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District Court of New Zealand |
Last Updated: 26 February 2022
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IN THE DISTRICT COURT AT WELLINGTON
I TE KŌTI-Ā-ROHE
KI TE WHANGANUI-A-TARA
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CIV-2017-085-000288
[2018] NZDC 23829 |
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BETWEEN
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V A HAWKINS (deceased) Plaintiff
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AND
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McGANNON MOTELS LTD
First Defendant
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AND
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P GANNON and C D GANNON
Second Defendants
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Hearing:
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20 and 21 November 2018
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Appearances:
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MRC Wolff and S Gunatunga for Plaintiff M Freeman for First and Second
Defendants
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Judgment:
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15 February 2019
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RESERVED JUDGMENT OF JUDGE C N TUOHY
[1] The plaintiff, the late Velma Hawkins, is the named lessor of motel premises in Upper Hutt known as the Hawk’s Inn Motel which are leased by the first defendant (“the lessee”). The second defendants (“the Gannons”) are company directors of the lessee and guarantors of its obligations under its lease.
[2] During the last few years of Mrs Hawkins’ life, her daughter Kay Hawkins acted for her in relation to the motel lease. Kay and her brother Russell are two of the three executors named in their mother’s will although probate has not yet been granted. However, there has been no objection from any interested party to this litigation
continuing in Mrs Hawkins’ name under Kay and Russell’s direction. I shall refer to the plaintiff in this judgment as “the lessor”.
[3] The lease contains a provision requiring the lessee to indemnify the lessor in respect of legal costs incurred by the lessor in attempting to enforce its rights under the lease.
[4] Pursuant to that provision, the lessor has claimed the sum of $104,621.28 being costs charged to her up until 31 August 2018 by her solicitors, Morrison Kent, for legal work undertaken on her behalf relating to the lease, including acting for her in this litigation for which continuing costs are also sought.
[5] The defendants dispute their liability on the basis that not all the costs for which recovery is sought were for work which falls within the terms of the indemnity and, in any event, in various respects the charges are unreasonable.
[6] In addition, the lessee has made a counterclaim in respect of two matters. The first matter relates to the lessee’s right to make use of a maintenance fund constituted under cl 17 of the lease. The second relates to the rights and obligations of the parties under cl 12 of the lease which relates to insurance of the motel premises.
Factual Background
[7] The Hawk’s Inn motel was built in 1978 – 79 by Kay Hawkins’ father and operated by her mother and father until 1990 when they leased it. Kay acquired the lease in 2000 and subsequently entered into a new 30 year lease from her parents commencing on 1 April 2003.
[8] The lease was varied twice, on 20 October 2005 and 6 November 2005, and then assigned by Kay to a new tenant, PLSM Limited. On 11 March 2011, the lease was assigned by PLSM to the lessee which has operate the motel since. The Gannons entered into a standard form guarantee of the lessee’s obligations under the lease.
[9] From the time the lessee took over the motel, it has been consistently late and sometimes in default in making rental payments and in reimbursing insurance
premiums as required by the lease. This resulted in ongoing correspondence and telephone calls from Kay Hawkins to the defendants over 2011, 2012, 2013 continuing until 26 August 2014 when she instructed her solicitors, Morrison Kent. During the latter part of that period, issues arose as to the use of the maintenance fund mandated by the lease.
[10] In September 2014, the defendants made claims in the Disputes Tribunal relating to the maintenance fund and the insurance premiums which are discussed in more detail below. After receiving instructions and considering the documentation, Morrison Kent wrote a long letter dated 25 September 2014 to the defendants covering various issues relating to the lease, specifically:
- Arrears of insurance premiums;
- Rent and interest arrears;
- Maintenance fund payments;
- Unauthorised alterations to the premises;
- Spa pool/heating issues.
The letter finished with a notification to the defendants that if the insurance, rent and maintenance fund arrears were not paid within a specified time, a Property Law Act (“PLA”) notice would be issued with a view to termination of the lease.
[11] In October 2014, further work was carried out by Morrison Kent in connection with the defendants’ Disputes Tribunal claims which were eventually struck out in December 2014. In November 2014, a PLA notice was issued in relation to insurance premium and maintenance fund arrears. Further correspondence ensued with the defendants’ then solicitors Hazelton Law, which also covered rental payments which had fallen overdue.
[12] A further PLA notice was issued on 3 February 2015. Both before and after this date, further attendances with Kay Hawkins and correspondence with Hazelton Law were undertaken by Morrison Kent in connection with the various arrears under
the lease and also relating to potential alternative insurance. Payments were made by the defendants from time to time. By now, the lessor was also seeking recovery from the defendants of her ongoing legal costs. These were disputed.
[13] By October 2015, the defendants had instructed their current solicitors, who continued the correspondence with Morrison Kent. Meantime arrears under the lease were increasing.
[14] On 22 December 2015, a further PLA notice was served on the lessee. As well as correspondence, there were telephone communications between the solicitors. From time to time rental and insurance payments were made but late.
[15] On 23 May 2016, a further PLA notice was served for rental, insurance and interest arrears. This not having wholly achieved its purpose, on 14 June 2016 the lessor served a statutory demand on the lessee under s 289 of the Companies Act, preliminary to putting the lessee into liquidation. The demand not having been complied with in full, liquidation proceedings against the lessee were filed in the High Court on 15 July 2016.
[16] Just prior to the hearing of the liquidation proceedings, the lessee paid the amount due under the demand. The hearing was vacated. Meanwhile current rental due was not paid.
[17] On 28 September 2016, a further statutory demand was issued. Some outstanding rental was paid late, but current rental fell into arrears. A further statutory demand was issued on 9 February 2017 for rental, insurance and interest arrears. This did not produce any payment and a further liquidation proceeding based on this demand was served on 16 March 2017.
[18] On 11 April 2017, this proceeding was filed in the District Court. Some payments were made after the liquidation proceeding was served, but not in the full sum demanded. On 26 April 2017, the High Court made an order putting the lessee into liquidation. A further PLA notice was served on 28 April 2017 based on the liquidation order.
[19] Further correspondence ensued between the solicitors not limited to the arrears and the liquidation – by now, an issue had arisen relating to the use of the premises for the manufacture of methamphetamine (not by the defendants).
[20] The lessee successfully applied to the Court to terminate the liquidation. That application was not opposed by the lessor. The lessee paid costs in the liquidation proceeding awarded on a Category 2B basis.
[21] Since that time, there has been further correspondence between the solicitors regarding continuing arrears under the lease and the methamphetamine issue. However, apart from this proceeding, there have been no further enforcement proceedings whether under the PLA, the Companies Act or otherwise.
The Lease
[22] As befits a commercial lease for a term of 30 years at an initial annual rent of
$128,000 plus GST, the terms of the lease are detailed and comprehensive. The clauses relevant to this claim are set out below:
2.1 The tenant shall pay the annual rent by equal monthly payments in advance on the rent payment dates.
2.2 The tenant shall pay the rent with no deduction or set off.
...
5.1 The tenant shall pay, or shall provide funds to the landlord under clause 11 for the payment of, by the due date for their payment of all the following:
- (a) Premiums and valuation fees associated with insurance policies that relate to the premises;
- (b) Rates, levies and taxes that relate to the premises;
- (c) Charges for water, gas, electricity, telephones and other utilities and services;
...
(f) Charges for cleaning, maintenance and repair of the building and building services, including repainting and decorative repairs;
(g) the costs of cleaning, maintaining and repairing the grounds, including surfaced areas;
...
(i) All other outgoings that relate to the premises and that are not expressly the responsibility of the landlord under the lease.
7.1 If the tenant fails to make a payment under the lease to the landlord for 14 days after the due date for the payment, the tenant shall pay to the landlord interest on the unpaid amount:
- (a) For the period from the date to the date on which the payment is made;
- (b) At a rate that is equal of 2% more than the rate of interest that the landlord’s bank charges on the due date to the landlord for an overdraft on a cheque account.
7.2 This clause does not affect other remedies of the landlord for failure by the tenant to make a payment.
8.1 The tenant shall pay on demand the following costs of the landlord:
...
(c) Solicitors’ client costs that relate to an attempt to enforce against the tenant the landlord’s rights under the lease;
...
12.1 The landlord shall insure the premises and the windows and the landlord’s fixtures, fittings and chattels for full replacement and reinstatement against all of:
- (a) loss, damage or destruction as a result of fire;
- (b) loss, damage or destruction as a result of earthquake;
- (c) loss of rent for a 12-month period consequential on interruption of the business;
- (d) liability for risk to the public.
12.2 The insurance policy shall be in the joint names of the landlord and tenant for their respective rights and interests.
12.3 The landlord shall consider in good faith any alternative insurance proposal submitted by the tenant or any competitive quote from established insurance brokers or insurance companies for the provision of insurance over that fully protects the landlord’s interests.
12.4 The tenant shall provide to the landlord the funds for all payments under the insurance policy.
...
14.1 The tenant shall keep the exterior and interior of the premises in the same good order, condition, and repair as they were at the commencement of the term, excluding any requirement to replace or repair exterior cladding or roofing where the requirement is due to fair wear and tear or defect and is the landlord’s responsibility under clause 13.
14.2 The tenant shall repair, paint, stain, and redecorate the interior and exterior of the premises. Such maintenance shall be carried out to such extent and as frequently as shall be necessary to maintain the exterior and interior of the premises in the same condition as they were at the commencement of the term.
14.3 Painting and decoration required under clause 14.2 must be to a specification and by contractors that are approved by the landlord. If any redecoration work involves a change in colour scheme, the tenant must obtain the landlord’s written consent. The landlord may not unreasonably withhold approval of a specification, a contractor, or a colour scheme.
14.4 The tenant shall keep and maintain sealed, paved, or surfaced, areas and all fences in good order, repair, and condition and whenever necessary shall carry out repairs and resurfacing required to keep the areas and fences in good order, repair, and condition.
14.5 The tenant shall:
- (a) Keep any grounds, yards and surfaced areas in a neat and tidy condition;
- (b) Maintain any garden or lawn areas in a tidy and cared for condition;
- (c) Replace any plants, shrubs, or similar growth when replacement is reasonably required;
- (d) Not cut down or substantially trim any trees or shrubs without the landlord’s written consent, which may not be unreasonably withheld.
...
17.1 The landlord shall set up a bank account called the Hawk’s Inn Maintenance Fund in the joint names of the landlord and the tenant.
17.2 The tenant shall pay into the bank account on each rent payment date an amount that is equal to the following proportion of the monthly payment that is due on the rent payment date and the Goods and Services Tax charged on the monthly payment.
- (a) 4%, if the rent payment date is after the end of the 2nd year of the term and before or at the end of the 7th year of the term;
- (b) 5%, if the rent payment date is after the 7th year of the term.
17.3 The tenant with the approval of the landlord may use the contents of the bank account to pay for work that is the responsibility of the tenant under clause 14.
17.4 The tenant has no right to the contents of the bank account other than under clause 17.3.
17.5 For the term of this lease, the landlord shall not permit the contents of the bank account to be used other than under clause 17.3.
The Lessee’s Counterclaim
[23] It is conventional to deal with a plaintiff’s claim before a defendant’s counterclaim. I have adopted the reverse order in this case because a decision on the counterclaim is necessary to deal fully with the lessor’s claim
Maintenance Fund
[24] The issue which has been the cause of disagreement between the parties relates to the extent of the lessee’s right to use the maintenance fund and the lessor’s power to control that use. The answer to that depends upon the meaning which is to be given to cl 17.3, more particularly the meaning to be ascribed to the words “with the approval of the landlord”.
[25] The issue came to a head because the lessor took the view that the fund should be used only for what the lessor considered to be major items of maintenance, such as resealing driveways and was not agreeable to releasing money from the fund to pay for day-to-day maintenance. The lessor’s concern was that if the fund was used for the latter, there would be insufficient moneys available for major items of maintenance.
[26] In the statement of counterclaim itself, the lessee’s position was that there should be implied into cl 17.3 a proviso that the lessor’s approval could not be unreasonably withheld. The lessor’s position appeared to be that there was no fetter on her power to withhold approval.
[27] By the end of the hearing, the process of legal discussion between counsel and the Court had brought about a meeting of the parties’ minds as to the proper meaning
of cl 17.3, which accorded with the conclusion that I had come to. I indicated that I would record that conclusion and the reasons for it. Counsel indicated that that should be sufficient to resolve the difficulties between the parties on this point and that no formal declaration or other order would be sought at this stage.
[28] My view, with which both parties now agree, is that the purpose of the words “with the approval of the landlord” is to enable the lessor to ensure that any payment from the fund will be used solely for the purpose of maintenance within the meaning of cl 14 and not for any other purpose. In practical terms, this means that the lessor, the joint holder of the bank account in which the maintenance fund is held, must permit the release of money from the account if she is satisfied that it is to be used to pay for maintenance which the lessee is required to carry out under the terms of cl 14.
[29] The features of the lease which led me to that conclusion are:
- The lessee has the sole obligation to maintain the premises at its cost in accordance with the detailed provisions of cl 14. That obligation exists independently of cl 17 and regardless of the state of the maintenance fund.
- The lessor has no power under the lease to control the way in which the lessee meets its obligation to maintain, except to the limited extent that cl 14 mandates.
[30] The obvious purpose of the fund is to help to ensure that the lessee meets its maintenance obligations by requiring it to put aside a significant sum on a continuing basis which the lessor can ensure will be used only to meet those obligations.
[31] Given the purpose of the fund and the features of cl 14 and cl 17 which have been highlighted above, I am satisfied that cl 17.3 must be read in the way which I have explained.
[32] A final point worth mentioning is that the maintenance required by cl 14 may be somewhat more limited in nature than the type of work which the parties have thought of as “maintenance”. In general, it does not extend to the replacement of lessor’s fixtures, fittings, or chattels with more modern items, or to general capital upgrades. While no doubt continuing work of that nature is commercially necessary to maintain competitiveness, it does not appear to come within the terms of cl 14 and thus may not, in the absence of express mutual agreement, be paid for from the maintenance fund established under cl 17.
Insurance
[33] The second head of the defendants’ counterclaim is a claim that the lessor has breached cl 12.2 of the lease2 by failing to insure the premises, the windows and the landlord’s fixtures, fittings and chattels “in the joint names of the landlord and tenant for their respective rights and interests”.
[34] The lessor’s answer is that the defendant’s interest is noted on the relevant insurance policy, thus discharging her obligation under cl 12.2. In any event, the defendants have suffered no loss arising from any breach by her of cl 12.2.
[35] The issue appears to have been first raised in an email dated 26 March 20143 in which Mr Gannon wrote:
I also note that cl 12.2 of the lease provides for the policy to be in joint names for “the respective rights and interests”. I cannot, in the documents you have provided, see any evidence that this is the case.
2 Para [22] supra
3 Affidavit of Kay Hawkins, Exhibit KH16
[36] Following that, Kay Hawkins emailed the insurer, FMG, on 6 April 2014, requesting confirmation that the tenant’s interest in the property as lessee was recorded. After further discussion with FMG, it issued to the lessor a document intituled “Certificate of Cover Multiple Items Interested Party”. The type of cover recorded appears to accord with the requirements of cl 12.1. Under the heading “Client Details”, the Certificate specified the lessor’s name and under the heading “Interested Party”, it recorded “Patrick and Caroline Gannon t/as McGannon Motels Limited Interest is noted as leasee (sic)”4.
[37] A copy of this Certificate was sent to the lessee under cover of a letter dated 6 July 2014. There was no suggestion in the evidence of any change in the way the insurer has recorded the interest of the lessee since that Certificate was issued.
[38] Both the lessor and the lessee have an insurable interest in leased premises. Obviously, their interests are different. The lessor is the owner of the premises and entitled to the reversion. The lessee has a right to possession of them for the term of the lease. It is common for commercial leases to provide, as this one does, that the lessor will insure the premises, but the lessee will pay the lessor the amount of the insurance premiums additional to rent. In those circumstances, whether or not the lessee is named as an assured in the policy, the policy is a composite one and each party has independent rights against the insurer5.
[39] Technically, there is a difference between a joint policy and a composite policy. Where the interests of the assured persons are the same, e.g. joint owners, the policy is said to be joint. Where their interests are different or divisible, the policy is said to be composite.6 A policy covering the different interests of a lessor and a lessee is a composite policy not a joint policy.
[40] Clause 12.2 must be read in the context of the legal position outlined above. The provision requires the lessor to insure in the names of both the lessor and the
5 Colinvaux’s Law of Insurance in New Zealand, 2nd ed 2017, para 15.1.10(1)
6 Ibid at para 15.1.3
lessee for their respective rights and interests. The use of the word “joint” in cl 12.2 was unnecessary and inapt.
[41] Since 2014, the policy has been in both names for their respective rights and interests. There is no evidence that the defendants suffered any loss before then as a result of the fact (if it is a fact) that they were not specifically named as an interested party in FMG’s records. Even if they were not, the legal position, as outlined above, is that they had independent rights against the insurer under the policy.
[42] It follows that there is no remedy available to the defendants under this head of their counterclaim.
The Lessor’s Claim
[43] The statement of claim filed on 11 April 2017 sought judgment against the defendants in the sum of $121,571.41 being:
- (a) (i) $51,241.81 for arrears of rental outgoings together with interest; and
- (ii) Legal costs of $70,329.57 (including GST) for enforcement of the lease; and
- (b) Any costs incurred in remedying damage caused, or permitted to be caused, to the premises by the lessee through the use of the premises for the manufacture of methamphetamine; and
- (c) Interest on unpaid moneys under cl 7 of the lease; and
- (d) Costs relating to the proceeding on a solicitor/client basis.
[44] The claims for outstanding rental and outgoings and for damage to the premises have been resolved. The outstanding claim is for recovery of legal costs incurred pursuant to cl 8.1(c).
[45] That is a claim for indemnity costs payable under a contract. The parties agreed at a teleconference prior to the hearing that a claim of this nature requires the Court to
address the matters listed by the Court of Appeal in paragraph [80] of its judgment in
Black v ASB Bank Ltd7 viz:
(a) What tasks attract a costs indemnity on a proper construction of the contract.
(b) Whether the tasks undertaken were those contemplated in the contract.
(c) Whether the steps undertaken were reasonably necessary in pursuance of those tasks.
(d) Whether the rate at which the steps were charged was reasonable having regard to the principles normally applicable to solicitor/client costs.
(e) Whether any other principles drawn from the general law of contract would in whole or in part deny the claimant its prima facie right to judgment.
[46] At that teleconference, it was agreed that the hearing would be confined to the issues enumerated in paragraph [80](a), (b) and (e). Accordingly, this judgment will not result in a final judgment. The issues referred to in paragraph [80](c) and (d) will remain to be addressed. Nevertheless, the Court will attempt to provide a decision on the issues before it which takes the dispute, as far as possible, towards final resolution.
[47] The lessor seeks to recover solicitor/client costs8 for work carried out by its solicitors, Morrison Kent, relating to the lease from the time the firm was first instructed on 26 August 2014 up to the present time, including costs in connection with this proceeding to date. At the hearing, I requested counsel for the lessor to provide the Court with a breakdown separating the costs incurred unrelated to this proceeding (“pre-proceeding costs”) from costs incurred for the purposes of this
proceeding (“proceeding costs”). Counsel provided a memorandum in response (dated 12 December 2018).
[48] The pre-proceeding costs now sought total $66,573.07, some deductions having been made from the total pre-proceeding costs of $80,361.94 (including GST). The proceeding costs claimed total $100,184.37 (including GST). That includes all costs up to and including 30 November 2018. Helpfully, full details of time recordings and invoices are attached to the memorandum.
Discussion
[49] The three issues identified in paragraph [46] above are those which the Court must decide. I consider that it is sensible to undertake that task in two stages: first in relation to the pre-proceeding costs and then in relation to the proceeding costs. I intend to refer to the submissions of counsel in the context of the discussion.
Pre-Proceeding Costs
[50] This part of the claim relates to legal costs charged to the lessor by her solicitors which relate to the lease, but are not costs in connection with this proceeding. In large part they were incurred before the proceeding was issued in April 2017. However, some portion of the costs incurred in the period November 2016 to September 2017 has been allocated to this category, while the remainder has been allocated to proceeding costs.
[51] The pre-proceeding costs total $80,361.94 (including GST). The period over which they were incurred commenced in August 2014 and ended in September 2017.
[52] The lessor has, both before and after the hearing, deducted certain sums from that total for the purposes of her claim. These sums are:
- (i) $1,150 (including GST) for attendances in relation to incorrect insurance invoicing. It is accepted that that issue is not within the ambit of cl 8.1(c).
[53] Thus, the balance now sought under this head is $66,573.67. The lessor asserts that all the work for which those costs have been charged relates to attempts to enforce her rights under the lease.
[54] The defendants assert that most of that work does not fall within the proper ambit of cl 8.1(c) because it does not constitute attempted enforcement of the lease. The only work which the defendants unequivocally accept is covered by that description is that connected with issuing PLA notices against the lessee although, even then, the defendants question whether their true purpose was enforcement.
[55] The dispute requires the Court to define exactly what is encompassed by the phrase “costs that relate to an attempt to enforce against the tenant the landlord’s rights under the lease”. This is a pure question of contractual interpretation which, in contrast with the proceeding costs, is not affected by the Court’s powers under the District Court Rules to award costs. That distinction needs to be kept in mind when considering the relevant authorities, most of which involve awards of costs in litigation.
[56] The principles of contractual construction of commercial agreements such as leases are well-established. Relevant authority was referred to in the submissions of both counsel. A succinct summary was provided by Tipping J in his judgment in the Supreme Court decision in Vector Gas Ltd v Bay of Plenty Energy Ltd9:
Interpretation of a commercial agreement is the ascertainment of the meaning it would convey to a reasonable person who has all the background knowledge
9 [2010] NZSC 5; [2010] 2 NZLR 444 at [61]
which would reasonably have been available to the parties in the situation in which they were at the time of contract. The language the parties use is generally given its natural and ordinary meaning, reflecting the proposition that the common law does not easily accept that linguistic mistakes have been made in formal documents.
[57] Counsel for the lessor submitted that the two key words in cl 8.1(c) are “relate” and “attempt”. Given that “relates” means no more than “show a connection to” and “attempts” means merely to “make an effort to achieve something”, a wide meaning should be given to the clause generally.
[58] However, the operative word in the clause is “enforce”. That which is covered must relate to an attempt to “enforce” the lessor’s rights under the lease. Both counsel referred to the meaning of that word in the Oxford Dictionary: “to compel observance of or compliance with a law, rule or obligation”. Counsel for the defendant submitted that that requires some sort of coercive action.
[59] Several of the authorities referred to by counsel concern the application of cl 6.1 of the Auckland District Law Society Form of Deed of Lease, the wording of which, prior to the Sixth Edition 2012(4), was “the landlord’s legal costs (as between solicitor and client) of and incidental to the enforcement or attempted enforcement of the landlord’s rights, remedies and powers”.10 These decisions generally do not contain any examination of what constitutes “enforcement” because they involve the making of awards of costs in proceedings which patently involve enforcement of some other right of the landlord under the lease.
[60] However, in AAA Storage Limited v Onehunga Primesite Limited11 Woodhouse J was required to consider the ambit of “enforcement” under that clause. The proceeding was an application under s 253 of the PLA for relief against cancellation,12 the landlord having issued a notice of intention to cancel the lease under ss 245 and 246 of that Act, for non-payment of rent and other sums alleged to be due under the lease. The Court held that, because the tenant paid all sums properly due before the
12 Formerly called “relief against forfeiture”
notice expired, the subsequent legal costs incurred by the landlord were not for enforcement of its rights.
[61] Nevertheless, it has been held that a landlord’s costs incurred in defending a tenant’s application for relief against cancellation were “incidental to” enforcement in that such an application is filed as a defence to the landlord’s PLA notice.13
[62] In my view, “enforcement” involves the application of some form of legal compulsion for the purpose of giving effect to the lessor’s rights under the lease. That interpretation places limits on the lessor’s ability to recover from the lessee legal costs incurred which relate generally to the lease. For example, there is a distinction between protecting the lessor’s rights and enforcing them as recognised by the wording of the indemnity clause under consideration in ASB Bank Ltd v Black14.
[63] It is difficult to see that the focus on “attempts” to enforce the lessor’s rights adds much. As noted above15, “attempted enforcement” was removed from cl 6.1 of the ADLS lease form in 2012 for reasons which I have been unable to establish. It may be that the reference to “attempts” was thought to be otiose. An enforcement process will attract the costs indemnity from the time it starts even though, at that stage, it could be termed a mere attempt to enforce the lessor’s rights. I consider that an attempt to enforce will encompass any step in an enforcement process whether or not it achieves its object and whether or not it is taken to a successful conclusion.
[64] The words “relate to” generally mean no more than “has a connection to”. However, the word must be read in the context of the clause as a whole as it would be understood by a reasonable business person. Such a person would not expect a tenant to indemnify a landlord for legal costs which are not causatively related to enforcement. In context, there is probably no material difference between “relates to” and the words used in the equivalent cl 6.1 of the ADLS lease, viz “of and incidental to”.
14 Supra at n 7
15 Supra at n 10
[65] It is not possible in this judgment to apply that interpretation to every individual item of work recorded by the lessor’s solicitors and included in the claim for pre-proceeding costs. The best that can be done is to identify categories of work claimed for to which the interpretation can be readily applied.
[66] Both counsel have sought to categorise the legal work undertaken in their respective submissions. The list below is largely a product of their combined efforts:
- Work relating to the two liquidation proceedings taken by the lessor against the lessee inclusive of prior statutory demands.
- Work relating to five notices issued by the lessor to the lessee pursuant to ss 245 and 246 of the PLA.
- Work relating to the Disputes Tribunal claims (CIV-2014-096-000504) made by the lessee against the lessor in 2014.
- Work relating to maintenance fund and insurance issues.
- Receiving instructions and considering documentation and correspondence.
- Attendances with the lessor.
- Research and advice.
- Correspondence with the defendants and their solicitors.
[67] The first three categories relate to specific areas of work while the last five relate to specific types of work.
[68] As recorded above, the lessor is no longer pursuing costs in relation to the two liquidation proceedings, not because they do not involve attempted enforcement of the lessor’s rights, but because they have already been reimbursed and/or were the subject of an award of costs. There may remain a claim for the work involved in issuing the statutory demands on which the proceedings were founded. It also appears that there was a third statutory demand which was not followed by a liquidation proceeding.
[69] I consider that the liquidation proceedings do constitute attempts to enforce the lessor’s rights. The preceding statutory demands are an integral part of the enforcement process. If the costs for the work relating to them have not been reimbursed or included in an award of costs, they fall within the ambit of pre- proceeding costs which are recoverable from the lessee. The same applies to the statutory demand which was not followed up. It was the first step in a contemplated enforcement proceeding.
[70] The defendants acknowledge that the work relating to the issue of the PLA notice does relate to attempts at enforcement. However, counsel for the defendants questioned whether they were genuinely enforcement efforts in that they were not followed by a cancellation of the lease or an application to do that.
[71] In my view, that fine distinction is not justified either on the evidence or as a matter of interpretation of cl 8.1(c). The issue of a notice is the first step in a legal process to enforce the lessor’s rights by cancellation of the lease. It is not possible to judge what the lessor’s future intention might have been in the event the notice was not complied with. Nor is it commercially sensible to read cl 8.1(c) as requiring proof that the lessor intended to follow up a notice with cancellation if not complied with.
[72] As advised to counsel at the hearing, I have obtained and considered the Disputes Tribunal file in order to fully understand the nature of both the lessee’s claims and the work carried out by the lessor’s solicitors. It appears that two claims were filed by the defendants in 2014. One related to the insurance issue. It recorded that the defendants had not paid the insurance premium for $10,772.39 requested and sought answers to three specific questions:
- Does the policy apply to the Hawk’s Inn Motel?
- Does the policy comply with cl 12.2 of the lease?
- If the policy does not comply with cl 12, who is responsible for payment?
[73] The other claim appears to have related to rental interest arrears of $5,661.26.
[74] On 25 September 2014, the lessor’s solicitors wrote a long letter to the defendants relating to insurance premium arrears, rent and interest arrears, outstanding maintenance fund payments and additional breaches of the lease. In relation to the insurance arrears, they addressed the defendants’ Disputes Tribunal claim. They advised that if that claim was pursued, they would advise the Tribunal that the total amount of insurance arrears was $43,605.62, above the Tribunal’s monetary jurisdiction, and that the lessor did not agree to the Tribunal “dealing with your debts to our client”.
[75] On 17 October 2014, the solicitors sent an email to the Tribunal to that effect with supporting submissions. The Tribunal hearing was scheduled for 20 October 2014. The lessor presented extensive written submissions prepared by their solicitors to persuade the Tribunal it had no jurisdiction. The submissions justifiably characterised the remedy sought by the defendants as a declaration they were not liable to pay the two sums specified. The solicitors advised that the actual sums owing under each head were $44,105.43 and $6,137.16 respectively and the dispute really involved those sums which were outside the Tribunal’s jurisdiction. The submission argued that the claims should be dealt with in the context of the PLA notice process which, the solicitors stated, the lessor was now “at the point of looking to issue ... with a view to terminating the lease”.
[76] After an adjournment for the defendants to make a written response on the jurisdiction issue, by a decision dated 8 December 2014 the Tribunal struck out both clams on the basis that they far exceeded the Tribunal’s jurisdiction.
[77] I am satisfied that the intent and potential of the claims was to obtain a ruling of the Tribunal that the defendants were not liable to reimburse the insurance premiums and the overdue interest. Repayment of these sums were rights given to the lessor by the lease. She wished to enforce those rights by the issue of PLA notices. An adverse ruling of the Disputes Tribunal had the potential to obstruct that enforcement process. Given that direct connection to the enforcement process about to be undertaken by the lessor, I consider the solicitors’ work to effectively nullify the Tribunal claims is directly related to an attempt to enforce the lessor’s right to
undertake her preferred enforcement process, viz. the issue of PLA notices preliminary to cancellation.
[78] The other categories listed above relate to the type of work undertaken by the solicitors. In principle, all those types of work could be the source of costs which would attract the indemnity. However, the work, whatever type it is, must be causatively related to a legal process of enforcement of the lessor’s rights. In para 21 of the submissions of counsel for the plaintiff dated 20 November 2018, these types of work are described in a more general way, which could encompass work not covered by cl 8.1(c). Without dealing with each individual item, it is not possible to be more specific.
Proceeding Costs
[79] The reason why I have decided to deal with these as a discrete topic is because of the distinction referred to in Para [55] above between a claim under a contract to be indemnified for legal costs incurred and an award of contractual costs made in the exercise of a Court’s jurisdiction to make an order for costs in litigation. Normally such awards are made consequent upon a separate successful substantive claim based on the contract in question. The award sought here is unusual in that a claim for contractual indemnity costs is itself the substantive claim. However, that does not alter the general principles applicable. It does mean, in contrast with the pre- proceeding costs, that there is little room for argument about whether the costs for which indemnity is sought were incurred in attempting to enforce the lessor’s rights under the lease: the right to indemnity costs is itself a right given by the lease.
[80] The judgment of the Court of Appeal in Black v ASB Bank Ltd16 identifies the source of the Court’s power to make an award of indemnity costs in respect of a proceeding. It is found in DCR 14.617. This provides:
16 Supra at n.2
17 The relevant rule in the District Court Rules 2014 has exactly the same numbering and wording as the corresponding rule in the former High Court Rules in force at the time Black v ASB Bank Ltd was decided.
14.6 Increased costs and indemnity costs
(1) Despite rules 14.2 to 14.5, the court may make an order—
...
(b) that the costs payable are the actual costs, disbursements, and witness expenses reasonably incurred by a party (indemnity costs).
...
(4) The court may order a party to pay indemnity costs if—
...
(e) the party claiming costs is entitled to indemnity costs under a contract or deed;
[81] The task of prosecuting a claim in the Court to recover legal costs incurred by the lessor in attempting to enforce its rights under cl 8.1(c) is obviously itself a task which would be contemplated as attracting a costs indemnity under the provision.
[82] The defendants have pointed to only one area of the proceeding costs as being outside the ambit of attempted enforcement of the lessor’s rights under cl 8.1(c). That is the work which relates to the defendants’ counterclaim in respect of the maintenance fund and the insurance.
[83] I agree with the defendants’ position in this respect. The legal work carried out in defending the counterclaim issues does not constitute an attempt to enforce any right of the lessor. As far as the maintenance fund issue goes, essentially the dispute was one of interpretation of the wording of cl 17. Likewise, the insurance issue related to the meaning of cl 12 and the way in which that meaning should be given effect.
[84] In her submissions, the lessor acknowledged that these issues “may not be” attempts to enforce the plaintiff’s rights under the lease18, but submitted they should fall within the ambit of cl 8.1(c) because the plaintiff was required to deal with them simultaneously with those connected with performance of the defendants’ obligations under the lease as they have been raised as defences and/or reasons for the defendants’ non-performance.
18 Closing submissions of plaintiff para 27
[85] The fact that other issues relating to the lease have been raised simultaneously with an attempt to enforce the lessor’s rights under the lease, does not bring them within the ambit of cl 8.1(c). Separating the legal work relating to those issues from the legal work relating to enforcement may be practically difficult, but that is not a reason to charge it all to the defendants.
[86] Nor have these issues been raised in the proceeding as defences to the lessor’s claim, or as reasons for non-payment of amounts properly payable under cl 8.1(c). In relation to the maintenance fund, the remedies sought were declarations and an order for reimbursement of costs incurred in undertaking maintenance which should have been paid for from the fund in a sum to be quantified (never quantified or pursued at trial). In relation to the insurance issue, orders were sought for specific performance of cl 12.2. In this regard, there is a distinction between the counterclaims in this proceeding and the claims in the Disputes Tribunal involving the same issues. Those claims were, in effect, raised as defences.
[87] An adjustment will be required to remove an appropriate sum from the lessor’s claim for indemnity proceeding costs for work related to defending the counterclaim issues. It may be that the parties can agree on this. If they cannot, then the Court will be required to undertake this task. It may be that a broad percentage approach will need to be taken if the task of unpicking individual attendances and invoices is found to be impracticable. That robust approach is often taken in the cases in which contractual indemnity costs are awarded.
[88] The final issue which the Court is required to resolve at this stage, is whether any discount should be applied to the lessor’s proceeding costs to account for the fact that the lessor’s success in the claim for pre-proceeding costs, once quantification has been achieved, will almost certainly be less than total.
[89] Although a contractual indemnity should not be anything less than a full indemnity for costs properly incurred19, it is common practice for the Court, when making an award of contractual indemnity costs, to discount the full solicitor/client
costs incurred in the proceeding to allow for the fact that the party relying on the indemnity has had only partial success. Examples of that in the cases cited by counsel in this case are AAA Storage Ltd v Onehunga Primesite Ltd20; Watson v Whitehead21; Roses are Red v Board of Administration of the Methodist Church of New Zealand22; Maydanozx NZ Ltd v Poppelwell23. The cases also show that the making of a Calderbank offer may also affect the degree to which an indemnity for the full costs of the litigation is awarded.
[90] The principle for such reductions is not always clearly articulated. The recent decision of Hinton J in Herron v Wallace24 provides perhaps the most direct attempt to grapple with the issue. In that case, a claimant, who had obtained judgment in the High Court in the sum of $966,531, had been awarded contractual indemnity costs of
$335,662. The Court of Appeal allowed an appeal against the amount of the judgment, reducing it to $291,531. The issue of costs awarded in the High Court was referred back to the High Court to reconsider in the light of the Court of Appeal’s decision.
[91] Having decided that the claimant was still entitled to costs as the successful party in the High Court, albeit for a lesser sum, Hinton J turned to consider whether the contractual costs award should be reduced on account of the reduction in the amount of the judgment obtained. She noted the absence of authority as to the basis for reducing or not the costs awarded and accepted that strictly any reduction should be based on the identification of any steps for which costs had been awarded which should be removed as a result of the appeal judgment.
[92] Ultimately, she felt able, as a result of a concession by counsel for the claimant, to take a robust view and reduced the award by 30%, part way between the 70% by which the quantum of the judgment had been reduced as sought by the other party and the 10% reduction accepted by the claimant.
22 [2009] NZCA 237; (2009) 19 PRNZ 369
[93] It seems, therefore, that there is ample precedent for some limited reduction in contractual indemnity proceeding costs for only partial success despite the absence of a clear basis in principle for it. It may be explained as a reflection of the overriding discretion of the Court in regard to proceeding costs or of a calculation that if a claimant has had only partial success, not all the costs incurred by it can have been properly incurred. It is not possible to be more specific on this issue at this stage other than to say that in the final result, some adjustment will have to be made in the proceeding costs for the fact that the lessor may not be fully successful in her claim for pre-proceeding costs.
[94] That leaves costs on the counterclaim to be dealt with under normal costs principles. My preliminary view is that costs on the counterclaim should lie where they fall.
[95] As set out above, the proper interpretation of cl 17 was essentially resolved during the course of the hearing. That interpretation was closer to that espoused by the lessee than by the lessor. The latter essentially argued for an interpretation which gave her a veto over the type of maintenance work under cl 14 which could be paid for from the fund. In fact, her power to control is limited to ensuring that the work for which payment from the fund is sought is of a type described in cl 14.
[96] On the other hand, the counterclaim relating to insurance was without substantive merit. However, it was not pursued with any real vigour and was little more than a distraction.
[97] I am conscious that neither party has had the opportunity to address the issue of costs on the counterclaim with knowledge of the result and of the basis on which costs will be decided. If either party disagrees with the preliminary view I have expressed, further submissions may be made in conjunction with the determination of other issues left outstanding after this judgment.
The Way Forward
[98] To reach a final resolution of their dispute, the parties must determine the issues enumerated in para [80](c) and (d) of the judgment in ASB Bank Ltd v Black and, following that, obtain a quantification of both the pre-proceeding costs and the proceeding costs in terms of those determinations and the determinations made in this judgment. As to the former, both parties have already obtained (and presumably paid for) extensive expert evidence.
[99] It is obvious that the costs of achieving that final resolution will themselves be significant. Furthermore, the defendants are in the invidious position that not only their own costs, but potentially the lessor’s costs also will fall on them. In those circumstances, there is a strong incentive for both parties to settle without further litigation.
[100] Various potential resolution mechanisms were set out by the Court of Appeal in ASB Bank Ltd v Black of which the parties’ advisers will be aware. There are other possibilities which occur. One is for the parties to agree to abide by the joint decision of their expert witnesses made upon the basis of the findings in this judgment. Another is for the parties to request a further judicial settlement conference at this point to resolve quantum. That would be an unusual course, but one which I would be prepared to direct if requested. (I would not be able to preside at any such conference as I may yet be called on to deliver a further judgment in this proceeding).
Conclusion
[101] The Court requests that the parties file a joint memorandum as to the steps proposed towards final resolution by the end of February. It is in the interests of both to co-operate. In the meantime costs are, of course, reserved.
C N Tuohy
District Court Judge
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URL: http://www.nzlii.org/nz/cases/NZDC/2018/23829.html