STYLO MEDICAL SERVICES LIMITED v HUM HOSPITALITY LIMITED [2015] NZHC 1150

STYLO MEDICAL SERVICES LIMITED v HUM HOSPITALITY LIMITED [2015] NZHC 1150 [27 May 2015]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYCIV-2013-404-4995[2015] NZHC 1150UNDER s 244 Property Law Act 2007IN THE MATTER of an application for cancellation of Deedof Lease dated 22 January 2011 andpossessionBETWEEN STYLO MEDICAL SERVICES LIMITEDApplicantAND HUM HOSPITALITY LIMITEDRespondentHearing: 24 April 2015Appearances: R O Parmenter for ApplicantS Abdale for RespondentJudgment: 27 May 2015JUDGMENT OF WHATA JThis judgment was delivered by Justice Whata on27 May 2015 at 11.30 p.m., pursuant tor 11.5 of the High Court RulesRegistrar/Deputy RegistrarDate:Solicitors:Winston Wang & Associates, AucklandFoy & Halse, AucklandCopy to:R O Parmenter, AucklandS Abdale, Auckland[1] Stylo Medical Services Ltd (Stylo) and Hum Hospitality Ltd (Hum) are locked in a long-running battle concerning a leasehold of a grand villa in Parnell. This will be the sixth judgment dealing with the dispute in 24 months.1[2] In this judgment I must resolve:(a) Whether I should cancel the deed of lease for noncompliance with covenant of repair;(b) Whether I should cancel the lease for non payment of rent in January this year;(c) Whether I should grant a stay preventing Stylo from commencing further proceedings against Hum, pending resolution of an appeal by Stylo against my judgment of November last year.2Background[3] The full background to this matter is thoroughly essayed in previous judgments. For present purposes it is sufficient for me to borrow from the third cancellation decision:3[5] The immediate background to the lease assumes significance in lightof Hum's claim that, contrary to representations made by Stylo's director, DrOoi, the buildings foundations were not fit for purpose.[6] Stylo purchased the villa in 2008 located at 123 Grafton Road, Auckland. It was in a state of considerable disrepair. Dr Ooi says that $22,000 was spent on repiling and relevelling the building. He also says thatCode of Compliance (CoC) "was issued and said it should last for 50 years".I could not find a copy of the CoC in the morass of paper filed with the1 See Stylo Medical Services Ltd v Hum Hospitality Ltd [2013] NZCHC 2114 [first cancellation decision]; Stylo Medical Services Ltd v Hum Hospitality Ltd [2014] NZHC 1587 [second cancellation decision]; Stylo Medical Services Ltd v Hum Hospitality Ltd [2014] NZHC 2029 [the consolidation decision]; Stylo Medical Services Ltd v Hum Hospitality Ltd [2014] NZHC 2428 [third cancellation decision]; Stylo Medical Services Ltd v Hum Hospitality Ltd [2014] NZHC 2723 [fourth cancellation decision].2 Stylo Medical Services Ltd v Hum Hospitality Ltd [2014] NZHC 2723 [fourth cancellation decision]. In that judgment I resolved to extend the time in which Hum was required to pay all outstanding rentals ($53,995.50) by one working day. Stylo appeals that decision to the Court of Appeal.3 Stylo Medical Services Ltd v Hum Hospitality Ltd [2014] NZHC 2428 [third cancellation decision].applications, but I assume he is referring to a CoC for the repiling. A resource consent to operate a café was also obtained, apparently at a cost of about $30,000. Dr Ooi then avers:6. . Based on the original consent too, only building consentis needed which would not take long at all to get as most of the detail has been submitted for the resource consent and I have full support from the heritage counsellor Ian Grant and heritage architect, Antony Matthews. I mention that the resource consent only lasts for 5 years, so we have lost a good part of that period already.[7] Stylo, it appears, had no further money to repair the villa and went searching for a tenant. Dr Ooi was introduced to Ms Armitage, director and shareholder of Hum. The best evidence of the outcome of their negotiations are the agreements to lease and the executed lease to which I will now turn.The lease[13] As I observed in my previous judgment, cl 46.1 provides the rent holiday, though the length of holiday is extended from 28 to 36 months. Clauses 48.1 to 48.7 deal with tenants' fitout and other work and effectivelyreplicates the second agreement to lease. Given their 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.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 thepremises.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 building consent are required for any work the Tenant shall atthe Tenant's cost obtain the 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 work the tenant must obtain the landlord's writtenconsent at least 10 working days 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 the tenant's businessuse and to comply with the requirements of law and local authority. The tenant will not require the Landlord to do any work or contribute to any work that is required for the premises to be usedfor the tenant's business use or to comply with the requirements of law or the local authority.[14] Clause 49.1 repeats the right of first refusal.The [then] previous judgments[15] The two previous judgments4 concern an alleged breach of the covenant to repair at cl 48. Ellis J proceeded on the basis that a breach had been established. By the time the issue got to me, Hum claimed it had completed all necessary works and also highlighted evidence that it had expended about $650,000 in repair costs. Stylo contends that the amount is more in the order of $100,000.[16] I was not able to reach a firm conclusion of the scale and standard of the works completed by Hum. But I was satisfied that Hum had made a substantial contribution to the repair of the villa noting that even on the evidence for Stylo, there had been almost $100,000 expended by Hum on the improvement of the premises. I therefore granted relief conditional on 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 workmanlike manner, and if not, what is required to complete those works to that standard. I recorded that this route to a final outcome was suggested by Ms Abdale.The third application[4] The third proceeding concerned an application for cancellation and possession for non payment of rent. Hum contended that relief from cancellationshould be granted because the building's foundation had never been fit for purposeand the rent should be abated pending the completion of necessary repairs to the foundations by Stylo. The essential issue was whether I could cancel the lease or grant relief from cancellation because the claim that the building foundations were never fit for purpose in against a backdrop where Hum had undertaken substantial works to rejuvenate the building. For the purposes of the cancellation application Irejected Hum's complaints about the building not being fit for purpose given thevery clear terms of the agreements to lease and the lease that Hum was taking thelease off the building "as it is". Ultimately I resolved to give conditional relief fromforfeiture on the basis that all outstanding rent (exclusive of interest) and outgoings as at the date of that judgment were to be paid within 15 working days. It transpires that the amount was paid, albeit it one working day late. Stylo objected to the grant of an extension of time within which to make payment. I nevertheless granted that extension and that decision has been appealed to the Court of Appeal.4 First Cancellation Decision, above n 1; Second Cancellation Decision, above n 2.Current issues[5] Hum failed to make payment of its rental on time in January 2015. Stylo filed a further Property Law Act notice claim, after the requisite period, in February. The rental was paid in February and Hum lodged an application for stay to, in short, prevent Stylo from commencing further Property Law Act claims while the second proceedings and the appeal to the Court of appeal remained unresolved. Faire J directed that this application be heard together with the second application. I considered that the most efficient way to deal with all outstanding matters was to await the production of the expert report as directed by me for the purposes of conditional relief in the second cancellation decision and then to have all matters determined at the same time.[6] After discussion with counsel it was agreed that the following matters remained to be determined namely:(a) Whether the work subject to covenant 48 has been completed and if not, what is required to complete those works;(b) Whether I should cancel the lease in respect of non compliance, if any, with covenant 48;(c) Whether I should make an order for costs and on what basis.[7] It was also considered appropriate to take the opportunity to resolve to the extent necessary the stay application in conjunction with the third rent application, the critical issues being:(a) Has the outstanding rental been paid?(b) If not, whether the application is an abuse of process;(c) If the application is not an abuse of process should the lease be cancelled for non payment of rent?[8] It transpires that the outstanding rental had in fact been paid by the hearing date, but I was advised that the April rental was now overdue and the May rental was due to be paid a week after the hearing. The critical issue in relation to this rent application then is whether I should grant relief from cancellation in that context.Resolution of the second cancellation proceedings[9] To recap I granted relief from cancellation on the basis that the Court would appoint an expert to specifically assess whether the work specified at cl 48.5 has been completed, whether those works have been completed in a workmanlike manner, and if not, what is required to complete those works to that standard. Mr White was appointed as the independent expert.[10] It transpires that the expert was unable to provide a comprehensive analysis in terms of the questions posed. It is necessary nevertheless to briefly canvas the outcomes in the report in order then to resolve the second proceeding.[11] In accordance with cl 48.5, Mr White assessed the following works:(a) Repaint and repair (if necessary) the exterior of the building (cl 48.2.1);(b) Repair the roof (if necessary) (cl 48.2.2);(c) Fence around boundary (cl 48.2.3);(d) Landscaping (cl 48.2.4).[12] I turn to examine Mr White's conclusions on each aspect.Repaint and repair (if necessary) the exterior of the building[13] Mr White concludes:The painting to the exterior of the building is not complete. The lean-to area to the rear (western) elevation which is due to be demolished as part of the commercial renovation has been left unpainted.[14] Mr White observes that based on available information, the existing weatherboards were stripped of existing paint by the application of a special stripping agent and there are numerous photographs showing this process in various stages. Mr White nevertheless concludes it is unclear from the photographs provided to what extent the rot was removed and to which location. He was not able to say that the rot had been remediated. However, he observes that it is clear from the before and after photographs that a significant amount of restoration works was undertaken.[15] He also observes that it appears that soakers do not appear to have been installed. He understands that the Auckland Council has confirmed they were happy with the heritage colours, but it is unclear as to which of the colours was confirmed as appropriate.[16] Mr White then observes:The standing of the painting is reasonable and the workmanship is fair.[17] He also refers to a Maynard Marks' report and the observation that the weatherboards on the northern elevation are poorly fitted. He concludes that this is explained by reason that these weatherboards are tacked in place because of an issue with sub-floor piling work.Repair the roof (if necessary)[18] Mr White was unable to inspect the roof, but noted that from street level it looked reasonable.Fence and balcony[19] Mr White observed that the balustrades to the verandah decks on the first and second level are incomplete on the north and west elevations. He says there are two bays on each level which have a non-compliant horizontal rail barrier in place. As to the balustrade work that has been completed, he says that they have been replicated from the original shapes. He says these appear to have been installed and suitably fixed, the spacings between the balustrades appear consistent and compliant.[20] As to what is required to complete the works, he observes that the balustrades will need to be completed on the north and west elevations as identified above.Landscaping[21] Mr White observes it was unclear to what extent landscaping work was expected to be completed. He notes that a proposed plan shows soft and hard landscaping, but that this appears to relate to restaurant changes which have not been undertaken yet. He also notes that the fencing and front hedging is not complete.[22] In terms of the manner of the works, he notes that it appears that the front and rear yards have been tidied up, but it is unclear to what extent the landscaping works are required. As he was unable to define the scope of the landscaping work he is unable to comment on what is required to complete those works to that standard.Submissions of counsel[23] Neither counsel was particularly impressed by the report. Mr Parmenter highlighted that the report concludes that some works had not been completed and to the extent that works have been completed the report does not confirm that they have been completed to the requisite standard in the lease.[24] Ms Abdale submitted that key works have been completed and that they have been completed to a workmanlike level. She also emphasised that in terms of the landscaping works, the lease is not ambiguous in that the schedule referred to by Mr White related only to "fit-out works" which were not in focus for the purposes of the assessment. She says that the landscaping that was required has been completed. As to the comments about the roof, there is ample evidence before me that substantial works have been done to the roof and that overall Mr White's assessmentis at least benign insofar as concerns Hum. There is no suggestion in the report that the works are substandard and there are references to the fact that a substantial amount of restoration work has been undertaken.Assessment[25] Mr White's report has been only of limited assistance to me. My overallimpression is, however, that the repair and painting has largely been undertaken to a workmanlike standard. I am unable to reach any final view in relation to the roof, save to observe that Mr White's examination did not reveal any substantive defectsor inadequacy (though I accept that his opinion was based on a cursory examination only). As to landscaping, the type of landscaping works required by the lease is linked to the consented works envisaged by the lease. I accept Hum's position thatthe ability to undertake the consented works is in turn inextricably linked to an issue with the re-piling. To the extent that the landscaping of the property does not meet the requirements of the schedule, there is, therefore, a reasonable explanation for it. I should be clear that I am not expressing a final view on where the proper balance lies in terms of the requirement to achieve landscaping in accordance with the consent. But for the purposes of exercising my discretion to grant relief, I conclude that the assessment is overall favourable to Hum.[26] Given the foregoing, I have come to the view that in light of Mr White'sreport and the evidence as a whole, substantial works have been undertaken by Hum with key aspects of it undertaken to a good workmanlike standard. Any residual relevant breach of cl 48.5 appears to be minor. I therefore conclude that it is appropriate that my temporary order be made final insofar as concerns the complaint made by Stylo in relation to non-compliance with cl 48 of the lease.Non-payment of rent and relief from cancellation[27] I have set out the relevant principles in my judgment in the third cancellation decision.5 In short, the Court has a broad discretion to provide relief from cancellation. A history of non payment of rent does not necessarily disqualify a tenant from relief.6 However, it would be inequitable to place a landlord in the5 Third cancellation decision, above n 1 at [24] and [25] referring to Studio X v Mobil Oil New Zealand Ltd [1996] 2 NZLR 697 (HC), Mulholland v Waimarie Industries ltd (2009) 10 NZCPR 590 (HC)6 Gill v Lewis [1956] 1 All ER 844 at 852; Re Brompton Securities Ltd (No 2) [1988] 3 All ER 677 at 681.position where immediate defaults would follow the granting of relief.7 Evidence of incapacity to pay rent is therefore a relevant factor. 8[28] As the January rent was not paid Stylo is prima facie entitled to cancellation.9There are numerous factors for and against relief from cancellation including:(a) This is the second occasion of actionable default on payment of rent;10(b) The delay in all of the circumstances seems small but not de minimis;(c) Hum has undertaken substantial improvements to the property over a lengthy period involving significant financial and personal cost to the proprietors of Hum;(d) At the date of hearing this matter, there was no actionable default under the Property Law Act (but I accept that the rental for the lease for the month up to April 2015 remains unpaid and owing together with other outgoings).(e) A further rental payment was due as at 1 May 2015.(f) Based on Ms Armitage's evidence (who was untroubled by cross examination) Hum has now some regular income in the form of rental at about $1,500 per week, together with average earnings from the kiosk of about $300 per week. Other earnings from donations are estimated at $300 per week. The leasehold rental is $8337 per month. The net monthly position is therefore breakeven, although this does not take into account the incidental lease expenses and running and7 QT Hospitality Ltd v Oxford Holdings Ltd HC Invercargill CIV 2007-425-178 11 May 2007, at [16].8 Inner City Businessmen's Club v James Kirkpatrick [1975] 2 NZLR 636 (SC) at 644 – 645;Harlow Finance and Leasing Ltd v Sterling Nominees Ltd HC Auckland 1262/00, 17 August2000 at [8]; although see in contrast Tipping J's comment that it was not the Court's role toprotect the landlord against ordinary commercial risks including the tenant's insolvency:Guardsman Restaurant (Christchurch) Ltd v Victoria Square Estates Ltd (1987) 13 NZCPR 668 at 688.9 Property Law Act 2007, s 245.10 I do not include the one day failure to comply with my order in the third cancellation proceedings.maintenance costs. Ms Armitage also noted, however, that she may be able to get up to $800 a week from the kiosk and other donations.(g) There are other sources of income, but that these are variable.(h) It appears that Hum has substantial debts, but the majority of those debts do not appear to have a fixed term, at least from the evidence before me.(i) Ms Armitage gave evidence that Hum should be in a position to regularise the payments of rent by the end of June, but this will depend on the input of a benefactor.[29] Taking all of those factors into account, I am satisfied that the balance overall favours of the grant of relief for the following reasons:(a) Hum has made substantial improvements to the property so that it is now habitable. The significance of this is highlighted by reference to the terms of the lease and in particular emphasis on the dilapidated state of the property at the commencement of the lease;(b) The amount owing at any given time (after the compliance with the first order of the Court) is small relative to the contribution made by Hum to the property;(c) Ms Armitage's indication that Hum will be able to regularise the rental payments from end of June onwards is optimistic but not without foundation based on her evidence of income deriving from the property.(d) This lease was premised on understanding that in exchange for the property being restored to a habitable state, Hum would be able to enjoy the leasehold over a very long term. The current insistence by Stylo on its strict legal rights is in my view discordant with this underlying premise. While Stylo is fully entitled to insist on its legalrights, further relief from cancellation is warranted in these circumstances.[30] I am not however sanguine about Stylo's vulnerability to Hum's financialposition. We have reached the stage where Hum must pay its outstanding rental payments and regularise its payment of rental in accordance with the lease. Stylo should not have to be confronted with ongoing non compliance with rental payments. I propose therefore to give Hum one final opportunity to regularise matters and put its rental payments to Stylo on a proper footing. Accordingly, a condition of my relief against forfeiture is that Hum must pay all outstanding rental owing as at by 31 June 2015. If it does not do so, Stylo will have leave to seek cancellation from me without the need to file a further application. Hum can expect that I will then cancel the lease if the all relevant payments have not been made. Furthermore, Hum cannot expect further indulgence in relation to the non payment of rent on time. I record my expectation, having now presided over several cancellation applications that any further non payment of rent on time will result in cancellation.The stay application and costs[31] Given the position I have got to I do not propose to dwell on the stay application. I simply note that while Stylo is plainly intolerant to any further non compliance with the lease terms, it has not abused the PLA notice regime thus far. I am concerned however that there is a risk that the use of the regime could unfairly burden Hum with costs liability. I note in this regard that the Stylo notices are effectively pro forma documents that require little by way of expert attention. It seems to me therefore that if Stylo wishes to continue with its litigious approach to the rental payments, closer scrutiny will need to be given to the appropriateness of costs on the applications, particularly where any default has been very short.[32] In relation to the present applications, I promised I would afford the parties an opportunity to submit on costs. If necessary they shall have 10 working days to file submissions.Outcome[33] I resolve the following:(a) Relief from forfeiture in respect of the second cancellation application is granted.(b) The stay application is dismissed.(c) Relief from forfeiture in respect of the second rental (the fourth cancellation application) is granted, but subject to the condition that leave is reserved to Stylo to seek cancellation in the event that any outstanding rental payments due and owing as at 30 June 2015 are not made in accordance with the lease terms by that date.(d) The parties have 10 working days to file memoranda as to costs.