OMV NEW ZEALAND LTD v PRECINCT PROPERTIES HOLDINGS LTD [2018] NZCA [240]

OMV NEW ZEALAND LTD v PRECINCT PROPERTIES HOLDINGS LTD [2018] NZCA 240 [6 July 2018]IN THE COURT OF APPEAL OF NEW ZEALANDI TE KŌTI PĪRA O AOTEAROACA35/2018[2018] NZCA 240BETWEEN OMV NEW ZEALAND LIMITEDAppellantAND PRECINCT PROPERTIES HOLDINGSLIMITEDRespondentHearing: 24 May 2018Court: French, Ellis and Woolford JJCounsel: A M Stevens and E P P Maclaurin for AppellantR J Gordon and N J G Smith for RespondentJudgment: 6 July 2018 at 10 amJUDGMENT OF THE COURTA The appeal is dismissed.B Costs are to be fixed in accordance with [35] of this judgment.____________________________________________________________________REASONS OF THE COURT(Given by Ellis J)[1] Precinct Properties Holdings Ltd (Precinct) is the owner of Deloitte House, inWellington. Since 2009, Precinct has leased the ninth and tenth floors to OMVNew Zealand Ltd (OMV).[2] The building was damaged in the 2016 Kaikōura earthquake. OMV says thedamage has rendered it untenantable, and the lease has automatically terminated.Precinct denies that and has claimed for unpaid rent, seeking summary judgment inthe High Court.[3] OMV now appeals a decision of Associate Judge Smith denying its applicationfor a stay of the High Court proceedings.1 A stay would have the effect of halting theprogress of Precinct's application for summary judgment pending reference of thewider dispute between the parties to arbitration. Leave to appeal was granted by theHigh Court.2[4] In the event that OMV's appeal is allowed, there is a subsidiary issue as towhether it has submitted to the jurisdiction of the High Court.3Background[5] The lease began in 2009 and was renewed in both 2012 and 2015. It was dueto expire on 30 November 2020. The lease is in the standard ADLS form.[6] The Kaikōura earthquake hit on 14 November 2016. The building wasdamaged and was closed on 17 November 2016 until further notice. Following theearthquake, Precinct excluded OMV and other commercial tenants from the premisesuntil at least 13 March 2017. On 20 March 2017 written engineering clearancesupporting resumption of occupation was received.[7] Prior to that, on 2 February 2017, OMV gave notice that, due to the earthquakedamage, the premises were untenantable and termination had been triggered inaccordance with cl 26(a) of the lease, which provides:26. Total DestructionIF the premises or any portion of the building of which the premises may formpart shall be destroyed or so damaged:(a) as to render the premises untenantable then the term shall atonce terminate or1 Precinct Properties Holdings Ltd v OMV New Zealand Ltd [2017] NZHC 2926 [HC decision].2 Precinct Properties Holdings Ltd v OMV New Zealand Ltd [2017] NZHC 3230.3 We also record that an application to adduce further evidence about the hearing in the High Courtwas withdrawn because it was rendered unnecessary by the provision of a transcript.[8] Precinct did not accept cl 26(a) had been engaged. On 8 June 2017, Precinctfiled a statement of claim together with an application for summary judgment in theHigh Court. The claim referred to OMV's non-payment of rent and sought adeclaration that the property was not untenantable. Precinct later filed an amendedstatement of claim and an amended summary judgment application in which Precinctdirectly claimed a total of $258,243.36 for unpaid rent said to have been due on13 March, 1 April, 1 May, 1 June and 1 July 2017. Credit was given for thecompulsory closure of the premises prior to 13 March 2017. Costs on an indemnitybasis were sought in accordance with the terms of the lease.[9] OMV's position has always been that the issue of untenantability, together withfurther complaints it has which are said to justify the cancellation of the lease(including alleged misrepresentations by Precinct as to the earthquake rating of thebuilding) must be referred to arbitration under cl 44.1 before Precinct can progress itssummary judgment application. Clause 44 is headed "Arbitration" and materiallyprovides:444.1. UNLESS any dispute or difference is resolved by mediation or otheragreement, the same shall be submitted to arbitration of one arbitrator whoshall conduct the arbitral proceedings in accordance with the Arbitration Act1996 and any amendment thereof or any other statutory provision relating toarbitration.44.3. THE procedures prescribed in this clause shall not prevent the Landlordfrom taking proceedings for the recovery of rent or other monies payablehereunder which remains unpaid or from exercising the rights and remediesin the event of such default prescribed in clauses 28 and 29 hereof.[5][10] When OMV filed documents in response to the High Court proceedings itexpressly did so under protest to jurisdiction. More specifically, OMV applied for astay of the summary judgment proceedings and referral of the dispute to arbitration.4 Clause 44.2 deals with the process for selecting an arbitrator.5 Clauses 28 and 29 relate to the landlord's rights of distraint and re-entry for non-payment of rent.Associate Judge Smith's judgment[11] Associate Judge Smith denied the application for stay and refused to refer theclaim to arbitration. He held that:(a) cl 44.3 applies regardless of whether the landlord's claim for rent isdisputed by the tenant;6(b) a construction limiting cl 44.3 to circumstances where there is nobona fide defence for the tenant would "unjustifiably water down theintended effect of cl 44.3";7 and(c) staying the claim for rent while the other matters raised by OMV arereferred to arbitration would undermine the intention behind cl 44.3.8[12] The Associate Judge also distinguished the circumstances of the present casefrom those in Hi-Tech Investments Ltd v World Aviation Systems (Australia) Pty Ltdon the ground that in that case there was a dispute about the quantification of the rentsaid to be owing.9 The Associate Judge accepted that so long as the lessor is pursuingrecovery for rent or other monies identified in the lease as being payable by the tenant,the lessor's claim may be brought in court.10[13] Precinct's application for summary judgment was then scheduled for4 December 2017, but has been adjourned pending the outcome of this appeal.116 HC decision, above n 1, at [36].7 At [37].8 At [37].9 At [39]; citing Hi-Tech Investments Ltd v World Aviation Systems (Australia) Pty Ltd HC AucklandCIV-2006-404-3579, 13 October 2006. The tenant had accepted that the result of a rent reviewwas an increase in the rent payable but disputed the landlord's ability to demand further increasessix weeks and six months later after the initial review.10 At [45].11 Precinct Properties v OMV New Zealand Ltd HC Wellington CIV-2017-485-476, 4 December2017 (Minute).Grounds of appeal[14] OMV challenges the Associate Judge's decision on the grounds that he:(a) failed to give sufficient effect to cl 44.1 and art 8(1) of the first scheduleto the Arbitration Act 1996;(b) wrongly applied cl 44.3 notwithstanding that it does not override themandatory arbitration cl 44.1; and(c) failed to apply the approach adopted in Hi-Tech Investments and(wrongly) preferred the approach in Drake City Ltd v Tasman-Jones.12[15] Alternatively if the Court does have jurisdiction, OMV submits that theAssociate Judge erred in suggesting the "pay now, argue later" principle applies topreclude OMV from contending that the lease does not remain in force and that norent is therefore "payable".Ancillary issue — jurisdiction[16] On 2 February 2018, Precinct filed a memorandum indicating its intention tosupport the decision of Associate Judge Smith on other grounds, relying on r 33 of theCourt of Appeal (Civil) Rules 2005. If necessary, Precinct wishes to argue that byfiling its substantive opposition to the summary judgment application, OMVsubmitted to the jurisdiction of the High Court.13[17] OMV's position on that issue is that Associate Judge Smith has twice ruled thatthere has been no such submission to jurisdiction and that, absent an appeal, thoserulings cannot now be contested by a side wind.1412 Drake City Ltd v Tasman-Jones [2016] NZHC 899.13 This ground was pleaded by Precinct in its notice of opposition dated 22 August 2017 but was notreferred to by Associate Judge Smith in his judgment denying the stay application.14 Those rulings are said to be: Precinct Properties Holdings Ltd v OMV New Zealand Ltd HCWellington CIV-2017-485-476, 1 August 2017 (Minute) at [2] and [7(h)]; and Precinct PropertiesHoldings Ltd v OMV New Zealand Ltd HC Wellington CIV-2017-485-476, 26 September 2017(Minute) at [7].[18] On 19 March 2018, Cooper J issued a minute indicating that this issue couldbe dealt with at the hearing of the substantive appeal.Discussion[19] OMV says the dispute about whether the premises were untenantable isproperly captured by cl 44.1, and must be determined by arbitration before thedetermination of a claim for rent under cl 44.3. Mr Stevens, counsel for OMV,effectively submits that the words "monies payable hereunder" in cl 44.3 mean thatthe clause could not operate if there was a dispute about whether the rent was payableat all (as there is here). He also calls in aid the Supreme Court's observations in ZurichAustralian Insurance Ltd v Cognition Education Ltd about the operation of art 8(1) ofthe first schedule to the Arbitration Act. Article 8(1) provides:A court before which proceedings are brought in a matter which is the subjectof an arbitration agreement shall, if a party so requests not later than whensubmitting that party's first statement on the substance of the dispute, staythose proceedings and refer the parties to arbitration unless it finds that theagreement is null and void, inoperative, or incapable of being performed, orthat there is not in fact any dispute between the parties with regard to thematters agreed to be referred.[20] And in Zurich, the Supreme Court observed:15Under art 8(1), a stay must be granted unless the court finds that the arbitrationagreement is null and void, inoperative or incapable of being performed or itis immediately demonstrable either that the defendant is not acting bona fidein asserting that there is a dispute or that there is, in reality, no dispute.It follows from this that an application for summary judgment and anapplication for a stay to permit an arbitration to take place are not differentsides of the same coin. In principle, the stay application should be determinedfirst and only if that is rejected should the application for summary judgmentbe considered.[21] We have little hesitation in rejecting that submission. The "arbitrationagreement" here must be seen as cl 44 as a whole. It expressly carves out rent disputes.The more absolutist premise of art 8(1) (and of Mr Stevens' submissions) is predicatedon there being no such exception. The only issue is whether the cl 44.3 exceptionapplies here.15 Zurich Australian Insurance Ltd v Cognition Education Ltd [2014] NZSC 188, [2015] 1 NZLR383 at [52].[22] And as to that issue, the purpose of cl 44.3 seems to us to be quite clear. It isa reflection of the primacy that leases generally place on the covenant to pay rent.16That primacy is reflected elsewhere in the lease, for example in cl 31, which provides:Essentiality of Payments31.1. FAILURE to pay rent or other moneys payable hereunder on the duedate shall be a breach going to the essence of the Tenant's obligations underthe Lease. The Tenant shall compensate the Landlord and the Landlord shallbe entitled to recover damages from the Tenant for such breach. Suchentitlement shall subsist notwithstanding any determination of the lease andshall be in addition to any other right or remedy which the Landlord may have.31.2. THE acceptance by the Landlord of arrears of rent or other moneys shallnot constitute a waiver of the essentiality of the Tenant's continuing obligationto pay rent and other moneys.[23] Similarly, the lease in its original form made it clear (in cl 1.1) that the agreedrent was payable "without any deductions". Later iterations contained express "noset-off" clauses.[24] Nor are we able to accept that cl 44.3 operates only where there is, in effect,no dispute as to the rent that is owing. As Mr Stevens seemed to acknowledge, on thatanalysis cl 44.3 would only permit recourse to the courts where a tenant accepts thatrent is owing but, for whatever reason, is unable to pay. In other words, its solepurpose would be to permit a lessor to obtain default judgment against an impecuniouslessee.[25] In the end, we need only record our agreement with Venning J's conclusion inDrake City that cl 44.3 operates as an exception to cl 44.1 and permits claims forunpaid rent to be litigated.17 As he said:18[24] The effect of the relevant provisions of the lease, particularly cl 44.3,is to preserve Drake's right as landlord to take separate legal proceedings forthe recovery of any rent or other monies payable under the lease. That is whatthe parties expressly agreed to. In terms of the Supreme Court test in Zurich16 Unlike the position in contract law generally where obligations are interdependent, a tenant'sobligation to pay rent is generally independent of the landlord's obligations under the lease:Chatfield v Elmstone Resthouse Ltd [1975] 2 NZLR 269 (SC) at 275.17 In Drake City, the tenant's guarantors raised various misrepresentation arguments, together withan alleged breach of the quiet enjoyment covenant in the lease, in order to avoid liability for payingrent. As here, the claim was that the rent recovery proceedings should be stayed pendingarbitration of those issues.18 Drake City, above n 12, (emphasis added).there is no dispute to refer to arbitration concerning Drake's claim for rent andoutgoings.[25] The defendants' claims of misrepresentation and breach of cl 32.1 areopposed and are currently unqualified. They are properly disputes whichshould be referred to arbitration in terms of cl 44.1. However, the fact thosedisputes should go to arbitration does not prevent Drake from taking theseseparate proceedings to recover rent and outgoings. The parties agreed thatDrake was not prevented from doing so despite the reference to arbitration ofother disputes under the lease. The commercial reason for such a clause isobvious. It is the same reason parties provide for no set-off clauses in relationto rent in leases.[26] Indeed cl 1.1 of the lease in this case confirms that there is no rightof set-off in relation to the disputes that the defendants now seek to rely on, atleast as against the claim for rent ... For present purposes, the effect of cl 44.3remains that Drake may pursue these proceedings and its application forsummary judgment for rent and outgoings.[26] As far as the "pay now argue later" point is concerned, whatAssociate Judge Smith said was this:[34] I think the commercial purpose of cl 44.3 was that stated by Venning Jin Drake City, namely to reflect the "pay now, argue later" intention of atypical "no set-off, no deductions" clause. In leases containing such clausesthe landlord's cashflow is protected by the continued payment of rent whilethe disputed issue is being arbitrated (or litigated if there is no arbitrationclause in the lease).[27] We are unable to interpret this passage as meaning anything other than what itsays, namely that cl 44.3 is consistent with the fact that the lease requires rent to bepaid regardless of the existence of any arguable set-off. That proposition appears tous to be wholly uncontroversial. Contrary to Mr Stevens' submission, OMV may stillcontend that the lease has been terminated as a defence to Precinct's claim for unpaidrent. The pleading of such a defence does not amount to a pleading of "deduction orset-off".[28] Lastly, in light of our conclusion, all we propose to say about the decision inHi-Tech Investments, is that its facts appear to be distinguishable from those in bothDrake City and the present case. There is, we think, a material difference between acontested claim for an otherwise undisputed amount (as here) and a claim for adisputed amount (as there). More specifically, the summary recovery processcontemplated by cl 44.3 is poorly suited to resolving what Associate Judge Abbottregarded in High-Tech Investments as a challenge to the rent review mechanismitself.19Conclusion[29] In summary, cl 44.3 operates as an exception to cl 44.1 and permits claims forunpaid rent to be litigated. To the extent that a tenant believes it has a defence to sucha claim (by which we mean a defence that some or all of the rent is not payable, forreasons other than the existence of a cross-claim in the nature of a set-off) that defencecan be pleaded and ventilated in the context of such litigation. But claims for set-offand counter-claims relating to alleged breaches of the lease or misrepresentations bythe landlord would not, in our view, qualify. Those are properly matters for arbitrationunder cl 44.1.[30] In light of our conclusion on OMV's appeal it is not necessary to consider thequestion of whether OMV has submitted to the High Court's jurisdiction.Costs[31] As noted earlier, the lease specifically deals with the issue of costs. Morespecifically, cl 6 provides:EACH party shall pay their own solicitors costs of and incidental to thepreparation of this lease however the Tenant shall pay the Landlord's solicitorscosts of and incidental to the preparation of any variation or renewal of Leaseor any Deed recording a rent review and the stamp duty payable, and theLandlord's legal costs (as between solicitor and client) of and incidental to theenforcement or attempted enforcement of the Landlord's rights remedies andpowers under this lease.[32] In the High Court, Associate Judge Smith noted OMV's contention that cl 6should not be applied but in the end simply reserved costs pending the outcome of thesummary judgment application.20[33] Mr Stevens does not attempt to argue that, on its face, cl 6 would not apply tocosts incurred in pursuit of the present matters. Rather, he asks us to exercise our19 High-Tech Investments, above n 9, at [22]–[23].20 HC decision, above n 1, at [49].discretion to decline to make an indemnity costs award under cl 6 on the grounds thatcosts on that basis would include costs that were not reasonably incurred and for stepstaken that were not reasonably necessary. More particularly, Mr Stevens submits theappeal had been rendered unnecessarily complex (and costly) by Precinct:(a) initially pursuing declaratory relief in the High Court (with no claimmade for rent);(b) amending the proceedings "mid-stream" to include a claim for rent;(c) seeking to proceed with a summary judgment hearing, rather thanresolving the stay/arbitration application first;(d) requiring the inclusion of all of the material from the High Courtproceedings in the Case on Appeal, when most of that material wasirrelevant; and(e) retrospectively raising the issue of OMV's submission to jurisdiction,under r 33.[34] We accept the validity of only the last of these points. We agree that thesubmission to jurisdiction argument was without merit. OMV had always made itclear that its engagement with the issues in the High Court was without prejudice tothe jurisdictional point. The Associate Judge made it quite clear he accepted that intwo minutes.21 But as for the other matters:(a) we are unable to see any significant connection between (a)–(c) and thereasonableness of the costs incurred in this appeal;21 See above n 14.(b) but in any event:(i) the original statement of claim was clearly underpinned by aclaim for rent; it made it clear that the declaration was sought inorder to establish that OMV had no defence to such a claim;(ii) the stay application was resolved first, albeit in the context ofthe summary judgment proceedings; and(c) at least some of the material to which objection was taken in the Caseon Appeal was referred to by OMV during the hearing of the appeal.OMV's position that it was not relevant was predicated on its positionthat it was right about the interpretation of cl 44.1 and 44.3. We havefound that to be incorrect.[35] We consider that Precinct is entitled to indemnity costs under cl 6 insuccessfully opposing OMV's appeal but recovery should be reduced to 80 per centof Precinct's costs to reflect the position it takes on the jurisdiction issue. Precinct isto file and serve a memorandum as to the costs incurred on an indemnity basis within10 working days of delivery of this judgment. OMV will have 10 working daysthereafter to file and serve a memorandum in response.[36] We record that Mr Gordon for Precinct does not ask us to certify for secondcounsel and so we do not do so.Result[37] For the reasons we have given, the appeal is dismissed.[38] Costs are to be fixed in accordance with [35] above.Solicitors:Izard Weston, Wellington for AppellantMinterEllisonRuddWatts, Wellington for Respondent