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Restaurant Brands Limited v Forsgren NZ Limited [2019] NZHC 2375 (19 September 2019)

Last Updated: 11 October 2019

JUDGMENT OF MUIR J

This judgment was delivered by me on Thursday 19 September 2019 at 4.00 pm Pursuant to Rule 11.5 of the High court Rules.

Registrar/Deputy Registrar Date:..............................

Counsel:

ARB Barker QC, Barrister, Auckland

Solicitors:

Meredith Connell, Auckland

RESTAURANT BRANDS LIMITED v FORSGREN NZ LIMITED [2019] NZHC 2375 [19 September 2019]

Introduction

[1] The plaintiff, Restaurant Brands Limited (RBL), seeks a declaration that it is entitled to payment of $400,000 (the Escrow Amount), being the amount held in escrow pursuant to an agreement between RBL and the defendants (collectively Forsgren). Whether RBL is entitled to the Escrow Amount depends on the proper interpretation of that agreement, which is contained in a side letter (the Side Letter). The case raises the familiar tension between what one party (RBL) describes as the natural and ordinary meaning of the agreement and what the other (Forsgren) says is the proper construction having regard to the full factual matrix.

Background

[2] In November 2014, RBL entered into a contract with Forsgren. It provided for RBL to purchase seven Carl’s Jr fast food businesses. The total purchase price was
$10,500,000 (comprising the book value of the assets ($9,982,672), an allowance for intellectual property rights ($420,712) and goodwill ($96,526)), plus a valuation of the stock in hand. The seven stores included premises located on the corner of Upper Harbour Highway and Paul Matthews Road, North Shore, Auckland. Of the total book value, $1,710,740 was attributed to this acquisition.

[3] The contract was subject to usual due diligence provisions. During the course of its inquiries RBL learned that the New Zealand Transport Agency (NZTA) planned to realign Paul Matthews Road within two or three years. The proposed realignment would remove access to Paul Matthews Road from Upper Harbour Highway, leaving the store in what was effectively a cul-de-sac and with significantly reduced exposure to passing traffic. That was a serious concern for RBL. It informed Forsgren that it was not willing to proceed with the transaction unless the risk was adequately mitigated.

[4] RBL advanced various proposals to resolve the impasse, including proceeding with the transaction without the North Shore store or proceeding with purchase of all seven stores on terms that address the proposed realignment.
[5] The second of these options involved a proposal that Forsgren remain as lessee of the store and execute a sublease to RBL for a three-year term with four rights of renewal. That permitted RBL to choose not to renew the sublease should there be significant disruption to traffic flow, thereby cutting its losses and leaving the liability under the head lease with Forsgren. The proposal further envisaged a purchase price reduction of $662,000, with $100,000 paid to Forsgren for every year the store remained open.

[6] Forsgren was amenable to a sublease arrangement but not to a reduction in the purchase price. It counter-offered with a proposal that the purchase price remain unchanged, but with $400,000 to be held in escrow and returned to RBL if the sublease was terminated within four years from the transaction completion date. This was broadly acceptable to RBL. RBL and Forsgren then negotiated the Side Letter, which was signed by both parties on or about 2 December 2014.

[7] Relevantly the Side Letter included the following provisions:

3 In order to resolve that issue, we propose the following arrangements:

(a) Notwithstanding clauses 3.1(b) and 11.2(c)(i) of the Agreement, the lease of the North Harbour Store will not be assigned to the Purchaser at Completion. Rather, the Vendor will retain the lease of the North Harbour Store and will sublease the North Harbour Store to the Purchaser. The terms of the sublease will include the following:

(i) The sublease will run from Completion for an initial term expiring on 18 December 2025 (“Initial Term”).

(ii) The Purchaser may terminate the sublease by notice to the Vendor if at any time prior to 5.00pm on the date that is the fourth anniversary of Completion (“Escrow Period”):

(A) access and egress to and from the road currently called Upper Harbour Highway or Paul Matthews Road is permanently closed; or

(B) there is, or works commence that are reasonably likely to result in, significant disruption to traffic or traffic flow (other than of a temporary nature) in the vicinity of the North Harbour Store.
(iii) After the expiry of the Escrow Period, the Purchaser may terminate the sublease by notice to the Vendor if at any time prior to 5.00pm on the date that is the eighth anniversary of Completion:

(A) access and egress to and from the road currently called Upper Harbour Highway or Paul Matthews Road is permanently closed; or

(B) there is, or works commence that are reasonably likely to result in, significant disruption to traffic or traffic flow (other than of a temporary nature) in the vicinity of the North Harbour Store.

...

(c) Notwithstanding clause 5.1(a) of the Agreement, at Completion the Purchaser shall pay to the Vendor the component of the Purchase Price set out in clause 4.1(a) of the Agreement less the Escrow Amount and less $400,000 (“North Shore Store Escrow Amount”).

...

(f) If at any time prior to the end of the Escrow Period the sublease of the North Shore Store is terminated or lapses for any reason (other than due to the Purchaser’s unremedied default under the sublease), including termination by the Purchaser in accordance with paragraph (a)(ii) or lapse due to the dissolution of the Vendor, then the Purchaser is entitled to payment of the full amount of the North Shore Escrow Amount.

(g) If the Purchaser becomes entitled to payment of the North Short (sic) Escrow Amount, the Purchaser may give written notice to the Escrow Agent requiring payment of the North Shore Escrow Amount to the Purchaser and the Escrow Agent must comply with that notice.

(h) If the Purchaser does not become entitled to payment of the North Shore Escrow Amount by the expiry of the Escrow Period, then the Vendor is entitled to payment of the full amount of the North Shore Escrow Amount.

[8] This agreement was, in turn, reflected in equivalent provisions in the sublease.

[9] In late 2017 the Crown notified RBL that it intended to acquire the freehold of the land under the Public Works Act 1981 (PWA) for the purposes of the so called Northern Corridor Improvements Project (Road Works).
[10] Negotiations between RBL and NZTA followed. It was agreed that RBL would be paid the fair market value of the business calculated as a going concern.¹ Experts’ reports were exchanged with both valuers assessing the going concern value at $1.4M.

[11] In arriving at that figure it is common ground that neither valuer took into account the Escrow Amount – that is to say, compensation was not reduced on the premise RBL would also receive that sum.

[12] On 14 May 2018 NZTA and RBL entered into an agreement styled Memorandum of Agreement Pursuant to the Public Works Act 1981 (the Compensation Agreement) which provided for RBL to be paid compensation of
$1,418,666.67 for what was identified as its “interest in the Sublessee’s Business”. This sum was structured as follows:

[13] The agreement did not contemplate assignment of the sublease to the Crown. Rather it envisaged “termination of the Sublease by the Crown consequent on the Crown’s taking of the land by proclamation or declaration”.² In this respect, Forsgren says, and I accept, that the Compensation Agreement exhibits elements of structuring to ensure that a claim by RBL to the Escrow Amount might be preserved. This was further reflected in cl 9.1 of the Agreement, which provided that if the Crown did not complete acquisition of the freehold and head lease and terminate the sublease on or before 3 December 2018 (being the expiration of the Escrow period under the Side Letter), then RBL reserved its position in respect of any loss or damage.

1. RBL’s valuers initially considered an alternative claim based on relocation costs, but this was abandoned when the resulting calculation indicated a claim less than the Crown’s assessment of fair market value on a going concern basis.

² At cl 1.

[14] After settlement of the Compensation Agreement, NZTA started a compulsory acquisition process under s 23 of the PWA. However, it did not ultimately acquire any party’s interest in the land through that process. Instead, it issued a Gazette Notice under s 20 of the Act declaring an agreement to have been entered into in respect of the land which “shall vest in the Crown on the date of publication ...”.³ In terms of ss 20 and 26(3) of the Act, the effect of such declaration was that the land passed to the Crown free of all interests including the head and subleases.⁴

[15] Subsequently, RBL’s solicitors wrote to the escrow agent seeking return of the Escrow Amount, citing termination of the sublease. Forsgren disputed this entitlement. Predictably, the escrow agent has stated that it requires a court order or joint instructions before it will pay the amount to either party.

[16] Accordingly, the issue for determination is the proper interpretation of cl 3(f) of the Side Letter. In particular, do the words “terminated or lapses for any reason” apply to the circumstances which occurred?

RBL’s submissions

[17] RBL stresses the literal meaning of the words in the Side Letter. It points out that “terminated” is not a defined term, nor does it have an accepted meaning, nor a meaning defined by statute. However, it says its ordinary meaning is “to come or bring to an end”,⁵ and that this is likewise its typical usage in leases. It says that such meaning demonstrably captures termination of the lease (and with it sublease) pursuant to the declaration/proclamation.

3. Section 26(3) in fact provides that the vesting occurs on the 14^th day after publication. In the present case that was on 14 June 2018.
4. In his submissions, Mr Barker QC, for Forsgren, questioned whether absent acquisition of the head lessee’s interest a declaration could be issued under s 20. That issue turns on whether the term “owner of the land” in s 20(1)(a) is a reference only to the registered owner of the freehold interest. There is authority to the effect that, in the context of a compulsory acquisition, the reference to the owner of the land is to such person only: Minister for Canterbury Earthquake Recovery v ACC Developments Ltd [2015] NZAR 964 (HC). However, Mr Barker submitted the situation under s 20 is not directly analogous, because in a compulsory acquisition context there are rights of objection by (for example) a lessee for which there is no parallel in the case of a s 20 agreement between the Crown and the holder of the freehold interest. Ultimately, however, Mr Barker accepted that absent some attempt to overturn the Crown’s s 20 declaration (which was not intended) Forsgren was obliged to accept that the sublease (and head lease) had “in substance” come to an end on publication of the declaration in the Gazette.

⁵ Oxford English Dictionary (6^th ed, Oxford University Press, Oxford, 2010).

[18] It submits that such position is reinforced by the words “for any reason” which mean “just what they say” and are not limited to termination by the sublessee as contemplated in cl 3(a)(ii) of the Side Letter or indeed termination by the sublessee at all. It says it was well open to the parties to adopt more restrictive wording but with competent legal representation on both sides they chose not to do so.

[19] RBL also submits that the wider context of the Side Letter reinforces the plain meaning it contends for. It advances the following propositions.

(a) Clause 3(a)(ii) permits RBL to terminate if traffic was significantly disrupted because of the road works (complete/permanent closure was not required).

(b) The Escrow Amount is held on trust for RBL; Forsgren has no interest/entitlement to it apart from in the specific circumstances contemplated in cl 3(f) and (g).

(c) While the parties might not have specifically discussed acquisition of the freehold under the PWA and the statutory consequences thereof the (virtually certain) road works were significant in scale and acquisition was always “very much a possibility” – one which ought to have been apparent to the respective legal teams. On its face, then, “for any reason” appears intended to capture an acquisition of this type, since it is hard to envisage that there would be a termination by any other means (except for those already and separately provided for). Furthermore, the clause could have excluded a PWA acquisition, but did not.

(d) The structure of the agreement does not directly tie compensation to the value of the store or the losses that either party would suffer as a result of the road works.

(e) The background does not suggest a common intention that RBL would not be entitled to the Escrow Amount if it was paid compensation for the loss of the store. In particular:

• (i) the store was valued at $1.71M, so the $400,000 Escrow Amount is significantly less than value. The Escrow Amount was rather, as Mr Forsgren accepted, a “medium for the deal to proceed”; and

(ii) RBL was entitled to the Escrow Amount whether the sublease was terminated on the day after settlement or the day before expiration of the four-year period – even though the losses RBL would have suffered would be quite different.

(f) The Side Letter was subject to negotiation, with both parties proposing substantive changes before signing.

(g) Nothing in the background circumstances demonstrates that this case is one of those “most obvious and extreme of cases”⁶ that warrants a departure from the plain meaning.

[20] RBL further submits that its entitlement to the Escrow Amount involves an interpretation of the contract which is far from being commercially absurd. First, the commercial purpose of the Side Letter was to permit the substantive transaction to proceed (selling all stores, as Forsgren desired), but on terms which mitigated RBL’s risk (as RBL desired). RBL was prepared for that risk to pass fully to RBL provided this was reflected in a reduced purchase price. Forsgren, however, preferred to retain the risk in exchange for the possibility of securing the full purchase price should the risk not materialise. It must now bear the cost of assuming such risk. Secondly, Forsgren itself has benefited from the Crown acquisition. Had the sublease been terminated in the manner Mr Forsgren says he anticipated (termination in accordance with (3)(a)), Forsgren would have been left with the obligation under the headlease – a significant liability, since it was at an above-market-rent lease in a location which (on the assumed hypothesis) would have significantly reduced exposure. So, says RBL, the benefits of the Crown acquisition do not all flow one way.

⁶ Firm PI 1 Ltd v Zurich Australian Insurance Ltd [2014] NZSC 147, [2015] 1 NZLR 432 at [93].

[21] It further argues that Forsgren’s interpretation creates difficulties that demonstrate it is neither commercially sensible nor what the parties intended. Firstly, it says that Forsgren’s submissions contemplate any sale by RBL “for value” would entitle Forsgren to the Escrow Amount. But it says RBL must be assumed not to have agreed to such outcome in the event it was paid some compensation, no matter how small. Secondly, it suggests that Forsgren itself received compensation for the loss of its interests and cannot be heard to say that RBL’s compensation precludes a claim for the Escrow Amount without acknowledging the same principle applies in its own case. However, that submission does not align with the facts as established. Although Forsgren was offered modest compensation in respect of these interests (having failed to convince NZTA of a higher claim based on the proposition, admittedly inconsistent with its claims in this case, that the sale/proclamation would negate its claims to the Escrow Amount), it declined to accept it.

[22] Finally, RBL relies on that inconsistency and the authorities establishing that subsequent conduct may shed light on the interpretive exercise.⁷ It cites the following extract from a letter sent by Forsgren’s solicitors to NZTA’s agents during Forsgren’s own compensation negotiations.

NZTA Acquisition that is to be completed by the Acquisition Date results in the termination of the Head Lease and the RB Sublease, hence negated our client’s right to receive the Escrow Sum.

Our client’s inability to receive the Escrow Sum would therefore fall within the basic compensation under the follow categories of the PWA: ...

Forsgren’s submissions

[23] Forsgren variously contends that:

(a) there was no “lapse” of the lease;

(b) there was no “termination” of the lease; and

7. Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5; [2010] 2 NZLR 444 at [122]; Pernod Ricard NZ Ltd v Lion [2012] NZHC 2801 at [145].
   • (c) even if there was a termination (in the broadest sense of the word), it was not a termination of the type intended by cl 3(f).

[24] As to “lapse”, it says that this has a well-defined meaning which is inapplicable to the circumstances that occurred.

[25] As to “termination”, it submits that RBL did not terminate the sublease. Rather, it effectively sold its interest in the North Shore store to the Crown for compensation. It says the Crown did not terminate the sublease either, at least in the sense of exercising some power under the sublease to bring it to an end. And neither, it says, did it terminate the lease by its declaration under s 20 of the PWA. Although by virture of s 26 the Crown takes the land free of all interests and is therefore not bound to recognise such interests, it is wrong to describe them as terminated albeit that “in substance” the sublease has come to an end.

[26] However, that aside, Mr Barker QC argues that cl 3(f) is concerned with termination involving exercise of a right to termination by one of the parties to the sublease (or headlease), not a non-party termination that comes about via operation of external factors (eg, by the operation of statutory provisions following a Crown acquisition).

[27] Forsgren suggests this interpretation is supported by the wording of cl 3(f) in the following ways.

(a) The clause expressly includes termination under cl 3(a) – thereby invoking a power given under the sublease/Side Letter. It says that termination should be interpreted ejusdem generis with this provision.

(b) It says termination following unremedied default by RBL is excluded. This suggests that one of the reasons for termination that would otherwise have been covered by cl 3(f) would be termination by Forsgren for a breach of the sublease.
(c) The sublease also has an alternative of the lease lapsing, which suggests “terminate” was not intended to cover every situation where the sublease comes to an end.

(d) The phrase “terminated ... for any reason” simply envisions the results of restricted access to Paul Matthews Road – there is no suggestion in any of the exchanges between the parties that any other termination event was apprehended. The words “for any reason” have in that context the character of a ‘lawyer’s tick’, rather than a response to any particular concern which was the subject of detailed negotiation.

(e) The phrase “lapses for any reason” was directed to a change of circumstances on the part of Forsgren (liquidation, receivership or statutory administration). Counsel refers to an earlier draft of the Side Letter containing a paragraph dealing specifically with this situation, which was later replaced by the addition of the word “lapses” in 3(f). “Lapses ... for any reason” also encompasses the other reasons for lapse provided for in the sublease renewal by RBL (cl 14) and termination by the head lessor (cl 16).

[28] Forsgren further submits that at the very least, the meaning of “terminate” is ambiguous. As such, surrounding context is of particular importance in understanding what the parties meant by it. Various contextual factors suggest that “terminate” does not refer to what has occurred in this case. These are that:

(a) The purpose of the escrow arrangement was to protect RBL from suffering financial loss as a result of changes of access to the store.

(b) The parties could not have intended that the relevant termination included by a transfer of the business. Otherwise RBL could sell at full value and yet receive a bonus of $400,000 if that subsequent holder terminated the sublease (which it says is, in effect, precisely what was happened). That would be commercially absurd.
(c) Had Paul Matthews Road become a cul-de-sac within four years and RBL consequently terminated the sublease, RBL could take chattels it had in the store and would receive the $400,000. But it would receive nothing else – such as compensation under the PWA, since if it terminated its lease, it would have no interest in the land that could be compensated. In contrast, RBL received over $1.4M from the Crown and claims the $400,000 Escrow Amount also. This result was clearly not envisaged, and it is commercially absurd to suggest the parties intended RBL to receive what in the circumstances would amount to a windfall.

Legal principles

[29] The Supreme Court’s most recent summary of the principles relevant to contractual interpretation occurs in Firm PI 1 Ltd v Zurich Australian Insurance Ltd.⁸ In that case Arnold J stated in reasons delivered on behalf of the majority:

[60] ... It is sufficient to say that the proper approach is an objective one, the aim being to ascertain “the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract”. This objective meaning is taken to be that which the parties intended. While there is no conceptual limit on what can be regarded as “background”, it has to be background that a reasonable person would regard as relevant. Accordingly, the context provided by the contract as a whole and any relevant background informs meaning.

[61] The requirement that the reasonable person have all the background knowledge known or reasonably available to the parties is a reflection of the fact that contractual language, like all language, must be interpreted within its overall context, broadly viewed. ... a purposive or contextual interpretation is not dependent on there being an ambiguity in the contractual language.

[30] The Court emphasised, however, that contractual language tends to feature things ordinary language does not.⁹ It is the product of a negotiation process and aims to set down formally the agreement reached.¹⁰ A central aim of the language used is

8. Firm PI 1 Ltd v Zurich Australian Insurance Ltd [2014] NZSC 147, [2015] 1 NZLR 432 (footnotes omitted).

⁹ At [62].

¹⁰ At [62].

to obtain certainty for the parties and any third parties.¹¹ So while context is essential, the wording of the text remains central:

[63] If the language at issue, construed in the context of the contract as a whole, has an ordinary and natural meaning, that will be a powerful, albeit not conclusive, indicator of what the parties meant. But the wider context may point to some interpretation other than the most obvious one and may also assist in determining the meaning intended in cases of ambiguity or uncertainty.

[31] Where these can be accurately identified, regard should be had to the commercial purpose of a commercial agreement, as well as the structure of the agreement as a whole.¹²

[32] A suggested interpretation must also not flout business common sense:¹³

... if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense.

[33] Caution is, however, required in applying this principle. What is or is not commercially absurd “tends to lie in the eye of the beholder”. ¹⁴ In Firm PI 1 Ltd¹⁵ Arnold J cited the following observation of Lord Hoffman in Chartbrook Ltd v Persimmon Homes Ltd:¹⁶

It is, I am afraid, not unusual that an interpretation which does not strike one person as sufficiently irrational to justify a conclusion that there has been a linguistic mistake will seem commercially absurd to another[.]

[34] Where, read in the context of the agreement as a whole, the language of an agreement has an ordinary and natural meaning, any challenge to that meaning based on commercial absurdity should therefore be reserved for “the most obvious and extreme of cases”.¹⁷ It must also be kept in mind that the parties who negotiate

¹¹ At [62].

¹² Firm PI 1 Ltd v Zurich Australian Insurance Ltd [2014] NZSC 147, [2015] 1 NZLR 432 at [79].

¹³ Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191 (HL) at 201 per Lord Diplock, cited with approval in Firm PI 1 Ltd v Zurich Australian Insurance Ltd [2014] NZSC 147, [2015] 1 NZLR 432 at [78].

¹⁴ Firm PI 1 Ltd v Zurich Australian Insurance Ltd [2014] NZSC 147, [2015] 1 NZLR 432 at [90].

¹⁵ At [90].

¹⁶ Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] AC 1101 at [15].

¹⁷ Firm PI 1 Ltd v Zurich Australian Insurance Ltd [2014] NZSC 147, [2015] 1 NZLR 432 at [93].

commercial contracts will be influenced by many factors in reaching their final bargains. As Arnold J again emphasised:¹⁸

The contracts that emerge from the process of negotiation will reflect accommodations of the parties’ varying interests, as they assess them at the time. The reasons underlying the compromises that typically occur in commercial negotiations may not be easily perceived or understood by a court, even if they are exposed as part of the relevant background.

[35] I will refer further to these principles in the discussion section of this judgment.

Discussion

[36] The genesis of the Side Letter was RBL’s identification, during the due diligence period, of the fact that a variety of Auckland Transport concept ideas all resulted in the part of Paul Matthews Drive where the North Shore Carl’s Jnr store was located being reduced to a “quiet cul-de-sac”.¹⁹ The plans did not at that stage provide for roading works through the Carl’s Jnr site such as would have necessitated a taking either by agreement or proclamation under the PWA.

[37] Consistent with that proposition, cl 3(a)(ii) of the Side Letter anticipated the premises continuing to exist, but either access and egress to and from Upper Harbour Highway/Paul Matthews Drive being permanently closed (the cul-de-sac scenario) or works occurring which resulted in significant and more than temporary disruption to traffic or traffic flow in the vicinity of the store. If either occurred within four years of completion the right to terminate the sublease arose.

[38] The commercial rationale for RBL’s receipt of discount against purchase price in the event of a cl 3(a)(ii) termination – being the agreed Escrow Amount – was clear. Although plant and equipment would be salvageable from the site and although the business would presumably have traded profitably for some (maximum four year) period prior to termination, premature closure carried with it obvious economic costs.

[39] In the event, none of the options resulting in creation of a “quiet cul-de-sac”, were proceeded with. Rather, NZTA pursued an acquisition strategy giving it greater

¹⁸ Firm PI 1 Ltd v Zurich Australian Insurance Ltd [2014] NZSC 147, [2015] 1 NZLR 432 at [91].

¹⁹ As so described in an internal RBL email dated 20 November 2014.

feasibility in its realignment options. Ultimately, it opted to demolish the store completely.

[40] That strategy resulted in an acquisition of RBL’s business at a fair market value calculated on a discounted cash flow basis. RBL received $1,418,666 and simultaneously repurchased all of the chattels of the business (having an identified depreciated value of $851,852.74) for $11,792.00. I accept it was fully and fairly compensated for all its losses. Indeed, the compensation figure exceeded by a small margin its own expert advice as to value. I do not accept, as RBL’s Chief Financial Officer Mr Ellis invites the Court to do at para 22.3 of his affidavit, that although RBL received full value as a going concern, it still suffered significant losses (in the order of $1M) having regard to the costs of re-establishing an equivalent store in the area. That neither takes into account the likely level of landlord contribution to such re- establishment (which on the evidence was stated to be in the range of $850,000 –
$900,000²⁰) or the heavily discounted repurchase of the plant and equipment located
at the Upper Harbour site.

[41] As a result, there is no realistic counter to the argument that RBL receives a windfall, if, in addition to the full compensation it received from the Crown, it is also entitled to the Escrow Amount. I use the word “windfall” in that context to describe an economic outcome which was both unexpected (in the circumstances which resulted in the Side Letter) and which would deliver a premium on the asset’s actual value. RBL does not in fact contend otherwise. Ms Carlyon accepted that there was such a windfall, but says that in the circumstances which ultimately occurred, Forsgren also received a significant unanticipated advantage when compared with the outcome contemplated in cl 3(a)(ii) of the Side Letter. That is because it was not left carrying a long term lease of premises which ex hypothesi would be less desirable and which (in RBL’s assessment at least²¹) provided for a rental which was significantly over market.

20. An internal RBL email refers to $900,000 being “what it asks for”. In a draft report from Deloittes, which advanced an alternative relocation scenario, not ultimately pursued, the allowance is

$850,000.

21. RBL’s correspondence suggests it considered the rental $60,000 per annum over market as at November 2014.

[42] However, the fact that in the particular circumstances that have transpired, the construction contended for by RBL would deliver it a windfall cannot be considered determinative of whether a reasonable person, having all of the background knowledge available to the parties at the time the Side Letter was signed, would regard such construction as wrong. That must be especially so where such circumstances also deliver Forsgren an unexpected benefit.

[43] The assumed reasonable person would be tasked to assess the response of the words used to an outcome which was not in the specific contemplation of any party. That is an admittedly difficult hypothetical with which to engage.

[44] RBL accepts that at the time the Side Letter was signed neither party contemplated what actually occurred, but says that these were major road works where acquisition by the Crown (whether compulsorily or voluntarily) was always “on the cards”. I cannot accept that submission, at least to the extent it might be thought to influence the meaning conveyed to the reasonable person whose assessment the interpretation process is based on. Relevant in that context is “all the background knowledge which would reasonably have been available to the parties in the situation they were in at the time of the contract”.²² Such knowledge pointed to a variety of potential scenarios, all involving commercial disruption to the site but none of which would have resulted in an acquisition. I return therefore to what I have described as the difficult hypothetical.

[45] Of course, any claim by RBL to the Escrow Amount assumes, as a precondition, that the sublease has been terminated or has lapsed “for any reason”. I regard the word “lapses” as inapposite to describe what has occurred in this case. The word generally refers to the loss of some right through the failure to activate or exercise that right, as in the case of the right of renewal referred to in cl 14 of the sublease. Black’s Law Dictionary, for example, defines the word as meaning “termination of a right or privilege because of a failure to exercise it within some time limit or because a contingency has occurred or not occurred,²³ and, in Words and

22. Investors Corporation Scheme Ltd v West Bromwich Building Society [1997] UKHL 28; [1998] 1 WLR 896 (HL) at 912 per Lord Hoffman.

²³ Bryan A Garner (ed) Black’s Law Dictionary (9^th ed, Thomson Reuters, 2009) at 958.

Phrases Legally Defined, it is said to be “the loss of any interest in land by reason of an omission to renew, or the non-performance of a condition, such as the payment of money”.²⁴

[46] In the present case I accept that a reasonable person, having all the relevant background knowledge, might attribute a broader meaning to the word “lapses” to capture the fact that during negotiations of the Side Letter the former cl 3(f)(ii), relating to the liquidation or receivership of Forsgren, was deleted and, by way of substitution, “lapses” was added to the final version of cl 3(f). However, whether that is the case or not, none of the circumstances in the former cl 3(f)(ii) apply here, so that any such potentially extended meaning is irrelevant.

[47] The preliminary question is therefore whether the sublease has been terminated. RBL did not do so. Its compensation agreement contemplated (cl 9.1) that it would be the Crown that did so, reserving, with RBL’s eye on the Escrow Amount, its right to claim damages if the Crown’s termination had not occurred by 3 December 2018²⁵ – the fourth anniversary specified in the Side Letter.

[48] Neither did the Crown give any contractual notice terminating the sublease. It had no right to do so having not taken any assignment of the interest. Rather, termination is said to have arisen as a matter of law under ss 20 and 26 of the PWA at the point 14 days after publication of the Gazette notice declaring the Crown’s acquisition of the freehold.

[49] As indicated, Mr Barker concedes that the sublease has “in substance”²⁶ or “on one level”²⁷ come to an end. But, he says it is unclear whether the process adopted by the Crown has involved a termination of the sublease as such. He says the Crown never acquired, as the Compensation Agreement contemplated, Forsgren’s interests and that for a valid declaration under s 20 there must have been an agreement with the owner of the land, which in terms of s 2 of the PWA includes any interest in the land.

24. David Hay (ed) Words and Phrases Legally Defined Volume 2 – L-Z (LexisNexis, 2007) at 14, citing O’Keefe v Malone [1903] AC 365 (HL) at 377.

²⁵ The fourth anniversary of the “completion” as specified in the Side Letter.

²⁶ As per his oral submissions.

²⁷ As per his written submissions.

However, absent proceedings challenging the declaration (of which there are none, present or intended), he acknowledges it must stand.

[50] Nevertheless, as a final point, he says it remains unclear whether there has been any termination of the sublease because all s 26 of the PWA provides is that the Crown is not bound to recognise it, not that it is terminated.

[51] That argument faces the difficulty, however, that s 26 provides that it is the land that is freed from all interests, estates, etc, not that the Crown is freed from its obligations in respect of those interests. I accept the submission of RBL that if any interests whatsoever existed at the time of proclamation, they fell away on the 14^th day after publication and that this includes the derivative interests of a sublessee. I accept also that the sublease is appropriately considered an interest in land for these purposes.²⁸

[52] But returning to what the word “terminated” would mean to the hypothetical reasonable person – which in my view is simply to “bring or put an end to”²⁹ – it must be accepted that, whatever the merits of Mr Barker’s argument, the sublease has indeed been terminated. Such person would, I consider, adopt a “functional” meaning. And since the combination of the Compensation Agreement, the Crown’s acquisition of the freehold and the operation of ss 20 and 26 mean that all rights and liabilities under the sublease were extinguished, I am satisfied that the sublease was at least “functionally” at an end by the relevant date. In that sense the door to RBL’s argument must, at a minimum, be considered ajar.

[53] However, the further, and more significant, issue is whether the phrase “terminated ... for any reason” would be interpreted by a reasonable person, with all the background knowledge, to include termination of the specific type which has occurred here. Mr Barker says the answer is “no”, because such person would interpret termination for “any reason” as being “any reason under the lease”, or at the

²⁸ It is an interest that is caveatable, capable of being mortgaged and is protected by the Property Law Act 2007, ss 258 and 260. Similarly, s 215(3)(b) recognises that a sublease, which cannot in terms of the section be registered, nevertheless creates “an equitable estate in the land”.

²⁹ Black’s Law Dictionary at 1609. Likewise, the Concise Oxford definition includes “bring or come to an end”.

very least would say it should not be interpreted in a way which would enable RBL to claim the Escrow Amount in circumstances where it had suffered no loss. Is he correct?

[54] The focus in this context is of course on interpreting the document rather than the particular words. But in my view the document as a whole is of limited assistance, probably for the reason already identified, namely, that the specific type of termination which occurred was not what the parties were actively considering at the time. Certainly, within the full context of the document it cannot be said that the only type of termination which entitled RBL to the Escrow Amount was that ultimately reflected in cl 3(a)(ii) of the Side Letter. That is because cl 3(f) refers to termination “for any reason ..., including termination by the Purchaser in accordance with paragraph (a)(ii)
...” (emphasis added). Clearly the inclusion would be otiose if termination was intended to be limited in that way.

[55] Nor is the ejusdem generis principle applicable because the specific words follow the general. As Lord Stendale said in Ambatielos v Anton Jurgens’ Margarine Works:³⁰

The first difficulty that I feel in applying the doctrine of ejusdem generis to this case is that in this case, unlike any other which has been cited to us, ... the specific words follow the general words and do not precede them.

[56] I start then with the ordinary and natural meaning of the phrase “terminated for any reason”. That, as the Supreme Court observed in Firm PI 1 Ltd v Zurich Australian Insurance Ltd, will always be a “powerful, albeit not conclusive, indicator of what the parties meant”.³¹ Of course something may have gone wrong with the contractual language, indicating that the natural and ordinary meaning was not what was intended. However, the courts have always required a strong case in this respect, because the “primary source for understanding what the parties meant is their language interpreted in accordance with conventional usage”.³² And the Courts “do not easily

³⁰ Ambatielos v Anton Jurgens’ Margarine Works [1922] 2 KB 185 at 194. A similar observation was made on appeal to the House of Lords by Viscount Cave L.C. Ambatielos v Anton Jurgens’ Margarine Works [1925] AC 175 at [183].

³¹ Firm PI 1 Ltd v Zurich Australian Insurance Ltd [2014] NZSC 147, [2015] 1 NZLR 432 at [63].

³² Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38; [2009] AC 1101 at [14] per Lord Hoffman.

accept that people have made linguistic mistakes, particularly in formal documents”.³³ Caution is certainly required before suggesting that such ordinary and natural meaning should yield to so-called “commercial common sense” or in the face of so-called “commercial absurdity”, given the extent to which these concepts lie in the eye of the beholder.

[57] In my view, there is only one natural and ordinary meaning to the phrase “terminated for any reason” – one so obvious that it does not require recourse to dictionary definitions. “Any reason” cannot, without doing violence to the language, be read to include some reasons but not others. That is essentially what Mr Barker invites in suggesting that the reason for termination must be one “under the sublease”. Indeed, cl 3(f) itself specifies the only “carve-out” intended – a termination based on RBL’s unremedied default.³⁴ In the same way the phrase cannot be limited to the particular type of termination envisaged in the Compensation Agreement, that is involving acquisition by the Crown of Forsgren’s interests, especially so for the fact that the Compensation Agreement came significantly later and Forsgren was neither party nor privy to it.

[58] Mr Barker’s alternative argument, that no-one would have intended the phrase to apply to a case where RBL had already been fully compensated (and a reasonable person would not therefore have so interpreted it), is in substance an invocation to conclude that the natural and ordinary meaning results in commercial absurdity or at least defies commercial common sense. But the authorities are clear that a court is not justified in concluding that a contract does not mean what it seems to say simply because it considers that, so interpreted, the contract is unduly favourable to one party.³⁵

³³ Bank of Credit and Commerce International v Ali [2001] UKHL 8; [2002] 1 AC 251 at [39] per Lord Hoffman.

³⁴ The ostensibly difficult scenario of disclaimer of the sublease by a liquidator or statutory manager of RBL does not, in my view, alter that conclusion. Although it might be considered commercially untenable that a liquidator should receive the Escrow Amount in that case, the situation does not in fact involve termination of the sublease, even in what I have called a “functional” sense. Rather the sublessees’ interest in the lease would simply be regarded as determined. That emerges from the cases that hold a disclaimer by the assignee of a lease does not relieve prior assignors. The lease in that sense continues. See Hindcastle Ltd v Barbara Altenborough Associates Ltd [1997] AC 70 and the discussion in G W Hinde Hinde on Commercial Leases (3rd ed, LexisNexis, Wellington, 2015) at [11.263].

³⁵ Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38; [2009] AC 1101 at [14] per Lord Hoffman; Firm PI 1 Ltd v Zurich Australian Insurance Ltd [2014] NZSC 147, [2015] 1 NZLR 432 at [89].

[59] This then doubles back on the “windfall” issue I have previously discussed. I am unable to conclude that the natural and ordinary meaning should be pared back so as to prevent such a windfall, especially because, as I have already observed, there was likewise an unexpected benefit to Forsgren from the way in which the Crown ultimately chose to proceed.

[60] Although contractual interpretation is often referred to as a “unitary exercise”,³⁶ there is in my view nothing in the background which indicates that something has gone wrong with the language when, applied to an unexpected occurrence, it produces a windfall for RBL and when the same occurrence likewise benefits Forsgren.

[61] Relevantly also, the language of the Side Letter was under control of experienced commercial parties.³⁷ As Neuberger LJ observed in Skanska Rashleigh Weatherfoil Ltd v Somerfield Stores Ltd:³⁸

Particularly in these circumstances it seems to me that the court must be careful before departing from the natural meaning of the provision in the contract merely because it may conflict with its notions of what the parties may, must or should have thought or intended.

[62] Indeed, both parties were represented by senior commercial property lawyers who negotiated the Side Letter over several days. In my view, the hypothetical reasonable person would in these circumstances be even more especially reluctant to conclude that “terminated... for any reason” did not mean exactly what it says.

[63] Finally, I note the correspondence from Forsgren’s solicitors to NZTA acknowledging that termination of the head lease/sublease “negated our clients’ right to receive the Escrow Sum”. Although this does not go so far as establishing an estoppel against Forsgren, it does provide strong support for the conclusion that a reasonable person with all the relevant background knowledge would come to the same conclusion.

³⁶ In the sense that the document, its content and the commercial consequences of the rival contentions are all necessary components of the interpretative process. For a recent discussion, see David McLaughlan Contracts Don’t Always Mean What They Say [2019] NZLJ 227.

³⁷ With both represented by senior property lawyers.

³⁸ Skanska Rashleigh Weatherfoil Ltd v Somerfield Stores Ltd [2006] EWCA Civ 1732 at 22.

Result

[64] I make a declaration that RBL is entitled to the Escrow Amount in accordance with cl 3(f) of the Side Letter.

[65] I do so with some reluctance given that RBL has, in my view, been fully compensated for its losses without recourse to the Escrow Amount. However, my function is limited to assessing the lawfulness of its claims. It is for others to judge their appropriateness in the wider sense.

Costs

[66] Despite the observations in the previous paragraph, I do not (provisionally) see r 14.7 engaged, with the result that costs (provisionally on a 2B basis) would ordinarily follow. If they cannot be resolved between counsel, memoranda (maximum 5 pages plus any schedules) may be filed on the following timetable:

(a) Plaintiff’s memorandum, 4 October 2019;

(b) Defendants’ memorandum, 18 October 2019;

(c) Plaintiff’s reply (if any), 25 October 2019.

Muir J