property Holdings Ltd(Knights) under a deed of lease dated 4 December 2018 (the lease) until Double Eightcancelled the lease for non-payment of rent and outgoings in late December 2019.[3] In CIV-2019-404-2386 (the declaration proceeding), issued before cancellationof the lease, Knights seeks an order declaring that a share sale agreement, which itsays was entered into at the same time as the agreement to lease, remains valid andenforceable. On 6 November 2019, Jagose J made an interim order by consent in theproceeding, preventing Mr Engel from taking any steps to dispose of the property.Mr Engel now applies for rescission of the interim order on the basis that Knights isnow clearly unable to meet its obligations under the share sale agreement.[4] In CIV-2020-404-98 (the cancellation proceeding), Knights makes anapplication for interim relief against what it says is a wrongful cancellation of thelease. On 21 January 2020, Knights paid $292,963.08 to Double Eight in respect ofrent and outgoings for December 2019, January 2020 and February 2020. DoubleEight nonetheless refused to reinstate the lease.Factual background[5] At the time that the lease was entered in to, in late 2018, it was envisaged thatKnights would eventually purchase the property. Proposed terms were drafted andannexed as "Annexure 1" to the agreement to lease dated 26 November 2018(agreement to lease), which preceded the lease. Under those proposed terms (whichare referred to in these proceedings as the share sale agreement), Mr Engel wouldincorporate a new company (Newco), transfer the property to Newco and then sell theshares in Newco to Knights for a total of $11 million, $500,000 of which would bepaid by applying a bond in that sum held by Double Eight under the lease. Another$500,000 would be paid by non-refundable deposit, and the last $10 million payableon the settlement date. Knights later nominated 28 February 2020 as the settlementdate for the share purchase.[6] Double Eight first cancelled the lease for non-payment of rent in September2019, after a string of late payments by Knights. In doing so, it also gave notice ofcancellation of all related agreements with Knights concerning the property, includingthe share sale agreement (if binding). Shortly thereafter, Knights applied to this Courtfor relief against the cancellation. That proceeding was resolved by consent on thebasis that the lease be reinstated without prejudice to Double Eight and Mr Engel'sposition on the cancellation of the share sale agreement.[7] In light of Mr Engel's reservation of rights, Knights filed the declarationproceeding on 31 October 2019, seeking a declaration that the share sale agreementwas binding on the parties. An interim injunction was also sought to prevent Mr Engelfrom taking any steps to procure Double Eight to dispose of the property before theproceeding was determined. Mr Engel is defending the proceeding, but as Knightswas paying rent at the time of filing, he consented to the order being made.[8] Knights once more failed to pay rent on 1 December 2019, and on 21 December2019, Double Eight cancelled the lease again. Double Eight then peaceably retookpossession of the property.[9] On 17 January 2020, Mr Engel sought Knights' consent to a rescission of theconsent order made by Jagose J. No response was received. Instead, Knights paid theoutstanding sums under the lease. On 28 January 2020, Knights filed the cancellationproceeding together with the interim application for relief currently before the Court.[10] Double Eight opposes interim relief in the cancellation proceeding. Knights'application was originally set down to be heard on 23 March 2020. However, inadvance of the hearing, Knights took no steps to file reply evidence or a synopsis, andon the day of the hearing its counsel sought, and was granted, leave to withdraw. Asa result, the hearing was adjourned.[11] In parallel, despite its position that the share sale agreement is binding, Knightsdid not tender payment on 28 February 2020, the settlement date nominated byKnights. By that time, Mr Engel said it became clear to Double Eight and himself thatKnights lacked the financial resources to comply with its obligations under the lease,let alone to complete the share sale agreement. As a result, Mr Engel filed anapplication to rescind the consent order on 13 March 2020.[12] On 25 March 2020, the New Zealand Government declared a state of nationalemergency to curtail the spread of COVID-19. The work of the courts has thereforebeen severely disrupted. It is only with the downgrade to alert level two on 14 May2020 that the Courts have been able to recommence much of its work.[13] The property remains in the possession of Double Eight and Mr Engel. Havingbeen locked out of the property, Knights has not paid rent for March, April or May2020.[14] It is convenient to deal with the cancellation proceeding first.Cancellation proceeding[15] The key issues for determination in this proceeding is whether Double Eightwas entitled to cancel the lease, and if so, whether Knights should be granted reliefagainst cancellation.[16] Double Eight issued a notice of intention to cancel the lease dated 4 December2019 (notice), pursuant to s 245 of the Property Law Act 2007 (PLA) for failure to paythe sum of $72,453.17 plus GST, being the rent and outgoings due under the lease forthe period 1 December 2019 to 31 December 2019.[17] It is Knights' case that the rent and outgoings for December 2019 were notoutstanding at the time the notice issued because the parties expressly negotiated andincluded cl 48 in sch 3 of the lease to deal with any defaults in paying rent andoutgoings. Clause 48.1 of the lease provides that Knights shall provide Double Eightwith a rental bond of $500,000. Knights submits that it is intended that the bond shallprovide security to Double Eight against any defaults by Knights in the payment ofrent and outgoings or in the observance of any other covenants. Clause 48.3 providesthat if Knights is in default for seven working days following notification by DoubleEight, Double Eight is entitled to deduct the outstanding amount from the bond andKnights must replenish the bond within 20 working days of being notified that thebond has been used.[18] Knights therefore submits that the terms of the lease require Double Eight toutilise the bond for any defaults of rent and outgoings before issuing a cancellationnotice. Alternatively, if Double Eight was not required to utilise the bond beforeissuing a cancellation notice, Knights submits that Double Eight was required to usethe bond to remedy the default specified in the notice before it expired.[19] On 20 December 2019, Knights sent Double Eight a letter specificallyrequesting that Double Eight deduct the outstanding rent and outgoings from the bond.Double Eight refused to do so because there was nine years left on the lease and thebond covered no more than six months' rent and outgoings.[20] Knights submits that Double Eights' refusal to use the bond is inconsistent withthe parties' intentions as expressed in the lease and its reasons for refusing to use thebond do not make sense. If Double Eight used the bond for a month's outstanding rentand outgoings and Knights failed to replenish it within 20 working days, Double Eightwould be able to cancel the lease at that point and still have a cushion of approximatelyfive months' rent and outgoings. In addition, the accrual of interest would be stemmedif Double Eight used the bond properly. Clause 48 also does not allow the bond to beused as security for any damages that Double Eight may be awarded against Knightsfollowing cancellation of the lease.[21] I do, however, agree with counsel for Double Eight that Double Eight was notrequired to use the bond. Clause 48.3 of the deed of lease provides:In the event of any default of the Tenant in payment of any sum payable underthe Lease which default continues for a period of seven days followingnotification by the Landlord to the Tenant in writing, the Landlord shall beentitled to deduct the outstanding payment from the bond[22] An entitlement is a right to do something. It is not a requirement. The purposeof the bond is to protect Double Eight from the consequences of default by Knights,not to limit its rights under the PLA to cancel the lease for non-payment of rent. Suchlimitation would require clear language, which is simply not present here.[23] While Double Eight was not obliged to use the bond, its choice not to do so isrelevant to the issue of whether Knights should be granted relief against cancellation.[24] Knights' history of paying the rent and outgoings has been patchy at best. Thelease commenced on 1 December 2018. The initial annual rental was $770,000 perannum plus outgoings for property and plant. The rent is paid monthly in advance onthe first of each month. There have been late payments of rent and outgoings underthe lease for:(a) January 2019 — paid 9 January 2019.(b) February 2019 — paid 13 February 2019.(c) June 2019 — paid 18 June 2019.(d) July 2019 — paid 31 July 2019.(e) August 2019 — paid 2 August 2019.(f) September 2019 — paid 23 September 2019.(g) December 2019 — paid 21 January 2020.(h) January 2020 — paid 21 January 2020.[25] By letters dated 10 July 2019 and 20 December 2019, Knights requestedDouble Eight to debit the $500,000 bond with any outstanding rent and outgoings.Double Eight chose not to do so. Double Eight issued notices of intention to cancelthe lease for non-payment of rent and outgoings on 18 June and 23 July 2019. Knightspaid the amounts specified in the notices before they expired. Double Eight thenissued another notice of intention to cancel the lease for non-payment of rent andoutgoings on 4 September 2019. On 22 September 2019, Double Eight gave notice ofcancellation of the lease on the basis that Knights had failed to pay the rent andoutgoings set out in the September 2019 notice. Knights paid the amount demandedin the September notice the next day.[26] On 24 September 2019, Double Eights' lawyers advised that Double Eight hadpeaceably re-entered the property on 23 September 2019. In that letter, the lawyerssaid that they were instructed that the lease "and other contracts" were at end forbreach. Knights then applied to the High Court for relief against cancellation inproceeding CIV-2019-404-2130. Knights and Double Eight resolved that dispute byagreement, and the proceeding was discontinued with no issues as to costs. Knightsresumed possession of the property.[27] On 4 December 2019, Double Eight gave notice of its intention to cancel thelease on the basis that Knights had failed to pay rent and outgoings for the period1 December 2019 to 31 December 2019. The last day for remedy was 20 December2019. Again, Double Eight chose not to use the bond. It could have deducted theamount outstanding from the bond after 11 December 2019 (seven days after issuingthe s 245 notice), but it did not do so.[28] On 21 December 2019, Double Eight gave notice that it had cancelled the leaseand Double Eight retook possession of the property. After Knights had received fundsfrom China on 21 January 2020, Knights paid Double Eight the sum of $292,963.08(including GST), being rent, outgoings and penalties for December 2019, January2020 and February 2020, notwithstanding that the rent and outgoings for the period1 February 2020 to 29 February 2020 was not due until 1 February 2020 and thatKnights had not had possession of the property since 21 December 2019.[29] The Court's approach to applications for relief against cancellation is wellestablished, as follows:1 save in exceptional circumstances, the function of the Court in exercisingthis equitable jurisdiction is to grant relief when all that is due for rent andcosts has been paid up, and (in general) to disregard any other causes ofcomplaint that the landlord may have against the tenant. The question is1 Gill v Lewis [1956] 2 QB 1 (CA) at 13 as cited in Cooper v Clark (1992) 2 NZ ConvC 191,309(HC) at 191,311.whether, provided all is paid up, the landlord will not have been fullycompensated; and the view taken by the Court is that if he gets the whole ofhis rent and costs, then he has got all he is entitled to so far as rent is concerned,and extraneous matters of breach of covenant and so forth are, generallyspeaking, irrelevant.[30] In Harlow Finance and Leasing Ltd v Sterling Nominees Ltd, the Court foundthat a series of breaches over two years, all of which were remedied, had not combinedto reach the point where it was in the "abysmal category" such the Court should refuserelief against cancellation.2 It was noted that refusing to grant relief againstcancellation would be exceptional, even where the tenant had an abysmal record.3[31] Double Eight has not persuaded me that the presumption in favour of relief ifall rent and outgoings are paid up-to-date should be displaced in the present case. Thisis for two main reasons. First, all the defaults in the payment of rent and outgoingshave been remedied within the month except for the most recent default in December2019. However, that was remedied the next month, on 21 January 2020. In addition,the rent and outgoings for January and February 2020 were paid on that date. This Itake to be an indication of good faith on the part of Knights, even though it had beenlocked out of the property and had not been able to continue with its nascent business.Knights chose to make a payment of the February rent and outgoings before it wasrequired in terms of the lease and not to keep it in a solicitor's trust account as abargaining chip in negotiations with Double Eight to reinstate the lease. Double Eightdid not reinstate the lease.[32] Secondly, Double Eight has chosen not to use the $500,000 bond, which wasdesigned to ensure that the rent and outgoings were paid and Double Eight was neverout of pocket. I agree with counsel for Knights that Double Eight could have deductedthe amount outstanding from the bond after 11 December 2019 (seven days afterissuing the s 245 notice), but it did not do so. If it had used the bond for December'soutstanding rent and outgoings, and the bond was not replenished within 20 workingdays as required under the lease, then Double Eight could have cancelled the lease at2 Harlow Finance and Leasing Ltd v Sterling Nominees Ltd HC Auckland M1262/00, 17 August2000 at [9].3 At [8].that point and still have a cushion of approximately five months' rent and outgoings.Interest would not accrue if Double Eight used the bond promptly.[33] Double Eight pointed to other indicia of what he said was an indication ofKnights' inability to pay its debts as they fell due. It referred to the failure of Knightsto tender $10 million on 28 February 2020 to purchase all the shares in Newco asowner of the property. The share sale agreement is, however, a different matteraltogether. In any event, Mr Engel's primary position is that it is not binding as itsterms required finalisation. Knights submits that Mr Engel also did not carry out hisside of the bargain, such as the requirement to initially transfer the property into thename of Newco, so Knights was unable to settle on 28 February 2020. Knights haspaid a deposit of $500,000, which Mr Engel has retained.[34] Double Eight also refers to, what it says is, the failure of Knights to pay smallcreditors such as a rodent control contractor and Tauranga City Council water rates,but explanations have been provided which cannot be entirely discounted.[35] In those circumstances, Knights' application for relief against cancellation ofthe lease is granted and the lease is reinstated from 21 December 2019 on the followingterms and conditions:(a) The rent due on 1 March 2020, 1 April 2020 and 1 May 2020 is to bepaid by Knights to Double Eight subject to (without prejudice) Knights'right to raise a claim under cl 27.5 of the lease for a rebate during thenational state of emergency.(b) The rent due 1 March 2020, 1 April 2020 and 1 May 2020 is to bededucted from the $500,000 bond held by Double Eight.(c) The bond is then to be replenished up to $500,000 within 20 workingdays from Double Eight giving written notice as required under cl 48.3.(d) Failure to replenish the bond up to $500,000 within 20 working daysfrom Double Eight giving written notice as required under cl 48.3 willautomatically terminate the lease from that date.Declaration proceeding[36] The key issue for determination in this proceeding is whether an order madeby consent by Jagose J on 6 November 2019 should be rescinded.[37] The order reads as follows:(a) [Mr Engel] is restrained from taking any steps to dispose of the[property] pending further order of the Court or agreement of theparties;(b) Leave is reserved for either party to apply for a review or variation ofthe [order] on five days' written notice [38] It is trite that the Court retains a supervisory jurisdiction over interim orderssuch that they may be revoked or varied at any time prior to a substantive judgment,as circumstances dictate. This applies equally to consent orders. In this case, thejurisdiction to do so is also expressly incorporated in the order itself. Interim orderswill be rescinded where circumstances have changed such that their continuance is nolonger in the interests of justice.[39] As noted above, Mr Engel's primary position is that the share sale agreementis not binding on the parties because it required finalisation. He refers to cl 5.2 of theagreement to lease, which states:The Tenant or its nominee shall purchase all the shares in Newco upon a datenominated by the Tenant within a period of between 1 November 2019 and30 May 2020, upon the terms set out in the agreement for sale and purchaseof shares in Annexure 1 and subject to finalisation of the agreement forpurchase of the shares in Newco as aforesaid.That is not a matter I can resolve in this hearing without full argument, but the sharesale agreement itself is 15 pages in length and has been signed by both parties.Mr Engel has not explained how it requires finalisation.[40] Mr Engel also submits that circumstances have changed in that it has becomeclear that Knights cannot complete the purchase of the property. On 21 December2019, less than two months after the consent order was made, Double Eight cancelledthe lease for non-payment of rent for the second time. While Knights eventually paidthe outstanding sums on 21 January 2020, shortly before filing the cancellationproceeding on 28 January 2020, Mr Engel submits it has provided no credible evidencethat it would be able to continue to do so. A month later, on 28 February 2020, it failedto tender settlement under the share sale agreement and has not actively engaged withMr Engel about its intentions in that regard. Mr Engel submits it is now clear fromthe reply evidence filed by Knights that it is not in a position to settle and is unlikelyto ever be able to do so.[41] Mr Engel submits that he and Double Eight will suffer ongoing prejudice solong as the order remains in place. The property is currently untenanted and DoubleEight is not receiving any rental income which would be used to service the mortgage.Double Eight is also required to meet the on-going costs of maintaining the emptyproperty and prevent the equipment from deteriorating. It wishes to mitigate itscontinuing losses by finding a solvent tenant or selling the property. The order ispreventing it from doing so. Given Knights' financial position, Mr Engel submits thathe is unlikely to be able to recover losses caused by the order from Knights if hesuccessfully defends the declaration proceeding.[42] On the other hand, he submits there is no prejudice to Knights if the order isrescinded. It cannot complete the contract it seeks to enforce even if it would besuccessful at trial. The only practical effect of the order is to delay an inevitable saleto a third party. An action for damages would be open to it.[43] Knights, on the other hand, points to the failure of Mr Engel to incorporateNewco. There are, therefore, no shares capable of being purchased under cl 3.1 of theshare sale agreement. In addition, Mr Engel has made it clear that he does not intendto incorporate Newco or otherwise perform the share sale agreement unless he iscompelled to do so by the Court. This is notwithstanding that Mr Engel received a$500,000 deposit payable under cl 6.1.1 of the share sale agreement on 7 May 2019and has not taken any steps to return that deposit. If the share sale agreement isdeclared valid and enforceable, Mr Engel will need to incorporate Newco, transfer theproperty and leased plant to it and be in a position to warrant that the assets of Newcocomprise the property and the leased plant (cl 11.1.19).[44] Knights submits that it does not make sense for it to tender payment for thepurchase of shares that do not yet exist, and which are unlikely to exist until thesubstantive issues are determined by the Court. It, therefore, submits that its failureto tender payment under the share sale agreement does not give rise to a natural orreasonable inference that Knights is unable to meet its obligations under the share saleagreement. In addition, there is no indication as to when Mr Engel will be in a positionto settle the share sale agreement. As a result, Knights' current financial position isnot evidence of its ability to settle the share sale agreement when it eventually becomesobliged to do so.[45] It seems to me that the share sale agreement has become a casualty in theconflict between Double Eight and Knights in relation to the payment of rent andoutgoings for the property. Mr Engel purported to cancel the share sale agreement bya lawyer's letter dated 24 September 2019, at the same time as Double Eight cancelledthe lease for the first time for the non-payment of rent and outgoings. However, abreach of the lease is not said to be a breach of the share sale agreement, whereas thereverse is true: a breach of the share sale agreement is considered a breach of the lease.[46] This proceeding has a case management conference on Wednesday, 27 May2020. I was able to offer the parties a one-day substantive hearing on 29 June 2020.This proceeding was set down for hearing on that date, subject to Mr Bigio QC'savailability. On 19 May 2020, however, counsel for Mr Engel filed a memorandumexplaining that, on further consideration, the matter is not ready for trial. Notably,Mr Engel says discovery has not been completed. He says 29 June 2020 is too soonto complete discovery, resolve any issues arising out of discovery and exchange briefsof evidence in advance of the trial. Mr Engel also says that a one-day hearing willlikely not be sufficient. I have not had the benefit of Knights' response to the issuesraised by Mr Engel as to the suitability of 29 June 2020.[47] It is in both parties' interest to have a substantive hearing heard and determinedas soon as possible. The case management conference on 27 May 2020 is retained forthe purposes of making appropriate timetable directions and to allocate an appropriatetrial fixture date, whether that ends up being 29 June 2020 or some other date. If thisproceeding is able to be heard on 29 June 2020, a continuation of the consent orderwill have little practical effect.[48] In any event, for the above reasons, I am not persuaded that the interests ofjustice require the rescission of the order made by consent at this time. Mr Engel'sapplication to rescind the interim order is dismissed. Leave is however granted foreither party to further apply for a review or variation of the order on five days' writtennotice if circumstances change markedly.Costs[49] Although Knights have been successful on both applications, costs areformally reserved. If they cannot be agreed, counsel are to file memoranda of no morethan five pages by 31 July 2020._________________________Woolford J