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Court of Appeal of New Zealand |
Last Updated: 24 January 2018
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IN THE COURT OF APPEAL OF NEW
ZEALAND
BETWEEN PATCROFT PROPERTIES LIMITED
Appellant
AND GRAEME JOHN INGRAM AND ELIZABETH KNEE
First Respondents
AND KIP INVESTMENTS LIMITED
Second Respondent
Hearing: 18 May 2010
Court: O'Regan, Priestley and Ronald Young JJ
Counsel: D G Collecutt for Appellant
D W Grove for Respondents
Judgment: 29 June 2010 at 3
pm
|
JUDGMENT OF THE COURT
|
____________________________________________________________________
REASONS
O’Regan and Ronald Young JJ [1]
Priestley J (dissenting)
[68]
Table of Contents
Para No
Introduction [1]
Right to re-enter and determine
lease on 14 June 2005 [8]
Clauses 26 and 27 of the
lease [21]
Was the lease
validly cancelled on 15 June 2005? [37]
Damages claims [58]
Other grounds of appeal [62]
Summary [63]
Costs and interest [66]
Introduction
[1] This appeal concerns the lease of a backpackers hostel and bar in Lorne Street, Auckland. Patcroft Properties Ltd (Patcroft) is the owner of the building. It let the backpackers portion of the property to Mr Ingram and Ms Knee (the first respondents and head tenants) and the basement of the building to KIP Investments Ltd (KIP) (the second respondent and subtenant) who operated it as a bar called the Embargo Bar.
[2] On 14 June 2005 the appellant, Patcroft, through Mr O’Donnell, a director, reentered under the lease alleging both tenants owed rent. It shut both tenants out of the building and distrained for the unpaid rent. The tenants’ businesses then failed.
[3] Mr Ingram, Ms Knee and KIP said the re-entry and distraint was illegal and later issued proceedings for damages said to have arisen as a result of Patcroft’s actions. Patcroft counterclaimed for money it said was owing by both tenants pursuant to the lease.
[4] In his judgment Allan J concluded:[1]
(a) the tenants owed Patcroft unpaid rent and operating expenses for June;
(b) no setoff against the rent owing was available to the tenants;
(c) Patcroft had not waived its right to re-enter;
(d) Patcroft’s purported distraint on 14 June was unlawful;
(e) Patcroft’s re-entry was illegal being one day early;
(f) the re-entry did not become lawful by effluxion of time;
(g) the tenants were not obliged to mitigate their loss by seeking relief against forfeiture;
(h) Patcroft was liable in damages to the tenants for its unlawful re-entry and distraint;
(i) the loss of value of the backpackers business was $100,000 and the loss of value of KIP’s bar was $100,000 plus a liability to New Zealand Breweries of $62,935.04;
(j) the first respondents were due reimbursement by Patcroft for overpayment of lift maintenance over the years of the lease of $36,597.55;
(k) Patcroft was entitled to recover $84,906.53 in damages against both tenants.
[5] On appeal Patcroft says its reentry on 14 June 2005 was lawful but if unlawful then, by the following day (15 June) its occupation became lawful. It denied any wrongful repudiation of the lease. It says in any event the tenants failed to mitigate their loss and at trial failed to prove loss of value of their businesses.
[6] The issues in this appeal are therefore:
(a) Was Patcroft entitled to cancel and/or determine the lease on 14 June 2005?
(b) If Patcroft was not entitled to cancel and/or determine the lease on 14 June 2005 is it deemed to have validly cancelled and/or determined the lease on 15 June 2005?
(c) Did Patcroft cause the tenants’ losses? In particular did the head tenant have no intention of paying the full amount of rental owed (including the April 2005 rent review rental) by 15 June 2005 so that it was inevitable that the lease was going to be forfeited?
(d) Did the tenants fail to mitigate their losses by tendering the rent arrears and applying for relief against forfeiture?
(e) Did the first respondents fail to discharge the burden of proving the value of their business?
(f) What was the true value of the tenants’ businesses?
(g) Has the second respondent double claimed for the value of its business and the amount owed on a brewery loan?
[7] In order to resolve the issue in [6](a) we also need to address whether counsel for Patcroft should be allowed to withdraw a concession made in the High Court.
Right to re-enter and determine lease on 14 June 2005
[8] The lease provided that Patcroft could reenter if the rent was 14 days in arrears (cl 26). Patcroft accepts that with respect to the unpaid June rental (due on 1 June 2005) it was not entitled to re-enter until 15 June 2005. The re-entry on 14 June, based on the June rental arrears, was therefore one day early and not authorised by the lease.
[9] Patcroft says, however, the Judge failed to consider the tenants’ unpaid rental from April which, by 14 June, totalled $2,249.90. These arrears justified the 14 June reentry by Patcroft. These arrears arose as a result of a rent review. Pursuant to the lease a rent review was due with effect from 1 April 2005. The review was undertaken but the tenants refused to pay the increase from 1 April claiming commencement of the increased rental was 1 May. It was not until trial that the tenants acknowledged the obligation to pay the increased rent arose from 1 April. Patcroft says that by 14 June there was unpaid rent of $2,249.90 outstanding since April 2005 well beyond the 14 day period.
[10] The tenants say at trial Patcroft conceded that its right to reenter could not be founded on liability for any sums owing prior to 1 June 2005. They submit Patcroft should not now be allowed to withdraw this concession. Secondly, they submit following the rule in Clayton’s Case,[2] rental payments made by them to Patcroft in early June 2005 should have been credited against the rent due for April. Thus by 14 June the tenants say there was no rent owing for the April period.
[11] We are satisfied that Patcroft did concede at trial that it could not reenter for any rental arrears prior to 1 June 2005. The tenants in their final submissions at trial recorded the concession made by Patcroft. There is nothing to suggest that Patcroft challenged the respondents’ submissions in this regard. In his judgment the trial Judge approached the issue of entitlement to reenter solely on the basis of a default from 1 June.
[12] Patcroft says that it should be allowed by this Court to withdraw its concession that it could only reenter for rental arrears owing from 1 June. Counsel said that in this case it is in the interests of justice that it be allowed to do so.[3]
[13] Counsel for Patcroft advised he had received very late instructions to appear at trial. He said that in an attempt to narrow the issues at trial he had made concessions which on reflection were not appropriate. This occurred given the late instructions and the pressure to narrow the issues for the Court.
[14] We do not consider that Patcroft should be permitted to withdraw its concession in this case. We accept the respondents’ claim that if Patcroft had not made its concession regarding the pre-June rental payments then the tenants would have conducted their case differently. They would have wished to rely upon the rule in Clayton’s Case. This rule creates a presumption that in a running account the oldest debt is paid by the most recent payment unless the parties direct otherwise.
[15] As we have noted there was a rent review in April 2005. The rent was increased from 1 April 2005 although the tenants initially maintained that the rent increase properly commenced from 1 May 2005. In any event the tenants did not pay the increased rental for April 2005 being $2,249 but did so for May.
[16] As at 1 June, therefore, the June rental of $28,593.75 together with the opex (operating expenses) payment of $8,190 was due. The April rent of $2,249 was also owing. On 1 June the tenants paid $10,191 and on 13 June $4,000. If the presumption in Clayton’s Case applied then the payments made on 1 and 13 June would have gone first towards repayment of the April rent of $2,249 being the oldest outstanding debt. In those circumstances as at 1 June there would have been no arrears of rent for April.
[17] The tenants also claimed that if the concession had not been made they would also have relied upon both waiver and setoff. We do not express a view as to the merits of the availability of either defence. However, if we now allowed the concession to be withdrawn the tenants would have to be allowed to raise the rule in Clayton’s Case, waiver and setoff. This would require witnesses to be recalled and perhaps new evidence given.
[18] While we accept that Patcroft’s counsel was under some pressure it is simply neither practical nor in the interests of justice to now send this matter back to the High Court for further evidence on these issues. We are satisfied in the circumstances that Patcroft should not be allowed to withdraw the concession made in the High Court.
[19] Given Patcroft’s concession that its reentry was not based on any arrears prior to 1 June the tenants were not required to establish by evidence called and crossexamination that the rule in Clayton’s Case applied.
[20] Our refusal to allow Patcroft’s concession to be withdrawn means its reentry on 14 June was therefore not authorised by cl 26 of the lease given it occurred after 13 days rather than the 14 days required. We therefore reject this ground of appeal.
Clauses 26 and 27 of the lease
[21] Patcroft submits that cl 27 of the lease entitled it to cancel the lease pursuant to s 7(4) of the Contractual Remedies Act 1979 immediately upon the tenants’ failure to pay the rent. Thus its reentry on 14 June was authorised by the lease and lawful. Although cl 26 entitles cancellation of the lease if the rent is unpaid after 14 days this clause, Patcroft says, is permissive and does not detract from the authority in cl 27 entitling immediate cancellation.
[22] Clause 26 of the lease provides as relevant:
26. RIGHT OF REENTRY
If at any time during the occupation of the premises by the Lessee:
(a) Any rent or other moneys payable by the Lessee are in arrear for the space of fourteen days after the same shall have become due although no formal demand thereof has been made; or
(b) In case of default by the Lessee in respect of any obligation on the part of the Lessee arising out of any covenant condition or agreement of this lease and such default is continued for fourteen days or in the case of repairs required to be effected by the Lessee such repairs are not completed within a reasonable time; or
...
Then notwithstanding any prior waiver or failure to take action by the Lessor or indulgence granted by the Lessor to the Lessee in respect of any such matter or default whether past or continuing it shall be lawful for the Lessor or any other person duly authorised by it to:
(i) reenter upon the premises or any part thereof in the name of the whole and thereby determine the estate of the Lessee; and
(ii) to remove or retain all goods fixtures fittings and effects found on the premises without releasing the Lessee from any liability in respect of the breach or nonobservance of any covenant condition or agreement of this lease and the Lessor may sell or otherwise dispose of the same and use the proceeds thereof to satisfy amounts owing by the Lessee under this lease and the Lessee making good damage suffered by the Lessor as a result of its reentry and determination of the term hereunder and the Lessor shall not be liable for any loss to the Lessee or Covenantor if any resulting from the exercise of the power of reentry.
(f) The Lessor shall make reasonable efforts to mitigate any loss suffered by it and recoverable under this clause or clauses 27 or 28 hereof.
[23] Clause 27 provides as follows:
27. ESSENTIALITY OF PAYMENTS
(a) Failure to pay rent or other moneys payable hereunder on the due date shall be a breach going to the essence of the Lessee’s obligations under the Lease. The Lessee shall compensate the Lessor and the Lessor shall be entitled to recover damages from the Lessee for such breach. Such entitlement shall subsist notwithstanding any determination of the Lease and shall be in addition to any other right or remedy which the Lessor may have;
(b) The acceptance by the Lessor of arrears of rent or other moneys shall not constitute a waiver of the essentiality of the Lessee’s continuing obligation to pay rent and other moneys.
[24] Clause 26, therefore, permits reentry and cancellation only when the rent is in arrears after 14 days. Clause 27 identifies payment of rent as an essential term of the lease which would ordinarily entitle cancellation[4] immediately upon a failure to pay rent on the due date.
[25] As to the apparent conflict between the two clauses the Judge said:
[55] ... It is trite that the lease document must be read as a whole. The express entitlement conferred upon the lessor to reenter when rent was in arrears for 14 days must be taken to prohibit any earlier reentry. If [counsel for Patcroft] is right, then the express power to reenter for nonpayment of rent after 14 days would be otiose. It follows that the lessor’s reentry was unlawful.
[26] Patcroft emphasises that the language of cl 27 makes it clear that the failure to pay rent on the due date is a breach going to the essence of the lessee’s obligations. This illustrates the parties’ intent that a failure to pay the rent on the due date was an essential term entitling Patcroft to cancel the contract. This “right” the appellant says, existed independently of the entitlement to reenter and determine the lease when the rent was in arrears for 14 days (cl 26).
[27] Patcroft’s case is that the cl 26 and 27 rights can and do coexist without excluding each other. In Morris v Robert Jones Investments Ltd[5] this Court quoted with approval the observations of Deane J in a decision of the High Court of Australia, Progressive Mailing House Pty Ltd v Tabali Pty Ltd where he said:[6]
It follows from the foregoing that, in the circumstances which had arisen, the landlord had both a contractual right to terminate the lease by reentry under cl 10.1 for breach of covenant and on the application of the ordinary principles of contract law, a common law right to terminate for fundamental breach. The landlord was not obliged to elect between the two grounds for terminating the lease: it was entitled to rely upon them both. A party entitled to terminate a contract for repudiation or fundamental breach may rely upon both a specific contractual right to terminate the contract and the common law right to terminate unless, as a matter of construction, the former excludes the latter, ...
[28] The appellant points to the final words of cl 27(a) as illustrating that the right arising from cl 27 to immediate cancellation is in addition to the rights in, for example, cl 26. As to this submission the final sentence in cl 27(a) refers to the fact that the entitlement identified is in addition to any other remedy the landlord may have (such as cl 26 cancellation). The entitlement referred to is referable to the immediately preceding sentence and the right to recover damages for breach. It is not referable to the right to cancel.
[29] Clauses 26 and 27 at face value do appear to be in conflict. Clause 26 entitles determination of the lease only when the rent is in arrears for 14 days. Clause 27 apparently entitles an immediate right to determine the lease on arrears of rent.
[30] We are satisfied, however, that the two clauses can be reconciled and that as a matter of construction cl 26 excludes the right to immediate cancellation claimed under cl 27.
[31] The declaration in cl 27 that a failure to pay rent on the due date is a breach going to the essence of the tenants’ obligations gives rights of cancellation to the landlord pursuant to s 7 of the Contractual Remedies Act 1979. Ordinarily the landlord would be able to immediately exercise its right of cancellation for such a breach. We consider properly interpreted, cl 26 delays the right to cancel for 14 days.
[32] Section 5 of the Contractual Remedies Act anticipates that the parties may wish to modify the statutory rules. This section makes the Act subject to an agreed alternative. We consider cl 26 modifies the statutory right to immediately cancel for breach of timely payment of rent. Clause 26 modifies cl 27 only to the extent of delaying the right to cancel for breach of an essential stipulation, here the payment of rent on time.
[33] Further, cl 26 specifically deals with the question of when the right to cancel for arrears of rent arises whereas cl 27 deals only with whether failure to pay the rent on time is a breach of an essential term. These differences favour an interpretation giving cl 26 primacy as to the timing of cancellation.
[34] Clause 27 is primarily concerned with the damages consequences of a breach of the obligation to pay the rent on time. The clause purports to preserve the right to damages for breach even though the contract has come to an end. Clause 27, therefore, is not concerned with the timing of the cancellation of the lease but with the entitlement to do so. Seen in that way the two clauses are not in conflict and are indeed complementary.
[35] We note that when Patcroft reentered on 14 June it did not claim to do so by virtue of cl 27. Patcroft reentered pursuant to cl 26 and later conceded that when it reentered 13 days after the rent was due, it did so one day early.
[36] We are satisfied that cls 26 and 27 can therefore be read together. They confirm payment of rent is an essential term to the landlord. They modify the statutory rules by providing for cancellation only after the rent has been in arrears for 14 days. We reject this ground of appeal.
Was the lease validly cancelled on 15 June 2005?
[37] To resolve this question it is necessary to decide what happened as a result of the actions of Patcroft and the tenants on 14 June. The reentry by Patcroft on 14 June was one day early (13 days after the rent was due) and therefore in breach of cl 26 of the lease. On the day Patcroft reentered it also had a warrant of distress, it changed the locks on the premises and gave the tenants a trespass notice. Patcroft made it known to the tenants it would not allow their reentry and would oppose any application for relief against forfeiture.
[38] On 15 June the solicitors for Patcroft wrote to the lawyers acting for the tenants confirming its reentry and cancellation of the lease. Further correspondence from Patcroft’s solicitors followed on 16 June again making it clear it was in possession of the building and intended to remain so. The first response from the tenants was a letter from KIP’s solicitors on 17 June. They “reserved” their position relating to the lawfulness of Patcroft’s reentry. However, they asked to be able to continue to operate the bar and mentioned the possibility of an application for relief against forfeiture. Patcroft refused the request. There was no communication from the first respondents at this time.
[39] Neither tenant ultimately made an application for relief against forfeiture. The first respondents had had enough of disputes with Patcroft and did not intend to seek relief. In the end both the tenants issued these proceedings for damages for the loss of the value of their businesses asserting, therefore, that the lease was at an end. This notification of an intention to sue for the loss of value of the business was made about one year after the reentry.
[40] Patcroft’s case is that if on 14 June the landlord entered in breach of cl 26 then this action is properly categorised as a repudiation of the lease.[7] The tenants then had an election to make. They could cancel[8] or affirm the contract.[9] Until election the contract remained alive.
[41] The rules as to cancellation are set out in s 8:
8 Rules applying to cancellation
(1) The cancellation of a contract by a party shall not take effect—
(a) Before the time at which the cancellation is made known to the other party; or
(b) before the time at which the party cancelling the contract evinces, by some overt means reasonable in the circumstances, an intention to cancel the contract, if—
(i) it is not reasonably practicable for the cancelling party to communicate with the other party; or
(ii) the other party cannot reasonably expect to receive notice of the cancellation because of that party's conduct in relation to the contract.
(2) The cancellation may be made known by words, or by conduct evincing an intention to cancel, or both. It shall not be necessary to use any particular form of words, so long as the intention to cancel is made known.
(3) Subject to this Act, when a contract is cancelled the following provisions shall apply:
(a) So far as the contract remains unperformed at the time of the cancellation, no party shall be obliged or entitled to perform it further:
(b) So far as the contract has been performed at the time of the cancellation, no party shall, by reason only of the cancellation, be divested of any property transferred or money paid pursuant to the contract.
(4) Nothing in subsection (3) of this section shall affect the right of a party to recover damages in respect of a misrepresentation or the repudiation or breach of the contract by another party.
[42] Patcroft says the tenants did not cancel the contract on 14 June. On 15 June, therefore, the contract was still in existence. By 15 June Patcroft was entitled to reenter and determine the lease pursuant to cl 26 given the rent was by then in arrears for 14 days. By 15 June the tenants were in breach of an essential term themselves, being the payment of rent, the 14 days having expired. Thus on 15 June given the tenants’ breach, Patcroft could elect to cancel the lease. Patcroft says that by remaining in occupation of the premises it gave notice to the tenants that it was cancelling the contract.[10]
[43] As to this the Judge said:
[61] It is arguable that the case falls within s 8(1)(b)(ii) and that the defendants could not reasonably expect to receive notice of any cancellation, in view of their unlawful conduct in respect of the termination of the lease. But in the present case nothing turns on that question. Despite early indications from the plaintiffs’ solicitors, no application was ever made to the Court under s 119 of the Property Law Act. Over time the right to make that application would have been lost by reason of delay. In those circumstances the loss of the entitlement would amount to a de facto acceptance by the plaintiffs of the defendants’ repudiation of the lease: Governors Ltd v Anderson CA94/04 16 August 2005 at [25]. Ultimately, the issue of this proceeding, in which the plaintiffs seek damages for repudiation, constituted express notice to the lessor of acceptance of their alleged repudiation of the lease.
[44] We are satisfied the key questions are: did the lease come to an end as a result of Patcroft’s early reentry on 14 June? If not, did the tenants repudiate the lease on 15 June by failing to pay the rent? If yes, did Patcroft then cancel the contract by its continued occupation of the premises? If the contract was validly cancelled, the tenants would have no claim in damages for the loss of value of their businesses.
[45] The tenants supported the Judge’s observations that this was a case governed by s 8(1)(b)(ii) of the Contractual Remedies Act. They said given Patcroft’s actions on 14 June (its reentry, changing the locks, issuing the trespass notices and making it clear that it did not intend to allow the tenants to reenter) it could not expect to receive notice of the tenants’ cancellation.[11]
[46] The respondents’ submission is that s 8(1)(b) was amended as a result of the Contract Statutes Review by the Law Commission[12] to cover exactly the type of difficulties evident in this case.
[47] Section 8(1) prior to the 2002 amendment and the current section provided as follows:
8 Rules applying to cancellation
(1) The cancellation of a contract by a party shall not take effect—
(a) Before the time at which the cancellation is made known to the other party; or
(b) Where it is not reasonably practicable to communicate with the other party, before the time at which the party cancelling the contract evinces, by some overt means reasonable in the circumstances, his intention to cancel the contract.
[48] In Schmidt v Holland[13] an unconditional contract was signed for the sale and purchase of a house property. The purchasers, however, repudiated the contract indicating that they were no longer prepared to purchase. The vendors then resold but did not tell the purchasers that they intended to do so. The Court concluded that the contract had not been cancelled because the vendors had not given the purchasers notice of cancellation as they were required to do at common law. The position was the same if the Contractual Remedies Act applied.
[49] Subsequent to Schmidt the Law Commission identified that the rules applying to cancellation had caused the most difficulty in the operation of the Contractual Remedies Act.[14] The difficulty was that s 8 required notification to the other party before cancellation was effective. The harshness of the effect of that rule was emphasised in Schmidt. The Review gave examples of cases[15] where the Court strived to find ways around the harshness of the rule.
[50] As a result the Law Commission recommended to Parliament what has now become the current s 8(1)(b). The essence of the amendment[16] is that where the other party’s conduct made it unreasonable to require notice of cancellation a failure to give notification would not prevent valid cancellation so long as the cancelling party does some overt act evidencing its intention to cancel.
[51] However we consider the issue in this case does not relate to the requirement to give notice to the party who has repudiated the contract. The issue in this case is whether the tenants cancelled the contract on 14 June because of Patcroft’s repudiation on that day. The current s 8(1)(b) still requires, by the introductory words, that the cancelling party, by some overt means, evince an intention to cancel. That intention to cancel need not be communicated to the repudiating party if because of the repudiating party’s conduct it could not expect to be told.[17] The fundamental point remains that there must be some overt action by the cancelling party that they are cancelling the contract before cancellation can take effect.
[52] Section 8(2) provides that cancellation can be by words or conduct as long as it evinces an intention to cancel. Therefore even if Patcroft’s conduct at the time of its unauthorised reentry on 14 June was disentitling of notice in terms of s 8(1)(b)(ii) the tenants still had to evince by some overt means, reasonable in the circumstances, that they were cancelling the contract. There is no evidence that either tenant took any action on 14 June, overt or otherwise, that could be seen as an intention to cancel the contract. Nor was any suggested to us. They made neither an election to affirm nor to cancel the contract on that date. Indeed it is clear that the tenants took the view that they would need to get legal advice before they could make any further decision.
[53] Although it was not put to us in argument, we have considered whether the non-payment of the outstanding rent by the tenants on 14 or 15 June could, itself, be sufficient to evince an intention to cancel the lease. We are satisfied that, on the facts of this case, it did not. We consider that there is a need for caution before attributing to a party an intention to cancel a lease when the evidence indicates that that party was still considering seeking relief against forfeiture and keeping open the possibility that it would pay the arrears of rent. We do not rule out the possibility that non-payment of rent in circumstances where the landlord has repudiated by unlawfully taking possession of the leased premises could amount to the evincing of an intention to cancel. But we consider there would need to be evidence to show that the tenant’s withholding of rent was a deliberate step amounting to a refusal to pay and an absence of evidence that the tenant was equivocating rather than bringing the lease to an end. If that were the case, the court would then need to decide whether s 8(1)(b)(ii) applied and, if it did, it may be that the court could be satisfied that the tenant had validly cancelled the lease.
[54] We conclude that there was no cancellation of the lease on 14 June by the tenants, not because the tenants did not tell Patcroft that they cancelled the contract but because the tenants did not cancel it or at least did not evince an intention to do so. Given that failure, the contract remained alive until at least 15 June. On that date the tenants were in breach of their obligation to pay the rent because the rent by then had been outstanding for 14 days. This failure entitled the landlord to cancel the lease pursuant to cl 26. The tenants could have reserved their rights on 14 June by paying the outstanding rent. If they had done so then the landlord’s continuing occupation of the property would have been unauthorised. The tenants would then have had breathing space to consider their options. However, by failing to pay the rent due by 15 June the tenants placed themselves in default under cl 26 of the lease and therefore in jeopardy of the lease being validly terminated by Patcroft under that clause.
[55] On 15 June the landlord remained in occupation of the premises. It had changed the locks and had given the tenants trespass notices. We consider that on 15 June the landlord’s continual refusal to allow the tenants access to the premises was a reentry and thereby a termination of the lease by virtue of cl 26. Thus, on 15 June Patcroft had, in our view (and contrary to that expressed by Priestley J), lawfully brought the lease to an end.
[56] Allan J also concluded that the tenants had not cancelled the lease on 14 June. But he found that the position of both parties repudiating the lease remained as a sort of deadlock until the tenants’ entitlement to seek relief against forfeiture lapsed by reason of delay and the tenants sued for damages. Priestley J endorses that view. We consider it unlikely that the lease (under which the tenant was deprived of possession of the premises and the landlord received no rent) remained on foot for an extended period with neither side cancelling. Mr Grove did not contend for that position before us: his argument relied on cancellation having been effected by the tenants on 14 June.
[57] The basis of the tenants’ claim for damages was the unlawful repudiation of the lease by the landlord. We have concluded that Patcroft lawfully cancelled the lease on 15 June. In those circumstances the tenants can have no claim for damages for loss of value of the businesses. We would therefore allow the appeal on this aspect.
Damages claims
[58] The claims and counterclaim in this case had a variety of aspects. We now consider the effect of our conclusion that Patcroft lawfully cancelled the lease on 15 June on the various damages awards.
[59] First, there was a claim for damages by the tenants for the loss and value of the backpackers business and the bar. In view of our findings these awards must now be set aside. The damages award for the first respondent was $100,000 and for the second respondent $100,000 for the loss of value of the business and $62,935.04 for a loan made to KIP from New Zealand Breweries. Both awards of $100,000 must be set aside as a consequence of this judgment. Those two awards of damages were assessed on the basis that the lease had been wrongly terminated by Patcroft. We have found it was not.
[60] As to the loan of $62,935.04 to KIP from New Zealand Breweries, this provided that if KIP met sales targets set by New Zealand Breweries, then KIP would not be required to repay the loan. The finding in the High Court was that had the lease continued KIP would have continued in business and the loan would have been repaid in due course, effectively by New Zealand Breweries, assuming KIP met the appropriate sales targets. This award of damages was also therefore based on the premise that there was a wrongful repudiation of the lease by the landlord. We have found there was not and therefore, on our view of the case, this award of damages must also be set aside.
[61] The landlord accepted the first respondent had overpaid (to Patcroft) its lift maintenance obligations by $36,597.55. That award remains unaffected by this judgment. The appellant’s counterclaim resulted in an award of damages of $84,906.53 against both tenants. This award also remains unaffected by this judgment.
Other grounds of appeal
[62] Patcroft also challenged the High Court’s decision on damages alleging the Court was wrong to reject the claim that the tenants had substantiated the value of the business and that the two awards of damages to KIP were not double claiming. Given our conclusion that the landlord validly cancelled the lease we are not required to consider these issues. We are, however, satisfied that the Judge’s decision in the High Court on these points of appeal was correct.
Summary
[63] We summarise our conclusions as follows:
(a) We are satisfied Patcroft lawfully cancelled the lease on 15 June 2005;
(b) As a result the claims for damages by the tenants for the loss of the value of their businesses must fail.
(c) The other claims, the reimbursement of the overpayment of lift maintenance and Patcroft’s counterclaim, remain unaffected by this conclusion.
[64] We would therefore allow the appeal.
[65] In accordance with the views of the majority, the appeal is allowed.
Costs and interest
[66] On 21 April 2010 Allan J released a ruling on costs and interest.[18] The trial Judge awarded interest with respect to the damages claims for loss of value of the businesses. These interest awards are also set aside. The awards of interest relating to the other awards of damages confirmed by this Court remain unaffected by this judgment.
[67] The respondents must pay the appellant’s costs for a standard appeal on a band A basis and usual disbursements. As to costs in the High Court we consider that Patcroft should have costs on a band 2B basis in that Court and disbursements as assessed by the Registrar of that Court. If however either party wish to contest this indication then we reserve leave for them to do so by them filing a memorandum in this Court within 14 days with any opposition within a further 14 days.
PRIESTLEY J
[68] I agree with the judgment of the majority as it relates to the inter-relationship of cls 26 and 27 of the lease. I also agree with the majority that the appellant should not be allowed to withdraw, for the purposes of this appeal, the concession made in the High Court.
[69] I respectfully disagree with the majority in their application to the facts of the cancellation rules that are contained in s 8 of the Contractual Remedies Act 1979.
[70] My reasons are threefold. First I consider that in the light of the events which occurred on 14 and 15 June 2005, it is both artificial and unreal to endeavour to construct a situation whereby one party is accepting the other party’s repudiation of the lease, thus bringing s 8 cancellation rules into play.
[71] Secondly, the evidence does not establish any connection or nexus between the appellant’s deemed cancellation of the lease on 15 June (when it remained in possession) and the respondents’ breach of cl 27 and their obligation to pay rent.
[72] Thirdly, again on the facts, the appellant’s actions and stance demonstrate that on 15 June it was not ready and willing to perform the contract, which is normally a prerequisite if a party wishes to cancel.
[73] Even on a charitable assessment, the landlord’s actions in re-entering the premises in the early hours of the morning on 14 June were high-handed. As is apparent from the landlord’s letter of 8 June,[19] the appellant had received “the promised $10,000” into his bank account on 1 June. Another $4,000 had been paid on the day before re-entry. The appellant’s letter sought “a timetable” for payment of rental arrears and opex and indicated that such timetable would need to be “rigidly followed to avoid re-entry”.
[74] In my view it thus behoved the appellant to make the correct date calculations before purporting to re-enter the premises. Not only did it get the date wrong, but it also wrongly attempted to distrain.
[75] Within hours of re-entry a director of the appellant, Mr O’Donnell, would not permit the respondent, Mr Ingram, to enter the building even to discuss matters.[20]
[76] The next day, 15 June 2005, was the day, on the majority’s analysis, the June rent had remained unpaid for 14 days, this constituting a repudiation by the respondents which the appellant, by remaining in possession, accepted. Certainly, in terms of ss 7(2) and 7(3)(b), failure to pay rent, a central stipulation of the lease, entitled the appellant to cancel. But there is no evidence that on or after 15 June it did so.
[77] On that date the appellant’s solicitors wrote to the respondent’s legal advisers asking the respondents to uplift books and records which had not been distrained. The letter claimed that the warrant to distrain was the “first act” of the appellant.[21]
[78] A further letter the next day (16 June), again from the appellant’s solicitors to those of the respondents, dealt in part with a request for the orderly transfer of the businesses conducted in the premises. But the letter started by saying:
Both of you will be aware that the obligation to pay rent and outgoings does not cease for your clients till the remainder of the term subject to of course to mitigation of any loss my client undertakes.
The current lease expires on 31 March 2008. With rent and outgoings this amount comes close to $1,000,000.00.
One possible interpretation of this letter could be that the appellant wished to keep the contract afoot. But because it contained, inter alia, references to the appellant’s obligation to mitigate its loss, I tend to the view that the solicitor writing it, when referring to “the obligation to pay rent and outgoings” was probably referring to the concept of damages.
[79] This stance of the appellant remained consistent. The appellant was totally unrepentant so far as its illegal actions on 14 June were concerned. A letter which the appellant’s solicitor wrote on 11 September 2006, after approximately a year of inactivity, to the first respondent’s solicitors, was headed “Demand for you to pay damages as a result of lawful re-entry”. The sum claimed was $1.297 million.
[80] So far as the appellant’s conduct was concerned, it was clearly and correctly set out by the Judge:[22]
It is difficult to conceive of a more clearly undertaken re-entry. I am satisfied that the [appellant] intended to re-enter and cancel the lease, and that they did in fact do so.
So the quandary arises, in a situation where the appellant, by its conduct, repudiated the lease and purported wrongly to cancel it, is it entitled, with no change in its stance, validly to cancel the contract the next day, solely as a result of continuing its unlawful re-entry? An argument can perhaps be made that ss 8(1)(a) and 8(2) convert the fact that the appellant remained in possession into something which “made known” the appellant’s cancellation (s 8(1)(a)) or constituted “conduct evincing an intention to cancel” (s 8(2)). But I am unconvinced, on the facts of this case, that the factual situation here was what Parliament had in mind as a mode of communicating cancellation of contract.
[81] In short I have difficulty in seeing how the s 8 cancellation rules can come into play in a situation where both parties to the lease were alleging the other was in breach. Under ss 7(2) and 7(3)(b) both parties to the lease had grounds for cancellation. But neither party cancelled or communicated a cancellation.
[82] The Judge in my view correctly analysed the factual complexity. He rejected the appellant’s submission that the unlawful re-entry became lawful by the passage of time:
[56] [Counsel for Patcroft] submits that even if, as I have found, the lessor’s re-entry was unlawful as at 14 June 2005, the lessees did not accept the lessor’s apparent repudiation of the lease, so that the respective rights and obligations of the parties continued. On the next day, 15 June 2005, the rental was 14 days in arrears, and accordingly, [counsel for Patcroft] argues, the lessor “...gained a fresh, additional, right to terminate the lease for non-payment of rental”.
[57] [Counsel for Patcroft] accepts that the lessor would not acquire any such fresh right to re-enter by effluxion of time if, in the meantime, the lessee had given notice of acceptance of the landlord’s earlier repudiation, but that did not occur here. His argument is not immediately attractive. If he is correct, then any unlawful re-entry would become lawful simply by expiration of time unless the innocent party took steps in the interim to accept the repudiation.
[83] The Judge also found as a fact that no notice of acceptance of repudiation had ever been given by the respondents to the appellant.[23] That finding is indeed correct. But nor, in my view, was any converse notice of acceptance of repudiation ever given by the appellant to the respondents.
[84] The Judge turned to s 8. His analysis was:
[61] It is arguable that the case falls within s 8(1)(b)(ii) and that the defendants could not reasonably expect to receive notice of any cancellation, in view of their unlawful conduct in respect of the termination of the lease. But in the present case nothing turns on that question. Despite early indications from the plaintiffs’ solicitors, no application was ever made to the Court under s 119 of the Property Law Act. Over time the right to make that application would have been lost by reason of delay. In those circumstances the loss of the entitlement would amount to a de facto acceptance by the plaintiffs of the defendants’ repudiation of the lease: Governors Ltd v Anderson CA94/04 16 August 2005 at [25]. Ultimately, the issue of this proceeding, in which the plaintiffs seek damages for repudiation, constituted express notice to the lessor of acceptance of their alleged repudiation of the lease.
(Emphasis added.)
[85] There are, for the reasons expressed by the majority, clear difficulties in interpreting s 8(1)(b)(ii) as applying to this situation. The position might have been different had Parliament adopted the wording suggested by the Law Commission which was:[24]
... or where the other party may by his or her conduct be deemed to have dispensed with the need for communication.
The scope of s 8(1)(b)(ii) is problematic, requiring a difficult distinction between cases of repudiation where the repudiating party either can or cannot reasonably expect notice of cancellation.[25]
[86] The applicability of the section as enacted, and whether the section now precludes the common law position of waiver applying in some situations where a contract is repudiated, (powerfully put by Eichelbaum J in Innes v Ewing),[26] are matters which will ultimately need resolution.
[87] However, I consider the Judge was right when he decided that nothing turned on the question of s 8(1)(b)(ii) and cancellation. As the Judge said, the only express notice from the respondents was the issue of proceedings which were filed a week after the 11 September 2006 letter from the appellant’s solicitors. The reality is that, in the confused situation which pertained on 14 and 15 June, neither party cancelled the contract either expressly or impliedly. The appellant, by its actions and words, remained in breach as a result of its unlawful re-entry. It did absolutely nothing to backtrack or remedy the situation. The respondents for their part failed to pay the rental arrears but reserved their rights for relief against forfeiture and damages.
I buttress this approach with two further considerations. The first is that the scheme of ss 7 and 8 of the Contractual Remedies Act envisages some nexus between a party’s breach of the contract and the other party’s cancellation and its communication. The approach of the majority in essence relies on the respondents’ breach of cl 27 of the lease and the failure to pay rent on 15 July as a breach which resulted in the appellant’s cancellation by virtue of it remaining in occupation. But that is not what happened. There is no evidence to support the proposition that the appellant elected to cancel the contract as a result of the respondents’ breach of an essential term on 15 June. Rather, the appellant maintained its own repudiation of the contract. The appellant’s conduct and stance, to which I have referred, although purporting to cancel the contract, relied on a breach which did not at the relevant time exist. Thus I consider that the nexus between a breach and repudiation is not evident on the facts of this case.
[88] Putting the same issue another way, the appellant’s conduct cannot be “conduct evincing an intention to cancel” because it was not a response to a breach by the respondents. Rather it was a stand-alone repudiation which was deliberately continued. I am uneasy about interpreting the statute in such a way that a repudiation can metamorphose into a cancellation through the passage of time.
[89] A second buttressing argument I mention but briefly, since New Zealand law in the area is perhaps obscure. At common law, a party who wished to cancel a contract had first to be ready and willing to perform the contract. It is not totally clear whether this approach has survived the passage of the Contractual Remedies Act.[27] This Court left the issue open in Kriletich v Birnam Investments Ltd.[28] In a judgment involving different facts, this Court in Noble Investments Ltd v Keenan referred to cases which had assumed “albeit with little discussion” that despite the Contractual Remedies Act “a party must be ready, willing, and able to proceed to completion in order to be able to validly cancel a contract”.[29] The Court considered the purpose of the common law rule was to ensure a party did not benefit from its own wrong:[30]
A party could be seen as benefiting from its own wrong if it seeks by cancellation to deprive the other party of the benefit of the contract in circumstances where the other party’s breach is a direct result of a breach committed by the party seeking to cancel the contract.
There was evidence before the Judge that one of the respondents, but for the appellant’s breach, would have had recourse to a family loan to pay the rent. Yet the appellant’s stance effectively precluded such an outcome.
[90] These reasons in combination prevent me from concluding that the appellant’s 14 June 2005 breach was extinguished by a valid cancellation of the contract the next day. Although I retain some uneasiness over the consequences of a one day miscalculation, the prospect of the respondents having no redress against the appellant’s conduct is unpalatable to me. In this uncertain yet complex area of the law I consider that Allan J’s judgment, which awarded damages to the respondents, and a counterclaim sum to the appellant (which included an unpaid rental component), correctly balances the parties’ respective contractual rights and reached a just result.
[91] For these reasons I would dismiss the appeal.
Solicitors:
Shean Singh, Auckland for Appellant
Foy & Halse,
Auckland for Respondents
[1] Ingram v Patcroft
Properties Ltd [2009] NZHC 777; (2009) 10 NZCPR 426 (HC).
[2] Devaynes v Noble
[1815] EngR 77; (1816) 1 Mer 572 [Clayton’s
Case].
[3] See GFW
AgriProducts Ltd v Gibson [1995] 2 ERNZ 323 (CA) at
327.
[4] Contractual Remedies
Act 1979, s 7(4).
[5]
Morris v Robert Jones Investments Limited [1994] 2 NZLR 275.
[6] Progressive Mailing House
Pty Ltd v Tabali Pty Ltd [1985] HCA 14; (1985) 59 ALJR 373 at 389-390.
[7] Contractual Remedies
Act 1979, s 7(4).
[8]
Ibid, s 7(2).
[9] Ibid,
s 7(5).
[10] Contractual
Remedies Act 1979, ss 7(2)
and 8(2).
[11] Contractual
Remedies Act 1979,
s 8(1)(b)(ii).
[12] Law
Commission Contract Statutes Review (NZLC R25,
1993).
[13] Schmidt v
Holland [1982] 2 NZLR 406
(CA).
[14] At
[1.60].
[15] Such as Innes v
Ewing [1989] 1 NZLR 598 (HC).
[16] At s
8(1)(b)(ii).
[17] Contractual
Remedies Act 1979, s 8(1)(b)(ii).
[18] Ingram v Patcroft Properties Ltd HC Auckland CIV-2006-404-4171, 21 April 2010.
[19] Ingram v Patcroft Properties Ltd [2009] NZHC 777; (2009) 10 NZCPR 426 (HC) at [8].
[20] At [9].
[21] At [12]-[13].
[22] At [48].
[23] At [59].
[24] Law Commission Contract
Statutes Review (NZLC R25, 1993) at [1.69].
[25] Burrows, Finn and Todd
Law of Contract in New Zealand (3rd ed, LexisNexis, Wellington, 2007) at
596.
[26] Innes v Ewing
[1989] 1 NZLR 598 (HC).
[27] See generally Burrows, Finn
and Todd at 592.
[28]
Kriletich v Birnam Investments Ltd CA214/90, 27 February
1991.
[29] Noble Investments
Ltd v Keenan [2006] NZAR 594 at [44].
[30] At [47].
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