The recent High Court judgment Reid v Estreich [2022] NZHC 1433 is an interesting case in that it analyses the damages that may be claimed as a consequence of a landlord’s unreasonable withholding of consent to assignment of lease.

Reid v Estreich involved a leasehold interest of rural land, pursuant to a 999-year lease with a nominal rental, which was owned by a Geraldine and Brandon Reid (tenants). Given the tenure of the lease, the interest was ‘all but equivalent to a fee simple interest.’ The freehold was owned by a Mr Estreich (landlord).

In 2021, the tenants decided to sell their leasehold interest to their son and daughter-in-law (assignees). It appears there was a preliminary exchange between the tenants and landlord in which the landlord offered to sell the fee simple to the tenants. However, the tenants told the landlord they were not interested in buying, the freehold and entered into an agreement for sale and purchase of the leasehold, with the assignees as purchasers, on 8 September 2021. The purchase price was NZ$400,000.

Two weeks later, on 22 September 2021, the tenants gave the landlord formal notice of their wish to assign the lease. This was accompanied by consent documents.

There was no immediate response from the landlord. Then, on 1 October 2021, the landlord sent the tenants’ solicitor an email saying “I appreciate you getting in touch in regard to the lease, transfer at 6224 State Highway 1 but at this stage it is, no benefit for myself to transfer the lease over to Mr, & Mrs Reid’s children. I have intentions of retiring and building a small, two-bedroom unit on my land in the near future if, this cannot be resolved. Would you like to refer to my email on the 12th, August 2021 that I will relinquish the freehold title to, Mr and Mrs Reid’s family for the sum of NZ$100,000. The, other option would be for Mr and Mr’s [sic] Reid to let, them purchase their dwelling for a reasonable offer. Please can you inform Mr & Mrs Reid I will not be, signing the attached document, I am open to further, discussion once you have spoken to your clients. [sic]”

On 18 October 2021, the assignees received a bank loan offer of NZ$400,000 at an interest rate of 3.45% per annum. The offer fixed the rate for 60 days on the basis that the interest rate would change if the loan was not drawn down by 17 December 2021. The assignees accepted the offer on 1 November 2021.

The next day, the tenant’s solicitor sent another consent form to the landlord and told him that settlement was scheduled for 5 November 2021. The solicitor also pointed out to the landlord that there would be costs associated with the delay and that the plaintiffs would seek to recover these from him should his consent not be given in time for settlement. The consent form was re-supplied to him by email the following day with the same warning. On 4 November 2021, the landlord replied saying that he would not unreasonably or arbitrarily withhold his approval of the transfer of the lease but he wanted to take appropriate legal advice.

On 15 November 2021, the tenants’ solicitor notified the landlord that an application would be made to the High Court for a declaration that his failure to grant consent was unreasonable.

On 22 November 2021, the landlord sent a text to the tenants’ lawyer saying ‘… I am not happy with the way to properties kept [sic] so you will hear from my lawyers shortly’. As there had been no further communication from or on behalf of the landlord, the assignees did not draw down the bank loan and the loan offer expired on 17 December 2021.

The proceeding

The tenants and assignees (plaintiffs) filed a claim in the court on 12 January 2022 for an urgent determination as to whether the landlord had unreasonably withheld consent. The reason for the urgency was that the assignees wanted to take advantage of a new loan offer before it expired.

The plaintiffs’ solicitor appeared before the Judge on 17 January 2022 at which time, the landlord had not given any reason for withholding consent except the suggestion that the property had not been kept in good repair. Later that day the landlord participated in a judicial telephone conference and confirmed he would send a text or email to the tenants that afternoon providing consent. Despite this undertaking, no such written consent was provided by the landlord.

The next day, however, on the basis of what was regarded as the landlord’s oral consent to the assignment, the assignee accepted a new finance offer (at an interest rate of 4.19% per annum) and the assignment of the lease was settled on 21 January 2022.

The plaintiffs jointly sought from the High Court a declaration and damages by default on formal proof. The High Court, adopted the applicable legal principles that were summarised by the High Court in Louis Vuitton NZ Ltd v Prince’s Wharf Property, Fund Limited HC Auckland CIV-2004-404-3401, 17 September 2004. It is unreasonable, for a lessor to refuse consent if the grounds do not reasonably relate to the covenant. The landlord said he was unhappy about the state in which the property was kept but he did not provide any evidence of that. The Court also observed that nothing in the assignment would change the landlord’s enjoyment of the freehold interest.

Damages

Although the Judge quickly came to the, conclusion that the landlord was in default, for failing to provide its consent, he was, ‘less sure about the claim for damages.’

Section 228 of the Property Law Act 2007 (Act) provides that damages may be recovered from a lessor if consent is unreasonably withheld. The assignees say that because of the delay, the mortgage rate they were required to pay to the Bank on the loan of NZ$400,000 to fund the purchase increased from 3.45% per annum to 4.19% per annum for the first two years of the mortgage. They accordingly sought a total award of NZ$5,920 plus interest.

Section 228(2)(b) of the Act extends the right to damages to parties having no contractual relationship with the lessor as they extend to ‘any assignee, sub-lessee, mortgagee, or person in possession of the leased premises. Because of this, the plaintiffs submitted that an assessment of damages should be based on the principles of remoteness applying in tort. The Judge contemplated whether Parliament intended a legislative intention to invoke considerations of tortious principles of remoteness into the causative element of the remedy. But concluded that to treat the enquiry into damages as one resting on principles of law that do not squarely fit into the legislative context is not justified.

However, the Judge noted that the damages available under s 228 of the Act are available to compensate the claimant “for any loss suffered because of [the] failure by the lessor to comply” with its obligation to not unreasonably withhold consent. He considered that, bearing in mind the simplicity of the statutory language and in the absence of any legislative guidance, the assessment of damages should be addressed as a relatively straightforward exercise of determining causation on the evidence available to the Court. In other words, the question is whether the claimant has proved on the balance of probabilities that they would not have suffered the losses if it was not for the lessor’s unreasonable failure or delay in providing consent.

The Judge opined that the solicitor’s email to the landlord of 2 November 2021, which mentioned ‘costs associated with the delay’, might fall short of putting the landlord on notice that he would be held liable to the assignees for increased borrowing costs. However, he held that the foreseeability of such losses ‘is not a relevant consideration’, and was satisfied, on the balance of probabilities, that the additional interest costs payable by the assignees would not have been suffered had the landlord consented to the assignment within a reasonable timeframe. He accordingly awarded the assignees damages in the sum of NZ$5,920 as claimed.

Commentary

It appears that the landlord’s motivation for his actions was to try and achieve his preference that the tenants buy out his freehold interest. He had no material grounds for withholding consent. In a case such as this, where there is no merit in the landlord’s position, a pragmatic approach may have been for the tenant and assignee to complete their settlement with or without the landlord’s consent given that such transaction would have, been effective. Taking the matter to the High Court certainly seemed excessive for the small quantum of damages claimed.

Originally published in Volume 23, issue 2 of the Property Lawyer Magazine. Republished with permission.