STYLO MEDICAL SERVICES LIMITED v HUM HOSPITALITY LIMITED [2014] NZHC 1587

STYLO MEDICAL SERVICES LIMITED v HUM HOSPITALITY LIMITED [2014] NZHC 1587 [8 July 2014]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYCIV 2013-404-004995[2014] NZHC 1587BETWEEN STYLO MEDICAL SERVICES LIMITEDApplicantAND HUM HOSPITALITY LIMITEDRespondentHearing: 31 March 2014, and 4 July 2014 (by Audio Visual Link)Counsel: R O Parmenter for ApplicantS L Abdale for RespondentJudgment: 8 July 2014JUDGMENT OF WHATA JThis judgment was delivered by me on 8 July 2014 March 2014 at 4.00 pm,pursuant to Rule 11.5 of the High Court Rules.Registrar/Deputy RegistrarDate.[1] Hum Hospitality Limited ("Hum") has leased a grand old villa from Stylo Medical Services Ltd ("Stylo"). Hum agreed to rejuvenate the villa which had falleninto disrepair. In exchange for that work, Stylo agreed that there should be a rent abatement for the first three years of the lease. The works have taken considerably longer than expected, so much so that Stylo commenced proceedings seeking the cancellation of the lease because, it says, the works have not been completed on time. Ellis J agreed, but relief from cancellation was granted. The Court envisaged that the parties might try to reach some agreement as to what exactly was required and then agree a basis for completion of the necessary works.[2] Hum and Stylo have not advanced matters in any positive way. Stylo has now issued a further Property Law Act notice claiming that the works are still not complete to the standard necessary to enable Hum to commence its business as a restaurant.[3] Hum responded that the works are complete to the standard required by the lease.[4] This matter was then heard by me in late March. The evidence on key issues was, in short, inconclusive. By minute dated 1 April 2014 I directed that the parties should have the opportunity to provide further evidence, preferably by way of joint expert brief, on the following matters:(a) What works have now been completed on the property;(b) What is the standard of those works;(c) What works have not been completed.[5] Regrettably, consistent with the general way in which this matter has evolved, and despite ample time to address the above matters, the experts could not even formulate a joint statement setting out matters not agreed, let alone matters agreed. I therefore directed the parties to separately file evidence on the three matters and reconvened the hearing given the elapse of time.[6] I must now therefore resolve whether the required works have been completed to the correct standard and if they have not whether the lease should be cancelled.Background[7] The immediate background to this proceeding is essayed by Ellis J as follows:1[2] Stylo's sole director and majority shareholder is Dr Shen Tat Ooi,who is a medical practitioner. Dr Ooi purchased 123 Grafton Road in 2008 from the Housing Corporation. He immediately spent some $22,000 re- piling the house, which was in a state of considerable disrepair. He also applied for a resource consent, which was granted in April 2010.[3] Dr Ooi had no further money to renovate the property and, indeed, has deposed that he has some $3.6m worth of bank debt due to his wider property investment activities. Dr Ooi appointed James Lee from Ray White Commercial to look for a tenant for the property. Mr Lee introduced Dr Ooi to Rosie Armitage, who is the sole director and shareholder of the respondent, Hum Hospitality Ltd (Hum).[4] In late 2010 there were negotiations between Dr Ooi, Ms Armitage and two others (Mr Mather and Ms Christiansen), as a result of which an agreement to lease between Stylo and Hum was signed on 1 November 2010. A Deed of Lease in relation to 123 Grafton Rd was subsequently executed on 22 January 2011. As I understand it, both parties had access to legal advice.[8] Given developments since the decision of Ellis J, it is necessary for me to review the agreements to lease and the lease itself.Agreement to lease No. 1 dated 1 November 2010[9] The first agreement to lease contemplated a rent holiday for a period of 28 months, provided that the tenant was liable for all outgoings.2 The agreement was conditional on the tenant being entirely satisfied in all respects that the property issuitable for the tenant's intended use.3 Clause 12 stipulated that before the tenant could commence business, the tenant was required, at the tenant's cost to completeamong other things repair, if necessary, the exterior of the building and the roof, fit1 Stylo Medical Services Ltd v Hum Hospitality Ltd [2013] NZHC 214 at [2]-[4].2 Agreement to Lease No. 1 dated 1 November 2010, cl 8.3 Clause 11.out all floors by painting, flooring and installation of toilet and kitchen, and any other work that in the tenants opinion is necessary for the tenants business use.4 All work was to be done to a workmanlike manner and in accordance with the Building Code.5 Landlord approval for the fit out was required and the work must be commenced by 1 March 2011 and completed by July 2011.[10] The agreement to lease also includes a right of first refusal, affording the tenant 10 working days to purchase the property after receipt of notice from the landlord of its intention to sell.6Agreement to lease No. 2 dated 8 December 2010[11] There is then the second agreement. The due diligence clause is deleted, but cl 12 generally repeats the terms of cl 12 of the first agreement. The dates are changed and there is a reference to a schedule listing the details of the work. The right of first refusal is also included.Deed of lease dated 22 January 2011[12] Turning to the Deed of Lease, clause 46.1 provides the rent holiday, though the length of holiday is extended from 28 to 36 months. Clauses 48.1-7 deal withtenants' fit out and other work and effectively replicates the second agreement to lease. Given its significance, I include the operative clauses for present purpose here:48.1 The Landlord agrees to provide the tenant full access to the premises upon this agreement is declared unconditional.48.2 Before the commencement of the Tenant's business the tenant shall, at the tenant's cost complete the following work:48.2.1 Repaint and repair (if necessary) the exterior of the building.48.2.2 Repair the roof (if necessary);48.2.3 Fence around the balcony;48.2.4 Landscaping.4 Clause 12.2.5 Clause 12.3.6 Clause 13.48.2.5 fitout all floors by painting, flooring, installation of toilet and kitchen.48.2.6 any other work that at the Tenant's opinion is necessary for the Tenant's business use of the premises.Details of the work are listed in the attached schedule.48.3 All work shall be done in a workmanlike manner and according to the New Zealand Building Code. If resource consent and/or buildingconsent are required for any work the Tenant shall at the Tenant's cost obtainthe relevant consent before the work starts. The Tenant shall also obtain Code Compliance certificate for any work that building consent is required.48.4 The tenant must obtain the Landlord written approval for the fitout work and other work at lease 20 working days prior to the commencement of the work. If resource consent or building consent is required for the workthe tenant must obtain the landlord's written consent at least 10 workingdays before the Tenant submit the application for the consent to the authority. The tenant shall provide the landlord with plans and specifications and other information necessary for the landlord to approve the work. The landlord shall consider the work fairly and reasonably and shall make a decision within 5 working days after receiving the notice and necessary information from the Tenant for the approval.48.5 The Tenant must commence the renovation of the building by 1 March 2011. The work listed in above 48.2.1 to 48.2.4 in relationship to everything downstairs, landscaping out the front, all external work on the house, front fencing, etc must be completed by 31 December 2011. All other work in relation to the gardens out the back and inside upstairs must be completed by 31 December 2012. If any of the work is not completed by the time period stated above the landlord may give the Tenant 20 working days notice to complete the work. If the Tenant fails to complete the work within the notice period the Landlord may terminate this agreement or the deed of lease immediately. If this agreement or the deed of lease is so terminated all the work done by the tenant, except kitchen equipments will belong to the landlord. The landlord has no obligation to pay any compensation.48.6 At the expiry of the lease term or earlier termination of the lease under this agreement or the deed of lease all work and fitout completed other than the kitchen equipment shall be the property of the landlord.48.7 For the sake of clarity the Tenant acknowledges that the premises are currently in a very poor condition. The Landlord leases the premises to the Tenant as it is. The Landlord gives no guarantee as to whether the premises are fit for the business use of the Tenant. The landlord does not warrant the soundness of the structure, the fitout or the services of the premises either. The Tenant will do all the work necessary to make the premises fit for thetenant's business use and to comply with the requirements of law and localauthority. The tenant will not require the Landlord to do any work or contribute to any work that is required for the premises to be used for thetenant's business use or to comply with the requirements of law or the localauthority.[13] Clause 49.1 repeats the right of first refusal.The alleged breaches[14] Stylo has had concerns for some considerable time about the slowness with which Hum has undertaken the required works. Stylo was initially sympathetic but began a formal complaint procedure by way of Property Law Act notice dated 20 August 2012. This was followed by a second notice dated 27 November 2012. In relation to this notice Ellis J found:7[40] More difficult, however, is the absence of clarity around precisely what is to be done to comply with cls 48.2.1 – 48.2.4. Even incorporation of cl 48.5 does not assist; that clause simply stipulates (for example) that thelandscaping required is "out the front" and the reference in the notice to cl48.5 does little to enhance the precision of what is needed to complete phase one. And although at the end of cl 48.2 there is reference to the "details" ofthe required work being listed in the schedule to the lease:(a) the "details" contained in the schedule are, as I have noted,hardly more particularised; and(b) the relationship between those "details" and either thespecific cl 48.2 matters referred to in the notice or the division of work into two phases is far from clear.[15] And further:8[43] Accordingly, although Hum necessarily accepts that it is in default, the extent of the default (and what is required to remedy it) is, as I have said, in dispute. So given that the code compliance certificate stage has not been reached, and given that the vague and uncertain contractual clauses reliedupon were drafted by Dr Ooi's lawyers, it would I think be wrong inprinciple for Dr Ooi to be permitted subjectively to determine what is required to comply with those provisions.[16] The Judge found that:9[45] As far as the issues relating to the lease itself are concerned, I havealready indicated my acceptance of Mr Parmenter's submission that it is not open to this Court to rewrite the deed of lease. The contract is clear at leastto the extent that Hum's obligations (whatever precisely they may be) andthe stipulated timeframes are not contingent, or aspirational. Moreover the lease is also clear that Hum took on the project (and the house) on an "as is, where is" basis. And while I am willing, on the evidence, to accept that DrOoi was prepared to cut Hum some slack in terms of meticulous compliance with the contractual time frames I do not consider, for example, that he ever7 Stylo Medical Services Ltd v Hum Hospitality Ltd, above n 1, at [40].8 At [43].9 At [45].represented that they did not matter at all. I do not consider that the formal requirements of an estoppel could be made out.[17] The Court observed that the timeframe was not contingent or aspirational and that the purchase was on an as is where is basis. The Court also, however, made the following key observations:10(a) Stylo has suffered no immediate harm;(b) Stylo could not afford to pay for the repairs;(c) The property was otherwise unrentable.[18] The Judge then concluded that the Property Law Act notice was not adequate, but that Hum was plainly in breach, and it had no positive defences. Ultimately the Judge resolved, nevertheless, that based on discretionary factors the lease should not be cancelled.Progress[19] The parties have not meaningfully engaged with each other since the first judgment. The applicant adopted an interrogation type approach. The respondent has adopted a siege mentality, refusing to allow further inspection of the property. Neither stance was particularly helpful.[20] Hum nevertheless maintains however that it has completed all works to a standard specified in the lease. The applicant does not accept this.Jurisdiction[21] Given that Ellis J has found that there was a breach of the lease, I proceed on the basis that this really is a case about whether relief against cancellation should be granted. I understand that Ms Abdale accepted that that was a proper basis upon which to proceed.10 At [47].[22] The Court's discretion to grant relief from cancellation is wide but not unfettered. There must be a clearly unjust factor demanding relief. The observations of Hammond J in Studio X v Mobil Oil New Zealand Ltd11 provide a helpful frame for assessment and involving in general terms assessment of the following factors:12(a) The nature, form and gravity of the breach (though breach of an essential term is not by itself a disqualifying reason);(b) The conduct of the tenant;(c) The conduct of the landlord;(d) The ability of the tenant to remedy the breach or breaches;(e) Proportionality or fairness as between the parties – the outcome should not be disproportionate to the breach or the loss suffered.13[23] Relevant to my decision, however, the tenant now claims that the works have been undertaken to the requisite standard and thus providing a compelling reason to grant relief from cancellation.The evidence[24] The evidence before me falls into two categories, namely the evidence given by representatives of the applicant and respondent, and expert evidence. I am not going to dwell on the narrative dealing with the conduct of the parties. The central issue before me is whether or not the works as contemplated by the lease have been completed to the requisite standard.11 Studio X v Mobil Oil New Zealand Ltd [1996] 2 NZLR 697 (HC).12 At 701.13 I employed a similar framework in my decision in The Three Sisters Vineyard Ltd v Trustees of the Storey Family Trust [2014] NZHC 471.The works[25] The most up to date assessments of the progress of works on the site is included in the affidavit of Mr Emmitt dated 6 June 2014 and the "washup" affidavitof Mr Nixon dated 27 June 2014.[26] Mr Emmitt holds a New Zealand certificate of quantity surveying from Carrington Polytechnic College, Auckland, (now Unit-tech Institute of Technology) with over 25 years experience as a professional quantity surveyor and 12 years in partnership and three years in his own business.[27] His assessment of works is contained in a report attached to his affidavit and marked A. In that affidavit he records what he says are costs of works completed to date (as at Wednesday 4 June 2014). He identifies 20 items, which he says in total amount to a cost of $659,000. He then provides a breakdown of each of those matters in separate schedules. A copy of his summary is attached as Appendix A.[28] He also says that in his understanding the work that has not been completed is to the areas of the property that have been worked on but cannot be fully completed until the repiling and relevelling is remedied. Though it is not entirely clear, it appears that the following matters need to be attended to:(a) Level back the north subfloor side needs further securing and final colour coat. Currently it is nailed in place in such a way to allow access or repiling and relevelling remedial work.(b) Lower deck T & G will need priming and colour once the need to constant rework due to movement below is no longer an issue.[29] Mr Nixon is a quantity surveyor. He holds a New Zealand certificate in quantity surveying and has completed the quantity surveying registration examination. He has some 42 years as a quantity surveyor with a large proportion of his experience having been involved in competitive tendering for projects and preparing estimates, both preliminary and fully detailed, for future projects, and financial control of buildings during their construction.[30] In response to a series of questions put to him by his counsel, Mr Nixon made the following observations:(a) The value of the work put into the refurbishment of the building by the tenant was (as at December) $87,800;(b) The likely costs of works needed to comply with the tenant'sobligations under the lease (based on compliance with the original resource consent R/LUC/2010 133) was $795,000 (including the $87,800 already spent);(c) The additional cost associated with the tenant's resource consentwould be in the vicinity of $280,000;(d) The total works costs is likely to be $1,075,000;(e) It would take approximately 26 weeks to complete the works associated with the original resource consent;(f) It would take an additional six to eight weeks to complete the works under the immediate resource consent.[31] Mr Nixon also provides a detailed response to Mr Emmitt's previous affidavit evidence wherein he identifies the works Mr Emmitt says have been undertaken. I do not propose to repeat the detail of that evidence. Instead I observe that Mr Nixon says that many of the items identified by Mr Emmitt as having been completed were not completed at all, and/or there was no evidence of the work having been undertaken, and/or the work was not undertaken by the tenant. Mr Nixon concluded from his analysis that the essential difference between their approaches is that he has had a detailed inspection of the property and analysed what has been done but that he does not think that Mr Emmitt has carried out such an extensive inspection.[32] Further to my direction, Mr Nixon has had the opportunity to reconsider the position and remains firmly of the view that his estimate of the works done and the works necessary to complete is accurate. He says that he has twice studied thecompleted work and is of the view that the works undertaken come to a value of about $94,253. He also comments on Mr Emmitt's affidavit of 6 June, noting thatthe original cost to date has increased by some $248,493. He says there is no accompanying explanation of the reasons for this change.The scope and standard of the works[33] Mr Parmenter says that the requirement to achieve compliance with the resource consent is implicit from references in cl 12 to the commencement of theTenants' business. Mr Parmenter submits that the reference to the business linkedthe works to the resource consent enabling their business.[34] Based on that analysis, Mr Nixon's assessment is that further works to the tune of $700,000 to $1,000,000 were required.[35] It is trite that if a term is to be implied into an agreement, which is in effect what Stylo was suggesting, it must make commercial sense. With respect to Mr Parmenter's argument, it does not make commercial sense that the tenant would commit in exchange for a three year rent abatement, $1,000,000 worth of work to be completed by the end of the abatement period. Even if the lesser sum of $700,000 is used, this is a remarkably uncommercial outcome entirely favourable to Stylo.[36] In any event, I consider that the scope of the works required to be completed by a specified time frame is expressly circumscribed by cl 48.5. That clause identifies two types of work. The work listed at cl 48.2.1 to 48.2.4 in relation to everything downstairs, landscaping out front, all external work on the house, front fencing, etc must be completed by 31 December 2011. All other work in relation to"the gardens out the back and inside upstairs" must be completed by 31 December2012. This is plainly a much smaller class of works than that described by Mr Nixon in his affidavit so to that extent his affidavit is unhelpful to me.[37] As to the standard of work, I also prefer to rely on the language used in thecontract itself which specifically refers to a "workman like" standard.[38] While the parties may well have contemplated that ultimately Hum would operate the leased premises for restaurant purposes, I am concerned only with alleged breaches of cl 48.5.[39] The key issue then is whether the specified works at cl 48.5 have been done to a workman like standard. Unfortunately, the evidence has not been produced in a way which identifies the listed works and confirms or otherwise that they have been completed and/or to what standard. Mr Emmitt's evidence is very generalised, therebeing no specific confirmation that the works have been completed to a specificstandard. I accept Ms Abdale's submission that it may be appropriate for me to infer from his evidence that the only outstanding matters are the two listed above at paragraph [28], which he says cannot be completed due to the need for relevelling and repiling. Balanced against this, Mr Nixon attaches a schedule of the works he says need to be completed and it may be inferred that some of the items listed by him correlate to the works set out in the lease. I spent some time with Mr Parmenter on this and he identified the following matters listed in Mr Nixon's schedule which he says have not been completed in accordance with the strict lease requirements, namely:ITEM COSTRepaint and repair (if necessary the exterior of the building)(i) Allow to strip lead based paint from existing weatherboards(ii) Allow to strip paint, refurbish, reinstall and repaint existingbalustrading, posts and fretwork, as required. (21 metres)(iii) Allow to strip paint, refurbish, reinstall and repaint existingbalustrading, posts and fretwork, as required. (21 metres)14,700.005,000.005,000.00Repair the roof (if necessary)Make good and paint to fascias, upper wall freize board and timberdetailing 2,795.00LandscapingAllow to strip and clear existing site of all vegetation, topsoil andrubbish 2,970.00DrainageNew cesspit and environment pool 2,400.00LandscapingDemolish & remove existing dwarf wall and pillar fence 600.00[40] Ms Abdale responds that some of the items identified are much broader and/or do not specifically relate to the matters specified in the lease. For example, she says that landscaping out front does not relate to the carpark.[41] I do not consider that I am able to conclude, given the state of the evidence what works have not been completed to any level of exactitude. Not only is the evidence inadequate, but there are clearly credibility issues arising when two experts are so far apart on their basic assessment of the works done or not done. I am prepared, however, to proceed on the basis that some of the works identified have not been finally completed given the matters identified by Mr Nixon. To that extent I prefer his evidence as more thorough and complete than the very generalised evidence provided by Mr Emmitt. I consider there is some considerable weight in Mr Parmenter's argument that the conclusions reached by Mr Emmitt are notsupported by clear reasons, in turn casting doubt on the thoroughness of the workthat he had undertaken. Having said that, nor am I prepared to accept Mr Nixon'squantification of the costs given my apprehension that he has not directed his attention specifically to the works that needed to be done in accordance with cl 48.5.[42] I therefore proceed on the basis that there are some works outstanding, but I am not able to quantify the extent of those works.Discretion as to relief[43] I am prepared to grant relief from cancellation notwithstanding the current state of the evidence. It seems to me that there is at least some evidence supporting the basic proposition that the tenant has worked hard to put the premises into a state enabling it to commence its business in earnest. While the improvements do notappear to meet the applicant's requisite standards, even on Mr Nixon's evidencethere has been almost $100,000 expended by the tenant in the improvement of theproperty. At the other end of the spectrum, were I to accept Mr Emmitt's evidence,then plainly the tenant has made a very substantial contribution to the improvements of the property well in excess of any ordinary rental that the tenant would have been expected to pay in the three year abatement period. But I am not prepared to accept that evidence at face value and for this reason I will grant relief on a conditional basis only. I consider that it is absolutely necessary to bring some clarity to the extent of the works undertaken by the tenant so that a proper and full assessment can be made as to whether the tenant should be afforded the ongoing forbearance of this Court. I therefore propose to make the grant of relief conditional upon the production of a report by a Court appointed expert specifically assessing whether the works specified at cl 48.5 have been completed, whether those works have been completed in a workman like manner, and if not, what is required to complete those works to that standard. I record that this route to a final outcome was suggested by Ms Abdale.[44] The cost of the Court appointed expert will be borne by the tenant given the further indulgence afforded to it.[45] Counsel have five working days to identify an expert that is acceptable to both of them to address the task I have identified. I will select the expert if there is no agreement. The expert will have one calendar month within which to undertake his or her assessment and to report to the Court. The parties will then have five working days within which to make further submissions on the report. Unless requested by counsel, I will then determine on the papers whether relief should continue.[46] Nothing in this judgment should be seen to affect whatever application that the applicant wishes to make for cancellation based on non payment of rent. For completeness I have taken into account the fact that three months rent is currently due and owing. That non payment is not sufficient in my view to warrant or to preclude me from exercising a discretion in favour of the tenant. Needless to say, however, that if non payment of rental continues then that will be on my final decision.[47] The parties have leave to come back to this Court if further clarification is needed. I otherwise implore the parties to refer to the express requirements of cl 48.5.Costs[48] While the applicant has not succeeded in obtaining an order for cancellation, I have exercised my discretion in favour of relief from cancellation on a limited basis in favour of the tenant. I consider that having granted that indulgence, my current view is that the tenant should be liable for the costs of the applicant on a 2B basis together with disbursements as fixed by the Registrar. Nevertheless, costs are reserved pending the outcome of the Court appointed expert review.Solicitors:Legal Vision, AucklandWinston Wang & Associates, Auckland