Auckland Waterfront Development Agency Ltd v Mobil Oil New Zealand Ltd

JurisdictionNew Zealand
CourtCourt of Appeal
JudgeEllen France P,Miller J,Harrison J
Judgment Date25 Aug 2015
Neutral Citation[2015] NZCA 390
Docket NumberCA111/2014

[2015] NZCA 390

IN THE COURT OF APPEAL OF NEW ZEALAND

Court:

Ellen France P, Harrison and Miller JJ

CA111/2014

Between
Auckland Waterfront Development Agency Limited
Appellant
and
Mobil Oil New Zealand Limited
Respondent
Counsel:

A R Galbraith QC and M C Smith for Appellant

M G Ring QC and P R Rzepecky for Respondent

Appeal against a High Court decision which held that tenancy agreements obliging the tenant to deliver the land in good and clean order did not extend to remediating subsurface contamination — the respondent, and before it other associated companies in its Group, leased reclaimed land on which they built storage for petroleum products and chemicals — the land was heavily contaminated by petroleum products, primarily as a result of the respondent's activities — by 1970 the land was so polluted it required complete remediation — the parties executed new shorter term leases in 1985 which contained clauses requiring the tenant to deliver the land in good and clean order — the appellant sought to recover $10 million for remediation of the land — whether the respondent had assumed the risk of contamination under the pre-1985 leases — whether the obligation to deliver the land clean and tidy extended to the subsurface — whether the clean and tidy clauses obliged the respondent to deliver possession of the land in an uncontaminated condition on termination.

The issues were: whether Mobil had assumed the risk of contamination under the pre-1985 leases; whether the obligation to deliver the land clean and tidy extended to the subsurface; whether the clean and tidy clauses obliged the respondent to deliver possession of the land in an uncontaminated condition on termination.

Held: All of the tenancies had contained a repair clause dealing with Mobil's obligations to keep the land “in good order and clean and tidy” during the term and to deliver it in that condition on termination. The relevant damage to the land had been done during the pre-1985 leases.

Waste was any act or omission by the lessee or tenant that caused enduring change to the nature of the thing demised, to the prejudice of the holder of the reversionary interest. An action for waste was an action in tort. The tortious obligation not to commit waste differed from a contractual obligation to keep a property in repair. An action could be brought in waste although the lease contained a covenant to repair, the presence of which was insufficient by itself to exclude waste Further it was well settled in New Zealand law that repair covenants were not to be interpreted in any technical way.

It was not waste to do something permitted under the lease. The principle that liability for waste did not extend to damage resulting from use that was reasonable having regard to the nature of the demised premises, was better suited to those cases in which the court was deciding whether the lease permitted the lessee's actual use. In this case, there was no doubt that Mobil's particular use was expressly authorised under the leases. The issue in this case was whether contamination was authorised as an incident of that use.

The HC had applied the wrong test. Reasonable use was the relevant standard where the question was whether the lease contemplated the lessee's actual use. Where the use was specifically authorised, as in the current case, and contamination was an incident of that use, the question was whether there was no other reasonable way of carrying on the permitted use. On the evidence the pre-1985 leases were not to be taken to have authorised either spillage or dewatering. However, a final view did not need to be reached about this. It was enough for present purposes that as at 1985 Mobil NZ confronted a legal risk, in the form of a potential claim that its neglect or practices, or both, amounted to waste that was not authorised by the original leases.

Under the leases, the repair covenants reached the land. As far as delivery up on termination was concerned the land was the principal focus of the clause. The standard in relation to the land was that it was to be delivered in good order and clean and tidy. The obligation was qualified, however, in that the lessor could only insist on the work being done to a reasonable standard. As at 1985 residential and light commercial use was not reasonably in prospect. The likely alternative use would have been an industrial one, consistent with the land's zoning at the time, meaning that the reasonable standard under the tenancies would reflect the less sensitive requirements of industry. That did not meant that every future new industrial tenant would be indifferent to the contamination.

In ordinary usage an owner's interest in land included the subsurface. The question, accordingly, was whether an owner who leased land for a given use should be taken to have parted for the term with something less than its entire interest. Mobil had not confined its activities to the surface. Damage to the subsurface was a direct consequence of contamination of the surface through petroleum products being discharged or spilled onto the surface. Some of the contamination had occurred when buried pipes leaked directly into the subsurface. There was no justification for excluding the subsurface from the tenancies and hence the repair clause. The lessor had to be taken to have parted with the whole of its interest in the land for the term of the tenancies.

The next question was whether the obligation extended to contamination predating the tenancies. Mobil came to the negotiating table in 1985 with an actual or potential prior liability for its own contamination. On the evidence the pre-1985 leases had not excluded liability for contamination; on the contrary, they had contained a covenant prohibiting any injury to the lessor. When the tenancies were read as a whole against the background of the original leases, the parties had foreseen an actual or potential liability for clean-up costs. Further it was not remarkable that Mobil accepted a remediation obligation in “short-term tenancies” as the parties actually saw them as a stopgap measure in a longstanding and continuing relationship that was about to undergo substantial change for the first time in many decades. A new lease did not excuse a tenant from its own liability for past breaches ( Canadian National Railway Company v Imperial Oil Ltd).

AWDA's alternative claim was that the tenancies ought to have a covenant against waste implied into them. The ancient law of waste remained centrally relevant to the relationship of landlord and tenant; they had quite different interests in the same land and premises, and the law balanced those interests. The tenant's obligation not to commit waste was also self-evident, meaning that parties normally had to be taken to recognise it even if they did not define its parameters in their particular circumstances.

To categorise the obligation not to commit waste as a term implied by law unless excluded by agreement was a straightforward way of implementing it in a relationship governed primarily by contract. However in this case the obligation was express, and there was no need to imply a term against waste. Under the repair clause in the 1985 tenancies Mobil assumed responsibility for delivering the land, including the subsurface, in clean and tidy condition having regard to its condition when Mobil's use first began in 1925.

Appeal allowed.

JUDGMENT OF THE COURT
  • A The appeal is allowed.

  • B Judgment is entered for the appellant in the sum of $10 million.

  • C The respondent is to pay the costs of the appellant for a standard appeal on a band B basis. We certify for second counsel.

REASONS

Ellen France P and Miller J [1]

Harrison J (dissenting) [77]

Ellen France P AND Miller J

(Given by Miller J)

TABLE OF CONTENTS

Introduction

[1]

The reclamation at Freemans Bay

[6]

The land and leases in issue

[11]

The pre-1985 leases

[13]

Contamination of the land

[16]

Knowledge of contamination in 1985

[21]

The future of the terminals as at 1985

[23]

The Wiri pipeline

[23]

Planning schemes

[27]

The 1985 tenancies

[29]

The claim

[36]

Who assumed the risk of contamination under the pre-1985 leases?

[38]

A lessee's or tenant's obligation not to commit or permit waste.

[39]

Liability under the pre-1985 leases

[47]

Liability for contamination under the 1985 tenancies

[55]

Claim of breach of leases

[55]

Claim of breach of implied term

[71]

Decision

[75]

Introduction
1

Mobil Oil New Zealand Ltd, which we will call Mobil NZ, and before it other companies in the Mobil Group occupied reclaimed land at Freemans Bay in the Waitemata Harbour from 1925 until 2011. They built a tank farm and other facilities for the bulk storage of petroleum products and chemicals delivered by ship to the Wynyard Wharf. Other oil companies and industrial uses occupied the balance of the reclamation, through which the Auckland region took its supplies of bulk fuel until the mid-1980s, when the oil companies commissioned a pipeline from the Marsden Point refinery near Whangarei to Wiri in south Auckland.

2

Mobil, which name we will use to describe all the companies involved that were or became part of the Mobil Group, occupied two sites under 50-year leases from the Auckland Harbour Board, which owned the reclamation. The first site, at 164–168 Beaumont St, comprises 1.62 ha and was known to Mobil as the Auckland Special Products Terminal (ASPT). It was used to store bulk chemicals as well as bulk fuels. The second, at 171 Pakenham St, comprises 1.349 ha. It was used to store bulk petroleum products.

3

The land is heavily contaminated by petroleum products, the result primarily of Mobil's activities until about 1970, by which time the land was so polluted as to require complete remediation. Mobil...

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