Ingram and Knee v Patcroft Properties Limited [2011] NZSC 49

Ingram, Knee and KIP Investments Limited (the tenants) leased a property containing a backpackers' hostel and bar, from Patcroft Properties Limited (the landlord), but had fallen behind in the rent.  Under the lease, the landlord could re-enter the premises and cancel the lease 14 days after the rent had become due and remained unpaid.  The landlord re-entered the property and purported to terminate the lease 13 days after rent was due, having miscalculated the number of days.  The landlord changed the locks, issued a trespass notice and advised the tenants not to re-enter the property.  The following day, the tenants failed to pay the outstanding rent and the 14 day period expired.

A year passed.  The tenants did not cancel the lease and neither paid rent, nor attempted to re-gain possession.  The dispute resurfaced when the landlord filed proceedings demanding $1.3 million in unpaid rent (and other amounts).  The tenants counterclaimed, seeking damages for the loss of business caused by wrongful re-entry.  The High Court found in favour of the tenants.  The Court of Appeal found in favour of the landlord.

On appeal, the Supreme Court held that the landlord's ongoing repudiation of the lease (by continuing to occupy the property when it had not been entitled to re-enter and terminate the lease) prevented it from claiming a right to cancel the lease for non-payment of rent.  As the tenants had not cancelled the agreement (as they were entitled to do because of the landlord's wrongful repudiation), the agreement continued.  The tenants' non-payment of the rent was justified because the landlord's actions, in effect, indicated that "any such payment would be futile".  The Court held that the landlord was not entitled to cancel for non-payment of rent and awarded the tenants $200,000 in damages for lost business.

Parties should carefully assess whether they are entitled to cancel a contract before purporting to do so.  If a party realises it has repudiated a contract, it should retract the repudiation and make amends to prevent the innocent party from cancelling or later seeking a large sum of damages.