The recent high court decision of Tobem Holdings Limited v Kid Country Holdings Limited (in liquidation)¹ [2023] NZHC 98 highlights the importance of ensuring that a lease captures all the terms that have been agreed between the parties. Almost always and as was the case here, it is the provisions of the lease that are binding and determinative.

Background facts

The case involved an agreement to lease for a childcare centre in Henderson, Auckland. It is worth noting that the court made no distinction that there was no formal deed of lease entered into by the parties. In this article, references to lease mean the agreement to lease.

In November 2016, Vaco Investments (Henderson Project) Limited (as landlord) and Kid Country (as tenant) signed a lease which had a commencement date of 30 days after the issuing of a code of compliance certificate (CCC) for the building. Earlier that month the parties signed a heads of agreement (HOA) for a proposed lease. We would presume, as usual, that the HOA was a non-binding arrangement. There were some differences between the lease and HOA, a significant one being that the rent in the lease was linked to the number of children the resource consent would allow, but the rent in the HOA was linked to the number of Ministry of Education "licensed places".

In February 2019, Narenda Patel purchased the prop¬erty from Vaco with a settlement date of 19 July 2019. Patel nominated Tobem as purchaser prior to settlement.

On 1 April 2019 Kid Country emailed Vaco saying there were mistakes in the lease document that needed fixing. They urged Vaco to renegotiate the lease or acknowledge that it was of no effect. Vaco rejected this request and denied that Kid Country had any right to terminate the lease.

On 19 July 2019 Vaco notified Kid Country that CCC was issued for the premises and the commencement date was set for 18 August 2019. Meanwhile Kid Country maintained that the lease was unenforceable and did not take possession of the premises.

The lease commenced after settlement with Tobem being the new landlord of the lease. Kid Country did not pay rent or outgoings, and Tobem issued notices under the Property Law Act 2007 of its intention to cancel the lease for non-payment of rent and outgoings. When Kid Country still did not pay, Tobem cancelled the lease and re-entered the premises.

Did the tenant breach the lease by not paying rent and outgoings? If so, what losses did the landlord suffer as a result?

Unsurprisingly, the High Court found that the tenant's failure to pay rent and outgoings amounted to a breach of the lease.² The landlord was entitled to cancel the lease and recover the unpaid invoices. It was critical to note that the court regarded the lease as the binding agreement between the parties and made the comment that it was irrelevant that the earlier HOA used different language. What matters is that the tenant was in breach of the lease, not any other agreement.

Mitigation

A landlord may recover reasonable expenses incurred to avoid or diminish the damage arising from the tenant's breach - even if the resulting damage exceeds the damage that would have been suffered had no mitigating steps been taken.³ Here, the landlord undertook alterations which resulted in part of the premises being leased to a new tenant. This enabled the landlord to mitigate its losses and the court found that the landlord was entitled to recover the cost of those alterations.⁴

Loss of bargain

A landlord who cancels a lease during its term and relets the premises at a lower rent is also entitled to damages based on the difference between the rent and rental value of the premises as at the date of cancellation.⁵ Valuation evidence is not required. The best evidence is the rent which is obtained by actively endeavouring to re-let.⁶ As such, if the landlord establishes that there is no available market for a replacement lease of similar terms, damage would be assessed by reference to the actual loss.⁷ Tobem was able to successfully demonstrate to the court the difference of rent, and as a result was entitled to claim a significant shortfall.

Are there any counterclaims available to the tenant such that it is not liable for any of the losses claimed?

Kid Country counterclaimed for misrepresentation and in its defence said it was induced to enter the lease by Vaco’s misrepresentations. The alleged misrepresentations were that there were 150 spaces available to the childcare centre, the outgoings were less than what the lease provided for, and that the terms of the lease reflected the terms of the HOA and other prior discussions.

The lease had a no warranty clause that also provided that the tenant enters the agreement in reliance on their own judgment.⁸ Nevertheless, Tahana J cited section 50 of the Contract and Commercial Law Act 2017 which gives the courts power to inquire into the circumstances despite such clauses and consider whether there had been misrepresentation.

The court found that since lawyers were not involved in all aspects of the transaction, the wording of the lease should not be considered conclusive. While the court did look beyond the lease when considering the defence, this did not change the outcome of the case.

No misrepresentation

Tahana J decided that there was no misrepresentation because while the landlord did communicate that the premises was able to accommodate 150 children, these statements were made with qualifiers i.e. that it was subject to the accuracy of the building survey plan and existing structure.

For there to be misrepresentation, the statement must have induced the tenant to enter into the lease.⁹ The court found that there was no inducement as the lease made clear provisions of how the outgoings were to be calculated, and the tenant obtained advice on the lease so was aware of the express terms.

When considering the representation that the lease reflected the HOA, Tahana J again pointed out that the tenant had obtained legal advice so had the opportunity to check the terms of the lease and negotiate changes. It would be unreasonable for the tenant to rely on the landlord stating that the lease “is all in order and pretty much as we agreed under the terms of the HOA” as the landlord was not a lawyer and did not draft the lease.

Commentary

The outcome of this case was entirely favourable to the landlord. It was successful in proving that the tenant breached the lease and establishing the losses they suffered. It was awarded accordingly.

It is of interest that the court pointed out that Kid Country’s lawyers failed to identify discrepancies between the terms of the HOA and the lease, and that this was a matter between it and its lawyer.¹⁰ This illustrates the key role that lawyers play in the pre-signing stage.

Lawyers also play a key role when there is a dispute about the terms. The case does not indicate whether the tenant engaged with its lawyer at this stage. In any case, the tenant should be aware that they are contractually bound to the lease for as long as the term is running. This does not mean that they are completely powerless; but should engage with their lawyer to seek advice.

As an aside, contrast the facts of this case with a situation where a term in the agreement to lease contradicts a term in the deed of lease. In such a situation, either party would be likely to be successful in an application for rectification of the deed of lease so that it reflects the terms set out in the agreement to lease. The standard Auckland District Law Society (ADLS) agreement to lease, for example, provides that the tenant shall enter into a formal lease with the landlord using the current ADLS deed of lease form "amended in accordance with the provisions of the agreement."

Kid Country failed to ensure that the lease captured all the terms it was expecting as set out in the HOA (but not binding on the landlord). Instead, it insisted that the lease it had signed was unenforceable. It is unfortunate that this mistake cost them the case and resulted in millions of dollars in damages.

This article has been written with the assistance of Elaine Deng, Solicitor at Dentons Kensington Swan

First published in Volume 23 Issue 4 of The Property Lawyer.

1. [2023] NZHC 98↩
2. At [47]↩
3. JNJ Holdings Ltd v Kent Sing Trading Company Ltd [2017] NZHC 3274 at [380]↩
4. At [53]↩
5. At [55]↩
6. Cheng v Heise (1991) ANZ ConvR 388 (HC) at 16↩
7. Lewis Holdings Ltd v Steel & Tube Holdings Ltd [2015] NZHC 2189 at [20]↩
8. At [65]↩
9. Contract and Commercial Law Act 2017, s 37(1)(a)↩
10. At [80]↩