E & E Developments Ltd v Housing New Zealand Ltd [2012] NZCA 7 (9 February 2012)

Last Updated: 17 February 2012

IN THE COURT OF APPEAL OF NEW ZEALAND

CA820/2010 [2012] NZCA 7

BETWEEN E & E DEVELOPMENTS LTD Appellant

AND HOUSING NEW ZEALAND LTD First Respondent

AND HOUSING NEW ZEALAND CORPORATION Second Respondent

Hearing: 10 October 2011

Court: Chambers, Ronald Young and Andrews JJ

Counsel: P F Chambers for Appellant M C Smith for First Respondent

Judgment: 9 February 2012 at 10 am

JUDGMENT OF THE COURT

A The appeal is allowed.

2. The judgment entered in the High Court in favour of the first respondent is set aside.

C The proceeding is remitted to the High Court to continue to trial.

4. The appellant is entitled to costs in the High Court. In the absence of agreement, these costs are to be fixed in the High Court.
5. The first respondent must pay the appellant costs in this Court for a standard appeal on a band A basis and usual disbursements.
   

REASONS OF THE COURT

(Given by Chambers J)

Low-cost housing contract

[1] In May 2002 E & E Developments Ltd, the appellant, and Housing New Zealand Ltd (HNZ), the first respondent, entered into an agreement under which E & E agreed to subdivide land it owned at Swanson, Auckland and to build on it 38 units. Each unit was to be on its own title. Under the agreement, HNZ was to pay progress payments as the units were constructed. Once completed, HNZ was to take title to the units.
[2] In early 2003 the parties decided to change course. The parties agreed that, instead of HNZ buying the units, it would lease them once the development was complete. It agreed to pay $245 a week for each two-bedroom unit. HNZ was to continue making progress payments but, on settlement, E & E would repay what HNZ had paid by way of progress payments. E & E seems to have made clear at this stage that it did not want to be a long-term landlord; it would be looking to sell on its interest in the land. All of this was recorded in a written agreement dated 28 February 2003.
[3] By about 26 November 2003 the 38 units had achieved “practical completion”. HNZ’s tenants began occupying the units from about 8 December 2003. At this stage, however, some things remained to be done in order for 38 individual titles to issue.
[4] On 20 January 2004 E & E and HNZ signed a lease to regularise their relationship now that the units were occupied. The January 2004 lease, as we shall call it, had a Commencement Date of 8 December 2003. Presumably that date was chosen because that was the date on which HNZ had allowed its tenants to commence occupation. The January 2004 lease provided for a monthly rent at a rate of approximately $40,000. Although the lease had a potential term of 10 years, it was anticipated it would survive only until settlement, as the February 2003 agreement envisaged there would be 38 individual leases, one for each individual title and unit, following settlement.
[5] At some stage – it is not entirely clear when – E & E sold its interest in the land to All About Finance Limited. Settlement of that sale was due to take place when the individual titles were issued. All About Finance for its part was selling on the proposed individual titles to investors. Those investors would obtain, on settlement, a title to a lot on which there was a brand-new unit, which was to be leased to HNZ upon the terms set out in the February 2003 agreement.
[6] The individual titles for the 38 units became available in June 2004. Settlement took place on 21 June 2004. A number of things took place at that time. First, E & E paid back all HNZ’s progress payments totalling more than $5.1 million. Secondly, individual leases with respect to the 38 units were entered into, with the individual investors becoming the respective landlords (in place of E & E and All About Finance). In each case, the tenant was HNZ. Thirdly, the January 2004 lease was surrendered. The surrender date was specified to be 9 June 2004: the evidence does not disclose why that date was selected. Following settlement, HNZ paid the respective landlords rent at the agreed amounts.
[7] What is in dispute in this case is whether HNZ is liable for rent from 8 December 2003 to 9 June 2004 under the January 2004 lease. E & E insists that HNZ is liable for rent in that period. HNZ disputes that. The question hinges on the proper interpretation of several provisions of the January 2004 lease.
[8] E & E sued HNZ for rent in the disputed period. It sought summary judgment. HNZ retaliated by itself seeking summary judgment. As it turned out, the two applications were not heard together. That was because, at the hearing of E & E’s application, there was some doubt as to whether HNZ’s application had been properly brought. So there were two hearings and two judgments. Associate Judge Faire delivered his judgment on E & E’s application on 31 March 2010.[1] E & E’s application failed. Associate Judge Faire delivered judgment on HNZ’s application on 9 November 2010.[2] That application succeeded. E & E has appealed against only the second judgment.
[9] We should explain the presence of Housing New Zealand Corporation as second respondent. It was joined improperly. Subsequently, E & E discontinued against Housing New Zealand Corporation. It should not have been a party to this appeal.

Issue on the appeal

[10] There is only one issue on this appeal. That is whether the Associate Judge was right to be satisfied that E & E’s claim could not succeed. A defendant is entitled to summary judgment only if the plaintiff’s claim is so hopeless that there is no “real question to be tried”.[3] We are not determining whether E & E should have got summary judgment as it chose not to appeal against Associate Judge Faire's first judgment. If we find E & E has an arguable claim, this appeal will have to be allowed and the case will have to proceed to trial.

Is it reasonably arguable that rent was payable for the period 8 December 2003 to 9 June 2004?

[11] Clause 1.1 of the lease read as follows:

The Lessee shall pay during the Term the Annual Rent (as reviewed and varied from time to time under this Lease) on the first day of each Month during the Term. Payments of the Monthly Rent shall be paid in arrears with the first payment (being a proportionate payment if applicable) to be paid on the first day of the Month first occurring after the Commencement Date.

[12] Some expressions in that clause were defined in the interpretation section of the lease. Relevant definitions include:

• Term — 10 years from the Commencement Date
• Annual Rent — $484,120 (inclusive of GST)
• Monthly Rent — $40,343.33 (inclusive of GST) being one twelfth of the Annual Rent as reviewed from time to time in accordance with this Lease (notwithstanding clause 1.1 ... the Annual Rent is payable from the date the Payments (as that expression is used in the agreement dated 22 May 2002 and made between [E & E, HNZ] and Lindsay Royce Ellery) are repaid to [HNZ]).
• Commencement Date — 8 December 2003

[13] With respect to the definition of “Monthly Rent”, we can indicate the parties agree that “the date the Payments ... are repaid to [HNZ]” turned out to be 21 June 2004. As we have said, however, the lease was surrendered with effect from a date before then.
[14] Accordingly, if one strips out unnecessary words and inserts definitional material where appropriate, cl 1.1 would read as follows:

The Lessee shall pay during the [10 years from 8 December 2003] the Annual Rent ... on the first day of each Month during the Term. Payments of the Monthly Rent [of $40,343.33] shall be paid in arrears with the first payment (being a proportionate payment ...) to be paid on 1 January 2004. Notwithstanding that, however, the Annual Rent is payable from the date the Payments ... are repaid to [HNZ] [which date turned out to be 21 June 2004].

[15] Associate Judge Faire held that the last sentence of that redraft (which we shall call part B) meant that rent was not payable in the period up to 21 June 2004. Indeed, of course, on this interpretation, rent was never payable, as the January 2004 lease was replaced by individual leases from settlement.
[16] Our tentative view is that a different interpretation of that clause is preferable. We shall first set out what our tentative view is and then explain why it is tentative. Our current view is that what cl 1.1 means is that rent was payable from 8 December 2003 but was not due to be paid until the settlement date. That interpretation would give appropriate meaning to both parts of cl 1.1. The Judge’s interpretation on the other hand simply ignores the first two sentences (part A), providing for rent to be payable from the Commencement Date (8 December 2003). The Judge’s interpretation effectively means that rent was not payable “during the Term” but only from part-way through the term. On the Judge’s reasoning, liability for rent was to commence not on the Commencement Date but rather on the settlement date, notwithstanding the fact that HNZ was itself receiving rent and top-up subsidies from the Crown (through the Department of Building and Housing) from 8 December 2003.
[17] It is significant that the lease itself was not a common-form agreement onto which special conditions were drafted. It was specifically drafted for this transaction. Any interpretation of cl 1.1 must give meaning to both parts of the clause. At the date the lease was entered into, it was known that the settlement date had not yet arrived. Notwithstanding that, the parties provided that the liability for rent was to commence from 8 December 2003. What they agreed, however, was that such liability would not fall due (and actually have to be paid) until the settlement date. Presumably what was envisaged was that outstanding rent would at that stage be set off against the large payment E & E had at that point to make to HNZ.
[18] While the Judge correctly drew a distinction between money being “payable” and money being “due”,[4] he ended up with an interpretation which meant rent never became payable prior to the settlement date, notwithstanding part A of the clause providing for rent to be payable from the Commencement Date. Further, since it was always envisaged that the lease would be replaced by individual leases on settlement, the entire rent clause became, on the Judge’s interpretation, effectively a sham. Nothing was ever going to be payable.
[19] We now turn to explain why our view as to the interpretation of cl 1.1 is tentative. The first reason is that E & E did not appeal against the Judge’s first judgment, thereby electing for its claim to go forward to a normal trial.
[20] Secondly, it is possible that our tentative view might be shown to be wrong once the agreement is placed in its overall factual matrix. We think our interpretation is not inconsistent with the overall circumstances as we currently understand them to be. We know, for instance, that, at the date of the lease, the units were at a stage of “practical completion”. We know that HNZ had already let them and was itself already receiving rent. In those circumstances, it might be expected that HNZ was itself required to pay rent, albeit the date for payment was deferred to settlement date. We know that it was envisaged that the lease would be replaced by individual leases following settlement. But that is all we know of the factual matrix. It is clear that the overall relationship between E & E and HNZ was complicated. The relationship had changed significantly during the course of the contract with HNZ deciding not to buy the units but rather to rent them. We have no evidence as to how and why that change came about. Nor do we have any means of assessing the parties’ respective bargaining strengths. In short, the background evidence is sparse. Once all relevant evidence is available, it might affect the interpretation of cl 1.1 to which we are tentatively drawn.
[21] Thirdly, four of the five judges in Vector Gas Ltd v Bay of Plenty Energy Ltd held that where the plain words of a contract lead to a meaning that flouts business commonsense, that meaning must yield to a commercially sensible interpretation.[5] In this case both parties claim that, if the arrangement was as the other side contends, then it was commercially absurd. There is something to be said for both sides’ submissions on this topic. We think it is inappropriate to be definitive on this topic in the context of a summary judgment application. A trial court which has heard all the evidence will be in a much better position to assess which interpretation makes better commercial sense.

Result

[22] We consider that summary judgment was wrongly entered in HNZ’s favour. Accordingly, we allow the appeal and set aside the High Court judgment. The proceeding must continue to trial.

Solicitors:
James D Thompson, Auckland for Appellant
Gilbert Walker, Auckland for Respondents

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[1] E & E Developments Ltd v Housing New Zealand Ltd HC Auckland CIV-2009-404-5656, 31 March 2010.

[2] E and E Developments Ltd v Housing New Zealand Ltd HC Auckland CIV-2009-404-5656, 9 November 2010 [the 9 November judgment].

[3] On a plaintiff’s application for summary judgment, this Court has explained the concept of “no defence” as the “absence of any real question to be tried”: see Pemberton v Chappell [1987] 1 NZLR 1 (CA) at 3.
[4] The 9 November judgment at [45]–[48].

[5] Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5, [2010] 2 NZLR 445 at [8]–[9] per Blanchard J, at [22] per Tipping J, at [61] per McGrath J, and at [123] per Wilson J.