Prime Commercial Limited v Capital Chambers Limited HC Wellington CIV-2010-485-002568 [2011] NZHC 1684 (22 November 2011)

Last Updated: 28 November 2011

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

_{CIV-2010-485-002568}

BETWEEN PRIME COMMERCIAL LIMITED Plaintiff

AND CAPITAL CHAMBERS LIMITED First Defendant

AND PETER CHARLES DENGATE THRUSH Second Defendant

AND SANDY LOUISE BAIGENT Third Defendant

Hearing: 28 and 29 September 2011

Counsel: C Anastasiou for Plaintiff

RJB Fowler for Defendants

Judgment: 22 November 2011

_{JUDGMENT OF MILLER J}

Introduction

[1] A landlord and its tenant dispute the precise extent of the tenant’s obligation, under a commercial office lease, to remove its fitout and reinstate the premises to a bare shell of open plan layout. They also contest the tenant’s obligation for rent while the landlord reinstated the premises, the tenant admittedly having failed to reinstate on expiry of the lease.

The premises and the protagonists

[2] The plaintiff, which I will call Prime Commercial, owns a building at 36

_{Customhouse Quay, Wellington, known as Craigs Investment Partners House. Mike}

PRIME COMMERCIAL LIMITED V CAPITAL CHAMBERS LIMITED HC WN CIV-2010-485-002568 22

November 2011

Garnham, who practices as a solicitor in Wellington, is also a director and a trustee of trusts which are shareholders in Prime Commercial.

[3] Prime Commercial leased Level 6 of the building to the first defendant, which I will call Capital Chambers. It is a company held by a group of barristers. Tim Castle and John Upton QC are among its shareholders and directors.

[4] The second and third defendants guarantee Capital Chambers’ obligations under the lease. For my purposes it is not in dispute that their liability is co- extensive with that of Capital Chambers.

The lease

[5] Prime Commercial purchased the building in March 2002. At that time Capital Chambers was an existing tenant, occupying Level 6 under a sublease with the previous owner.

[6] In July 2004 Capital Chambers replaced the existing carpet with carpet tiles. I do not know whether the consent of the head lessor was required under the then lease and sublease, but it was common ground before me that Prime Commercial’s consent was not obtained.

[7] The sublease expired in December 2004. Prime Commercial then entered a lease directly with Capital Chambers for a term of six years, with one right of renewal. The first term expired on 30 November 2010.

[8] The lease described the premises as all of the sixth floor being 531.85 metres square more or less, detailed on an attached plan which does not appear to include any fitout. The lease contemplated that the tenant might install or alter its own fitout, but nothing was said about the existing fitout as a set of barristers chambers.

[9] However, the fifth schedule did contain an inventory of the landlord’s fixtures and fittings. It provided that those items, which were owned by the landlord, were provided for the tenant’s use through the duration of the lease. They were:

Suspended ceilings

Flush fit light boxes

Separately metered electrical power supply and distribution to the premises

Interior treatments of Perimeter walls

HVAC [heating, ventilation and airconditioning] units and in-ceiling services configured to open plan layout together with perimeter heating units

[10] The lease provided for removal of the tenant’s fixtures and fittings on expiry.

Clause 33.1 provided:

The Tenant shall at its expense at the expiry or earlier termination of this Lease, remove all partitions, fixtures, fittings, light fittings, ceiling and floor treatments installed in the premises and the Tenant shall make good any damage to the premises caused by such removal, and redecorate. For the sake of clarity, the Tenant shall at its expense reinstate the premises as near as practicable to a refurbished and redecorated bare shell of open plan layout. These works shall include the plastering, repair and repainting of interior wall surfaces to a quality and style suitable for commercial office premises and the Tenant shall at its expense remove all floor coverings or treatments and replace the same with carpet of a quality and style suitable for commercial office premises to the Landlord’s reasonable satisfaction in all respects. The Tenant shall be responsible at its expense, for the repair of any damage to the Landlord’s plant, equipment and chattels caused by any fitout works or partition removal works including the reasonable redecoration of the Landlord’s ceiling and lighting fixtures and fittings.

[11] Where the tenant failed to discharge its obligation to remove “the partitions, alterations, additions or fitout” from the premises within 14 days of the date of expiry of the lease, then, under cl 33.3, the landlord was entitled at the tenant’s expense to re-enter and effect such removal and make good, with “all reasonable expenses and costs of undertaking such works” to be payable by the tenant within 14 days of receipt of an account from the landlord for such expenses and costs. Clause

33.3 also provided that “until such time as such removal is effected” the tenant shall

pay rent to the landlord:

Where the Tenant has an obligation to remove partitions, alterations, additions or fit-out from the premises, and the Tenant shall not have completed such removal and making good as contemplated in paragraph

33.1 hereof within fourteen (14) days of the date of the expiration of the

Lease, or renewed term thereof, then:

(a) The Landlord shall be entitled (but is not obliged) at the Tenant’s expense to re-enter the premises and effect such removal and make good in which case all reasonable expenses and costs of undertaking such works shall be due and payable by the Tenant within fourteen (14) days of receipt of an account from the Landlord for such expenses and costs; and

(b) Until such time as such removal is effected, the Tenant shall pay rent to the Landlord at the rate payable as at the expiry or earlier termination of the Lease, but without prejudice to the Landlord’s right to claim for damages for the failure to remove.

[12] Under the heading “additions and alterations/fitout of premises,” the lease provided that all tenant’s works required the landlord’s approval. The term “tenant’s works” included any works undertaken by the tenant whether by way of fitting out, additions, installations, alterations, removal, reinstatement, compliance with cl 33 or otherwise. Under cl 22.2, the tenant must, before commencing such works, submit to the landlord and obtain the landlord’s written approval of detailed plans, specifications and full working drawings, a programme for the works, a list of contractors and subcontractors, a copy of the proposed contract conditions and a budget of hard fitout plans and costings, and any other relevant details required by the landlord. It is common ground that the landlord’s consent could not be unreasonably or arbitrarily withheld. The tenant was responsible for obtaining any necessary building consent.

[13] The lease also provided that the tenant must pay the landlord’s legal costs, on a solicitor and client basis, of and incidental to the enforcement or attempted enforcement of the landlord’s rights remedies and powers under the lease.

Lease expiry and reinstatement negotiations

[14] Capital Chambers elected not to renew the lease in 2010. Somewhat unusually, I was told, Capital Chambers elected to reinstate the premises instead of leaving the landlord to do so. On 22 June 2010 Mr Garnham met with Messrs Castle and Upton to discuss the reinstatement. The discussions were amicable. They agreed that each side would instruct its preferred quantity surveyor, both of whom happened to be from the same firm, Rider Levett Bucknall, to estimate reinstatement costs. Mr Garnham instructed Bevan Hartley, a principal and shareholder of the

firm, and Capital Chambers instructed Grant Watkins, a director and shareholder. Messrs Hartley and Watkins inspected the premises together and prepared what was in substance a joint report, although separately addressed to each party.

[15] Mr Hartley reported to Prime Commercial by letter dated 10 August. He estimated the reinstatement of costs at $28,000 excluding GST. Mr Watkins agreed with this assessment. On the basis that most of the carpet tiles were still in very good or as new conditions, they agreed that the carpet tiles would be patched by replacing those that were worn.

[16] Mr Garnham was not satisfied. He promptly emailed Mr Hartley, emphasising that the lease required new carpet, no matter what the condition of the existing, and the tenant must remove and reinstate both ceiling and floor treatments to a “refurbished and redecorated bare shell”. With respect to interior wall surfaces, plastering, repair and repainting was required, including the making good of any damage caused by removal of fitout. He pointed out too that Mr Hartley had overlooked the toilet, kitchenette and shower which formed part of the leased premises. The kitchenette and shower would require removal and reinstatement. He suggested that a building consent would be required for that reason, and also for any work to the HVAC units or electrical and fire protection services. He observed that when a tenant had vacated Level 10 of the building the costings for similar reinstatement were about $125,000.

[17] Mr Hartley reviewed his report in response to Mr Garnham’s criticisms. His updated report, dated 7 September 2010, stated that he believed the scope of the work was reinstatement as near as practicable to a refurbished and redecorated bare shell of open plan layout. He based his assessment on an open plan layout provided by Prime Commercial, which he understood to be another consultant’s view of what the base build open plan layout ought to look like. There is no evidence that the plan he relied upon depicted either a specific open plan layout preceding the Capital Chambers fitout or the building’s original base fitout. (I was given to understand that the building was erected in the 1970s.) He included provision for replacement of carpet. The estimated cost was now $95,000 plus GST.

[18] Mr Garnham thought this estimate a little light, but he forwarded it to Mr Upton on 9 September. He asked that Capital Chambers liaise with its consultant or architect then lodge an application for building consent, and inquired whether Capital Chambers preferred to have its contractor undertake the work, or to have Prime Commercial do it. He noted that Mr Hartley had advised that the reinstatement works, from seeking a building consent through to completion of physical works, were likely to take about 16 weeks in total, so Capital Chambers should get the building consent process under way as soon as possible. Reinstatement might overlap the Christmas break and rent obligations would continue until completion. Finally, he added, he had inquiries from tenants expressing an interest in leasing the premises in the first quarter of 2011.

[19] It appears that Capital Chambers applied to the Wellington City Council for a building consent on 1 October.

[20] Mr Garnham received no response from Mr Upton or anyone else at Capital Chambers to his email of 9 September, but he met Mr Upton in the street in October and was told that Capital Chambers expected to start reinstatement works in about mid-November. He wrote to Mr Upton by email of 22 October to, as he put it in evidence, “see how things were going”. He pointed out that the landlord’s approval was required before any works began, emphasising that he took the processes in cl 22 of the lease quite seriously. Among other things, any such works affected building systems such as fire detection, HVAC and electrical services, and other tenants had a right to quiet enjoyment. He also warned that Prime Commercial would require to approve the colour and specification of the replacement carpet. The specification contemplated a good quality underlay, 48 ounce all wool carpet, all double stuck. He advised that Prime Commercial uses Magnetix in the building. This carpet, it is common ground, is a broadloom; it does not come in the form of carpet tiles.

[21] This drew a response. Mr Castle wrote on 29 October, stating that Capital Chambers was proceeding to reinstate in accordance with Mr Hartley’s first report. He emphasised that both quantity surveyors had agreed on that sum. Mr Castle recognised that the original estimate of $28,000 required adjustment, in that the lease

also required Capital Chambers to reinstate the kitchen and shower area notwithstanding that both were in existence when Capital Chambers took over the premises some 18 years previously. That had increased the estimate to approximately $40,000 plus GST. But the carpet was of appropriate quality to be left on the floor and did not require replacement.

[22] Mr Castle further advised that a building consent had been sought from the Wellington City Council and the successful tenderer, Tracer Construction, was looking to complete the work at or about the time the lease expired on 30 November. Mr Castle now submitted for Prime Commercial’s approval detailed plans and specifications from Workspace Vision, which had prepared them, and what were said to be full working drawings of the tenant’s reinstatement works and a copy of the proposed contract conditions. He reassured Mr Garnham that the work would be done in a good and tradesmanlike manner.

[23] The correspondence now took on an acrimonious tone. Mr Garnham responded by letter of 2 November, describing Mr Castle’s letter as entertaining. He invited Mr Castle to compare the scope of the work that Capital Chambers proposed with the terms of the lease, describing them as markedly different, and he reminded Mr Castle that rent must be paid until such time as removal was effected. He stressed that Capital Chambers would not get the landlord’s consent to the works until Prime Commercial was satisfied as regards scope, specification and supporting documentation. He asserted the documents provided thus far did not meet that standard, although he did not specify in what respects they were inadequate.

[24] Mr Garnham also wrote on 4 November to Messrs Watkins and Hartley, and to Tracer Construction, advising that the landlord had not granted its consent to the proposed works and none of the addressees were to enter the building to undertake any demolition building works pending such approval. That brought to an end Capital Chambers’ attempt to complete the reinstatement work.

[25] There followed an exchange of correspondence in which Mr Castle complained that consent had been unreasonably withheld. However, he remained insistent that the existing carpet could be patched, suggesting that if necessary to

comply with the lease it could be lifted and put back down again, a pointless exercise. He offered to have the issue of the carpet arbitrated. Mr Garnham responded that either Capital Chambers could submit a full set of documentation covering the reinstatement obligations, in which case its contractors could undertake the reinstatement works, or Capital Chambers could pay for reinstatement by Prime Commercial. Mr Castle responded that Capital Chambers had always been prepared to make “full reinstatement” and had provided all necessary documents, and insisted that approval had been unreasonably withheld and any delays were not the tenant’s responsibility.

[26] The lease expired on 30 November and Capital Chambers vacated the premises, no reinstatement works having been undertaken. At that date it was still Capital Chambers’ position that full reinstatement did not require a replacement of carpet, and Prime Commercial continued to insist that the documentation provided when seeking its consent was inadequate, without specifying in what respects that was so.

The landlord’s reinstatement works

[27] Having resumed possession on 30 November 2010, Prime Commercial took its time about reinstatement. In mid-December Mr Garnham met his preferred contractor, Capital Construction Limited, and other consultants, including Mr Hartley. Capital Construction is a preferred contractor which has been used by Prime Commercial over a number of years. It had tendered for the tenant’s reinstatement works, and its price was competitive with that of Tracer Construction. However, Prime Commercial decided to let the work to Capital Construction on a non-competitive basis. Mr Garnham explained that he did so because there is confidence and trust between the two firms, and the work is done on an open book basis.

[28] Not until March 2011 were final plans and a final version of the scope of works completed. A number of consultants had been involved, including a firm of architects, Pynenberg and Collins, a fire safety consultant, a mechanical services engineer, and of course the quantity surveyor. Also engaged was Mr Garnham’s

own law firm, a point to which I must return. The scope of work became more

detailed. Capital Construction’s price was $118,123 plus GST.

[29] On 17 March, Mr Garnham wrote to the Council by email asking to take over the existing building consent which had been issued to Capital Chambers. That approval was granted within two days.

[30] Through Mr Hartley, Prime Commercial also applied for an amended building consent on 12 April 2011. Mr Hartley explained in the application that the work being done was not amended, but further detail had been added. That description was not challenged before me. On 20 April the Council declined the application, stating that the application involved no change to the original consent. In other words, the work done and time taken to secure an amended building consent were unnecessary.

[31] In May 2011 Capital Construction began demolition work, expecting to complete it by 31 July. Reinstatement still has not been completed, but Prime Commercial accepts that Capital Construction has been delayed by other demands from Prime Commercial, and it acknowledges that for my purposes it should be assumed that the reinstatement works could have been completed by 31 July 2011.

The pleadings

[32] Prime Commercial now claims for breach of the tenant’s reinstatement obligation the sum of $122,903 plus GST. (The difference between that and the quote at [28] above represents consultant’s fees.) The sum claimed includes demolition, reinstatement to a bare shell layout, including suspended ceilings, lights, power, HVAC units and in-ceiling services, and a number of consultants’ fees, including those of Mr Garnham’s law firm. The claim is subject, according to Mr Garnham’s evidence, to further increases for “Prime Commercial management costs” and further architectural fees, but no evidence of these sums was led, and such evidence as there was tended to show that Prime Commercial’s management and administration work was done by Mr Garnham or his law firm and included in the claim for legal costs.

[33] Prime Commercial also seeks solicitor-client costs of the litigation which are yet to be quantified. Such costs are ultimately in the Court’s discretion, and I will deal with them in a later judgment after hearing further from counsel.

[34] Rent is claimed from 1 December 2010 until 31 July 2011, at the rate of

$19,627.50 plus GST per month.

[35] It is accepted that because Prime Commercial has yet to invoice Capital Chambers for the construction work, interest is not yet payable on that sum. But interest is payable on arrears of rent. The obligation to pay interest is not in dispute.

[36] Capital Chambers admits the obligation to fulfil its removal and making good obligations under the lease, but pleads that the last date for doing so would have been 14 December 2010 rather than 30 November. It further admits that the tenant had failed to perform those obligations, but says that it was ready, willing and able to do so with the exception of replacement of the entire carpet, and would have done so had Prime Commercial not prevented it. Capital Chambers admits that as a consequence of its non-compliance with the removal and making good obligations, Prime Commercial was entitled to re-enter and remove and make good at the tenant’s reasonable expense, and that it must pay rent until such time as the work has been done. But it does not accept that it must pay rent after 30 November, maintaining that but for the landlord’s unreasonableness the work might have been completed in time.

Breach of the tenant’s reinstatement obligation

[37] As I have already observed, it is not in dispute that the tenant failed within 14 days after the expiry of the lease to reinstate the premises. Nor was it in dispute that the tenant must replace the existing floor coverings with new carpet, and that as at the expiry of the lease it still insisted that it need not comply with that obligation.

[38] In the circumstances, I find that Prime Commercial did not unreasonably withhold its consent to the tenant’s reinstatement works. It followed that Prime Commercial might re-enter on expiry of the term and complete reinstatement itself

under cl 33. I did not understand Mr Fowler to dispute that. He argued, however, that when it comes to quantifying the rent payable there is a “reasonableness overlay” on cl 33.3. I return to that point below.

Scope of reinstatement works under the lease

[39] There was little disagreement between counsel about the meaning of cl 33.1, which both specifies what must be done and prescribes to what standard. It begins by requiring that on expiry the tenant shall remove “all partitions, fixtures, fittings, light fittings, ceiling and floor treatments installed in the premises, reinstating them to a bare shell with open plan layout.” Counsel agreed that, when read in conjunction with the 5th Schedule, this obligation requires that the tenant remove the tenant’s fitout.

[40] Next, the clause requires that the bare shell be redecorated and refurbished, which work includes plastering, repair and painting of interior wall surfaces and removal of all floor coverings and replacement with carpet, to a quality and style suitable for commercial office premises. The removal of floor coverings and replacement carpet must further be to the landlord’s reasonable satisfaction.

[41] Finally, the tenant must repair any damage to the landlord’s plant, equipment and chattels caused by any fitout works or partition removal. The repair work includes the reasonable redecoration of the landlord’s ceiling and lighting fixtures and fittings. Accordingly, the making good obligation extends to repair of any

damage to items included in the 5th Schedule.

Has the landlord confined the work to removal and reinstatement?

[42] Although the interpretation of the lease was not in dispute, its application was, in several respects. First, it became apparent during Mr Garnham’s evidence that Prime Commercial’s reinstatement did not begin by identifying what tenant’s works had been done by way of fitout to modify the premises from an open plan layout preceding Capital Chambers’ original tenancy. Rather, Prime Commercial’s

consultants simply prepared an open plan layout which met with Mr Garnham’s satisfaction. It bore no necessary relationship to any previous layout, including the building’s original design. As I have noted, Mr Hartley relied on the Prime Commercial plan when preparing his $95,000 estimate.

[43] For the most part, Capital Chambers did not dispute this approach. For example, the correspondence suggests that the kitchenette and shower pre-dated the original Capital Chambers tenancy, but no point was taken about the tenant’s obligation to remove and reinstate those facilities. However, Capital Chambers did take the point that it did not use an in-ceiling service, namely an air handling unit which presumably pre-dated its fitout, yet the unit’s removal and reinstatement is included in Prime Commercial’s claim. Other items were described as betterment, a term which was used by Mr Fowler not to signal a departure from an open plan layout preceding the Capital Chambers fitout, but rather to signal improvements to what Mr Hartley, in his $95,000 estimate, and Mr Watkins considered a reasonable bare open plan layout.

[44] The items which are said to amount to replacement or improvement of landlord’s fixtures and fittings, rather than reinstatement to a bare open plan layout, are said to be:

a) the in-ceiling air handling unit;

b) the number of sprinkler heads; it is said that the landlord has required more than would be needed to restore the premises to an open plan layout;

c) air diffusers and grilles; it is said that Prime Commercial insists on replacing some grilles instead of replacing any that are damaged and otherwise cleaning them and the diffusers;

d) ceiling tiles; it is said that Prime Commercial insists on 300 new ones, while Capital Construction accepts that it must replace 60 that are damaged but says the rest can be cleaned and painted;

e) light fittings; Capital Chambers accepts that some fittings must be moved to establish an open plan layout, but it maintains that Prime Commercial’s lighting layout includes an extra row of light fittings;

f) metal spandrel panels which cover perimeter walls below the windows; the issue is whether power and data outlets, which must be removed as part of the tenant’s fitout, can be patched or the panels must be replaced;

g) venetian blinds on perimeter windows; the issue is whether they must be replaced or merely cleaned;

h) light tubes; the issue is whether working light tubes must be replaced along with any that no longer work;

i) Fibrous plaster finish to curved wall by lifts; the issue is whether an allowance must be made for reinstatement.

[45] I begin by finding that the open plan layout on which Mr Hartley’s $95,000 estimate was based provided adequately not merely for removal of the tenant’s fitout but also for reinstatement to open plan layout. I observe that Messrs Hartley and Watkins both gave evidence, and they agreed that much of the reinstatement work required by Mr Garnham had been included not only in Mr Hartley’s $95,000 estimate but also in the original $28,000 estimate, which was not materially different in scope from the $95,000 estimate once the kitchenette and shower and carpet had been included. Both estimates included, for example, any necessary work to move ventilation outlets or lights following the removal of partitions. In a number of instances, such as relocation of sprinklers and HVAC systems, that proposal specified reinstatement to original base build. I prefer their layout to that later adopted by Mr Garnham for several reasons. First, the quantity surveyors agreed in evidence before me, almost inevitably, that it was a reasonable bare open plan layout. Second, I do not accept that Mr Garnham’s layout is consistent with the lease in certain respects; I detail these in succeeding paragraphs. Third, I note that he was initially content with the reinstatement proposal in Mr Hartley’s second

estimate, which he forwarded to Mr Upton with an invitation to get the work under way. These conclusions, it will be seen, dispose of some of the specific items in dispute.

[46] I turn to deal with the specific items, allowing or disallowing them as part of the tenant’s removal and reinstatement obligation. I note that the evidence is in some respects obscure and unsatisfactory. I have done the best I can with it, but for some of the items I have not been able to fix upon an exact figure. It should now be possible for counsel to reach agreement on what remains.

The in-ceiling air handling unit

[47] I accept that the tenant was not required to remove and reinstate this unit. Prime Commercial failed to show that it was part of the tenant’s fitout. On the contrary, it is part of the landlord’s fixtures and the evidence suggested that it pre- dated the Capital Chambers fitout.

Sprinkler heads

[48] Messrs Hartley and Watkin agreed that their first and second estimates provided for moving sprinkler heads and configuring them to a reasonable open plan layout. It is unclear whether additional sprinkler heads are provided for in Prime Commercial’s claim. If so, there is no evidence that they are required for fire safety purposes. An open plan layout normally requires fewer sprinklers than a partitioned one. I am not persuaded that any additional work or expense is reasonably necessary. This claim is disallowed.

Air diffusers and grilles

[49] It is not in dispute that any of these items that are damaged must be replaced, and any additional ones required for an open plan layout added. The issue is whether the tenant must replace some or all of them, or may clean and paint them.

Prime Commercial claims for 22 new grilles, while Capital Chambers had allowed to relocate 12.

[50] I observe that shortly before trial I authorised an inspection of the premises by Capital Chambers’ experts, over Mr Garnham’s objections. Mr Watkin’s evidence is that the grilles have been replaced, in his opinion unnecessarily, but the diffusers have been re-used. Mr Garnham conceded that was so.

[51] It is not suggested that these items are part of the tenant’s fitout. The parties implicitly accepted that they are included in the landlord’s fixtures and fittings in Schedule 5, presumably as part of “suspended ceilings”. As such they need not be removed, but they must be restored to open plan layout, as Mr Hartley provided for, and replaced if damaged. Those that are not damaged must be made good and redecorated. I accept Mr Fowler’s submission that only in relation to carpet does the lease require replacement of a landlord’s fixture or fitting with a new item; otherwise it provides for repair and redecoration. It is clear that most of the diffusers and grilles, if not all, are undamaged. It suffices, accordingly, if they are cleaned and repainted. Only if they cannot be repaired and reinstated need they be replaced. I am not persuaded that any allowance is required beyond the allowance for relocation made by Capital Chambers. This claim is disallowed.

Ceiling tiles

[52] For the reasons just given, the tenant need only restore the ceiling tiles to open plan layout, replace any that are damaged, and clean and repaint the rest. Prime Commercial has allowed for 300 new tiles to replace damaged ones, while Capital Construction had allowed for 60.

[53] I note that 300 tiles is a large number, and Mr Watkins’ unchallenged evidence is that ceiling tiles have in fact been re-used. Further, Mr Hartley and Mr Watkins originally estimated that only 60 need be replaced. I prefer their estimate at that time to the evidence of Mr Wickens, who simply asserted that more were required without specifying by whom or against what standard. The claim for ceiling tiles, over and above the allowance in the $95,000 estimate, is disallowed.

Light fittings and working light tubes

[54] I am not satisfied that an additional row of new light fittings was reasonably required for open plan layout. It was not provided for in the $95,000 estimate, but it is included in Prime Commercial’s claim. Otherwise light fittings must be reinstated in the same way as diffusers, grilles and ceiling tiles. The evidence is that Prime Commercial has re-used the existing ones.

[55] It was, implicitly, common ground that light tubes also form part of the landlord’s fixtures and fittings, presumably as part of “flush fit light boxes”. There is no obligation to install new ones on expiry, notwithstanding that those in situ (like other fixtures and fittings) are part way through their working lives, nor is there any evidence that working light tubes are capable of any kind of refurbishment short of replacement. They might require cleaning, although I heard no evidence about that. This claim is disallowed.

Metal spandrel panels

[56] The spandrel panels are part of the landlord’s fixtures. Power and data cables are run behind them, and holes are punched in them for power and data sockets. It is common ground that the tenant’s data cabling and sockets must be removed, leaving holes in the panels. The question is whether the holes can be patched and the panels repainted, or whether the panels must all be replaced. Prime Commercial wants to replace all of them. I take it from Mr Watkins’ evidence that patching involves placing a blank over the hole, rather than filling it so that it is invisible after redecoration.

[57] Any use, even a bare open plan layout, will require data and power supply. For that purpose a new tenant may well re-use some of the existing holes. The

$95,000 proposal assumed, perhaps for this reason, that it sufficed to patch the existing panels. Mr Watkins evidently remains of that view. Further, his evidence was that when he inspected the premises before trial he found that only a couple of panels had been replaced; the rest had data outlets blanked over and retained the

power outlets. Mr Garnham responded that all the panels will be replaced; indeed, the new panels are even now on site.

[58] In his evidence, Mr Hartley opined that the panels must be replaced where the tenant had made the holes in them. However, that does not take me very far, for two reasons. First, there is no evidence about the state of the panels when Capital Chambers originally moved into the premises. Second, cl 33.1 does not insist on replacement with new panels. Replacement is necessary only if there is no way to repair and reinstate to open plan layout.

[59] Doing the best that I can with the evidence before me, I prefer to rely on the

$95,000 estimate to establish what is reasonably required by way of repair and redecoration to a bare open plan layout suitable for commercial office premises, as cl 33.1 requires for the interior wall surfaces. Accordingly, blanking off holes and repainting the panels will normally suffice to meet the repair and reinstatement obligation. There may be exceptions, depending for example on the number and location of holes, but there was no suggestion in the evidence that there was anything unusual about the Capital Chambers layout in that regard. Mr Watkins’ evidence about the state of the panels on his pre-trial inspection tends to confirm this view. The claim for new spandrel panels fails.

Venetian blinds on perimeter windows

[60] It is common ground that these are the landlord’s fittings. I accept Mr Garnham’s evidence that new ones have been ordered. There is no obligation in the lease to replace them. Rather, they must be repaired where damage, and cleaned or redecorated as appropriate. There is nothing in the evidence to show that their condition was such that reinstatement was impossible. This claim is disallowed.

Fibrous plaster lift wall finish

[61] The evidence about this claim is unsatisfactory. It seems clear that the original fitout included a curved fibrous plaster lift wall. Fibrous plaster is not now

easy to obtain, having been supplanted by other functionally equivalent materials, and to have it made in a curved form is expensive. In fact the wall has been finished with plain plasterboard, which remained only to be painted when the premises were inspected before trial. Mr Garnham gave evidence that he understood fibrous plaster was to be installed. No allowance was made for fibrous plaster in the Hartley or Watkins estimates but an allowance was made for a plain plasterboard finish. I accept Mr Watkins’ opinion that plasterboard is all that was reasonably required to reinstate the premises. It is functionally equivalent to fibrous plaster and a plaster surface could easily be applied if a textured finish was wanted. The allowance made in the quantity surveyors’ estimates is reasonable.

The reasonable cost of meeting the tenant’s removal and reinstatement

obligation

[62] I was presented here with three alternatives: the contracted price of $118,123, Mr Hartley’s second ($95,000) estimate, and the sum of not more than $80,000 being the same estimate shorn of what are said to be errors in pricing carpet and contingencies. (I deal with Prime Commercial’s claim for consultants’ fees separately.)

[63] Prime Commercial obviously contended for the first of these figures. In support, Mr Hartley agreed in re-examination that the Capital Construction price was reasonable. However, he had not reviewed the detailed specifications to verify, for example, whether there were more sprinkler heads, and he assumed that it was reasonable to increase the number of light fittings from his $95,000 proposal. Further, I accept Mr Fowler’s submission that the price must be approached with caution, not only because of the aggressive approach taken to the scope of works but also because the price was not secured on a competitive basis. Prime Commercial might have been able to justify failing to tender the work had it moved with real urgency, so reducing the time otherwise needed for reinstatement and limiting the tenant’s obligation for rent, but it did not. Finally, I have disallowed a number of items included in the Capital Construction price.

[64] Against that, for the reasons I have already given I accept that the $95,000 estimate was based on a scope of works that broadly accords with the tenant’s removal and reinstatement obligations, subject to adjustment for the fibrous plaster lift wall finish. I acknowledge that that was an estimate, including some provisional sums, while Prime Commercial now has a firm price, but I observe that the earlier estimate of approximately $40,000 corresponded closely to the tenders received. In short, I prefer the approach that Mr Hartley took then to the approach he takes now, and I generally prefer the evidence of Mr Watkins.

[65] That brings me finally to the difference between the $95,000 estimate and the

$80,000 contended for by Capital Chambers. Of that, a substantial part is explicable by Mr Hartley’s estimate that new carpet would cost $37,170. It is now common ground that the actual cost of Prime Commercial’s preferred broadloom, which Mr Fowler was prepared to accept, was $27,000, a saving of $10,000. The other aspect relied on by Mr Fowler was professional fees, as to which he accepted that $4,000 would be reasonable. He based that sum on the $40,000 contract price agreed with Tracer Construction. In his $95,000 estimate Mr Hartley allowed for $10,500. Mr Fowler accordingly invited me to reduce Mr Hartley’s estimate by $16,000 to arrive at a reasonable sum.

[66] I accept that Mr Hartley’s estimate should be reduced by $10,000 for the carpet. However, I am told that the professional fees are calculated as a percentage of the contract price. Mr Fowler advanced no justification for excluding the carpet from the calculation. It is true that no more professional work would be required when new carpet was included in lieu of replacing carpet tiles, but it is implicit in Mr Fowler’s argument that fees should be calculated on an item by item basis. The evidence is that the fees are calculated as a provisional sum and based on the estimated value of the work, which in this case includes new carpet. The fees should be calculated accordingly. The evidence did not allow me to calculate them, although Mr Watkins appeared to accept that $10,000 was reasonable. In the circumstances, I leave it to counsel to calculate the appropriate fees according to the appropriate scale for a contract price of $85,000. There will be leave to apply in the event that they cannot agree.

[67] Because I cannot calculate the fees it is not possible to fix the reasonable cost of meeting the tenant’s obligations, but I have made it clear that it is founded upon the $95,000 estimate and I have been able to fix most of the items. It should be possible for the parties to agree what remains. If they cannot, there will be leave to apply. In that case I envisage that I would likely allow the parties to file affidavits from the two quantity surveyors.

Consultants’ costs incurred by Prime Commercial

[68] It is not in dispute that Prime Commercial is entitled under cl 33.3 and cl 6 to recover the reasonable expenses of and incidental to reinstatement.

[69] The claim includes $21,484.91, exclusive of GST, for consultants’ costs,

being:

CHP Taupo Ltd – Mechanical Services Engineer $ 759.00

Rider Levett Bucknall – reinstatement advisory $ 5,280.00

Holmes Fire & Safety – March Invoice $ 2,512.75

Holmes Fire & Safety – April Invoice $ 1,495.00

_{Pynenburg & Collins – Architects $ 2,360.66}

Mike Garnham/PCL – Fees in relation to reinstatement process

$ 9,077.50

_TOTAL $21,484.91

[70] I am not prepared to allow any of the first five items. I am not persuaded that they were reasonably incurred. Some of the fees related to the unnecessary amendment to the building permit. Others must have been included within the provisional sum allowed for by the quantity surveyors. To some unknown extent there is an element of betterment about Mr Garnham’s approach.

[71] With respect to legal costs, I accept that Prime Commercial might reasonably engage a solicitor to advise it, but I accept Mr Fowler’s submission that the costs are not recoverable, for three reasons. First, Mr Garnham was involved qua director of

Prime, not as an external lawyer. He acted as a principal. Second, so far as the time of his staff is concerned, Prime Commercial has no staff of its own. A substantial part of the costs claimed are administrative or commercial rather than legal in nature. They are overheads of Prime Commercial, not legal costs. I am unable to say, by reference to invoices or time sheets, what part of the sum claimed represents legal work of the sort which would normally be done by an external lawyer. Third, any such costs may have been included in the provisional sum for professional fees. In the result, Prime Commercial has not proved this part of its claim.

For how long is rent payable?

[72] As counsel agreed, it is necessary to establish both the date from which rent is payable under cl 33.3 and the date on which the obligations ceased, a reasonable time for the landlord’s reinstatement works having elapsed.

[73] The first question is when the obligation begins to run under cl 33.3. That clause envisages that the landlord may re-enter and effect removal and making good where the tenant has failed to do so within 14 days of the date of expiry of the lease. Rent is then payable “until such time as such removal is effected ...”. The obligation to pay rent generally expires at the end of the lease, and the obligation to pay rent under cl 33.3 does not arise until the tenant has failed to complete removal and making good within 14 days after expiry. In circumstances in which reinstatement was completed on the fourteenth day, for example, no obligation to pay rent would arise for that two-week period. The evident purpose is that the tenant should have two weeks after the date on which rent ceases to be payable under the lease to effect removal of its fitout; if it were otherwise, the tenant would be deprived, some time before the lease expired, of its ability to use the premises as fitted out.

[74] In this case, no question arises of the tenant completing reinstatement within that period. Indeed, Prime Commercial appears to have re-entered immediately on expiry; it certainly had exclusive control of the premises from that point. However, I do not think those facts make any difference to the analysis. I accept that the obligation to pay rent began 14 days after expiry.

[75] Mr Fowler argued that I might adjust the starting date, in effect, by reference to what he characterised as the landlord’s unreasonable behaviour over reinstatement. In particular, he highlighted Mr Garnham’s failure to specify in what respects the documents provided by Capital Chambers were inadequate. He suggested that I might effectively backdate the time needed for reinstatement to take account of the work done by Capital Construction to prepare to reinstatement. For this proposition he relied upon what he characterised as a “reasonableness overlay”, which he submitted is evident in the only relevant authority, Cigna Life Insurance

Limited v The New Zealand Counties Investment Company Limited.1

[76] I do not find it useful to examine whether Mr Garnham acted unreasonably in refusing to explain exactly what he wanted by way of detailed plans and specifications, for he clearly wanted the new carpet to which Prime Commercial was entitled and Capital Chambers equally clearly refused to install it. Consent to the tenant doing its works before expiry of the lease was reasonably refused.

[77] However, it is not in dispute that rent is payable only for such time as the landlord reasonably required to complete reinstatement and make good. When calculating that reasonable time, I accept that I may take into account work done by Capital Chambers to the extent that it reduced, or ought to have reduced, the time required for the landlord’s reinstatement.

[78] Into this category falls the building permit obtained by Capital Chambers. I have found that the scope of works contained in Mr Hartley’s second ($95,000) report was reasonable, and it did not differ from the scope relied on in his first ($28,000) report, which after extension for the kitchenette and shower formed the basis of the building permit application. The supporting plans and documents prepared at that time sufficed to obtain the building permit, whether or not they also met Mr Garnham’s exacting requirements in terms of detail. (I find that his requirements were in substantial part the product of his concern that the work was being done by the tenant, not under his control; that is, the additional details were not

_{objectively necessary for purposes of securing a permit, which is what matters for}

1 Cigna Life Insurance Limited v The New Zealand Counties Investment Company Limited HC Wellington CP 27/96, 10 May 1997.

present purposes. The evidence also suggested that having assumed control, he understandably was less concerned about detailed specifications.) Prime Commercial adopted the building permit, which did not require amendment, and the process of transferring it from tenant to landlord took only two days.

[79] However, I accept that Prime Commercial could not be required to use Capital Chambers’ chosen building contractor, and it was reasonable to require that its new contractor should price the work. The reasonable time required must also take into account Capital Chambers’ failure to provide for complete removal, procurement and installation of new carpet.

[80] Mr Hartley originally estimated that the entire project from developing scope of work to completion of construction would take 16 weeks, excluding the Christmas period. I accept Mr Anastasiou’s submission that Mr Hartley’s works programme was reasonable. He could offer no justification for the additional time actually taken by Prime Commercial and Capital Construction, other than that was how long it took.

[81] Of the 16 weeks allowed by Mr Hartley, five were required for scoping the work and design/documentation and obtaining the building consent (the last of these items overlapping with the tender period). That work was all done by Capital Chambers before the lease expired. That leaves a reasonable period of 11 weeks from the beginning of the tender period to the end of construction.

[82] The 11-week period might be thought to begin on 30 November, Capital Chambers having vacated the premises by then. But I prefer the view that Prime Commercial ought to be allowed the succeeding two weeks as a reasonable period to assume control of the space on expiry, and assess what needed to be done, and commence its own arrangements to complete the reinstatement. The 11-week period therefore begins on 14 December.

[83] It was common ground that if the construction programme were to span the Christmas period an additional two weeks must be allowed. That results in an effective period of 13 weeks. No extension to that period is required for the ordering

and installation of new carpet, whether broadloom or carpet tiles, because the evidence established that the carpet need not have been ordered earlier and the work might easily have been completed within the 13-week period.

[84] It follows that Capital Chambers is liable to pay rent for 13 weeks commencing on 14 December 2010.

Decision

[85] For the reasons given above it is not presently possible to fix the amount for which Prime Commercial will have judgment. Counsel must seek agreement on the amount.

[86] Prime Commercial is entitled to interest in terms of the lease. I was given to understand that I need not quantify it, but I record that it was not in dispute that it is presently payable on the rent, nor was it in dispute that Mr Garnham has yet to invoice for removal and reinstatement costs so as to start interest running on those sums.

[87] The claim for costs of the litigation is reserved for a future judgment. [88] There will be leave to apply generally.

Miller J

Solicitors:

N Garnham, Solicitors, Wellington for Plaintiff

DLA Phillips Fox, Wellington for Defendants