LEASES

Fundamental Concepts and Definitions of Leases

• Definition of a Lease: A lease is the legal right to exclusive possession of land for a certain period less than the period for which the landlord holds the land. It provides exclusive possession for a fixed duration.

• Scope of Leasing: Leases can involve land, part of a land, a building, or specific segments of airspace or the subsurface.

• History of the Leasehold Interest:

  • Originally, a lease gave only a personal action (right in personam) against the lessor for a breach of "quiet enjoyment." It was regarded as "personalty" (chattel).

  • Later, rights of ejectment and trespass were allowed, transforming it into a "right in rem." Consequently, leases were historically termed "chattels real."

• Types of Leases:

  • Fixed Term: Examples include durations of $1\,\text{year}$, $5\,\text{years}$, $21\,\text{years}$, or $99\,\text{years}$.

  • Periodic Tenancy: Repeating durations such as weekly, monthly, quarterly, or yearly. Certainty is established by the repeating unit (e.g., every fortnight).

  • Implied Statutory Tenancy: Governed by ss 210–211 of the Property Law Act (PLA) 2007. This is the default position in New Zealand where the formalities are incomplete or terms are unclear but a lessor-lessee relationship exist. It requires $20\,\text{working days}$ ($4\,\text{weeks}$) notice to terminate. Its purpose is to prevent occupation rights from becoming adverse possessory rights.

  • Tenancy at Will: Occurs under common law or s 210 PLA 2007. It exists where a lease has ended but parties intend a new lease (already executed or agreed but not formalized) and the lessee remains in possession. The "will" of the parties is that the lease continues despite the lack of a formal document.

• Essential Elements of a Lease:

  • Exclusive Possession: The cornerstone of a leasehold, providing a right to exclude all others, including the landlord (subject to specific powers of entry).

  • Reversion: The landlord (lessor) must retain a reversionary interest, meaning the property must return to them at the end of the term. This is subject to s 215.

  • Intention to Confer an Interest in Land: There must be a clear intent to grant an interest in the property rather than a mere personal privilege.

  • Certainty of Term: The term must be certain or capable of being rendered certain.

Creation and Formalities of Leases

• Leases of Mortgaged Land:

  • Consent of Mortgagee: Under LTA ss 91(4), the consent of the mortgagee is required. Without it, the lease is not binding on the mortgagee, who could sell the land regardless of the lease.

  • Effect of Consent: Under LTA ss 91(5), consent binds the mortgagee and every person subsequently deriving an interest in the mortgage. Consent is also required for lease variations under LTA ss 93.

• Formal Lease: Created via a registered Lease Instrument. The formality lies in the act of registration.

• Informal Lease: Under PLA s 24, any interest in land must be in writing and signed by the parties to be bound. However, registration is rare for many leases due to the complexity of determining internal three-dimensional boundaries of leased space.

• Short-Term Leases (PLA ss 207–209):

  • Definition: A lease or periodic tenancy for $1\,\text{year}$ or less, or a statutory tenancy under s 210.

  • Commencement: Must begin no later than $20\,\text{working days}$ after the contract to lease.

  • Formality: Can be created orally or through informal writing (PLA s 208).

  • Priority: A short-term lessee who has given valuable consideration has priority over unregistered interests created after occupation, or before occupation if entered in good faith without notice and without a caveat being lodged (PLA s 209). However, it must give way to a registered lease under the Land Transfer Act (LTA).

Equitable Doctrines and Informal Leases

• Doctrine of Part Performance (PLA s 26): Preserves the enforceability of oral contracts for land dispositions. It applies when parties have acted in a way that objectively shows an intent to create a lease.

• Test for Part Performance (TA Dellaca v PDL Industries Ltd (1992)):

  1. Was there a sufficient oral agreement enforceable in contract law but for the writing requirement of s 24?

  2. Has there been part performance (a step in performing a contractual obligation or exercise of a right)?

  3. When viewed independently of the oral contract, was the act likely done on the footing that a contract relating to the land existed?

  4. Do the circumstances make it unconscionable (fraudulent in equity) for the defendant to rely on the Act?

• Mahoe Buildings Ltd v Fair Investments Ltd (1994): The Court of Appeal found sufficient part performance where the landlord permitted possession, did not seek other tenants, arranged a valuation for new rent, and accepted that new rent.

• Doctrine of Walsh v Lonsdale (1882): If circumstances allow a Court to order specific performance of an agreement to lease, the parties are treated as if a formal lease had been executed. "Equity looks on that as done which ought to be done." This is an equitable, discretionary remedy in the High Court of New Zealand; the claimant must come with "clean hands."

Leases vs. Licenses: Rights and Implications

• Definition of a License: A permission given by one person to another to perform an act that would otherwise be unlawful (e.g., a right to park a car).

• Primary Determinant (Fatac v CIR (2002)): The New Zealand Court of Appeal re-established that exclusive possession is the primary test. If there is no exclusive possession, it is a license, not a lease.

• Why the Distinction Matters:

  • Registration: Fixed-term leases are registrable under LTA 2017; licenses generally are not.

  • Binding Successors: A registered lease binds the landlord’s successors in title. A license usually does not bind a new owner if the land is sold.

  • Relief: Historically, licensees could not seek relief against forfeiture or refusal to renew, but under PLA 2007 s 206(3) & ss 253–264, licensees now have the same rights as lessees in these circumstances.

The Dual Nature of Leases: Privity of Contract and Privity of Estate

• City of London Corp v Fell (1993): A lease is both a contract and an estate in land.

• Privity of Contract: Arises from the contractual relationship between the original landlord, tenant, and guarantor. This relationship persists for the entire duration of the lease, even if the lease is assigned.

• Privity of Estate: Arises from the relationship of landlord and tenant regarding the land itself. Obligations that "touch and concern" the land (like rent) are "imprinted" on the term or reversion and bind the owners for the time being.

• Specific Relationships:

  • Lessor and Lessee: Both privity of contract and privity of estate.

  • Lessor and Assignee (New Lessee): Privity of estate only. The original lessee remains in privity of contract with the landlord.

  • Lessor and Sub-lessee: No privity of contract and no privity of estate. The lessor cannot sue the sub-lessee for rent; they must sue the head lessee. Privity can only be created via a direct covenant (e.g., W E Wagener case [1984]).

• Transfer of Reversion: Under PLA s 233, the benefit of the lessee's covenants runs with the reversion. A new owner can sue the lessee because the benefit of the contract is assigned to them.

Lessor’s Covenants, Powers, and Obligations

• Overview of Covenants:

  • Implied by Common Law: Many now codified in statute.

  • Implied by Statute: Found in ss 217–220 and Schedule 3 of PLA 2007.

  • Express Covenants: Specifically written into individual lease documents.

• Fitness for Purpose: There is no implied undertaking that premises are fit for the lessee's purpose (caveat emptor). The lessee must satisfy themselves through inquiry (Campbell v Speers).

  • Campbell v Speers: Land was leased for growing squash but was contaminated with chemicals. The lessor was not liable for fitness for purpose but was found negligent for failing to disclose the spraying history. Liability was limited to $50\%$ due to the lessee's contributory negligence for not testing the soil.

• Non-Derogation from the Grant: The lessor must not do anything inconsistent with the purpose of the lease. It applies to both leases and contracts. It covers economic interference and is broader than quiet enjoyment (Mount Cook National Park Board v Mount Cook Motels [1972]).

  • Tram Lease v Croad (2003): The "Shoe Sheriff" case. Demolishing a common wall that undermined the lessee's business was found to be a derogation from the grant.

• Quiet Enjoyment: A covenant that the lessor will not substantially interfere with the lessee’s lawful possession. This includes non-physical interference like noise or dust (Kalmac Property Consultants v Delicious Foods (1974)).

• Power to Enter and View Repair: Implied under PLA Sch 3, Pt 2, cl 11. Landlords must provide notice for these intermittent visits.

• Power to Cancel: Implied under PLA Sch 3, Pt 2, cl 12 for non-payment of rent or other breaches.

Repair Obligations and Statutory Compliance

• Standard Rule: No implied covenant for the lessor to repair, except:

  1. If the lessor retains control of part of the premises (Cockburn v Smith [1924]).

  2. In multi-tenanted buildings where repair of common areas (stairs, lifts, escalators) is necessary for access (Liverpool City Council v Irwin [1977], Karragianis v Malltown (1979)).

• Express Covenants to Repair:

  • The lessor's obligation usually arises only upon receiving notice (unless they control that part of the premises).

  • Repairs must be done with "reasonable expedition."

  • Remedies for Failure to Repair: The lessee may carry out repairs and set off costs against rent (risky if improvements are made), seek specific performance, or claim damages.

  • Weatherhead v Deka New Zealand Ltd (1999): The repair covenant does not require the lessee to perform substantial and permanent improvements that would result in a "windfall" for the lessor.

• Statutory Compliance: Lessors/Lessees must comply with:

  • Building Act 1991 (Structural safety).

  • Resource Management Act 1991 (Zoning).

  • Health Act 1956 (Sanitation).

  • Housing Improvement Regulations 1947 (Light, room size, ceiling heights).

  • Consumer Guarantees Act 1993 (Specific appliances).

  • Fair Trading Act 1986 (Misrepresentations by agents).

Lessee’s Covenants and Obligations

• Rent (PLA Sch 3, cl 4):

  • Implied covenant to pay rent in advance (s 222).

  • Rent must be certain or capable of being rendered certain (e.g., linked to productivity or CPI).

  • Variation by Assignee: A variation agreed upon by an assignee without a rent review clause does not bind the original lessee (Friends Provident (1996)).

• Waste: Under PLA s 68 and Sch 3, cl 7, lessees must not commit voluntary waste (acts that cause enduring change and prejudice the reversion).

  • Auckland Waterfront Development Agency Ltd v Mobil Oil New Zealand Ltd [2016]: Contamination of subsoil was held to be implicitly authorized by the lessor because it was a consequence of the agreed activities and the lessor had not complained for years.

  • BP Oil v Ports of Auckland [2004]: Ports sought onerous rehabilitation for hydrocarbon seepage. The court held waste was actionable but excluded by the statute of limitations as the damage occurred long ago.

• Repair (PLA Sch 3, cl 13): Obligation to keep/yield up premises in the same condition as the start of the lease, excluding reasonable wear and tear or damage by fire/flood/storm. The obligation is limited to the surface and does not extend to transforming the character of the land (Mobil Oil NZ Ltd v Development Auckland Ltd [2017]).

• Rates and Insurance:

  • Owners are prima facie liable for rates, but parties can agree otherwise.

  • Landlords usually insure, but lessees pay the cost through funds. Under PLA ss 268–269, the lessor indemnifies the lessee if damage is not intentional.

• Assignment or Sub-letting: Can be "Absolute" (no right to assign) or "Qualified."

  • Under PLA s 226(2), consent cannot be unreasonably withheld and must be given in writing within a reasonable time.

  • Louis Vuitton NZ Ltd v Prince’s Wharf Property Fund Ltd (2005): Establishes a two-stage test for unreasonableness: subjective intent and objective reasonableness. Consent cannot be withheld to achieve a "collateral advantage" (Corunna Bay Holdings).

Dealing with Leases: Assignment, Sub-leasing, and Renewals

• Right of Renewal/Purchase of Reversion:

  • These are interests in land and can be caveated if they exist from the start of the lease (e.g., an option).

  • Right of First Refusal: Not an interest in land until the lessor decides to sell; then it becomes caveatable.

  • Indefeasibility: If a lease is registered, rights of renewal or purchase gain the protection of indefeasibility, even if they were originally ultra vires (Pearson v Aotea District Maori Land Board [1945]; Rotorua and Bay of Plenty Hunt Club Inc v Baker (1941)).

• Extension vs. Renewal:

  • Extension: Continues the old lease; original lessee/guarantor remain liable through privity of contract.

  • Renewal: Prima facie presumption of creating a new lease. Original parties are not liable for the new term unless clearly agreed (Sina Holdings (1996)).

  • Surrender and Regrant: A major variation to a lease (like extending the term) may be treated as a surrender of the old lease and the grant of a new one, releasing the original lessee (Adams v Touchtwo Ltd (2010)).

• Sub-leasing (PLA s 215): For leases after $1\,\text{Jan}\,2008$, a sub-lease for a term equal to or exceeding the head lease takes effect as a sub-lease (not an assignment) for as long as the head lease exists. If the head lease is renewed, the sub-lease can be extended accordingly. This overruled the common law position where such sub-leases took effect as assignments of the lease by operation of law.

Remedies and the Cancellation of Leases

• Cancellation Code: The PLA 2007 provides a mandatory code for cancelling commercial leases (s 243(1)). Only the landlord has the right to cancel via this code (with minor exceptions for lessees under Sch 3, cl 10).

• Procedures to Regain Possession:

  1. Application for Court Order (s 244(1)(a)): Effective on the date of the order.

  2. Peaceable Re-entry (s 244(1)(b)): Effective on the date of possession. Forcible entry is illegal under s 91 Crimes Act 1961. Changing key codes can be considered peaceable re-entry (Wood Bay Enterprises Ltd v Wise (2012)).

• Grounds and Notice Requirements:

  • Non-payment of rent: Rent must be $10\,\text{working days}$ in arrears, and a notice period of at least $10\,\text{working days}$ must expire (s 245).

  • Other breaches: Requires a notice of intention to cancel and a period "reasonable in the circumstances" to remedy (s 246). For example, $31\,\text{days}$ was once held insufficient for fire repairs (Dunedin City Corp v Searl).

  • Notice Content: Must specify the nature of the breach, remedy method, compensation sought, and the right to apply for relief (s 247).

• Ingram v Patcroft Properties (2011): A landlord re-entered on the $14\text{th\ day}$ of a $2\text{-week\ notice}$ period (one day early). The re-entry was unlawful, resulting in a net award of over $\$214,000$ to the lessee for business losses.

Relief Against Cancellation and Refusal to Grant Renewal

• Relief Application: Must be brought before a court order for possession or within $3\,\text{months}$ of peaceable re-entry.

• Factors for Relief (Studio X v Mobil Oil NZ [1996]):

  1. Was the breach deliberate/advertent?

  2. Was the breach beyond the tenant's control?

  3. Does the breach involve immoral/illegal use?

  4. Is the tenant willing/able to fulfill future obligations?

  5. Conduct of the landlord.

  6. Personal qualifications/financial position of the tenant.

  7. Position of third parties (e.g., a new tenant who already moved in).

  8. Gravity and lasting damage to the landlord.

  9. Proportionality: Is the loss of the lease proportionate to the damage caused by the breach?

• Waikato District Council v Singh [2015]: Relief was granted for hot springs upgrades where more than $\$450,000$ had been spent; cancelling would result in disproportionate hardship.

• Pike River Coal Ltd v O’Malley Farming Ltd [2011]: Relief sought for a critical lease next to the mine to allow the receiver to sell the business.

• Refusal to Renew: ss 261–264 PLA 2007 allow for relief if a lessor refuses a renewal or a right to purchase. The court must balance the rights of both parties.

Methods of Determining a Lease

• Expiry of Term: Natural conclusion of the lease.

• Determining Event/Break Clauses: Specific conditions met or rights exercised to end the lease early.

• Notice of Termination: Applicable to periodic tenancies.

• Surrender: Mutual agreement to end the lease.

• Merger: Occurs if the lessee purchases the lessor’s freehold interest.

• Disclaimer on Bankruptcy: Under ss 117–121 Insolvency Act 2006, the official assignee may disclaim onerous leasehold property.