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Court reinstates cancelled lease

31 March 2017

It has been over six years since the Pike River Coal Mine Limited disaster claimed 29 lives. The impact of the tragedy has not yet subsided. Only months after the tragedy Pike River had to deal with one relatively minor issue in the overall scheme of things. That was the cancellation of Pike River’s lease of a strategic facility which enabled it to transport coal by rail to Lyttelton.

The receivers who had been appointed soon after the disaster wanted to sell the mine. Solid Energy was the prime contender. The sale of the mine depended on continued access to the facility which was on land leased by Pike River from two farmers (O’Malley and Brown). O’Malley and Brown cancelled the leases relying on a clause in the lease giving them the right to cancel if Pike River went into receivership. At the same time O’Malley and Brown cancelled the leases they signed an agreement to lease the facility to Solid Energy and received payment from Solid Energy to do so. Pike River challenged cancellation of the leases claiming the purpose of cancellation had been to advance Solid Energy’s position to buy Pike River and was anti-competitive behaviour in breach of the Commerce Act.

Property Law Act process must be followed

The judge had to decide whether to grant Pike River relief against cancellation of the leases. The Property Law Act 2007 governs the cancellation of leases. Under this Act the procedure to cancel a lease must be followed by the landlord even if the lease says otherwise and, even if the landlord follows the correct process, a tenant may apply to the Court for relief against cancellation. The Court has wide powers to grant relief depending on what is fair in the circumstances.

Deciding on relief

The judge outlined the balancing exercise he would have to undertake to decide whether Pike River should be granted relief against cancellation. The factors to be considered and the judge’s assessment of them were.

  1.    The nature of Pike River’s default. At that time there was no evidence that Pike River was at fault.
  2.    The interests of the public and other parties affected. Although there was considerable public interest in the disaster and the continuation of the mine this factor was neutra
  3.    The importance of the facility to Pike River. The facility was a core strategic asset and its loss would materially devalue Pike River.
  4.    The prejudicial effect on the parties. There would be no immediate prejudice to Brown and O’Malley or Solid Energy. The rent would still be paid. The receivers had offered to sublease the facility to Solid Energy. The prejudice to Pike River would have been significant. It would lose a $10.5m investment in improvements on the land and a physical connection to the rail line which would have value to a purchaser of Pike River.
  5.    Whether O’Malley and Brown were being “foisted with a hopelessly insolvent lessee”. This was unlikely given the efforts of the receivers to sell Pike River and their optimism that a purchaser would be found.
  6.     Whether it was possible to transfer the lease. This was not being particularly relevant as it was too early to tell whether the transfer of the lease could be prevented.

Weighing up all the factors the Judge said that cancellation would be a disproportionate response to the breach (being the receivership of Pike River) and granted the relief against cancellation.

Relief against cancellation always a possibility 

On the face of it a lease might be correctly cancelled by following both the process set out in the lease and the Property Law Act. Landlords and tenants must keep in mind, however, the possibility of the tenant’s application to the Court for relief and whether such an application is likely to be successful. Professional advice should always be sought when cancellation of a lease is being considered.

Please email me at barbara.mcdermott@nwm.co.nz with your ideas for future articles. Keep an eye out for next month's column, where I will discuss another relevant rural legal issue.


Barbara McDermott is a partner of Norris Ward McKinnon, specialising in commercial and rural law. With offices in Hamilton and Huntly, we have friendly, expert legal advisors ready to help you with your business and personal legal matters.

 

Barbara McDermott