NEW ZEALAND INSTITUTE OF SPORT LIMITED v MAJESTIC INVESTMENTS LIMITED [2013] NZHC 2762

NEW ZEALAND INSTITUTE OF SPORT LIMITED v MAJESTIC INVESTMENTS LIMITED [2013] NZHC 2762 [10 May 2013]IN THE HIGH COURT OF NEW ZEALANDWELLINGTON REGISTRYCIV-2012-485-1407[2013] NZHC 2762BETWEEN NEW ZEALAND INSTITUTE OFSPORT LIMITEDPlaintiffAND MAJESTIC INVESTMENTS LIMITEDDefendantHearing: 10 September 2012Counsel: R J Gordon and C A Levermore for PlaintiffP J Woods for DefendantJudgment: 10 May 2013JUDGMENT OF WILLIAMS JIn accordance with r 11.5, I direct the Registrar to endorse this judgment with the delivery time of 4.30pm on the 10th May 2013.Introduction[1] Majestic Investments Limited (MIL) agreed to lease its premises in Riccarton to the New Zealand Institute of Sport (NZIS). The relationship between the parties proved fractious and conflictual. NZIS had been in occupation for about a year when MIL issued seven PLA notices for unremedied breaches of covenant in relation to rent, opex, failing to obtain building consents, subleasing without consent and failure to maintain on foot a liquor licence held by the previous tenant.[2] NZIS responded by issuing a statutory demand to MIL for the amount of thelandlord's contribution to fit-out – $200,000 (+ GST) – as set out in the agreement to lease.[3] NZIS now applies for relief against cancellation and damages under s 228 of the PLA, the latter application alleging that MIL has unreasonably withheld its consent to various subleases. MIL cross-applies to set aside NZIS's statutory demand for the landlord's contribution to the cost of fit-out.[4] The issues in respect of the seven PLA notices are:(a) has NZIS breached either the agreement to lease or the unsigned Auckland District Law Society (ADLS) deed as alleged in the PLA notices?(b) if so, should relief against cancellation be granted?[5] In relation to the application for damages under s 228, the issues are:(a) has MIL unreasonably withheld its consent to sublease?(b) if yes, is NZIS entitled to an immediate award of damages?[6] In relation to the statutory demand for fit-out costs, the issue is whether MIL is currently obliged to pay NZIS those costs and, if yes, whether MIL can deduct various set-offs from the amount for which it is liable.[7] I will outline the facts in detail and then address, in turn, each of the three categories of issue summarised above at [4] to [6].The facts[8] MIL owns a substantial commercial property at Wharenui Road in Riccarton, Christchurch. It comprises 1.6291 hectares and over 4,000 square metres of building floor area.[9] NZIS is a NZQA accredited private training organisation. It provides tertiary courses for students in the sports, fitness and recreation industries.[10] NZIS originally operated from premises in Christchurch's central city, butthese premises were effectively destroyed in the earthquake of 22 February 2011.Within two weeks of that date, NZIS had found MIL's premises and entered into anagreement to lease them. A second agreement to lease was executed on 1 April 2011. This superseded the earlier agreement and is the operative document for the purposes of this proceeding.[11] It was agreed that the lease would be generally in the ADLS form with the following additional (and material) terms:(a) Rental would be $115 per square metre (+ GST) "for the areas of buildings exclusively occupied" (cl 10.1). Now that it has taken over the entire site, NZIS pays approximately $476,000 (+ GST) per year in rents.(b) NZIS would enjoy a three year rent holiday for "the land on which nobuildings are situated or on which temporary buildings are placed bythe tenant " (cl 10.4). Soon after arrival, NZIS placed a number of temporary buildings on site.(c) The landlord's contribution to fit-out would be $200,000 (+ GST) subject to the following relevant procedural requirements:The landlord will make such contribution as and when required by the tenant who will provide the landlord with GST tax invoices addressed to the landlord evidencing the work that has been carried out. The landlord will pay to the tenant the amount of such invoices up to a total amount of $200,000 plus GST. The tenant and the landlord will agree on which parts of the fit-out the landlord's contribution isspent. (cl 17.3)NZIS claims to have spent around $824,000 on the fit-out. MIL challenges this, arguing that the outlay is less than half that figure.(d) In relation to a liquor licence formerly held by the Riccarton Club, the former primary occupant of the main building on site:The tenant agrees and acknowledges that the liquor licence held by the Riccarton Club is of value to the landlord and that the landlord wishes to keep such licence on foot. The tenant will use its best endeavours to keep such licence current and will keep the landlord advised of its endeavours in this regard. (cl 21).(e) In relation to operating expenses:The tenant must pay 100 percent of operating expenses for those areas exclusively occupied by it while the Riccarton Club remained on site and, on expiry of the Riccarton Club lease, all operating expenses for the entire property. (cl 22.1).[12] The initial term of the lease is four years with three rights of renewal of five years each meaning a final expiry date as late as 31 March 2030.[13] As at the date of the agreement to lease the Riccarton Club was progressively vacating the site. NZIS steadily took over as the Riccarton Club departed. This process took a year, with Riccarton Club finally evacuating on 28 March 2012. In the interim, MIL agreed that NZIS could place a block of relocatable prefab classrooms and portacoms on the site. MIL further agreed that NZIS could refit and occupy the old abandoned Riccarton Bowling Club, a 530m2 building also situated on the site. These were stop gap measures to allow NZIS to run classes and administer courses almost immediately on arrival. The transported prefabs and portacoms would be rent-free for three years in accordance with cl 10.4 of the agreement to lease.[14] The parties never finally executed the ADLS form deed of lease. They fell into disagreement over a number of aspects of the lease and in the year between theagreement to lease and MIL's seven PLA notices, these disagreements could not beresolved.[15] For MIL, the big issues were:(a) a claim to rental arrears of $101,000;(b) NZIS's alleged failure to pay opex of $97,000;(c) NZIS's alleged failure to obtain the building consents MIL said wererequired for:(i) the placement and fit-out of the prefabs and portacoms;(ii) the fit-out of the old Riccarton Bowling Club;(d) the failure of NZIS and its principal Mr John Fiso to provide to MIL an indemnity against any liability arising out of these regulatory breaches;(e) the scope of the fit-out in the main building on site;(f) the lack of project insurance for fit-out work;(g) NZIS's failure to execute the deed;(h) NZIS's failure to maintain on foot the Riccarton Club's liquor licence;and(i) the alleged failure to provide MIL's principal, Mr Andrew Beavan,with an office on site and gym memberships free of charge as allegedly agreed.[16] On NZIS's side, significant causes of discontent were:(a) MIL's refusal to give written consent to NZIS's sublessees namelyPlatinum Sport Limited, Design and Arts College of New Zealand Limited, Optimum Performance Limited, St Andrews Holdings Limited and Dance Masters International Limited;(b) MIL's failure to pay the agreed fit-out contribution of $200,000 (+ GST); and(c) MIL's alleged failure to fix a leaking roof that was allegedlyinterrupting classes, the lack of proper fire protection and failure to complete painting and maintenance work as agreed.[17] There were other items, but on reviewing the exchange of emails between the principals and between their lawyers, the foregoing list seems to me to be an accurate description of the major complaints on and against each side during the course of the lease so far.[18] On 15 May 2012, the parties – both principals and lawyers – met in a final and, it appeared, genuine attempt to resolve all outstanding matters. In all there were 27 items on an extended agenda for without prejudice discussion. According toAndrew Beavan, MIL's owner, the eight big ticket items discussed were:(a) rental arrears of $101,000;(b) the building consent issues for the bowling club and transportable buildings;(c) the scope of the fit-out in the main building and the landlord'scontribution;(d) the lack of project insurance;(e) NZIS's failure to execute the deed and the knock-on financing cost such failure represented to Mr Beavan (he said that without an executed deed of lease he could not refinance and the resulting extra interest cost to MIL amounted to $150 per day);(f) consent for sub-tenants;(g) liquor licence; and(h) Mr Beavan's personal office and gym memberships.[19] Although, according to Mr Pringle, solicitor for NZIS, Mr Beavan started the meeting in a very aggressive and testy manner, by the end it was felt that discussions had gone well and the parties were close to or had in fact reached final agreement. A draft agreement was almost completed but Mr Pringle had to catch the last plane back to Invercargill and final recording of such agreements as were reached was left to written exchanges between the lawyers over the following week.[20] On 18 May 2012, Mr Pringle wrote to MIL's lawyer, James Davies of CastleLaw enclosing a draft settlement agreement and notes of the 15 May meeting. Mr Pringle described the draft as an "expanded" settlement agreement coveringmatters discussed at the meeting and any prior agreements that should be recorded. The tone of the letter suggests that there remained a number of points of contention still to be resolved, but none of them were fundamental.[21] The draft provided that NZIS would execute the deed of lease and the required indemnity within seven days of the agreement; MIL would pay its fit-out contribution (on receipt from NZIS of a schedule of works) together with $50,000 in relation to the cost of fire compliance and opex. NZIS on the other hand would pay MIL outstanding outgoings of $97,000 for the period 1 April 2011 to 26 January 2013, and $101,000 for rental (both agreed and disputed) up to 31 March 2012. All payments to be made within seven days of the agreement. MIL would also consentto NZIS's fit-out works and sublessees and acknowledge that the transported buildings were not fixtures belonging to MIL on termination of the lease.[22] As a token of good faith (according to NZIS at least), NZIS paid $93,000 of the rental arrears. The remaining approximately $7,000 was disputed as to liability. One of the current PLA notices relates to that $7,000 sum.[23] Four days later Mr Davies replied rejecting the draft as an inaccurate representation of what had been agreed.[24] Mr Davies wrote that it had been agreed at the 15 May meeting that NZIS would provide the executed deed of lease and indemnity by 18 May 2012 and this had not been done. He rejected the proposal in the draft agreement that executedlease and indemnity documents be provided within seven days of confirmation of the written agreement. That, he said, was not the agreement. Mr Davies confirmed that Building Act 2004 breaches exposed MIL to fines and risked refusal of insurance cover. He complained again that NZIS's failure to execute the deed was costing his client $150 per day in finance costs. He also complained about Mr Fiso's refusal togive a personal indemnity alongside that of NZIS for breaches of the Building Act and in respect of NZIS's refusal to obtain contract work insurance.[25] Mr Davies complained that the current "difficulties" might have been avoidedif Mr Pringle and NZIS had stayed longer at the 15 May meeting. In any event, Mr Davies advised that his client had "lost all confidence" in NZIS. He said that Mr Fiso's refusal to provide a personal indemnity had "soured the relationship between our clients".[26] On behalf of his client, Mr Davies hardened his stance. He counter offered rescinding all earlier concessions made.[27] On the same day, MIL issued five PLA notices and on 12 June two more issued. They may be summarised as follows:Date Section Breach Remedy22/5/2012 246(1)(b) $7,557.12 rent Payment with 10working days22/5/2012 246(1)(a) Operating expenses and legalcosts totalling $97,347.77(inclusive of GST)Payment within 10working days22/5/2012 246(1)(a) Erection of prefabricatedbuildings on the land withoutfirst obtaining a buildingconsent in breach of theBuilding Act 2004 and incontravention of the Deed ofLeaseObtaining a Certificate ofAcceptance from theChristchurch City Councilwithin 25 working days22/5/2012 246(1)(a) Permitting building work (asdefined in Section 7 of theBuilding Act 2204) to take placein the former bowling clubbuilding without first obtaininga building consent in breach ofthe Building Act 2004 and incontravention of the Deed ofLeaseObtain a Certificate ofAcceptance from theChristchurch City Councilwithin 25 working days22/5/2012 246(1)(a) Undertaking building work tothe former bowling clubbuilding and erectedprefabricated buildings on theland without obtaining thenecessary building consents.Using and permitting the use ofthe Non-Consented Areas incontravention of Section 363 ofthe Building Act 2004Ceasing to use and notpermitting the use of theNon-Consented Areas withinfive working days12/6/2012 246(1)(a) Parting with possession of partof the property of subleasing toPlatinum Sport Ltd and Design& Arts College of New ZealandLtd and permitting other entitiesto use the gymnasium beforefirst obtaining MIL's consent incontravention of the leaseTerminating the Non-Consented subtenant'sinterest in the property orcomplying with theprovisions of the lease within20 working days12/6/2012 246(1)(a) Failure to use its bestendeavours to keep the liquorlicence held by the RiccartonClub Inc (in liquidation) on footMaking application to theChristchurch City Councilfor a liquor licence anddoing all things necessary toprogress such applicationthrough the Council within20 working days[28] NZIS then cross applied, as I have said, for relief against cancellation and on 14 June 2012 made its own statutory demand for the fit-out cost of $200,000 (+ GST).[29] MIL then cross applied to set that demand aside.Breaches of the agreement to lease and deed[30] MIL accepts that the issues raised in the notices in respect of money sums(rent, legal fees and opex) are unlikely to be sufficient to resist the plaintiff'sapplication for relief. Nor are the issues in relation to the loss of the RiccartonClub's liquor licence. MIL accepted that the best it could hope for in those respectswas an order for relief subject to conditions advantageous to it. I will come back to those matters below.[31] The serious matters relate to the allegations that NZIS has carried out work without the Building Act consents exposing MIL thereby to ongoing liability under that Act and the further risk that insurance cover in the event of loss or damage to the premises would be declined due to the presence of unlawful structures.[32] I will focus on these matters first.Relocatable classrooms and portacoms[33] For MIL, Graeme Calvert provided a report in an affidavit setting out his view of the regulatory requirements under the Building Act in respect to both the relocatables and the bowling club. Mr Calvert formerly worked as a builder, between 2002 and 2007 as a building certifier and then as a building inspector withthe Christchurch City Council. From 2007 to 2011 he managed the Council'sweathertight homes litigation. Mr Calvert confirmed that in his opinion, a building consent was required for the relocatables so that Council could assess building compliance in respect of foundations, fire safety, disability accessibility, energy efficiency, storm water dispersal, sanitary facilities and any other requirements of the building code.[34] NZIS accepted that this was the case. Ms Addison (the deputy chief executive of NZIS) said that the buildings had been placed on site with great urgency immediately after the February earthquake. She said that NZIS obtained a temporary accommodation approval pursuant to the Canterbury Earthquake (Resource Management Act Permitted Activities) Order 2011 and did not know that a building consent was also required. Because the work had been completed before an application for building consent had been made, an application for a certificate of acceptance (ABA10115346) was made after the event. It appears however that a building consent was in the end also applied for (ABA10116438) coveringfoundations, an accessibility ramp and the repositioning of a building in "Block 3".Building consent was granted on 3 August 2012. The certificate of acceptance appears not to have been pursued.[35] Given that the relocatable buildings were inspected by Council officials and consents granted, it seems most unlikely that there were outstanding aspects in relation to the relocatable buildings that were non-compliant and not picked up. Building inspectors would have identified any such areas and required applications. There is no evidence that this occurred.[36] I would accordingly set to one side issues in relation to the relocatable buildings. I do not consider it is arguable that they now give rise to Building Act non-compliances, at least not on the information available to me.Bowling club[37] NZIS applied to build a ramp entry and accessibility toilet in the bowling club building. Consent was granted on 13 March 2012.[38] It is common ground however that the classroom and office partitions installed in the bowling club building in 2011 did not have building consents. Bill Skews Architects arranged for consents for the ramp and toilet facility but, as far as I can tell, prepared no plans for the partitions.[39] Tom Logan of Tom Logan Builders Limited did the internal classroom and office fit-out. He gave evidence for MIL. He said that he told NZIS that if the classrooms were to be in permanent use, a building consent would be required for the work he had done. Ms Addison for NZIS claims the opposite. She said he told them that no consent was required. Whether a building consent is required is of course a mixed question of fact and law for me. Mr Logan's advice to NZIS on thatquestion, whatever it was, is of little assistance to me.[40] Section 40 of the Building Act provides that any "building work" requires abuilding consent. Failure to obtain one exposes the offender to a fine of up to $100,000 plus $10,000 per day for a continuing offence.[41] 'Building work' is extremely widely defined in s 7 of the Building Act. Section 41 provides a series of exceptions to that rule. The crucial exception in this case is contained in s 41(1)(b). It provides that any building work of the kind described in Schedule 1 of the Act is exempt from the requirement to obtain a building consent. Paragraph (ca) of Schedule 1 provides for the following exemption:The construction, alteration, or removal of an internal wall (including the construction, alteration or removal of an internal doorway) in any existing building if –(i) compliance with the provisions of the Building Code relating to structural stability is not reduced;(ii) the means of escape from fire provided within the building are not detrimentally affected; and(iii) the wall is not made of units of material (such as brick, burnt clay, concrete, or stone) laid to a bond in and joined together with mortar.[42] In my view, these provisions make it plain that a building consent is not required for the construction of non-supporting walls of the kind in this case provided the means of escape from the building in the event of fire is not affected in a manner that could be described as detrimental. There is no evidence of detrimental effect in this case. According to the photographs provided each classroom is fitted with a standard doorway leading to a wide corridor and exits. There is potentially an extra doorway added between students and the fire exits, but that is not, in my view, sufficient to create a requirement for a building consent. According to the Oxford English Dictionary (online), to affect something detrimentally is to do so in a manner causing harm, hurt or injury. I do not see that the means of escape is harmed, hurt or injured by interposing a wall with a well built functioning door.[43] I note that Mr Calvert points out that the bowling club has no building warrant of fitness either alone or as part of the wider complex. That may well be soand may well need rectification but it is not referred to in any of MIL's PLA noticesand so is not relevant for me. By memorandum dated 12 September 2012, counsel for NZIS confirmed that the necessary Warrant of Fitness is now in place.[44] I note also that MIL alleges that there is no change of use consent for the bowling club building as required by ss 114 and 115 of the Building Act. In some circumstances where the use of a building is changed, the Council must be notified and a consent must be obtained. The relevant controls are contained in Schedule 2 of the Building (Specified Systems, Change The Use, and Earthquake Prone Buildings) Regulations 2005.[45] In Schedule 2 a change from a Small Crowd (CS) use to a Large Crowd (CL) use will require a change of use consent. The trigger point is where the number of people likely to gather in the relevant building space increases from below 100 to above 100. I do not know what the numbers using the bowling club building are at present, but if they are more than 100 and, by contrast, when the building was operated as a bowling club, the crowds were fewer than 100, then a consent may well be required. I do note that a fire safety strategy report provided to NZIS on 21 May 2012 by fire safety compliance consultants Holmes Fire, indicated that the use of the building as a bowling club was a CL – large crowd – use. The report proceeds on the basis that classroom uses are also CL. While this is not definitive, the report does give some basis for assuming that there has not been a change of use in terms of Schedule 2.[46] In any event, according to s 115, an owner of a building must not change the use of that building unless the building, in its new use, will–(i) comply, as nearly as is reasonably practicable, with every provision of the building code that relates to either or both of the following matters:(A) means of escape from fire, protection of other property, sanitary facilities, structural performance, and fire-rating performance:(B) access and facilities for people with disabilities (if this is a requirement under s 118): and(ii) continue to comply with the other provisions of the building code to at least the same extent as before the change of use.[47] The short answer to this issue is that none of the PLA notices relate to changeof use. They all relate to "building work" and building consents pursuant to s 49 of the Building Act. Change of use consents are issued under s 114 and are not buildingconsents. That said, NZIS will need to consider whether a change of use application will be required. As I have said, at this stage, I do not have sufficient information to reach a settled view on that.[48] I do note that NZIS filed the Holmes Fire report in respect of fire hazards(ultimately) with MIL's consent. This showed that the bowling club had beenassessed for compliance with s 69 of the Building Act in relation to fire hazards. The report provided:We believe that the proposed fit-out for New Zealand Institute of Sports at 66A Wharenui Road is in compliance with the objectives of the New Zealand Building Code to the extent required by the Building Act, based on implementation of the following scope of works.[49] The proposed scope of works required that:(a) a manual fire alarm system be installed in the building;(b) locking devices on escape route doors be visible and non-key operated;(c) appropriate signage including exit signage be installed;(d) emergency lighting be installed;(e) building surface finishes meet specifically stated fire hazard index limitations; and(f) foam plastic building materials be encapsulated in a flame barrier meeting required flame resistance and flame propagation criteria.[50] These seem to be standard and relatively minor requirements. I do not know whether they have been met already. They may need to be if the change of use rules apply. But even if they do apply, on these facts, they are clearly insufficiently onerous to avoid relief against cancellation.Money breaches[51] The amount claimed for rental arrears is $7,557.12. This amount is disputed. NZIS says it is under no obligation to pay this as it relates to an open court yard and a disused implement shed attached to the bowling club building neither of which NZIS occupies. The court yard area is approximately 125 square metres. The area of the shed is 29 square metres.[52] Clause 10.1 of the agreement to lease sets rent at $115 per square metre "for the areas of buildings exclusively occupied". The court yard is not exclusivelyoccupied by NZIS or its sub-tenants. More importantly, it is not a building asrequired by that clause. Mr Beavan described the court yard as "partially covered".I do not know what that means but from the photograph provided, it seems to be an open court yard not at all enclosed. There can be no obligation in respect of that area.[53] The implement shed is described by Ms Addison as "adjacent to" the oldbowling club. Ms Addison says that NZIS does not occupy the shed. As far as I can tell it is attached to the back of the bowling club building and clearly part of that complex. It is therefore occupied by NZIS even if it is not used. NZIS will be liable accordingly to pay rent for the shed.[54] Operating expenses and legal costs are claimed totalling $97,347.77. The opex claims are made up of $35,745.94 for the year ending 31 March 2012 and $55,851 for the year commencing 1 April 2012. There is an additional figure of $5,750 being legal costs claimed for enforcement of the lease up to 3 May.[55] NZIS has since paid the larger opex for the period commencing 1 April 2012 but disputes liability for both the preceding year and legal costs.[56] In respect of the $35,745.44 figure, NZIS says it paid that sum to theRiccarton Club (then still in occupation of the main building) with Mr Beavan'sknowledge and indeed at his request. Ms Addison said she treated the Riccarton Club as head lessee as required. Mr Beavan denies this. He said the Riccarton Clubwas never authorised to collect opex payments on MIL's behalf. He says that he toldMs Addison to pay MIL directly and that she agreed to the same.[57] It seems to be common ground that the opex money for the first year of occupation was paid to the Riccarton Club. There is, it seems, a genuine disputeover whether this was in accordance with the landlord's instructions or contrary tothem. This is not an issue capable of being resolved on the affidavits.[58] Whether the $5,745 in legal fees is recoverable depends on cl 6.1 of the ADLS deed. It provides as follows:THE Tenant shall pay the Landlord's solicitors reasonable costs of theincidental to the preparation of this lease and any variation of renewal of any Deed recording a rent review, the Landlord's reasonable costs incurred in considering any request by the Tenant for the Landlord's consent to any matter contemplated by this lease, and the Landlord's rights remedies andpower under this lease.[59] According to Mr Beavan these legal fees are for the preparation of the lease and its enforcement up to 3 May. Whether all of those fees are recoverable in accordance with cl 6.1 depends upon what proportion of them relates to enforcement, and whether the enforcement action is justified in law. Once again I cannot resolve that without further evidence in subsequent processes.[60] I would note however that, in light of the scale of rental paid by NZIS on an annual basis, these arguable sums are not substantial.The liquor licence[61] The liquor licence held by the Riccarton Club terminated on that club'sdeparture from the premises. It is not disputed by MIL that liquor licences are specific both to the licence holder and the relevant premises. The licence could not therefore have survived the Riccarton Club's departure. Clause 21 of the agreementto lease provides (as I have set out above at [10]) that NZIS accepted the importanceof this licence to MIL and promised to use its "best endeavours" to keep the licencecurrent and to keep MIL advised of its endeavours in that regard.[62] NZIS has no wish to operate a liquor retailing business of any kind. According to Ms Addison, NZIS nonetheless made enquiries of the local liquor licencing authority to determine whether it could take over the licence. The Authority gave the advice I have already outlined. The licence is non-transferable. Mr Beavan was then advised accordingly.[63] In my view, NZIS has done all required of it pursuant to cl 21 of the Agreement to Lease. That clause cannot be retrospectively reinterpreted as creating an obligation on NZIS to make its own application for a liquor licence. That is plainly not what it says or requires.Parting with possession[64] This notice puts in issue the subleases to Platinum Sport Limited and the Design and Arts College of New Zealand Limited as well as "permitting other entities to use the gymnasium".[65] Platinum Sport Limited operates the gymnasium in the main building and is a related company to NZIS. Design and Arts College of New Zealand Limited occupies the relocatable buildings on site.[66] In his affidavit, Mr Beavan indicates that MIL has given no consent for these sub-tenancies. The notice also complains that NZIS has permitted "other entities to use the gymnasium". I am not sure what that means.[67] Ms Addison's response is that Mr Beavan had in fact consented orally toPlatinum Sport and the Design and Arts College tenancies along with that relating tothe Three Elements Chinese restaurant, another of NZIS's sublessees. She said hehad refused written consent to the first two of these sub-tenants but did not complain of the Chinese restaurant because, she speculates, the restaurant has a liquor licence. Mr Beavan says he has no recollection of any oral agreement.[68] I do not know whether Mr Beavan did in fact consent orally to the Platinum Sport and the Design and Arts College sub-tenancies. If it is true that Mr Beavangave oral consent, then MIL's position is substantially undermined.[69] I address this matter further in the context of NZIS's application under s 228of the PLA. But for now it is sufficient to say that in light of MIL's apparentinconsistency in the tenancies it challenges, I cannot yet be satisfied that a breach is established.The law in relation to relief against cancellation[70] The applicable law in this area is well settled. The cancellation of leases is governed by ss 243 to 264 of the PLA. Those provisions are a code and they override any inconsistent lease terms.[71] The courts will readily grant relief to a lessee in default of a rent covenant where the arrears is paid up. In this case, there was a genuine dispute over liability to pay a small portion of the rent, a dispute I have now resolved. Relief against cancellation in respect of rent arrears is therefore appropriate in this case provided the arrears in respect of the implement shed is paid to MIL within 14 days of this judgment.[72] In respect of the non-rent conditions at issue here, only opex and legal costsof around $41,000 and unconsented subleasing remain. I have rejected MIL'scontentions in respect of building consents and the liquor licence.[73] The leading decision in respect of relief against cancellation for breach of non-rent conditions is Studio X Limited v Mobil Oil New Zealand Limited in which Hammond J identified the following factors to be considered:1Whether the breach was advertent or deliberately committed. In such a case there are sound reasons why in the normal case relief should not be given: why should a lessor be compelled to remain in a relation of neighbourhood with a person in deliberate breach of his obligations?Conversely, whether the breach was caused by inadvertence or wasentirely beyond the tenant's control.1 Studio X Limited v Mobil Oil New Zealand Limited [1996] 2 NZLR 697 (HC).Whether the breach involves an immoral/illegal user. It must be wrong in principle for a lessor to be forced into improper or illegal relations, possibly even exposing the lessor himself to some form of legal sanction.Whether the tenant has made or will make good the breach of the covenant and is able and willing to fulfil his obligations in the future.The conduct of the landlord.The personal qualifications of the tenant.The financial position of the tenant.Sometimes the position of third parties has had to be considered. For instance the position of a contracting purchaser of the interest.The gravity of the breach.Whether a breach has occasioned lasting damage to a landlord.There is proportionality concern. Under this head there has to be concern whether whatever damage is said to have been sustained by the landlord can truly be said to be proportionate to the advantages she will obtain if relief is not granted. Generally speaking, and at a greater levelof abstraction, there has to be a concern with keeping an even hand [74] Bearing those factors in mind, and the extent of the breaches I have either found or, alternatively, accept as arguable, I am well satisfied that relief against cancellation should be granted. There has been no lasting damage occasioned to the landlord by these breaches or alleged breaches and that reflects the fact that they are not particularly grave. NZIS is solvent and no doubt, if found to be liable in any of the respects alleged, will be in a position to make good their breaches.[75] I accept that non-payment of opex for the 2011/12 financial year was deliberate as was the refusal to pay legal fees. But there seems to be an honest dispute here, and NZIS has chosen (as it is entitled) to stand on its rights. I will address, as I have said, the subleasing issues below, but for present purposes, thelandlord's conduct in this respect is relevant. He knew for many months prior to issuing the PLA notices that sub-tenants had been brought in and he offered no complaint. The evidence suggests that his refusal to give consent to the subject subleases was part of a wider strategy in the context of difficult and acrimonious negotiations between landlord and tenant.[76] There is also the potential impact of cancellation on NZIS. The plaintiff is a tertiary education provider and it is contractually bound to provide courses of study for its 160 Christchurch students. A requirement to move to new premises would disrupt classes at least as much as the post-earthquake move in April 2011. NZIS would lose its valuable fit-out to the main building, classrooms, bowling club and relocatables. It could also lose the relocatables themselves if they were considered, at this stage, to be fixtures. I express no opinion on that point, but it is a potential impact.[77] In my view, these detrimental effects on the wellbeing of NZIS would be entirely disproportionate to the breaches that I have found to be either made out or arguable.Damages under s 228 for withholding consent to sublease[78] MIL accepts that it has refused to give consent to the following sublessees:Optimum Performance Limited for an annual rent of $50,220 (+ GST);St Andrews Holdings Limited (Harrington's Bar) for an annual rent of$73,818 (+ GST); andDance Masters International Limited for an annual rent of $23,617.50 (+ GST).[79] Optimum Performance is a physiotherapist clinic located in the bowling club. Dance Masters International Studio is also in the bowling club.[80] In its PLA notice MIL complains of subleases to Platinum Sport Limited(operating the main gymnasium and, according to NZIS, a "related" company) andDesign and Arts College New Zealand Limited while "permitting other entities to use the gymnasium". MIL says it will not give written consent while NZIS is inbreach of its lease covenants and while NZIS refuses to execute the deed of lease.[81] MIL expressed considerable concern about sublessees being put into buildings without the relevant regulatory consents. That was the primary substantive concern in terms of legal argument even though other matters were raised. I have found that this concern is currently unfounded although NZIS accepted it did not have the necessary building consents for the relocatables until long after they were shifted to the site. There remain other breaches or alleged breaches.[82] MIL relies upon cl 34.1 of the ADLS deed. The clause obliges the landlord to consent to subleases provided certain conditions are met. The clause provides as follows: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 a 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 moneys payable have been paid and there is notany subsisting breach of any of the Tenant's covenants;(c) In the case of an assignment a deed of covenant in customary form approved or prepared by the Landlord is duly executed and delivered to the Landlord;(d) In the case of an assignment to a company (other than a company listed on the main board of a public stock exchange) a deed of guarantee in customary form approved or prepared by the Landlord is duly executed by the principal shareholders of that company and delivered to the Landlord; and(e) The Tenant pays the Landlord's reasonable costs and disbursements in respect of the approval and the preparation of any deed of covenant or guarantee and (if appropriate) all fees and charges payable in respect of any reasonable inquiries made by or on behalf of the Landlord concerning any proposed assignee subtenant or guarantor. All such costs shall be payable whether or not the assignment of subletting proceeds.[83] The sticking point is paragraph (b). MIL says NZIS is not up to date with rent and opex, and there are other breaches of covenant.[84] In light of my findings in those respects, it must be said that the subsisting or arguable breaches are of a relatively minor nature for a tenant such as NZIS. Nonetheless, applying the terms of cl 34.1(d) of the deed, it cannot be said that MIL has unreasonably withheld its consent in light of the subsisting breaches.[85] It is not clear to me whether existing tenants, all of them still in occupation as far as I am aware, have been paying rent or withholding it pending final resolution of the matter. In any event, I have received no indication that the tenants have not or alternatively cannot pay rent to NZIS. On the contrary, counsel submitted that each of the new sub-tenants was 'ready, willing and able to pay the agreed rental'. Itwould therefore be quite inappropriate for me to make an order for the payment of damages in compensation for loss of rent, when I do not know the extent to which rent has either been paid or can be readily paid once the position is regularisedthrough the landlord's consent. In short, putting to one side the question of breach, NZIS has not yet proved loss.Fit-out – application to set aside statutory demand[86] As I have said, NZIS issued its statutory demand for the landlord'scontribution of $200,000 (+ GST) in accordance with cl 17.3 of the agreement to lease.[87] MIL makes its application to set the demand aside pursuant to s 290 of the Companies Act 1993 which provides as follows:Court may set aside statutory demand(1) The Court may, on the application of the company, set aside a statutory demand.(2) The application must be—(a) Made within 10 working days of the date of service of the demand; and(b) Served on the creditor within 10 working days of the date of service of the demand.(3) No extension of time may be given for making or serving an application to have a statutory demand set aside, but, at the hearing of the application, the Court may extend the time for compliance with the statutory demand.(4) The Court may grant an application to set aside a statutory demand if it is satisfied that—(a) There is a substantial dispute whether or not the debt is owing or is due; or(b) The company appears to have a counterclaim, set-off, or cross-demand and the amount specified in the demand less the amount of the counterclaim, set-off, or cross-demand is less than the prescribed amount; or(c) The demand ought to be set aside on other grounds.(5) A demand must not be set aside by reason only of a defect or irregularity unless the Court considers that substantial injustice would be caused if it were not set aside.(6) In subsection (5) of this section, defect includes a material misstatement of the amount due to the creditor and a material misdescription of the debt referred to in the demand.(7) An order under this section may be made subject to conditions.[88] The applicable principles in setting aside statutory demands are well settled. Any claim of disputed debt must be founded in a substantial and arguable dispute. Where the amount in question is an unliquidated sum any argument in set-off requires "a real basis for the claim to set-off and that accordingly the applicant'sclaim to be a creditor is, to the extent of the set-off, seriously in doubt ".2[89] MIL makes three arguments. MIL says it is not required to pay the contribution yet because the parties have still to agree on which parts of the fit-outthe landlord's contribution is spent in terms of cl 17.3. Second, MIL argues that the2 Covington Railways Ltd v Uni-Accommodation Ltd [2001] 1 NZLR 272 at [11].debt was not due and owing at the date of the demand. Third, MIL argues that it has a counterclaim or set-off against NZIS that exceeds the sum due. NZIS says that agreement on allocating the contribution under cl 17.3 is not a condition precedent of payment, that the debt is due and owing and that its claim far exceeds any arguable set-off or counterclaim MIL may have.Disputed debt[90] The relevant parts of cl 17.3 are set out above at paragraph 10, but the whole clause is worth setting out in full at this point:The Landlord will contribute the sum of $200,000.00 plus GST to theTenant's alterations and fit out carried out in accordance with paragraph 17.1. The Landlord is only required to pay its agreed contribution once the tenant has confirmed the NZQA condition in clause 13.1. The Landlord will only be required to contribute to work commenced after the date of this Agreement to Lease. The Landlord will make such contribution as and when required by the Tenant who will provide the Landlord with GST tax invoices addressed to the Landlord evidencing the work that has been carried out. The Landlord will pay to the Tenant the amount of such invoices up to a total amount of $200,000.00 plus GST. The Tenant and the Landlord will agree on which parts of the fit out the Landlord contribution is spent.[91] MIL accepts that NZIS has confirmed the NZQA condition referred to in cl 13.1, and that the costs sought relate to work commenced after the date of the agreement to lease.[92] The remaining portion of the clause thus requires that:(a) MIL must pay its contribution when NZIS requires it.(b) But NZIS must invoice MIL with tax invoices capable of demonstrating that the work involved has been completed.(c) Those invoices must be paid up to a maximum total figure of $200,000 (+ GST).(d) NZIS and MIL must agree on the parts of the fit-out to which MIL'scontribution will be attributed.[93] NZIS has required MIL to pay its fit-out contribution and has provided its own invoices. The first was issued on 19 April 2012 for $100,000 (+ GST). The second was issued on 30 May 2012 for $200,000 (+ GST). These invoices showed no detail of the actual work to which they relate.[94] As to (d) above, I agree with MIL that the parties have not yet agreed on theworks to which the landlord's contribution will be attributed. This is confirmed inthe handwritten draft agreement prepared by Mr Pringle during the 15 May 2012 meeting. It provided that MIL's obligation to pay was still, as at that date, dependenton the parties agreeing attribution for the expenditure.[95] The requirement in (d) relates to rental reviews in another part of the Agreement to Lease. Rental reviews are covered in cl 10. Clause 10.9 provides:The calculation of any reviewed rental shall not take into account the fit-out or any improvements to the property made by the tenant. The landlord'simprovements to the property including its $200,000 contribution will be taken into account in assessing the market rental for the property.[96] This clause only works if NZIS and MIL agree which parts of the overall fit- out can be treated as having been funded by MIL. Not all parts of a fit-out are equal in the value they add to a building or buildings, so rent review calculations can be affected by that attribution. That is why the parties must agree on this issue. I certainly do not agree with Mr Beaven's assertion that prior attribution wasnecessary because, once attributed, ownership of that part of the fit-out passed to MIL. There is nothing at all in the agreement or background facts to suggest there is any basis at all for that assertion.[97] Given the way in which cl 17.3 is structured and the purpose of the requirement to agree on attribution, I do not consider that it is arguable that attribution is a condition precedent to payment of the contribution sum. Its focus is rather the rent review. It is a condition precedent of that process rather than payment of the contribution sum.[98] I do note however that the invoices NZIS provides must be capable of proving that the work to which the contribution is to be attributed, has in fact beendone. The invoices must presumably also show the cost to NZIS of the work. Thus, if the parties have not already agreed what the attributed fit-out work will be, the obligation on NZIS must be to provide all invoices to MIL for all fit-out work under cover of NZIS's own invoice to MIL for the contribution sum. This has not yet beendone. There is therefore not yet an obligation to pay the invoices.[99] In case I am wrong in that conclusion. I go on to address the other two arguments advanced by MIL.Due and owing?[100] As I have said, NZIS issued two invoices: one on 19 April 2012 and one on 30 May 2012. The 19 April invoice was for $100,000 (+ GST). The 30 May invoice was $200,000 (+ GST). The due date for the April invoice was 26 April 2012, and that for the May invoice was a little less clear. Payment terms indicated payment was due seven days from the date of invoice – making the due date 6 June 2012, but on the remittance advice sheet the due date was recorded as 20 June 2012.[101] If the second due date is relied on, MIL is right to argue that the debt was not due and owing when the statutory demand was made on 14 June 2012. It was not due until six days later.[102] Two points can be made in that respect. The first is that, on any view, the first invoice for $100,000 (+ GST) was due and owing when the demand was made. The second point is that while there may be some doubt in respect of the second invoice because of the ambiguity in its terms, there is no doubt that it is due and owing now.[103] This slight irregularity in the invoice is an insufficient basis for setting asidethe demand. Section 290(5) requires a "substantial injustice" before such anargument would succeed, and none is obvious here.Set-off and counterclaim[104] The list of set-off items are summarised in MIL's submissions as follows:(a) outstanding operating expenses and rent – $69,916.21;(b) interest costs of approximately $150.00 per day from 3 February 2012 arising from the failure of NZIS to execute the Deed of Lease (total from 3 February to 3 September 2012 at approximately $4,500 per month = $31,500);(c) MIL's payments directly for parts of the Clause 17 fit-out - $5,849.43;(d) chattels removed whilst in NZIS's possession – approximately $6,000.00;(e) damages in respect of NZIS's failure to provide an office at $200 perweek from 1 April 2012 - $4,000 and continuing at approximately $10,400 plus GST per annum for the remainder of the lease. Should the application by NZIS for relief against cancellation succeed the lease has a final expiry date of 31 March 2030 – approximately 17.5 years);(f) the costs of obtaining a new liquor licence ($10,000);(g) the removal of the bowling club commercial kitchen (estimate $10,000);(h) the removal of the beer system ($13,031 as per chattel list);(i) further legal costs per clause 6.1 of the Deed of Lease;(j) soiled and broken chattels (estimated $3,000).[105] I accept that there is an argument with respect to approximately $41,000 of the item (a) figure and in relation to that portion of the $7,000 rent sum relating to the implement shed. The actual sums will need to be recalculated, but would, I expect, be of the order of $42-43,000.[106] There is also reference to $25,762.02 in resource consent fees, market assessment fees and legal fees. I do not know what these are and no details areprovided. I see no 'real basis' to set off these figures.[107] As to (b), whether the refusal to execute the Deed of Lease (the basis for the figure in (b)) was the fault of MIL or NZIS is a highly contested matter. NZIS says it refused to execute because MIL wanted it to sign a different lease to that originally agreed containing changes that were disadvantageous to its interests. As Ms Addison noted:For its part NZIS remains willing and able to execute a deed of lease in [ADLS] form. The reason NZIS has not executed a deed of lease to date isthat the various forms of deed provided by MIL's solicitors do not accordwith the ATL or the standard form – but rather, and during the course of what was supposed to be a straightforward drafting exercise, MIL has now sought to include a range of additional terms for its own commercial benefit.[108] Mr Beavan says there has been to-ing and fro-ing on both sides with the parties agreeing various changes to the agreement to lease without apparent difficulty even after the agreement was signed. He says (essentially) Ms Addison'scontention is wrong and simplistic.[109] I am not at all satisfied that there is a "real basis for the claim to set-off" inthis respect such that NZIS's status as a creditor is, to the extent of the claimed set-off, "seriously in doubt".3 In my view, NZIS's refusal to execute the deed reflected abreakdown in trust between the parties that was, in the circumstances, understandable. And it was created in large part by Mr Beavan's attitude to thetenancy.[110] I understand the amount referred to in paragraph (c) – $5,849.43 is for mirrors in the gymnasium that MIL paid for and another small item. NZIS accepts this sum should be set-off.[111] Item (d) relates to chattels removed from the premises valued at an estimated $6,000. Specific losses are identified as a safe valued at approximately $3,000 and an ice maker of similar value that had apparently gone missing from the premises. Ms Addison replies that MIL offered NZIS use of the chattels including (I presume) the two items in question and NZIS declined the offer. She said NZIS had no responsibility for storage or safeguard of the chattels – rather it was MIL'sresponsibility to promptly remove them. I understand NZIS stacked them outside the building NZIS occupied at the time. Ms Addison points to a letter from Mr Davies of Castle Law to Mr Pringle in which he accepts that MIL is responsible for removal of the chattels.3 Property Law Act 2007, s 290.[112] I do not think there is a 'real basis' for the claim to sum identified under thishead.[113] Item (e) relates to an allegation that NZIS promised to provide an office free of charge to Mr Beavan. The amount claimed is $200 per week from the commencement of the tenancy equally $10,400 (+ GST) per annum. NZIS denies this. It is not possible to resolve this matter on the papers. Nor even, I venture, toresolve whether there is a 'real basis' to this aspect of the claimed set-off. All I have is bare allegation and denial. Mr Beavan gives no details and, of course, there is no reference to it in the agreement to lease. MIL has not shown a substantial or arguable case for entitlement to set this amount off.[114] The next item is the cost of obtaining a new liquor licence (at (f)). This is not claimable.[115] Items (h) and (j) relate to removal of the beer system and soiled and broken chattels. I do not accept that either item is claimable. And MIL gives precious little detail as to why such claims have any real basis.[116] As to "further legal costs" that matter is covered in the global figure under item (a) and any ongoing costs can be dealt with in the normal way.[117] In his second affidavit, Mr Beavan refers to the loss to him as a result of removal of kitchen and bar installations in the auditorium and bowling club. Nofigures are given. I am not satisfied that any 'real basis' is given to set-off losses in these respects either.Conclusion[118] I would conclude therefore that the landlord's contribution is not able to beclaimed at this point because the tenant remains in breach, albeit in relatively minor ways, but if it was so liable, some limited set-off would be available.Conclusions and final disposition[119] I have concluded generally that:(a) NZIS is entitled to relief against cancellation on all seven PLA notices;(b) NZIS has not proved any entitlement to damages under s 228 PLA;(c) MIL is not immediately liable to pay the landlord's fit-out contribution, because there remains rent and other monies payable (or in the case of opex arguably payable) in terms of cl 34.1(b) of the deed.[120] It seems to me however, that at the centre of these findings is a knot that can be easily unpicked. If MIL is entitled to set-off the amount for rent, opex and legal fees referred to above, that will satisfy the breach of cl 34.1(b) provided any further reasonable legal costs and disbursements of the landlord not already covered by the preceding figure are identified in terms of cl 34.1(e), and set-off. MIL will then be immediately liable to pay the remainder of the contribution. If that payment is made to NZIS, there can be no reason at all for NZIS to refuse to execute the ADLS deed of lease.[121] I therefore order as follows:(a) MIL must pay NZIS the landlord's contribution less set-off amounts indicated herein to be agreed between the parties or affirmed by this court;(b) NZIS must then execute the deed of lease; and(c) MIL must also give written consent accordingly to all NZIS sub- tenants.[122] Leave is reserved for counsel to seek further directions in respect of such remaining matters as must then be addressed. These will include, if the parties wish it, any further steps in respect of the s 228 application, set-off calculation resolution of the remaining opex dispute or other matters.[123] Costs are also reserved.___________________________Williams JSolicitors: Minter Ellison Rudd Watts, Wellington Anthony Harper, Christchurch