Case note: Relief against cancellation of lease — Beattie v Mason

Written by David McDonald (Partner, McDonald Brummer) for the Conveyancing Bulletin

Landlord and tenant

The Property Law Act 2007 distinguishes between the cancellation of a lease for non-payment of rent and for the breach of other covenants — both as to the process and the availability of relief. The orthodox understanding is that where the breach is solely a failure to pay rent, payment of the rental arrears and costs leads to a presumptive right to relief. But this is just a presumption. Beattie v Mason [2023] NZHC 3613 provides a recent illustration of both the importance of paying the landlord’s costs, not just the rental arrears, and other considerations — there the relationship between landlord and tenant — that may weigh against the grant of relief. The judgment is considered by David McDonald.

Beattie v Mason
[2023] NZHC 3613

Relief against cancellation of lease — failure to pay rent — relief not granted — not feasible to expect landlord to continue the landlord/tenant relationship — factors usually taken into account in deciding whether to grant relief — relevance of tenant’s conduct — whether application would be able to be dealt with by arbitration — effect of “no set-off” clause — whether defaulting tenant should pay landlord’s costs — Property Law Act 2007, ss 246 and 256

Background

The Respondent (Mason) was the owner of a farm property and, as part of a plan to distribute assets to her family, in 2009 Mason entered into an arrangement with her daughter and son-in-law (the Beatties) whereby:

• 23 ha of land was transferred to the Beatties’ family trust (the Trust);
• the cash component, $141,250, of the purchase price was paid to Mason on settlement and the remaining $230,000 was left owing interest free and repayable upon demand;
• the Trust agreed to lease back to Mason most of the purchased land, excluding curtilage, for a term of 20 years. This was on the basis that Mason would pay
  the rates and insurance premiums and would pay a rental equal to the interest which the Trust paid on the money they had borrowed for the cash component; and
• that the rental would be adjusted to a market value if Mason ever sold the property during the term of the lease to a third party.

The Court accepted the Beatties’ evidence that, at the time these arrangements were put in place, it was intended that the $230,000 debt would ultimately be forgiven, either during Mason’s lifetime or in her Will.

In 2019, the parties entered into a further agreement whereby the Beatties purchased a second parcel of land which required a boundary adjustment, and it was intended that the extra land would be leased back to Mason on the same basis as for the original 23 ha. The purchase price was paid before the boundary adjustment was completed on the basis that Mason would finalise it within 12 months, which she did not do.

In 2021, difficulties had arisen in the relationship between Mason and the Beatties. Mason had not met her obligations as tenant, in that she had not properly maintained the property and had fallen into arrears with rent and outgoings, and she also employed her son (K) on the farm, knowing that K was facing criminal charges with regard to his conduct toward Mrs Beattie and had been convicted on a charge of willful damage to the Trust’s property. The Trust’s lawyers raised these concerns with Mason but, when no resolution was forthcoming, a notice of intention to cancel the lease under s 246 of the Property LawAct 2007 (PLA) for non-payment of rent and rates was served. Mason still took no steps to remedy the breaches and the Trust issued these proceeding asking for orders cancelling the lease, awarding possession of the land, and giving judgment for arrears, interest and costs. In response, Mason opposed the applications, applied for relief against cancellation, and made demand for repayment of the $230,000.

Issues

The Court identified two issues to be decided, namely:

• Is the Trust entitled to cancel the lease?
• Should relief against cancellation be granted?

First issue — is the Trust entitled to cancel the lease?

In opposing the application, Mason argued that:

• The Trust was not entitled to cancel because the s 246 notice was defective for the following reasons:
• — The notice contained wording which described it as a Notice of Cancellation of Lease, which was obviously wrong because it was no more than a notice of intention to cancel, a lease normally being incapable of cancellation by mere notice but requiring either a court order or peaceable re-entry. The Court (at [23]) dismissed this defence, noting that the PLA did not specify any particular form of intituling and the notice clearly informed Mason of the amount of the arrears and the consequences if not paid on time.
• — The notice erroneously stated that rates were in arrears when they had actually been paid. The Court noted (at [32]) that the rates payments that Mason had paid had been dishonoured, so the Trust had therefore paid them and now sought reimbursement. Unsurprisingly, this defence was also dismissed.
• — The rent arrears figure shown in the notice was incorrect in that it included a rental increase of $3,345.64 to cover an interest increase which the Trust had incurred under its mortgage loan. The lease contained the normal provisions whereby any rental proposed increase needed to be notified to the tenant, giving the right to object and to arbitrate, and this procedure had not been fol- lowed. The Court (at [35]) dismissed this defence firstly, on the basis that the rent was explicitly stated to be the equivalent of the interest payable by the Trust and, secondly, the review clause was worded so as to be subject to the clause linking the rent to the amount of interest.
• The Trust had itself committed a breach of the lease by grazing its own stock on the leased land, which entitled Mason to damages which she could set off against the rent. The lease contained the following clause prohibiting deduction or set-off, which the Court held (at [36]) to be a complete answer to this defence:
• Rental and other monies shall be paid without deduction or set off (whether legal, equitable, statutory or any other form) by automatic bank authority or as the lessor may in writing otherwise direct.
• The lease contained a clause requiring that all disputes be submitted to arbitration with the result that these proceedings should be stopped and the disputes could be arbitrated. The Court (at [40]) dis- missed this defence on two grounds:
• — Mason had already applied to the Court for relief against cancellation and, by doing so, she had submitted to the jurisdiction of the Court and waived any right to insist on arbitration.
• — An arbitral tribunal does not have jurisdiction to deal with disputes arising from leases under ss 253–264 of the PLA because that Act confers such jurisdiction exclusively on the Court. In this regard the Court cited the following passage from the judgment in Highgate on Broadway Ltd v Devine [2012] NZHC 2590 at [39]:
  • When passing the Act [meaning the PLA] Parliament drew a clear distinction between arbitral proceedings and court proceedings.Thus,whereas ss 253 to 264 of the Act refer to issues arising under those sections being determined by a court, Schedule 3, Part 2, cl 4(5) of the Act refers to disputes arising under that clause being referred to arbitration under the Arbitration Act 1996.Parliament would not have referred to court proceedings in relation to disputes under ss 253 to 264, and arbitration proceedings in relation to disputes under Schedule 3 if the two fora were synonymous.

The Court concluded that The Trust had established a right to cancel the lease.

Issue 2 — should relief against cancellation be granted?

In opposing the application, Mason argued that:

• the amount of alleged arrears was small and was subject to dispute;
• the Trust had initially caused the dispute by interfering with Mason’s right of quiet enjoyment;
• the leased land constituted 28 per cent of Mason’s farming operation and cancellation, when the lease still had six years to run, because of a dispute over a minor amount of arrears would be grossly disproportionate; and
• there was a presumptive right of relief where arrears were paid in full, and the disputed sum was currently held in a solicitor’s Trust Account and would be paid
  that day.

The Court (at [44]–[45]) noted the very wide discretion conferred on it by s 256(1) of the PLA. It also noted with approval the following comments in the judgment in McIvorv Donald [1984] 2 NZLR 487 (CA) at 1–2:

• relief is normally granted to one who has made good the breach and is able and willing to fulfil his obligations in the future ... but when there are wilful breaches relief will not readily be given[,]

and the following oft-quoted list of relevant factors list in the judgment in Studio X Ltd v Mobil Oil New Zealand Ltd [1996] 2 NZLR 697 (HC):

• whether the breach was advertent or deliberately committed. In such a case there are sound reasons why in the normal case relief should not be given: why should a lessor be compelled to remain in a relation of neighbourhood with a person in deliberate breach of his obligations?
• conversely, whether the breach was caused by inadvertence or was entirely beyond the tenant’s control
• whether the breach involves an immoral/illegal user. It must be wrong in principle for a lessor to be forced into improper or illegal relations, possibly even exposing the lessor himself to some form of legal sanction;
• whether a tenant has made or will make good the breach of the covenant and is able and willing to fulfil his obligations in the future;
• the conduct of the landlord;
• the personal qualifications of the tenant;
• the financial position of the tenant.
• Sometimes the position of third parties has had to be considered. For instance, the position of a contracting purchaser of the interest;
• the gravity of the breach;
• whether a breach has occasioned lasting damage to a landlord; and
• there is a proportionality concern. Under this head there has to be concern whether whatever damage is said to have been sustained by the landlord can truly be said to be proportionate to the advantages she will obtain if relief is not granted. Generally speaking, and at a greater level of abstraction, there has to be a concern with keeping an even hand. After all, a lease is both an interest in land and a contract.

Looking at the factual background in this case, the Court noted (at [53]–[61]) that:

• Mason had not offered to meet any of the Trust’s costs and considered that any presumptive right to relief is based on the defaulting tenant not only paying the arrears but also reimbursing the landlord for any other loss caused by the default
• The familial context of the dispute could not be ignored. Clearly a schism had developed within the family which involved criminal behaviour and intimidation on the part of K, who was working on Mason’s farm, and Mason seemed unwilling to take adequate steps to keep K under control.
• Mason’s behaviour in refusing to pay rent and then raising unmeritorious defences raised serious questions as to whether the relationship of landlord and tenant should be revived and whether the parties could realistically be expected to work together in the future.
• While Mason had certainly been generous in transferring the leased land to the Trust and leaving the bulk of the purchase price on loan repayable upon demand, her generosity was balanced by the Trust leasing the land back to her on extremely favourable terms. Mason had now disturbed that balance by calling up the loan, thus placing the Trust in a position where it would be required to borrow money at commercial rates to make the repayment but would not receive market rent if the lease were allowed to continue.

Taking these factors into account, the Court concluded (at [62]) that it was not appropriate to grant relief and the lease should be cancelled.

Judgment

• The lease was cancelled from a date six months from the date of judgment.
• The Trust was awarded costs equal to its actual and reasonable costs.

Comment

This judgment is a good example of a situation where relief against cancellation is likely to be denied. Where a lease is cancelled for non-payment of rent or outgoings the Court will usually treat an application for relief with sympathy upon suitable assurance that the shortfall has been, or will be, paid. It would not be safe, however, to assume that relief will always be granted. As the comment in McIvor v Donald and the factors listed in Studio X Ltd v Mobil Oil New Zealand Ltd illustrate, there are a number of other factors that may persuade the Court against relief. A land- lord has a contractual right to cancel a lease when the tenant is in breach and an order for relief infringes that right. If granting relief would constitute an injustice to the landlord, the Court will be less sympathetic to a defaulting tenant. In this case the obvious prospect of future strife between the parties caused by the family scenario, along with the tenant’s intransigent conduct with regard to paying rent and costs, and with regard to the loan, convinced the Court that it would be unreasonable to expect the landlord to continue with the lease.

As the Court observed, a “no set-off” provision in a lease means exactly what it says and in this case the clause was drafted widely enough to cover both rent and “other monies”, such as rates. A tenant who wishes to claim damages or rent reduction from a landlord in these circumstances, in the absence of any other entitling provision in the lease, can only do so by way of a separate claim and is not entitled to hold back rent or other money.

The Court commented (at [53]) that a defaulting tenant should pay the landlord’s costs as well as all arrears if the tenant expects relief from the Court, so that the landlord is not left out of pocket by the tenant’s default. While that is fair comment, it should also be noted that, in a case where the tenant is obviously likely to be granted relief, the Court has in more recent times shown an inclination to award costs against a landlord who opposes the application.

The Court’s comment, relying on Highgate on Broad- way Ltd v Devine, that an application to cancel a lease cannot be dealt with by arbitration, and the reliance on the PLA’s differing references to court proceedings in ss 253–264 and to arbitration in sch 3, raises an interesting point. Section 10(1) of the Arbitration Act 1996 provides that, where the parties have agreed to submit to arbitration, any dispute may be determined by arbitration unless contrary to public policy or legally not capable of such determination and s 12(1)(a) of that Act provides that an arbitral tribunal may award any remedy or relief that could have been ordered by the High Court. Section 10(2) of the Arbitration Act then further provides that:

• The fact that an enactment confers jurisdiction in respect of any matter on the High Court or the District Court but does not refer to the determination of that matter by arbitration does not, of itself, indicate that a dispute about that matter is not capable of determination by arbitration.

On the face of it, the Arbitration Act could be interpreted as conferring jurisdiction to grant relief against cancellation on an arbitral tribunal and the reasoning in Highgate on Broadway Ltd v Devine, to the contrary, does not seem overly convincing. Perhaps, in view of the fact that a grant of relief involves a discretion to abrogate contractual rights, it should be kept within the jurisdiction of the Court, but it would be desirable that the law be better clarified. In this particular case, the question became academic because Mason applied to the Court for relief and thus waived any right she might have had to arbitration.

HMS, Land Law in New Zealand [11.243]
David McDonald
Partner, McDonald Brummer

The judgment is considered by David McDonald (Partner, McDonald Brummer) for the Conveyancing Bulletin. To enquire about Conveyancing Bulletin subscription, submit the form below: