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Paros Property Trust Limited v Smith [2021] NZHC 2163 (19 August 2021)

Last Updated: 27 September 2021

JUDGMENT OF HARLAND J

This judgment was delivered by me on 19 August 2021 at 11:00 am Pursuant to Rule 11.5 High Court Rules

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

Counsel/Solicitors:

L McEntegart, Waterloo Tower Chambers, Auckland A Steel, Chancery Street Chambers, Auckland Brown Partners, Auckland

Copy to:

First Defendant; and Second Defendant

PAROS PROPERTY TRUST LIMITED v SMITH [2021] NZHC 2163 [19 August 2021]

Introduction

• [1] It is generally thought to be preferable to own a freehold rather than a leasehold interest in land. This is because a leasehold interest attracts the payment of rent for the use of the land, which is typically subject to review and the prospect of the rent increasing. In Auckland, where the price of land has increased exponentially, the payment of ground rent payable under such leases has also increased – sometimes dramatically.

• [2] In this case, following their separation and with their life savings, the defendants purchased the leasehold interest in a townhouse at 54 Napier Street, Freemans Bay in Auckland in which the plaintiff owns the fee simple. The lease contains a clause providing a right to freehold the property in certain circumstances and subject to certain conditions. The interpretation of this clause and whether it was legally engaged is at the heart of this case. The plaintiff landlord says the clause was not engaged, and that rental arrears amounting to $237,625 are owed to it by the defendants. The first defendant (Mr Smith) says the clause was engaged, and that the plaintiff’s failure to comply with it justified him cancelling the lease on behalf of both defendants. The second defendant (Ms Shaw) seeks an indemnity from Mr Smith should she and Mr Smith be found liable to the plaintiff for the rental arrears.

Background

• [3] The property at 54 Napier Street is one of 30 terraced townhouses in a development known as “Freemans Close”, which was constructed and sold by the Auckland City Council in the early 1970s. The Council retained ownership of the freehold estate in the land, and the townhouses and a common area were sold to various parties with their leasehold interests recorded in a lease. The term of the lease was 99 years commencing on 14 November 1972, with a rent review period of 21 years.

• [4] In the 1990s, as part of local government reorganisation, the Council sold its interest in the freehold estate over the land to private interests. This meant that there were more lessors involved, many of whom were investors and some of whom owned the fee simple in several townhouses. At the first rent review in 1993, the rent payable

under the lease increased significantly. The ownership of a leasehold interest in these circumstances was not an attractive proposition for all lessees.

• [5] A variation of the lease was negotiated in December 2004. The variation inserted a right to freehold into the lease (a benefit to the lessee) and the rent review period was reduced from 21 years to 7 years (a benefit to the lessor).

• [6] On 18 December 2006, the freehold interest in 54 Napier Street was sold to the plaintiff in its capacity as trustee of the Paros Property Trust (Paros). Mr Neil Christian is the director and the sole shareholder of Paros. He is an experienced commercial landlord.

• [7] In early 2015, after 20 years of marriage and two children, Mr Smith and Ms Shaw separated. In the wake of this decision, Mr Smith became interested in purchasing the leasehold interest at 54 Napier Street using his and Ms Shaw’s life savings of $155,000. Mr Smith wanted to live at the property, but he also thought it would be a good investment given the right to freehold contained in the lease. Ms Shaw was very concerned about Mr Smith’s plan, however she reluctantly agreed to go along with it.

• [8] In August 2015, Mr Smith and Ms Shaw purchased the leasehold interest in the property, and became jointly liable under the lease.¹ Unfortunately, Ms Shaw did not obtain independent legal advice about the risks associated with the leasehold nature of the property, nor did she receive any advice about the relationship property implications associated with it before the property was purchased.

• [9] Mr Smith has been living in the townhouse since the date of purchase. He has been responsible for paying the outgoings in relation to the property since then, including the rent payable under the lease. He has also been responsible for everything to do with the operation of the lease from the lessees’ perspective.

• [10] Clause 23 of the lease is the “right to freehold” clause. I introduce it very generally at this point, because the interpretation of the specific wording of this clause

¹ Lease L243503.01 / VL6240784.1.

is at the heart of the dispute. Clause 23 provides the lessee with an option during the 12-month period prior to a rent review to purchase the lessor’s fee simple estate in the land if the lessee has not been in breach of the lease. This is done by the lessee giving the lessor notice to that effect, a valuation being obtained which is paid for by the lessee, and the lessor then being obliged to offer to sell the land to the lessee at a price equivalent to the amount of the valuation.

• [11] The rent review in this case was due on 14 November 2018.

• [12] Between December 2017 and February 2018, Mr Smith approached Paros regarding the freehold. What happened over this period and subsequently is contested and will be analysed in more detail later in this judgment; however, it is enough to note that Mr Smith formed the view that the process to freehold he suggested was correct, that Paros’ agent agreed to it, and that Paros did not follow this process. Mr Smith considered Paros’ failure to follow the process to be a breach of the lease and he gave notice purporting to cancel the lease on 30 August 2018. As can be seen, this was prior to the rent review date. Because Mr Smith contends that he validly cancelled the lease, he took no steps in relation to the rent review process provided under the lease, which provided an opportunity for the amount of the rent proposed for the next seven years to be challenged.

• [13] On 1 November 2018, in an attempt to resolve the interpretation of cl 23, Paros applied to the High Court for a declaration that the lease had not been validly cancelled. Paros’ application was heard on 22 February 2019 before Peters J. A judgment was delivered on 16 July 2019.² Peters J declined the application for declaration.

• [14] In August 2019, a rent review notice was served on both Mr Smith and Ms Shaw advising that the annual rent would be $81,375 per annum. A notice under the Property Law Act 2007 for the unpaid rent was also issued.

• [15] On 29 August 2019, Mr Smith and Ms Shaw executed a deed of delegation and indemnity in which Mr Smith agreed to indemnify Ms Shaw for any losses suffered

² Paros Property Trust Ltd v Smith [2019] NZHC 1657.

by her under the lease. The deed also formally recorded their prior oral agreement that Mr Smith was authorised by Ms Shaw to act for her in relation to all matters pertaining to the lease.

• [16] This proceeding was issued in November 2019.

The issues

• [17] The plaintiff’s claim is that the defendants are substantially in arrears of the rent that is owed under the lease. It sues to recover the rental arrears.

• [18] By way of their affirmative defences and counterclaims, the defendants allege that the lease was determined by Paros’ refusal to allow the defendants to exercise the right to freehold, and that the lease was cancelled on acceptance of that repudiation.

• [19] There is also a cross-claim between the defendants, by which Ms Shaw seeks an indemnity from Mr Smith, which he resists.

• [20] This summary of the issues was fleshed out during case-management by Andrew AJ. I include the issues he identified by way of completeness, because these issues were addressed in that order by Mr Smith in his evidence and submissions. They are:

(a) The proper interpretation of cl 23 of the lease, which provides a process for the purchase of the fee simple estate;

(b) Whether Mr Smith, the first defendant, validly exercised rights on behalf of himself and Ms Shaw under cl 23 of the lease on or about 26 April 2018;

(c) Whether Paros breached cl 23 of lease and/or repudiated the lease by breach;

(d) Whether Mr Smith validly cancelled the lease by notice on behalf of himself and Ms Shaw on or about 30 August 2018;

(e) What loss (if any) has been suffered by Mr Smith as a result of any breach of cl 23 or repudiation of the lease by Paros;

(f) What loss (if any) has been suffered by Ms Shaw as a result of any breach of cl 23 or repudiation of the lease by Paros;

(g) What relief (if any) should be granted, and in particular whether specific performance is appropriate; and

(h) The amount due by Mr Smith and Ms Shaw to Paros by way of rent and interest.

• [21] The above issues can be further condensed. I summarise the issues for me to resolve on both the claim and the counterclaims as follows:

(a) How should cl 23 of the lease be interpreted?

(b) Was cancellation of the lease by the defendants legally justified?

(c) If not, what amount of rental is payable and by whom?

Issue One: How should cl 23 of the lease be interpreted?

• [22] Clause 23 of the lease provides the lessee with a right to purchase the fee simple interest in the land from the lessor and sets out the process to be followed should the lessee wish to exercise that right. The relevant parts of the lease are as follows:

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.

What happened in this case?

• [23] In December 2017, Mr Smith emailed Mr Christian and asked to meet to discuss the lease. Given the time of the year, it was agreed that they would meet after Mr Christian was back from holiday in late January 2018.

• [24] In 5 February 2018, Mr Smith emailed Mr Christian and asked to meet him. Later that morning, Mr Smith telephoned Mr Christian. The conversation lasted a long time – just over an hour. In his first affidavit,³ Mr Christian did not recall this conversation but after reading Mr Smith’s affidavit,⁴ Mr Christian recalled some details about it and addressed them in his affidavit in reply.⁵ Nothing turns on this in my view. The phone conversation however sets the scene for what followed.

• [25] Mr Smith said he explained to Mr Christian that he had recently lost his job and that his only options in relation to the property were for him to freehold or to sell the leasehold interest. He indicated he was happy to offer the leasehold interest to Mr Christian at a cost of $155,000. This was the price the lessees had paid for the leasehold the previous year. Mr Smith said Mr Christian told him that if he could not afford the rent or to freehold the property, if the lessees abandoned the lease he would not pursue them for the arrears that would be owing over its term. Mr Smith said he found the response “somewhat chilling” as he was aware that other lessees in the development had had to abandon their leasehold interests through litigation and the rent review process. Mr Christian agreed that he told Mr Smith that Paros would allow him to abandon the property and the lease and would not pursue him for default of rent

³ Sworn 5 November 2018.

⁴ Sworn 18 December 2018.

⁵ Sworn 15 February 2019.

on condition that the property was left in good order because he said he felt sorry for Mr Smith given that Mr Smith had lost his job.

• [26] On 11 April 2018, Mr Smith called Mr Christian and left a voicemail message which he said notified Mr Christian that he wanted to freehold the property and agree the process for doing so with him. The voicemail message was not saved but there is a record of it occurring. I accept that Mr Smith called Mr Christian on this date.

• [27] In any event, Mr Christian responded with a text message on the same date. The text said:

Hi Tim, thanks for your email.

Re purchase of your L/HD Interest.

The Trust is in a position to purchase this from you.

However, If you wish to freehold the land at 54 Napier Street as in accordance with the lease you can tender your request in writing to Point Management the Trust property managers. Once they receive your notice they will then advise the steps required. Prior payment of valuation etc.

Thanks again regards Neil

• [28] The next day, Mr Smith was advised that his contact at Point Property Management was Lisa Baillie.

• [29] Mr Smith says he spoke to Ms Baillie on 19 April 2019 by phone. Mr Smith says that the conversation included him emphasising that he wanted to ensure he complied with the lease and to avoid any issues with the filing of the notice. He says he discussed with Ms Baillie the difficulties with the freehold notice because under cl 23(b) of the lease it had to be accompanied by a remittance for the cost of valuation. Mr Smith says he asked Ms Baillie if it was up to him to locate an independent registered valuer and ascertain the cost of such valuation and send in payment for the cost of it with his notice. Mr Smith says Ms Baillie agreed that payment for the cost of the valuation in this way would be acceptable under the lease. Accordingly, Mr Smith contends that he and Ms Baillie agreed that he could locate a registered independent valuer and send in remittance for the cost of valuation with his notice of intention to freehold.
• [30] While initially not recalling the phone call, Ms Baillie subsequently accepted that it occurred, but she did not accept that agreement of the kind outlined above was reached. I return to this later in the judgment where it is more relevantly addressed.

• [31] Mr Smith set about finding a valuer. It was clear from the way he approached this task that he considered the valuer would need to be someone who had not previously been commissioned by either Paros or Mr Christian. He obtained a quote from Gribble Churton Taylor (Mr Matt Taylor) with whom he had no previous dealing. Having satisfied himself that this firm was independent he said:

I advised Gribble Churton Taylor of the lease clause and circumstances in terms of valuation and that the Lessor would be briefing them, appointing them and giving them the go ahead.

• [32] Mr Smith sent an email to Mr Taylor on 19 April. This email provided certain background matters Mr Smith considered would be helpful to Mr Taylor including the amount he understood that properties next door had recently sold for at auction. He requested that Mr Taylor advise the full cost of his services and the name of the account into which the cost of the valuation should be paid. In this email, Mr Smith said:

The Lessor (Neil Christian) has asked that the valuation is to be prepaid. To do this and to satisfy the lease clause requirements, I am required to pay for the valuation in advance and send the remittance with the notice to the Lessor of the Lessee’s desire to purchase the land. My intention therefore in order to achieve this is to send a non-negotiable cheque for the cost of your services as a registered valuer required under the lease.

• [33] On 26 April 2018, Mr Smith sent an email to Ms Baillie giving notice of his intention to purchase the lessor’s fee simple interest in the land. Attached to the email was a copy of a Kiwi Bank cheque for $2,363.25 made out to Gribble Churton Taylor Limited. At the end of the email, Mr Smith said:

Please cause the valuation to happen by “reply all” confirming the receipt of this notice, and for the valuation to take place to the valuer who is cc’d above and myself.

• [34] Ms Baillie forwarded this on within a matter of minutes to Mr Christian. She also advised Mr Smith that she was checking with the lessor and would get back to him.
• [35] On the morning of 27 April 2018, Mr Christian wrote an email to Ms Baillie. The tone of this communication indicates Mr Christian’s view of things. Importantly, Mr Christian considered that Mr Smith was “trying to maneuver [sic] things in a particular way that it is less than honourable”. Mr Christian described the valuer as having a “torrid reputation”, and that he was a “known litigator” who “acts as advocate for lessees”. Mr Christian noted:

At this stage, their intentions are abundantly clear and it does raise an alarm bell to proceed with caution.

The freehold valuation process in the lease is very clear and simple to understand yet somehow they have got it so wrong? It’s hilarious really.

We would never agree to their proposal, so moving forward either Tim makes his request in accordance with the lease or we will not proceed.

• [36] Mr Christian indicated that he would think about a valuer he would be prepared to use.

• [37] The content of this email was not known to Mr Smith at this point; however, it provides some insight into the approach that Mr Christian intended to take, which when viewed in the context of the approach Mr Smith wanted to take was bound to cause conflict.

• [38] Mr Christian telephoned Mr Smith and left a message for him to call him back. The call that ensued lasted one hour 20 minutes. Both parties have set out their respective views of what was said during this phone conversation. From what I have heard of it, what was said does neither of them any credit. Both seemed to have continued to assert their respective views of the process to be undertaken to freehold the property and give notice thereof. Mr Smith said Mr Christian threatened him with High Court proceedings. Whatever the truth of the various assertions, it is very clear to me that after this phone call, both parties’ perspectives became completely entrenched.

• [39] Ms Baillie, after receiving Mr Christian’s approval and editing of her draft response, sent an email to Mr Smith advising that his application to freehold did not comply with the lease and that matters could not proceed as he proposed. The email

suggested that if he had any difficulties understanding the freehold description in the lease, Mr Smith ought to contact Mr Christian or take his own legal advice.

• [40] Mr Smith responded to Ms Baillie stating that his email was not an “application”, it was “notice” under cl 23 and that he considered he had fulfilled his obligations regarding the process for valuation and purchase of the fee simple estate. He noted that all the lessor needed to do was to “cause” the valuation to be made and reiterated his view that he had complied with the process set out in cl 23. He noted that he had had no previous dealings or relationship with Mr Taylor and that the valuer was registered and independent of him in every way.

• [41] After the unfortunate phone call on 27 April 2018, Mr Christian instructed his solicitors Brown Partners to liaise with Mr Smith.

• [42] On 13 May 2018, Mr Smith made a payment of six months’ rent in advance.

• [43] On 15 May 2018, Brown Partners sent a letter to Mr Smith advising that his email of 26 April was not, in their view, valid notice of his intention to purchase the fee simple estate in the land, as it was not accompanied by the cost of the valuation referred to in cl 23(b) of the lease. Brown Partners’ view about what was required was then set out. In summary, it:

(a) sought confirmation that the lessees were not in breach of the lease by asking Mr Smith to:

(i) confirm that the land, buildings, fixtures and improvements had been kept in good order, repair and condition and outlined that an inspection of the property would be undertaken thereafter; and

(ii) provide evidence about the insurance policy for the property and asking for a copy of it.

(b) outlined that once satisfied that there was no breach of the lease, the right to freehold would then become exercisable. In relation to this, the process was then outlined as follows:

(i) Notice of Mr Smith’s desire to purchase the fee simple estate should be provided to Brown Partners, who were authorised to receive it on behalf of Paros.

(ii) When notice was given, payment should also be made to Brown Partners trust account in the amount of $2,500.

(iii) Thereafter Paros would arrange for a valuation to be undertaken by a registered valuer of its choice.

(iv) Once the valuation was completed, Brown Partners would on behalf of Paros give Mr Smith notice offering to sell the land at the price equivalent the amount in the valuation and would provide a copy of the valuation to him.

(v) Mr Smith could then decide whether to accept Paros’ offer in which case he could purchase Paros’ land, or to decline the offer and the lease would continue.

• [44] Over the following months, correspondence was sent backwards and forwards in which Mr Smith asserted that the process outlined by Brown Partners did not comply with the lease and Brown Partners maintained that it did. There is no point reviewing all this correspondence as it simply records the entrenched position that had been reached.

• [45] To resolve the impasse that had developed, Brown Partners suggested that the meaning of cl 23 and the process to be adopted in relation to it be referred to arbitration. Mr Smith did not agree with this, rather he suggested “arbitration for the valuation as required under the original lease”. This is likely a reference to the process outlined in s 152(3) of the Municipal Corporations Act 1954 which dealt with a

valuation of rent or improvements in certain situations. Paros contends this process no longer applies as that Act no longer applies to this lease. I deal with this issue later in this judgment.

• [46] On 31 August 2018, Mr Smith gave notice indicating his view that Paros had repudiated the lease, and he cancelled the lease.

• [47] On 25 September 2018, Brown Partners again renewed the offer to arbitrate the meaning of the cl 23 which was rejected by Mr Smith because he maintained that the lease was concluded and discharged by the cancellation notice he had given on 31 August 2018.

• [48] The declaration proceedings then followed.

• [49] The rent review process then commenced, the details of which will be dealt with later in this judgment.

Analysis

• [50] It is worth restating two general principles that apply to the interpretation of clauses in a lease:

(a) The meaning of such clauses depends on the context within which they are used and the object the parties had in mind;⁶

(b) In interpreting the meaning of a clause, the court should read the lease as a whole, giving the words used their natural and ordinary meaning in the context of the agreement, the parties’ relationship and all the relevant facts surrounding the transaction so far as is objectively shown to be known to the parties.⁷

⁶ Mandic v Cornwall Park Trust Board [2011] NZSC 135, [2012] 2 NZLR 194 at [15].

⁷ At [15] citing Bank of Credit and Commerce International v Ali [2001] UKHL 8, [2002] 1 AC 251 at [8] per Lord Bingham.

(c) If the contractual language, interpreted in the context of the contract as a whole, has a natural and ordinary meaning, the court will generally give effect to that and it will take a “strong case” to persuade a court that something must have gone wrong with the language.⁸

• [51] What then is the proper construction of cl 23? As Peters J observed, the meaning of cl 23 is highly contentious.⁹ This is because a valid notice under cl 23(a) must be accompanied by remittance of the cost of the valuation. Mr Smith’s argument (noted by Peters J and repeated before me) is that the lessee can only do this if the lessee knows the cost of the valuation, and as the clause does not address how that cost is to be known, it must mean it is for the lessee to select the valuer and ascertain the cost of the valuation. The opposing argument by Paros is that the lessor must select the valuer, as it is required under cl 23(b) to “cause a valuation to be made” and then supply a copy of it to the lessee under cl 23(d).

The purpose of clause 23

• [52] I begin with the purpose of cl 23, which in my view is:

(a) to provide the lessee with a right to purchase the lessor’s fee simple estate in the land if certain conditions are met; and

(b) to enable the lessor to “cause a valuation to be made” whereby the value of the lessor’s fee simple estate in the land can be established, if the lessee’s right to purchase arises.

• [53] When one looks at these two purposes side by side, the logic of them is apparent. The fee simple estate in the land is the lessor’s asset and therefore it makes absolute sense that the lessor should be in charge of the process to establish the value of its estate in the land. This is supported by my view that the option to purchase the fee simple estate in the land by the lessee (an option which the lessor must accept if

⁸ Firm PI 1 Ltd v Zurich Australian Insurance Ltd [2014] NZSC 147, [2015] 1 NZLR 432 at [88], citing Lord Hoffman in Investors Compensation Scheme Ltd v West Bromwich Building Society [1997] UKHL 28; [1998] 1 WLR 896 (HL) at 912; Bank of Credit and Commerce International, above n 7, at [39]; and Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] 1 AC 1101 at [14].

⁹ Paros Property Trust Ltd, above n 2, at [31].

the process outlined in cl 23 is followed), while not a detriment because the value of the estate is established at a point in time, nonetheless reduces the benefit to the lessor of ongoing income over the period of the lease. In this sense, therefore, the clause benefits the lessee more than it benefits the lessor. Indeed, it is hard to see why a lessee would not exercise the option to purchase the fee simple estate in the land in circumstances where the rent is likely to increase over time.

Who causes the valuation to be made?

• [54] Bearing the purpose of the clause in mind as I have outlined it above, in my view the clause anticipates that it is the lessor rather than the lessee who is responsible for “causing a valuation to be made”. There would be nothing to stop the lessor accepting a valuer nominated by the lessee, but equally there is nothing to require the lessor to accept a valuer nominated by the lessee. All that required is that the lessor causes a valuation to be made by a “registered valuer”.

• [55] In relation to the latter point, Mr Smith submitted that the registered valuer needs to be independent. He considered that the valuer he nominated was the only valuer that would provide an independent valuation of the fee simple. I have difficulty accepting this submission for two reasons. The first is that all registered valuers are required to act professionally and to provide independent valuations of the properties they are asked to value. Their role is to provide an expert opinion about the value of a property substantiated by the reasons they provide supporting that opinion. The reasons typically include an assessment of the property being valued in relation to other comparable properties. The second reason is that cl 23(b) is very clear that it is the lessor’s responsibility “to cause the valuation to be made”, not the lessee’s responsibility. As outlined above, the reasons for this fit with the purpose of the clause.

• [56] I reject the inference I am asked to make by Mr Smith that the meaning of the words “the lessor will cause the valuation” is triggered by the lessor confirming instructions to a valuer nominated by the lessee. Although the clause does not prevent such an agreement being reached, as I have outlined above, the lessor is ultimately not required to accept a valuer nominated by the lessee. In my view, the lessor is authorised

by this clause “to cause the valuation to be made” by any registered valuer of his or her choice.

How to give notice under clause 23?

• [57] I now consider how valid notice is given by the lessee to the lessor requiring the lessor to cause the valuation of the fee simple estate to be undertaken. I accept that the wording of cl 23(a) is both difficult and important, because the option to purchase must be “in accordance with” the procedure outlined in the clause and “subject to” the matters contained in sub paras (a) and (b), which I refer to as “conditions”.

• [58] The first part of cl 23(a) is straightforward. The lessee can give notice to the lessor of the lessee’s desire to purchase the lessor’s fee simple estate in the land at any time during the 12-month period before each rent review date. The clause does not require any specific form for the notice, nor does it specifically indicate that it ought to be in writing. However, I infer that the latter likely needs to occur given the second sentence in cl 23(a), which is the part of the clause giving rise to the argument in this case.

• [59] The second sentence of cl 23(a) provides “[t]he notice will not be valid unless it is accompanied by a remittance for the cost of the valuation referred to in clause 23(b).” This part of cl 23(a) is important because it determines the validity of the notice. Mr Smith’s argument is this: how can remittance for the cost of the valuation accompany the notice if the lessor has not caused the valuation to be made, because until this event occurs the cost of the valuation will not be known. This is particularly so because the wording of cl 23(b) provides that the act of causing the valuation is made after the lessor has received the lessee’s notice and payment of the cost of the valuation.

• [60] I agree that on the face of it, cls 23(a) and (b) appear to conflict with each other in terms of the timing of the notice in relation to the causing of the valuation. On either parties’ submission this requires me to infer part of the process into the clause. According to Mr Smith, the proper inference is that the lessee must approach a valuer to obtain the cost of the prospective valuation, then provide the notice accompanied

by the remittance for the cost of the valuation, which then triggers the lessor to cause the valuation by the lessee’s nominated valuer to occur. According to Paros, the proper inference is that the lessee indicates a desire to purchase the fee simple estate, the lessor then instructs a valuer and advises the sum of the remittance (exact or otherwise) and then the notice under cl 23(a) together with remittance can be forwarded by the lessee to the lessor.

• [61] A theme running through Mr Smith’s evidence and submissions was his lack of trust in Mr Christian and Paros. His view seemed to be that Mr Christian would do everything to maximise his own position, the result of which would be to prevent Mr Smith and Ms Shaw purchasing the fee simple estate in the land, to increase the rent to an extent that was unaffordable and to force the abandonment of the lease. Mr Smith sought to draw on other cases where he said this had happened to support his contention.

• [62] The other cases referred to in submissions do not form part of the evidence of this case. But even if they did, I do not consider the inference Mr Smith invites me to draw to be a proper one. This is because the events after the purported notice was given indicate that Paros intended to perform its obligations under the lease and to put in place a process to enable the lessees to purchase the fee simple. I refer to the following events:

(a) The various offers by Paros’ solicitors starting with the offer on 15 May 2018 (repeated in subsequent communications between the end of May 2018 and 20 August 2018) to suggest a process to enable a valuation of the fee simple to be obtained;

(b) Paros’ offer for the competing interpretations of cl 23 to be referred to arbitration (the offer for which was repeated again on two occasions in September 2018);

(c) Despite the defendants’ purported cancellation of the lease, in August 2018, Paros continued to maintain that the lease was on foot and made an application to the Court for orders declaring it to be such;

(d) The evidence that Mr Christian was prepared to think about who Paros might use as a valuer after receiving Mr Smith’s email of 26 April 2018, such intention being revealed in his email to Ms Baillie on 27 April 2018.

• [63] I have formed the view that Mr Smith was intent upon being in charge of selecting the valuer who should be engaged to value the fee simple estate in the land, and he was not prepared to contemplate an outcome that did not support this approach. This was largely because he did not trust that Mr Christian’s choice of valuer would provide a fair or independent valuation of the fee simple estate.

• [64] In my view the proper inference, in terms of the process to be followed, is that the lessee advises of its desire to purchase the fee simple estate, the lessor then instructs a valuer and advises the sum of the remittance (exact or otherwise) to the lessee, who then gives notice together with the remittance to the lessor. It follows that I have preferred the inference suggested by Paros via Brown Partners rather than that suggested by Mr Smith. In my view, this inference better meets the purpose of cl 23.

Was there an agreement to vary the clause 23 process?

• [65] Although I have found that the proper interpretation of cl 23 favours the approach of Brown Partners in its letter of 15 May 2018, I must also determine whether Ms Baillie agreed to the process Mr Smith suggested was correct. This is because if she did agree, it may be arguable that in so doing there was an agreement to vary the cl 23 process, if Ms Baillie had the authority of Paros to reach such an agreement.

• [66] Ms Baillie’s evidence was largely based on two affidavits she filed in the declaration proceedings: an affidavit in support of Paros’ originating application and one in reply to Mr Smith’s affidavit filed in the same proceedings. In her first affidavit, Ms Baillie did not refer to the phone call of 19 April, but in her reply affidavit, she did to the extent that she accepted the phone call had taken place. In this affidavit, Ms Baillie said:

[4] ... Although I agree that the phone call took place, I did not have authority to agree on behalf of the landlord that Mr Smith complied with the process under the Lease. Point was the first port of call for tenant enquiries,

but all decisions were for the landlord. I did not advise Mr Smith, nor did I have the authority to advise him, that he could select a valuer of his choice.

• [67] The extent of Ms Baillie’s evidence in this proceeding was to confirm the contents of her affidavits and to answer a limited number of questions from counsel and Mr Smith. During questioning, she confirmed that her role was “to clear the rent”. She said she did not discuss the freeholding process or the lease with Mr Christian because that was not her role, and she did not have authority to make decisions. Ms Baillie said she did not recall the details of the phone conversation with Mr Smith on 19 April, but she said, “at the time I swore the affidavits, it was clear, but that was three years ago.”

• [68] Although Mr Smith asserts that Ms Baillie agreed with him about his suggested process, the evidence falls well short of satisfying me that there was such an agreement. In reaching this conclusion, I take into account that Ms Baillie’s evidence in the declaration proceedings did not address the phone call on 19 April until Mr Smith raised it in his affidavit. However, I am not persuaded that there is anything untoward about this, because Ms Baillie had no reason to recall the phone call or to make a note about it at the time. This omission, in my view, does not affect Ms Baillie’s credibility as a witness.

• [69] Given Ms Baillie’s lack of recall about the events apart from the matters she referred to in her affidavits, I turn to the written communications made at the time, which support the view I have reached that there was no agreement between Ms Baillie and Mr Smith that he could arrange for the valuer:

(a) After receiving the purported notice of intention to freehold email on 26 April 2018, Ms Baillie’s immediate response was to reply to Mr Smith saying, “I am just checking with the Lessor, and will get back to you.” Had there been an agreement reached, there would have been no need for Ms Baillie to check with the lessor;

(b) Mr Smith’s email to Ms Baillie does not suggest a prior agreement or discussion with her, instead he refers to the prepayment of the valuation being at the request of Mr Christian;

(c) Ms Baillie drafted a letter in response to Mr Smith having contacted Mr Christian, and Mr Christian amended it. Mr Christian’s amended version was then sent to Mr Smith on 27 April 2018. That letter suggested that Mr Smith contact the lessor or obtain legal advice about “the freehold description in the lease”. This suggests Ms Baillie’s role was limited and very much at the direction of Mr Christian;

(d) Mr Smith responded to Ms Baillie’s email of 27 April just under 12 minutes after receiving it. While asserting his view of the interpretation of the freeholding clause, he did not refer to or assert any prior agreement with Ms Baillie;

(e) When asked about the words which indicated Ms Baillie’s agreement during the conversation of 19 April, Mr Smith said:

A ... I asked her for advice, we ended up in agreement because she would not give advice ... she was very cagey about it and would only say: “That’s for the lessor,” when I proposed: “If I find an independent registered valuer and send in the remittance for that, would that satisfy the lease?” “Yes.” “Okay.”

...

Q ... You’re saying she agreed, what did she say to you that make you think she’d agreed? Did she say: “I agree with that, that’s what you have to do”?

A “Yes, I think that would satisfy the lease.”

The context of the reply Mr Smith says Ms Baillie made does not assist because she had made it clear that she would need to refer matters back to the lessor. In my view even if it was said, the response does not amount to an agreement.

• [70] In addition, after receiving Mr Smith’s email of 26 April 2018, and in relation to her forwarding the original email to Mr Christian for further instruction, Ms Baillie said she was not previously aware of the freeholding process under the lease which is why she would never have advised a lessee about the operation of the clause. Although this statement should be viewed in the context of Ms Baillie subsequently saying that

she had spoken with Mr Smith on the phone on 19 April 2018, her recall and evidence did not extend to recording any details about the freeholding clause. Because of this, I do not consider Ms Baillie’s earlier statement that she was not aware of the freeholding process under the lease to be inconsistent with her later evidence that the phone call had occurred. I accept Ms Baillie’s evidence that she was not aware of the freeholding clause under the lease or the details about it and therefore her role was limited to the collection and processing of the rent.

• [71] I have no doubt that Mr Smith genuinely believed he had reached an agreement with Ms Baillie about the process he suggested should occur for obtaining the valuation and giving notice under the lease of the intention to freehold. This does not, however, mean that Ms Baillie agreed with the approach Mr Smith suggested or that she had the authority from Paros to do so.

• [72] It is for the defendants to prove on the balance of probabilities that there was a binding agreement reached with Ms Baillie in the course of her conversation with Mr Smith on 19 April 2019, because it is an affirmative allegation that they have made as part of their defence and counterclaim.¹⁰ For the reasons expressed above, I am not satisfied that the defendants have done so. This means that I do not consider it more probable than not that there was a binding agreement reached with Ms Baillie.

• [73] Because I have reached this view, it is not necessary for me to traverse the plaintiff’s submission about agency. The short point made by Paros is that Ms Baillie and Point Property Management had no actual authority to agree to a variation of the process contained in cl 23. Had I been required to determine this issue; I would have found that Ms Baillie’s authority did not extend to reaching the agreement contended for by Mr Smith.

Issue Two: was the cancellation by the defendants legally justified?

• [74] Because of my findings above, I do not need to analyse this part of the argument in any detail. To be clear, my finding is that the lease was not repudiated or

¹⁰ Abil Property Taurarua Ltd v Cozzolino HC Auckland CIV-2008-404-1800, 25 May 2010 at [15]– [17].

breached by Paros and therefore cancellation by the defendants was not legally justified.

• [75] It also follows from my findings on Issues One and Two that the defendants’ counterclaims cannot succeed.

Issue Three: what amount of rental is payable and by whom?

Which Act applies to the rent review process?

• [76] The issue is whether the Municipal Corporations Act 1954 or the Public Bodies Leases Act 1969 applies to the valuation process to be employed on a rent review under this lease.

• [77] Mr Smith submitted that the process outlined under the Municipal Corporations Act 1954 applied, but Paros submitted that the process to be followed is that which appears in the Public Bodies Leases Act 1969.

• [78] Mr Smith’s argument was based on the fact that the first page of the lease states that it was made pursuant to the Municipal Corporations Act 1954. He highlighted that under s 152(3) of this Act, a valuation for rent review purposes is to be undertaken by three independent persons: one for the lessor, one for the lessee and one appointed as agreed by those two people. Mr Smith submitted that s 152 applied both to any valuation obtained under the lease for rent review purposes and to any valuation of the land for the purposes of freeholding it.

• [79] Mr Smith also submitted that:

(a) the Public Bodies Leases Act does not apply because Paros is not a “leasing authority” under that Act; and

(b) in any event, the repeal of the Municipal Corporations Act 1954 could not apply in this case, because it would affect an existing right he has under the lease which would be contrary to s 32(1)(b) of the Legislation Act 2019.

• [80] Although Paros accepted that the original lease required the valuation for the rent review to be determined by the process outlined under s 152(3) of the Municipal Corporations Act 1954, Mr Steel (who advanced this part of the argument for Paros) submitted that this section was repealed by s 8(1) of the Local Government Amendment Act (No. 3) 1977. This Amendment Act introduced a new s 231 into the Local Government Act 1974 which deals with the sale and leasing of land and buildings. Section 231 provides a power to lease any land, and that such lease is to be in accordance with the Public Bodies Leases Act 1969 and that Act is to apply accordingly. Importantly, Mr Steel submitted, under s 231(2) of the Local Government Act 1974, leases entered into under the Municipal Corporations Act are statutorily deemed to be leases under the Public Bodies Leases Act.

• [81] In relation to Mr Smith’s point that Paros must be “a leasing authority”, Mr Steel submitted that when Paros became the owner of the reversion and became entitled to enforce the lease, it took an assignment of the Public Bodies Leases Act lease to which the rent review mechanism in s 22 of that Act applied. I agree that such an assignment is expressly contemplated under cl 20 of Schedule 1 and cl 25 of Schedule 2 to the Act, which provide that “[t]he expression lessor as herein used includes the successors and assigns of the lessor”.

• [82] I am satisfied that the process outlined in s 22 of the Public Bodies Leases Act applies to the valuation undertaken for the purposes of the rent review in this case.

What is the amount of rent owning?

• [83] To set the rental, upon review, Paros has relied upon a valuation provided by Savills, dated 9 August 2018.

• [84] Rent review notices were served on Mr Smith in August 2018 and again on both defendants in August 2019. The notices outlined that the new rental under the lease had been assessed at $81,375 per annum. The notices also advised that the lessees had two months to require the matter to be referred to arbitration if there was any dispute.
• [85] Unfortunately, Mr Smith was only prepared to attend an arbitration in relation to valuation for freeholding purposes rather than in relation to the rent review,¹¹ and in any event, at this point he considered the lease has been validly cancelled by him. In the letter he delivered to Brown Partners on 30 August 2019, Mr Smith claimed that the lease was “discharged and completed” and invited Paros to purchase the leasehold improvements from him, an option which it was not prepared or obliged to accept.

• [86] I have found that there were no grounds to legally justify Mr Smith cancelling the lease. This means that the rent assessed under the review provisions applies. The amount of the rent assessed was not challenged or referred to arbitration as required under s 22(2)(b) of the Public Bodies Leases Act. It is the rent that now applies.

• [87] Mr Christian provided a calculation of the amount of rent and interest due under the lease in his evidence. The calculation takes into account the ex gratia payment of $6,500 made by Mr Smith on 12 September 2019. The total amount owed is calculated at $237,625 as at 14 June 2021 but will need to be adjusted as the calculation only deals with interest up to the first day of hearing rather than the date of payment.

Who is liable to pay the rent?

• [88] This part of the judgment deals with Ms Shaw’s liability.

• [89] In relation to Paros, as a lessee, Ms Shaw is liable jointly and severally together with Mr Smith for the rental arrears. However, she issued a cross-claim against Mr Smith seeking an indemnity from him on the basis of a Deed of Delegation of Authority and Indemnity dated 31 August 2019 (the Deed). Prior to this, from 20 August 2017, Ms Shaw claims there was an oral agreement between her and Mr Smith that he would indemnify her for any losses caused by his actions and omissions in relation to the lease.

¹¹ As outlined previously in this judgment, arbitration was also offered as an option to resolve the impasse about the interpretation of cl 23; however, this option was also rejected by Mr Smith.

• [90] Mr Smith filed a statement of defence to Ms Shaw’s cross-claim. He contends that:

(a) Ms Shaw freely delegated him to attend to all matters in relation to the lease and (I infer) is bound by his actions;

(b) in any event, Ms Shaw has not adhered to the terms of the Deed by transferring her share of the lease to him; and

(c) the costs incurred by Ms Shaw are not those which are indemnified under the Deed in any event, which he submits Ms Shaw is attempting to interpret in a harsh and oppressive way.

• [91] In her reply to Mr Smith’s statement of defence to her cross-claim, Ms Shaw outlined that the Deed records her intention to transfer her share and interest in the leasehold estate in the property, but as it is part of the parties’ relationship property division, it is yet to be completed. The resolution of the parties’ relationship property has stalled because of these proceedings.

• [92] In her evidence, Ms Shaw explained that in 2016, she suggested to Mr Smith that he acquire her share in the property. Negotiations about this and other relationship property issues included discussions about Ms Shaw transferring her half share of the property to Mr Smith for $80,000. Ms Shaw’s understanding was that this transfer would occur in the future, but that the delegation and indemnity applied from 20 August 2017.

• [93] Ms Shaw said in July 2018 she asked her previous relationship property lawyer to prepare a document reflecting her agreement with Mr Smith, but unfortunately this was never finalised.

• [94] Ms Shaw was not included as a party in the declaration proceedings. This was a matter of concern raised by Peters J.
• [95] The Deed was eventually executed on 31 August 2019. The Deed records the delegation of authority as effective from 20 August 2017 to continue up until the date when Ms Shaw revokes it.

• [96] Clause 3 of the Deed provides:

In consideration of the above delegation of authority, Party 2 [Ms Shaw] covenants with Party 1 [Mr Smith] to indemnify her and keep her indemnified against all direct and indirect loss and liability of any kind whatsoever incurred or sustained by the parties in relation to the exercise of their rights and obligations under the Lease, including any acts or omissions by Party 2, from 20 August 2017 and up to the date of revocation by delegated authority, if any.

• [97] Ms Shaw submitted that the legal principles relating to the interpretation of the lease agreement apply equally to the interpretation of the Deed.

• [98] The provisions of the Deed in relation to indemnity are clear. Under the Deed, Mr Smith agreed to indemnity Ms Shaw “against all direct and indirect loss and liability of any kind whatsoever incurred or sustained by the parties in relation to the exercise of their rights and obligations under the Lease ... from 20 August 2017”.

• [99] I find that although still liable to Paros, Ms Shaw has a right to be indemnified by Mr Smith in relation to any rental arrears incurred from 20 August 2017, including any interest payable in relation to those arrears.

What is the amount payable?

• [100] The amount payable is the sum of $237,625, to be adjusted for the additional rental owing up to the date of judgment and as to interest. The plaintiff is to file a further memorandum as to the additional rental sought and interest as outlined below. To the extent that these may matters need to be finally determined, the judgment is interim, however it is final in all other respects.

• [101] As previously decided, Ms Shaw is entitled to be indemnified by Mr Smith for any rental arrears and interest from 20 August 2017 onwards.

Conclusion

• [102] I summarise my findings as follows:

Issue One (a): Was a valid notice given by the defendants to the plaintiff under cl 23 of the lease?

Answer: No.

Issue One (b): Was there an agreement to vary the cl 23 process in relation to the notice to freehold?

Answer: No.

Issue Two: Was the lease repudiated or breached by Paros so that cancellation by the defendants was legally justified?

Answer: No.

Issue Three: What is the amount of rental payable and by whom?

Answer: The sum of $237,625 is payable to be adjusted as to the additional rental owing up to the date of judgment and as to interest. Although both defendants are liable to Paros for these amounts, Ms Shaw is entitled to be indemnified by Mr Smith for any rental arrears and interest from 20 August 2017 onwards.

Result

• [103] Judgment is entered in favour of Paros against Mr Smith and Ms Shaw (jointly and severally):

(a) in the amount of $237,625;

(b) in respect of any further amounts falling due and unpaid under the lease up to the date of judgment;

(c) interest is awarded on the judgment sums referred to in (a) and (b) above under s 9 of the Interest on Money Claims Act 2016 from the due date of each payment of the date of judgment and under s 10 of the Act from the date of judgment until payment.

• [104] The plaintiffs are to file a memorandum outlining any further rental arrears owing and interest payable as outlined in paragraphs [100] and [103] above within 14 days of the date of receipt of this judgment.

• [105] The defendants’ counterclaims are dismissed.

• [106] Ms Shaw’s statement of cross-claim succeeds. I make an order that Ms Shaw is to be indemnified by Mr Smith on the terms contained within the Deed of Delegation of Authority and Indemnity dated 31 August 2019.

• [107] Costs are reserved. Paros is to file a memorandum (not exceeding three pages) in relation to cost within 14 days of the date of receipt this judgment. The defendants are to file any memoranda in reply (not exceeding three pages) no later than 14 days thereafter. Costs will be dealt with on the papers unless the Court considers upon reading the memoranda that a further hearing is required.

Harland J