The Court of Appeal takes a dim view of a case pivoting to new arguments about misrepresentations and half-truths. David Williams reports
A tumultuous deal over a run-down Auckland hotel, involving high-profile businessmen Neville Mahon and Tim Edney, ended suddenly in 2016, when Mahon’s company, Beach Arena Ltd, had its lease terminated so the property could be sold.
Two companies controlled by property investor Edney then went to court: Waikoro Ltd, which owned the Arena Hotel, for unpaid rent and lease-related debts; and Waimauri Ltd, for payment of a hotel-related loan.
Mahon, a controversial Auckland property developer, personally guaranteed the loan.
The High Court demand for payment to Waimauri was met with a counter-claim.
Mahon and Beach Arena said a 2013 variation to the loan agreement wiped the slate clean, and meant they were entitled to money from the sale of the properties on Auckland’s Beach Rd. (The $16.7 million sale included two adjacent development lots.)
They lost, and an appeal was filed, claiming the High Court erred.
Last Wednesday, the Court of Appeal issued a judgment dismissing the appeal, and awarding costs.
It turns out Beach Arena and Mahon dropped the original grounds of appeal. Instead, they pivoted to claims of misrepresentations – about insurance premiums, the hotel’s earthquake rating and property defects.
Edney’s companies told the court the appeal must be dismissed because the original grounds had been abandoned.
The court agreed, forcefully, saying the “reframed appeal must fail”.
“At the risk of stating the obvious, an unsuccessful claimant cannot introduce a fresh cause of action on appeal that depends on facts additional to, and materially different from, those that were in issue at trial, and ask this Court to decide that new cause of action,” wrote Justices Mark Cooper, Brendan Brown and David Goddard.
The misrepresentation claims were central to separate, parallel proceedings involving Waikoro Ltd. They were not argued in the Waimauri High Court case, and to allow them would have been an abuse of process, the court said.
“Even more plainly, a plaintiff whose claim has been found to be time-barred in one proceeding cannot simply ignore that result and attempt to pursue the same claims in another proceeding.”
(The High Court decision on the separate Waikoro case is being appealed.)
In a more fundamental sense, the Court of Appeal said the misrepresentation claims arose before Waimauri was in the picture – they arose from negotiations between Mahon and Beach Arena, and Waikoro and Edney.
In other words, claims against separate legal entities must be kept separate.
A former argument run by Mahon solidified this. In the High Court, he successfully resisted the attempt to add overdue rent owed to Waikoro to Waimauri’s loan agreement without the consent of Beach Arena (BAL).
The Court of Appeal judgment said: “Mr Mahon and BAL cannot have it both ways.”
But it’s worth highlighting the history of the soured Arena Hotel deal to decipher how things went wrong.
A 10-year lease was signed for what used to be known as the Station Hotel in 2012, with options for Beach Arena Ltd to buy the property, including two adjacent development lots.
By all accounts, the Arena Hotel was a dog. But the lease was clear: Beach Arena accepted the properties “on an as-is basis”, and it would pay for maintenance. Mahon inspected the property several times before the lease was signed.
Beach Arena’s first shock was insurance premiums of almost $145,000, 12 times the sum suggested by Edney months earlier. (Edney was aware of the increase a few days before the lease was signed but didn’t pass the information on.)
The premium was due immediately and Beach Arena didn’t have the money, so Waimauri agreed to lend the money.
The second shock was the hotel’s condition. As noted by the Court of Appeal it was worse than anticipated, “with regular flooding, unsanitary overflows of sewage and falling masonry creating serious health and safety risks to the occupants and the public generally”.
(As previously reported, serious flooding led to a ceiling collapsing on a guest, and 13,000 litres of sewage needed to be pumped from the basement.)
Waikoro pointed to the lease agreement – these problems were Beach Arena’s responsibility. But Waimauri was happy to expand its loan. A detailed agreement was signed in 2013, with Mahon as guarantor.
The property issues were financially suffocating. Beach Arena fell behind in rent to Waikoro, and was unable to repay loans to Waimauri.
Edney and Mahon agreed the properties should be marketed but no sale eventuated. The $16.7 million sale – with the hotel and development lots sold separately – took place after Beach Arena’s options to buy had expired.
Waikoro wanted the lease surrendered, but Beach Arena refused to cooperate unless there was a clean break. Waikoro wouldn’t indulge the argument, and terminated the lease.
Waimauri’s first loan demand in 2016 was for $1.63 million. It was amended soon after to $2.42 million. The company started court action in 2018. A year later, Waikoro pursued unpaid rent and other lease outgoings in a separate proceeding.
An attempt by Beach Arena and Mahon to consolidate the cases were denied by the High Court.
The basis of the Waimauri Ltd case was what’s known as the second amended statement of defence and counterclaim, dated February 2020.
The Court of Appeal judgment said the amended statement did not state there was a duty to disclose property defects, did not detail the alleged defects or the cost of fixing them, did not claim non-disclosures were misrepresentations, or that Beach Arena was induced to enter the lease. The increased insurance premiums weren’t referred to, or the hotel’s earthquake rating.
With the original appeal grounds abandoned, Grant Collecutt, the lawyer for Beach Arena and Mahon, focused on the alleged misrepresentations. He claimed the High Court judge, Justice Matthew Muir, overlooked them. Collecutt emphasised the court’s wide powers to amend pleadings to determine the “real controversy” between parties, so long as it doesn’t cause an injustice.
David Chisholm QC, counsel for Edney and Waimauri, said the misrepresentation claims were fresh causes of action, and the claims – virtually the same argued in the Waikoro case, which were struck out because they were time-barred – were never put before the High Court.
The Court of Appeal justices said it was “quite clear” the proposed claims – relating to “alleged non-disclosures and half-truths” – are “on any test” new causes of action. They were different in fact and law from the original claims.
“They depend on facts that were not pleaded. They put forward a new legal basis for the claims.”
To permit such an amendment would be a “significant prejudice.” to the respondents. The suggestion the claims were overlooked by the judge “is plainly wrong”, the judgment said.
The Court of Appeal noted it will likely consider the issue of time limitation of the misrepresentation claims in the appeal to Waikoro’s strikeout proceedings.
But, in the Waimauri fight, at least, this round has gone to Edney’s interests.