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High Court of New Zealand Decisions |
Last Updated: 22 January 2018
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IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2008-404-8585
UNDER Section 3 of the Declaratory Judgements
Act 1908
IN THE MATTER OF a lease between Timothy Drummond Hardley and Keith Sharples
Hardley as Landlord and Normanby Project Limited (In
Liquidation) as
tenant
BETWEEN TIMOTHY DRUMMOND HARDLEY, KEITH SHARPLES HARDLEY AND CORALIE HARDLEY
Applicants
AND VIVIAN FATUPAITO AND COLIN MCCLOY AS LIQUIDATORS OF NORMANBY PROJECT LIMITED (IN LIQUIDATION)
Respondents
Hearing: 11 June 2009
Appearances: Mr R J Connell for Applicants
Mr M J Tingey for Respondents
Judgment: 30 June 2009 at 3 pm
JUDGMENT OF LANG J
This judgment was delivered by me on 30 June 2009 at 3 pm, pursuant to
Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date...............
Solicitors:
Connell & Connell, Auckland
Bell Gully, Auckland
HARDLEY V FATUPAITO AND MCCLOY AS LIQUIDATORS OF NORMANBY PROJECT LIMITED (IN LIQUIDATION) HC AK CIV-2008-404-8585 30 June 2009
[1] The applicants are the owners of a commercial property that they
leased to a company called Normanby Project Limited. That
company operated a
restaurant on the premises.
[2] The restaurant is said to have operated successfully, but the company
nevertheless got into financial difficulties. It eventually
went into
liquidation, and the respondents were appointed as liquidators.
[3] Although they had the power to do so, the liquidators did not
disclaim the lease on the basis that it was onerous property.
Instead, they
paid rent from the date that they were appointed and they placed the restaurant
business on the market. When they
found a purchaser, they sought the
lessors’ consent to an assignment of the lease to the purchaser. The
lessors confirmed
that they would give their consent to the assignment, but only
on the condition that the liquidators paid outstanding arrears of
rental and
outgoings that the company owed under the lease. As at the date upon which the
company went into liquidation the total
amount outstanding to the lessors was
$24,431.27.
[4] The liquidators took the view that they had no obligation to pay the arrears. They argued that the condition that the lessors had imposed was in breach of s
227(1)(a)(i) of the Property Law Act 2007. That section prohibits a lessor
from requiring a lessee to pay any “amount (whether
by way of additional
rent, or by way of premium or fine) or other consideration” when the
lessee seeks the consent of the lessor
to a proposed assignment of lease. The
liquidators also argued that the lessors were in breach of their obligations
under the lease
by imposing the condition. They contended that by imposing the
condition the lessors were unreasonably withholding their consent
to the
assignment.
[5] The liquidators also contended that payment of the arrears would result in the lessors being preferred over the other unsecured creditors of the company. They maintained that this would also contravene the Companies Act 1993, which requires unsecured creditors to share equally in the assets of any company in liquidation.
[6] In order to resolve the impasse the lessors filed an originating
application seeking declaratory relief that confirms their
right to require the
liquidators to pay the arrears of rental. Pending the Court’s decision
on this point, the parties have
reached a sensible compromise that protects
their respective positions whilst allowing the sale of the restaurant
business
to proceed. This involves the liquidators’ solicitors holding
the arrears of rental in their trust account until such time
as the Court has
delivered its decision.
[7] In order to understand the issues that the Court is required to
determine, it is necessary to briefly refer to the relevant
provisions of the
lease.
The lease
[8] The lease is the Auckland District Law Society form of lease
4th Edition 2002 (2) that contains amendments particular to the
agreement that the original lessor and lessee reached. These are not
relevant
for the purposes of this proceeding.
[9] The lease contained standard covenants on the part of the lessee to
pay rental and outgoings without deduction or set-off.
It also
contained the following provisions relating to the circumstances in which the
lessor would be entitled to re- enter
the premises and determine the
lease:
29.1 THE Landlord may re-enter the premises at the time or at any time
thereafter:
(a) if the rent shall be in arrear 14 days after any of the
rent payment dates;
(b) in case of breach by the Tenant of any covenant or agreement on the
Tenant’s part herein expressed or implied;
(c) if the Tenant shall make or enter into or endeavour to make or enter
into any composition assignment or other arrangement with
or for the benefit of
the Tenant’s creditors;
(d) in the event of the insolvency bankruptcy or liquidation of the
Tenant; or
(e) if the Tenant shall suffer distress or execution to issue against the Tenant’s property goods or effects under any judgment against the Tenant in any Court for a sum in excess of five thousand dollars ($5,000):
and the term shall terminate on such re-entry but without prejudice to the
rights of either party against the other.
[10] The most important provision of the lease for present purposes is
Clause 35, which provided the lessee with a qualified right
to assign its
interest under the lease. It provided as follows:
ASSIGNMENT OR SUBLETTING
35.1 THE Tenant shall not assign sublet or otherwise part with the
possession of the premises or any part thereof without first obtaining the
written consent of the Landlord which the Landlord shall give if the following
conditions are fulfilled:
(a) The Tenant proves to the satisfaction of the Landlord that the proposed
assignee or subtenant is (and in the case of a company
that the shareholders of
the proposed assignee or subtenant are) respectable responsible and has the
financial resources to meet
the Tenant’s commitments under this
lease;
(b) All rent and other moneys payable have been paid and there is not any
subsisting breach of any of the Tenant’s covenants;
(c) ...
The issues
[11] There is no dispute in the present case that the proposed
assignee was acceptable to the lessors in terms of
Clause 35.1(a) of the lease.
The only question is whether the lessors were entitled to withhold their consent
under Clause 35.1(b)
on the basis that the company had not paid the arrears of
rent and outgoings.
[12] In responding to the lessors’ application the liquidators
raise three arguments
They are:
3. The condition was in breach of the Companies Act
1993 because it would require the liquidators to prefer the lessors over
the
other unsecured creditors of the company.
1. Did the condition contravene s 227(1)(a)(i) of the
Property Law Act
2007?
[13] Section 227(1)(a)(i) relevantly provides:
227 When consent is unreasonably withheld
(1) For the purposes of section 226(2)(a), consent is unreasonably withheld if,—
(a) as a condition of, or in relation to, giving consent, the lessor— (i) requires the payment of an amount (whether by way of
additional rent, or by way of premium or fine) or other
consideration; or ...
[14] The section is not entirely new. Its predecessor was s 109(1) of
the Property Law Act 1952, which provided that “no
fine or sum of money in
the nature of a fine shall be payable for or in respect of any such licence or
consent [to a proposed assignment]”.
Earlier statutory provisions were to
the same or similar effect.
The purpose of the section
[15] Counsel for the liquidators reminded me that, in interpreting the
meaning of a statute, it is necessary to have regard to
both the text of the
enactment and its purpose. He drew my attention to the following passage from
the judgment of the Supreme Court
on Commerce Commission v Fonterra
Co-operative Group Limited [2007] NZSC 36; [2007] 3 NZLR 767:
It is necessary to bear in mind that s 5 of the Interpretation Act 1999 makes text and purpose the key drivers of statutory interpretation. The meaning of an enactment must be ascertained from its text and in light of its purpose. Even if the meaning of the text may appear plain in isolation of purpose, that meaning should always be cross-checked against the purpose in order to observe the dual requirements of s 5. In determining purpose the Court must obviously have regard to both the immediate and the general legislative context. Of relevance too may be the social, commercial or other objective of the enactment.
[16] In Waite v Jennings [1907] 2 KB 11 Moulton LJ described the
purpose of comparable statutory provisions in England as follows (at
17-18):
Now it is evident that an unqualified covenant not to assign without consent
may be turned from a protection to the lessor to a means
of profit to him, if
money or money’s worth can be demanded as a condition of granting the
consent. If this is done, the lessee
is placed in much the same position as a
copyholder who is subject to an arbitrary fine on alienation. That being so,
the Legislature
stepped in to prevent the lessor thus abusing his powers. It
has done so by providing in s 3 of the Conveyancing Act, 1892, that
into every
lease containing a covenant against parting with the possession of the property
leased without the consent of the lessor
there shall be read in ... a proviso
that no fine or sum of money in the nature of a fine shall be payable for or in
respect of a
... consent to assign. In other words, the Legislature declares
that the power to refuse consent to assign is not to be made a source
of profit
to the lessor.
[17] I consider the purpose of s 227(1) is much the same. It is designed
to prevent the lessor from using its power to consent
to an assignment to gain
an improper advantage or benefit from the lessee. There is nothing in the
section, however, to suggest
that it was intended to curtail the lessor’s
ability to enforce rights under the lease that exist independently of any
request
for consent to a proposed assignment. A lessor’s requirement in
this context will therefore only be improper when it is triggered
solely by a
request by the lessee for consent to an assignment.
[18] The need for the section arises as a result of the fact that a
lessee will generally not be able to assign its interest
under a lease without
the lessor’s consent. The lessor is therefore potentially in a position of
considerable power over the
lessee. The lessee may often be anxious, or even
desperate, to assign its obligations under the lease to a third
party.
[19] The section is designed to redress this imbalance of power. It
operates to prevent the lessor from abusing its position.
It does so by
prohibiting the lessor from requiring the lessee to provide additional
consideration to the lessor in order to secure
the lessor’s consent to a
proposed assignment.
[20] With that purpose in mind it is appropriate to consider the meaning
to be given to the words used in s 227(1)(a)(i). I begin
by considering the
distinction to be drawn between the words “amount” and
“consideration”.
[21] The Select Committee that referred the draft Property Law Bill back
to the House inserted the word “amount” into
clause 227(1)(a)(i).
Up until that point the clause had contained the word “money”
instead of “amount”.
Neither the Select Committee’s report,
nor the Hansard reports of subsequent parliamentary debates, shed any
light on the reason for the change in wording.
[22] I consider, however, that the meaning to be ascribed to the terms
“amount” and “consideration” are
clear. The word
“amount” means a monetary amount. It captures all payments by way
of monetary consideration. The
term “consideration” is wider, and
encompasses all forms of benefit or advantage that the lessor might seek to
obtain
from the lessee after being asked to consent to a proposed
assignment.
[23] It is not difficult to see why Parliament was anxious to ensure that
the section applied to all forms of benefit or advantage
that a lessor might
seek to obtain from a lessee in this context. One can readily envisage a
situation in which the lessor might
agree to consent to a proposed assignment
provided the lessee did something for the lessor in return. By way of example,
the lessor
could ask the lessee to carry out renovation or refurbishment work on
the premises that the lessee was not required to carry out
under the lease. To
take a more extreme example (and one that counsel for the lessors suggested
during the hearing), the lessee
could ask the lessee to meet the costs of an
overseas trip for the lessor in return for the granting of consent.
[24] I therefore take the difference between the term
“amount” and “consideration” to
lie in the fact that
the former applies to monetary benefits, whilst the latter applies to all forms
of non-monetary benefits.
The scope of the term “amount”
[25] Counsel for the liquidators contended that the word “amount” was not limited or restricted in any way by the words “whether by way of additional rent, or by way of premium or fine”. He submitted that the word stood on its own, and that it was not necessary to read it down or restrict its meaning in any way. As a result, he
argued that the section applies to any amount at all that the lessor requires
the lessee to pay in the context of a request
for consent to a
proposed assignment. He contended that the only exception is that contained
in s 227(2), which permits
the lessor to require the lessee to pay the
reasonable legal or other expenses of the lessor in giving consent.
[26] I do not agree. Had Parliament added the words “or
otherwise” to the end of the phrase beginning “whether
by”,
the submission may have had some merit. It could then be argued that the words
“additional rent”, “premium”
and “fine” were
merely non-exclusive examples of the types of payment that would be caught by
the section.
[27] Parliament has, however, drafted the section in such a way that the
very general word “amount” is followed immediately
by the words
“whether by”. The phrase “whether by” therefore
clearly qualifies the word “amount”.
The phrase “whether
by” is in turn followed by three types of payment that, as I shall shortly
explain, share a common
feature. For present purposes I am prepared to accept
that the words “additional rent”, “premium” and
“fine”
may not necessarily comprise an exclusive category of
payments that will be deemed to be an “amount” for the purposes
of
the section. Even allowing for that possibility, however, those words
nevertheless operate to restrict the type, or nature,
of monetary payment that
will be caught by it.
[28] I therefore proceed on the basis that, in the context of a request
by a lessee for the lessor’s consent to a proposed
assignment, the section
does not apply to every amount that the lessor might require the lessee to pay.
It applies only to any amount
that the lessor may require the lessee to pay that
is in the nature of additional rent, premium or fine.
[29] The terms “additional rent”, “premium” and
“fine” are not defined in the Act. It is therefore
appropriate to
consider what they mean in the present context.
“Additional rent”
[30] The concept of “additional rent” is straightforward. In
this context I take it to mean rent that is payable
over and above the rent that
the lessee must already pay under the lease.
[31] It is instructive, in my view, that Parliament has only included
“additional rent” within the category of amounts
that are caught by
the section. It would have been a simple matter for the section to have been
worded so that it applied to both
“outstanding or additional rent”.
Had that been the case, there could be no dispute that it also applied to any
requirement
that the lessee was to pay outstanding rent.
[32] The lessor is therefore prohibited in this context from requiring
the lessee to pay more rent than the lessee is already
required to pay under the
lease. This means, for example, that the lessor cannot require the lessee to
pay a lump sum equivalent
to three or six months rent in order to obtain the
lessor’s consent to a proposed assignment.
“Premium and fine”
[33] The position in relation to the terms “premium” and
“fine” is not quite as straightforward, because
they are technical
terms, particularly in the context of leasehold estates in land.
[34] Counsel for the lessors referred me to the following definitions in
Mozley and
Whiteley’s Law Dictionary (New Zealand edition)
1964:
“Fine” is defined as “any pecuniary penalty or pecuniary
forfeiture or pecuniary compensation payable under a conviction”
and
“fine for renewal of lease” is defined as a sum of money payable by
a lessee on a renewal of lease.
“Premium” is defined as “a reward”, a “lump sum or fine paid for the granting of a lease, a sum paid in excess of the nominal value of shares or stock”.
[35] Counsel also referred me to Gillett v Burke [1997] 1 VR 81,
in which the Supreme Court of Victoria considered s 9(1) of the Retail Tenancies
Act 1986. That section operated to render void any provision of a lease that
entitled the landlord to obtain any “key money”
or “any
consideration for the goodwill of the business”. The Act defined
“key money” inter alia as money
that the tenant was required to pay
“by way of a premium or something of a like nature in consideration of
the...consenting
to an assignment of a lease or sub-lease”.
[36] This wording led Ormiston J to consider the historical background of
the words “premium” and “fine”
in considerable detail at
91 – 97.
[37] He said at 92-93:
A brief examination of the treatment of both fines and premiums will
demonstrate that their only common characteristic is that they
consist of
capital payments in consideration of the creation, renewal or assignment of
leasehold or similar interests in land...One
primary purpose of fines and
premiums has been to acquire or retain particular non-permanent interests in
land. Sometimes the motive
for demanding one or the other has been merely to
obtain an immediate capital payment in circumstances where the tenant or
proposed
tenant cannot refuse...More recently, in the present century, premiums
have been exacted because there has been legislative restriction
on the rent
which can be reserved in a lease or otherwise demanded from a tenant and so
there was clear motive for landlords to make
up the difference between the
permitted rents and what they wished to obtain by exacting a premium from
tenants or proposed tenants.
This almost every legislative scheme sought to
prevent by prohibiting the payment and receipt of premiums, ordinarily defined
to
include a “fine or other like sum”.
[38] He also noted that the learned authors of Butt, Land Law
(5th ed 2005) observe at [1549] that “[a] fine is a lump
sum payment made in return for the grant of the lease”. And
further:
Sometimes it is difficult to distinguish between a lump sum paid in return
for the grant of a lease (a “fine”, or in more
modern parlance a
“premium”) and a lump sum that is in reality a compounding of rent
payable in advance (and usually
in addition to regular rent) for use of the
land.
[39] Ormiston J observed that the current meanings to be attributed to the terms “premium” and “fine” were applied in one of the earliest revenue cases, King v Earl Cadogan [1915] 3 K.B. 485. In that case, which was concerned with the meaning of the word “premium” in the Finance Act 1912 (UK), Warrington L.J. said at 492-3:
[P]remium, as I understand it, used as it frequently is in legal documents,
means a cash payment made to the lessor, and representing,
or supposed to
represent, the capital value of the difference between the actual rent and the
best rent that might otherwise be obtained.
It is a very familiar expression to
everybody who knows the forms and powers of granting leases. It is in fact the
purchase-money
which the tenant pays for the benefit which he gets under the
lease.
[40] I consider that, in using the words “additional rent”,
“premium” and “fine” in s 227(1)(a)(i),
Parliament
intended to capture every type of monetary or non- monetary benefit or advantage
that a lessor might seek to extract from
a lessee. The section only applies,
however, to benefits and advantages that the lessor seeks to extract as a
consequence of a request
for consent to an assignment.
[41] It does not matter whether the lessor requires the lessee to provide
the benefit or advantage as a formal condition of granting
consent or whether it
does so informally. The latter will fall within the words of the section
because it is “in relation
to” a request for consent to an
assignment.
[42] The section will also apply regardless of whether or not the lease
contains an express provision giving the lessor the right
to require the lessee
to provide the lessor with the benefit or advantage. Where the entitlement
arises from, or is triggered by,
a request for consent to an assignment, it will
be void because it contravenes the section.
[43] The corollary to this principle, however, is that the section does
not apply in circumstances where the lessor seeks to enforce
a contractual right
that exists or arises completely independently of the request for
consent.
Decision
[44] The liquidators’ argument is straightforward. They contend that the section applies in the present case because the lessors have required the liquidators to pay an amount, namely the outstanding rental, as a condition of granting their consent to the proposed assignment. As a result, they say that s 227(1)(a)(i) applies, and the liquidators must be taken to have unreasonably withheld their consent.
[45] My earlier analysis of the meaning to be given to the section means,
however, that this argument cannot succeed. Although
the lessors have required
the company to pay a monetary sum as a condition of granting consent to the
assignment, the company is
already required to pay that sum under the terms of
the lease. The requirement to pay the arrears is a contractual obligation that
arose prior to, and exists entirely independently of, the request for consent to
the proposed assignment. The rental that the lessors
seek does not, in my view,
comprise consideration, or the price to be paid by the liquidators, for the
consent of the lessors to
the proposed assignment.
[46] Nor, in my view, can the amount that the lessors have required the
liquidators to pay realistically be described as being
in the nature of
additional rent, a premium or a fine. They are not requiring the liquidators to
provide them with any further benefit
or advantage over and above that to which
the lessors were already entitled under the lease.
[47] Counsel for the liquidators endeavoured to resist this line of reasoning by advancing an argument based upon the preferential treatment that the lessors would receive if the liquidators were to make the payment that the lessors are seeking. Counsel submitted that, if the liquidators make the payment, the lessors will inevitably receive more than would be the case if they were treated in the same way as the other unsecured creditors of the company. Counsel argued that this meant that the lessors were seeking to obtain an additional benefit or advantage that brought s
227(1) into play.
[48] I consider, however, that this argument confuses two distinct and separate concepts. One relates to benefits and advantages that arise within the context of the relationship of the parties as lessor and lessee. The other relates to the dividend that the lessors can expect to receive as unsecured creditors in the liquidation. Section
227(1) is only concerned with the former; the latter has no application in the present context. The issue is therefore not whether the lessors are seeking to obtain more than they would receive as unsecured creditors of the company. Rather, it is whether they are seeking to obtain an additional benefit from the lessee as a result of the fact that the lessee is seeking the lessors’ consent to the proposed assignment.
[49] Next, counsel for the liquidators submitted that, if the
argument for the lessors is correct, s 227(2) is rendered
meaningless. That
section permits the lessor to require the lessee, where the lease so provides,
to pay the reasonable legal or
other expenses of the lessor in giving
consent. Counsel observed that Parliament obviously considered that it was
necessary
to expressly provide that a requirement to pay the lessor’s
legal costs was exempt from the prohibition under s 227(1)(a)(i).
He submitted
that, if the argument for the lessors is correct, s 227(2) would not be
necessary.
[50] I disagree with this analysis. Any obligation to pay the lessor’s legal costs can only arise as a direct result of a request for consent to a proposed assignment. For that reason it is a benefit or advantage to the lessor that would be caught by s
227(1)(a)(i). For many years, however, parties to leases have accepted that
it is generally appropriate for the lessee to pay the
reasonable legal costs of
the lessor in giving consent to an assignment. In enacting s 227(2) Parliament
has obviously accepted
that this practice should be permitted to
continue.
[51] Finally, Counsel for the liquidators contended that the requirement
to pay arrears of rental amounted to requirement to pay
a “fine”.
He argued that the concept of a fine applied to any payment that a lessor might
require a lessee to make
in order to obtain the lessor’s consent to a
proposed assignment. In this context counsel referred me to the following
passage
from the judgment of Thorp J in Chandler House Ltd v Peter Mack Ltd
HC AK CL 10/87 14 January 1988 (at 10):
Nor am I impressed by Mr Asher’s contention that the term “fine
or sum of money in the nature of a fine” should
be given a different
significance from that which the same phrase has been given in Re Cosh
(1897) 1 Ch 9 and Waite v Jennings (1906) 2 KB 11 which held that it
means nothing more than “paid as the price for consent”.
[52] In Chandler the plaintiff, who was the lessee of retail premises, had sought consent from the defendant lessor to a proposed assignment of the lease to a third party. The lease contained a provision in which the lessee covenanted that it would not assign its obligations under the lease to a third party without the written consent of the lessor. The same clause prohibited the lessor from unreasonably or arbitrarily
withholding its consent in the case of a respectable, responsible and solvent
assignee. The clause also contained several provisos,
one of which was as
follows:
... PROVIDED FURTHER that as a condition precedent to the granting of
consent to an assignment the lessee shall pay to the lessor one half of any
consideration
given by the assignee to the lessee for the assignment of the
lessee’s interest herein and any moneys paid by the assignee
for the
lessee’s fixtures, fittings or chattels over and above their current
market value shall be deemed to be consideration
for the lessee’s interest
herein.”
[53] The lessor sought to enforce this proviso by requiring the lessee to
account to it for one half of the amount that the lessee
was to receive from the
assignee by way of goodwill payable in respect of the lease of the premises.
The lessee objected, contending
that the provision contravened s 109(1) of the
Property Law Act 1952, the predecessor to the present s 227(1)(a)(i). Section
109(1)
provided:
“No fine for licence to assign – (1) In all leases
containing a covenant, condition, or agreement that the lessee shall not,
without the licence or consent
of the lessor, assign, underlet, part with the
possession, or dispose of the demised premises or any part thereof, that
covenant,
condition, or agreement shall, notwithstanding any express provision
to the contrary, be deemed to be subject to a proviso to the
effect that no fine
or sum of money in the nature of a fine shall be payable for or in respect of
any such licence or consent; but
this proviso shall not preclude the right to
require the payment of a reasonable sum in respect of any legal or other
expenses incurred
in relation to the licence or consent.
[54] Thorp J noted at 5 that statutory provisions similar to s 109 have
been part of our law since 1905. Until 1975, however,
those provisions were
subject to express contractual provisions to the contrary. This had effectively
permitted the parties to a
lease to contract out of the section. In 1975,
however, s 109 was amended and the words “notwithstanding any express
provision
to the contrary” were added to the body of the section. It
thereby brought s 109 into line with s 110 of the Act, which also
dealt with
leases containing a covenant against assignment without the lessor’s
consent. The amendment meant that parties
were no longer able to contract out
of the provisions of s 109. It put s 109 out of step, however,
with comparable
provisions in English and Australian legislation. These
continued to permit parties to contract out of the legislation by express
contractual provision.
[55] Thorp J concluded that the proviso in the case before him clearly contravened s 109(1). He said at 10-11:
... At the same time the Court must give that provision meaning and effect,
and I cannot imagine a clearer case of a breach of that
s.109(1) than that
created by the final proviso to clause 7. It requires a substantial payment of
money over and above that agreed
between the parties at the time the lease was
taken out, and does so by seeking that payment from the moneys which would be
payable
to the lessee as a consequence of the proposed assignment. It seems to
me unavoidable that such a requirement is one which requires
the lessee to pay
“a fine or sum of money in the nature of a fine for or in respect of
consent to assignment.”
[56] The same cannot be said of the payment that the lessors seek in the
present case. They do not seek to share in any benefit
that the liquidators
will undoubtedly obtain as a result of the assignment of the lease. When
Chandler is read in its entirety, therefore, it does not assist the
liquidators at all. It demonstrates, in fact, that since 1975 it has not
been
possible for the lessor to insert a provision in the lease requiring the lessee
to provide it with a benefit or advantage when
the lessee assigns the lease to a
third party.
[57] I have therefore concluded, for the reasons that I have given at
[45], that the lessors have not breached s 227(1)(a)(i)
by requiring the
liquidators to pay the outstanding arrears of rental and
outgoings.
2. Are the lessors unreasonably withholding their consent to the
proposed assignment?
[58] Counsel for the liquidators made extensive submissions regarding the circumstances in which a lessor may be held to act unreasonably in withholding consent to a proposed assignment of the lessee’s obligations under the lease to a third party. Winkelmann J summarised the principles that apply in this context in Louis Vuitton New Zealand Ltd v Prince’s Wharf Property Fund Ltd HC AK CIV 2004
404 3401 17 September 2004. Counsel for the liquidators referred me to the
following passage from that decision:
Test for assessing reasonableness
[34] At this hearing counsel referred me to the English Court of Appeal decision International Drilling as the leading authority on the principles to be applied by a Court in assessing the reasonableness of a refusal to consent to an assignment (the second stage of the enquiry). In that case the principles were identified as follows: (at pp325-6)
(1) The purpose of a covenant against assignment without the consent
of the landlord, such consent not to be unreasonably withheld,
is to protect the
lessor from having his premises used or occupied in an undesirable way, or by an
undesirable tenant or assignee:
see per A L Smith LJ in Bates v Donaldson
[1896] 2 QB 241 at 247, [1895–9] All ER Rep 170 at 174 approved by
all the members of the Court of Appeal in Re Gibbs & Houlder Bros &
Co Ltd’s Lease [1925] Ch 575, [1925] All ER Rep 128.
(2) As a corollary to the first proposition, a landlord is not
entitled to refuse his consent to an assignment on grounds which
have nothing
whatever to do with the relationship of landlord and tenant in regard to the
subject matter of the lease: see Re Gibbs & Houlder Bros & Co
Ltd’s Lease, a decision which (despite some criticism) is binding on
this court: see Bickel v Duke of Westminster [1976] 3 All ER 801, [1977]
QB 517.
A recent example of a case where the landlord’s consent was
unreasonably withheld because the refusal was designed to achieve
a collateral
purpose unconnected with the terms of the lease is Bromley Park Garden
Estates Ltd v Moss [1982] 2 All ER 890, [1982] 1 WLR 1019.
(3) The onus of proving that consent has been unreasonably withheld is on the tenant: see Shanley v Ward (1913) 29 TLR 714 and Pimms Ltd v Tallow Chandlers in the City of London [1964] 2 All ER 145 at 147, [1964]
2 QB 547 at 564.
(4) It is not necessary for the landlord to prove that the conclusions which led him to consent were justified, if they were conclusions which might be reached by a reasonable man in the circumstances: see Pimms Ltd v Tallow Chandlers in the City of London [1964] 2 All ER 145 at 147, [1964]
2 QB 547 at 564.
(5) It may be reasonable for the landlord to refuse his consent to an assignment on the ground of the purpose for which the proposed assignee intends to use the premises, even though that purpose is not forbidden by the lease: see Bates v Donaldson [1896] 2 QB 241 at 244, [1895–9] All ER Rep
170 at 173.
(6) There is a divergence of authority on the question, in considering
whether the landlord’s refusal of consent is reasonable,
whether it is
permissible to have regard to the consequences to the tenant if consent to the
proposed assignment is withheld ...
But in my judgment a proper reconciliation of those two streams of authority
can be achieved by saying that while a landlord need
usually only consider his
own relevant interests, there may be cases where there is such a disproportion
between the benefit to the
landlord and the detriment to the tenant if the
landlord withholds his consent to an assignment, that it is unreasonable for
the
landlord to refuse consent.
(7) Subject to the propositions set out above, it is, in each case, a question of fact, depending on all the circumstances, whether the landlord’s consent to an assignment is being unreasonably withheld: see Bickel v Duke of Westminster [1976] 3 All ER 801 at 805, [1977] QB 517 at 524 and West Layton Ltd v Ford [1979] EWCA Civ 1; [1979] 2 All ER 657 at 663, 664 [1979] EWCA Civ 1; [1979] QB 593 at 604,
606.
[35] Two further propositions were added to this analysis by Phillips LJ
in Mount Eden Land Ltd v Straudley Investments Limited (1996) 74 P & CR
306, at 310:
(1) It will normally be reasonable for a landlord to refuse consent or
impose a condition if this is necessary to prevent his
contractual rights under
the lease from being prejudiced by the proposed assignment or sublease;
(2) It will not normally be reasonable for a landlord to seek to
impose a condition which is designed to increase or enhance
the rights that he
enjoys under the headlease.
[59] Counsel for the liquidators submitted that in the present case the
lessors are using their power to withhold consent for
a collateral purpose that
is unconnected with the lease. Counsel contended that the lessors are seeking
to obtain an advantage over
other creditors by imposing the condition that the
arrears of rental be paid.
[60] I do not accept this argument. Most leases contain a provision
entitling the lessor to withhold its consent to a proposed
assignment if the
lessee is in breach of its obligations under the lease. The requirement to pay
rental is a fundamental obligation
under any lease. If the lessee is in breach
of that obligation I do not consider that any lessor could ordinarily be
criticised
for withholding its consent to a proposed assignment until the breach
has been remedied. A lessor acting in that way would clearly
be acting to
protect and enforce its rights under the lease.
[61] I do not consider that the validity of this reasoning is affected by
the fact that the lessee is insolvent. In that event
the lessor has the
ability, if rental is in arrears, to re-enter and determine the lease.
Similarly, the administrator of the insolvent
estate has the option of either
disclaiming the lease as onerous property or affirming it on the basis that it
might realise some
value to the estate. The latter course will involve the
administrator assigning the lease, with the obligations of the lessee
intact, to a third party.
[62] If the administrator elects to affirm the contract, logic dictates that both the lessor and the lessee should remain entitled to exercise all of their rights under the lease. In particular, I do not see why the lessor should be precluded from enforcing its right to withhold its consent to a proposed assignment until the lessee has paid outstanding arrears of rental.
[63] For these reasons I do not consider that the imposition of the
condition means that the liquidators are unreasonably withholding
their consent
to the proposed assignment. This discussion leads naturally, however, to the
final argument that the liquidators advance
in opposition to the lessors’
claim.
3. Does the condition breach the provisions of the Companies Act
1993?
[64] Counsel for the liquidators points out that the Companies Act 1993
requires the liquidators of a company to distributed the
assets of the company
in accordance with the provisions of ss 312 and 313 of the Act. Once the
liquidators’ costs and all
preferential costs have been paid, the assets
must be distributed on a pari passu basis to the company’s
unsecured creditors.
[65] The lessors in the present case are unsecured creditors, and would
therefore ordinarily receive the same dividend as
the other unsecured
creditors of the company. The evidence suggests that unsecured creditors are
highly unlikely to receive
any dividend. For that reason counsel for the
liquidators argued that his clients would be preferring the lessors over the
other
unsecured creditors of the company if they were to submit to the condition
that requires them to pay the arrears of rental. As
a result, he submitted
that the Act prevents the liquidators from complying with the
condition.
[66] I agree that the liquidators would be prevented from distributing
the assets of the company in a manner that placed the lessors
in a position of
preference over the other unsecured creditors. I do not consider, however, that
the liquidators are currently involved
in the process of distributing the
company’s assets. Before they can distribute those assets, they must
first realise them.
This requires the liquidators to convert into money the
assets of the company, including the restaurant business, that do not already
consist of money.
[67] The evidence makes it clear that the lease has real value for the purchaser of the company’s business. The liquidators candidly accept that they have been able to obtain a much better price for the business as a going concern than they would have been able to achieve if they had not been able to obtain the lessors’ consent. For this
reason the creditors as a whole have benefited considerably. Had the
liquidators not been able to sell the business as a going concern,
they would
have been obliged to sell the company’s fixed assets on a stand alone
basis. That would obviously not have realised
nearly as much as the sale that
they have been able to achieve.
[68] I therefore do not accept that the liquidators in the present case
will be in breach of their obligations under the Companies
Act 1993 if they
submit to the condition requiring the company to pay the arrears of rent. In
doing so they will not be distributing
the assets of the company in an
unauthorised manner. Rather, they will be ensuring that the company is in a
position to realise
the maximum value for the lease. That will be to the
benefit, and not the detriment, of the creditors as a whole.
[69] I take the view that, once the liquidators elected to affirm the
contract, the company remained bound by all of the obligations
that the lease
imposed upon it. If the liquidators wanted to obtain the lessors’ consent
to a proposed assignment of the lease,
they needed to ensure that the company
was not in breach of those obligations. If the company was in breach of its
obligation to
pay rent, I consider that the lessors were entitled to insist that
that breach be remedied before they granted their consent.
[70] This is nothing new. A liquidator may often encounter suppliers who
refuse to supply further products or services until
such time as outstanding
arrears have been paid. The enactment of s 275 of the Companies Act 1993 in
2004 reflects this fact.
That section prohibits suppliers of gas,
electricity, water and telecommunications services from refusing to supply a
liquidator
(or a company in liquidation) by virtue of the fact that the company
is indebted to the supplier in respect of earlier supplies.
[71] The section was enacted at the prompting of the Law Commission,
which first proposed the change in 1989. In its report Company Law: Reform
and Restatement NZLC R9, June 1989 the Commission said:
Section 215 prohibits the refusal of essential services to a liquidator. At present some suppliers of essential services (gas, electricity, water and telecommunications) are able, because of their monopoly position, to be treated as preferential creditors by demanding payment of their debt in full
before continuing to provide the service. This section prevents that, and is
based on the Australian Law Reform Commission’s
proposals.
[72] The learned authors of Brookers Insolvency Law and Practice
note at CA
275.02 that, when the Justice and Law Reform Select Committee called for submissions in relation to the Bill containing the new clause, some submitters pointed out that the services listed in that clause were not the only ones that could be described as essential. These included the Department of Justice (Department of Justice, Companies Bill: Liquidations, report to the Justice and Law Reform Select Committee, Wellington, 27 August 1992 p 15) and the New Zealand Society of Accountants (New Zealand Society of Accountants, Submission to the Justice and Law Reform Select Committee on the Companies Bill, Wellington, 18 February
1991, p 49). The submissions by the New Zealand Society of Accountants made
the following point:
Not infrequently, commercial leases and supply contracts contain automatic
termination clauses which entitle the landlord or distributor
to terminate the
contract upon commencement of insolvency proceedings without regard to whether
or not the party is otherwise in
default under the contract.
[73] Ultimately, however, Parliament elected to restrict the
operation of the section to the four essential services
listed at [70]. In so
doing, it must be taken to have intended that suppliers of other services would
remain entitled to rely on
their contractual rights. Parliament did, however,
subsequently enact s 227(1)(b) of the Property Law Act 2007, which provides that
a lessor will unreasonably withhold its consent to a proposed assignment if it
does so on the basis that the lessee is bankrupt,
in receivership or in
liquidation.
[74] In reaching my conclusion I do not necessarily disagree with counsel for the liquidators when he submitted that, if the company had paid the arrears of rent shortly before it went into liquidation, that payment would prima facie constitute a voidable transaction that the liquidators could subsequently set aside. Given that fact, counsel contended that the lessors cannot be placed in a better position than they would otherwise have been in solely by virtue of the fact that the company is now in liquidation.
[75] I accept that such a payment might well constitute a voidable
transaction if the company made it shortly before it went into
liquidation. It
would clearly be made otherwise than in the ordinary course of business, and it
may well enable the lessor to receive
more than would be the case if it was
forced to file a claim in the liquidation as an unsecured creditor. Whether or
not the Court
would deny recovery to the liquidator under s 296(3) would
depend upon whether the lessor could establish the necessary
grounds under
that section. The lessor would need to show that it received the payment in
good faith and that it had altered its
position in the reasonably held belief
that the payment was validly made and would not be set aside. The lessor would
also need to
persuade the Court that it would be inequitable to order recovery,
or recovery in full.
[76] It is not difficult to envisage situations in which recovery might
be denied to a liquidator in such circumstances. A lessor
may often elect not
to re-enter and terminate a lease notwithstanding the fact that the lessee is in
arrears with rent and is exhibiting
symptoms of insolvency. The lessor may
refrain from exercising those rights in order to give the lessee the opportunity
to find
a new tenant. In such circumstances the lessor may be able to persuade
the Court that it has acted in good faith throughout, and
that it has also
altered its position to its detriment. It may also be able to convince the
Court that it would be inequitable to
order recovery, or at least recovery in
full. That could occur, for example, where the lessor has refrained from
terminating the
lease in order to enable the company to sell its business for a
price that it could never have obtained if the lessor had terminated
the
lease.
[77] Those considerations are, however, essentially irrelevant to the issues that this proceeding raises. The voidable transaction regime is based on the premise that those in control of an insolvent company may be motivated to treat creditors in an unequal manner. The regime is therefore designed to enable a liquidator to recover assets where they have been distributed unevenly between creditors at a time when the company is deemed to be insolvent. The onus in such a situation is on those who deal with the company in such circumstances to demonstrate that they have acted in good faith and that it would be inequitable to order recovery.
[78] A liquidator, on the other hand, can be expected to act in
accordance with the obligations imposed by the Act. The liquidator
must also
act in the interests of the creditors. For that reason creditors may, in fact,
be better placed to deal with the company
once it has been placed in
liquidation. They will be able entitled to deal with the liquidator secure in
the knowledge that any
transactions that they enter with the liquidator will not
be set aside.
Conclusion: result
[79] This case demonstrates that it will be a matter of commercial
judgment for a liquidator to decide how he or she should deal
with a lease under
which the company in liquidation is the lessee. If the liquidator considers
that the lease has no realisable
value, s 269 of the Companies Act 1993 provides
the necessary power to enable the liquidators to disclaim it on the basis that
it
is onerous property. If the liquidator elects to keep the lease on foot,
however, the company will need to honour its obligations
under the lease if it
wishes to obtain the consent of the lessor to an assignment of the lease to a
third party.
[80] The lessors have therefore persuaded me that they were entitled to withhold their consent to the proposed assignment until such time as the company had paid the outstanding arrears of rental and outgoings. I therefore make the declarations that they seek in paragraphs 1 to 4 of the originating application dated 23 December
2008.
Costs
[81] Counsel advised me during the hearing that they have made their own
arrangements in relation to the issue of costs. For that
reason I make no order
as to costs.
Lang J
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