Contract: Honey Bees Preschool v. 127 Hobson St Ltd

Failure to install a second lift in a commercial building as promised left a landlord unable to boot out a tenant for non-payment of rent.  Agreeing to indemnify its tenant if the lift was not installed by a fixed date did not amount to an unenforceable penalty clause.

Auckland commercial landlord Dennis Parbhu is losing some $556,000 rent on his central Auckland building after a failed challenge to an indemnity clause, collateral to a Hobson Street lease to Honey Bees Preschool Ltd.

The High Court was told Honey Bees agreed to lease space in the Auckland CBD for six years.  In the course of negotiations there were allegations that the building’s compliance with council parking rules, fire regulations and Ministry of Education licensing requirements were not all satisfied, contrary to advertisements which attracted Honey Bees owner to the business opportunity.  Honey Bees wanted premises fit for use as a preschool.  All was smoothed over with a signed lease and collateral deed in which both Mr Parbhu and his company agreed to indemnify Honey Bees against all lease obligations if a second lift was not installed within 31 months.  With limited parking at the base of the building, a second lift would be needed as the school expanded, speeding up arrivals and departures.  Honey Bees incurred considerable expense refurbishing the building as a school.  It was in full operation within eight months of signing the lease.  The lift was not in place by scheduled date.  Honey Bees stopped paying rent.

Mr Parhbu and his company Hobson Street Ltd challenged operation of the indemnity clause used as justification for Honey Bees rent strike.  It was a penalty clause and unenforceable, they said.  By the time this dispute reached the High Court, the lift installation was almost fourteen months overdue.

Courts do not enforce contract provisions designed to punish.  They enforce promises; not impose penalties.  In recent refinements to the rule, courts have been willing to enforce provisions intended to deter non-performance.  Justice Whata ruled the indemnity was not a penalty.  A second lift was required within a specified timeframe to ensure proper operation of the preschool.  Honey Bees was committing considerable financial resources to the fitout and a second lift was known to be important to have the premises fit for intended use.  The indemnity was intended as a deterrent against any failure to have a second lift installed on time.  As a deterrent this was reasonable, Justice Whata ruled.  It was not a penalty.  No rent was payable until a second lift was installed.  The court was told completion of the lift installation would cost $222,940.

Honey Bees Preschool Ltd v. 127 Hobson Street Ltd – High Court (31.01.18)

18.030

Pedigree: Smith v. NZ Kennel Club

Kennel Club rules came under close scrutiny in arguments over registration of three pedigree Japanese Spitz.  Right to register and choice of name have an economic value.  Kennel Club rules are designed to promote exclusivity and scarcity.

Louise Smith challenged registration of three Japanese Spitz she had purchased: one dog and two bitches.  They had not been recorded on the ‘Full Register’ and had been registered, out of spite she said, with derogatory names: Mondial Catch Me If You Can; Mondial Do A Runna, and; Mondial Where the Hell R Ya.

This legal dispute had its origins in a 2011 Disputes Tribunal hearing, wound its way through a police-supervised animal handover and finished up in the High Court.  Central to the dispute was a Japanese Spitz bitch called Mondial Cookies and Cream, better known as Fudge.  Jane Faulkner had purchased Fudge subject to a breeding leaseback agreement in favour of former owner Susan Howard.  Fudge was to be serviced by one of Ms Howard’s stud dogs with Ms Howard entitled to retain one of the litter.  Fudge and her stud proved compatible.  Four pups were born.  Ms Howard and Ms Faulkner proved to be less compatible.  Ms Howard registered on the ‘full register’ the pup she retained; the remaining three (which were sold by Ms Faulkner to Ms Smith) were registered by Ms Howard on the ‘restricted register’.  This reduced their commercial value.  They cannot compete in open shows or pass on their pedigree.

The High Court was asked to rule on who has the right to register and to choose a registration name.  Interpretation of Kennel Club rules and regulations proved problematic.  The Club was founded in 1886.  The rules have gone through many iterations.

Justice Ellis ruled Ms Howard was the ‘breeder’.  As such, she was entitled to register and choose the names.  Justice Ellis indicated the derogatory names chosen by Ms Howard for the three pups returned to Ms Faulkner reflected a previous difficult relationship between the two.  Ms Howard had refused to return Fudge after breeding until Ms Faulkner handed over signed paperwork necessary to have Ms Howard identified as ‘breeder’ of Fudge’s four pups bred from her stud dog.     

Smith v. NZ Kennel Club Inc – High Court (30.01.18)

18.029

Insolvency: re Apollo Bathroom

Insolvency specialists have a pay rise.  High Court approval of PwC’s application sees new hourly rates for court-appointed liquidators with a 24 per cent increase for partners through to 27 per cent for support staff.

Associate judge Bell accepted consumer price index increases and movements in salaries justified new hourly rates for insolvency specialists ranging from $485-$550 for liquidators, $315-$385 for managers and $140 for support staff.  PricewaterhouseCoopers had not asked for any increase since 2004.  Others appointed as liquidators by the court are expected to fall in with PwC’s new rates.

Payments for court-appointed liquidators come out of assets recovered in a liquidation.  Often not enough is recovered to pay liquidators in full, let alone provide any return for unpaid creditors.  Inland Revenue is by far the most frequent creditor filing in court to have a company liquidated. Defaulting corporate taxpayers are usually small to medium businesses with few assets of any value.  Inland Revenue told the court it had no objection to PwC’s request for an increased pay scale. PwC is currently handling about 500 liquidations, 240 out of its Auckland office.

Liquidators’ strategies for recovering cash in an insolvent liquidation have changed in recent years.  Judicial rulings have made it more difficult to claw back from creditors payments received prior to liquidation.  Liquidators now concentrate on directors of insolvent companies; claiming damages from them for reckless trading, trading whilst insolvent and failing to keep proper accounting records.

re Apollo Bathroom and Kitchen Ltd – High Court (26.01.18)

18.028

Bankruptcy: NZ Life Care v. Official Assignee

Insolvency Service is holding $4.02 million from Edward John Harman’s bankruptcy with creditors from his multiple business interests currently in line to get twenty cents in the dollar.  The High Court rejected NZ Life Care’s $4.8 million claim to be an unpaid Harman creditor.

Mr Harman was bankrupted in February 2009, driven under after the global financial crisis.  He was discharged from bankruptcy in 2012.  Insolvency Service has spent $197,000 to date dealing with the bankruptcy.  Arguments over who can claim as a creditor is delaying payments.  Insolvency Service rejected claims by liquidators of Harman companies that $22 million was due for alleged breaches by Mr Harman of his duties as a director.  Validity of these claims is set down for a court hearing in March.

NZ Life Care Ltd failed in its separate High Court claim that Mr Harman owed it $4.8 million.  The court was told Mr Harman as a director of NZ Life Care offered to manage the six million dollar cash proceeds from its 2005 sale of six aged-care facilities to an infrastructure fund managed by Macquarie Group.  He was then providing treasury services for NZ Life Care.  It said Mr Harman had personally guaranteed repayment of funds advanced to his treasury operations and the unpaid guarantee was a bankruptcy debt.

The legal rule for over 340 years has been that guarantees are not enforceable unless in writing and signed.  This rule is now enshrined in the Property Law Act.  It is designed to overcome evidentiary arguments about guarantees.

Associate judge Bell said it was more likely than not that Mr Harman did give an oral guarantee of repayment in 2005, but nothing was committed to writing.  There was evidence of sloppy business practices by NZ Life Care around this time.  No-one followed up on getting the paper work completed.  Any guarantee given in 2005 was unenforceable; it was oral only, not in writing.

NZ Life Care said a written guarantee did arise from an exchange of emails in 2008.  Judge Bell ruled this was insufficient.  Mr Harman expressed his willingness to sign a guarantee; that did not amount to a guarantee.  And the emails did not specify terms of any guarantee.  Terms were still under negotiation.  There was no link back to the earlier 2005 guarantee agreed orally.

Mr Harman told the court he had agreed to a personal guarantee.  This admission could not bind the Insolvency Service, Judge Bell ruled.  The Insolvency Service, acting on behalf of all unpaid creditors, was entitled to decline the $4.8 million claim because the legal requirements for a guarantee had not been satisfied.

NZ Life Care Ltd v. Official Assignee – High Court (25.1.18)

18.027