STYLO MEDICAL SERVICES LTD v HUM HOSPITALITY LTD [2020] NZHC 499

STYLO MEDICAL SERVICES LTD v HUM HOSPITALITY LTD [2020] NZHC 499 [12 March 2020]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV-2019-404-365[2020] NZHC 499UNDER section 244 of the Property Law Act 2007IN THE MATTER of an application for cancellation of Dead ofLease dated 22 January 2011 and possessionBETWEEN STYLO MEDICAL SERVICES LTDApplicantAND HUM HOSPITALITY LTDRespondentHearing: 4 October 2019 and 12 December 2019Counsel: R O Parmenter for ApplicantR J Sussock for RespondentJudgment: 12 March 2020JUDGMENT OF BREWER JThis judgment was delivered by me on 12 March 2020 at 4:00 pmpursuant to Rule 11.5 High Court Rules.Registrar/Deputy RegistrarSolicitors:Winston Wang & Associates (Auckland) for ApplicantLowndes Jordan (Auckland) for RespondentIntroduction[1] The applicant ("Stylo") seeks an order cancelling its lease of premises to therespondent ("Hum"). Stylo also seeks orders for possession of the premises, thepayment of arrears of rental (if any) and for ancillary relief.[2] This, by my count, is the sixth occasion Stylo has brought legal proceedingsseeking to evict Hum from the premises. The last occasion was resolved in Hum'sfavour by Katz J in her judgment of 11 April 2018.1 In that case the precipitating eventwas Hum's inadvertent failure to give a renewal notice of the lease within the requiredtimeframe. Justice Katz ordered Stylo to enter into a new lease with Hum for a furtherterm of eight years from 1 February 2017 (plus one further right of renewal for eightyears) and otherwise upon, and subject to, the covenants and agreements in the originallease (dated 22 January 2011).[3] The apparent casus belli2 for this attempt to evict Hum is non-payment of rent.Stylo contends that from 1 December 2016 the annual rent, payable monthly, is$120,000 plus GST.[4] Hum's notice of opposition raises issues of substance which I divide into twocategories:(a) Interpretation of the lease. Hum contends that the rental is no longer$120,000 plus GST but a much lesser sum which it has been paying. Itclaims there was a rent review as at 1 February 2017 which reduced therent and that Stylo owes Hum $137,624 in overpaid rent.(b) Dispute going to the formation of the lease. The leased premises is asubstantial two-storey heritage villa in central Auckland. Hum operatesas the business arm of a charitable trust and the idea was to renovatethe premises to support the work of the trust. The lease was structuredaccordingly. Hum, in 2016, sued Stylo and others, alleging againstStylo that it was induced by Stylo's misrepresentation to enter into the1 Stylo Medical Services Ltd v Hum Hospitality Ltd [2018] NZHC 642.2 An occurrence giving rise to war.lease and that Stylo has breached the covenant conferring on Hum theright to quiet enjoyment of the premises.3 The case ("Hum'sproceeding") is due to be heard in this Court commencing 1 August2020.[5] In its notice of opposition, Hum claims to have carried out substantialimprovements and restoration work to the property valued at over $650,000. It refersto Hum's proceeding and submits:i. It would be unjust in circumstances where the respondent iscontinuing to pay market rent to cancel the lease until thoseproceedings have been determined.Procedural history[6] Stylo's application was called before me on 4 October 2019. I took it from thesubmissions of the parties that the issue of the quantum of rent would likely beresolved by the applicability of the rent review clauses in the lease which provide thaton review the annual rent cannot be reduced ("ratchet clauses").[7] At the outset of the hearing I advised counsel that I saw three main issues:(a) Is there an operative ratchet clause?(b) If there is, can Hum pay the amount of the proven default?(c) How does the existence of [Hum's proceeding] affect the Court'sdiscretion to grant or withhold relief?[8] Mr Parmenter, for Stylo, was content to proceed on that basis.[9] Ms Sussock, for Hum, at once referred to the arbitration clause in the lease andsubmitted that any question of the applicability of a ratchet clause would have to bedetermined by arbitration.3 Hum Hospitality Ltd v Stylo Medical Services Ltd HC Auckland CIV-2016-404-636.[10] I directed counsel to file submissions on the point and adjourned the hearing.[11] The hearing resumed on 12 December 2019.[12] The jurisdictional issue on the claimed right to arbitrate rather died away. First,Mr Parmenter pointed out the probable applicability of Article 8(1) of Schedule 1 tothe Arbitration Act 1996 ("Article 8"). Essentially, this requires a Court to stayproceedings "brought in a matter which is the subject of an arbitration agreement" ifa party requests that "not later than when submitting that party's first statement on thesubstance of the dispute".4 Hum made no such request.[13] Second, Ms Sussock submitted that Hum's main defence to the claim forunpaid rent is already part of Hum's proceeding. Hum's argument is that theapplicable ratchet clause does not apply to entrench rent at $120,000 per annumbecause there was a rent review agreed on the February 2017 renewal which reducedthe rent. It would be different if the rent review had taken place during the course ofa term of the lease (there are different formulations of the ratchet in the applicableclauses). Therefore, with a factual issue as to what was agreed in this case which isalso an issue in Hum's proceeding, Ms Sussock submitted a consolidation ofproceedings is appropriate.[14] Ms Sussock did not abandon her submission that arbitration is the correctjurisdiction for the "matter" she submits is in issue. Her submission is this is not the"matter" Stylo wishes to progress – whether the lease should be cancelled.Issue[15] This judgment decides the issue of jurisdiction, namely whether Stylo's claimmust be decided by arbitration.4 Zurich Australian Insurance Ltd v Cognition Education Ltd [2014] NZSC 188, [2015] 1 NZLR383.Discussion[16] Stylo has applied by way of originating application to cancel the lease, toobtain possession of the premises and to recover arrears of rent (if any). Stylo relieson cl 47.1 of the lease which provides:Despite the provisions in clauses 2.1 to 2.4 the rent will be increased to$100,000.00 plus GST on the 1st December 2015 and to $120,000.00 plus GSTon 1 December 2016. Thereafter the rent will be reviewed every two yearsaccording to the provisions in clauses 2.1 to 2.4.[17] Hum responds that the lease was renewed from 1 February 2017 and the rentwas reviewed as at that date and reduced to the rent it is paying.[18] Hum relies on cl 33.1 of the lease which provides (relevantly):IF the Tenant has given to the Landlord written notice to renew the lease atleast 3 calendar months before the end of the term and is not at the date of thegiving of such notice in breach of this lease (including any maintenanceobligations) then the Landlord will grant a new lease for a further term fromthe renewal date as follows:(a) If the renewal date is a rent review date the annual rent shall be agreedupon or failing agreement shall be determined in accordance withclauses 2.1 and 2.2 but such annual rent shall not be less than the rentpayable as at the commencement date of the immediately precedinglease term;(e) Pending the determination of the rent the Tenant shall pay an interimrent in accordance with clauses 2.3 and 2.4; and(f) Notwithstanding anything contained in clause 33.1(e) the interim rentreferred to in that clause shall not be less than the annual rent payableas at the commencement date of the immediately preceding leaseterm.[19] Hum submits that the words "as at the commencement date of the immediatelypreceding lease term" refer to the commencement date of the lease on 1 February 2011at which time the rental was zero because cl 46.1 provided for a "rent free holiday fora period of 36 Months from the commencement date of this lease".[20] Hum submits that this can be contrasted with the wording in cl 2.1 whichprovides for rent reviews other than on lease renewal. The ratchet clause is:(d) Notwithstanding any other provision of this clause, the annual rentpayable as from the relevant rent review date shall not be less than theannual rent payable as at the commencement date of the then currentlease term.[21] Hum accepts that if this provision applies then the ratchet clause would holdthe rental at $120,000 plus GST. Its argument is that it does not apply.[22] A difficulty for Hum is that the front page of the First Schedule to the lease hasthis entry:RENT REVIEW DATES: (a) Each renewal date;(Delete where appropriate if neither ORoption is deleted, then option (a) (b) (Insert dates): See clause 47.1applies)[23] Ms Sussock submits that the two Agreements to Lease preceding the case didnot have option (a) struck out and that part of Hum's case is that the true agreementbetween the parties preserved option (a).[24] In Ms Sussock's submission, these are matters which must be decided byarbitration. The relevant clauses in the lease are:44.1 UNLESS any dispute or difference is resolved by mediation or otheragreement, the same shall be submitted to the arbitration of onearbitrator who shall conduct the arbitral proceedings in accordancewith the Arbitration Act 1996 and any amendment thereof or any otherstatutory provision then relating to arbitration.44.3 THE procedures prescribed in this clause shall not prevent theLandlord from taking proceedings for the recovery of any rent or othermonies payable hereunder which remain unpaid or from exercisingthe rights and remedies in the event of such default prescribed inclause 28.1 hereof.[25] Ms Sussock submits that cl 44.3 does not permit Stylo to litigate the issues shehas raised in relation to the claimed rent review.[26] I have decided I have jurisdiction to determine Stylo's application. Hum hasnot invoked cl 44.1 of the lease in accordance with Article 8, and the Hum proceedingpleads Hum's position on the rent review in any event:• The parties agreed upon an escalating rental after the three year rent abatementperiod of $87,000 plus GST from 1 February 2014, $100,000 plus GST from1 December 2015 and $120,000 plus GST from 1 December 2016, with therent to be reviewed on renewal and every 2 years thereafter.5• The Deed of Lease contained the following terms:44.4 The annual rent was $87,000.00 plus GST, increasing to $100,000.00plus GST from 1 December 2015 and $120,000.00 plus GST from1 December 2016 with the rent to be reviewed on renewal and everytwo years following according to the provisions of the lease.[27] Therefore, Article 8 applies. Hum has waived any right for the issue of theclaimed rent review to be resolved by arbitration.[28] In any event, I find the issue of whether there has been a rent review is one thatfalls within the ambit of cl 44.3 of the lease.[29] Ms Sussock cited Hi-Tech Investments Ltd v World Aviation Systems(Australia) Pty Ltd.6 That was an application for summary judgment by a landlord forunpaid rent. The tenant filed an appearance under protest to jurisdiction saying therewas a dispute as to whether the sums claimed were payable. The tenant's case wasthat a rental review had taken place in accordance with the lease, that the tenant waspaying rent at the reviewed rate, and that the landlord subsequently and contrary to theconcluded review claimed greater sums.[30] Associate Judge DH Abbott held:[22] Rent can only be payable either as the parties agreed at thecommencement of the lease, or as fixed in accordance with the rent reviewprocedures of the lease. I do not accept that clause 44.3 allows the landlord toclaim a rent which has not been fixed in this way, or to seek a determinationby the Court as to whether or not it has been fixed in this way. The evidenceis clear that the rent review mechanism was initiated. It seems that the revisedrent was accepted by the defendant and under the terms of the rent reviewmechanism it was thereby deemed to be the rent payable. There is now adispute or difference as to whether it has been or can be altered. That seemsto me to call into question whether the rent which the plaintiff now claims ispayable.[23] Counsel for the plaintiff endeavoured to persuade me that any issue asto the rent that was payable was merely an element in proving its claim for a5 Amended statement of claim dated 5 December 2018, cl 39.6 Hi-Tech Investments Ltd v World Aviation Systems (Australia) Pty Ltd HC Auckland CIV-2006-404-3579, 13 October 2006.debt 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.[31] Accordingly, Ms Sussock's submission is that the issue of whether there hasbeen a rent review is one that is not able to be determined under cl 44.3.[32] I disagree. In my view, the division of roles between cl 44.1 and cl 44.3 issummed up by the Court of Appeal in OMV New Zealand Ltd v Precinct PropertiesHoldings Ltd:7[29] In summary, cl 44.3 operates as an exception to cl 44.1 and permitsclaims for unpaid rent to be litigated. To the extent that a tenant believes it hasa defence to such a claim (by which we mean a defence that some or all of therent is not payable, for reasons other than the existence of a cross-claim in thenature of a set-off) that defence can be pleaded and ventilated in the contextof such litigation. But claims for set-off and counter-claims relating to allegedbreaches of the lease or misrepresentations by the landlord would not, in ourview, qualify. Those are properly matters for arbitration under cl 44.1.[33] In this case, Stylo claims for unpaid rent and relies on the rent provisionscontained in the lease. Hum disputes the rent claimed is payable arguing there hasbeen a valid rent review. That is a defence that some of the rent claimed is not payable.It is not a defence which relies on a cross-claim in the nature of a set-off.The next step[34] The Hum proceeding is scheduled to commence on 1 August 2020. The issueof whether the lease provided for the "rent to be reviewed on renewal and every twoyears thereafter" is pleaded for determination. The Court's answer to the issue wouldmost likely determine Stylo's claim in this case for payment of arrears of rent. If thereare arrears of rent, the determination of the other issues in the Hum proceeding wouldbear on the Court's discretion as to cancellation of the lease. The issue now is whether7 OMV New Zealand Ltd v Precinct Properties Holdings Ltd [2018] NZCA 240, (2018) 19 NZCPR899.I should adjourn Stylo's application until after the determination of the Humproceeding, consolidate Stylo's application with the Hum proceeding, or proceed todetermine Stylo's application.[35] I direct submissions from Stylo to be filed and served by 31 March 2020.Submissions from Hum are to be filed and served by 14 April 2020. I will determinethe matter on the papers unless counsel apply for a hearing.________________________________Brewer J