Quay Lease Ltd v Shell New Zealand Ltd HC Auckland CIV 2009-404-1930 [2009] NZHC 2585 (15 December 2009)

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Quay Lease Ltd v Shell New Zealand Ltd HC Auckland CIV 2009-404-1930 [2009] NZHC 2585 (15 December 2009)

Last Updated: 13 June 2010

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

_{CIV 2009-404-001930}

BETWEEN QUAY LEASE LTD Plaintiff

AND SHELL NEW ZEALAND LTD Defendant

Appearances: S Grant/B Saldanha for Plaintiff

J Douglas/L van Dam for Defendant

Judgment: 15 December 2009

_{JUDGMENT OF ASSOCIATE JUDGE ROBINSON}

This judgment was delivered by me on 15 December 2009 at 2 pm, Pursuant to Rule 11.5 of the High Court Rules

Registrar/Deputy Registrar

Date.......

Solicitors: Minter Ellison Rudd Watts, PO Box 2793, Wellington

_{Hornabrook McDonald, PO Box 91845, Auckland}

QUAY LEASE LTD V SHELL NEW ZEALAND LTD HC AK CIV 2009-404-001930 15 December 2009

[1] On 1 September 1962 the Crown granted Shell New Zealand Limited, then Shell Oil New Zealand Limited a renewable lease duly registered under the Land Transfer Act 1952 under number SA2020/156 in respect of land situated at Mount Maunganui. The lease at that time was subject to Shell being entitled to a rent rebate pursuant to s 85 Land Act 1948. On 3 March 1992 the Crown transferred the land subject to the original lease to Landcorp Investments Limited. On 21 December 1995 the lease was renewed. On 23 October 2003 Landcorp transferred the land to the plaintiff Quay Lease Limited.

[2] Quay Lease maintains that Shell is no longer entitled to the rent rebate and applies by way of summary judgment for a declaration that s 85 of the Land Act

1948 which provides for the rent rebate does not apply to the lease to Shell or in the alternative that the rent rebate be set at nil percent and for an order that Shell pay the additional rent owing from 1 July 2008 plus interest.

[3] Shell opposes the application by Quay Lease Limited for summary judgment and seeks summary judgment in its favour declaring the rental rebate provided by s 85 Land Act 1948 continues to bind the parties and that the reference in that section to the Minister of Finance be given its plain meaning.

Background

[4] The term of the lease from the Crown to Shell was for thirty-three years from

1 January 1963. The lease contained provision for the leasee to have the right at the expiry of each term of thirty-three years to obtain a renewal of the lease for thirty- three years in accordance with s 63(4) Land Act 1948.

[5] Pursuant to s 85 Land Act 1948 the leasee was entitled to a rent rebate. The relevant provisions of s 85 that applied at the time are as follows:

85 Rebates on Payments

(1) A holder of a lease or license under this Act (other than a deferred payment license or a license granted under s 68 of this Act) who is not in arrears with any instalment of rent under his lease or license shall be entitled to a rebate of such proportion as may be fixed by the Governor General, by order in council, of each half yearly instalment of rent if that instalment is paid within one month after the day appointed for the payment thereof...

(5) Any rebate to which a lessee or licensee is entitled under this section may be deducted and retained by him from the full amount when payment is being made.

[6] On 1 April 1956 the rental rebate was fixed by the Governor General by order in council at 0.5% of the rental value and it has remained at that rate ever since. At the present time the rental rebate amounts to $54,455 plus GST per

[7] On 21 December 1995 when the term of the lease was to expire Landcorp Investments Limited which was then the lessor entered into a deed of renewal and variation of the lease. That deed provided for a renewal of the lease for thirty-three years from 1 January 1996, for the rent for the first eleven years to be $39,150 calculated on a rental value of $870,000 and for the rent for the two successive periods of eleven years to be determined in the manner provided by s 132(a) Land Act 1948. The variation and renewal contained the following provision:

Save as hearby expressly varied all the covenants, conditions and restrictions contained or implied in the said memorandum of lease shall remain in force.

[8] On 23 October 2003 Landcorp transferred the land subject to the lease to Quay Lease Limited. At that time Landcorp provided a memorandum to Quay Lease with the transfer instrument that dealt with the rent rebate under s 85 Land Act 1948. In that memorandum Landcorp advised Quay Lease as follows:

Standard rebate for prompt payment (ie within one month of the due date) is

0.5% of rental value. This has been the rebate percentage under s 85(1) of the Land Act since 1 April 1956 when it was set by order in council, and has

not been changed since. The net rent shown in the financial analysis of

leases at appendix A1 is the gross rent less rebate. Landcorp automatically applies the rebate when charging the rent due.

[9] On 12 September 2007 the lease was further varied by fixing the rental payable from 1 January 2007 for the next eleven years at $490,095 plus GST per annum calculated on a rental value of $10,891,000. It is confirmed that the rental

value shall have the same meaning as under the Land Act 1948 and that the rent for the remaining period of the lease is to be determined in the manner provided by s

132(a) Land Act 1948. The variation includes the following provision:

Except as expressly varied under this instrument all covenants, conditions and restrictions contained or implied in the lease shall remain in full force and effect.

[10] It is accepted by Quay Lease that the rebate provision contained in s 85 Land Act 1948 continued to apply to the land leased to Shell notwithstanding the provisions of s 24(3) State Owned Enterprise Act 1986 which provides that once land is transferred to a State Enterprise such land ceases to be subject to the Land Act 1948 because of the provisions of clause 17, schedule 4 of the State Owned Enterprise Act which applies to the lease to Shell. However, it is contended by Quay Lease that on the land being transferred to it the land ceased to be Crown land as defined by s 2 Land Act 1948 and consequently can no longer be subject to the rebate provision contained in s 85 Land Act 1948.

Case for Quay Lease

[11] Counsel for Quay Lease accepts that the terms of the lease have included a covenant to provide a rental rebate to Shell notwithstanding the fact that the Land Act 1948 can no longer apply because the land subject to the lease is no longer Crown land. However, it is contended on behalf of Quay Lease that such covenant does not pass with the land as the covenant does not touch and concern land. In this respect it is argued that the rebate entitlement does not of itself effect the value of the land as such rebate is at the discretion of the Minister of Finance and could be set at

0 or so low a rate as to be negligible when compared with other economic factors. It is contended that the covenant concerned is a personal covenant which was appropriate when the land was owned by Landcorp as the covenant provides for the Minister of Finance to fix the proportion of rebate. Whilst it is appropriate for the Minister of Finance to be involved in fixing rebates of rental payable to a State Owned Enterprise such as Landcorp it is completely inappropriate for the Minister of Finance to be involved in regulating rent between private landlords and tenants. It is further contended that as there is no privity of contract between Quay Lease and

Shell with regard to the rent rebate provision Quay Lease is not bound by such rent rebate.

Case for Shell New Zealand

[12] Shell New Zealand contends that the covenant incorporating s 85 Land Act

1948 is a covenant that runs with the land is therefore binding on Quay Lease. It is also contended that as Quay Lease were aware of the existence of the covenant because of the information documents supplied by Landcorp to Quay Lease when Quay Lease acquired the property Quay Lease is bound by that covenant.

Decision

[13] Although the Land Act 1948 no longer applies to the land leased to Shell because such land is no longer Crown land certain provisions of the Land Act continue to apply because the parties have covenanted to incorporate those provisions in the lease. Pursuant to the lease the lessee has a right to obtain a renewal in accordance with the provisions of s 63(4) Land Act 1948. That section contains provision for rights of renewal for thirty-three years.

[14] The rental is to be determined in the manner described by part VIII of the Land Act 1948. That part of the Land Act 1948 sets for the method of calculating the rent to be paid when the lease is renewed. S 85 Land Act 1948 containing the provision for the rent rebate was in force when the lease was created and continued to apply to the land until the enactment of the State Owned Enterprises Act 1986. Pursuant to s 24(3) of the State Owned Enterprise Act 1986 the land leased to Shell ceased to be subject to the Land Act 1948. However, pursuant to schedule 4, clause

14 of the State Owned Enterprises Act 1986 s 85 continued to apply to the land. The relevant parts of that section provides:

The Land Act 1948 shall have effect in respect of any land transferred to the Land Corporation Limited pursuant to [the SOE Act] where at the date of the transfer there is a lease...in respect of that land to which any or all of the following provisions of the Land Act 1948 apply, and those provisions shall continue to apply to that lease...as if the land were still Crown land subject to this Act and every reference in those provisions to a Commissioner of

Crown Lands, the Land Settlement Board, the Board, or the Department included a reference to the Land Corporation Limited:

The provisions of the Land Act 1948 referred to in clause 17 include s 81 to 85.

[15] Schedule 4 including clause 17 of the State Owned Enterprises Act 1986 expired on 1 January 1988. When clause 17, schedule 4 expired by reason of s 20 of the Acts Interpretation Act 1924 s 85 of the Land Act 1948 continued to apply to the lease. S 20 of the Acts Interpretation Act 1924 provides that the repeal of an Act does not affect the validity, invalidity, effect or consequences of anything already done or suffered; any existing status or capacity; or any right, interest, or title already acquired, accrued or established, or any remedy or proceedings in respect thereof.

[16] S 23(8) of the State Owned Enterprise Act 1986 empowered the Governor General by order in council to declare certain provisions of the Act to continue to apply to “any land that is subject to any lease...created on terms and conditions wholly or partly set out in any Act”. The State Owned Enterprises (Landcorp) order

1989 did this in respect of s 85 of the State Owned Enterprises Act. Consequently, by reason of the statutory provisions and regulations I have referred to s 85 of the Land Act 1948 continues to apply to the lease.

[17] Counsel for Quay Lease accepts that if the provision for rent rebate contained in s 85 creates a covenant that runs with the reversion then by operation of s 113

Property Law Act 1952 and s 231 Property Law Act 2007 Quay Lease is bound by that rent rebate covenant.

[18] S 231 Property Law Act 2007 provides:

231 Burden of lessor’s covenants to run with reversion

(1) If the reversion expectant on a lease ceases to be held by the lessor (whether by transfer, assignment, grant, operation of law, or otherwise), the obligations imposed by every covenant of the lessor-

(a) run with the reversion; and

(b) may be enforced by the person who is from time to time entitled to the leasehold estate or interest against the person who is from time to time entitled to the reversion.

(2) Subsection (1) applies unless a contrary intention appears from the lease or from another circumstance.

(3) In subsection (1), the reference to every covenant of the lessor is, - (a) for a lease that comes into operation before 1 January 2008,

a reference to every covenant of the lessor that refers to the

subject matter of the lease; and

(b) for a lease that comes into operation on or after that date, a reference to every covenant of the lessor, whether it refers to the subject matter of the lease or not.

[19] As the lease was created before 1 January 2008 being the date when the Property Law Act 2007 came into force it is contended that Quay Lease would not be bound by the covenant for rent rebate created by s 85 Land Act 1948 because such covenant does not in terms of s 231(3)(a) “refer to the subject matter of the lease”.

[20] In P & A Swift Investments (a firm) v Combined English Stores Group PLC [1988] 2 ALL ER 885 at pages 890 to 891 Lord Oliver set forth the following test to be applied in determining whether a covenant touches and concerns the land.

Formulations of definitive tests are always dangerous, but it seems to me that, without claiming to expound an exhaustive guide, the following provides a satisfactory working test for whether, in any given case, a covenant touches and concerns the land. (1) The covenant benefits only the reversioner for the time being, and if separated from the reversion ceases to be of benefit to the covenantee. (2) The covenant affects the nature, quality, mode of user or value of the land of the reversioner. (3) The covenant is not expressed to be personal (that is to say neither being given only to a specific reversioner nor in respect of the obligations only of a specific tenant). (4) the fact that a covenant is to pay a sum of money will not prevent it from touching and concerning the land so long as the three foregoing conditions are satisfied and the covenant is connected with something to be done on, to or in relation to the land.

That test has been applied by the New Zealand Court of Appeal in Mayhew v Robert

Jones Investments Limited CA No 23/91, decision dated 20 May 1992.

[21] In Heggies Bulkhul Limited v Global Limited Australia Pty Limited [2003] NSWSC 851, the Supreme Court of New South Wales held that an agreement between the lessor and the lessee to effect a reduction in future of the rent from

12.5% to 11% of the average sale price of minerals was an obligation entered into by

a lessor with reference to the subject matter of the lease and therefore enforceable by the lessee against a transferee of the reversion.

[22] Applying the principles referred to above enunciated by Lord Oliver in P & A Swift Investments I come to the following conclusions:

a) It is clear that the rental rebate covenant contained in s 85(5) is not intended to bind the lessor in the absence of the reversion just as the covenant to pay rent is not intended to benefit the lessor in the absence of a reversion. Instead both covenants are intended to bind and benefit only the current lessor and lessee.

b) The rental rebate covenant clearly effects the value of the land. The memorandum from Landcorp provided to the plaintiff at the time of the transfer set out the value of the leases by reference to the net rent paid by Shell. Consequently, the price Quay Lease was willing to pay for the land must have been effected by the rental received which in turn was subject to a rebate.

c) The rental rebate covenant is not expressed to be personal in the sense that it is expressed as being an exclusive obligation of the Crown. The rental rebate has in fact bound both the Crown and Landcorp nor is it a personal entitlement of Shell.

[23] For the above reasons therefore I conclude that the rent rebate covenant contained in s 85 Land Act 1948 does affect the land and consequently is binding on Quay Lease. In any event as Quay Lease and Shell entered into a deed of variation of the lease on 12 September 2007 Quay Lease is bound by the rent rebate covenant. That rent rebate covenant in terms of the lease variation executed by Quay Lease and Shell on 12 September 2007 was expressly incorporated into the lease variation by use of the following words contained in that document:

Except as expressly varied under this instrument all covenants, conditions and restrictions contained or implied in the lease shall remain in full force and effect.

[24] The rent rebate by agreement and regulation has been fixed and applied by the parties for more than forty years. Clearly, such rent rebate will continue at the existing rate unless the parties agree to vary the rebate or the Minister of Finance fixes the rebate in terms of s 85.

[25] Consequently, I conclude that the application by Quay Lease for summary judgment must be dismissed. The application by Shell for summary judgment is granted. There is an order that the rental rebate covenant contained in the lease between the parties in terms of s 85 Land Act 1948 continues to bind the parties and that reference to the Minister of Finance is to be given its plain meaning.

[26] As Shell has been successful in its defence and application for summary judgment it is entitled to costs on a 2B basis with disbursements as fixed by the

_registrar.

Associate Judge Robinson