PRECINCT PROPERTIES HOLDINGS LIMITED v OMV NEW ZEALAND LIMITED [2017] NZHC 2926

PRECINCT PROPERTIES HOLDINGS LIMITED v OMV NEW ZEALAND LIMITED [2017] NZHC 2926 [28November 2017]IN THE HIGH COURT OF NEW ZEALANDWELLINGTON REGISTRYI TE KŌTI MATUA O AOTEAROATE WHANGANUI-Ā-TARA ROHECIV-2017-485-476[2017] NZHC 2926BETWEEN PRECINCT PROPERTIES HOLDINGSLIMITEDPlaintiffAND OMV NEW ZEALAND LIMITEDDefendantHearing: 6 November 2017Counsel: R J Gordon and N J G Smith for the PlaintiffA M Stevens and E P P Maclaurin for the DefendantJudgment: 28 November 2017JUDGMENT OF ASSOCIATE JUDGE SMITH[1] This is an application by the defendant (OMV) for a stay of the proceeding.[2] The plaintiff (Precinct) has applied for summary judgment on its claim forrecovery of rent said to be owing under a lease of certain commercial space on the 9thand 10th floors of Deloitte House, on Brandon Street, in Wellington (the Lease). OMVsays that it was prevented from occupying the leased premises (the premises) for asignificant period after the Kaikoura earthquake on 14 November 2016, and that thepremises became "untenantable" in terms of one of the clauses in the Lease. On 2February 2017 it gave notice purporting to terminate the Lease, relying on this clause.[3] Later, OMV advanced further grounds that were said to justify the cancellation,including alleged misrepresentations by Precinct as to the earthquake rating of thebuilding in which the premises were located.1[4] OMV says that it is entitled (i) to have its "untenantable" claim, and the validityof its cancellation of the Lease, determined by an arbitrator under a provision in theLease and (ii) to have Precinct's claim to recover rent stayed until that has occurred.In accordance with the decision of the Supreme Court in Zurich Australian Insurancev Cognition Education,2 OMV says that its stay application should be heard anddetermined before Precinct's claim for the rent.[5] Precinct says that the purported cancellation of the Lease was invalid, and thatOMV remains liable for rent from at least the date on which it could have re-occupiedthe premises (13 March 2017). It says that the arbitration clause in the Lease does notapply to a claim by the lessor for rent, and that there is accordingly no issue that mustbe referred to arbitration under the arbitration clause.[6] I now give judgment on OMV's stay application.Background[7] The Lease commenced in 2009, and was renewed in 2012 and 2015. After themost recent renewal, the Lease was due to expire on 30 November 2020.[8] The Lease contained the following provisions referring to the payment of rent:Rent1.1 THE Tenant shall pay the annual rent by equal monthly payments inadvance (or as varied pursuant to any rent review) on the rent payment dates.The first monthly payment (together with rent calculated on a daily basis forany period from the commencement date of the term to the first rent paymentdate) shall be payable on the first rent payment date. All rent shall be paid1 There are alleged to have been misrepresentations made by Precinct at the time of the most recentrenewal of the Lease. OMV alleges that it was then told that that the building was 100% of NBS(New Building Standard). It says that the building has subsequently given a lower rating as aresult of "existing structural issues" that were identified after the earthquake. OMV notes thatthese representations gave it a right to terminate the Lease under ss 37 and 28 of the Contract andCommercial Law Act 2017 (dealing respectively with misrepresentation and mistake).2 Zurich Australian Insurance v Cognition Education [2015] 1 NZLR 383 at [52].without any deductions by direct payment to the Landlord or as the Landlordmay direct.[9] Under the First Schedule to the Lease, rent was payable for the premisesmonthly, on the first day of each month.[10] By Deed of Partial Surrender, Variation and Renewal of Lease dated 27November 2015, OMV partially surrendered the Lease from 31 December 2015.Certain space OMV had occupied on level 8 of Deloitte House no longer formed partof the premises. The Deed set out the rent that would be payable for the remainingspace (on levels 9 and 10), saying that payment would "continue to be payable inadvance without deduction or setoff in equal calendar monthly instalments ".[11] As a result of the Kaikoura earthquake on 14 November 2016, damage wascaused to the Deloitte House building. Although there was no damage to the premises,on 17 November the whole building was closed until further notice.[12] On 2 February 2017, OMV emailed Precinct purporting to give noticeterminating the Lease under the following clause in the Lease (cl 26(a)):26 IF the premises or any portion of the building of which the premisesmay form part shall be destroyed or so damaged:(a) as to render the premises untenantable then the term shall at onceterminate or[13] On 10 February 2017, Precinct found out that the premises could bereoccupied. OMV was notified of this by Precinct on 13 February. Re-occupationwas possible from 13 March. By this time, however, OMV had already committed toa lease of other commercial space in central Wellington.[14] Precinct has required OMV to pay rent falling due from 13 March 2017. OMVhas refused to pay, contending that the Lease was validly terminated.Precinct's summary judgment application and its amended claim[15] In its statement of claim and application for summary judgment filed on 8 June2017, Precinct asked only for a declaration that the premises had not been rendereduntenantable, and costs. There was no specific claim made for recovery of rent.[16] On 20 July 2017, Precinct filed an amended statement of claim, in which itadded a claim for $258,243.36 for unpaid rent payments allegedly due on 13 March2017, and on the first days of April, May, June and July 2017. Credit was given forthe period of the compulsory closure of the premises prior to 13 March 2017.[17] On 25 September 2017, I granted leave to Precinct to file the amendedstatement of claim, and also an amended application for summary judgment, whichhad been filed on 15 September 2017. The amended application asked for judgmentfor the unpaid rent (in addition to the existing application for a declaration), and costson an indemnity basis. I adjourned the hearing to 6 November 2017, and gavedirections for the filing of additional affidavits and submissions.The arbitration clause in the Lease[18] Clause 44 of the Lease materially provided:44.1. 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 theLandlord from taking proceedings for the recovery of rent or other moniespayable hereunder which remains unpaid or from exercising the rights andremedies in the event of such default prescribed in clauses 28 and 29 hereof.The law applicable to the stay application[19] Article 8(1) of the First Schedule to the Arbitration Act 1996 provides:8 Arbitration agreement and substantive claim before court(1) A court before which proceedings are brought in a matter which is thesubject of an arbitration agreement shall, if a party so requests not laterthan when submitting that party's first statement on the substance ofthe dispute, stay those proceedings and refer the parties to arbitrationunless it finds that the agreement is null and void, inoperative, orincapable of being performed, or that there is not in fact any disputebetween the parties with regard to the matters agreed to be referred.[20] In the leading case of Zurich Australian Insurance v Cognition Education, theSupreme Court held that:3Under 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.Submissions for OMV[21] Mr Stevens submits that the issue of whether the premises had becomeuntenantable, and whether OMV validly cancelled the Lease, are matters that must bereferred to arbitration under cl 44.1 of the Lease. If the Lease has been validlycancelled, there could be no action by the lessor for recovery of rent to which cl 44.3of the Lease might apply. The issue of the validity of the cancellation must thereforebe determined first, and Precinct's claim stayed while that issue is referred toarbitration.Submissions for Precinct[22] Mr Gordon acknowledges that, at least for the purposes of the stay application,OMV should be regarded as having acted bona fide in asserting that there is a dispute.Nor does he suggest that the Court could find that there is, in reality, no dispute.Rather, he submits that, from the beginning, Precinct's claim has been a claim for therecovery of rent, to which cl 44.1 of the Lease does not apply.4[23] Mr Gordon submits that, on the proper interpretation of the Lease, everydispute over whether the Lease has been terminated is a matter for the Court and notthe arbitrator, so long as the lessor is pursuing recovery of rent or other monies payableunder the Lease.3 Zurich, above n 2, at [52].4 Because such claims are excluded from the ambit of cl 44.1 by cl 44.3.Discussion and conclusions[24] Mr Gordon relied on the decision of Venning J in Drake City Ltd v Tasman-Jones.5[25] In Drake City, the guarantors of the lessee (then in liquidation) claimed thatthey were entitled in equity to set off against the landlord's claim for rent andoutgoings certain unquantified damages claims arising from allegedmisrepresentations made relating to the development where the leased premises werelocated, including the levels of occupancy. They also claimed that the landlord hadbreached the covenant for quiet enjoyment in the lease. There was no dispute that therent claimed was the amount payable under the lease.[26] The lease in Drake City included a no set-off clause that read as follows:6All rent shall be paid without any deductions or set-off by direct payment tothe Landlord or as the Landlord may direct.[27] Venning J considered that the fact that the guarantors had raised disputes fallingwithin the arbitration clause did not prevent Drake City from taking separateproceedings to recover the outstanding rent and outgoings under the lease. His Honournoted that the parties had agreed that the landlord would be entitled to issue a courtclaim for recovery of unpaid rent notwithstanding the reference of other disputes underthe lease to arbitration. He further noted that the commercial reason for clauses likecl 44.3 was obvious – they were used for the same reason parties to leases includeclauses providing that there should be no set-off from the amount payable for rent.[28] The "no set-off" clause in Drake City applied only to the landlord's claim forrent; it did not preclude the tenant from asserting a set-off in opposition to a claim bythe landlord for outgoings. But Venning J did not consider that should affect the resultof the guarantors' stay application. His Honour simply noted that that would be a"consideration at summary judgment stage."7 His Honour concluded that the parties'express agreement to exclude claims for rent under the lease from the ambit of cl 44.15 Drake City Ltd v Tasman-Jones [2016] NZHC 899.6 At [22].7 At [26].had the consequence that there was no dispute capable of reference to arbitration inrelation to Drake City's claim for the rent and other outgoings.8[29] Mr Stevens submits that the answer to the "stay or no stay" question is providedby Hi-Tech Investments Ltd v World Aviation Systems (Australia) Pty Ltd.9 In thatcase, Associate Judge Abbott had to construe a clause that was identical to cl 44 of theLease.[30] In Hi-Tech there was a dispute over the amount of rent that was due under therelevant lease. It provided for rent to be reviewed on a regular basis, and on 27September 2005, in accordance with that process, the landlord sent the tenant a noticespecifying an increase in rent. The tenant took the view that the increase wasreasonable, and it responded by increasing its monthly payments. On 11 November2005, the landlord sent a facsimile to the tenant claiming a further increase in rent.The tenant responded disputing the landlord's right to amend the rent, on the basis thatthe rent review process had concluded with the tenant's acceptance of the increase on27 September. There was a similar incident on 19 March 2006. The landlord thensought to recover the difference in rent between the claimed increase and the increaseof 27 September. The tenant applied to stay the proceeding, on the basis that thedispute should be referred to arbitration under the arbitration clause in the lease.[31] Associate Judge Abbott came to the following conclusion on the meaning ofthe word "payable" in cl 44.3 of the lease:10[23] Counsel for [the landlord] endeavoured to persuade me that any issue asto the rent that was payable was merely an element in proving its claim for adebt due. However, taking the facts of the present case, this could meanshowing that the notice of 27 September 2005 (which was given and actedupon as part of the rent review mechanism) is not binding. It seems to me thatany challenge to the rent review mechanism must go beyond merely recoveryof rent that is payable.[24] For these reasons, I construe clause 44.3 as allowing proceedings forrecovery of rent or other monies for which liability has been established underthe lease or (if necessary) by the arbitration procedures of clause 44.1.8 At [43].9 Hi-Tech Investments Ltd v World Aviation Systems (Australia) Pty Ltd HC Auckland, CIV-2006-404-3579, 13 October 2006.10 At [23] and [24].[32] On the basis of Hi-Tech, Mr Stevens submits that if the Lease has in fact beenvalidly terminated, as OMV claims, OMV will not be liable to pay any rent due underit. In those circumstances Precinct's claim is not a claim for the recovery of rent "forwhich liability has been established", but a claim that the provisions in the Lease underwhich rent would have been payable are still binding, in response to a claim by thelessee that they are not.[33] Mr Gordon says that all that is required by cl 44.3 is that the rent would bepayable under the Lease if the Lease were in force. He seeks to distinguish Hi-Techon the basis that it was a dispute as to the quantum of rent payable, and that no suchdispute exists in the present case.[34] I think the commercial purpose of cl 44.3 was that stated by Venning J in DrakeCity, namely to reflect the "pay now, argue later" intention of a typical "no set-off, nodeductions" clause. In leases containing such clauses the landlord's cashflow isprotected by the continued payment of rent while the disputed issue is being arbitrated(or litigated if there is no arbitration clause in the lease).[35] As Associate Judge Abbott observed in Hi-Tech, it is open to the parties todecide that some matters should be referred to arbitration while others should beresolved by the Court.11 In this case, as in both Drake City and Hi-Tech, the partiesagreed that any claim for rent by the landlord could be made by recovery action incourt, and need not be referred to arbitration. And I think it is implicit in the decisionof Venning J in Drake City that it does not matter that a landlord's claim to recoverrent or outgoings may be disputed by the tenant. In that case, the guarantors' claimsto an equitable set-off against the landlord's claim for outgoings would not have beenprecluded by the "no set-off clause", and would presumably have been within theambit of the cl 44.1 arbitration clause, but Venning J nevertheless considered that theclaim for the outgoings was not a claim that the parties had agreed would be referredto arbitration. It was covered by cl 44.3, and therefore was not within the scope of cl44.1.11 At [15].[36] Quite apart from the decision of Venning J in Drake City, I think it must be thecase that cl 44.3 can apply regardless of whether the landlord's claim is disputed bythe tenant. Clause 44.3 states that "the procedures prescribed in [cl 44] shall notprevent [a proceeding by the landlord to recover rent or other monies payable underthe lease]", but "the procedures" prescribed in cl 44 will apply only if there is alreadya "dispute or difference" between the parties.12[37] Looking at cl 44 more broadly, I think any construction which limited cl 44.3to situations where there was no bona fide argument for the tenant would in my viewunjustifiably water down the intended effect of cl 44.3. As Venning J observed inDrake City, the broad intent of cl 44.3 was to "mirror", or give practical effect to, thetypical "no set-off or deductions" clause, and I think staying the present claim for rentwhile OMV's arguments are referred to arbitration would undermine that intention.[38] Mr Stevens submits that the principal dispute here is a dispute over whetherthe Lease has been cancelled, and that, as in Hi-Tech, that dispute goes beyond a mereclaim for the recovery of rent. As such, it is not a claim in respect of which the tenant'sliability "has been established" (to borrow from the wording of the Associate Judge inHi-Tech).[39] It seems to me that Hi-Tech is distinguishable from this case. Associate JudgeAbbott was there concerned with a dispute over what rent or other monies wererequired to be paid under the lease, and there is no such dispute in this case. The issuehere is whether OMV has a defence to Precinct's claim for rent, whether under cl 26(a)of the Lease or because it was entitled to cancel for misrepresentation or mistake. Tomy mind the expression "rent or other monies payable hereunder" in cl 44.3 wasintended to serve only to identify particular kinds of claims that a landlord might bringin Court notwithstanding cl 44.1. It was not intended to address the question ofwhether the amounts claimed were in fact payable, in the sense that the tenant wouldhave no defence to them.[40] I think that must be so, because cl 44.3 was intended to apply in circumstanceswhere there was known to be a dispute or difference between parties that had not yet12 Clause 44.1 of the Lease.been resolved by a third party decision-maker (court or arbitrator). In that context, thereferences in cl 44.3 to the monies remaining unpaid, and to "such default", must beconstrued as references to allegations by the landlord, and not as preconditions to thelandlord's entitlement to access the subclause.[41] On the facts in Hi-Tech I do not think it surprising that the Associate Judgefound that the dispute had to be referred to arbitration under cl 44.1. But if and to theextent the learned Associate Judge intended to go further and hold that cl 44.3 wasintended to allow only undefended claims by a landlord for rent and outgoings (so thatany defence raised by a tenant would have to be referred to arbitration before thelandlord could proceed to take recovery action in Court), I would respectfully disagreewith him. If there was no dispute at all, the landlord's claim would not be caught bycl 44.1 anyway, and there would be no need to invoke cl 44.3. And if there was adispute and the parties went to arbitration, the landlord's claim for rent wouldpresumably be determined in the arbitral proceeding. If the landlord obtained anarbitration award for the rent there would no longer be any dispute or difference overthe tenant's liability for the rent, and again there would be no need for cl 44.3.[42] OMV's contention that the Lease has been validly cancelled might not becaught by the "no deductions or set-off" clause in this case, but that was also theposition with the guarantors' claim to an equitable set-off against the landlord's claimfor outgoings in Drake City, and Venning J allowed the claim for summary judgmentto proceed (including the claim for outgoings). If there is an issue here at all, I thinkit must be whether, for the purposes of the application of cl 44.3, there is any relevantdistinction between a tenant's claim that it has a set-off for damages which wouldextinguish the claim for rent (so that no rent is payable), and a tenant's claim that norent is payable because the tenant has validly cancelled the lease.[43] I think it could be difficult in practice to apply a distinction of that sort, wherea tenant's equitable set-off claim might well be accompanied by a claim that the tenanthas validly cancelled the lease. I think it unlikely the parties would have intended thatthe additional factor (claimed cancellation by the tenant) would require the landlord'sclaim – which otherwise could have been pursued in court – to be referred toarbitration.[44] Nor do I think the parties could have intended that some determination shouldbe made (presumably by the landlord) that a claim by the tenant should have primacyover the landlord's claim for rent, so that the tenant's claim has to be referred toarbitration before the landlord could proceed under cl 44.3. In many situations theonly real matter in dispute is likely to be the tenant's claim, and requiring the landlord'sclaim for rent to be referred to arbitration in that situation would defeat the purpose ofcl 44.3.[45] For the foregoing reasons I accept Mr Gordon's submission that, as long as thelessor is pursuing recovery of rent or other monies identified in the Lease as beingpayable by the tenant, the claim may be brought in court. It follows that the applicationto stay the proceeding must be refused.[46] For completeness, I mention that I do not think it matters that Precinct's claim,as originally formulated, sought only a declaration on the issue of whether or not theLease had been validly terminated. With the amendment made to the statement ofclaim and the application for summary judgment, the claim is clearly now a claim forrent payable under the Lease. Whether or not the claim as originally formulated wasa claim that should have been referred to arbitration under cl 44.1 does not affect thatposition. Precinct has consistently sought to proceed in this Court; it has never electedto refer the rent claim to arbitration.Result[47] OMV's application for a stay of the proceeding is dismissed.[48] Precinct's application for summary judgment remains to be heard at 10.00 amon 4 December 2017.[49] Ordinarily, Precinct would be entitled to costs on OMV's unsuccessful stayapplication. But there may be costs issues arising out of the amendments made byPrecinct to its statement of claim and its application for summary judgment. (OnOMV's view, the claim as originally formulated was not a claim for rent or othermonies payable under the Lease, and it had to be referred to arbitration under cl 44.1.On Precinct's view, the claim was in essence always a claim for unpaid rent.) Giventhe proximity of the date of hearing for the summary judgment application, I willreserve the question of costs on the stay application for further submissions to be madeby counsel at the summary judgment hearing. I will give my decision on costs on thestay application with my decision on the summary judgment application.Associate Judge SmithSolicitors:MinterEllisonRuddWatts for the PlaintiffIzard Weston, Wellington for the Defendant