THE WALLACE & YORK PARTNERSHIP v RSG CONSULTANTS LIMITED [2021] NZHC 3115 [18 November 2021]

THE WALLACE & YORK PARTNERSHIP v RSG CONSULTANTS LIMITED [2021] NZHC 3115 [18 November 2021]IN THE HIGH COURT OF NEW ZEALANDWELLINGTON REGISTRYI TE KŌTI MATUA O AOTEAROATE WHANGANUI-A-TARA ROHECIV-2021-485-42[2021] NZHC 3115UNDER the District Court Act 2016IN THE MATTER OF a breach of guaranteeBETWEEN THE WALLACE & YORK PARTNERSHIPAppellantAND RSG CONSULTANTS LIMITEDRespondentHearing: On the PapersCounsel: T D Gee for the Appellant F B Q Collins for the RespondentJudgment: 18 November 2021JUDGMENT No 2 OF PALMER J(Costs)Solicitors:McBride Davenport James, WellingtonGibson Sheat, Lower HuttWhat happened?[1] On 28 September 2021, I issued the judgment in these proceedings. 1 In summary, I said:[1] In 2013, the Wallace and York Partnership (the Partnership) purchased Level 7 of the Willeston Centre in Wellington from what is now RSG Consultants Ltd (RSG). In the sale and purchase agreement, and a deed of guarantee, RSG guaranteed minimum rental payments to the Partnership for the full term of the lease. The Guarantee was subject to a requirement, in cl 23.2, that the Partnership: will not unreasonably withhold consent to a replacement tenant or the terms and conditions provided that [the Partnership] continues to receive a minimum of $11,[3]33.33 plus GST per month and is agreeable if necessary to extending the lease term [2] In February 2017, when the guarantee had been activated, RSG proposed to the Partnership that it should enter into a new six-month tenancy of Level 7. The Partnership objected it could not do so but would be available to discuss it later. RSG repudiated the guarantee and stopped payments. Judge C N Tuohy, in the Wellington District Court held the Partnership withheld consent unreasonably and that RSG was entitled to the guaranteed sum for six months. The Partnership appeals.[3] The plain meaning of cl 23.2 is to place two obligations on the Partnership, as Purchaser, if RSG is obliged to underwrite the rent. First, the clause requires that the Partnership's consent to a replacement tenant or terms and conditions of a replacement tenancy will not be unreasonably withheld. The second obligation is the requirement that the Partnership "is agreeable if necessary" to a lease extension. It is an additional obligation, not an aspect of the obligation not to unreasonably withhold consent. The Partnership was not presented with a lease between the correct parties, with terms and conditions of such a lease, or with a clear indication of what the Partnership would receive by way of rental. Accordingly, there was not a sufficient proposal to which the Partnership could consent or withhold consent. Furthermore, the Partnership explicitly left open the prospect of further discussions. In any case, withholding consent in those circumstances was reasonable. I uphold the appeal.[2] I upheld the appeal, quashed the District Court's decision and ordered that RSG is liable to the Partnership.2 In relation to interest and costs I said:[44] If the parties cannot agree on interest and costs, I give the Partnership leave to file brief submissions of up to 10 pages within 10 working days of this judgment. RSG may file submissions in response of the same length within 10 working days of that. The Partnership may file submissions of up to five pages within five working days of that.1 The Wallace & York Partnership v RSG Consultants Ltd [2021] NZHC 2548 (footnotes omitted).2 At [43].[3] The parties have been unable to agree on aspects of interest and costs and have filed submissions accordingly.Is RSG liable for contractual interest?Submissions[4] The Partnership claims contractual interest for late payment under cl 5.1 of the second schedule of the deed of lease and cl 13 of the first schedule. Mr Gee, for the Partnership, submits that, on exercise of the break clause, all lease obligations were assumed by the guarantor RSG under cls 1 and 23 of the deed of guarantee. Contractual interest is therefore payable at 12 per cent per annum.[5] Mr Collins, for RSG, submits the Partnership is not entitled to interest under the terms of the deed of guarantee because the purpose of the deed of guarantee was to guarantee the monthly rent only, as indicated by the wording of cl 23.1. He submits interest should be awarded under s 10 of the Interest on Money Claims Act 2016.Interest[6] Clause 23.1 of the deed of guarantee is not as limited as Mr Collins submits. It states (with emphasis added):23.1 The Vendor undertakes from the date of settlement to guarantee the monthly lease rental payments of [SSL] during the term of its initial lease up until the 31st March 2019 and in the event of [SSL] invoking its break clauseon the 31 st March 2016 and vacating the premises the Vendor will take over the lease obligations as stated in the Deed of Lease dated 18 June 2013 and pay the monthly rent of $11,[3]33.33 plus GST until the lease expiry of 31stMarch 2019.[7] SSL did invoke its break clause. Accordingly, RSG took over the lease obligations as stated in the deed of lease. Clause 5.1 of the second schedule and cl 13 of the first schedule of the deed of lease states:5.1 If the Tenant defaults in payment of the rent of other moneys payable under this lease for 10 working days then the Tenant shall pay on demand interest at the default interest rate on the moneys unpaid from the due date for payment to the date of payment.13. DEFAULT INTEREST RATE: 12% per annum (subclause 5.1)[8] As I found in the substantive judgment, RSG did default on the payment of rent. Accordingly, RSG is liable for interest at the specified rate of 12 per cent per annum for the rental payments it had guaranteed.Is RSG liable for contractual costs?Submissions[9] Mr Gee, for the Partnership, submits costs should be paid on a solicitor-client basis under the contractual arrangements. He submits the court's role in this regard does not involve the exercise of discretion.[10] Mr Collins submits the Partnership is not entitled to solicitor-client costs under the deed of guarantee because cl 2 can only be operative if there is a failure by the tenant to pay rent under the deed of lease, which requires there to have been a breach of the deed of lease by the tenant. However, the tenant exercised its contractual right under the break clause; it did not breach the lease. The tenant's liability was not rendered void or unenforceable. He submits costs should be awarded on a 2B basis in the District Court and High Court.Contractual costs[11] Clause 1 of the deed of guarantee provides:The Guarantor hereby unconditionally and irrevocably guarantees to the Landlord the due, proper and punctual observance and performance by the Tenant of the obligations contained within the Lease and the due, proper and punctual payment to the Landlord by the Tenant of all sums which are now owing or may from time to time become owing to the Landlord ("the moneys hereby secured") in the manner and at the time set out in the terms of the Lease in accordance with clause 23.0 of the Agreement.[12] Clause 6.1 of the second schedule of the deed of lease requires the tenant to pay the Partnership's "legal costs (as between lawyer and client) of and incidental to the enforcement of the Landlord's rights remedies and powers under the lease".[13] Under cl 2 of the deed of guarantee, RSG agreed to pay all costs incurred by the Partnership "as a result of any failure by the Tenant to make due, proper andpunctual payment of all or any of the moneys hereby secured whether or not the liability of the Tenant is or has become void or unenforceable for any reason".[14] The costs claimed are incidental to the enforcement of the Partnership's rights. On the basis of the reasoning regarding interest above, on exercise of the break clause, RSG as guarantor took over the tenant's obligation to pay them. They were not paid by the tenant for obvious reasons. The unenforceability of that liability against the tenant is explicitly excluded as being a reason for RSG not to pay them. The point of the guarantee was to ensure RSG, rather than the Partnership, bore these sorts of costs. I conclude RSG is liable for solicitor-client costs under the contractual arrangements.Should indemnity or increased costs be awarded under the Rules[15] Alternatively to its submission on contractual interest, the Partnership claims indemnity or increased costs under r 14.6 of the High Court Rules 2016 (the Rules). Mr Gee submits:(a) RSG's conduct in relation to the facts giving rise to the dispute was unreasonable;(b) RSG acted unreasonably in defending the proceeding, in particular by unnecessarily expanding the scope of the issues between the parties, alleging bad faith and claiming equitable remedies, resulting in significantly increased costs for the Partnership; and/or(c) RSG failed to accept reasonable offers of settlement includingCalderbank offers.[16] In response, Mr Collins submits:(a) The conduct referred to was more than a year before proceedings were filed so is irrelevant to the determination of costs. And RSG's conduct was not unreasonable in the circumstances.(b) It was not unreasonable for RSG to reject the Partnership's offers at the time they were made. Both parties ran the risk of an adverse result, as the District Court judgment established. There is nothing here that meets the threshold for indemnity costs.(c) RSG's allegations relating to equitable principles did not result in unnecessary time or expense and had merit. There is no basis for awarding increased costs.[17] If RSG were not liable for solicitor-client costs under the contract, I do not consider increased or indemnity costs should have been awarded on the basis of its conduct. RSG's conduct in defending the proceedings was not unreasonable. It simply made legal arguments that failed in the High Court, though some of them succeeded in the District Court.[18] The Partnership made Calderbank offers to RSG on 17 July and 13 August 2018. It offered to forgo contractual interest and costs (then amounting to some $22,000) if the rental guarantee were honoured. But that offer assumed the Partnership was entitled to contractual interest and costs. It would not assist if that assumption was incorrect. Although I have found the Partnership is entitled to contractual interest and costs, RSG was not required to accept that assumption when the Partnership made their Calderbank offers. I do not consider this would make a difference to the award of scale costs, if they were awarded.Quantum[19] There was initially disagreement on whether GST is recoverable on legal fees and expenses. However, on the basis of New Zealand Venue and Event Management Ltd v Worldwide NZ LLC, the Partnership agrees it is not. 3 The sums claimed are GST exclusive.[20] The only outstanding issue in relation to the quantum of solicitor-client costs is their reasonableness:3 New Zealand Venue and Event Management Ltd v Worldwide NZ LLC [2016] NZCA 282 at [13]– [16].(a) Mr Collins submits the Partnership's actual costs, of $69,050 (GST excl) were not objectively reasonable. The amount claimed is three times scale costs for a proceeding determined following a one-day trial determining discrete issues based on very limited documents.(b) Mr Gee submits the point of contractual provision for solicitor-client costs is that the parties have agreed one party should not be out of pocket if the other party fails to comply with the contract. He submits the costs are reasonable.[21] Because I have concluded that RSG is liable for solicitor-client costs under the contract, the actual costs are payable. If I had not concluded that, I would have held that the actual costs were reasonable, given the legal arguments the Partnership was required to meet.Palmer J