Fernyhough v The Freight People Limited [2012] NZHC 2638 (10 October 2012)

Last Updated: 13 November 2012

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2012-404-3553

CIV-2012-404-5015 [2012] NZHC 2638

UNDER Section 72 of the District Courts Act 1947

IN THE MATTER OF an appeal against a decision of the District

Court at Auckland

BETWEEN EDWARD JOHN FERNYHOUGH, JUDITH DIANNE HONEYWELL AND ANNE ELIZABETH HERBERT Appellants

AND THE FREIGHT PEOPLE LIMITED Respondent

Hearing: 9 October 2012

Appearances: S H N Chan for Appellants

No appearance for Respondent

Judgment: 10 October 2012

_{JUDGMENT OF PETERS J}

This judgment was delivered by Justice Peters on 10 October 2012 at 5 pm pursuant to r 11.5 of the High Court Rules

Registrar/Deputy Registrar

Date: ...................................

Solicitors: McVeagh Fleming, Auckland: [e-mail]

Vallant Hooker & Partners, Auckland: [e-mail]

_{Copy for: Mr J Price: [e-mail]}

FERNYHOUGH V THE FREIGHT PEOPLE LIMITED HC AK CIV-2012-404-3553 [10 October 2012]

[1] This is an appeal from decisions of Judge Bouchier in the District Court at Auckland on 23 May 2012 (“decision on the merits”) and 31 July 2012 (“decision on costs”).1

[2] In the decision on the merits, the Judge determined proceedings brought by the trustees of the Classic Car Museum Trust, to whom I shall refer as “the trustees”. The trustees brought proceedings in the District Court as the lessor of premises situated in Auckland, the premises having been leased to the Respondent (“Freight People”).

[3] The trustees appeal against aspects of her Honour’s decision on the merits. Although Freight People cross appealed, a liquidator has now been appointed to that company and the liquidator has advised the Court that he will abide the Court’s decision. There was no appearance for the liquidator when this matter was heard and I dismiss the cross appeal accordingly.

[4] The trustees also appeal against the Judge’s decision on costs.

Grounds of appeal

[5] The grounds of the appeal on the merits are:

(a) did the Judge err in finding that the term of the lease between the parties expired on 1 April 2011, rather than on 1 June 2011; and

(b) did the Judge err in law and in fact in finding that the trustees had failed to mitigate their loss and in reducing by 25 per cent the damages recoverable by the trustees.

[6] As to the appeal on costs, the issue which arises is whether the Judge erred in awarding costs of $28,000 plus standard disbursements to the trustees, rather than a

1 Fernyhough v The Freight People Limited DC Auckland CIV-2010-004-2513, 23 May 2012; and

Determination of Judge Bouchier on costs dated 31 July 2012.

greater sum to which the trustees contend that they are entitled pursuant to the terms of the lease.

Background

[7] By (undated) Deed of Lease (“lease”) the trustees leased to Freight People the premises described in the lease. The lease was on the ADLS Fourth Edition 2002 (3) form, but as varied by the parties.

[8] The lease was expressed to be for a term of three years, with three rights of renewal of three years each. The Renewal Dates were 1 April 2011, 1 April 2014 and 1 April 2017 with the Final Expiry Date to be 31 March 2020.

[9] When originally typed, the Commencement Date of the lease (“Commencement Date”) was shown as “1 April 2008”. A representative of Freight People deleted that date and wrote in “on or before 1st day of June 2008” as the Commencement Date. The parties appear to have initialled the amendment and there is no dispute that the Commencement Date of the lease was 1 June 2008.

[10] Freight People were to pay rent monthly, in advance. Freight People paid rent up to and including the rent due on 1 January 2010 but not thereafter. Freight People quit the premises on or about 2 February 2010. The Judge found that the trustees lawfully re-entered the premises on 12 March 2010.2

[11] The Judge held that the trustees were entitled to the rent due in respect of

February 2010 and March 2010. These sums totalled $10,312.50.

[12] The Judge also awarded damages for lost rental from 1 April 2010 to

31 March 2011, on the basis that the term of the lease expired on that date.3 That sum was $62,562.42. This award of damages gives rise to the first ground of the appeal, namely that the Judge erred in determining that the term of the lease expired

_{on 31 March 2012. The trustees contend that, properly construed, the term of the}

2 _{Fernyhough v The Freight People Limited DC Auckland CIV-2010-004-2513, 23 May 2012 at [112].}

3 At [113].

lease expired on 31 May 2011. Such a determination would increase the damages for lost rental by about $10,000.

[13] In addition, the Judge accepted a submission by Freight People that the trustees had failed in their duty to mitigate. The Judge’s decision regarding the breach and the effect thereof was as follows:

10. Did the plaintiff mitigate its damages?

[115] I am satisfied that in terms of the case law requiring a duty to mitigate being only reasonable efforts in the circumstances, in terms of the Robt. Jones Holdings case and the further quotation of:

“The standard of reasonable is not high in view of the fact that

the defendant is an admitted wrongdoer.”

[116] However given the amount of time taken to consider its position, attempt to re-let at the same rental against a clear downward trend in the market, I am of the view then that the plaintiff has not properly mitigated its damages. Therefore the plaintiff’s damages should be reduced by 25% to

$46,291.82.

[14] The trustees dispute that they failed to mitigate their losses. If they are wrong in that, the trustees dispute the amount of the reduction.

First ground of appeal – term of the lease

[15] On appeal, counsel for the trustees contended that the amendment to the Commencement Date did not alter the three year term of the lease, so that the (first) term of the lease would expire on 31 May 2011, rather than 31 March 2011.

[16] The difficulty with that submission is how it might affect the provisions in the lease relating to any renewal of the lease and the Final Expiry Date of the lease, which were as noted above. The lease provided that any renewed term of the lease would take effect as of 1 April 2011 (and three yearly thereafter), that is two months before the trustees contend the first term expired.

[17] Counsel submitted that, if the tenant wished to renew, they would be required to give notice (not less than three months’ written notice in this case) as if the term of the lease expired on 31 May 2011, although the term of the renewal would still

commence on 1 April 2011. Counsel submitted that, if the tenant wished to renew, the tenant should be assumed to be willing to “forfeit” their lease in respect of April and May 2011, so that the new term could commence on 1 April 2011. Failing notice of intention to renew, counsel submitted the term of the lease would expire on

31 May 2011.

[18] In my view, such a construction is unworkable. Aside from anything else, it would lead to uncertainty and considerable confusion. The lease fell to be construed as of 1 June 2008 and the term of the lease had to be ascertained as at that date. The term of the lease could not vary depending on whether or not Freight People gave notice of its wish to have a renewal.

[19] I am not satisfied that there was any error in the Judge’s decision on this aspect of the case. In my view, the construction that the Judge adopted was correct, doing the least violence possible to the lease.

[20] I dismiss the appeal on this point.

Second ground of appeal - duty to mitigate

[21] The trustees do not dispute that they were subject to a duty to mitigate their loss. The trustees do, however, dispute the Judge’s finding that they breached their duty to mitigate. If they fail on this point, the trustees dispute that the reduction of damages should be as much as 25 per cent.

[22] Counsel for the trustees submitted that the duty to mitigate that is imposed on a lessor requires that the lessor make reasonable efforts in the circumstances. I accept that is a correct statement of the legal position.4

Evidence

[23] Much of the evidence before the Judge was given by way of affidavit, with some deponents not being required for cross-examination. The evidence relevant to

4 Robt. Jones Holdings Ltd v Northern Crest Investments Ltd [2009] NZHC 1331; (2010) 11 NZCPR 206 (HC).

this issue (all of which the Judge referred to in her decision) was given by Mr Fernyhough, being one of the trustees; Mr Chaney, who managed the property for the trustees; and two real estate agents called by Freight People, namely Ms K Kirby and Ms S de Jong. These agents were with Bayleys and Barfoot & Thompson respectively at the material time and they were the agents responsible for conducting the trustees’ listing with those firms.

[24] Ms Kirby and Ms de Jong were not cross-examined. However, counsel for Freight People cross-examined Mr Fernyhough and Mr Chaney extensively on their evidence as it related to mitigation. From the cross-examination, it is apparent that Freight People took issue with the length of time that the trustees took to list the premises for letting after Freight People vacated and, once the premises had been listed, with the rent that the trustees were seeking.

[25] The relevant evidence was as follows.

[26] Minimal “make good” was required to the premises after Freight People

vacated. To the extent “make good” was required it had been completed by about

17 March 2010.

[27] Mr Fernyhough’s affidavit evidence was that, after Freight People abandoned the premises, the trustees “needed a reasonable period of time to assess their options”, being whether they would seek another tenant, occupy the premises themselves for trust business or sell the premises.5

[28] Clearly the trustees had made a decision to seek a tenant by 31 March 2010, because there was communication between Mr Chaney and Ms de Jong of Barfoot & Thompson that day. That communication led to inspections by the agent. Barfoot & Thompson provided a general agency agreement on or about 5 May 2010. The trustees did not return the executed agreement until 17 June 2010. In cross- examination, Mr Chaney was unable to explain why it took from 5 May 2010 to the

_{middle of June to do so.}6

5 _{Affidavit of E J Fernyhough dated 3 April 2012 at [14].}

6 Notes of Evidence taken before Judge A-M J Bouchier dated 7 May 2012 at 26.

[29] Mr Chaney also communicated with Mr L Somerville of CB Richard Ellis (“CBRE”) in early May 2010. CBRE did not provide an agency agreement and the premises were never listed with them.

[30] The trustees also engaged Bayleys under a general agency agreement on or about 8 July 2010.

[31] In summary, the trustees had engaged one agent by mid June 2010 and the other in the first week or so of July 2010.

[32] The second respect in which the Judge considered that the trustees failed to act reasonably was in the asking rent for the premises.

[33] Under their lease, Freight People were required to pay annual rent of $55,000 plus GST plus the outgoings attributable to the premises. The trustees wished to re- let the premises at the same rent. Under cross-examination, Mr Fernyhough’s evidence was that the trustees required a certain income by way of rent to service their borrowings, and that the trustees could not afford to receive less in rent than that which had been paid by Freight People.

[34] Each of the agents that the trustees consulted or engaged informed Mr Chaney that the asking rent of $55,000 per annum was too high in the prevailing market. In early May 2010 CBRE advised that a base rent of $45,000, with an incentive of one month free rent per year of lease term, would be appropriate. Barfoot & Thompson advised that the rent was too high and would deter perspective tenants even from enquiry. The evidence from the Bayleys’ agent is that she provided Mr Chaney with the asking rent for comparable properties and told him that

$55,000 was not achievable. The agents’ evidence is that she considered the market rent to be approximately $27,000 per annum, and that she communicated to Mr Chaney that there was a lack of interest in the property because of the level of rent that was being sought.

[35] Despite that advice, and a lack of interest from prospective tenants, the trustees took no step to reduce the asking rent until mid-August 2010. In mid-

August, the trustees instructed Barfoot & Thompson to delete the asking rental from their listings (on their own and other websites) so that the premises were offered as “by negotiation”.

[36] On 30 August 2010 the trustees requested Barfoot & Thompson to reduce the asking price to between $36,000 and $45,000. Mr Chaney does not appear to have ever communicated the reduced asking price to Bayleys.

[37] The trustees did not re-let the premises. They listed the property for sale in February 2011, and entered into an agreement for sale and purchase in April 2011. It does not appear that Freight People raised any issue as to whether the listing for sale, or the agreement for sale and purchase, were inconsistent with the trustees’ case that they were entitled to damages to 31 May 2011.

Submissions

[38] Counsel for the trustees submitted that the trustees were entitled to a period of time in which to make a decision as to the action they would take and were then allowed a period of time in which to “test the market” at their preferred rental. Mr Fernyhough’s evidence was that the trustees were sceptical as to advice from the agents, given that (in the trustees’ view) the agents’ interests lay in getting the property let, rather than the rental that was achieved.

[39] I accept the submission that the trustees were entitled to a period in which to decide what they wished to do, given the circumstances in which they found themselves. Despite that, however, I am satisfied that the Judge was correct to find that there was a breach of the duty of mitigate.

[40] The delays in getting the premises listed appear to have been occasioned by the fact that one or more of the trustees was away on holiday or, on the evidence of one of the agents, an unwillingness to agree to the agent’s fee. The trustees were far less active than the lessor in Robt. Jones Holdings Ltd v Northern Crest Investments

_Ltd,7 _{even allowing for the fact that the lessor in that case was in the business of}

7 Robt. Jones Holdings Ltd v Northern Crest Investments Ltd [2009] NZHC 1331; (2010) 11 NZCPR 206 (HC) at [41].

leasing property. The following passage from that case demonstrates the manner in which the lessor conducted itself:

[41] Evidence of RJH’s efforts to mitigate their loss here, by finding another tenant, is outlined in the affidavits of Mr. Rankin and Mr Chas William Keogh (“Mr. Keogh”) of CBRE. Mr. Rankin deposes that within a few days of 25 August 2008 he took steps to re-let the premises. He states that he contacted leading commercial real estate agencies to list the premises and he continues to deal with these agents. He says further that he has shown several prospective tenants through Level 12 and engaged in negotiations with them. Examples of correspondence with these agents and prospective tenants are attached to his affidavit. Mr. Rankin notes that the difficulty in obtaining a new tenant is unsurprising given the drop-off in tenant demand for commercial premises in the Auckland CBD. Mr. Keogh is one of the real estate agents engaged by Mr Rankin. In his affidavit he outlines his efforts towards finding a tenant for Level 12 and the carparks, and the difficulties of doing so in the present market. With regard to the car parks in particular, Mr Keogh notes that in his experience the vacancy level for car parks in commercial buildings in Auckland is higher than that for office space, as recently tenants have come to view car parks as an unnecessary expense and a way of reducing overheads.

[41] I am also satisfied that the Judge was correct to determine that the trustees’

persistence in seeking a rental as high as they did was unreasonable.

[42] Turning to the 25 per cent reduction that the Judge made, counsel for the trustees submitted that this was excessive. Counsel submitted that, if any reduction were required, it should not exceed more than the amount of one month’s rent, being approximately $5,000.00.

[43] Counsel submitted, and I agree, that these matters are not to be measured too closely or finely, such as by counting the days that the property lay untenanted. I do not, however, propose to interfere with the Judge’s reduction of 25 per cent.

[44] The Judge had to make some assessment of the reduction she should impose, taking into account the delay in getting the property listed and the fact that the trustees were listing the property at an asking rent that exceeded what was realistic.

[45] An alternative to the global reduction that the Judge made might have been to attempt a more exact analysis of the effect of the trustees’ actions. For instance, the Judge might have reduced the damages by a sum equivalent to, say, two months’ rent

for the fact that the trustees did not list the property until mid June 2010. This would be a reduction of approximately $10,000.00.

[46] The Judge might then have reduced the damages awarded in respect of several months, so as to reflect the excessive asking price, at least until August 2010.

[47] However, an approach such as this in itself requires assumptions, and I am not at all satisfied in this case that the trustees’ position would be improved if such an approach were adopted. Given that, I dismiss the appeal on this point.

Costs

[48] Pursuant to cl 6.1 of the lease, the trustees were entitled costs as follows:

THE Tenant shall pay the Landlord’s solicitors reasonable costs of and incidental to the preparation of this lease and any variation or renewal or any Deed recording a rent review, and the Landlord’s legal costs (as between solicitor and client) of and incidental to the enforcement or attempted enforcement of the Landlord’s rights remedies and powers under this lease.

[49] Given that contractual entitlement, the trustees submitted to the Judge that they ought to have an award of costs on an indemnity basis.

[50] The Judge’s decision on this matter reads as follows:

I have received and read all memoranda of counsel. This was not a difficult case either legally or factually.

It is a common type of claim within our jurisdiction. Costs are of course at the Court’s discretion, but a proper balance of the case, the facts and the claim are required in exercising discretion.

Obviously the lease gives the landlord the right to solicitor client costs under the lease, but reasonableness must also be considered.

I award the sum of $28,000 plus standard disbursements.

[51] On appeal, the trustees contend that the Judge erred in failing to award them

“solicitor client” costs of $60,162 plus disbursements of $6,168.71.

[52] The District Court Rules 2009 contain, at r 4.6.4(e), provision for awarding costs on an indemnity (or solicitor/client) basis where a party is entitled to such under a contract or deed.

[53] In Black v ASB Bank Ltd,8 the Court of Appeal recently considered the effect of the equivalent provision in the High Court Rules.9 The Court held that effect should be given to such an entitlement, subject to an assessment of the reasonableness of the costs claimed.10 Such an entitlement is not subject to the Court’s usual discretion as to costs but rather involves an assessment as to whether the steps taken were within the ambit of the clause, whether it was reasonable to take those steps, and whether the rates at which the work was charged were reasonable.11

[54] If a detailed vetting of costs is necessary, then the Court of Appeal said that it may be appropriate for that vetting to be undertaken by someone other than a judge, for instance by referring the costs to taxation before the Registrar.

[55] I accept counsel’s submission that the trustees were entitled to costs in accordance with cl 6.1 of the lease. I am not, however, able to determine whether the entire sum claimed by the trustees properly falls within that clause.

[56] Given that, I propose to make a declaration that the trustees are entitled to costs and disbursements in accordance with cl 6.1 of the lease, with those costs to be subject to taxation by the Registrar in accordance with High Court Rules, rr 14.18 –

14.21 and 14.23.12 Although I could remit the matter to the Registrar of the District

Court at Auckland, it is more convenient to undertake the taxation exercise at the High Court. I do not consider there is any material difference between the High Court Rules and the District Court Rules in so far as they apply to taxation but I

_{reserve leave to apply if there are any differences between the rules.}

8 _{Black v ASB Bank Ltd [2012] NZCA 384.}

9 _{High Court Rules, r 14.6(4)(e).}

10 _{Black v ASB Bank Ltd [2012] NZCA 384 at [77].}

11 _{At [80].}

12 At [82].

Result

[57] I make a declaration that the trustees are entitled to costs and disbursements in accordance with cl 6.1 of the Deed of Lease between the trustees and The Freight People Limited, such costs and disbursements to be taxed by the Registrar.

[58] In all other respects the appeal is dismissed.

[59] I make an award of costs in the trustees’ favour in respect of the appeal in CIV-2012-404-5015, being the appeal on the matter of costs. Failing that, I make no order as to costs.

..................................................................

M Peters J