Smith v Paros Property Trust Ltd

• Jurisdiction: New Zealand
• Judge: Goddard J
• Judgment Date: 21 September 2022
• Neutral Citation: [2022] NZCA 447
• Docket Number: CA562/2021
• Court: Court of Appeal

Between

Timothy Eric Bruce Smith

Appellant

and

Paros Property Trust Limited

Respondent

[2022] NZCA 447

Court:

Goddard, Simon France and Hinton JJ

CA562/2021

IN THE COURT OF APPEAL OF NEW ZEALAND

I TE KŌTI PĪRA O AOTEAROA

Property — appeal against a decision which held a lease remained on foot — repudiation — cancellation — duty of good faith — Contract and Commercial Law Act 2017

Counsel:

Appellant in person

L McEntegart and A J Steel for Respondent

• A The appeal against the entry of judgment on the respondent's claim for rent is allowed. The High Court judgment on that claim is set aside. The claim is remitted to the High Court to determine the amount of rent payable.

• B The appeal in relation to the dismissal of the appellant's counterclaims is dismissed.

• C Costs in this Court are reserved. If either party seeks costs, they may file a memorandum not exceeding five pages within 10 working days of the date of this judgment. The other party may file any memorandum in response (not exceeding five pages) within 10 working days. Costs will be determined on the papers.

• D The costs order in the High Court is set aside. Costs in the High Court will be determined by that Court in light of the outcome before this Court, and on remittal to the High Court.

• E The application for leave to adduce further evidence on appeal is declined.

JUDGMENT OF THE COURT

REASONS OF THE COURT

(Given by Goddard J)

Table of contents

	Para No.
Introduction	[1]
The disputes between the parties	[1]
Summary of result on appeal	[8]
Background	[10]
The property and the lease	[10]
The parties	[18]
The 2018 rent review and the attempt to freehold – an overview	[21]
Declaration proceedings	[26]
Rent review notice re-issued	[28]
The current proceedings	[30]
High Court judgment	[33]
The appeal	[42]
Issue 1: Interpretation of cl 23 of the lease	[46]
The issue	[46]
High Court judgment	[63]
Submissions of Mr Smith on appeal	[69]
Analysis	[76]
Issue 2: Was the cl 23 process varied by agreement?	[91]
The issue	[91]
High Court judgment	[98]
Submissions of Mr Smith on appeal	[100]
Analysis	[103]
Issue 3: Was the lease validly cancelled?	[117]
The issue	[117]
High Court judgment	[118]
Submissions of Mr Smith on appeal	[119]
Analysis	[121]
Issue 4: Rent payable under the lease	[133]
The issue	[133]
High Court judgment	[138]
Submissions of Mr Smith on appeal	[140]
Submissions of Paros	[142]
Further submissions following the hearing	[144]
Analysis	[151]
Rent review notice a breach or repudiation?	[166]
Application to adduce further evidence	[167]
Costs	[170]
Result	[174]

Introduction

The disputes between the parties

1 Mr Smith, the appellant, lives in a townhouse at 54 Napier Street, Freemans Bay in Auckland (the property). The respondent, Paros Property Trust Ltd (Paros), owns the fee simple title to the property. In August 2015, Mr Smith and his former partner Ms Toni Shaw purchased the leasehold interest in the property (the lease).

2 In 2018 Mr Smith sought to exercise a right under the lease of the property to acquire the freehold. He considered that he had given a valid notice to trigger the freeholding process set out in cl 23 of the lease. Paros disagreed. Each party was firmly persuaded of the correctness of its position.

3 Mr Smith says that Paros's conduct in connection with the freeholding process amounted to a breach and/or repudiation of the lease. He says he cancelled the lease on 30 August 2018. Paros says that it did not breach or repudiate the lease, Mr Smith was not entitled to cancel and there was no valid cancellation. Thus, Paros says, the lease remains on foot, and Mr Smith and Ms Shaw remain liable to pay rent under the lease.

4 Paros brought proceedings in the High Court seeking to recover rent under the lease from November 2018 onwards. Mr Smith opposed that claim on the basis that the lease had been cancelled. He counterclaimed for a declaration that the lease had been cancelled.

5 Paros was successful in the High Court. 1 Harland J found that the lease remained on foot. She entered judgment in favour of Paros for rent in the amount of $237,625, together with further amounts of rent falling due and unpaid up to the date of judgment and interest. The counterclaim was dismissed.

6 Mr Smith appeals. He says that he gave a valid notice under the lease seeking to freehold the property. The refusal by Paros to engage with the freeholding process amounted to a repudiation. He was entitled to cancel, and did cancel, the lease.

7 Mr Smith also says that if the lease was not cancelled, the full amount of rent claimed by Paros and awarded by the High Court is not recoverable because the rent review notice relied on by Paros to determine the rent payable from November 2018 onwards was not given in accordance with the rent review process prescribed by the lease.

Summary of result on appeal

8 It is in our view very clear that the lease remains on foot. Mr Smith was not entitled to cancel it.

9 However, we accept Mr Smith's submission that the rent review process adopted by Paros did not comply with the process prescribed by the lease. His appeal from entry of judgment for unpaid rent must therefore be allowed. We will remit the proceeding back to the High Court to determine the amount of rent that is payable.

Background

The property and the lease

10 The property is one of 30 terraced townhouses in a development known as “Freemans Close” which was constructed by the Auckland City Council (the Council) in the early 1970s. The Council retained ownership of the freehold estate in the land.

Leasehold interests in each of the townhouses and a common area were created and sold to various parties

11 The lease was granted by the Council in 1972. The recitals record that the lease was granted pursuant to the powers conferred by the Urban Renewal and Housing Improvement Act 1945 (URHI Act) “and … all other powers and authorities enabling it to do so”. From the early 1900s to the 1960s, Freemans Bay was considered a slum. In the 1950s the Council started an urban renewal scheme in that area. Many old houses were demolished and replaced by flats and townhouses such as the property. 2 As we explain below, the URHI Act provided for urban renewal schemes of this kind.

12 The term of the lease was originally 99 years, commencing on 14 November 1972. The initial yearly rent was $100 during the first 21-year period of the term. The lease provided for rent reviews at 21-yearly intervals. The lessee was required to pay rent:

… during each of the succeeding twenty-one (21) yearly periods which will commence on the 14th day of November 1993 the day of November 2014 and the 14th day of November 2035 and during the final fifteen (15) years of the term the respective annual rentals for each period determined by a valuation of the land only without taking account of any improvements on the land, in the manner provided in Section 152(3) Municipal Corporations Act 1954 …

13 In the 1990s, in the course of a local government reorganisation, the Council sold its interests in the freehold estates in the development to private purchasers. Some were investors who acquired the fee simple in several townhouses.

14 A variation of the lease was negotiated by the then lessor and lessee in December 2004. The 99-year term of the lease was deleted and replaced with a term of 32 years commencing on 14 November 1972, with a further term of 21 years commencing on 14 November 2004, and further 21-year terms renewable in perpetuity.

15 The 2004 variation also modified the rent review dates. In place of rent reviews every 21 years, the lease was amended to provide for the yearly rental to be reviewed on 14 November 2011 “and every 7 years following that date on the terms set out in the lease”.

16 The lease as varied included a ratchet clause providing that the rent payable during any seven-year period would not be less than the rent payable during the previous seven-year period.

17 The 2004 variation also inserted in the lease a new cl 23 providing for a right to freehold:

23. If the Lessee has not been in breach of this lease the Lessee will have the option during the 12 month period prior to 14 November 2011, and then during the 12 month period prior to each subsequent rent review date, to purchase the Lessor's fee simple estate in the Land in accordance with the following procedure and subject to the following conditions:

• (a) The Lessee may at any time during the 12 months periods specified in this clause 23 give notice to the Lessor of the Lessee's desire to purchase the Lessor's fee simple estate in the Land. The notice will not be valid unless it is accompanied by a remittance for the cost of the valuation referred to in clause 23(b).

• (b) As soon as practicable after receipt by the Lessor of the Lessee's notice and payment by the Lessee of the cost of the valuation the Lessor will cause a valuation to be made by a registered valuer of the value of the Lessor's fee simple estate in the Land.

  …

• (d) As soon as practicable after the making of the valuation the Lessor will give notice in writing to the Lessee (“Offer Notice”) offering to sell the Land to the Lessee at a price equivalent to the amount of that valuation inclusive of GST, if any. The Offer Notice must include a copy of the valuation.

• (e) Within one month after the giving of the Offer Notice (time being of the essence) the Lessee must give notice in writing to the Lessor stating either:

  • (i) That the Lessee accept the Lessor's offer at the price specified in the Offer Notice; or

  • (ii) That the Lessee...