Does an arbitration clause prevent a tenant from seeking relief against cancellation from the Courts?

Monday 30 October 2017

Authors: David Friar, Jane Holland, Sally Whincop and Morgan Powell

The Courts have long had the power to stop a landlord from cancelling a lease or failing to renew a lease. However, in a surprising development, the High Court ruled recently that a standard arbitration clause in a lease prevents a tenant from seeking such relief from the Courts. 

Under the Property Law Act 2007, if a landlord cancels a lease for breach by the tenant, the tenant can apply for relief against cancellation. In addition, if the lease provides for a renewal and the landlord refuses the tenant's request for renewal, the tenant can apply to the Court for relief against the failure to renew. In both cases, the Court has a wide discretion to consider all relevant circumstances and grant relief as it sees fit.

The recent ruling is inconsistent with common practice adopted by tenants and landlords over many years. A standard Auckland District Law Society (ADLS) lease includes an arbitration clause that would, under this ruling, prevent a tenant from seeking such relief from the Courts. In our view the decision goes too far, and we hope that the position is quickly clarified by the Courts.  

Background

The case, Lawson v Gawith [2017] NZHC 40, concerned a farm near Martinborough that was owned by the Gawiths. The Lawsons leased the farm for six years, with two rights of renewal for six years each. The Gawiths refused to grant the last renewal when the Lawsons asked, and so the Lawsons applied to the High Court for relief against the Gawiths' failure to renew.

The Court struck out the Lawsons’ claim

Surprisingly, the High Court struck out the Lawsons' application, on the basis that the Court has no jurisdiction to grant relief in circumstances where the lease contains an arbitration provision. This was because the Arbitration Act 1996 gives an arbitrator the power to award any relief that could have been ordered by the High Court, unless that would be contrary to public policy or to law.

The Court said that because the lease required any dispute to be referred to arbitration, the Court had no jurisdiction to hear the application for relief against a failure to renew. Only an arbitrator could decide that issue.  

Further, the Property Law Act requires that any application for relief against a failure to renew be brought within three months of a landlord's failure to renew. The Lawsons had filed their application with the Court within the three months, but were now out of time to file a similar application with an arbitrator.  

The Court ruled that it had no power to extend the time limits. As a result, the Lawsons had no remedy, as they were now precluded from seeking relief from both the Court and an arbitrator.  

The Court therefore struck out their claim.

Consequences of the Court’s decision

The Court’s reasoning would seem to apply not only to relieve against a failure to renew, but also to relieve against cancellation. Given that most leases have an arbitration clause, it would mean that tenants would no longer be able to seek relief against cancellation from the Courts. Instead, tenants would need to commence arbitration proceedings in order to obtain any relief.

Our view

When Parliament passed the Arbitration Act in 1996, one of its purposes was to encourage arbitration as an agreed method of resolving commercial and other disputes. Clearly, the Court’s decision in Lawson v Gawith is consistent with this purpose.

While it is true that arbitration should be encouraged, in our view the decision goes too far, in that the inclusion of arbitration clauses in leases was not intended to pre-empt the Courts’ long-standing jurisdiction to grant relief to a tenant. 

Indeed, despite the fact that the Arbitration Act has been in place for more than 20 years, there has been no case before now in which a Court has ruled that an arbitration clause pre-empts the Courts' jurisdiction to grant relief to a tenant. To the contrary, the High Court had previously ruled that such a clause does not preclude the Courts’ jurisdiction.1

The difficulty with the Court’s decision in Lawson v Gawith is that it saw the issue as a "private law matter capable of determination" between the parties. However, relief against renewal or cancellation is much more than a private law matter between the parties.  It is a dispute in relation to land, with other potential interests affected that are not subject to the arbitration clause. For example, if the landlord has found a new tenant in the meantime, the Court can order relief against cancellation, cancel the new tenant’s interests, and order damages. How could an arbitrator make this order if the new tenant is not a party to the arbitration clause?

Likewise, a subtenant can seek relief against cancellation. Assuming that the sublease is not the subject of an arbitration clause, the subtenant can seek relief from the Court. But if the head lease has an arbitration clause, the tenant can only seek relief from an arbitrator. That leaves open the potential for two inconsistent decisions in circumstances where the obvious solution would be for the Court to hear both applications at the same time.

Receivers and mortgagees can also seek relief from the Court, but in the same situation lessees could not be heard because of an arbitration clause.

Finally, the decision is inconsistent with common practice adopted by tenants and landlords over many years. Indeed, the Courts routinely consider applications for relief by tenants, which are brought by way of originating application and dealt with in a swift and cost-effective manner. It is by no means clear that a formal arbitration process would be a more effective alternative in such cases.

Key points​

We would hope that the position is quickly clarified by the Courts. In the meantime, tenants should consider:

  • Drafting arbitration clauses that make it clear that they do not preclude the Court's jurisdiction to grant relief to tenants under the provisions of the Property Law Act, and

  • If an application is made to the Court for relief, also commencing a precautionary arbitration application within the relevant time limits in case the application to the Court is struck out.​

If you or your business would like further information or advice on any issue this update has raised, please do not hesitate to contact your usual Bell Gully adviser.​


Highgate on Broadway v Devine [2012] NZHC 2590 at [39]​.​​


Disclaimer

This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.

For more information
  • David Friar

    Partner Auckland
  • Jane Holland

    Partner Auckland
  • Sally Whincop

    Special Counsel Auckland
Related areas of expertise
  • Arbitration
  • Property and real estate
  • Litigation and dispute resolution