TU v ZHANG and WU [2022] NZHC 1106

TU v ZHANG and WU [2022] NZHC 1106 [19 May 2022]IN THE HIGH COURT OF NEW ZEALANDINVERCARGILL REGISTRYI TE KŌTI MATUA O AOTEAROAWAIHŌPAI ROHECIV-2021-425-99[2022] NZHC 1106UNDER the Property Law Act 2007IN THE MATTER of an application under section 261 for reliefagainst refusal to renew a lease and relatedclaimsBETWEEN WANLIN TUApplicantAND SONGWEN ZHANG and XIYUAN WURespondentsHearing: (Determined on the papers)Counsel: C M Ruane for ApplicantJudgment: 19 May 2022JUDGMENT OF OSBORNE J(by way of formal proof)This judgment was delivered by me on 19 May 2022 at 2.30 pm pursuant to Rule 11.5of the High Court RulesRegistrar/Deputy RegistrarDate:An application for relief in relation to a lease[1] This proceeding concerns Wanlin Tu's lease of an Invercargill property ownedby the respondents, Songwen Zhang and Xiyuan Wu (the purchasers), from whichMr Tu operated his business from 2017.An application for relief in relation to a lease[2] Mr Tu applies on notice for relief under s 261 Property Law Act 2007 (the Act).He was granted interim relief in November 2021.[3] He now seeks a final order that the respondents renew his lease upon the termsset out in the deed of lease dated 15 March 1994 (the deed of lease), as varied by adeed of assignment of lease dated 11 July 2017 (the deed of assignment).[4] The deed of lease adopted the ADLS/REINZ (third edition) standard form. Thedeed of lease provided for three, five year terms of renewal. The deed of assignmentprovides the lessee with four rights of renewal for five years each. While the term ofthe lease current at the time of the assignment expired on 13 March 2019, the potentialterm of the lease (with renewals) is to 13 March 2039.[5] The background is set out in the earlier judgment of Nation J granting Mr Tuinterim relief:1[2] (a) The applicant has been running the subject business sincepurchasing it in 2017 for $405,000.(b) The applicant had the benefit of a lease which was for fiveyears beginning 15 March 1994, with three rights of renewalof five years each. Through a deed of assignment of leasedated 11 July 2017, the applicant and respondent agreed therewere four rights of renewal of five years each, with the finalexpiry for the lease of 13 March 2039 and an annual rent of$17,114.96 plus GST. The deed of assignment of lease isconsistent with it having been due for renewal on13 March 2019.1 Tu v Zhang [2021] NZHC 3053 at [2].(c) The applicant says he was not aware he needed to give formalnotice to renew the lease on or before 13 March 2019 andpresumed it would run through to 13 March 2039 by default.(d) On 14 March 2019, the respondent sent a written noticeinforming the applicant the rent would be increased to$1,689.39 per month inclusive of GST. The respondent saidnothing about needing to renew the lease at that time. Theapplicant has paid rent accordingly.(e) On 4 September 2021, the respondent advised the applicantthat there was no lease because it had not been renewed in2019. The respondent gave the applicant three choices:i. to sign a new deed of lease with the rent increased to$52,000 inclusive of GST per annum, $4,333.33 permonth inclusive of GST;ii. to terminate the lease as from 1 December 2021; oriii. to purchase the business premises at the price of$600,000.(f) The applicant has obtained a valuation showing a fair currentmarket rental to be $23,850 per annum and the market valueof the premises to be $350,000. The applicant is not preparedto accept any of the options put to him by the respondent.[6] His Honour found Mr Tu had a seriously arguable case that he was entitled tosuch relief.The evidence[7] The history summarised in the judgment of Nation J at [5] above reflects theunchallenged evidence of Mr Tu. I respectfully adopt the summary. Mostsignificantly, the respondents advised Mr Tu via a WeChat message on 14 March 2019(the day after the previous term of the lease expired) that the new rental starting fromthat month was $1,689.39. They asked Mr Tu to adjust the amount for bank transfer.Mr Tu confirmed by message two hours later that he would charge the automatictransfer limit. He did so. From 14 March 2019 (as before) Mr Tu met all rent paymentsat the agreed increased rate. The rate of $1,689.39 per month equates to $20,272.68per annum.[8] Self-evidently the rate subsequently demanded by the respondents inSeptember 2021 ($52,000 per annum) exceeds the rate offered and accepted in March2019 by over 150 per cent.[9] The valuation report produced by Mr Tu is that of a registered valuer (ReganJohns of Telfer Young) as at 5 October 2021. His market rental assessment of thepremises at that date was $23,850.00.[10] Mr Tu, in addition to meeting his lease obligations (including the increasedrental), has himself attended to many maintenance requirements, including somewhich may strictly have been lessor responsibilities.[11] Mr Tu's business is that of a discount store conducted from the premises. Hepurchased the business run from the premises in 2017 for $405,000 and fears he wouldlose the value of the business if the premises are sold to another operator (as the lessorcould do upon cancellation of the lease).[12] Interim relief was granted on a without notice basis because of the risk therespondents would seek to evict Mr Tu from the premises or try to sell the premiseson the basis they are not subject to a lease. Nation J concluded that:2[5] With the respondent having advised what a new rental would be on14 March 2019, the applicant having paid rent at that rate since then,and the respondent having accepted that rent, the applicant has aseriously arguable case that the respondent accepted in March 2019that the rent lease was being renewed for a further five years and isnow estopped from contending that the lease was brought to an endthrough the applicant not giving formal notice that he was renewingthe lease in 2019. The applicant is also able to make an applicationfor relief against forfeiture of the lease under the PropertyLaw Act 2007. The relief regime[13] Section 261 of the Act provides:261 Relief against lessor's refusal to enter into renewal or sellreversion to lessee2 Tu v Zhang, above 1.(1) This section applies to a lease if—(a) the lessor has covenanted in writing with the lessee that,—(i) on the expiry of the term of the lease, the lessor willextend the term of the lease, renew the lease, or enterinto a new lease of all or part of the premises to thelessee; or(ii) on the expiry of the term of the lease, or at someearlier time, the lessor will transfer or assign to thelessee all or part of the reversion expectant on thelease; and(b) the obligation of the lessor referred to in paragraph (a) isconditional on—(i) the fulfilment of any condition or the performance ofany covenant or agreement of the lessee; or(ii) the lessee giving notice, within a specified time or ina specified manner, of the intention to exercise theright to require an extension or a renewal of the leaseor the entering into of a new lease or the transfer orassignment of the reversion; and(c) the lessee is in breach of the condition, covenant, oragreement, or has failed to give the notice within the specifiedtime or in the specified manner; and(d) the lessor has refused to extend or renew the lease, or enterinto a new lease, or transfer or assign the reversion, as the casemay be.(2) If this section applies to a lease, any of the following persons mayapply to a court in accordance with section 262 for relief undersection 264:(a) the lessee:(b) a mortgagee of the leasehold estate or interest:(c) a receiver appointed in respect of the leasehold estate orinterest:(d) if 2 or more persons are entitled to the leasehold estate orinterest as joint tenants, 1 or more of those persons on behalfof the other joint tenants.(3) If an application made in accordance with subsection (2)(d) is notmade by all of the joint tenants, the application must be served onevery joint tenant who is not already a party, unless the court ordersotherwise.[14] An application for relief under s 261 of the Act may be made after the leasehas expired.3 Mr Tu made his application within three months of the respondents'indicating a refusal to treat the lease as renewed.4[15] The Court has a broad discretion whether to grant relief under s 264 of the Act.It requires the Court to balance the interests of the lessor and lessee.5 Such wasidentified by McCarthy J in Vince Bevan Ltd v Findgard Nominees Ltd, when notingthat the Court:6 should not view these sections narrowly, neither in the jurisdictionconferred nor in the relief to be granted. The obvious final intention of theLegislature was to place the Court in a position to do what it thinks fit inaccordance with the justice of the particular application.[16] Seven factors are considered by the Court as part of this balancing exercise.They are not exhaustive. The factors are:7(a) the reason for failure to give notice, for example, whether it wasinadvertent;(b) whether the cause of the default was due to any action of the lessor;(c) the lessee's conduct, in particular, whether they have complied with allconditions and covenants and have been a good tenant;(d) the prejudice to the lessee if the relief is not granted;(e) the prejudice to the lessor if relief is granted;(f) the lessor's motivation for the refusal to renew and understanding ofthe lessee's intentions; and3 Twin Peaks Coffee Co Ltd v Broadway Developments 1986 Ltd (2010) 12 NZCPR 49 (HC) at [49].4 Pursuant to ss 262(b) and 263(a) Property Law Act 2007.5 Kuoch v Ganda [2022] ZHC 452 at [25]–[26]; and Wendco (NZ) Ltd v LJCTB Trustees Ltd [2017]NZHC 2668 at [17].6 Vince Bevan Ltd v Findgard Nominees Ltd [1973] 2 NZLR 290 (CA) at 299 referring to thepredecessor to s 261 of the Property Law Act, being s 120 of the Property Law Act 1952.7 Ponsonby Mall Trust Ltd v New Zealand Food Industries Ltd (2005) 7 NZCPR 48 (HC) at [29]cited in Twin Peaks Coffee Ltd v Broadway Developments 1986 Ltd, above n 3 at [65]–[66].(g) whether the interests of third parties are affected.Formal proof hearing[17] The respondents have been served with the application but have taken no steps.Mr Tu seeks final orders by way of formal proof.Discussion[18] The benefit of the lease of the premises was assigned to Mr Tu by the deed ofassignment.[19] I am satisfied the present situation falls within the scope of s 261 of the Act.The lessors covenanted that, on the expiry of the lease, they would grant a renewal.The rights of Mr Tu as lessee were conditional upon his meeting his obligations underthe lease. The evidence is that he has done so. What he failed to do was to give aformal notice of his intention to renew. The respondents' reaction may be viewed intwo ways — either they have refused to grant Mr Tu an extension or they have madedemands of him that are inconsistent with an implicit agreement to grant an extension.[20] My findings in relation to the factors that call for consideration (as set out at[16] above) are:(a) Reason for failure to give noticeThe failure was due to Mr Tu's inadvertence, he not appreciating theneed for written notice.(b) Lessors' contribution to default?This factor is neutral — Mr Tu does not attribute his misunderstandingto anything done by the respondents.(c) Lessee's conductMr Tu has complied with all his lease obligations.(d) Prejudice to lessee if relief refusedMr Tu would be seriously prejudiced if relief were not granted, giventhe likely loss of the entire value of his business.(e) Prejudice to lessors if relief grantedOn the evidence there is no apparent prejudice to the lessors if relief isgranted. It may be inferred that the lessors' stipulated (and accepted)rental increase in March 2019 (18 per cent) was based on someinformation the respondents had obtained as to valuation. The sumsubsequently demanded in September 2021 bears no relationship to theTelfer Young valuation, that valuation being much closer to what theparties had moved forwards with from 14 March 2019. Therespondents have received that increased rent ever since.(f) Lessors' motivation for refusalThe irresistible inference from the evidence is that the respondents havesought to take commercial advantage of Mr Tu's overlooking of therequirement for notice, while having for the time being accepted MrTu's continuing occupation on the basis he was paying the increasedrent at the level stipulated by the respondents. This factor stronglyfavours relief.(g) Third party interestsNo considerations arise in relation to other parties.[21] The balancing of these factors clearly favours Mr Tu.[22] I then stand back and assess the overall justice of the application. It isoverwhelmingly in favour of relief. While the respondents' failure to oppose theapplication (or otherwise appear) is not determinative in any evidential sense, itsupports the weight that can be applied to Mr Tu's evidence and the conclusion thatthe just outcome is in favour of relief.Conclusion[23] It is appropriate there be an order as sought that the respondents, as lessor,renew the lease dated 15 March 1994, as varied by the deed of assignment of leasedated 11 July 2017, for a five year term from 14 March 2019.[24] Leave will be reserved to the applicant to seek a further order authorising theRegistrar of the Court to execute, on behalf of the respondents, any documentsnecessary to give effect to the order of renewal, in the event the respondents fail toexecute a renewal in accordance with this judgment.[25] Mr Tu is entitled to an order for the costs and disbursements of the proceeding.I will fix costs on a 2B basis, together with disbursements.Further orders sought by Mr Tu[26] Mr Tu, by counsel's memorandum, sought further orders out of an abundanceof caution:(a) restraining the respondents from selling Mr Tu's business; and(b) restraining the respondents from evicting Mr Tu or re-entering or takingpossession of the premises.[27] I do not consider the making of such orders is appropriate for three reasons:(a) The interim orders were sought and made to preserve Mr Tu's positionpending consideration of his application for relief under the Act. Nowthat final relief is being granted, Mr Tu's occupation of the premiseswill remain his right pursuant to the renewed lease.(b) There is no application for the additional relief suggested before theCourt — the respondents therefore have no notice of the additionalapplication.(c) Mr Tu's continued occupation of the premises, and the lessors' rights,are subject to the terms of the lease. The further orders in the termssuggested by counsel would have the potential effect of curtailing rightsthe respondents have under the lease.Order[28] I order:(a) The respondents shall (by document executed and provided to theapplicant's solicitor no later than 10 working days after service on theseorders upon them) renew to 13 March 2024 the lease with theapplication upon the terms set out in the deed of lease dated 15 March1994 as varied by the deed of assignment dated 11 July 2017, with arental of $1,689.39 per month (inclusive of GST) for the term expiringon 13 March 2024.(b) The applicant has leave to seek (by counsel's memorandum supportedby affidavit evidence) a further order authorising the Registrar, onbehalf of the respondents, to execute such renewal document in theevent the respondents themselves do not execute such documentswithin the said 10 working days.(c) Service of these orders upon the respondents may be effected upon thesame terms as the directions for service made on 29 November 2021utilising the email address [REDACTED].(d) The respondents are to pay to the applicant the costs of the proceedingfixed on a 2B basis together with disbursements to be fixed by theRegistrar.Osborne JSolicitors:Leslie Hills Law, Christchurch (for Applicant)Copy to counsel:C M Ruane, Barrister, Christchurch (for Applicant)