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